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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD _________ TO _________ .
COMMISSION FILE NUMBER 33-80777
NORCAL WASTE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2922974
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
FIVE THOMAS MELLON CIRCLE, SAN FRANCISCO, CA 94134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 330-1000
SECURITIES REGISTERED PURSUANT TO SECTION 15(D) OF THE ACT:
12 1/2% SERIES B SENIOR NOTES DUE 2005
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
NORCAL WASTE SYSTEMS, INC., IS CURRENTLY 100% OWNED BY AN EMPLOYEE STOCK
OWNERSHIP PLAN.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, AS
OF THE LATEST PRACTICABLE DATE: ON DECEMBER 15, 1996, THERE WERE 24,134,973
SHARES OF COMMON STOCK OUTSTANDING.
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PART I
ITEM 1. BUSINESS
Forward Looking Information
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described below in "Risk Factors" and elsewhere in this Form 10-K
include, but are not limited to: changes in general economic conditions,
inability to maintain rates sufficient to cover costs, inability to obtain
timely rate increases, fluctuations in commodities prices, changes in
environmental regulations or related laws and competition. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on its behalf.
History and Certain Recent Developments
Norcal Waste Systems, Inc. ("Norcal" or the "Company"), a California
corporation, is a vertically integrated waste management company. Norcal
provides services to approximately 377,000 residential and 44,000 commercial and
industrial customers (as of September 30, 1996) throughout the State of
California through 24 operating subsidiaries. The Company's principal activities
include refuse collection, recycling and other waste diversion, transfer station
and hauling operations, and management of both Company-owned and third
party-owned landfills.
The Company traces its roots to the 1920s and, pursuant to a City of San
Francisco Ordinance enacted in 1932 (the "Ordinance"), has provided
substantially all of the residential and commercial refuse collection in San
Francisco since that time. The Company currently provides waste management
services to 38 cities and counties throughout California. The Company operates
28 landfills in California, five of which it owns, and owns and operates six
transfer stations and three materials recovery facilities ("MRFs"). Norcal is
currently 100% owned by an employee stock ownership plan (the "ESOP").
In 1987, the Company's two predecessors merged to form the Company.
Beginning in late 1990, the Company experienced severe constraints on its
liquidity, due in large part to a severe recession in California, regulatory
changes that required pre-funding for landfill closure and post-closure
obligations, significant indebtedness outstanding after the merger, and
additional indebtedness incurred to finance certain acquisitions and to fund
capital expenditures, including those in connection with mandated increased
recycling. In early 1991, the Company was unable to pay required amounts on
certain of its outstanding indebtedness and did not make contributions to the
ESOP to enable the ESOP to service its indebtedness. As a result, the Company
and the ESOP defaulted on substantially all of their outstanding debt.
In December 1994, Norcal effected a settlement with the holders of certain
subordinated notes (the "Old Subordinated Notes") issued by one of the Company's
predecessors in 1987 to former shareholders. Pursuant to the settlement, Norcal
paid approximately $5.5 million in cash to settle certain claims, and issued
$51.0 million aggregate principal amount of new subordinated notes (the "Class A
and B Notes") in exchange for all of the Old Subordinated Notes which, together
with accrued interest, aggregated $59.5 million. Norcal subsequently redeemed
the Class A and B Notes for approximately $39.3 million with a portion of the
proceeds from the Refinancing (as defined herein). In August 1995, Norcal and
the ESOP reached a settlement with certain holders of other subordinated notes
(the "ESOP Notes") issued by the ESOP in 1986 to former shareholders of the
Company's other predecessor. As of November 21, 1995, the outstanding aggregate
balance of the ESOP Notes was $53.5 million, including accrued but unpaid
interest. Norcal utilized approximately $37.8 million of proceeds from the
Refinancing to effect the settlement and provide for the retirement of the ESOP
Notes.
On November 21, 1995, Norcal issued 12 1/2% Series A Senior Notes ("Series
A Senior Notes") in an aggregate principal amount of $175.0 million, for which
it received proceeds, after original issue discount, of approximately $170.2
million (the "Offering"). The Company used the proceeds from the Offering (less
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certain associated expenses), together with certain cash balances, to retire
approximately $199.1 million of its then outstanding indebtedness and certain of
the ESOP's indebtedness to third parties.
Concurrent with the Offering, the Company entered into a new bank credit
agreement providing for a revolving credit facility with maximum availability of
$100.0 million, of which up to $25.0 million may be utilized for letters of
credit (such credit agreement, as amended, is hereafter referred to as the
"Credit Agreement"). As of September 30, 1996, the Company had utilized $9.4
million for letters of credit and had availability under the Credit Agreement of
approximately $25.0 million, with an additional $15.6 million available for
letters of credit and additional amounts potentially available to fund
acquisitions based on certain pro-forma ratios. The financing provided by the
Offering and the Credit Agreement together with the transactions effected
through the application of the initial proceeds thereof, are collectively
referred to herein as the "Refinancing." The Credit Agreement was recently
amended primarily to provide additional flexibility under the financial
covenants contained therein and increase the Company's ability to incur certain
types of additional debt (including indebtedness incurred in connection with
acquisitions).
In September 1996, the Company exchanged all of the outstanding Series A
Senior Notes for an identical principal amount of 12 1/2% Series B Senior Notes
(the "Senior Notes") registered under the Securities Act of 1933.
On November 1, 1995, the Company commenced operation of nine additional
active landfills in San Bernardino County, bringing the total number of
landfills operated by the Company in San Bernardino County to 17. Furthermore,
as of the same date, the Company assumed primary responsibility for designing
and implementing a strategic plan to identify and address the County's long-term
waste disposal needs, and assumed specific responsibilities including closure
and monitoring of non-active landfills and identification, permitting and
construction of new landfills and landfill expansions.
The Company employs approximately 1,300 employees under union contracts. Of
this total, approximately 59% are covered under contracts that have expired or
will expire by December 31, 1996. The Company is currently in the process of
negotiation with representatives of the various unions.
The Company reached agreement in October 1996 with Humboldt County on the
funding of certain landfill liabilities related to the Cummings Road Landfill
upon the expiration of the current waste disposal agreement in September 1998.
The County has agreed, among other things, to provide funding for any
outstanding liability funding requirements with respect to closure/post-closure
and/or corrective action activities at the landfill.
The Company completed the acquisition of the assets of a company in Butte
County for approximately $4.5 million in November 1996. This was the Company's
first acquisition since the completion of the Refinancing.
In September 1996, the Company applied for an increase to its collection
and disposal rates in the City of San Francisco. The application requested an
increase of 14.9%, to be effective March 1, 1997, to fund several new recycling
programs requested by the City, along with increases to recover current and
projected increases in operating costs. In accordance with the rate procedures
dictated by the Ordinance, the Director of Public Works (the "Director") held
hearings and filed two recommended rate orders (the "Recommended Rate Orders")
in mid-December 1996. The Recommended Rate Orders provide for a 9.5% increase,
which was lower than requested, primarily due to the disallowance of ESOP
expense which historically was allowed in the rates. The Company objects to the
positions taken by the Director and intends to vigorously pursue its rights
under the Ordinance, including filing an appeal with the Refuse Collection and
Disposal Rate Board (the "Rate Board"), which has the authority to make the
final rate determination. See "Risk Factors -- Changes in Legislation and
Political Uncertainty -- Problems in Rate-Setting Process" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Collection Operations
The Company provides refuse collection services to residential, commercial
and industrial customers in California. Residential customers accounted for
approximately 43% of the Company's refuse collection revenues in fiscal year
1996, and commercial and industrial customers accounted for the remaining 57%.
Services to residential customers are typically provided pursuant to
municipal contracts or franchises that obligate the Company to collect from all
residences in a specified area. At inception, these contracts typically extend
for 5 to 20 years. As of September 30, 1996, the Company had 37 franchise
agreements with municipalities and served many additional customers through
operating contracts.
Commercial services are typically provided under contracts ranging from 1
to 3 years while contracts for the larger "roll-off" container services may
provide for either temporary or longer-term services. Fees are negotiated with
each customer and are determined by such factors as frequency of collection,
type and size of equipment furnished, and the type and volume or weight of the
waste collected.
San Francisco Operations. Since 1932, the Company has provided solid waste
collection and recycling in San Francisco pursuant to the Ordinance, which
provides that, with limited exceptions, only a collector that has been granted a
permit for a specified route may collect or transport solid waste on that route.
The Company's principal operating subsidiaries have held the only permits for
substantially all the routes subject to the Ordinance since 1932, which routes
serve virtually all of San Francisco. San Francisco operations represent the
single largest portion of the Company's business, accounting for approximately
170,000 of its customers and approximately 40% of its total revenues for fiscal
year 1996. The Ordinance permits refuse with "commercial value" (as defined in
the Ordinance and interpreted by the courts) to be collected without a permit.
In addition, debris boxes at construction sites do not require a permit under
the Ordinance. The Company competes for the placement of boxes at construction
sites and the collection of refuse with commercial value.
The Company's San Francisco permits continue until terminated under the
provisions of the Ordinance. Termination, or the award of permits to a
competitor, could occur if, among other things, the Company were to provide
inadequate service. None of the Company's permits has been terminated since
their initial grant in 1932. A vote to repeal or amend the Ordinance could also
adversely affect the status of the Company's permits. The Company defeated two
initiatives placed on the San Francisco ballot in 1993 and 1994 that, if
enacted, would have repealed or amended the Ordinance and opened residential and
commercial refuse collection to competition. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Ballot Initiatives Affecting
Ordinance."
If a similar initiative passes in the future, the Company believes that
although a portion of the Company's operations may be immediately affected,
California statutory law would not allow the Company to be completely displaced
by another exclusive waste collection provider for five years unless a buy-out
arrangement were reached between the Company and San Francisco on mutually
satisfactory terms or the permits were terminated pursuant to the existing
provisions of the Ordinance. Furthermore, the Company believes it would be
difficult to create an alternative to its transfer station anywhere in or around
San Francisco because of community resistance, permitting requirements and the
requirements of the California Environmental Quality Act.* See "Risk
Factors -- Changes in Legislation and Political Uncertainty -- Potential Flow
Control Legislation."
The Company currently deposits solid waste collected in San Francisco at an
independently owned landfill at favorable rates. These rates are set by an
agreement between San Francisco, the Company and the third party-owner of the
landfill, and are subject to annual increases for inflation and regulatory
costs. This agreement is one of several agreements to which the Company is a
party (the "Waste Disposal Agreements") relating to certain operations in San
Francisco that clarify the relationships among the City and County of San
Francisco, the Company and the third-party owner of the landfill at which all
non-hazardous solid waste collected in San Francisco is deposited. The Waste
Disposal Agreements continue until the earlier of the year 2053 or the deposit
of 15 million tons of waste in the landfill. Although estimates are uncertain,
the Company believes, based on historical disposal volumes, the Waste Disposal
Agreements will remain in force until at least 2012.*
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Franchise and Other Agreements. Outside of San Francisco, the Company
provides most collection services pursuant to franchise and other agreements
with local governmental entities that obligate the Company to collect from all
residences and, often, commercial establishments within a specified area. Such
agreements typically grant near-exclusivity, although some expressly allow
limited activities by others, such as residential self-hauling and recycling by
charitable or non-profit organizations. Certain agreements allow competition for
specified categories of commercial waste such as construction debris. A local
governmental entity may enter into multiple franchise or other agreements with
different collection companies, each covering a distinct territory within its
jurisdiction. The Company has multiple agreements with certain governmental
entities, in some cases representing the entity's entire jurisdiction and in
other cases representing only part of that entity's jurisdiction.
At inception, the Company's franchise and other agreements relating to its
collection operations typically have terms of between five and 20 years.
Although the Company's franchise and other agreements generally provide for
termination under specified circumstances, such as failure to provide adequate
and continuous service, failure to comply with applicable laws, or insolvency or
bankruptcy, the Company has never had an agreement terminated for such cause.
For fiscal year 1996, 74% of the Company's collection revenues, excluding San
Francisco operations, were generated under franchise and other agreements with
remaining terms of five years or more. In the past ten years, the Company has
been successful in renewing or extending substantially all of its franchise and
other agreements. In light of increasing competitive pressure in the waste
industry, and the risks of competitive bidding, there can be no assurance that
the Company will be able to renew existing franchise and other agreements, or
that such franchise and other agreements will yield levels of profit consistent
with past levels.* See "Risk Factors."
Changes in state or local laws could also terminate the exclusivity of
these agreements or otherwise subject the Company to greater competition in its
collection activities. Under California law, counties may be required to conduct
competitive bidding upon the expiration of collection franchise agreements,
although under certain conditions counties may extend existing franchise
agreements for one additional term (not to exceed 25 years) without such
bidding. The majority of the Company's franchise agreements are with
municipalities other than counties and are unaffected by this law. However, any
laws enacted in the future requiring competitive bidding could have a material
adverse effect on the Company's financial condition or results of operations.*
In addition, a California Court of Appeal ruled in 1994 that state facilities
such as state universities and other schools, correctional facilities, office
buildings, and parks are free to conduct competitive bidding despite exclusive
franchises granted under local ordinances. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Potential Competitive Bidding."
Rates. Refuse collection customers pay a single rate that is designed to
cover not only collection services, but all the services the Company performs as
to the materials it collects, including transfer, landfill disposal and
recycling. In most jurisdictions, rate boards, city councils or other local
governmental agencies are authorized to set the rates the Company may charge at
a level that allows the Company to recover projected specified costs and realize
a profit margin. Such specified costs generally include all direct operating
costs, such as direct collection costs (such as personnel and equipment); any
applicable recycling costs; operating costs or tipping fees for transfer
stations, landfills and other facilities; interest charged on leases;
depreciation; trust fund obligations associated with closure and maintenance of
landfills; and other costs. In San Francisco the Ordinance prescribes an
involved ratesetting procedure under which a rate board determines rates for
residential customers on a similar basis.
The Company generally applies for rate increases every one to three years
in each of its franchise areas to reflect changes in its costs of providing
services. Although rate increases have generally been satisfactory, at times the
Company has not succeeded in fully coordinating the timing and amount of rate
increases with increases in its expenses or capital expenditures, including ESOP
and other corporate-related costs, or has not succeeded in obtaining rate
increases to cover capital expenditures or increased costs, resulting in reduced
margins. Some of the Company's franchise agreements provide for inflation-based
adjustments to a negotiated rate. The negotiated rates may be adjusted for
specific regulatory and certain other cost increases. In September 1996 the
Company applied for an increase to its collection and disposal rates in the City
of San Francisco. The application requested an increase of 14.9%, to be
effective March 1, 1997, to fund several new
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recycling programs requested by the City, along with increases to recover
current and projected increases in operating costs. In accordance with the rate
procedures dictated by the Ordinance, the Director held hearings and filed the
Recommended Rate Orders in mid-December 1996. The Recommended Rate Orders
provide for a 9.5% increase, which was lower than requested, primarily due to
the disallowance of ESOP expense which historically was allowed in the rates.
The Company objects to the positions taken by the Director and intends to
vigorously pursue its rights under the Ordinance, including filing an appeal
with the Rate Board, which has the authority to make the final rate
determination. See "Risk Factors -- Changes in Legislation and Political
Uncertainty -- Problems in Rate-Setting Process" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Outside of San Francisco, commercial and industrial fees are generally
regulated by local governments and vary from customer to customer depending on
such factors as frequency of collection, volume or weight of waste, type of
equipment furnished by the Company, and distance from the customer site to the
Company's disposal facility. Although rates for commercial and industrial
customers in San Francisco are subject to negotiation and are not directly
regulated, historically the Company's practice has been to raise these rates
consistent with percentage increases in residential rates.
Recycling and Waste Diversion. The Company provides a variety of recycling
services, including material recovery services and other waste diversion
services (collectively, "recycling services"), under arrangements with various
local governments and directly with commercial customers. At times a substantial
portion of the Company's recycling revenues have been derived from the sale of
various grades of recycled paper and paper products. Prices of recyclable
commodities are volatile and cause fluctuations in the Company's recycling
revenues. In addition, the costs associated with mandated recycling efforts and
the resulting increase in supply of, and reduction in sales prices for,
recyclable materials place pressure on the Company's operating margins in its
recycling operations. See "Risk Factors -- Fluctuations in Prices for Recyclable
Commodities."
The Company owns and operates six transfer stations. Transfer station
ownership allows the Company to exercise greater control over the waste stream
from its collection operations and promotes greater efficiency in its recycling
and waste transportation activities. As of September 30, 1996, over 80% of the
waste delivered to these facilities came from the Company's collection
operations. The City and County of San Francisco requires that all refuse
collected in San Francisco by refuse collectors be deposited at a transfer
station owned by the Company.
Landfills
The Company operates 28 landfills in California, five of which it owns and
23 of which are owned by local governmental entities. Each of these landfills
generally accepts only non-hazardous waste, with the exception of certain wastes
that may be hazardous due to asbestos content.
Owners or operators of landfills face substantial liabilities, including
environmental impairment liabilities, closure and post-closure maintenance
obligations and corrective action obligations. With respect to all but one of
the third party landfills currently managed by the Company, the Company is a
contractor and is not the operator under the applicable permits. In those
circumstances, the Company is not responsible for closure and post-closure
maintenance obligation payments. In addition, in San Bernardino County, the
County has agreed to indemnify the Company for certain other liabilities.
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Owned Landfills. The following table sets forth certain information about
the five landfills owned by the Company:
<TABLE>
<CAPTION>
YEAR APPROXIMATE
LANDFILL PERMITTED
BEGAN LANDFILL
LANDFILL LOCATION OPERATIONS ACREAGE(A)
------------------------------------ ----------------------- ---------- -----------
<S> <C> <C> <C>
B & J............................... Vacaville, CA 1964 260
Cummings Road(b).................... Eureka, CA 1969 30
Ostrom Road(c)...................... Yuba County, CA 1995 220
Pacheco Pass(d)..................... Santa Clara County, CA 1963 60
Yuba-Sutter(e)...................... Marysville, CA 1967 100
</TABLE>
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(a) Includes all permitted landfill acres. Total landfill area is approximately
2,500 acres, including contiguous acres. Not all contiguous acres are
permittable.
(b) The Company has entered into an agreement that may result in the closure of
this landfill and the diversion of waste currently deposited there to an
alternative site.
(c) The permit for this landfill was obtained in December 1993. The Company
commenced construction and preparation of this site in the third calendar
quarter of 1994. Site utilization began in the second calendar quarter of
1995.
(d) Permitted acreage includes approximately 35 acres that can only be used for
the disposal of concrete, asphalt and similar inert demolition waste due to
the existence of geologic conditions unsatisfactory for landfill siting.
(e) This landfill substantially reached its capacity in November 1996. The waste
stream associated with this landfill is being transferred to the Ostrom Road
Landfill located 14 miles away.
Based on its estimates, the Company believes it owns landfills with
sufficient capacity to service each of the markets currently served for a
minimum of six years.* Although certain of the Company-owned landfills have
limited remaining capacity, the Company believes it will be able either to
redirect waste being deposited at these landfills under existing contracts to
Company owned landfills with substantial remaining capacity or extend the life
of the landfill by permitting additional acreage or redesigning the site.*
During fiscal year 1996, the Company's B & J and Ostrom Road landfills obtained
Class II permits, which allow these landfills to accept non-hazardous waste that
is capable of degrading water quality if not properly handled, in addition to
municipal solid waste. The Company's estimates of remaining landfill capacity
are updated annually and are based, among other things, on the terms of existing
permits, remaining permitted capacity and anticipated incoming waste volumes
taking into account projected community growth rates.
Of the waste deposited at Company-owned landfills for fiscal year 1996
approximately 88% was received from the Company's collection, waste diversion
and transfer station operations and 12% was received from independent third
party collectors, hauling companies and self-haulers.
Operated Landfills. The Company currently manages 23 third party-owned
landfills, 22 under contracts with the permitted operators and one under lease
from the landfill owner. These landfills have approximately 2,150 permitted
acres. Landfill operating agreements with third party owners generally provide
for payment to the Company of a fee based on tonnage received. In 1989, the
Company commenced operation of four landfills in San Bernardino County, and in
1991 commenced operation of an additional four landfills. In 1995, the Company
entered into a contract with San Bernardino County, pursuant to which the
Company on November 1, 1995, commenced operation with respect to all active
landfills in San Bernardino County (bringing the total number of landfills
operated by the Company in San Bernardino County to 17), and, the Company
assumed primary responsibility for designing and implementing a strategic plan
to identify and address San Bernardino County's long-term waste disposal needs.
The Company also assumed specific landfill management responsibilities including
closure and monitoring of non-active landfills and identification, permitting
and construction of landfill expansions.
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Approximately 14% of the Company's revenues for fiscal year 1996 were
derived from services performed for San Bernardino County. The Company's
revenues from San Bernardino County are derived from two categories of services.
The core service is the performance of ongoing landfill operations activities.
Over the term of the contract the amount of revenues from this core service will
vary primarily as a result of changes in volume of waste deposited at landfills
and changes in the Company's per ton compensation rate. The other component of
revenues represents activities associated with the planning and implementation
of the strategic plan to regionalize landfill operations in San Bernardino
County. This includes planning, engineering and construction management for
landfill expansions, transfer station construction and landfill closures. It is
anticipated that the majority of these activities will be completed over the
next 7 years, during which time San Bernardino County plans to spend over $200
million. While revenues generated from these activities are significant, the
Company generally earns lower margins than on its collection and disposal
operations, due to the fact that there is little capital investment required to
generate the additional revenues and revenues are provided on a cost plus profit
margin basis per the agreement. In addition, this business involves substantial
subcontractor, consulting and other related expenses paid to third parties. The
Company's agreement with San Bernardino County terminates on June 30, 2001. The
Company, at its option, may extend the agreement for up to an additional thirty
years, so long as the projected waste stream to the landfills meets certain
levels. However, each party may terminate the contract for default, failure to
reach an agreement regarding the reconfiguration of the landfills and other
facilities following a reduction in tonnage, or the bankruptcy or insolvency of
the other party. In addition, beginning July 1, 1999, San Bernardino County may
terminate the contract so long as it municipalizes such operations or uses a
competitive procedure to select a contractor, and either party may terminate the
contract for failure to reach an agreement regarding the redetermination of the
Company's per ton compensation rate (which rate must be redetermined every three
or four years, at the option of San Bernardino County).
On March 1, 1995, the Company commenced daily management activities of five
landfills covering approximately 700 permitted acres in San Diego County
pursuant to a contract that expires in 2000. The Company's other landfill
operation covering approximately 300 permitted acres is in Placer County,
California and expires in 2001.
Landfill Development. The Company regularly reviews the status of its
owned landfills for opportunities to expand the operating capacity of such
landfills. During fiscal year 1996 the Company obtained permits to expand the B
& J landfill from 141 to 256 permitted acres. Because the process of developing
new landfills or expanding existing landfills is lengthy, complex and expensive
there can be no assurance that the Company will be successful in its future
attempts to expand its landfills or develop new ones. See "Risk Factors --
Changes in Legislation and Political Uncertainty -- Difficulty of Obtaining
Landfill Permits."
Financial Assurance Obligations. Extensive regulation of landfills not
only affects their siting and operations but also imposes long-term obligations
on landfill owners or operators to make substantial efforts to close landfills
and maintain them following closure for at least 30 years. The Company believes
that where it operates landfills owned by local governmental entities, those
entities, as the holders of the relevant permits, are responsible for closure
and post-closure maintenance obligations.
For each landfill it owns, the Company is required to demonstrate financial
assurance for closure and post-closure maintenance costs. The Company makes
periodic deposits to trust funds so that at the time of landfill closure there
will be sufficient amounts to fund the Company's current estimates for all
closure costs and, under current California law, at least 15 years of
post-closure maintenance costs. Beginning in April 1997, California law will
require financial assurance for 30 years of post-closure maintenance. The
Company estimates, that as of September 30, 1996, the aggregate cost of its
closure and 30-year post-closure requirements is approximately $60.4 million.*
The foregoing estimates of closure and post-closure liabilities are based on
currently available information and current environmental and regulatory
requirements and may change if applicable regulations or the assumptions relied
on or facts and circumstances relating to the Company's landfills change.
California regulations also require the Company to provide financial
assurance contingency funds for the initiation and completion of corrective
action for certain possible releases of contaminants that may occur
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from its landfills into the groundwater, surface water or unsaturated zone,
whether such releases occur before or after closure of the landfill.
Regulations amended in 1992 also require California landfill operators to
demonstrate financial assurance to compensate third parties for bodily injury
and property damage arising out of landfill operations. Under the method adopted
by the Company, the regulations require funding of $1.0 million per landfill to
a maximum of $5.0 million Company-wide. To satisfy this requirement the Company
has established financial assurance mechanisms for each landfill. The Company
has obtained an insurance policy for one of its landfills not covered by the
method described above.
Special Waste and Hazardous Waste
The Company provides limited waste management services in connection with
five types of special waste: medical waste, waste water sludge, asbestos,
non-hazardous contaminated soil and ash.
In addition, the Company operates permanent household hazardous waste
collection facilities in four communities and periodically collects household
hazardous waste in other communities as part of special programs designed to
help reduce deposits of hazardous waste in the solid waste stream. The Company
also provides limited hauling and disposal services for asbestos and may also
handle hazardous waste from its load checking activities at its facilities. The
Company currently has no other plans to collect or dispose of hazardous or toxic
materials.
Environmental Regulation
The Company's business activities are subject to extensive and evolving
regulation under various complex, and at times overlapping and conflicting,
federal, state and local laws for the protection of public health and the
environment. These laws, and the numerous regulatory bodies responsible for
interpreting and enforcing them, impose significant restrictions and
requirements on the Company's activities. The Company believes that such
regulation will increase in the future.
To operate landfills, transfer stations and other waste processing
facilities, the Company must possess and maintain various governmental
approvals, operating permits and licenses, and in certain instances, must secure
various land use approvals. Obtaining approvals and permits to acquire, develop
or expand solid waste management facilities is difficult, time-consuming and
expensive and is sometimes opposed by local citizen groups or other private
parties. Once obtained, operating permits are subject under certain
circumstances to modification or revocation by the issuing agency and may be
altered by changing laws and regulations.
In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, and time
and frequency of collection.
The Company's operation of solid waste management facilities subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations, as well as financial assurance obligations relating to third party
liability, corrective actions, and closure and post-closure maintenance.
In addition to costly and restrictive regulation, other factors, the
long-term effects of which are unpredictable, may have a significant effect on
the Company's operation of landfills. Increasing public opposition to the siting
and operation of landfills is adding to the length of time required to obtain
necessary permits and approvals for new landfills and the expansion of existing
landfills. Moreover, there is a national trend to attempt to reduce the volume
of solid waste and the dependence on landfill disposal by promoting source
reduction, waste transformation and recycling programs.
During the ordinary course of its operations, the Company may from time to
time receive citations, notices and comments from regulatory authorities that
such operations are not in compliance with applicable environmental regulations.
Upon receipt of such citations, notices or comments, the Company works with the
authorities in an attempt to address the issue. In some instances, where the
Company operates a landfill or transfer station pursuant to an agreement with a
county or other governmental body, responsibility for the
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matters referenced in such citations, notices or comments lies with such
governmental body. Failure to correct the problems to the satisfaction of the
authorities could lead to fines or a curtailment or cessation of the landfill or
transfer station's operations.
Compliance with current or future regulatory requirements may require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. While the Company intends to apply for
rate increases whenever possible to cover such increased costs, there is no
assurance that it will be able to pass all or a portion of these costs on to its
customers.
Federal Regulation
The principal federal statutes affecting the Company's business operations
are:
The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA
regulates the handling, storage, treatment, transportation and disposal of
hazardous and non-hazardous wastes and requires states to develop programs to
insure the safe disposal of solid waste. Subtitle D of RCRA establishes a
framework for federal, state and local government cooperation in controlling the
management of nonhazardous solid waste, and prohibits the operation of municipal
solid waste landfills that fail to meet minimum federal standards for protecting
human health and the environment. Under these regulations, state and local
governments retain primary responsibility for ensuring enforcement and
compliance with state and federal minimum standards by landfills within their
jurisdictions.
The United States Environmental Protection Agency (the "EPA") adopted
regulations under Subtitle D of RCRA that provide minimum standards or criteria
establishing landfill location restrictions, design standards, operating
criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements and corrective action
requirements. These regulations establish stringent requirements for liner
design, leachate (liquid that has leached from the landfill and become
contaminated through contact with solid waste) collection systems, groundwater
testing wells and methane gas control systems. A landfill that fails to meet the
Subtitle D criteria will be deemed to be engaged in "open dumping" in violation
of RCRA. Most of these regulations have been in effect in California for several
years. The EPA has approved California's application to operate California's
permitting program for solid waste landfills under Subtitle D.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund" or "CERCLA"). CERCLA imposes liability for the investigation
and clean up of, or natural resource damages from, facilities from which there
has been, or is threatened, a release of a hazardous substance into the
environment. Current owners or operators of the site, parties who were owners or
operators at the time the hazardous substance was disposed of, and all
generators of transporters of a hazardous substance that is released from a site
are potentially responsible parties. Liability under CERCLA is strict, joint and
several, meaning that it can be imposed upon any potentially responsible party
even if such party complied with all laws and regulations in effect at the time
of the act giving rise to liability or has generated no more than a very small
portion of a facility's contamination. Many of the more than 700 substances
listed by the EPA as "hazardous substances" (including asbestos) can be found in
household waste.
CERCLA investigation and cleanup costs can by very substantial. Many of the
sites addressed under CERCLA are or were municipal solid waste landfills that
ostensibly never received hazardous wastes. Even if the Company's landfills
never received hazardous wastes as such, one or more hazardous substances may
have come to be located at these landfills. The same is true of other industrial
properties owned or operated by the Company. If the Company were to be found to
be a responsible party for a CERCLA cleanup, the enforcing agency could hold the
Company completely responsible for all investigative and remedial costs, even if
others were also liable. The Company's ability to obtain reimbursement from
others for their allocable share of such costs would be limited by the Company's
ability to locate such other responsible parties and to prove the extent of
their responsibility and by the financial resources of such other parties.
Legislation has been introduced in Congress which, if passed would limit the
liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. If such legislation becomes law, the
Company's ability to seek contribution from municipalities for CERCLA cleanup
costs would be limited even if the hazardous
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substances requiring remediation at one of the Company's facilities were
generated or transported to the facility by a municipality.
The Federal Water Pollution Control Act (the "Clean Water Act"). The Clean
Water Act regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites, into surface waters of the United States.
The discharge of runoff or leachate from the Company's landfills into waters of
the United States would require the Company to apply for and obtain a discharge
permit, conduct sampling and monitoring and under certain circumstances, reduce
the quantity of pollutants in the discharge. Also, under new federal storm water
regulations, many landfills, transfer stations and other Company operations are
now required to obtain storm water discharge permits and to develop a storm
water pollution prevention and monitoring program.
The Clean Air Act. The Clean Air Act, as amended, provides for federal,
state and local regulation of emissions of air pollutants into the atmosphere.
The EPA has proposed new source performance standards regulating air emissions
of certain pollutants (methane and non-methane organic compounds) from municipal
solid waste landfills. The EPA may also issue regulations controlling the
emissions of particular regulated air pollutants from municipal solid waste
landfills. In addition, the EPA has issued standards regulating the handling of
asbestos-containing materials.
Occupational Safety and Health Act of 1970 ("OSHA"). OSHA establishes
certain health and safety standards for the workers employed by the Company.
Certain of these standards, including standards for notices of hazards, safety
in evacuation, and the handling of asbestos, may apply to certain of the
Company's operations.
State and Local Regulation
Each state in which the Company now operates or may operate in the future
has laws and regulations for the protection of human health and the environment
that affect various operations of the Company. These laws and regulations
govern, among other things, solid waste disposal, water and air pollution and,
in most cases, the design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. Among the principal California
statutes affecting the Company's business operations are:
The California Integrated Waste Management Act. The California Integrated
Waste Management Act of 1989 establishes a framework for the regulation of
landfills and other solid waste facilities in California through a system of
solid waste facilities permits administered jointly by the California Integrated
Waste Management Board (the "Waste Board") and the local enforcement agency
(generally a county health or environmental department). Periodic site
inspections and permit reviews are undertaken by the local enforcement agency to
ensure that the landfill operations comply with current health, safety and
environmental regulations. Among those regulations are minimum performance
standards for proper operation, closure, post-closure maintenance and ultimate
re-use of landfill sites to assure that public health and safety and the
environment are protected from pollution due to the disposal of solid waste.
The California Integrated Waste Management Act also requires each local
government to divert 25% of its waste from landfill disposal through source
reduction, recycling and composting. This required level will increase to 50% by
the beginning of calendar year 2000. Compliance with these diversion goals could
substantially reduce the tonnage of waste deposited in the Company's landfills.
Closure/Post-Closure. A part of the California Integrated Waste Management
Act known as the Eastin Statute requires landfill owners and operators to (i)
develop closure and post-closure maintenance plans and submit plans to both the
Waste Board and the applicable Regional Water Quality Control Board for
approval, (ii) prepare an estimate of closure and post-closure maintenance
costs, and (iii) establish a mechanism acceptable to the Waste Board to
demonstrate financial responsibility for such estimated costs.
Regulations promulgated under the Eastin Statute (the "Eastin Regulations")
impose closure and post-closure requirements governing the removal of
structures, decommissioning of environmental control systems, construction and
maintenance of final cover, grading, drainage and site face, slope protection
and erosion control (revegetation), leachate control and monitoring systems,
groundwater monitoring facilities and landfill
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<PAGE> 12
gas monitoring and control systems. Landfill owners and operators must submit
preliminary closure and post-closure maintenance plans at the time of the
application for any existing solid waste facilities permit review or upon the
first application for a permit. Existing permit reviews generally occur in
connection with modifications for the permit or, if earlier, five years
following the most recent permit review. In addition, final closure and
post-closure plans must be submitted two years before the anticipated date of
landfill closure. The EPA has approved California's application to operate its
existing solid waste program under Subtitle D.
The Eastin Regulations require the owner or operator of each landfill to
(i) estimate the cost associated with closing the landfill in accordance with
the foregoing requirements, including the costs of conducting post-closure
maintenance for a period of at least 30 years after closure, (ii) certify such
cost estimates to the Waste Board and the local enforcement agency, and (iii)
demonstrate that the owner or operator has the financial resources to conduct
closure and post-closure maintenance activities. One of the means by which an
owner or operator can demonstrate financial assurance is to establish a
statutory trust fund whereby the owner or operator is committed to make yearly
contributions over the remaining life of the landfill. This is the primary
mechanism used by the Company for the landfills that it has responsibility for
closing. Each year's minimum trust fund deposits are based upon a regulatory
formula using the ratio of the landfill's annual capacity filled, to the
remaining permitted capacity, multiplied by the remaining cost estimate to be
funded. Because these costs can be substantial, the annual trust fund
contributions could have a significant impact on the Company's cash flow if the
Company were unsuccessful in collecting such costs in tipping or collection
fees.
Hazardous Waste Control Law and Carpenter-Presley-Tanner Hazardous
Substance Account Act. The California Environmental Protection Agency's
Department of Toxic Substances Control has broad authority under the Hazardous
Waste Control Law, similar in may respects to Subtitle D of RCRA, to regulate
generators and transporters of hazardous waste and facilities that treat, store
or dispose of hazardous waste. California also has enacted the
Carpenter-Presley-Tanner Hazardous Substance Account Act, which is the state's
"Superfund" law, with provisions similar to those of the federal CERCLA.
The Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"). The
Porter-Cologne Act regulates the discharge of waste that may affect waters of
California, whether surface or subsurface, and whether by point or non-point
sources of discharge. This would include the discharge of waste into a landfill.
Each discharge must file a report of waste discharge with the regional board
having jurisdiction over the location of the proposed discharge, and the
regional board issues a permit, known as "waste discharge requirements," that
limits the quantity and manner of the discharge to meet water quality standards
and to ensure the protection of beneficial used of the receiving waters.
Pursuant to the Porter-Cologne Act, in 1984, California adopted regulations
imposing design, siting, and operational standards for waste disposal sites to
minimize the extent to which landfill runoff and leachate may pose a threat to
surface or groundwater quality. These standards also apply to new or expanded
waste disposal facilities.
The federal Clean Water Act allows states to assume the EPA's
responsibilities over point source discharges of pollutants into surface waters.
California has assumed those responsibilities under the Porter-Cologne Act.
California has also adopted regulations requiring owners and operators of
landfills to provide financial assurance for the initiation and completion of
corrective action for known or reasonably foreseeable releases of contaminants
from landfills into the groundwater, surface water or unsaturated zone.
Other States' Regulation. Although almost all of the Company's business is
currently conducted in California, the Company has historically and in the
future is likely to conduct business in other states with statutes similar to
California's that would regulate the Company's handling, transportation and
disposal of waste, and the design, operation, maintenance, closure and
post-closure care of solid waste disposal facilities and underground storage
tanks ("USTs") regulation. These states may have additional rules with which the
Company would have to comply.
Underground Storage Tank Regulation. USTs in California are regulated by
federal law under RCRA, by a California law that closely parallels the
requirements of the federal law and by local regulation. These regulations
contain extensive requirements relating to monitoring, leak detection and
prevention, permitting,
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reporting, and other matters, including the required removal or closure in place
of tanks that are no longer in use. In connection with its business operations,
the Company maintains numerous USTs, all of which are used for the storage of
petroleum products, a hazardous substance.
The Company has 14 USTs that it is required to remove by 1998 (including
the remediation of any associated contaminated soil). Removing USTs can be
costly because of the possibility of discovering contaminated soil and
groundwater, and the need to remove or remediate such contamination. Based upon
its experience in its UST removal program, the Company expects that removal of
its 14 USTs will cost approximately $0.6 million over two years, exclusive of
any material remediation that is subsequently determined to be necessary.* With
the exception of two sites at which the Company anticipates that up to an
additional $0.5 million may be required to remediate contamination, the Company
is not aware of any USTs that will require significant soil or groundwater
remediation.* However, in most instances the Company has not conducted soil or
groundwater testing sufficient to assess fully the extent and cost of required
remediation. These costs will not be known until such tests are completed or the
USTs are removed.
Owners and operators of USTs containing petroleum also must demonstrate
financial responsibility to pay for corrective action and third party claims
arising from a release from their USTs. The Company has purchased insurance to
make this demonstration.
Flow Control. Many states and municipalities attempt to direct the flow of
municipal solid waste through a variety of means, including the passage of laws
and ordinances requiring solid waste to be processed or disposed of at a
particular facility. In addition, some municipalities grant franchises and
permits that have the effect of limiting who may collect solid waste and where
such waste may be brought for disposal. In 1994, the United States Supreme
Court, in the case of Carbone v. Town of Clarkstown, held unconstitutional a
local ordinance that required all solid waste generated within or brought into
the locality to be disposed of at a particular transfer station that the town
had guaranteed a certain minimum tonnage of solid waste, in order to help
finance the construction of the transfer station. The Court held that the
ordinance discriminated against interstate commerce by allowing only the favored
facility to process solid waste from the town and effectively "hoarding"
commerce in the service of processing solid waste for the benefit of local
economic interests. The Court found that the primarily economic reasons for
enacting the ordinance could not justify the law's discrimination against
interstate commerce.
Although the Company believes there are many significant differences
between the facts in Carbone and the circumstances relating to the collection
franchises, permits and agreements held by the Company and to government actions
related to such franchises, permits and agreements, it is possible that these
franchises, permits and agreements could be challenged under a similar
rationale. In that event, the municipalities involved would have to show that
their franchises, permits and agreements (i) do not regulate interstate
commerce, (ii) do not discriminate against interstate commerce and do not impose
an excessive burden on interstate trade in relation to the total benefits
conferred; or (iii) are necessary to advance legitimate local interests. There
can be no assurance that such franchises, permits and agreements would be
upheld.
Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress.
At present, it is impossible to know in what form such a bill, if any, will pass
the Congress, but the attempts to pass such a bill have been unsuccessful to
date. Although these bills appear to be intended to limit, rather than broaden,
the scope of Carbone, there can be no assurance that a bill will not be enacted
that will adversely affect the legality of exclusive franchises, agreements or
permits under the interstate commerce clause.
Competition
The solid waste services industry is highly competitive and requires
substantial capital, technical expertise and human resources. The industry is
comprised of four large national waste service companies (WMX Technologies,
Inc., Browning-Ferris Industries, Inc., USA Waste Services, Inc. and Allied
Waste Industries, Inc. -- Laidlaw Waste Systems, Inc.) and several smaller
national companies, as well as numerous regional and local companies of varying
sizes and competitive resources. Many of the Company's competitors have
significantly greater financial and operating resources and a lower cost of
capital than the Company and can
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take advantage of less capital intensive environmental regulatory financial
assurance obligations than those with which the Company is required to comply.
Additionally, in smaller markets, the Company may be at a competitive
disadvantage with respect to regional and local companies which may have
significantly lower operating costs. In its landfill activities, the Company
also competes with cities and counties that conduct their own waste disposal
services. These municipalities may have the advantages of access to tax revenues
and tax exempt financings as well as the ability to direct the collection and
disposal of waste in their respective jurisdictions.
Most of the Company's collection operations are conducted pursuant to
franchise agreements, permits and licenses that make the Company the exclusive
provider of most waste services in a specific geographic area. However, each of
these arrangements has a specific duration except in San Francisco, and the
Company may become subject to competition if these arrangements are not extended
prior to maturity. The Company competes for collection services primarily on the
basis of service and price. Transfer station activities are often tied to
collection operations so the same competitive considerations apply. Competition
among landfills is based upon price, service and the proximity of the landfill
to the waste generator. Competition for operation of landfills under contract is
based on price and service. The Company believes that from time to time,
competitors offer substantially lower prices for their services in an effort to
maintain or expand market share or win a competitively bid municipal contract.
The industry is undergoing significant consolidation, characterized by the
acquisition of smaller regional and local operations by larger entities,
mergers, the privatization of operations that local governments no longer wish
to conduct and the reduced presence of smaller regional and local operations
caused by the ability of larger entities to bid for franchises and contracts at
prices such smaller operations cannot match. Because of the difficulty in
obtaining approvals to operate in communities that already have established
service providers, competition for the acquisition of other companies and
price-related competition upon the renewal of existing contracts and franchises
are increasingly intense. In addition, the Company believes that a number of its
competitors have full-time personnel primarily dedicated to locating, evaluating
and securing business expansion opportunities and acquisitions -- including
environmental and regulatory experts, engineers, attorneys, lobbyists, financial
and accounting personnel and finders. The Company does not have employees solely
dedicated to acquisition or business expansion activity and may be at a
competitive disadvantage if it is unable to identify, adequately evaluate or
respond to business opportunities or incurs higher costs than are borne by its
competitors. Accordingly, it may become uneconomical for the Company to make
further acquisitions, or the Company may be unable to locate suitable
acquisition candidates, particularly in markets the Company does not already
serve.
Risk Factors
The following is a discussion of certain risks and uncertainties that could
cause results to differ materially from predictions, estimates and expectations
expressed by the Company in this Form 10-K.
Geographic Concentration of Business
The Company is dependent on a number of franchise contracts and operating
permits for a significant portion of its revenues. Approximately 40% and 14% of
the Company's revenues for fiscal year 1996 were derived from services performed
in the City and County of San Francisco and for the County of San Bernardino,
respectively. In San Francisco, the Ordinance provides that, with certain
limited exceptions, only a collector that has been granted a permit for a
specified route may collect or transport solid waste on that route in the City
and County of San Francisco. Although the Company holds permits for
substantially all routes covered by the Ordinance, a permit may be revoked or
additional permits granted to third parties if, among other things, the Company
were to provide inadequate service, such as a failure to collect refuse properly
or overcharging. The granting of additional permits due to inadequate service is
required if 20% or more of the customers on a route sign a petition stating that
the Company's service has been inadequate and the Director of the Department of
Public Health finds such statement to be correct. Further, the Ordinance could
be repealed or amended by the vote of the electorate in a way that is
unfavorable to the Company. A change in the Ordinance and the possible loss by
the Company of one or more of its permits could have a
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material adverse effect on the Company's business, financial condition and
results of operations. However, the Company believes that California law would
not allow it to be completely displaced by another exclusive waste collection
provider for five years if the Ordinance were repealed, unless the permits were
terminated pursuant to the existing provisions of the Ordinance. The Company's
agreement with San Bernardino County terminates on June 30, 2001. However, each
party may terminate the contract for default, failure to reach an agreement
regarding the reconfiguration of the landfills and other facilities following a
reduction in tonnage, or the bankruptcy or insolvency of the other party. In
addition, beginning July 1, 1999, San Bernardino County may terminate the
contract so long as it municipalizes such operations or uses a competitive
procedure to select a contractor, and either party may terminate the contract
for failure to reach an agreement regarding the redetermination of the Company's
per ton compensation rate (which rate must be redetermined every three or four
years, at the option of San Bernardino County).
Substantially all of the Company's assets and operations are located in
California. An economic slowdown in California (such as occurred in the early
1990s) or a change in California's environmental or related regulations that
negatively affects the waste management industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
Changes in Legislation and Political Uncertainty
The waste management industry is subject to federal, state and local
statutes, regulations, ballot initiatives and judicial decisions that impose
significant risks and compliance burdens on the Company. The adoption or
promulgation of new, or the amendment of existing, legislation and regulations
could cause the Company to lose franchises, reduce the value of its existing
franchises or require the Company to modify its waste disposal facilities and
methods of operation at substantial cost. In addition, because operations of
waste management companies are the subject of a high level of public concern,
unfavorable publicity may have an adverse effect on the Company.
Ballot Initiatives Affecting Ordinance. In November 1993 and November
1994, initiatives were placed on the San Francisco general ballot which, if
passed, would have repealed or amended the Ordinance and would have opened
refuse collection in San Francisco to competition. Although these initiatives
were defeated (by votes of 76% to 24% and 65% to 35%, respectively), there can
be no assurance that other attempts will not be made to implement legislation
with a material adverse effect on the Company's operations. The Company incurred
costs in connection with its campaigns to defeat the 1993 and 1994 initiatives
and may incur significant costs in connection with future ballot initiatives, if
any. Future attempts to implement legislation may be financed by persons having
greater resources than the Company and may be successful in modifying or
repealing the Ordinance. There can be no assurance that the Ordinance will not
be modified or repealed in the future.
Potential Competitive Bidding. The Company provides waste collection
services in San Francisco pursuant to permits granted under the terms of the
Ordinance and in other communities generally pursuant to exclusive franchise or
other service agreements. In the event of the amendment or repeal of the
Ordinance or upon the expiration or termination of a franchise or service
agreement in other communities, the award of a franchise or service contract may
be determined by competitive bidding. The waste management industry is intensely
competitive and many of the Company's competitors have greater financial and
other resources than the Company and therefore there can be no assurance that
the Company will succeed in having its bid for such franchise or other service
contract accepted or that such franchise or other service contract, if accepted,
will be on terms and at prices which result in profit margins similar to those
currently earned by the Company.
Problems in Rate-Setting Process. The Company generally seeks to recover
all of its operating costs, including the costs of recycling services, landfill
closure and post-closure obligations and tipping fees in the rate-setting
proceedings that determine many of its collection, transfer station and landfill
rates. However, rate-setting bodies sometimes have been reluctant to allow all
of the Company's operating and related costs, including capital expenditures, to
be reflected in its rates. Political pressure has occasionally inhibited local
governments from allowing large rate increases and caused them instead to
increase rates gradually. Lack of public understanding of new regulatory
requirements which can significantly affect the Company's operating
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<PAGE> 16
costs, especially relating to recycling mandates and landfill closure and
post-closure maintenance, has sometimes made it difficult for the Company to
obtain rate increases to cover such costs. In addition, certain municipalities,
including San Francisco, have not allowed the Company to recover through its
rates some or all ESOP or other corporate-related expenses. In September 1996,
the Company applied for an increase to its collection and disposal rates in the
City of San Francisco. The application requested an increase of 14.9%, to be
effective March 1, 1997, to fund several new recycling programs requested by San
Francisco, along with increases to recover current and projected increases in
operating costs. In accordance with the rate procedures dictated by the
Ordinance, the Director held hearings and filed the Recommended Rate Orders in
mid-December 1996. The Recommended Rate Orders provide for a 9.5% increase,
which was lower than requested, primarily due to the disallowance of ESOP
expense which historically was allowed in the rates. The Company objects to the
positions taken by the Director and intends to vigorously pursue its rights
under the Ordinance, including filing an appeal with the Rate Board, which has
the authority to make the final rate determination. If the Company is
unsuccessful in its attempt to modify the Recommended Rate Orders in San
Francisco, its future annual operating results and cash flow could be adversely
impacted by as much as $4.0 million (the amount of ESOP expense recovery denied
reimbursement).* In addition, if the Company is unsuccessful in its appeal, the
Company expects that by the end of fiscal year 1997 potential availability under
the Credit Agreement will be reduced by up to approximately $12 million and the
Company's ability to incur certain other future debt financing could be
significantly curtailed or eliminated.* Given these difficulties, there can be
no assurance that the Company will succeed in obtaining timely rate increases
sufficient to cover all costs or sufficient to maintain profit margins at
historic levels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Potential Flow Control Legislation. Many states and municipalities attempt
to direct the flow of municipal solid waste through a variety of means,
including the passage of laws and ordinances requiring solid waste to be
processed or disposed of at a particular facility. In addition, some
municipalities grant franchises and permits that have the effect of limiting who
may collect solid waste and where such waste may be brought for disposal. In
1994, the United States Supreme Court, in the case of Carbone v. Town of
Clarkstown, held unconstitutional a local ordinance that required all solid
waste generated within or brought into the locality to be disposed of at a
particular transfer station for which the town had guaranteed a certain minimum
tonnage of solid waste in order to help finance the construction of the transfer
station. Although there are many significant differences between the facts in
Carbone and the circumstances relating to the collection franchises, permits and
agreements held by the Company and to government actions related to such
franchises, permits and agreements, it is possible that these franchises,
permits and agreements could be challenged under a similar rationale. There can
be no assurance such a challenge would not be successful or would not adversely
affect the enforceability of the Company's exclusive franchises, permits and
agreements. Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress
but the attempts to pass such bills have been unsuccessful to date. At present,
it is impossible to predict the form in which such a bill, if any, will pass.
There can be no assurance that a bill will not be enacted that will adversely
affect the enforceability of exclusive franchise agreements or permits under the
interstate commerce clause of the U.S. Constitution.
Adverse Publicity. Because the Company's business is dependent on
approvals of political bodies, unfavorable publicity affecting public attitudes
or perceptions of the Company could result in political pressure, including
government action, which may have an adverse effect on the Company's business.
The Company has in the past and may from time to time in the future receive
unfavorable publicity relating to litigation, regulatory actions and other
claims, including those involving environmental issues and employment practices.
Also, in the ordinary course of its business, the Company makes political
contributions to various state and local elected officials or candidates for
elective office and pays substantial compensation to consultants, lobbyists and
business opportunity finders, including persons who are former officials or were
formerly employed by officials of municipalities with which the Company does
business or may seek to do business. These activities could become the subject
of unfavorable publicity. There can be no assurance that unfavorable publicity
relating to Norcal or its affiliates will not have an adverse effect on the
Company's business or prospects.
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Environmental Regulation and Potential Litigation
The Company's operations are subject to, and substantially affected by,
numerous federal, state and local laws and regulations that govern environmental
protection, zoning, public health and safety and other matters. In recent years,
these regulations have become increasingly stringent (particularly in
California).
These requirements and standards change and, to comply with new
requirements, the Company may from time to time be required to make significant
capital and operating expenditures. These expenditures may be necessary to
modify, replace or supplement equipment and facilities at substantial cost and
without any resulting increase in revenues. In addition, the Company will be
required to make substantial expenditures to satisfy statutory obligations
concerning closure and post-closure maintenance of the landfills it owns. The
Company may be unable to pass some or all of these expenditures on to its
customers through rate increases. Even if such expenditures can be passed on,
the Company may experience significant delays in recovering these expenditures.
Moreover, the cost of closure and post-closure monitoring may exceed the amount
the Company has set aside in trust funds and reserves to satisfy its regulatory
obligations.
Environmental regulations may also impose restrictions on the Company's
operations. In order to develop and operate a landfill or other solid waste
management facility, for example, the Company usually must obtain, maintain in
effect and periodically renew several permits and often must obtain zoning,
environmental or other land use approvals. These permits and approvals are
difficult and time consuming to obtain or renew and may, under certain
circumstances, be modified or revoked by the issuing agency. Additionally, from
time to time, the Company may be subjected to actions brought by citizens'
groups or other private parties in connection with the grant of permits or
alleging violations of permits or other regulatory requirements. There can be no
assurance that the Company will successfully obtain and maintain in effect the
permits and approvals required for the successful operation and growth of its
business. The Company's failure to obtain or maintain in effect a significant
permit could adversely affect the Company's business and financial condition.
In the normal course of its business, the Company may become subject to
various judicial and administrative proceedings involving federal, state or
local agencies, or private parties. These proceedings may seek to impose fines
on the Company, to revoke or deny renewal of an operating permit or license held
by the Company, or to require the Company to remediate environmental problems.
The Company could incur substantial legal expenses during the course of such
proceedings and the outcome of one or more of these proceedings could have an
adverse impact on the Company's business.
Difficulty of Obtaining Landfill Permits. Obtaining the zoning approvals
and permits required to develop new landfills or expand existing landfills is a
lengthy, complex and expensive process. Permit applications are generally
subject to extensive governmental scrutiny, as well as comment and opposition by
local citizens. Several years may be required to obtain all necessary operating
permits, during which time the Company may become the target of litigation
opposing the project. There can be no assurance that the Company will be able to
complete its current landfill development projects, expand other existing
landfills or develop new landfills. The failure to achieve these objectives
could have a material adverse effect on the Company and its results of
operations.
Possible Liability for Environmental Remediation and Damages
With limited exceptions, federal and state laws impose joint, several and
strict liability upon present and former owners, operators and users of
facilities that release certain hazardous substances into the environment and
the generators and transporters of those substances, regardless of the care
exercised by such persons and regardless of when the hazardous substance is
first detected in the environment. All such persons may be liable for the costs
of site investigation, clean up and natural resource damage. Many of such
hazardous substances can be found in household waste. The Company may face
claims for remediation of environmental contamination, personal injury, property
damage or damage to natural resources with respect to facilities it currently or
formerly owned, operated or used. Costs for remediation of, and damages and
penalties for, environmental contamination can be substantial and if incurred by
the Company such liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
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The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. There can be no assurance that the
Company will identify all problems or risks in connection with the businesses it
acquires, including environmental problems or risks. As a result, the Company
may have acquired, or may in the future acquire, landfills or other properties
that have unknown environmental problems and related liabilities. The Company
will be subject to similar risks and uncertainties in connection with the
acquisition of facilities that formerly had been operated or owned by businesses
acquired by the Company.
A subsidiary of the Company has indemnification obligations with respect to
damages, removal and remedial costs associated with the deposit of hazardous and
certain other types of waste to the City and County of San Francisco and the
owner of the landfill at which such subsidiary deposits a substantial amount of
waste. Neither the Company nor the subsidiary maintains insurance with respect
to these indemnification obligations, although certain costs resulting from such
obligations may be reimbursed through a reserve fund maintained by the City and
County of San Francisco or through rate increases. There can be no assurance
that the reserve fund or rate increases will be adequate to satisfy such
indemnification obligations.
Insurance, Bonding and Letters of Credit
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. Liability for environmental damage
significantly in excess of these limits could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to obtain such insurance in the
future. The Company also has underground storage tank liability insurance to
satisfy financial assurance requirements mandated under state and federal law.
The current policy has a limit of $1.0 million per loss with an annual aggregate
limit for all losses of $1.0 million, covering pollution conditions emanating
from the Company's locations which result in bodily injury or property damage
beyond the boundaries of these locations.
The Company carries a broad range of insurance coverage that it considers
adequate to protect its assets and operations from "risk of loss." The Company's
commercial general liability, general business automobile liability, and
umbrella and excess liability policies provide an aggregate of $50.0 million
coverage for any single occurrence, subject to a variety of exclusions and a
self-insurance requirement of $500,000. Substantially all of the Company's
present workers compensation liabilities are self-insured and some of its
pre-existing workers' compensation liabilities are self-insured; however, this
liability is capped at a maximum of $350,000 per claim with workers'
compensation insurance covering liabilities in excess of this amount. In
addition, employee and certain retiree healthcare liabilities are self-insured.
Norcal also provides director and officer and ERISA fiduciary insurance.
The Company is required to post performance bonds in connection with
certain contracts on which it bids. In addition, the Company is usually required
to post a performance bond or a bank letter of credit at the time of execution
of a municipal collection contract. Some of these performance bonds are secured
by letters of credit posted by the Company. At September 30, 1996, the Company
had available performance bonds outstanding in the aggregate amount of $23.7
million, and had provided its surety companies with letters of credit of
approximately $5.8 million to secure the Company's obligations to indemnify the
surety companies. If the Company were to be unable to obtain surety bonds or
letters of credit in sufficient amounts or at reasonable rates, it might be
precluded from bidding on certain contracts, entering into additional municipal
collection contracts or obtaining or retaining landfill operating permits. See
"Risk Factors -- Competitive Industry."
As of September 30, 1996, the Company had $3.6 million of additional
letters of credit outstanding, most of which relate to workers' compensation
deferred premiums and landfill operation contract matters.
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Required Payments for ESOP Participant Benefits
To the extent Norcal contributes funds to the ESOP, in order for the ESOP
to pay cash benefits due to retired, terminated or withdrawing ESOP
participants, or to the extent Norcal is obligated to repurchase common stock
distributed to participants, Norcal will have less cash available to make
payments on its outstanding indebtedness or for other reasons. The amount Norcal
may contribute to the ESOP to fund such ESOP distribution obligations (or may
use to repurchase common stock distributed by the ESOP) will increase
significantly in the future as the Company's workforce ages and retires, as
additional shares of common stock are allocated to participants, or if the value
of the common stock increases.
Dependence on Senior Management
The Company is highly dependent on the efforts of its senior management
team. The loss of services of any member of senior management may have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company's success may also be dependent on its
ability to hire and retain additional qualified management personnel. There can
be no assurance that the Company will be able to hire and retain such personnel.
The Company does not maintain "key man" life insurance.
Competitive Industry
The solid waste industry is highly competitive. Operations require
substantial technical, managerial and financial resources. The Company competes
with large national solid waste companies, including WMX Technologies, Inc.,
Browning-Ferris Industries, Inc., USA Waste Services, Inc. and Allied Waste
Industries, Inc. -- Laidlaw Waste Systems, Inc. and their affiliates, several
small national companies and with regional and local companies, some of which
have significantly greater financial and other resources, lower cost of capital
and more established market positions than the Company. Additionally, in smaller
markets, the Company may be at a competitive disadvantage with respect to
regional and local companies, which may have significantly lower operating
costs. The Company's competitors also may not be subject to restrictions on
their ability to incur new indebtedness, obtain necessary performance bonds or
letters of credit, or make capital expenditures, strategic acquisitions or
engage in certain expansions of their businesses such as those imposed on the
Company by the Credit Agreement and the indenture relating to the Senior Notes
(the "Indenture"). As a result, competitors of the Company may be better able to
compete more aggressively for new permits and franchises (including those held
by the Company), pay higher prices for acquisition candidates, withstand
economic downturns and volatility in prices for recyclable commodities and bear
the costs of new regulations.
Acquisition-Related Risks
The Company intends to grow, in part, through the acquisition of additional
franchises, contracts, permits and other companies. Such growth, if any, may
place significant strain on the Company's management, working capital and
financial control systems. As a result, the Company's future operating results
will depend, in part, on its ability to make acquisitions at appropriate
purchase prices and integrate successfully such acquisitions, including its
ability to recruit, if necessary, qualified management and other personnel to
supervise such operations and improve financial controls. There can be no
assurance that the Company will be able to make and manage such acquisitions
successfully or that such acquisitions will not materially and adversely affect
the Company's results. To fund significant expansion, the Company may require
financing for amounts which exceed the amount of its internally generated cash
and borrowing capacity under existing credit facilities. There can be no
assurance that such financing will be available. Moreover, the Company's lack of
a publicly traded equity security and its alternative cost of financing, which
may be higher than that of its competitors, could limit the amount the Company
could prudently pay for acquisition candidates. Also, the Credit Agreement
restricts the Company's ability to make acquisitions. For the remainder of
fiscal 1997, without significant improvements in cash flow and operating
results, the Company will likely be restricted under the Indenture from certain
borrowings for material acquisitions (other than under the Credit Agreement) to
support the growth of its business.*
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Substantial Leverage
As of September 30, 1996, the Company had outstanding long-term debt of
$176.7 million and stockholder's equity of $6.1 million. This level of
indebtedness and the debt service obligations arising therefrom may have one or
more of the following effects on the Company: (i) the Company's ability to
obtain additional financing in the future may be limited; (ii) a significant
portion of the Company's cash provided from operations is and will be dedicated
to servicing the Company's indebtedness, thereby reducing the funds available to
the Company for operations and capital expenditures; and (iii) the Company may
be more vulnerable to economic downturns or other adverse developments than less
leveraged competitors and thus may be limited in its ability to withstand
competitive pressures. Furthermore, the Credit Agreement provides for total
maximum borrowing availability of $100.0 million (subject to certain limitations
imposed by certain financial ratios), $25.0 million of which may be utilized for
letters of credit, all of which indebtedness is scheduled to become due prior to
the time any principal payments may be made on the Senior Notes (except for
certain optional redemptions). As of September 30, 1996, the Company had
availability under the Credit Agreement of approximately $25.0 million (with
additional amounts potentially available to fund acquisitions based on certain
pro forma ratios), along with $15.6 million which may be utilized for additional
letters of credit. Changes in availability under the Credit Agreement are a
function of, among other things, changes in operating results. The Company
expects that by the end of fiscal year 1997 potential availability under the
Credit Agreement will be reduced by up to approximately $12 million if the
Recommended Rate Orders are put into effect without modification by the Rate
Board.* As of September 30, 1996, under the incurrence covenant in the
Indenture, the Company would have been able to incur approximately $4 million of
additional debt (in addition to that which would have been available under the
Credit Agreement and was otherwise permitted under the Indenture). The Company
currently anticipates that the incurrence covenant of the Indenture will
preclude it from incurring such additional debt during the remainder of fiscal
year 1997.*
Possible Inability to Service Debt
The Company's ability to make scheduled payments on its indebtedness,
including payments on the Senior Notes, depends on its financial and operating
performance (including its ability to generate EBITDA), which, in turn, is
subject to prevailing economic conditions and to financial, business and other
events, many of which are beyond its control (including delays in obtaining rate
increases, the ability to renew franchises at historical profit margin levels,
and fluctuations in prices for recyclable commodities). Moreover, the Company
may incur additional indebtedness in the future. There can be no assurances that
the Company's cash flow will be sufficient to repay its debt. The Company's
ability to make scheduled payments also may be affected by its obligations to
provide cash to fund ESOP distributions to retired, terminated or withdrawing
participants.
Effect of Holding Company Structure
Norcal has no operations other than those relating to its subsidiaries and
depends on the earnings and cash flows of, and dividends from, such subsidiaries
to pay its obligations, including payments of principal and interest on its
indebtedness. The ability of Norcal's subsidiaries to pay such dividends will be
subject to, among other things, state law and contractual restrictions.
Substantially all of the assets of Norcal's wholly-owned subsidiaries (the
"Subsidiary Guarantors") have been pledged as collateral for their guarantees of
Norcal's obligations under the Credit Agreement and the capital stock of (or
partnership interests in) all the Subsidiary Guarantors has been pledged as
collateral for Norcal's obligations under the Credit Agreement. In the event of
a default under the Credit Agreement, the rights of Norcal with respect to the
liquidation of these assets would be subject to the prior claims of the lenders
under the Credit Agreement. A default under the Senior Notes constitutes an
event of default under the Credit Agreement. Similarly, certain defaults under
other indebtedness in excess of $5.0 million (including indebtedness under the
Credit Agreement) constitute an event of default under the Indenture.
Seasonality
The Company's revenues tend to be lower during the fall and winter months
due to lower volumes of certain types of waste, such as yard clippings and
construction and demolition debris. Such reduced volumes result in lower
revenues and earnings from the Company's transfer stations, waste collection,
and landfill operations during such months.
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Fluctuations in Prices for Recyclable Commodities
The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities. However, costs
(including significant capital costs) related to recycling do not fluctuate in
accordance with changes in prices for recyclables. As a result, the Company may
experience increases in profitability with increases in commodity prices, or
reduced profitability (or losses) at times (such as the current period) of low
commodity prices. In 1995, a substantial portion of the Company's recycling
revenues were derived from the sale of various grades of recycled paper and
paper products, the prices for which have suffered substantial declines since
such time.
Employees
The Company employs approximately 1,900 persons as of September 30, 1996.
Sixty-six percent of the Company's employees are covered under union contracts
with varying terms and expiration dates. Approximately 59% of these union
employees are covered under contracts that have expired or will expire by
December 31, 1996. While historically the Company has continued to operate after
the expiration of union contracts without any impact on operations, there can be
no assurance that the Company will be able to reach agreement with the employees
or that expiration of these contracts will not have a material adverse impact on
operations.
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ITEM 2. PROPERTIES
The principal properties of the Company consist of landfills, transfer
stations, waste recovery, administrative and maintenance facilities and other
land and improvements. The Company owns an aggregate of 309 acres of property on
which its California operations, maintenance, storage, warehousing and
administration facilities are situated. It owns six transfer stations, five of
which are located at the Company's collection sites. The Company also operates
three MRFs. The Company owns five landfills in California and approximately
2,800 acres on eight sites primarily in California that are used as a source of
landfill cover, as potential expansion sites for Company operations or for other
purposes.
The Company owns a 496-acre quarry in Kansas City, Missouri that was
originally purchased for development as a landfill. In 1991, the Company failed
to secure approval for a landfill site from the Kansas City Council. In August
1996, a contract that the Company had entered into in August 1995 to sell the
property expired as a result of certain closing conditions not being satisfied.
The Company has arranged government assistance in financing certain property
remediation and is currently marketing the site to potential buyers.
In November 1996 the Company entered into an agreement to sell property
currently utilized for recycling operations of the Company's West Coast
Recycling subsidiary. The agreement includes a leaseback agreement that allows
the Company to continue operations on the site for a one year period after the
sale. The Company is currently studying various options regarding the relocation
of West Coast Recycling's operations.
The Company's headquarters are located in approximately 22,000 square feet
of leased office space in San Francisco, California, pursuant to a lease that
expires in 1999. Under a lease expiring in 2007, the Company leases 29,000
square feet of industrial space in Oakland, California, where the Company's
medical waste treatment and disposal subsidiary conducts business. The Company
also leases several small parcels of real property in California, generally
under short-term leases. The Company acquired 5 unimproved acres in Santa Clara,
California, in August 1996 and is constructing a 22,000 square foot facility to
house the operations of three of its subsidiaries and the administration of its
South Bay region.
The Company owns a 302-acre site situated in San Benito and Santa Clara
Counties in California that formerly was used to spread waste water sludge. The
soil quality suffered from such activities but was returned to normal
agricultural condition in 1993. The Company may use the site again to spread
waste water sludge on a more limited basis and for other waste diversion
activities.
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ITEM 3. LEGAL PROCEEDINGS
Litigation Regarding the ESOP Notes.
On July 29, 1994, two lawsuits entitled Abraham, et al. v. Norcal Waste
Systems, Inc., et al., Case Nos. C94-3076 CAL and C94-2730 CAL, in the United
States District Court for the Northern District of California (the "Abraham
Actions") were filed against Norcal, the ESOP, and various parties to which
Norcal has certain indemnification obligations, including past and present
directors and officers of Norcal, members of the ESOP Administrative Committee,
and banks that acted as financial advisers, trustees or lenders to Norcal. The
suits were filed by certain holders ("Plaintiffs") of notes issued by the ESOP
("ESOP Notes") under the indenture dated as of December 19, 1986 between the
ESOP and Security Pacific National Bank as Indenture Trustee ("1986 Indenture").
The complaints alleged a variety of claims in connection with the 1986
transaction in which the ESOP purchased Plaintiffs' stock in one of Norcal's
predecessors in exchange for cash and the ESOP Notes, and certain later
transactions involving Norcal or its predecessors.
On August 9, 1995, Norcal and the ESOP reached a settlement (the "Abraham
Settlement") with Plaintiffs and certain other noteholders ("Settling
Plaintiffs"). In connection with the Abraham Settlement, the Settling
Plaintiffs' ESOP Notes were satisfied in full and cancelled, and Settling
Plaintiffs released all claims arising out of any of the events alleged in the
Abraham Actions, based on the ESOP Notes or the 1986 Indenture, or relating to
Settling Plaintiffs' capacities as noteholders or former shareholders of Norcal,
against all defendants, including Norcal and the ESOP, and related entities such
as their past and present officers, directors, employees, agents, attorneys,
subsidiaries, affiliates, and everyone else involved in the events alleged in
the Abraham Actions (the "Released Parties"), with one exception. Settling
Plaintiffs did not release and are permitted to proceed upon claims (the
"Excluded Claims") against certain banks (and counsel to one of them) based upon
their roles as former trustees under the 1986 Indenture, but only insofar as
those claims are not indemnifiable under a provision of the 1986 Indenture that
requires indemnification by the ESOP for loss, liability or expense incurred by
the trustee without the trustee's negligence or bad faith. Those banks are
Security Pacific National Bank ("Security Pacific") (and Bank of America solely
as successor to Security Pacific) and U.S. Trust Company of New York (and its
counsel) (collectively, Security Pacific (and Bank of America, as successor),
U.S. Trust and its counsel are referred to as the "Indenture Trustee Parties").
In Action No. C94-3076 CAL, Plaintiffs dismissed with prejudice all claims
against all defendants except the Excluded Claims against Bank of America and
Security Pacific. Action No. C94-2730 CAL was dismissed with prejudice in its
entirety.
The Abraham Settlement provides that Settling Plaintiffs shall indemnify
Norcal, the ESOP and certain related persons, including Norcal's and the ESOP's
current counsel and financial advisers and past and present officers, directors,
affiliates and subsidiaries (collectively, the "Indemnified Norcal Parties"),
against claims brought against any of the Indemnified Norcal Parties by the
Indenture Trustee Parties or any of the Released Parties caused by, arising out
of or related to the Excluded Claims (the "Indemnified Claims"), including
claims against Norcal for indemnification by Released Parties who are sued by
the Indenture Trustee Parties as a result of Settling Plaintiffs' pursuit of the
Excluded Claims. Settling Plaintiffs' indemnification extends to reasonable
attorneys' fees and costs incurred in connection with such Indemnified Claims,
with the exception of Norcal's and the ESOP's own defense costs. The indemnity
is to be paid from certain funds to be placed in escrow (the "Escrow Account")
and not disbursed to Settling Plaintiffs until the later of the resolution of
all Indemnified Claims or, if no Indemnified Claims are brought, then nine
months after deposit. No Settling Plaintiff is personally liable on the
indemnity beyond his, her or its interest in or distribution from the Escrow
Account. The funds to be placed in the Escrow Account consist of (i) any amounts
Settling Plaintiffs recover from the Indenture Trustee Parties (the "Escrowed
Recovery"); and (ii) a deferred settlement payment by Norcal, to be paid on the
earlier of the fifth anniversary of the effective date of the Abraham Settlement
and final resolution of Settling Plaintiffs' claims against the Indenture
Trustee Parties, in the amount of $500,000 reduced by the amount of reasonable
attorneys' fees and costs as to which Norcal or the ESOP is contractually
obligated to provide indemnification and/or reimbursement incurred by
Indemnified Norcal Parties (exclusive of Norcal and the ESOP) after September
30, 1995 in defense of claims arising out of Settling Plaintiffs' pursuit of the
Excluded Claims (the "Deferred Settlement Payment").
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On September 29, 1995, the court entered an order in Action No. C94-3076
CAL (the "Good Faith Determination") finding that the Abraham Settlement was
fair and made in good faith under all applicable legal standards, including
California Code of Civil Procedure sections 877 and 877.6. The court barred, and
enjoined the prosecution of, any claim against the Released Parties, including
Norcal and the ESOP, by any other joint tortfeasor (including Bank of America
and Security Pacific) for full or partial equitable comparative contribution or
full, partial or comparative equitable indemnity, based on comparative
negligence or comparative fault, however captioned or styled, that is based
upon, arises out of, or in any way relates to the released claims. The United
States Court of Appeals for the Ninth Circuit denied Bank of America's petition
for writ of mandamus seeking, among other things, the vacating of the Good Faith
Determination. If, as a result of an appeal from a judgment, or otherwise, the
Good Faith Determination were reversed, vacated or modified in such a way that
the Indenture Trustee Parties were not prohibited from proceeding against some
or all of the Released Parties on such claims for implied equitable indemnity
and contribution, the Settling Plaintiffs' indemnification of Norcal and related
parties would still extend to such claims.
On August 20, 1996, Norcal and the ESOP, pursuant to an order allowing them
to intervene in Action No. C94-3076 CAL, filed a declaratory relief action (the
"Declaratory Relief Action") in that Action against Bank of America entitled
Norcal Waste Systems, Inc., et al. v. Bank of America, N.T. & S.A., seeking a
declaration that they have no obligation to indemnify the Bank or reimburse the
Bank's costs or litigation expenses following the Abraham Settlement under the
indemnity provisions of certain agreements between Bank of America or Security
Pacific, on the one hand, and Norcal or the ESOP, on the other (the "Indemnity
Agreements"), in connection with Settling Plaintiffs' pursuit of the Excluded
Claims. By order dated December 17, 1996, the court granted summary judgment to
Norcal and the ESOP in the Declaratory Relief Action.
On September 10, 1996, Bank of America, in its own capacity and as
successor to Security Pacific, served a cross-complaint (the "Cross-Complaint")
in Action No. C94-3076 CAL entitled Security Pacific National Bank, et al. v.
Norcal Waste Systems, Inc., et al., alleging a variety of claims against, among
others, Norcal and the ESOP relating to the Abraham Settlement or the Indemnity
Agreements. The Cross-Complaint included claims for fraud, breach of contract,
and tortious breach of the implied covenant of good faith and fair dealing in
entering into the Abraham Settlement, and claims for declaratory relief and
breach of contract in connection with the Indemnity Agreements. In addition to
punitive damages, the Cross-Complaint sought compensatory damages subject to
proof at trial, alleged to include possibly in excess of $13.0 million in
damages. By order dated December 17, 1996, the court dismissed all claims in the
Cross-Complaint with prejudice, except that the claim against the ESOP for
tortious breach of the implied covenant was dismissed with prejudice insofar as
it attempted to state a tort claim and was otherwise dismissed without
prejudice.
Any claims in the Cross-Complaint are "caused by or related to the Excluded
Claims" and, as such, are Indemnified Claims covered by Settling Plaintiffs'
indemnity. Accordingly, any liability incurred by Norcal (other than its own or
the ESOP's defense costs) in connection with the Cross-Complaint would be
payable from the Escrowed Recovery, if any, and potentially the Deferred
Settlement Payment. Norcal believes that it is unlikely that it would be liable
to pay an amount in damages on the Cross-Complaint that is materially greater
than any recovery by Settling Plaintiffs from Bank of America (aside from any
liability for damages in the amount of Bank of America's litigation expenses),
and thus any award of damages (aside from such expenses) on the Cross-Complaint
is not likely to exceed the Escrowed Recovery (before reduction for indemnified
defense costs).
IRS Dispute.
The Internal Revenue Service (the "Service") has almost completed an audit
of the Company's income tax returns for the fiscal years ending September 30,
1988 through 1991. During the course of that audit, the Service also examined
certain transactions involving employee benefit plans sponsored by the Company.
With respect to this audit, the Service has proposed a number of
adjustments (some of which have been agreed to by the Company). In particular,
the Service has stated that it does not (i) believe the Company should be
permitted to deduct post-retirement health and welfare benefits paid to former
employee-
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shareholders of Norcal's predecessors on the grounds that such benefits should
be treated as additional purchase price consideration for the stock acquired
from such shareholders and therefore must be capitalized, or (ii) agree with the
manner in which the Company has calculated certain deductions related to its
landfill closure and post-closure costs. The Company has advised the Service
that it intends to challenge vigorously the Service's proposed treatment of the
post-retirement health and welfare benefits. The Service and the Company have
tentatively agreed on an alternative treatment of landfill closure and
post-closure costs that is acceptable to the Company.
The Company does not believe that the income tax adjustments proposed by
the Service will have a material adverse effect on the financial condition of
the Company. However, certain income tax deductions that would otherwise be
available to the Company in future periods (in particular, deductions related to
the provision of post-retirement health and welfare benefits to former
employee-shareholders) may be substantially reduced or deferred.
The Service also asserted that the role played by a subsidiary of Norcal in
connection with the investment by certain of the Company's pension plans,
through Bank of America, the trustee of such plans, in Techno-Therm, Inc., a
Colorado corporation in which Mr. Sangiacomo and certain former executive
officers of Norcal also invested, constituted a "prohibited transaction" for
which the Company is liable for penalties under the Code. The Company disagrees
with the Service's assertion, but has nevertheless reached a compromise
agreement with the Service regarding the transaction that will permit the
Company to resolve this matter in a way that will not have a material adverse
effect on the Company's financial condition or cash flow.
The Service also investigated the transactions pursuant to which the ESOP
acquired and subsequently disposed of Excel Environmental, Inc. ("Excel") (the
"Excel Transaction"), and in accordance with that investigation, the Service
sought technical advice from its national office as to how the Excel Transaction
and related events should be treated for tax purposes. The Service's auditors
requested specific guidance, among other things, as to: (i) whether the ESOP
acquired impermissible assets upon the merger of the Excel employee stock
ownership plan (the "Excel ESOP") into the ESOP or otherwise should be subject
to sanctions (including possible revocation of its qualified status) by reason
of its participation in the acquisition and subsequent disposition of Excel,
(ii) whether the Company should be subject to so-called "prohibited transaction"
taxes by reason of its role in the acquisition and disposition of Excel by the
ESOP, and (iii) what the resulting income tax consequences of the Excel
Transaction should be to the Company, the former Excel shareholders, the Excel
ESOP and the ESOP in light of the resolution of the foregoing issues. In
conjunction with the Service's request for technical advice, the Company
provided a detailed position paper setting forth why the Company believes there
should be no adverse tax consequences to the Company or the ESOP as a result of
the Excel Transaction. The National Office of the Service has issued a favorable
technical advice memorandum to the Company that concurs with the views espoused
by the Company as to how the Excel Transaction should be treated for tax
purposes on all but one immaterial issue. Accordingly, this matter will be
resolved in a manner that will not have a material adverse effect on the
Company's financial condition or cash flow.
The Service has also initiated an audit of the Company's income tax returns
for the periods ended September 30, 1992, through September 30, 1994.
Environmental Liabilities.
Cummings Road Landfill. In 1987, contamination was confirmed in the
groundwater underlying and in the vicinity of the Company's Cummings Road
Landfill in Humboldt County, California. Investigations indicated that the
landfill was the source of the contamination. In response to civil claims, the
Company made cash payments, restricted use of certain property, exchanged
property and provided an alternative water supply to certain residents and
businesses affected or potentially affected by the impacted groundwater. As part
of a revised corrective action plan submitted to and in 1994 approved by the
Regional Water Quality Control Board various landfill improvements have been
made or are under construction including a trench to intercept upgradient
groundwater to divert it away from the landfill. The Company currently estimates
its remaining expenditures to be incurred to be $1.9 million and has established
a mechanism with the County of Humboldt to secure reimbursement of such
remediation costs at the landfill by the end of the current disposal agreement
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on September 30, 1998. In addition, the Company has extended a municipal water
line to certain residents downgradient of the landfill. The Company estimates
that there are $0.6 million in additional expenditures to be incurred in
connection with completion of this water line project. The Company plans to seek
reimbursement from third parties for a portion of the total project cost of the
water line.
On December 3, 1996, The Pacific Lumber Company ("Pacific Lumber") filed a
lawsuit against a subsidiary of the Company entitled The Pacific Lumber Company
v. City Garbage Company of Eureka et al. in the Superior Court of the State of
California, County of Humboldt. The lawsuit alleges that a parcel of real
property owned by Pacific Lumber has been affected by contamination emanating
from the Cummings Road Landfill and seeks unspecified damages based upon strict
liability, negligence, nuisance, trespass, waste and equitable indemnity. The
lawsuit also seeks declaratory relief that the defendants are responsible for
cleaning up and removing any contamination on Pacific Lumber's property and for
any other remedial measures which might be required. The Company has already
taken remedial action at the Cummings Road Landfill with respect to the source
of the contamination, which action was approved by the applicable regulatory
authority. The Company believes that there has been no significant economic
damage to Pacific Lumber's property and therefore that even if this matter is
resolved in a manner adverse to the Company, it is not likely to have a material
adverse effect on the Company's financial condition or cash flow.
Sierra Point Landfill. On March 25, 1996, the California Regional Water
Quality Control Board (the "Regional Board") issued a formal request for
information pursuant to the California Waste Code to Sunset Scavenger Company
("Sunset"), a subsidiary of Norcal, regarding Sunset's ownership, prior to 1980,
of the now closed Sierra Point landfill in the City of Brisbane. Preliminary
research indicates that landfilling ceased at the site prior to 1972 and closure
work was completed by 1982. The Regional Board issued the information request in
connection with its review of the existing Waste Discharge Requirement ("WDRs")
order for the landfill. On April 17, 1996, the Regional Board adopted updated
WDRs naming seven parties, but not Sunset or Norcal, as responsible for
performing specified post-closure landfill monitoring, maintenance and,
potentially, corrective action or work at the landfill if monitoring indicates
that is necessary. Although neither Sunset nor Norcal were named in the WDRs,
the Regional Board staff stated at the April 17, 1996 hearing that they may
propose to add Sunset or Norcal as parties to the WDRs or to a site cleanup
requirements ("SCRs") order in the future. Sunset is preparing its response to
the information request, but it is not possible at this stage of the
administrative proceeding to determine what, if any, Sunset or Norcal's
liabilities may be at the landfill. If Sunset or Norcal ultimately is named in
the WDRs or SCRs order, either or both may be required to fund or perform a
share of the post-closure work. Such work could include pumping and treatment of
landfill leachate, if monitoring demonstrates that such work is necessary.
Sunset and Norcal currently are not able to estimate the costs that may be
associated with such work.
In the ordinary course of its business, the Company has incurred
environmental liabilities at some of its other sites including soil and water
contamination. Although the Company believes the environmental liabilities at
these sites will not have a material adverse effect on the Company, there can be
no assurance that such liabilities will not be material or that other material
liabilities will not arise in the future at these or other sites.
Other Matters
From time to time, in the normal course of its business, the Company may
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. The Company could incur substantial legal
expenses during the course of such proceedings and the outcome of one or more of
these proceedings could have an adverse impact on the Company's business. From
time to time, the Company also may be subjected to actions brought by
individuals or citizens' groups in connection with the grant or permits for its
operations or alleging violations of permits or other regulatory requirements
pursuant to which the Company operates, which, if successful, could have a
material adverse effect on the Company's business. See "Risk
Factors -- Environmental Regulation and Potential Litigation."
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to ordinary
litigation are adequately provided for or that resolution of such matters will
not have a material adverse impact on the financial condition of the Company;
however, there can be no assurance that the impact of such matters on its
results of operations or cash flows for any given reporting period will not be
material.
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<PAGE> 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 22, 1996, the ESOP, as the sole shareholder of the Company,
approved consulting and related agreements with each of Messrs. Pacini and
Corbolotti, former officers of the Company.
On July 25, 1996, the ESOP, as the sole shareholder of the Company,
approved an amendment to the Company's Bylaws, which such amendment set the
number of directors of the Company at five.
On July 30, 1996, the ESOP, as the sole shareholder of the Company,
approved (i) the 1996 Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan"); (ii) grants of options to each of Messrs. Molinari and Flynn
and Ms. Kaufman pursuant to the Non-Employee Director Plan, each such grant
being for 35,000 shares of common stock; (iii) grants of options to each of
Messrs. Molinari and Flynn pursuant to the 1996 Executive Stock Incentive Plan
(the "1996 Stock Plan"), each such grant being for 15,000 shares of common
stock; and (iv) the Employment Agreement and the Stock Option Agreement (which
such agreement provided for, among other things, a grant of an option for
960,000 shares of common stock under the 1996 Stock Plan) with Mr. Sangiacomo.
26
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is 100% owned by the ESOP and is not publicly
traded. As of December 15, 1996, there were 1,708 employees who were
participants in the ESOP.
During the two most recent fiscal years, the Company has declared no cash
dividends on its common stock. The Indenture relating to the Senior Notes
provides that the Company may not, and may not permit any of its subsidiaries
to, directly or indirectly, declare or pay any dividend or make any distribution
on account of, or any contribution in respect of, its capital stock, other than
dividends or distributions payable in capital stock (other than stock, or any
security convertible into common stock, with certain mandatory dividend or
redemption provisions) of the Company or dividends or distributions payable from
a subsidiary to the Company or any wholly-owned subsidiary of the Company, if at
the time of and after giving effect to such dividend, distribution or
contribution, certain conditions are not met. This provision does not prohibit
certain purchases of capital stock distributed by the ESOP, certain
contributions or dividends paid to the ESOP, or certain loans to the ESOP.
Pursuant to the Credit Agreement, neither the Company nor any of its
subsidiaries may declare or pay any distributions (including dividends) on or in
respect of any class of capital stock other than (i) distributions payable
solely in its capital stock; (ii) distributions of cash by a subsidiary of the
Company to a Subsidiary Guarantor or to the Company; (iii) certain distributions
made to the ESOP; (iv) distributions made by the Company to repurchase any
capital stock of the Company distributed by the ESOP, to the extent made under
certain circumstances; and (v) other distributions not to exceed $1,000,000 in
the aggregate per fiscal year, subject to certain events of default.
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractural and legal
restrictions and other factors deemed relevant by the Board of Directors.
27
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information
regarding the Company for the five years ended September 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues....................................... 288,215 271,501 247,176 255,149 253,925
------- ------- ------- ------- -------
Cost of operations:
Operating expenses.......................... 202,848 183,865 167,740 173,515 174,123
Depreciation and amortization............... 18,320 19,985 20,141 22,704 26,233
ESOP compensation expense(a)................ 10,291 7,923 7,319 6,920 3,519
General and administrative.................. 30,965 26,446 24,849 26,286 24,752
Restructuring expenses(b)................... -- -- -- -- 36,533
------- ------- ------- ------- -------
Total cost of operations............... 262,424 238,219 220,049 229,425 265,160
------- ------- ------- ------- -------
Operating income (loss)........... 25,791 33,282 27,127 25,724 (11,235)
Interest expense............................... 23,913 19,909 20,920 23,900 28,958
Gain (loss) on dispositions, net............... (477) 1,279 6,744 11,477 --
Settlement of litigation(c).................... 3,648 -- 5,480 -- --
Other income (expense)......................... 1,111 2,443 1,389 6,287 795
------- ------- ------- ------- -------
Income (loss) before income taxes,
extraordinary item and
cumulative effect of change in
accounting principle............ (1,136) 17,095 8,860 19,588 (39,398)
Income tax expense (benefit)................... -- 6,662 2,500 1,447 (317)
------- ------- ------- ------- -------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting
principle....................... (1,136) 10,433 6,360 18,141 (39,081)
Extraordinary gain on early extinguishment of
long-term debt, net of $0 income taxes...... 31,379 -- -- -- --
Cumulative effect on prior years of change in
accounting for income taxes................. -- -- 2,500 -- --
------- ------- ------- ------- -------
Net income (loss)................. 30,243 10,433 8,860 18,141 (39,081)
======= ======= ======= ======= =======
BALANCE SHEET DATA
Property and equipment, net.................... 137,147 132,431 129,566 143,706 160,242
Total assets................................... 321,235 299,152 292,299 305,655 322,763
Total long-term debt, including current
portion(d).................................. 176,740 205,410 226,013 258,186 271,860
Stockholder's equity (deficit)................. 6,117 (43,878) (65,935) (81,864) (99,162)
</TABLE>
- ---------------
(a) Non-cash ESOP compensation expense is calculated under the shares allocated
method based upon principal repayment on the ESOP's indebtedness to the
Company, funded by contributions from the Company.
(b) Restructuring expense in 1992 includes losses incurred in connection with
the disposal of certain operations, asset abandonments, and writedowns,
reserves for litigation expenses and settlements, and professional and other
fees.
(c) Data for 1996 and 1994 represent non-recurring expenses incurred in
connection with the settlement of litigation involving the ESOP Notes and
the Old Subordinated Notes, respectively.
(d) Includes indebtedness of the ESOP in fiscal years 1992 to 1995 as required
to be reflected on the Company's balance sheet by GAAP.
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<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise indicated, references in the discussion below to a
particular year are references to the Company's fiscal year ended September 30.
FORWARD LOOKING INFORMATION
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described earlier (see "Risk Factors" in Item 1) and elsewhere in
this Form 10-K include, but are not limited to: changes in general economic
conditions, inability to maintain rates sufficient to cover costs, inability to
obtain timely rate increases, fluctuations in commodities prices, changes in
environmental regulations or related laws and competition. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by it or on its behalf.
GENERAL
The Company's revenues are comprised primarily of fees charged to
residential, commercial and industrial customers for the collection and disposal
of solid waste, disposal fees charged to third parties who dispose at the
Company's transfer stations and landfills, fees charged for landfill operations
and solid waste systems management activities for third party landfill owners,
and revenues generated from the sale of recyclable materials.
Collection and disposal revenues are subject to pressures from a variety of
sources, including increased competition, reductions and diversion of solid
waste and regulatory changes. Revenues are generated through rates charged to
customers. Residential rates are generally covered by formal rate setting
mechanisms as established by rate boards or other local government
jurisdictions, which provide a specified return on allowable costs. Commercial
and industrial rates are generally subject to competitive considerations if not
covered by formal rate setting mechanisms. The rate setting process may result
in the exclusion of certain costs and/or delays in cost recovery. The recent
Recommended Rate Orders in San Francisco disallowed from future rate recovery
certain ESOP-related expenses. See discussion below in "Liquidity and Capital
Resources." To the extent that certain operating costs are excluded from the
allowable costs to be recovered, operating margins will be negatively impacted.*
The Company believes the trend of increasing pressure on collection rates, and
therefore profit margins, will continue in the future.*
During 1996, the Company commenced management of the operations under the
new contract in San Bernardino County. In addition to the operations and
engineering activities with respect to all active landfill sites, the new
contract includes the potential to generate substantial revenues through the
development and implementation of the County's Solid Waste Strategic Plan.*
Approximately 14% of the Company's revenues for fiscal year 1996 were derived
from services performed for San Bernardino County. The Company's revenues from
San Bernardino County are derived from two categories of services. The core
service is the performance of ongoing landfill operations activities. The
Company estimates that revenues from this component will account for 35-50% of
total revenues generated in San Bernardino County in 1997.* Over the term of the
contract the amount of revenues from this core service will vary primarily as a
result of changes in volume of waste deposited at landfills and changes in the
Company's per ton compensation rate. The other component of revenues represents
activities associated with the planning and implementation of the strategic plan
to regionalize landfill operations in San Bernardino County. This includes
planning, engineering and construction management for landfill expansions,
transfer station construction and landfill closures. It is anticipated that the
majority of these activities will be completed over the next 7 years, during
which time San Bernardino County plans to spend over $200 million.* The
Company's agreement with San Bernardino County terminates on June 30, 2001. The
Company believes the regionalization of the landfill disposal system will create
efficiencies for the County and can be used by the Company as a model to pursue
other opportunities of this nature, although there can be no assurance that the
Company will be successful in pursuing this strategy.*
29
<PAGE> 31
Although the Company will generate significant revenues from its services
for San Bernardino County, the Company generally earns lower margins than on its
collection and disposal operations, due to the fact that there is little capital
investment required to generate the additional revenues and profit margins are
limited by the contract.* The additional revenues are anticipated to generate
additional earnings but will tend to reduce the overall profit margin as
compared to historical levels.* This business involves substantial
sub-contractor, consulting and other related expenses paid to third parties. The
Company believes the dilutive impact on margin percentages may increase as
additional revenues and profits are generated by the San Bernardino County
contract and other similar activities.*
The revenues derived from the sale of recyclable materials are volatile and
fluctuate in accordance with changes in prices of recyclable commodities which
in turn are, in many cases, dependent on worldwide supply of and demand for such
recyclable commodities. In the aggregate, the costs related to recycling
operations do not fluctuate in accordance with changes in the prices of
recyclable commodities and as a result the Company may experience increases or
decreases in profitability depending on changes in the prices for recyclable
commodities. The Company derives substantial revenues from the sale of paper and
paper products, which have suffered substantial declines since 1995.
Operating expenses include labor, disposal fees paid to third parties,
fuel, equipment maintenance and rentals, engineering, consulting and other
professional services and other direct costs of operations. Also included are
accruals for landfill closure and corrective action costs, consistent with
regulatory requirements. General and administrative expenses include management
salaries, administrative and clerical overhead, professional services costs and
other fees and expenses.
ESOP compensation expense includes amounts contributed by the Company to
the ESOP to allow the ESOP to repay its intercompany loans to the Company along
with amounts to fund distributions to retired, terminated or withdrawing
participants. The total contributions are subject to various limitations imposed
by the Internal Revenue Service and are generally tax deductible. The debt
repayments by the ESOP result in allocation of Company common stock to ESOP
participants' accounts pursuant to an allocation formula. Distribution payments
are made by the ESOP to retired, terminated or withdrawing participants based on
their vested allocated shares of Company common stock.* The Company expects
future contributions to the ESOP to fund distributions to increase significantly
as additional employees reach retirement age, as additional shares are allocated
to employee accounts and if the appraised value of the Company common stock
increases.* During 1996, the Company made contributions to the ESOP that, in
addition to funding the distribution obligation and the scheduled loan payment,
allowed the ESOP to prepay approximately $9.0 million of intercompany loans.
This additional contribution resulted in substantial tax savings and additional
ESOP compensation expense relative to the additional shares allocated.* The
Company may make similar additional contributions to the ESOP in excess of the
scheduled contribution in future periods corresponding to tax advantages
afforded by the accelerated contributions.*
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
30
<PAGE> 32
RESULTS OF OPERATIONS
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY STATEMENTS OF OPERATIONS
PERCENTAGE RELATIONSHIP TO TOTAL REVENUE
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues:
Collection and disposal operations......................... 78.2% 81.6% 84.6%
Third party landfill management services................... 15.8% 7.9% 7.6%
Recycled commodities sales................................. 6.0% 10.5% 7.8%
----- ----- -----
Total revenues..................................... 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses......................................... 70.4% 67.7% 67.9%
Depreciation and amortization.............................. 6.4% 7.4% 8.1%
ESOP compensation expense.................................. 3.6% 2.9% 3.0%
General and administrative................................. 10.7% 9.7% 10.0%
----- ----- -----
Total cost of operations........................... 91.1% 87.7% 89.0%
----- ----- -----
Operating income......................... 8.9% 12.3% 11.0%
Interest expense............................................. (8.3)% (7.3)% (8.5)%
Gain (loss) on dispositions, net............................. (0.2)% 0.4% 2.7%
Settlement of litigation..................................... (1.2)% 0.0% (2.2)%
Other income (expense)....................................... 0.4% 0.9% 0.6%
----- ----- -----
Income (loss) from operations before
income taxes and extraordinary item.... (0.4)% 6.3% 3.6%
----- ----- -----
Income tax expense........................................... 0.0% 2.5% 1.0%
----- ----- -----
Income (loss) before extraordinary
item................................... (0.4)% 3.8% 2.6%
----- ----- -----
Extraordinary item -- gain on early retirement of debt,
net........................................................ 10.9% 0.0% 0.0%
Cumulative effect on prior years of change in accounting for
income taxes............................................... 0.0% 0.0% 1.0%
----- ----- -----
Net income............................... 10.5% 3.8% 3.6%
===== ===== =====
</TABLE>
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
Revenues. Revenues for 1996 increased $16.7 million (6.2%) to $288.2
million from $271.5 million for 1995. The increase in revenues was primarily due
to higher third-party landfill management services revenues and waste collection
and disposal revenues partially offset by lower recycled commodities sales
revenues. Third-party landfill management services revenues were higher due to
new and expanded landfill operations and solid waste management activities in
San Bernardino and San Diego Counties. Waste collection and disposal revenues
were higher primarily as a result of rate increases in several service areas.
Recycled commodities sales revenues were down due to lower prices received from
the sale of recyclable commodities, primarily paper and cardboard.
Operating Expenses. Operating expenses for 1996 increased $18.9 million
(10.3%) to $202.8 million from $183.9 million for 1995. As a percentage of
revenues, operating expenses increased to 70.4% in 1996 from 67.7% in 1995. The
increased costs were due to higher project and subcontractor related costs,
payroll and related costs and fuel costs. The increase in project management and
subcontractor costs was associated with new and expanded third-party landfill
management services activities in San Bernardino and San Diego
31
<PAGE> 33
Counties. Payroll and related costs were higher as a result of additional hires
and scheduled union wage increases. Fuel costs were higher, reflecting a general
increase in fuel prices. These increased operating costs were partially offset
by lower recycling purchases due to lower costs for recyclable commodities and
lower landfill costs resulting from increased capacity and changes to estimated
closure costs at the Company-owned landfills.
Depreciation and Amortization. Depreciation and amortization decreased
$1.7 million (8.3%) in 1996 to $18.3 million from $20.0 million in 1995. The
decrease is attributable to a reduction in landfill depletion expense based on
increased capacity at the Company's landfills along with a reduction in
depreciation expense from a number of assets that became fully depreciated at
September 30, 1995 along with the buyouts of expiring capital leases during
fiscal year 1995.
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the Company's contribution to the ESOP. The Company contributes to the ESOP to
allow for repayment of intercompany loans and to fund distributions to retired,
terminated or withdrawing participants. ESOP expense for 1996 increased $2.4
million to $10.3 million from $7.9 million for 1995. The increase in expense can
be attributed to higher contributions made to the ESOP that allowed the ESOP to
make scheduled loan payments and prepayment of additional principal along with
increases in contributions related to the funding of distributions.
General and Administrative. General and administrative expenses for 1996
increased $4.6 million (17.4%) to $31.0 million from $26.4 million in 1995. As a
percentage of revenues, general and administrative expenses increased to 10.7%
for 1996 from 9.7% for 1995. The increased costs were due to higher payroll and
related costs and other expenses. The increase in payroll and related costs
resulted from general wage increases and additional management personnel. Other
administrative costs increased as a result of the new and expanded third-party
landfill management services in San Bernardino and San Diego Counties.
Operating Income. Operating income decreased $7.5 million (22.5%) to $25.8
million in 1996 from $33.3 million in 1995. As a percentage of revenues,
operating income decreased to 8.9% for 1996 from 12.3% for 1995. The primary
causes of the decrease in operating income for 1996 were the significant drop in
recycling revenues due to lower commodity prices coupled with higher operating,
ESOP compensation and general and administrative expenses.
Interest Expense. Interest expense increased by $4.0 million (20.1%) to
$23.9 million for 1996 from $19.9 million in 1995. The increase is due to a
higher effective interest rate associated with the Company's Senior Notes issued
as part of the refinancing transaction in November 1995.
Settlement of Litigation. Settlement of litigation for 1996 reflects the
payment of $3.6 million made to the holders of ESOP Notes as part of the ESOP
noteholder litigation settlement agreement.
Gain (Loss) on Dispositions. The loss on dispositions of $0.5 million for
1996 represents the net impact of asset disposals, primarily real estate. The
gain on dispositions of $1.3 million for 1995 primarily represented the gain on
the sale of the Company's 50% ownership interest in an affiliated company.
Other Income (Expense). Other income decreased $1.3 million (54.5%) to
$1.1 million for 1996 from $2.4 million for 1995. The decrease in other income
was due to non-operating expenses incurred during 1996, including equity in
losses of an affiliate, certain expenses associated with the Refinancing, losses
incurred from the sales of investments held in trust accounts, lower interest
earned on trust fund balances and the absence of equity in earnings of another
affiliate which was sold in July 1995.
Income Tax Expense (Benefit). There was no income tax expense for 1996
compared to income tax expense of $6.7 million in 1995. The Company experienced
an effective rate for fiscal 1996 of zero as a result of realizing certain of
its deferred tax assets for which a valuation allowance had previously been
established.
Extraordinary Gain. The Company recorded an extraordinary gain of $31.4
million as a result of the early extinguishment of subordinated notes pursuant
to the refinancing transaction.
Net income. The Company recorded net income of $30.2 million for 1996
compared to net income of $10.4 million for 1995. The net income for 1996 is
attributable to the Extraordinary Gain, offset by those
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<PAGE> 34
factors discussed in Operating Income as well as higher interest expense,
settlement of litigation and lower other income.
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
The results of operations of the Company during 1995 were impacted by the
performance of services under a contract to operate five landfills for San Diego
County in March 1995 and the expiration of a contract to operate a landfill for
a third party in August 1995. The results of operations of the Company during
1994 were impacted by the sale of the stock of two subsidiaries, and
substantially all of the assets of a third subsidiary, during the first quarter
of that year.
Revenues. Revenues for 1995 increased $24.3 million (9.8%) to $271.5
million from $247.2 million for 1994. Net of the effect of disposed operations,
which comprised revenues of $2.0 million for 1995 and $6.4 million for 1994,
revenues from continuing operations increased by $28.7 million or 11.9%. The
increase in revenues was due to higher waste collection and disposal, recycled
commodities and third-party landfill management services revenues. Waste
collection revenues increased due to rate increases received in several service
areas, including San Francisco. Recycled commodities sales revenues increased
due to higher prices received from the sale of commodities, primarily paper and
cardboard. Third-party landfill management services revenues increased primarily
due to the new San Diego contract.
Operating Expenses. Operating expenses for 1995 increased $16.2 million
(9.6%) to $183.9 million from $167.7 million for 1994. As a percentage of
revenues, operating expenses decreased to 67.7% in 1995 from 67.9% in 1994. Net
of the effect of disposed operations, which had operating expenses of $1.5
million for 1994, operating expenses from continuing operations increased by
$19.1 million or 11.7%. The increase was due to higher disposal costs, recycling
purchases, payroll and related costs, landfill costs, repairs and maintenance
and other expenses. The increase in disposal cost was a result of paying higher
disposal fees at several operating subsidiaries, including the San Francisco
operations. The increase in recycling purchases was due to higher prices paid
for recyclable commodities. The increase in payroll and related costs was due to
scheduled wage increases. The increase in landfill costs was due to the
increased scope of activities at several landfills. The increase in repairs and
maintenance was due to inflationary increases. The increase in other expenses
included increases in contract services and franchise fees.
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the Company's contribution to the ESOP and increased $0.6 million to $7.9
million for 1995 from $7.3 million for 1994. ESOP compensation expense increased
due to increased share allocations and increased contribution for share
repurchases related to a higher share price.
General and Administrative. General and administrative expenses for 1995
increased $1.6 million (6.5%) to $26.4 million from $24.8 million for 1994. As a
percentage of revenues, general and administrative expenses decreased to 9.7% in
1995 from 10.0% in 1994. Net of the effect of disposed operations, which had
general and administrative expenses of $0.2 million for 1995 and $0.9 million
for 1994, general and administrative expenses for continuing operations
increased by $2.7 million or 11.3%. The increase was due to an increase in fees
for professional services, along with higher outside data processing, travel and
outside equipment rental costs.
Operating Income. Operating income increased $6.2 million (22.7%) to $33.3
million in 1995 from $27.1 million in 1994. As a percentage of revenues,
operating income increased to 12.3% for 1996 from 11.0% for 1995. The primary
cause of the increase in operating income for 1995 was the significant increase
in recycling revenues due to higher commodity prices.
Interest Expense. Interest expense for 1995 decreased $1.0 million (4.8%)
to $19.9 million from $20.9 million for 1994. The decrease was due to payments
made pursuant to debt obligations, and the resultant lower balances outstanding,
during 1994 and 1995 and a reduction in interest accrued on the Class A and B
Notes as compared to the Old Subordinated Notes.
Gains on Dispositions. The gain on dispositions of $1.3 million for 1995
primarily represented the gain on the sale of the Company's 50% ownership
interest in an affiliated company. The gain on dispositions of $6.7
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<PAGE> 35
million in 1994 primarily resulted from the sale of the stock of one subsidiary
and substantially all of the assets of another, along with the sale of certain
real property.
Settlement of Litigation. Settlement of litigation for 1994 reflects the
payment of $5.5 million made to the holders of Old Subordinated Notes as part of
the Old Subordinated Notes noteholder litigation settlement agreement.
Other Income (Expense). Other income for 1995 increased $1.0 million
(75.9%) to $2.4 million from $1.4 million for 1994. The increase in other income
was due to an increase in the interest income earned on trust funds and cash
balances in certain restricted cash accounts established by the Company in
connection with the Third Amended and Restated Credit Agreement dated as of
September 30, 1992, as amended, among Norcal and its lenders (the "Old Credit
Agreement"). In connection with the Refinancing in November 1995, the Old Credit
Agreement was terminated.
Income Tax Expense (Benefit). The income tax expense provision for 1995
increased to $6.7 million from $2.5 million for 1994. The effective income tax
rate for 1995 was 39%, which is lower than the federal and state statutory rates
due to utilization of deferred deductions upon which no benefit was previously
recognized. The increase in income tax expense for 1995 was due to higher income
before taxes and a higher effective income tax rate.
Effect of Accounting Change. Effective October 1, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" which allows, among other things, the recognition of a deferred
tax asset associated with net operating losses available to offset future
taxable income. The Company recognized a cumulative adjustment related to
available net operating losses which increased income by $2.5 million in 1994.
Net Income. The Company recorded net income of $10.4 million for 1995
compared to net income of $8.9 million for 1994. The increase in net income for
1995 is attributable to those factors discussed in Operating Income, lower
interest expense and higher other income partially offset by higher income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of working capital
requirements, interest on outstanding indebtedness, capital expenditures and
deposits to trust funds to satisfy certain environmental statutes and
regulations. Prior to September 30, 1996, the Company had operated with working
capital deficits for several years, primarily due to the current portions of
debt obligations and other accrued liabilities. Throughout this period, the
Company financed its operations primarily through operating cash flow and the
proceeds from divestiture of certain operations and other assets. The Company
was able to take advantage of access to limited capital lease financing during
1994 and 1995. With the completion of the Refinancing in November 1995 and the
impact of operations for the year ended September 30, 1996, the Company has
improved its working capital position by $40.4 million to a working capital
surplus of $4.9 million from a deficit of $35.5 million at September 30, 1995.
In addition to the improvements in working capital, as part of the Refinancing
the Company entered into the Credit Agreement which provides for up to $100
million of additional borrowings and which, subject to certain limitations and
covenant restrictions (including financial ratios), can be drawn by the Company
to fund ongoing operations, invest in capital equipment and/or facilities and to
finance acquisitions. The Credit Agreement has a five-year term. At September
30, 1996, the Company had utilized $9.4 million of the credit facility provided
by the Credit Agreement for letters of credit and had availability under the
Credit Agreement of approximately $25.0 million (with additional amounts
potentially available to fund acquisitions based on certain pro-forma ratios)
along with $15.6 million which may be utilized for additional letters of credit.
Changes in availability under the Credit Agreement are a function of, among
other things, changes in operating results. The Credit Agreement was recently
amended primarily to provide additional flexibility under the financial
covenants contained therein and increase the Company's ability to incur certain
types of additional debt (including indebtedness incurred in connection with
acquisitions). The Company expects that by the end of fiscal year 1997 potential
availability under the Credit Agreement will be reduced by up to approximately
$12 million if the Recommended Rate Orders are put into effect without
modification by the Rate Board.* In addition, in November 1996 the Company
signed a letter
34
<PAGE> 36
of intent for the provision of operating lease financing for certain capital
expenditures. The agreement, subject to final credit approval by the lessor,
would provide up to approximately $13.5 million of available financing.
The Indenture governing the Senior Notes contains provisions which, among
other things, (i) limit the Company's and its subsidiaries' ability to declare
or pay dividends or other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal or, in certain cases,
the ESOP), (ii) limit the purchase, redemption or retirement of capital stock
and (iii) limit the incurrence of additional debt. As of September 30, 1996,
under the incurrence covenant in the Indenture, the Company would have been able
to incur approximately $4.0 million of additional debt (in addition to that
which would have been available under the Credit Agreement and was otherwise
permitted under the Indenture). The Company currently anticipates that the
incurrence covenant of the Indenture will preclude it from incurring such
additional debt for the remainder of fiscal year 1997.*
The Senior Notes mature in November 2005. Interest on the Senior Notes
currently accrues at the rate of 13.0% per annum, which rate will increase by an
additional 0.25% per annum on each of May 16, 1997, and November 16, 1997, to a
maximum of 13.5% per annum. However, the interest rate on the Senior Notes will
revert to 12.5% at such time as the Company (in one or more transactions) will
have offered to purchase (whether or not any actual purchases are made) or
redeemed an aggregate of $25.0 million in principal amount of Senior Notes out
of the proceeds of equity sales.
Cash Flow from Operations. Cash flow from operations decreased 44.8% to
$20.4 million for 1996 from $36.9 million for 1995. The decrease was due to the
loss before extraordinary item of $1.1 million for 1996 compared to income of
$10.4 million for the same period a year ago. If the Company is unsuccessful in
its attempt to modify the Recommended Rate Orders in San Francisco, its future
annual operating results and cash flow could be adversely impacted by as much as
$4.0 million (the amount of ESOP expense recovery denied reimbursement).*
Changes in availability under the Credit Agreement are a function of, among
other things, changes in operating results. In addition, the Company expects
that by the end of fiscal year 1997 potential availability under the Credit
Agreement will be reduced by up to approximately $12 million, and the Company's
ability to incur certain other future debt financing could be significantly
curtailed or eliminated.*
While the Company expects future cash flow generated from operating
activities and available financing to be adequate to support existing operations
of the Company, without significant improvements in cash flow and operating
results, the Company will likely be restricted under the Indenture from certain
borrowings for material capital expenditures or acquisitions to support the
growth of its business.*
Cash flow from operations decreased 5.2% to $36.9 million for 1995 from
$38.9 million for 1994. The decrease in 1995 from 1994 included the payment of
$5.5 million in connection with the 1994 settlement of litigation related to the
Old Subordinated Notes.
Cash Flow from Investing Activities. Cash used by investing activities was
$7.2 million for 1996 compared to $9.6 million in 1995. The Company generated
$6.8 million from the liquidation of trust funds that were released upon
termination of an indemnification trust by current and former directors of the
Company. In addition, $2.7 million was received from restricted cash accounts
which were released upon completion of the Refinancing and applied to the then
outstanding debt balance. The Company also generated $4.5 million from the sale
of miscellaneous assets and used $20.8 million on capital expenditures during
1996, primarily vehicles, containers and other equipment. During 1995, the
Company withdrew $10.2 million from restricted cash accounts, received $6.1
million from the sale of miscellaneous assets, used $19.6 million for capital
expenditures, invested $5.6 million in marketable securities and deposited $0.6
million to trust funds.
In 1994, the Company generated $3.1 million from investing activities as a
result of asset and subsidiary sales of $21.6 million and withdrawal of $11.3
million and $3.5 million from restricted cash accounts and trust funds,
respectively, partially offset by capital expenditures of $14.6 million and
deposits of $17.5 million and $0.7 million to restricted cash accounts and trust
funds, respectively.
Cash Flow from Financing Activities. Cash used by financing activities was
$7.2 million for 1996 compared to $24.9 million for 1995. As discussed above,
the Company completed the Refinancing on November 21, 1995 which included the
receipt of $170.2 million (after original issue discount) from the issuance of
Senior Notes and utilized the funds for the payment of then outstanding bank
debt, certain
35
<PAGE> 37
capitalized lease obligations and redemption of subordinated notes. In addition,
the Company incurred approximately $10.8 million in fees and expenses related to
the transaction. The Company also received $3.5 million from the ESOP as payment
on loans to the ESOP paid from the insurance proceeds received in conjunction
with a litigation settlement. During 1995, the Company made principal payments
on long term debt and capital leases of $32.2 million, partially offset by
proceeds from capitalized leases and additional debt of $4.2 million and the
receipt of $3.1 million from the ESOP as payment on loans to the ESOP paid from
the proceeds of a litigation settlement with the former owners of a subsidiary.
Financing activities during 1994 consisted of principal payments on long term
debt and capital leases of $45.5 million, partially offset by proceeds from
capitalized leases of $2.2 million.
OTHER CASH REQUIREMENTS
The Company has material financial obligations related to closure and
postclosure costs with respect to landfills it owns. While the amount of these
future obligations cannot be determined definitively at this time, the Company
estimates the costs in current dollars for final closure of landfills it owns,
as well as related post-closure activities for an estimated period of thirty
years after the closure of each respective landfill, at approximately $60.4
million.* The Company recognizes an expense and liability for such costs based
on units of production and makes contributions to trust funds to satisfy
financial assurance requirements and fund the landfill costs. As of September
30, 1996, the Company had a recorded liability of $25.3 million for such
projected costs in accordance with generally accepted accounting principles
("GAAP") and had on deposit $20.4 million in trust accounts consistent with
regulatory requirements. The Company estimates its 1997 funding requirement at
approximately $3.2 million, although the actual requirements could vary with
changes in cost estimates and/or regulatory requirements.*
The Company also has significant financial obligations with respect to
certain environmental statutes and regulations protecting the groundwater and
surface water in the vicinity of its landfills. The Company estimates the
remaining expenditures associated with this issue to be approximately $4.4
million and is satisfying that obligation through deposits made to trust funds.*
The Company estimates its 1997 funding requirement at approximately $0.4
million, although the actual requirement could vary with changes in cost
estimates and/or regulatory requirements.* The Company also has recorded a
liability of $1.2 million for potential costs associated with other
environmental matters.
The Company is in discussions with the City of San Francisco regarding
plans for the construction of materials recovery and other facilities for use in
connection with the Company's San Francisco operations and to facilitate
compliance with mandated recycling requirements. If the Company and the City
reach agreement on the nature and scope of the project, the Company believes
construction of the facilities could begin in 12 to 18 months from that time.*
Over the term of the Senior Notes, the Company estimates that it will need to
invest substantial capital to acquire waste processing facilities and household
hazardous waste facilities, maintenance and administrative complexes and
equipment.* These projects, including the San Francisco facilities, will require
significant capital investments. The Company intends to seek continued rate
recovery for amounts expended on these projects and may seek to finance such
costs through additional secured borrowings, including $30.0 million of
borrowing for certain "Designated Capital Expenditures" (as defined in the
Indenture).*
The Company is obligated to provide, subject to certain conditions,
post-retirement health and welfare benefits to certain former
employee-shareholders (as well as their spouses and dependents) of two of its
predecessors. Although the Company's obligation with respect to some of its
former employee-shareholders will terminate upon the earlier of October 1, 2000
or the final resolution of legal claims against third parties reserved pursuant
to the settlement of litigation, most of the Company's obligations extend for
the lifetime of such former employee-shareholders. The accrued post-retirement
medical benefit liability as of September 30, 1996 was $34.4 million and the
Company made cash payments during 1996 totalling approximately $1.1 million.
Payments at rates similar to those made in 1996 or greater, depending on medical
inflation rates and the aging of the persons entitled to benefits, are expected
for a significant number of years.
The Company anticipates future increases of approximately $1.0 million to
$3.0 million annually in the ESOP contributions related to funding the
distributions to retired, terminated or withdrawing participants based on their
vested allocated shares of Company common stock.* The Company expects the
contributions
36
<PAGE> 38
to increase as additional employees reach retirement age, as additional shares
are allocated to employee accounts and if the value of the Company common stock
increases. In addition, accelerated contributions made to realize tax benefits
will increase the ESOP compensation expense and will have a negative impact on
earnings.* While Norcal may consider a public offering of its common stock as a
potentially desirable way to eliminate the ESOP-related requirements to either
repurchase stock or fund cash distributions for retired, terminated or
withdrawing employees, there can be no assurance that Norcal would be able to
effect such an offering or otherwise create a trading market for its stock.*
The Company is currently reviewing the adequacy and operational
capabilities of its management information systems. The cost of modifications to
the Company's information systems could impact the results of operations or
require substantial capital investment during 1997 and/or subsequent years.*
ENVIRONMENTAL REGULATIONS
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.*
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to the leachate and groundwater management
and remediation. There are many unknown and uncertain factors including
regulatory requirements, incomplete data with respect to projected volumes,
quality and cost of treatment among others. Accordingly, estimates for closure
and postclosure management and remediation of leachate and contaminated
groundwater could be subject to periodic and substantial upward revision as the
Company's knowledge increases concerning these factors.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
Historically, the Company has experienced cost increases due to the effects
of inflation on its operating expenses, particularly the cost of compensation
and benefits, and the replacement of or additions to property and equipment.
Fuel costs which fluctuate with inflation and other market conditions also have
affected operating results. Most of the Company's operations are subject to rate
setting processes which allow for the recovery of certain costs including labor
and fuel. However, inflationary increases in operating costs may cause the
Company to incur lower operating margins, at least until such time as new rates
can be implemented. Rate adjustments, if approved, can take several months. The
rise in fuel costs during 1996 has had a negative impact on Company results
which is expected to continue until such time as the Company may be able to
attain the necessary rate increases to compensate it for higher fuel costs or
fuel cost prices subside to previous levels.*
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* The
Company is unable to determine the significance a California economic downturn
would have on its operations.
SEASONALITY
The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) than fall and winter when lower volumes of certain
types of waste, such as yard clippings and construction and demolition debris,
are generated. This typically results in decreased volume at the Company's
transfer stations, waste collection, and landfill operations during these
months.
ACCOUNTING AND OTHER MATTERS
In October 1995, Statement of Financial Accounting Standard No. 123
"Accounting for Stock Based Compensation" (SFAS 123) was issued. This Statement
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
37
<PAGE> 39
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25
(APB 25) "Accounting for Stock Issued to Employees." The Company has concluded
it will continue to utilize the method of accounting prescribed by APB 25 at
this time.
The Company is considering a "quasi reorganization" for financial reporting
purposes, which would enable the Company to revalue assets and liabilities to
fair value and eliminate accumulated deficit against additional paid in capital.
This procedure, if effectuated, will not have any material effect on the
Company's operations or its ability to service its obligations.* There can be no
assurance that the Company will be able to effect such a quasi reorganization.*
38
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Norcal Waste Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Norcal
Waste Systems, Inc. (the Company) and subsidiaries as of September 30, 1996 and
1995, and the related consolidated statements of income, stockholder's equity
(deficit) and cash flows for each of the years in the three year period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norcal Waste
Systems, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in note 2 to the consolidated financial statements, effective
October 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
San Francisco, California
December 23, 1996
39
<PAGE> 41
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $288,215 $271,501 $247,176
-------- -------- --------
Cost of operations:
Operating expenses....................................... 202,848 183,865 167,740
Depreciation and amortization............................ 18,320 19,985 20,141
ESOP compensation expense (note 9)....................... 10,291 7,923 7,319
General and administrative............................... 30,965 26,446 24,849
-------- -------- --------
Total cost of operations.............................. 262,424 238,219 220,049
-------- -------- --------
Operating income................................. 25,791 33,282 27,127
Interest expense........................................... (23,913) (19,909) (20,920)
Gain (loss) on dispositions, net........................... (477) 1,279 6,744
Settlement of litigation (note 14)......................... (3,648) -- (5,480)
Other income............................................... 1,111 2,443 1,389
-------- -------- --------
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in
accounting principle........................... (1,136) 17,095 8,860
Income tax expense (note 8)................................ -- 6,662 2,500
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... (1,136) 10,433 6,360
Extraordinary gain on early extinguishment
of long-term debt net of $0 income taxes (note 5)........ 31,379 -- --
Cumulative effect on prior years of change in accounting
for income taxes (note 8)................................ -- -- (2,500)
-------- -------- --------
Net income....................................... $ 30,243 $ 10,433 $ 8,860
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 42
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash............................................................... $ 14,378 $ 8,416
Restricted cash.................................................... -- 2,721
Marketable securities.............................................. 6,889 5,645
Trust accounts, current portion (note 12).......................... 4,066 --
Accounts receivable, less allowance for doubtful accounts of $1,611
in 1996 and $1,277 in 1995...................................... 39,120 31,055
Parts and supplies................................................. 2,434 2,411
Prepaid expenses................................................... 3,836 4,710
--------- ---------
Total current assets....................................... 70,723 54,958
--------- ---------
Property and equipment:
Land............................................................... 42,691 45,187
Landfills.......................................................... 24,481 19,720
Buildings and improvements......................................... 43,189 42,490
Vehicles and equipment............................................. 107,822 100,357
Construction in progress........................................... 4,412 5,639
--------- ---------
Total property and equipment............................... 222,595 213,393
Less accumulated depreciation and amortization..................... 85,448 80,962
--------- ---------
Property and equipment, net................................ 137,147 132,431
--------- ---------
Other assets:
Franchises, permits and other intangibles, net of amortization of
$35,952 in 1996 and $32,227 in 1995 (note 3).................... 76,166 79,956
Trust accounts (note 12)........................................... 24,209 31,289
Prepaid pension cost (note 10)..................................... 3,090 --
Deferred financing costs, net of amortization of $1,177 in 1996.... 9,636 252
Other.............................................................. 264 266
--------- ---------
Total other assets......................................... 113,365 111,763
--------- ---------
$ 321,235 $ 299,152
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 43
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS, CONTINUED
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt (note 5)......................................... $ 354 $ 28,277
Capital leases (note 7)......................................... 935 3,419
Accounts payable................................................... 12,133 9,941
Accrued expenses (notes 5 and 12).................................. 44,632 33,203
Income taxes payable (note 8)...................................... -- 3,884
Deferred revenues.................................................. 2,722 2,838
Other accrued liabilities.......................................... 5,091 8,885
--------- ---------
Total current liabilities.................................. 65,867 90,447
Long-term debt (note 5).............................................. 172,386 67,602
Obligations under capital leases (note 7)............................ 3,065 4,071
Deferred income taxes (note 8)....................................... 12,503 13,039
Landfill closure liability (note 12)................................. 18,668 21,456
Postretirement medical benefits (note 11)............................ 33,318 33,905
Other liabilities.................................................... 9,311 10,469
Subordinated notes payable (note 6).................................. -- 102,041
--------- ---------
Total liabilities.......................................... 315,118 343,030
--------- ---------
Commitments and contingencies (notes 7, 8, 9, 10, 11, 12, 13 and 14)
Stockholder's equity (deficit) (note 9):
Common stock, $.01 par value; 100,000,000 shares authorized;
24,134,973 shares issued and outstanding........................ 241 241
Additional paid-in capital......................................... 166,378 166,378
Accumulated deficit................................................ (112,915) (143,158)
Pension liability adjustment (note 10)............................. -- (8,581)
Unrealized gains on marketable securities.......................... 581 --
--------- ---------
54,285 14,880
Less net scheduled contribution to the ESOP (note 9)................. (48,168) (58,758)
--------- ---------
Total stockholder's equity (deficit)....................... 6,117 (43,878)
--------- ---------
$ 321,235 $ 299,152
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 44
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK ADDITIONAL PENSION SCHEDULED GAINS ON
--------------- PAID-IN ACCUMULATED LIABILITY CONTRIBUTION MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TO THE ESOP SECURITIES TOTAL
------ ------ ---------- ----------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1993........ 24,135 $241 $166,378 $(162,451) $(12,052) $ (73,980) $ -- $(81,864)
Contributions to reduce ESOP
debt...................... -- -- -- -- -- 5,924 -- 5,924
Pension liability
adjustment................ -- -- -- -- 1,145 -- -- 1,145
Net income.................. -- -- -- 8,860 -- -- -- 8,860
------ ---- -------- --------- -------- -------- ---- --------
Balances,
September 30, 1994........ 24,135 241 166,378 (153,591) (10,907) (68,056) -- (65,935)
Contributions to reduce ESOP
debt...................... -- -- -- -- -- 9,298 -- 9,298
Pension liability
adjustment................ -- -- -- -- 2,326 -- -- 2,326
Net income.................. -- -- -- 10,433 -- -- -- 10,433
------ ---- -------- --------- -------- -------- ---- --------
Balances,
September 30, 1995........ 24,135 241 166,378 (143,158) (8,581) (58,758) -- (43,878)
Contributions and adjustment
to ESOP debt.............. -- -- -- -- -- 10,590 -- 10,590
Pension liability
adjustment................ -- -- -- -- 8,581 -- -- 8,581
Unrealized gains on
marketable securities..... -- -- -- -- -- -- 581 581
Net income.................. -- -- -- 30,243 -- -- -- 30,243
------ ---- -------- --------- -------- -------- ---- --------
Balances,
September 30, 1996........ 24,135 $241 $166,378 $(112,915) $ -- $ (48,168) $581 $ 6,117
====== ==== ======== ========= ======== ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 45
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 30,243 $ 10,433 $ 8,860
Extraordinary gain on early extinguishment of long term
debt.................................................. (31,379) -- --
------- ------ ------
Income (loss) before extraordinary gain............... (1,136) 10,433 8,860
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................... 18,320 19,985 20,141
Landfill trust contributions, withdrawals, interest
income, net of landfill closure and other regulatory
expense............................................. (2,053) (2,805) 14
Pension, postretirement and insurance, net of amounts
paid................................................ 1,845 1,949 (41)
ESOP compensation expense in excess of cash payments
for redemptions..................................... 8,768 7,528 7,031
Accrued interest, amortization of discounts and
deferred financing fees............................. 10,664 6,031 9,648
(Settlement of) accrual for litigation................ -- (5,480) 5,480
(Gain) loss on dispositions and other income.......... (709) (2,380) (7,243)
Other................................................. 619 (613) (601)
Changes in assets and liabilities, net of effects of
dispositions:
(Increase) in accounts receivable................... (8,399) (4,356) (1,319)
Increase in accounts payable........................ 2,192 1,376 2,005
(Decrease) in accrued expenses and other
liabilities...................................... (3,275) (1,677) (4,642)
Increase (decrease) in income taxes................. (4,817) 5,915 (2,641)
Other assets and liabilities........................ (1,667) 1,006 2,242
------- ------ ------
Net cash provided by operating activities........ 20,352 36,912 38,934
------- ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 46
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment.................... $(20,842) $(19,603) $(14,622)
Proceeds from dispositions, net.......................... 4,498 6,057 21,579
(Deposits to) and withdrawals from trust accounts, net... 6,795 (595) 2,849
Investment in marketable securities...................... -- (5,608) --
(Deposits to) and withdrawals from restricted cash,
net................................................... 2,735 10,203 (6,240)
Other.................................................... (383) (20) (435)
------- ------ ------
Net cash (used in) provided by investing
activities..................................... (7,197) (9,566) 3,131
------- ------ ------
Cash flows from financing activities:
Proceeds from long-term debt and capitalized leases...... 170,848 4,212 2,170
Principal payments on long-term debt and capitalized
leases................................................ (97,698) (32,156) (45,494)
Principal payments on subordinated debt.................. (73,061) -- --
Payments of loans by ESOP................................ 3,531 3,081 --
Deferred financing costs................................. (10,813) -- --
------- ------ ------
Net cash used in financing activities............ (7,193) (24,863) (43,324)
------- ------ ------
Net increase (decrease) in cash............................ 5,962 2,483 (1,259)
Cash, beginning of year.................................... 8,416 5,933 7,192
------- ------ ------
Cash, end of year.......................................... $ 14,378 $ 8,416 $ 5,933
======= ====== ======
Supplemental schedule of net cash paid for:
Interest................................................. $ 13,883 $ 13,912 $ 11,328
======= ====== ======
Income taxes............................................. $ 5,221 $ 747 $ 1,274
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 47
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) NATURE OF BUSINESS
Through its subsidiaries, Norcal Waste Systems, Inc. (the Company) provides
integrated waste services to residential, commercial, municipal and industrial
customers in California. The Company's services include refuse collection,
recycling and other waste diversion, transfer station and hauling operations,
operation of Company-owned landfills and third party landfill management
services (including engineering and construction management services). The
Company continues to be, with limited exceptions, the sole provider of
commercial and residential refuse collection for the City and County of San
Francisco.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Norcal Waste
Systems, Inc. and its subsidiaries, all of which are wholly owned. The Company
uses the equity method for its investments in unconsolidated subsidiaries.
Investments in companies which are 50% or less owned are not consolidated and
are accounted for under the equity method. All significant intercompany accounts
and transactions have been eliminated.
The Company's outstanding common stock is 100% owned by the Norcal Waste
Systems, Inc. Employee Stock Ownership Plan and Trust (the Norcal ESOP or the
ESOP).
(b) Revenue Recognition
The Company recognizes revenue when services are performed. Revenues billed
in advance are deferred and recorded as income in the period in which the
related services are rendered. A significant amount of the Company's revenue is
subject to rate regulation by local jurisdictions under franchise agreements and
permits.
The Company performs project services on managed landfills relating to
landfill closure, landfill expansion and various regulatory compliance tasks.
Revenues are recognized on the percentage-of-completion method. Determination of
the percentage complete is based on estimates of subcontractors of actual job
progress and expenses incurred. Project costs include all direct and indirect
costs related to contract performance including subcontractors, materials and
internal labor. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
(c) Parts and Supplies
The Company's parts and supplies are recorded at cost (first-in,
first-out).
(d) Property and Equipment
Property and equipment, including major renewals and betterments, are
stated at cost. Property and equipment under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. Ordinary
maintenance and repairs are charged directly to operations. The Company
capitalizes interest costs for significant projects under development in
accordance with Statement of Financial Accounting Standards (SFAS) No. 34,
"Capitalization of Interest Cost". The amount capitalized and netted against
interest expense in the consolidated statements of income was $0.4 million in
1996 and $0 for both 1995 and 1994. Certain properties available for sale have
been written down to their estimated net realizable value.
46
<PAGE> 48
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
Depreciation is calculated on the straight-line method over the estimated
useful lives of assets as follows: buildings and improvements, 3 to 40 years;
and vehicles and equipment, 6 to 9 years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.
Landfills are carried at cost which includes acquisition, engineering and
permitting costs related to landfills which are currently in operation. These
costs are amortized as the landfill is used, based on engineering estimates of
the available capacity. Engineering, legal and other costs associated with the
development of new landfills and expansion at existing landfills are deferred
pending receipt of all necessary operating permits, at which time they are
capitalized as landfill costs. The Company is required to close, monitor, and
maintain landfill sites for a period of thirty years or more after closure. The
estimated costs and changes thereto in current dollars attributable to future
closure and post-closure costs are accrued in landfill closure liability for
each site based upon the capacity used in the current year in relation to the
total remaining capacity as of the beginning of the year.
(e) Intangible Assets
The excess of cost over net assets of acquired businesses is amortized on
the straight-line method over periods not exceeding 40 years. Franchises,
permits and contracts are amortized on the straight-line method over their
estimated lives ranging from 3 to 40 years. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed Of" during the year
ended September 30, 1995. It is the Company's policy to review the estimated
undiscounted future cash flows for each operation on an annual basis and to
compare it to the remaining net book value to ascertain if a provision for
impairment is necessary. Adoption of SFAS No. 121 did not result in the
recognition of any impairment loss.
(f) Income Taxes
The Company adopted the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," effective October 1, 1993 and has reported the
cumulative effect of the change in method in the 1994 consolidated statement of
income. Under the liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Deferred
taxes are provided on financial statement and income tax basis differences
relating to business acquisitions, except that no deferred taxes are provided on
amounts related to operating permit rights and excess of costs over net assets
of businesses acquired. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. This standard requires that the Company recognize income tax
benefits for loss carryforwards and certain temporary differences for which tax
benefits have not previously been recorded. The likelihood of realizing the tax
benefits related to a potential deferred tax asset is evaluated, and a valuation
allowance is recognized to reduce that deferred tax asset to an amount that more
likely than not will be realized.
(g) ESOP Accounting
The Company recognizes ESOP compensation expense using the shares allocated
method whereby the expense is based upon expected contributions by the Company
to the ESOP relating to ESOP debt service payments, the historical cost of the
shares and the number of shares allocated by reason of such payments. Shares
allocable to participants for a given year are determined based on the ratio of
the current year's debt
47
<PAGE> 49
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
service payments to the total of the current year's and estimated remaining debt
service. Shares to be allocated to individual participants are based upon the
participants' relative compensation.
(h) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a remaining maturity at the time of purchase of three months or
less. Cash and cash equivalents are principally comprised of cash invested in
demand accounts and money market instruments and are stated at cost plus accrued
interest.
(i) Restricted Cash
The restricted cash account, which was liquidated as part of the
refinancing transaction, was established in accordance with the Third Amended
and Restated Credit Agreement (the Old Credit Agreement)(Note 5). Withdrawals
from this account were restricted to certain expenditures requiring written
notice from the Company to the collateral agent and were limited as specified in
the agreement.
(j) Marketable Securities and Trust Accounts
Marketable securities represent primarily investments in fixed income
securities of federal government entities which are considered as available for
sale securities and are recorded at market value using the closing price as
quoted on a national securities exchange. The available for sale securities
mature at various dates from May 1998 to September 2010. Unrealized gains and
losses, which occur when the cost basis differs from the fair value, are
included as a separate component of stockholder's equity, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." During fiscal 1996, $10.4
million of available for sale securities were sold for proceeds of $10.1
million. There were no sales of available for sale securities during fiscal
1995. The gross unrealized holding gains and gross unrealized holding losses (in
thousands) for available for sale securities at September 30, 1996 were $1,327
and $151, respectively.
The Company has established restricted and unrestricted trust accounts
principally in connection with landfill operations with respect to closure and
post-closure liabilities, financial assurance for the initiation and completion
of corrective action and liabilities to third parties for bodily injury/property
damage. Amounts are principally invested in fixed income securities of federal
government entities with maturities from two to ten years. The Company considers
certain of its trust accounts to be held to maturity and, consequently, has
stated these investments at amortized cost in accordance with SFAS No. 115. The
gross unrealized holding gains and gross unrealized holding losses (in
thousands) for held to maturity securities at September 30, 1996 were $86 and
$224, respectively, and at September 30, 1995 were $445 and $233, respectively.
Pursuant to guidance contained in the Special Report, "A Guide to
Implementation of Statement 115 Accounting for Certain Investments in Debt and
Equity Securities" issued by the Financial Accounting Standards Board (FASB), at
December 31, 1995 the Company re-evaluated its classification of certain
investments held in trust accounts as "held to maturity." Based on the Company's
intent and ability, it reclassified certain investments as "available for sale."
The aggregate fair value and amortized cost of the investments reclassified was
$13.1 million and $12.9 million, respectively, and the related unrealized gain
was $0.2 million.
48
<PAGE> 50
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
(k) Stock Options
The Company has applied Accounting Principles Board (APB) Opinion No. 25
and the related interpretations in accounting for its various stock option
plans. Accordingly, no compensation expense has been recognized for its fixed
price stock option plans.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(3) FRANCHISES, PERMITS AND OTHER INTANGIBLES
When the Company acquires businesses with definitive franchise or other
agreements with specific terms, a portion of the purchase price is allocated to
the franchise based upon its estimated fair value at the date of acquisition. In
certain instances, permits or other legal documents evidence the Company's right
to do business for an indefinite period and are similar to goodwill. Any amounts
in excess of amounts allocated to franchises and permits are included in excess
of cost over net assets of businesses acquired. A summary of intangible assets,
net of accumulated amortization at September 30, is as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Franchises and contracts......................................... $ 8,168 $ 9,123
Operating permit rights.......................................... 62,224 64,260
Excess of cost over net assets of businesses acquired............ 5,774 6,573
------- -------
$76,166 $79,956
======= =======
</TABLE>
(4) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On July 28, 1995, the Company sold its 50% ownership interest in an
affiliated company and other related entities, which were engaged in the waste
collection and disposal business for $5 million in cash. The gain on disposal of
$1.2 million is included in gain on dispositions in the consolidated statements
of income.
The investments in unconsolidated affiliates are included in other assets
in the accompanying consolidated balance sheets. The Company's equity in
earnings/(losses) of unconsolidated affiliates included in other income in the
consolidated statements of income (in thousands), was $(284), $517 and $532 for
the years ended 1996, 1995 and 1994, respectively.
49
<PAGE> 51
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
(5) LONG-TERM DEBT
Long-term debt at September 30, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Series B 12.5% Senior Notes, due 2005........................... $170,392 $ --
Bank loans:
Facility A and B loans, six-year term loan dated September 30,
1992, original principal balance of $149,733,818, interest
at 9.63%................................................... -- 93,951
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8 1/2%........... 850 914
Other notes..................................................... 1,498 1,014
-------- -------
Total debt................................................. 172,740 95,879
Less current portion....................................... 354 28,277
-------- -------
Long-term debt........................................ $172,386 $67,602
======== =======
</TABLE>
On November 21, 1995, the Company completed a private debt offering, (the
Refinancing) of $175.0 million in Series A Senior Notes. The Series A Senior
Notes matured in November 2005 with interest payable semi-annually. The Series A
Senior Notes were redeemable at the option of the Company, in whole or in part,
at any time during or after November 2000. Prior to this date, the Series A
Senior Notes were partially redeemable in the event of a public offering, or
would have been required to be redeemed in the event of a change in control of
the Company. The Series A Senior Notes were unsecured and ranked pari passu in
right of payment to all existing and future senior indebtedness of the Company.
The Series A Senior Notes were guaranteed on a senior unsecured basis by the
Company's wholly-owned subsidiaries. The Indenture governing the Series A Senior
Notes contains provisions which, among other things, (i) limit the Company's and
its subsidiaries' ability to declare or pay dividends or other distributions
(other than dividends or distributions payable to Norcal or any wholly owned
subsidiary of Norcal), (ii) limit the purchase, redemption or retirement of
capital stock and (iii) limit the incurrence of additional debt. As of September
30, 1996, under the incurrence covenant in the Indenture, the Company would have
been able to incur approximately $4 million of additional debt (in addition to
that which would have been available under the Credit Agreement and was
otherwise permitted under the Indenture). The Company currently anticipates that
the incurrence covenant of the Indenture will preclude it from incurring such
additional debt during the remainder of fiscal year 1997. In September 1996, the
Company completed the exchange of all of its outstanding Series A Senior notes
for Series B Senior Notes (Senior Notes) with an identical principal balance and
terms. The exchange was completed under the Securities Act of 1933. The interest
rate on the Senior Notes is currently 12.75% and increases .25% per annum on
each of November 16, 1996, May 16, 1997 and November 16, 1997 to a maximum of
13.5%. The interest rate reverts back to 12.5% if Norcal (in one or more
transactions) offers to purchase (whether or not any actual purchases are made)
or redeems an aggregate of $25.0 million in principal amount of Senior Notes out
of the proceeds of equity sales.
The Company received net proceeds from the private debt offering of $170.2
million (after original issuance discount of $4.8 million). Deferred financing
costs at September 30, 1996 include commissions and other costs related to the
offering and the new credit agreement (see below) and are being amortized over
the life of the Senior Notes and the new credit agreement. The Company used the
proceeds from the Series A Senior Notes, proceeds from the liquidation of
indemnification trusts and cash balances to repay $94.0 million long-term debt,
$2.2 million of capital leases, redeem subordinated notes for $73.4 million and
settle litigation for $3.6 million.
50
<PAGE> 52
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The debt outstanding at September 30, 1996, matures as follows (in
thousands): 1997, $354; 1998, $236; 1999, $251; 2000, $255; 2001, $226; and
thereafter, $176,026, less unamortized discount of $4,608. Included in accrued
expenses at September 30, 1996 and 1995 is accrued interest amounting to $8,791
and $446, respectively.
Concurrent with the private debt offering, the Company entered into a new
Credit Agreement with a group of lenders and the First National Bank of Boston
as Agent. The agreement established a revolving credit facility in an amount of
up to $100 million, up to $25 million of which can be used for letters of
credit. Substantially, all of the assets of the Company and its wholly owned
subsidiaries are pledged to secure the obligations of the Company and such
subsidiaries. Subsidiaries of the Company have guaranteed the debt under the
Credit Agreement on a joint and several basis. The Credit Agreement provides for
certain positive and negative covenants including restrictions on indebtedness,
investments, and distributions among others, and financial covenants including
leverage ratio, interest coverage ratio, consolidated net worth, and debt
service ratio. There are no compensating balance requirements or any informal
arrangements in connection with any of the loans. The Company must pay to the
lenders a commitment fee on the daily average amount of the unused credit
commitment at an annual rate per annum equal to 0.05%, plus an amount equal to
2.25% of the face amount of each letter of credit. Except as set forth below,
there were no borrowings outstanding under the Credit Agreement at September 30,
1996.
In the event of a default under the Credit Agreement, the rights of Norcal
with respect to the liquidation of all of the assets of Norcal's wholly owned
subsidiaries and the capital stock of the wholly owned subsidiaries would be
subject to the prior claims of the lenders under the Credit Agreement. A default
under the Senior Notes constitutes an event of default under the Credit
Agreement. Similarly, certain defaults under other indebtedness in excess of
$5.0 million (including indebtedness under the Credit Agreement) constitute an
event of default under the Indenture.
As of September 30, 1996, the Company had availability under the Credit
Agreement of approximately $25.0 million (with additional amounts potentially
available to fund acquisitions based on certain pro forma ratios), along with
$15.6 million which may be utilized for additional letters of credit. The
Company expects that by the end of fiscal year 1997 potential availability under
the Credit Agreement will be reduced by up to approximately $12 million if the
Recommended Rate Orders (as hereinafter defined) are put into effect without
modification. See Note 16.
(6) SUBORDINATED NOTES PAYABLE
As part of the refinancing (Note 5), the Company redeemed the subordinated
notes on November 21, 1995. The recorded value and associated accrued interest
of the subordinated notes that the Company redeemed was $103.3 million. The
Company recognized an extraordinary gain of $31.4 million.
Norcal ESOP Notes (ESOP Notes)
Subordinated notes payable by the ESOP to former shareholders of Norcal
Solid Waste Systems Inc. (Old Norcal) (ESOP Notes) were issued by the ESOP in
the original amount of $36.6 million. The discounted present value of the ESOP
Notes as of September 30, 1995 was $32.4 million. The ESOP Notes were recorded
net of a discount of $4.2 million to reflect a market rate of interest at the
date of issuance. The ESOP Notes bore interest at a fixed rate of 8% per annum
and were discounted to yield 13.3%. The discount was amortized over the life of
the notes. At September 30, 1995 there was $16.4 million of interest in arrears.
Although the Company was not an obligor or guarantor on the ESOP Notes, they
were recorded as a liability on the Company's consolidated balance sheets in
accordance with generally accepted accounting principles (GAAP) with a
corresponding decrease to stockholder's equity (Note 9).
51
<PAGE> 53
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The ESOP Notes and related interest were in default at September 30, 1995
and could not be paid according to the terms of the Old Credit Agreement and the
Indenture governing the Class A and B Notes until certain restructuring
conditions were met. Interest payments due under the ESOP Notes had not been
paid since 1991 and scheduled principal payments had not been made in 1995 and
1994. Accordingly, the discounted present value of the ESOP Notes together with
accrued interest aggregating $48.8 million were included as long-term
liabilities in 1995 financial statements. A settlement of claims by holders of
ESOP Notes against Norcal, the ESOP and others was reached in August 1995 as
more fully described in Note 14. The ESOP Notes were repaid in November 1995 in
connection with the Refinancing.
Envirocal Notes Payable (Class A and B Notes)
In December 1994, under the terms of a settlement agreement (as further
described in Note 14), the Company issued new notes (the Class A and B Notes) in
exchange for the subordinated notes payable by the Company to former Envirocal
shareholders (Old Subordinated Notes). The Class A and B Notes consisted of
Class A Notes in the amount of $41.8 million and Class B Notes in the amount of
$9.3 million.
The Class A and Class B Notes were issued in exchange for the Old
Subordinated Notes, which were payable by the Company to former Envirocal
shareholders and were issued in 1987 by Envirocal, Inc. in the original amount
of $41.8 million.
No gain or loss was recognized on the conversion of the debt instruments on
the Old Subordinated Notes. Accordingly, the difference between the carrying
amount of Old Subordinated Notes and accrued interest in the amount of $52.7
million, at the settlement date and the future payments required by the Class A
and B Notes would have been recognized as interest expense over the life of the
Class A and B Notes at an imputed interest rate which approximated 5.8%. At
September 30, 1995, the total recorded obligation was $53.2 million.
The Company was obligated to and did redeem the Class A and Class B notes
(based upon a stipulated amount) in connection with the settlement of claims by
holders of ESOP Notes in November 1995.
(7) LEASES
The Company leases certain land, buildings, vehicles and equipment under
lease agreements. Certain of these leases are accounted for as capital leases.
The Company is responsible for all maintenance costs, taxes and insurance on the
equipment. At September 30, the gross amount of property and equipment and
related accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Vehicles and equipment........................................... $ 6,534 $17,092
Less accumulated amortization.................................... (2,232) (8,426)
------ -----
$ 4,302 8,666
====== =====
</TABLE>
52
<PAGE> 54
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1996 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending September 30:
1997........................................................... $ 1,310 2,041
1998........................................................... 1,310 1,492
1999........................................................... 1,288 1,194
2000........................................................... 658 813
2001........................................................... 248 363
Thereafter..................................................... 54 1,798
------ -----
Total minimum lease payments........................... 4,868 7,701
=====
Less amount representing interest................................ 868
------
Present value of minimum lease payments.......................... 4,000
Less current portion............................................. 935
------
$ 3,065
======
</TABLE>
Rental expense charged to operations under all operating leases was
approximately $3.9 million, $2.8 million and $2.8 million for the years ended
1996, 1995, and 1994, respectively, including amounts under short-term rental
agreements.
(8) INCOME TAXES
As discussed in Note 2, the Company adopted SFAS No. 109 as of October 1,
1993. The cumulative effect of the change in accounting for income taxes of $2.5
million was determined as of October 1, 1993 and is reported separately in the
consolidated statement of income for the year ended September 30, 1994.
Income tax expense (benefit) for the fiscal years ended September 30, 1996,
1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $ 639 $4,562 $2,188
State................................................. 301 1,600 87
----- ------ ------
940 6,162 2,275
----- ------ ------
Deferred:
Federal............................................... (639) 425 225
State................................................. (301) 75 --
----- ------ ------
(940) 500 225
----- ------ ------
$ -- $6,662 $2,500
===== ====== ======
</TABLE>
53
<PAGE> 55
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
Total income tax expense differed from the amount computed by applying the
federal statutory income tax rate of 35% to income as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate................................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit....................... 6.0 6.0 6.0
Change in valuation allowance............................. (36.5) (14.6) (43.3)
Amortization of nondeductible intangibles................. 3.1 5.1 9.2
Permanent differences related to debt extinguishment...... (12.4) -- --
Permanent differences on affiliate sold................... -- 6.5 --
Current utilization of previously deferred deductions and
state net operating loss................................ -- -- 22.3
Other..................................................... 4.8 1.0 (1.0)
----- ----- -----
Income tax expense........................................ 0.0% 39.0% 28.2%
===== ===== =====
</TABLE>
The deferred tax liability at September 30, 1996 and 1995 primarily relates
to financial statement carrying amounts in excess of the tax basis in certain
land investments that will not be disposed of in the foreseeable future. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at September 30 are summarized
below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforward.................. $ 3,862 $ 3,183
Accrued liabilities.......................................... 2,298 4,785
Post retirement benefit obligations.......................... 14,117 13,967
ESOP expense, including accrued interest, in excess of cash
contributions............................................. 8,344 14,979
Pension expense in excess of contributions................... -- 3,550
Insurance reserves........................................... 5,175 4,787
Landfill closure reserves.................................... 2,414 1,175
Vacation accrual............................................. 1,400 1,071
Bad debts.................................................... 661 465
Other........................................................ 706 1,702
Old Subordinated Notes, interest recapture................... -- 2,320
-------- --------
38,977 51,984
Less: Valuation allowance...................................... 24,716 35,745
-------- --------
Net deferred tax assets.............................. 14,261 16,239
-------- --------
Deferred tax liabilities:
Property and equipment, basis and depreciation differences... 22,080 25,616
Franchises, permits and other intangibles.................... 3,011 3,662
Pension contributions in excess of expense................... 1,269 --
Marketable securities........................................ 404 --
-------- --------
Gross deferred tax liabilities....................... 26,764 29,278
-------- --------
Net deferred tax liabilities......................... $(12,503) $(13,039)
======== ========
</TABLE>
The total valuation allowance decreased for the years ended September 30,
1996 and 1995 by $11.0 million and $2.5 million, respectively.
54
<PAGE> 56
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
At September 30, 1996, 1995, and 1994, the Company concluded it was unable
to implement tax planning strategies which would have enabled the Company to
reduce deferred tax liabilities. Consequently, the Company has provided a
valuation allowance for deferred tax assets attributable to substantial expenses
and losses recognized for financial statement purposes which represent future
deductible amounts.
The Internal Revenue Service (the "Service") is completing an audit of the
Company's income tax returns for the fiscal years ended September 30, 1988
through September 30, 1991. During the course of that audit, the Service also
examined certain transactions involving employee benefit plans sponsored by the
Company. With regard to this tax audit, the Service has proposed a number of
adjustments (some of which have been agreed to by the Company). In particular,
the Service has stated that it does not (i) believe the Company should be
permitted to deduct post-retirement health and welfare benefits paid to Old
Norcal and Envirocal employee-shareholders on the grounds that such benefits
should be treated as additional purchase price consideration for the stock
acquired from such shareholders and therefore must be capitalized or (ii) agree
with the manner in which the Company has calculated certain deductions related
to its landfill closure and post-closure costs. The Company has advised the
Service that it intends to vigorously challenge the Service's proposed treatment
of the post-retirement health and welfare benefits. The Service and the Company
have tentatively agreed on an alternative treatment of landfill closure and
post-closure costs which is acceptable to the Company.
The Company does not believe that the income tax adjustments proposed by
the Service will have a material adverse effect on the financial condition of
the Company. However, income tax deductions otherwise available to the Company
to reduce income subject to tax in future periods (in particular, deductions
related to the provision of post-retirement health and welfare benefits to
former employee-shareholders) may be substantially reduced or deferred as a
result of the income tax audit.
The Service has also initiated an audit of the Company's income tax returns
for the fiscal years ended September 30, 1992 through September 30, 1994.
It is the Company's opinion that these matters relating to the IRS
examinations are adequately provided for or that the resolution of such matters
will not have a material adverse impact on the financial condition of the
Company; however, there can be no assurance that the impact of such matters on
its results of operations or cash flows for any given reporting period will not
be material.
(9) STOCKHOLDER'S EQUITY (DEFICIT)
Capital Structure
The Company's Articles of Incorporation allow for the issuance of Preferred
Stock in one or more series, at such designations, rates of dividends,
redemption prices, liquidation payments, voting rights and conversion, exchange
or other special rights to be determined at the time of issuance. None is
presently issued or outstanding.
Stock Options
The Company has four stock option plans that provide for the granting of
Incentive Stock Options and Non-Qualified Stock Options for the purchase of
Common Stock. The options may be granted to officers, employees, directors and
independent contractors of the Company. Participation in the Stock Option Plans
is determined by the Compensation Committee of the Board of Directors, based on
the parameters of each respective plan. The term of an option granted under any
of the option plans cannot exceed ten years and may be further limited by the
specific restrictions as detailed in the individual plans. The options generally
are
55
<PAGE> 57
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
exercisable pursuant to any vesting requirements imposed by the Compensation
Committee upon the grant of the options.
The following table sets out specific details of the respective stock
option plans and status as of September 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996
1990 NON-EMPLOYEE
STOCK 1996 1996 DIRECTOR
OPTION EXECUTIVE STOCK EMPLOYEE STOCK STOCK
SHARES UNDER OPTION PLAN INCENTIVE PLAN INCENTIVE PLAN OPTION PLAN
-------------------------------- ---------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at September 30,
1994.......................... 266,100 -- -- --
Canceled........................ (5,600) -- -- --
---------- ---------- --------
Outstanding at September 30,
1995.......................... 260,500 -- -- --
Granted......................... -- 1,390,000 527,500 105,000
Canceled........................ (17,750) (400,000) -- --
---------- ---------- --------
Outstanding at September 30,
1996.......................... 242,750 990,000 527,500 105,000
========== ========== ========
Options available to grant...... 2,757,250 1,897,500 3,095,250(c) 70,000
========== ========== ========
Average option price:
September 30, 1995 and 1994... $ 7.04 $ -- $ -- $ --
September 30, 1996............ $ 7.04 $ 4.89(a) $ 4.89(b) $ 4.89
Options exercisable:
At September 30, 1994......... 266,100 -- -- --
At September 30, 1995......... 260,500 -- -- --
At September 30, 1996......... 242,750 64,000 -- --
</TABLE>
- ---------------
(a) $4.89 to estimated fair value at September 30, 1998.
(b) Price subject to adjustment to at least 85% of value at date of grant.
(c) To the extent shares are granted under the 1990 Stock Option Plan, the 1996
Executive Stock Incentive Plan, the Deferred Compensation and Stock Option
Plan (defined below) or the 1996 Non-Employee Director Stock Option Plan,
the number of shares available under the 1996 Employee Stock Incentive Plan
is reduced by a corresponding amount.
In addition to the plans summarized above the Company has granted a
nonqualified stock option pursuant to a plan (the "Deferred Compensation and
Stock Option Plan") to an officer to purchase up to 300,000 shares of common
stock at an exercise price of $4.89 per share. The options will vest 90,000
shares on each of September 30, 1996, 1997, 1998, and 30,000 on May 1999.
Employee Stock Ownership Plan
In 1986, Old Norcal established an employee stock ownership plan and trust
(the ESOP) which purchased all of the Company's outstanding stock. Old Norcal
borrowed funds from a lender group and in turn Old Norcal loaned funds to the
ESOP which were used together with the ESOP Notes described in Note 6 for the
purpose of purchasing the stock. In addition, in connection with two other
transactions, the Company borrowed funds from lender groups and in turn loaned
funds to the ESOP.
The ESOP will obtain funds to repay the Company loans primarily through the
receipt of tax deductible contributions made by the Company. For financial
statement purposes, the Company's future scheduled contribution to the ESOP, as
described below, is reflected as a reduction of stockholder's equity.
56
<PAGE> 58
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The ESOP covers most of the employees of the Company and is
noncontributory. The benefits are based on the employee's account balance which
is a function of contributions, forfeitures, income and appreciation or
depreciation in the value of assets allocated to the accounts based on years of
service and compensation.
During 1996 the ESOP received $3.5 million in insurance proceeds related to
settlement of litigation (Note 14). During 1995 the ESOP received a $3.1 million
litigation settlement. These proceeds were applied against Company loans to the
ESOP.
In connection with the Refinancing (Note 5) the ESOP's indebtedness
reflects, among other things, Norcal's funding of the ESOP's retirement of the
ESOP Notes, repayment of all amounts owed under the Old Credit Agreement, and
incurrence of new indebtedness by the Company pursuant to the Refinancing. At
September 30, 1996, the outstanding principal balance owed to Norcal was $68.8
million. The ESOP and Norcal have entered into a Fourth Amended and Restated
ESOP Loan Agreement, effective as of October 1, 1995, whereby the ESOP will
repay such outstanding indebtedness, plus unpaid accrued interest at the rate of
seven percent (7.0%) per annum, in thirteen equal installments of approximately
$9.8 million each as of September 30 of each year, beginning in 1996 and ending
in 2008. In addition, the ESOP will prepay such outstanding indebtedness,
without penalty, to the extent that Norcal makes contributions to the ESOP for
the purpose of making such prepayments subject to certain limitations. The
Company made an additional contribution of $9.0 million to the ESOP with respect
to September 30, 1996 which has been applied as a prepayment of the loans from
the Company to the ESOP.
The scheduled contribution to the ESOP presented in the accompanying
balance sheets as a reduction in equity represents the aggregate principal
amounts which the Company has scheduled to contribute to the ESOP in future
years attributable to the original loans and is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Loans from the Company to the ESOP................... $ 68,798 $ 47,750
ESOP notes........................................... -- 32,398
-------- --------
Total scheduled contribution to the ESOP... 68,798 80,148
ESOP compensation expense recognized in excess of
Company contributions.............................. (20,630) (21,390)
-------- --------
Net scheduled contribution to the ESOP............. $ 48,168 $ 58,758
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Information concerning the ESOP is as follows:
ESOP compensation expense....................... $10,291 $7,923 $7,319
======= ====== ======
Interest expense related to ESOP debt........... $ 5,633 $9,224 $8,373
======= ====== ======
</TABLE>
Following is a summary of shares as of September 30:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allocated.......................................... 14,842 13,777 12,794
Committed to be released........................... 1,570 1,066 983
Unallocated........................................ 7,723 9,292 10,358
------- ------ -------
24,135 24,135 24,135
====== ====== ======
</TABLE>
57
<PAGE> 59
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The Company has an obligation to make cash contributions to the ESOP or to
repurchase shares from participants as described below. The cash contributions
made for purposes of funding ESOP benefit payments were $1.2 million, $0.4
million and $0.3 million for the years ended 1996, 1995, and 1994, respectively.
The amount of the repurchase obligation will increase significantly in the
future as the Company's workforce ages and retires as additional shares are
allocated to participants, and as the value in common stock increases. The fair
value of the shares as established by independent appraisers was $4.89 and $2.61
as of September 30, 1995 and 1994, respectively. The fair value has not yet been
determined as of September 30, 1996.
The Company's common stock is not traded on an established market.
Presently, all shares are held by the ESOP, and all distributions from the ESOP
are intended to be made in cash which is received from Norcal or trust income. A
participant who is vested is entitled to begin receiving a distribution of his
or her ESOP accounts at a future date following his or her termination of
employment. Distributions may be made in a lump sum, equal annual installments
over a period generally not to exceed five years or a combination of the
foregoing, generally as determined by the ESOP Administrative Committee (the
Committee). The Committee also generally determines the time and manner of
distributions, subject to the following limitations: (1) in the event of a
participant's retirement, disability or death, distribution must begin no later
than September 30th of the Plan Year following the Plan Year in which employment
terminates; (2) if a participant's employment terminates for any other reason,
distribution must begin no later than September 30th of the sixth Plan Year
following the Plan Year in which employment terminates, although the Committee
may (a) further defer distributions that are attributable to shares of Common
Stock purchased with loan proceeds until after such loan has been repaid, and
(b) further defer distributions that are not attributable to post-1986 shares
until the participant reaches the age that he or she would be required to reach
in order to qualify for retirement under the ESOP.
As discussed in Note 6 to the financial statements, during 1995 and 1994
certain debt payments were not made by the Company and corresponding
contributions to the ESOP were not made. Consequently, the ESOP was unable to
make its loan payments to the Company. As of October 1, 1995 the Company and the
ESOP entered into an Amended and Restated ESOP Loan Agreement and the ESOP is in
compliance with the terms of that agreement.
(10) PENSION PLANS
The Company has two noncontributory funded defined benefit pension plans
covering a portion of their employees. Benefits are based on a formula which
includes years of service and average compensation. Nonparticipating employees
generally are covered under one of several multi-employer union plans to which
the Company contributes.
Net periodic pension cost for the years ended September 30, 1996, 1995, and
1994 included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period.... $ 2,499 $ 2,279 $ 2,373
Interest cost on projected benefit obligations....... 6,624 6,325 5,989
Actual return on plan assets......................... (10,579) (9,269) (1,139)
Net amortization and (deferral)...................... 5,480 4,192 (3,429)
-------- ------- -------
Net periodic cost.......................... $ 4,024 $ 3,527 $ 3,794
======== ======= =======
</TABLE>
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
58
<PAGE> 60
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at September 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
PLANS WITH PLANS WITH
ASSETS IN EXCESS ASSETS LESS THAN
OF ACCUMULATED ACCUMULATED
BENEFIT OBLIGATIONS BENEFIT OBLIGATIONS
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $70,987 in 1996 and $69,828 in
1995............................................ $ (73,323) (71,982)
======= =======
Projected benefit obligation......................... (89,179) (88,028)
Plan assets at fair value, primarily marketable
equity securities, fixed income securities, U.S.
government obligations, money market funds and
other investments.................................. 77,669 66,968
------- -------
Projected benefit obligation in excess of plan
assets............................................. (11,510) (21,060)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions........................................ 14,094 24,237
Prior service cost not yet recognized................ 506 390
Reduction of stockholder's equity to recognize
minimum liability.................................. -- (8,581)
------- -------
Net pension asset/(liability) recognized in
the consolidated balance sheets.......... 3,090 (5,014)
------- -------
Prepaid pension/(accrued) pension cost included in:
Accrued expenses -- current........................ -- (3,284)
Prepaid pension cost............................... 3,090 --
Long-term pension liability........................ -- (1,730)
------- -------
Net pension asset/(liability) recognized in
the consolidated balance sheets.......... $ 3,090 $(5,014)
======= =======
</TABLE>
The Company has unrecognized losses from past experience different from
that assumed and effects of changes in assumptions amounting to $14.1 million
and $24.2 million at September 30, 1996 and 1995, respectively. At September 30,
1995, $8.6 million had been charged to stockholder's equity representing the
excess of the accumulated benefit obligation of $5.0 million over plan assets
and the excess of cumulative contributions of $3.6 million over net periodic
pension cost. Since the accumulated benefit obligation exceeded the fair value
of plan assets at September 30, 1995, the Company recognized a liability equal
to the unfunded accumulated benefit obligation. At September 30, 1996, the
excess cumulative contributions over net period pension costs of $3.1 million
has been reflected as a prepaid pension cost on the balance sheet.
It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $3.5 million,
$3.3 million and $4.3 million during 1996, 1995 and 1994, respectively.
The weighted average discount rate was 8.0%, 7.75%, and 8.0% respectively,
for 1996, 1995, and 1994. The expected long-term rate of return on assets and
rate of increase in future compensation levels used in determining the benefit
obligations for all three years was 9.0% and 5.0%, respectively. The actual
annual rate of return on investments may be lower than projected, which could
result in a reduction of the prepaid pension asset or a return to the unfunded
status of the plans.
59
<PAGE> 61
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
Certain of the Company's union employees are participants in multi-employer
union defined benefit pension plans. Pension cost charged to expense under these
plans for the years ended September 30, 1996, 1995, and 1994, was $1.5 million,
$1.6 million and $1.5 million, respectively. The Company's portion of the
actuarially computed value of the vested and nonvested benefits of the plans and
the net assets of the pension funds have not been determined.
(11) POSTRETIREMENT MEDICAL BENEFITS
The Company recognizes postretirement medical benefits in the financial
statements over the term of an employee's service with the Company as required
by Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
The postretirement medical benefit plans are unfunded. The following table
sets forth the status of the postretirement medical benefits plans at September
30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement medical benefit obligation:
Retirees....................................................... $12,176 $12,515
Fully eligible active plan participants........................ 9,744 10,737
------- -------
Accumulated postretirement medical benefit obligation............ 21,920 23,252
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions........................ 8,810 7,598
Unamortized prior service credit not yet recognized in net
periodic postretirement benefit cost primarily resulting from
plan changes................................................... 3,665 4,068
------- -------
Accrued postretirement medical benefit liability................. $34,395 $34,918
======= =======
</TABLE>
Net periodic cost for the post retirement medical benefit plans for the
years ended September 30, 1996, 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on accumulated postretirement benefit
obligation............................................. $1,625 $1,758 $2,070
Amortization of prior service cost....................... (403) (403) (403)
Amortization of gain..................................... (667) (524) (9)
------ ------ ------
Net periodic cost.............................. $ 555 $ 831 $1,658
====== ====== ======
</TABLE>
For measurement purposes, 11.50%, 11.75%, and 12% medical cost trend rate
was assumed for the calculation of accumulated postretirement benefit obligation
at September 30, 1996, 1995, and 1994, respectively. This rate was assumed to
decrease incrementally to 7%, 6.75% and 7% after 9 years, 10 years and 10 years,
respectively, and remain at that level thereafter. The medical cost trend rate
has a significant effect on the amounts reported. The weighted average discount
rates of 8.0%, 7.75%, and 8.0% were assumed as of September 30, 1996, 1995, and
1994, respectively. By increasing the assumed medical cost trend rate by 1
percentage point in each year, the interest cost component for the years ended
September 30, 1996, 1995, and
60
<PAGE> 62
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
1994, and the accumulated postretirement benefit obligation at September 30,
1996, 1995, and 1994 would increase approximately as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest component....................................... $ 220 $ 248 $ 324
====== ====== ======
Accumulated postretirement medical benefit obligation.... $3,058 $3,384 $3,098
====== ====== ======
</TABLE>
In connection with the ESOP's purchase of stock from the former Old Norcal
employee-shareholders, the Company has agreed to provide certain post-retirement
health and welfare benefits to certain settling plaintiffs until the earlier of
the resolution of certain claims against third parties or October 1, 2000. In
connection with the ESOP's purchase of stock from the former Envirocal
employee-shareholders, the Company has agreed to provide the former Envirocal
employee-shareholders with lifetime post-retirement health and welfare benefits
subject to certain conditions.
(12) LANDFILL CLOSURE, POST-CLOSURE LIABILITIES, ENVIRONMENTAL LIABILITIES,
COMMITMENTS AND FUNDING
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.
Compliance with current or future regulatory requirements will require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. It is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts. The Company
has made and may continue to make substantial expenditures relating to
environmental conditions primarily on its landfill properties. In the opinion of
management, compliance with present environmental protection laws will not have
a material adverse effect on the results of operations of the Company provided
costs are substantially covered in the Company's rates on a timely basis. The
Company continues to monitor these matters; however, there is no assurance that
material costs or liabilities related to environmental matters will not be
incurred in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to leachate and groundwater management and
remediation. There are many unknown and uncertain factors including regulatory
requirements, incomplete data with respect to projected volumes, quality and
cost of treatment among others. Accordingly, estimates for closure and
post-closure management and remediation of leachate and contaminated groundwater
could be subject to periodic and substantial revision as the Company's knowledge
increases concerning these factors.
At September 30, 1996 and 1995, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $25.4 million
and $24.4 million, respectively, based on the total estimated closure costs and
post-closure maintenance and monitoring at each date, in current dollars, and
the percentage of estimated landfill capacity remaining. The current portion of
landfill closure liability at September 30, 1996 and 1995, amounting to
approximately $7.2 million and $3.2 million, respectively, is included in
accrued expenses and is determined by the amount of required funding of various
trust funds in accordance with
61
<PAGE> 63
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
various jurisdictional requirements along with the estimate of
closure/post-closure work to be performed in the next year. Amounts charged to
operating expenses for landfill closure in 1996, 1995 and 1994, net of interest
income earned on related trust accounts, were approximately $0.2 million, $2.0
million and $2.9 million, respectively. Included in each year's expense are
amounts that represent the effects of changes in cost and capacity estimates
that are being recognized over the remaining life of each site. At September 30,
1996 and 1995, the future closure and post-closure obligation remaining to be
recognized over the remaining lives of the applicable landfills is estimated to
be approximately $35.0 million and $30.5 million, respectively. While the
Company believes its estimates of closure and post-closure costs are reasonable,
such amounts are based upon current laws, technology and information available
on the properties. Accordingly, the Company's estimates may be subject to
substantial upward revision.
In accordance with State of California legislation, and other governmental
jurisdictions, the Company has established restricted and unrestricted trust
funds for each owned landfill which will be funded annually in amounts designed
to provide the resources to accomplish closure and post-closure maintenance and
monitoring. The estimated funding requirements are $3.2 million for 1997 and
approximately $11.0 million due over the subsequent 5 year period based upon
volume used at the landfill and regulatory requirements. At September 30, 1996
and 1995, $20.2 million and $17.3 million, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. Withdrawals of
funds from certain restricted trust accounts may require approval of regulatory
agencies. In addition to establishing trust funds, the Company also provides
financial assurance for one of its landfills through the issuance of a bond for
$3.9 million.
In addition, in accordance with State of California legislation, the
Company is required to provide financial assurance for the initiation and
completion of corrective action for potential releases of contaminants from its
landfills. The Company has on deposit $0.9 million in trust funds as of
September 30, 1996 and estimates that future contributions to trust funds of
approximately $6.9 million over the remaining lives of the respective landfills
will be required to satisfy these obligations. In the event of a release prior
to full funding, the Company may be required to pay for the corrective action or
to accelerate funding of the trust funds.
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. The Company also carries an underground
tank policy to satisfy financial assurance requirements mandated under federal
law.
California landfill operators must demonstrate financial assurance to
compensate third parties for bodily injury and property damage arising out of
landfill operations. Under the method adopted by the Company, the regulations
require funding of $1.0 million per landfill to a maximum of $5.0 million
Company-wide. To satisfy this requirement the Company has established financial
assurance mechanisms for each landfill. The Company has approximately $1.0
million in each of the four separate trust funds at September 30, 1996 and has
secured an insurance policy for the other landfill.
(13) COMMITMENTS AND CONTINGENCIES
The Company has arranged stand-by letters of credit with various expiration
dates totaling $9.4 million and $16.7 million at September 30, 1996 and 1995,
respectively. These letters of credit are provided primarily to secure insurance
and self-insurance obligations and for bond requirements. As of September 30,
1996, the Company has $15.6 million in standby letters of credit availability.
62
<PAGE> 64
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
The Company is self-insured for various risks of loss related to general
liability, automobile liability, property damage, employee and certain retiree
healthcare, and workers' compensation. The establishment of reserves and claim
payment activity include estimates of the ultimate costs of claims that have
been reported but not settled and of claims that have been incurred but not
reported. Adjustments to the reserve are charged or credited to expense in the
periods in which they are determined to be necessary. At September 30, 1996 and
1995, the Company's accrued liability for self-insured claims was approximately
$12.6 million and $10.3 million, respectively.
At September 30, 1996, the Company and the other unrelated investors were
jointly and severally liable as guarantors of affiliates' (Note 4) indebtedness
totaling $2.0 million.
(14) LITIGATION
In December 1994, the Company effected the settlement of litigation
originally commenced in 1991 by certain holders of the Old Subordinated Notes.
The aggregate amount of settlement payments of $5.5 million for personal injury
claims was included in other accrued liabilities at September 30, 1994. Norcal
issued $51.1 million aggregate principal amount of new notes ("Class A and B
Notes") in exchange for all of the Old Subordinated Notes (Note 6). In
connection with a settlement in August 1995 (the "ESOP Note Settlement") with
holders of all but four of the ESOP Notes (the "Settling Plaintiffs") of
litigation commenced in 1994 entitled Abraham et. al. v. Norcal Waste Systems
Inc. et al., discussed below, the Company was required to redeem the Class A and
B Notes. The ESOP Note Settlement was successfully consummated in November 1995,
and the redemption of the Class A and B Notes occurred resulting in the
recognition of a gain of $14.4 million since there was no gain recognized for
financial statement purposes on the conversion of the debt instruments in 1994.
Pursuant to the ESOP Note Settlement, Norcal paid $3.6 million in
settlement of personal injury claims and provided funds to the ESOP in the
amount of $33.2 million to satisfy those ESOP Notes in full and provide for
their extinguishment. Although the Company was not an obligor or a guarantor on
the ESOP Notes, they were recorded on the Company's consolidated balance sheet
in accordance with GAAP. Settlement of the ESOP Notes for less than the carrying
amount of the Notes resulted in a gain of $17.0 million to the Company. The
Company also agreed to continue to provide certain post-retirement health and
welfare benefits to certain Settling Plaintiffs until the earlier of the
resolution of remaining claims and October 1, 2000. The ESOP subsequently paid
the holders of the four remaining ESOP Notes approximately $0.9 million funded
by Norcal, in exchange for cancellation of their ESOP Notes, which represented
outstanding principal and accrued interest totaling approximately $1.4 million
as of September 30, 1995 and as of the redemption date and releases equivalent
to those provided by the Settling Plaintiffs.
The Settling Plaintiffs did not release and were permitted to proceed upon
claims (the "Excluded Claims") against certain banks (and counsel to one of
them) based upon their roles as former trustees under the ESOP Notes Indenture
(the "Trustee Parties"), but only insofar as those claims are not indemnifiable
under a provision of the ESOP Notes Indenture that requires indemnification of
the trustee by the ESOP for liability incurred without the trustee's negligence
or bad faith. The ESOP Note Settlement provides that the Settling Plaintiffs
shall indemnify the Company, the ESOP and certain related parties against claims
brought by the Trustee Parties or the released parties arising out of the
Excluded Claims (the "Indemnified Claims"). The indemnity is to be paid from
certain funds to be placed in escrow (the "Escrow Account") and not disbursed to
Settling Plaintiffs until the later of the resolution of all Indemnified Claims
or, if no Indemnified Claims are brought, then nine months after deposit. No
Settling Plaintiff is personally liable on the indemnity beyond his, her or its
interest in or distribution from the Escrow Account. The funds to be placed in
the Escrow Account consist of (i) any amounts Settling Plaintiffs recover from
the Trustee Parties (the
63
<PAGE> 65
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
"Escrowed Recovery"); and (ii) a deferred settlement payment by Norcal, to be
paid on the earlier of the fifth anniversary of the effective date of the ESOP
Note Settlement and final resolution of Settling Plaintiffs' claims against the
Trustee Parties, in the amount of $500,000 reduced by the amount of certain
attorneys' fees and costs as to which Norcal or the ESOP is contractually
obligated to provide indemnification and/or reimbursement (the "Deferred
Settlement Payment").
On August 20, 1996, Norcal and the ESOP filed a declaratory relief action
(the "Declaratory Relief Action") in the Abraham Action against Bank of America
entitled Norcal Waste Systems, Inc., et al. v. Bank of America, N.T. & S.A.,
seeking a declaration that they have no obligation to indemnify the Bank
following the ESOP Note Settlement under the indemnity provisions of certain
agreements between Bank of America or Security Pacific, on the one hand, and
Norcal or the ESOP, on the other (the "Indemnity Agreements"), in connection
with Settling Plaintiffs' pursuit of the Excluded Claims. By order dated
December 17, 1996 the court granted summary judgment to Norcal and the ESOP in
the Declaratory Relief Action.
On September 10, 1996, Bank of America, in its own capacity and as
successor to Security Pacific, served a cross-complaint (the "Cross-Complaint")
alleging a variety of claims against, among others, Norcal and the ESOP relating
to the ESOP Note Settlement or the Indemnity Agreements. The Cross-Complaint
included claims for fraud, breach of contract, and tortious breach of the
implied covenant of good faith and fair dealing in entering into the ESOP Note
Settlement, and claims for declaratory relief and breach of contract in
connection with the Indemnity Agreements. In addition to punitive damages, the
Cross-Complaint sought compensatory damages subject to proof at trial, alleged
to include possibly in excess of $13.0 million in damages. By order dated
December 17, 1996 the court dismissed all claims in the Cross-Complaint with
prejudice, except that the claim against the ESOP for tortious breach of the
implied covenant was dismissed with prejudice insofar as it attempted to state a
tort claim and was otherwise dismissed without prejudice.
Any claims in the Cross-Complaint are "caused by or related to the Excluded
Claims" and, as such, are Indemnified Claims covered by Settling Plaintiffs'
indemnity. Accordingly, any liability incurred by Norcal (other than its own or
the ESOP's defense costs) in connection with the Cross-Complaint would be
payable from the Escrowed Recovery, if any, and potentially the Deferred
Settlement Payment. Norcal believes that it is unlikely that it would be liable
to pay an amount in damages on the Cross-Complaint that is materially greater
than any recovery by Settling Plaintiffs from Bank of America (aside from any
liability for damages in the amount of Bank of America's litigation expenses),
and thus any award of damages (aside from such expenses) on the Cross-Complaint
is not likely to exceed the Escrowed Recovery (before reduction for indemnified
defense costs).
On October 19, 1995, Norcal and the Secretary of the United States
Department of Labor (the "Secretary") settled matters arising out of the
Secretary's investigation of certain employee-benefit plans sponsored by Norcal
or its predecessors, as well as a transaction (the "Plan Investment") involving
an investment by certain of the Company's pension plans (the "Plans") through
Bank of America (the "Bank"), the trustee on the Plans. Pursuant to the
settlement (the "Norcal-Secretary Settlement"), a $3.5 million payment, which
was fully funded by insurance proceeds, was allocated in amounts determined by
the Secretary and the Internal Revenue Service to be sufficient to correct in
full any "prohibited transactions" with respect to the Plan Investment, with
$45,000 deposited in one of the Plans and the remainder of the settlement
payment deposited in the ESOP, which used the proceeds to pay a portion of its
debt to Norcal.
The Secretary released claims against Norcal, the Plans and certain related
persons, including officers, directors, agents, fiduciaries, advisers and
attorneys; the Secretary did not release claims (the "DOL Excluded Claims")
arising out of the Plan Investment against the Bank as trustee for the Plans,
except insofar as the Bank was entitled to indemnity from Norcal on such claims.
On February 14, 1996, the Secretary filed an action against the Bank on the
DOL Excluded Claims alleging ERISA violations, entitled Reich v. Bank of
America, N.T.&S.A., in the United States District Court
64
<PAGE> 66
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
for the Northern District of California (the "Bank Action"). Norcal intervened
in the Bank Action to bring a declaratory relief action asserting that Norcal
had no indemnity obligations to the Bank in connection with the Bank Action.
On March 29, 1996, the Bank and the Secretary entered into a settlement of
the Bank Action (the "Bank-Secretary Settlement"), which was conditioned on
Norcal and the Plans issuing releases of the Bank. The Bank paid to the Plans
the aggregate amount of $4.0 million; and the Bank released Norcal, the Plans
and certain related persons, including officers, directors, agents, fiduciaries,
advisers and attorneys, from all claims, including indemnification claims,
relating to the Plan Investment, the Bank-Secretary Settlement and the
Norcal-Secretary Settlement. The Bank Action and Norcal's declaratory relief
action were dismissed with prejudice.
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to ordinary
litigation are adequately provided for or that resolution of such matters will
not have a material adverse impact on the financial condition of the Company;
however, there can be no assurance that the impact of such matters on its
results of operations or cash flows for any given reporting period will not be
material.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required under Statement of Financial Accounting Standards
(SFAS) No. 107 "Fair Value of Financial Instruments" to disclose fair value for
all of its financial instruments. The carrying value of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short maturity of these instruments.
Estimates for the fair value of the Company's other financial instruments at
September 30, are detailed below:
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Trust accounts........................ $ 28,150 $ 28,187 $ 31,289 $31,222
Marketable securities................. 6,889 6,889 5,645 5,645
Liabilities:
Senior Notes.......................... 170,392 170,392 -- --
Other long term debt including
current portion.................... 2,348 2,348 95,879 95,879
Subordinated notes payable:
Class A and B Notes................... -- -- 53,249 38,489
ESOP Notes............................ -- -- 32,398 34,016
</TABLE>
Trust accounts and marketable securities -- The fair value of the trust
accounts and marketable securities has been estimated based on market values
provided by the respective trustees and quoted market prices.
Senior Notes -- The fair value of the senior notes has been estimated to be
the carrying amount of the notes because of the proximity of the exchange to
September 30, 1996 and the lack of an established market.
Class A and B Notes -- The fair value of the Class A and B Notes has been
estimated based on the calculated redemption price of the notes under the terms
of the settlement agreement as of September 30, 1995. The notes were redeemed on
November 21, 1995, as part of the refinancing (Note 6).
65
<PAGE> 67
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
ESOP Notes -- The fair value of the ESOP Notes has been estimated based on
amounts paid in connection with the Settlement. The notes were redeemed on
November 21, 1995 as part of the refinancing (Note 6).
(16) BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment -- solid waste management
services primarily consisting of collection, transfer and disposal to
industrial, commercial, residential and municipal customers. In 1996, one
customer accounted for 14% of consolidated revenue and 27% of consolidated
accounts receivable at September 30, 1996, during 1995 and 1994, no single
customer accounted for as much as 10% of consolidated revenue or accounts
receivable.
The Company operates primarily in seven different geographical areas within
the State of California. The San Francisco geographical region represents
approximately 40%, 45% and 44% of revenues for the years 1996, 1995 and 1994,
respectively. In September 1996, the Company applied for an increase to its
collection and disposal rates in the City of San Francisco. The application
requested an increase, to be effective March 1, 1997, to fund several new
recycling programs requested by San Francisco, along with increases to recover
current and projected increases in operating costs. In accordance with certain
rate procedures two recommended rate orders (the "Recommended Rate Orders")
recommended smaller increases than requested, primarily due to the disallowance
of certain ESOP expenses which historically were allowed in the rates. The
Company objects to the positions taken by the Director of Public Works and
intends to vigorously pursue its rights under the Ordinance, including filing an
appeal with the Refuse Collection and Disposal Rate Board, which has the
authority to make the final rate determination. If the Company is unsuccessful
in its attempt to modify the Recommended Rate Orders in San Francisco, its
future annual operating results and cash flow could be adversely impacted in
that certain operating costs may not be recovered.
The Company has collective bargaining agreements in this region which
represent 35% of the Company's total labor force and such agreements expire
within one year.
The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities.
(17) GUARANTEE OF SECURITIES
Norcal is a holding company and has no independent operations other than
those relating to its subsidiaries. The Senior Notes are guaranteed by certain
direct and indirect subsidiaries of Norcal. The guarantor subsidiaries are all
wholly owned subsidiaries and the guarantees of the guarantors are full,
unconditional and joint and several. The direct and indirect nonguarantor
subsidiaries of Norcal are individually and in the aggregate inconsequential.
Separate financial statements of each guarantor have not been presented since
management has determined such separate financial statements are not material to
investors.
66
<PAGE> 68
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
(18) SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The Company became subject to SEC reporting requirements in the third
quarter of 1996. The following table summarizes the unaudited quarterly results
of operations (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating revenues........... $67,602 $ 69,802 $71,228 $ 79,583
====== ======
Income from operations....... $ 7,678 $ 5,349 $ 9,784 $ 2,980
====== ======
Net income (loss)............ $29,971 $ (1,246) $ 3,747 $ (2,229)
====== ======
</TABLE>
The fourth quarter operating results were adversely impacted by the
Company's decision to increase the contributions to the ESOP by $9.0 million,
having the effect of reducing current taxes payable, and resulting in an
increased ESOP compensation expense relative to the additional shares allocated.
The contribution was applied as a prepayment of the loans from the Company to
the ESOP.
67
<PAGE> 69
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
68
<PAGE> 70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions and offices with Norcal of the current
executive officers and directors of Norcal are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- --------------------------------------------------
<S> <C> <C>
Michael J. Sangiacomo........ 47 President, Chief Executive Officer and Director
Donald M. Moriel............. 62 Executive Vice President and Chief Operating
Officer
Mark R. Lomele............... 40 Acting Chief Financial Officer, Treasurer and Vice
President
Bennie J. Anselmo, Jr........ 51 Vice President -- Equipment Procurement and
Maintenance
David A. Cochrane............ 40 Vice President -- Facilities Development and
Technical Services
Jon D. Braslaw............... 35 Controller
Kenneth James Walsh.......... 49 Division Manager of Southern California
Archie L. Humphrey........... 44 Division Manager of Northern California
Gale R. Kaufman.............. 42 Director
John B. Molinari(a)(b)....... 87 Director, Chairman of the Board of Directors
H. Welton Flynn(a)(b)........ 74 Director
</TABLE>
- ---------------
(a) Audit Committee member
(b) Compensation Committee member
Michael J. Sangiacomo has served as a director of Norcal since November
1990 and as Chief Executive Officer and President since January 1991. From
November 1990 to January 1991, Mr. Sangiacomo served as Acting Chief Executive
Officer and President of Norcal. From August 1988 until November 1990, he served
as Chief Financial Officer of Norcal, and held the additional title of Senior
Vice President from January to November 1990. Mr. Sangiacomo serves as a
director and an executive officer of all of Norcal's subsidiaries. From January
1988 until August 1988, he served as General Manager of Norcal subsidiary Sunset
Scavenger. From October 1983 through December 1987, Mr. Sangiacomo served as
Chief Financial Officer of Envirocal, Inc., a Norcal predecessor. Mr. Sangiacomo
holds a B.S. in Business Administration from the University of San Francisco and
practiced as a certified public accountant from 1971 to 1978.
Donald M. Moriel has served as Executive Vice President and Chief Operating
Officer of Norcal since June 1992. Mr. Moriel also serves as an executive
officer and since June 1994 as a director of all of Norcal's subsidiaries. Since
March 1992 and prior to his current positions, Mr. Moriel, through a wholly
owned consulting company unaffiliated with Norcal, Pentagon Equities Corporation
located in Davis, California, served as a consultant to three Norcal
subsidiaries located in Solano County, California and was the General Manager of
these operations between March 1980 and March 1982. Mr. Moriel has been
President and Chief Executive Officer of Pentagon Equities Corporation since it
formation. Mr. Moriel's son-in-law is the Vice President and General Manager of
Norcal's Vacaville Sanitary Service subsidiary and Group Manager of five
additional subsidiaries.
Mark R. Lomele has served as a Vice President of Norcal since November 1990
and as its Acting Chief Financial Officer and Treasurer since July 1996. From
September 1988 to July 1996, Mr. Lomele served as Norcal's Controller. From
April 1996 to September 1996 he also served as General Manager of Nortech Waste
LLC, a joint venture in which the Company is a minority investor. Prior to 1988,
Mr. Lomele was a financial manager for National Semiconductor Corporation. Mr.
Lomele has been a member of the ESOP's
69
<PAGE> 71
Administrative Committee since 1991 and has served as its Chair since February
1, 1995. He holds a B.S. in Business Administration from the University of San
Francisco.
Bennie J. Anselmo, Jr. has served as Vice President -- Equipment
Procurement and Maintenance and Vice President of Alta Equipment, Inc. since
November 1990. Mr. Anselmo served as Director of Equipment Procurement for
Golden Gate Disposal Company from January 1988 until his transfer to Norcal in
November 1990. Mr. Anselmo began his career with Golden Gate Disposal Company in
1963, serving as shop foreman and shop superintendent, among other capacities.
David A. Cochrane has served since February 1996 as Vice President of
Norcal, with responsibility for landfill operations in Northern California,
facilities development and technical services. Prior to that Mr. Cochrane served
Norcal as Director of Technical Services since October 1994, and as Corporate
Manager for Landfill Engineering since April 1993. Since November 1996, Mr.
Cochrane as served as Vice President of Alta Environmental Services, Inc., a
subsidiary that markets certain types of landfill space to third parties, and as
Vice President of B&J Drop Box, subsidiary that owns a landfill in Vacaville,
CA, and Western Placer Recovery, Inc., a subisdiary that operates a landfill in
Roseville, CA. Before joining Norcal in April 1993, Mr. Cochrane served since
April 1990 as an executive manager for Emcon Associates, an environmental and
engineering consulting firm that has provided services to the waste industry,
including Norcal and its subsidiaries. He holds a B.A. in Geology from Humboldt
State University.
Jon D. Braslaw has served as Controller since July 1996. Prior to that
time, Mr. Braslaw served as Assistant Controller from April to July 1996, and as
Manager of Financial Reporting since January 1995. Before joining Norcal in
November 1989, Mr. Braslaw was Controller of the Santa Barbara Metropolitan
Transit District. He holds a B.A. in Economics from the University of California
at Santa Barbara.
Kenneth James Walsh has been an employee of Norcal since 1965. During this
period, Mr. Walsh has performed extensive operations functions. Mr. Walsh has
worked at seven Norcal subsidiary companies, and has been the Division Manager
of Southern California since 1990. He is responsible for overall management of
the contracts with San Bernardino and San Diego Counties. Mr. Walsh is currently
Vice President and District Manager of Norcal/San Bernardino, Inc., the
subsidiary that administers the Company's San Bernardino County operations, and
Norcal/San Diego, Inc., the subsidiary that administers the Company's San Diego
County operations, and Vice President and General Manager of Norcal Waste
Solutions, Inc.
Archie L. Humphrey has served as Division Manager for all Northern
California operations except San Francisco operations, Integrated Environmental
Systems, a subsidiary that owns and operates a medical waste incinerator, and
Northern California landfills since November 1996 and is a Vice President of 14
subsidiaries of the Company. Mr. Humphrey has also been a member of the
Administrative Committee of the ESOP since 1986 and its Secretary since 1992.
From August 1995 to November 1996, Mr. Humphrey served as Division Manager for
North Coast operations of the Company. Mr. Humphrey served as a Regional Manager
for the Company's Solano County operations from October 1992 until August 1995
and as a director of the Company from November 1991 until February 1996. He
began his career with Vacaville Sanitary in 1982. Mr. Humphrey holds a B.A. in
Sociology from California State University at Sacramento.
Gale R. Kaufman became a director of Norcal in July 1996. Since 1987, Ms.
Kaufman has been the president of Kaufman Campaign Consultants, a political
campaign and consulting firm. From 1992 to 1995, she was the Director of the
Speaker's Office of Majority Services of the California State Assembly. Since
May 1993, she has provided certain consulting services to Norcal, including
overall campaign responsibility in connection with Norcal's defeat of certain
City of San Francisco ballot initiatives. Ms. Kaufman has a B.A. in Political
Science from George Washington University.
John B. Molinari has served as a director of Norcal and its predecessor
since 1986 and as Chairman of the Board since December 1990. From 1948 to 1953,
Mr. Molinari served as a judge of the San Francisco Municipal Court; from 1953
to 1962, he served as a judge of the San Francisco Superior Court; and from 1962
to 1977, he served as a Justice on the California Court of Appeal. He has been
an attorney in private practice since 1977. He serves on the board of directors
of Redwood Bank and is a member of its compensation committee.
70
<PAGE> 72
H. Welton Flynn has served as a director of Norcal since December 1991.
From 1949 until the present, Mr. Flynn has been the sole proprietor of an
accounting firm located in San Francisco. Since January 1996, he has served as a
member of The Public Transportation Commission of the City and County of San
Francisco. Mr. Flynn was appointed to the Public Utilities Commission for the
City and County of San Francisco in 1970 and served as its President for more
than five terms before retiring in 1991.
Each executive officer of Norcal is appointed by, and serves at the
pleasure of, the Board of Directors. There are no family relationships among
executive officers or directors of Norcal.
Board of Directors
Number of Directors and Term of Office. Norcal's Bylaws currently fix the
authorized number of directors of Norcal at five. All directors hold office
until the next annual meeting of shareholders and until their successors have
been elected. The ESOP (as shareholder) has the power to remove directors at any
time. There is currently one vacancy on the Board of Directors.
Committees of the Board. The Compensation Committee recommends to the
Board of Directors the salary, benefit and incentive compensation levels of
Norcal's executive officers as well as the contractual provisions of their
employment contracts, and administers Norcal's 1990 Stock Option Plan (the "1990
Option Plan"), the 1996 Employee Stock Incentive Plan (the "1996 Employee Plan")
and the 1996 Executive Stock Incentive Plan (the "1996 Stock Plan"), including
determination of grants of options, prescribing the terms and provisions of the
options, construing and interpreting the 1990 Option Plan, the 1996 Employee
Plan and the 1996 Stock Plan and establishing and amending rules and regulations
related thereto. The members of the Compensation Committee are Messrs. Molinari
and Flynn. The Audit Committee recommends the firm of independent certified
public accountants to be appointed to audit Norcal's financial statements,
reviews the scope and results of the audit, reviews with management Norcal's
interim and year-end operating results, considers the adequacy of the internal
accounting controls and audit procedures of Norcal and reviews the non-audit
services to be performed by the independent accountants. The members of the
Audit Committee are Messrs. Flynn and Molinari.
Compensation of Directors. Directors who are employees of Norcal or its
subsidiaries do not receive additional compensation for their services as
directors of Norcal. For services as a non-employee director during fiscal year
1996, John B. Molinari, H. Welton Flynn and Gale R. Kaufman were each paid
$19,750, $18,000 and $3,500, respectively. Each non-employee director receives
an annual retainer of $18,000 and a payment of $1,000 plus expenses for each
board meeting attended and $1,000 plus expenses for each committee meeting
attended that is held at a different time or place than a board meeting.
Non-employee directors are also eligible to receive option grants under the 1996
Non-Employee Director Stock Option Plan. All directors are eligible to receive
option grants under the 1996 Stock Plan and the 1996 Employee Plan.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions. Messrs. Molinari and Flynn were appointed to the Compensation
Committee in May 1992. Neither has ever been an officer or employee of Norcal or
any of its subsidiaries. Mr. Sangiacomo, President and Chief Executive Officer
of Norcal participates fully with the committee members in recommending to
Norcal's Board of Directors the salaries, benefits and incentive compensation
for Norcal's executive officers, excluding his own.
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<PAGE> 73
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning the compensation paid or accrued during the three fiscal
years ended September 30, 1996 to Norcal's Chief Executive Officer and to each
of the four other most highly compensated executive officers of Norcal who
received compensation in excess of $100,000 during the last completed fiscal
year (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
FISCAL SALARY BONUS(A) COMPENSATION OPTIONS COMPENSATION(C)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (NUMBER) ($)
- ---------------------------------- ------ -------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Sangiacomo............. 1996 350,000 147,500 -- 960,000 --(d)
President and Chief 1995 333,846 175,000 -- -- 94,582
Executive Officer 1994 279,230 150,000 -- -- 42,277
Donald M. Moriel.................. 1996 275,578 100,000 68,615 300,000 35,856(e)
Executive Vice President and 1995 261,539 110,000 -- -- 31,247
Chief Operating Officer 1994 214,230 100,000 -- -- 14,286
Mark R. Lomele.................... 1996 128,233 50,000 -- 65,000(b) --(d)
Acting Chief Financial Officer, 1995 117,066 42,000 -- -- 44,288
Treasurer and Vice President 1994 109,078 40,000 -- -- 18,344
Kenneth James Walsh............... 1996 154,617 40,000 25,502 35,000(b) --(d)
Division Manager -- 1995 120,990 38,000 -- -- 20,160
Southern California 1994 113,708 80,000 -- -- 29,530
Archie L. Humphrey................ 1996 135,013 30,500 -- 75,000(b) --(d)
Division Manager -- 1995 105,926 32,000 -- -- 69,336
Northern California 1994 100,041 25,000 -- -- 29,257
</TABLE>
- ---------------
(a) Bonuses are indicated for the fiscal year in which they were earned based on
the achievement of certain business plan targets.
(b) Options set forth below for fiscal year 1996 include certain options that
were granted during fiscal year 1997 with respect to employment during
fiscal year 1996.
(c) Unless otherwise indicated in a note to this table, this amount consists
primarily of increases in the value of the individual's ESOP account as a
result of an allocation of additional shares of Norcal's Common Stock to
such account as well as an increase in the estimated fair market value per
share of such stock. This figure also includes premiums paid by Norcal on
behalf of the Named Executive Officers for group life insurance during each
of the years indicated, pro-rated for partial years of service.
(d) Amounts representing increases in the value of the individual's ESOP account
are not presently calculable. See footnote (c).
(e) Represents amounts earned with respect to a deferred annuity to be paid as
part of the Deferred Compensation and Stock Option Plan (as hereinafter
defined). Mr. Moriel will also receive compensation relating to the increase
in the value of his ESOP account (see footnote (c)). This amount is not
presently calculable.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. Norcal has employment contracts with various executive officers
and key employees.
In April 1996, Norcal entered into a new employment agreement with Mr.
Sangiacomo, its President and Chief Executive Officer. Under the agreement, Mr.
Sangiacomo will initially receive a salary of $350,000 per year and be eligible
to participate in the Short-Term Incentive Bonus Plan. In addition, Mr.
Sangiacomo will receive insurance and other benefits and perquisites generally
available to Norcal's executive employees.
Mr. Sangiacomo will be entitled to certain severance payments (i) if his
employment is terminated constructively or without cause after a change in
control of Norcal or (ii) if he resigns at any time more than
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<PAGE> 74
12 months but less than 13 months after a change in control of Norcal. Such
severance benefits would, under certain circumstances, include payment of an
amount equal to twice his average total annual compensation for the two previous
years.
Norcal has granted Mr. Sangiacomo a nonqualified stock option pursuant to
its 1996 Stock Plan to purchase Common Stock consisting of three series, with
each series being for 320,000 shares. The initial exercise price for all shares
is $4.89. The exercise price for the Series B and C shares will be subject to
adjustment on October 1, 1996, and, with respect to the Series C shares only, on
October 1, 1997, to the fair market value of the stock on such date (but in no
event less than the initial exercise price of $4.89 per share). Each Series
generally will vest over four years, with the first vesting to occur for Series
A, B and C options on September 30 of 1996, 1997 and 1998, respectively. This
vesting schedule will be partially accelerated if Norcal achieves certain
financial, operational and strategic objectives, including an initial public
offering. Under certain circumstances, the option will vest completely if there
is a change in control (a "Control Event") of Norcal. Generally, a Control Event
will be deemed to have occurred if: (i) a third party (other than an employee
benefit plan or an entity controlled by the Company) acquires 25% or more of
Norcal's voting securities (or 35% or more if Norcal has not had an initial
public offering of Common Stock and the ESOP owns more than 50% of Norcal's
voting securities); (ii) persons who are directors of Norcal as of the date of
this prospectus (the "Incumbent Board") cease to constitute a two-thirds
majority of Norcal's board of directors (provided that any director whose
nomination or election is approved by a two-thirds majority of the Incumbent
Board shall be considered a member of the Incumbent Board); (iii) a merger or
like event involving Norcal is consummated unless, among other things, Norcal
shareholders immediately before such event own immediately following such event
at least 75% of the voting securities of the resulting corporation; (iv) Norcal
is liquidated or dissolved; or (v) substantially all of Norcal's assets are
sold.
As long as Mr. Sangiacomo remains employed by Norcal, he may exercise any
option in a Series any time within seven years after the exercise price has been
fixed for that Series with respect to shares that have vested.
In June 1996, Norcal entered into a new employment agreement with Mr.
Moriel, its Chief Operating Officer. Under the agreement, Mr. Moriel will
initially receive a salary of $275,000 per year, with $50,000 of such annual
salary deferred pursuant to the Deferred Compensation and Stock Option Plan
(defined below). Mr. Moriel will be eligible to participate in the Short-Term
Incentive Bonus Plan. In addition, Mr. Moriel will receive insurance and other
benefits and perquisites generally available to Norcal's executive employees.
Pursuant to the agreement, Mr. Moriel will retire in 1999 and will receive
a retirement annuity pursuant to the Deferred Compensation and Stock Option Plan
which, together with certain pension payments, will result in aggregate payments
to Mr. Moriel of $50,000 per year. Upon his retirement, Mr. Moriel has agreed to
enter into a consulting agreement with Norcal, with a term of five years and
with a minimum annual payment of $50,000. Mr. Moriel will also receive certain
other post-retirement benefits, including health insurance for himself and his
dependents.
Mr. Moriel will be entitled to certain severance benefits if (i) his
employment is terminated without cause and (ii) he signs a release relating to
certain claims. Such severance benefits would include, until the earlier of 18
months after his employment termination or May 1999, payment of an amount equal
to his average annual compensation (salary plus bonus) for the two previous
years.
Norcal granted Mr. Moriel a nonqualified stock option under the Deferred
Compensation and Stock Option Plan to purchase up to 300,000 shares of Common
Stock at an exercise price of $4.89 per share. The option will vest as follows:
with respect to 90,000 shares, on each of September 30, 1996, 1997, and 1998,
and with respect to 30,000 shares, on May 27, 1999. The option will vest
completely upon Mr. Moriel's termination as a result of disability or death.
Subject to certain provisions of the Deferred Compensation and Stock Option
Plan, Mr. Moriel may exercise his option with respect to the shares that have
vested at any time on or before September 30, 2002.
In April 1996, the Board of Directors adopted a severance pay policy (the
"Severance Policy") which would be triggered by a change in control of Norcal.
The program covers up to ten key employees of the Company (but not Messrs.
Sangiacomo and Moriel). Each employee covered by the Severance Policy will
receive an amount equal to his current base salary if there is a change in
control of Norcal and the employee is
73
<PAGE> 75
constructively terminated or terminated without cause within 13 months after
such change in control. The Company has not designated any specific employees to
be covered by the Severance Policy at this time.
Short-Term Incentive Bonus Plan. In April 1996, the Company adopted a
Short-Term Incentive Bonus Plan (the "1996 Bonus Plan") providing variable cash
bonuses for up to approximately 70 of the Company's executive and management
employees (including the Named Executive Officers). Under the 1996 Bonus Plan,
cash bonuses will be based on a percentage of each participant's base salary,
with such percentages varying depending on how closely Norcal (or its regional
operations, as the case may be) achieves specific financial, operational and
strategic objectives. No bonuses will be paid unless the Company's profit before
taxes exceeds the aggregate amount of bonuses due to be paid pursuant to the
1996 Bonus Plan. Depending on the employee, cash bonuses will range from 5% to
30% of base salary if 85% of the target is achieved to between 20% and 120% of
base salary if 120% of the target is achieved. With respect to fiscal year 1996,
the Company has retained the discretion to reduce such bonuses by up to 50%. The
Board of Directors may, from time to time, modify the 1996 Bonus Plan for any
period after September 30, 1996.
1996 Executive Stock Incentive Plan ("1996 Stock Plan"). Pursuant to
Norcal's 1996 Stock Plan, up to 2,887,500 shares of Common Stock have been set
aside to satisfy awards that may be granted to officers, employees or directors
of the Company or its affiliates. Awards may consist of incentive or
nonqualified stock options, restricted stock, stock appreciation rights,
performance awards and dividend equivalent rights. The 1996 Stock Plan will
expire in January 2006.
The 1996 Stock Plan is administered by a committee of non-employee
directors (currently, the Compensation Committee), which has the power to
determine when and to whom awards will be granted and the terms of each award.
The terms of any award will be set forth in an award agreement, which may modify
or delete provisions of the 1996 Stock Plan that would otherwise apply to such
award or which may contain other terms and restrictions not set forth in the
1996 Stock Plan.
With respect to awards of options, the committee has authority to determine
(i) the number of shares of Common Stock that may be purchased pursuant to each
option, (ii) the option's vesting provisions, (iii) the exercise price (provided
in general that the exercise price for shares must be at least 85% of the fair
market value of the shares as of the grant date), (iv) the term of such option
and (v) such other terms as the committee determines.
The 1996 Stock Plan generally provides that, upon a Control Event, all
outstanding options will become immediately and fully exercisable, and
optionholders may surrender any option to the extent not yet exercised in
exchange for a cash payment.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Stock Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Stock Plan.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition and confidentiality provisions in the 1996 Stock
Plan are subject to certain forfeiture provisions with respect to their options
or shares.
Effective April 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 15,000 shares of Common
Stock under the 1996 Stock Plan at an exercise price of $4.89 per share.
1996 Employee Stock Incentive Plan (the "1996 Employee Plan"). Pursuant to
the 1996 Employee Plan, up to 5,260,500 shares of Common Stock (less any such
shares set forth in awards granted pursuant to the 1996 Stock Plan, the 1990
Option Plan, the Non-Employee Director Plan and the Deferred Compensation and
Stock Option Plan) have been set aside to satisfy awards that may be granted to
officers, employees or directors of the Company or its affiliates. Awards may
consist of incentive or nonqualified stock options, restricted stock, stock
appreciation rights, performance awards and dividend equivalent rights. The 1996
Employee Plan will expire in December 2006.
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<PAGE> 76
The 1996 Employee Plan is administered by a committee of non-employee
directors (currently, the Compensation Committee), which has the power to
determine when and to whom awards will be granted and the terms of each award.
The terms of any award will be set forth in an award agreement, which may modify
or delete provisions of the 1996 Employee Plan that would otherwise apply to
such award or which may contain other terms and restrictions not set forth in
the 1996 Employee Plan.
With respect to the awards of options, the committee has authority to
determine (i) the number of shares of Common Stock that may be purchased
pursuant to each option, (ii) the option's vesting provisions (provided that the
rate of vesting must be at least 20% per year over five years from the date the
option is granted), (iii) the exercise price (provided in general that the
exercise price for shares must be at least 85% of the fair market value of the
shares as of the grant date), (iv) the term of such option (provided that the
term of an option may not be greater than ten years from the date of grant
thereof) and (v) such other terms as the committee determines.
The 1996 Employee Plan generally provides that, in the event of certain
changes in control, the committee, in its sole discretion, may take a variety of
actions (including acceleration of unvested options) with respect to outstanding
awards that it considers to be in the best interests of the Company.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Employee Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Employee Plan, which option will terminate upon the consummation of the
Company's first public offering of Common Stock.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition, confidentiality and other provisions in the 1996
Employee Plan are subject to certain forfeiture provisions with respect to their
options or shares.
Messrs. Lomele, Humphrey, Walsh, Braslaw, Cochrane and Anselmo, who are
employees of the Company and/or certain subsidiaries, were each awarded an
option with respect to their employment during fiscal year 1996, to purchase up
to 65,000, 75,000, 35,000, 20,000, 30,000 and 15,000 shares of Common Stock,
respectively, under the 1996 Employee Plan at an exercise price equal to the
greater of (i) $4.89 per share or (ii) 85% of the fair market value of the
shares of Common Stock as of the date of grant (as such value is determined by
the Compensation Committee). These options have a seven-year term (commencing
September 30, 1996) and vest over four years.
Deferred Compensation Stock Option Plan. Pursuant to Norcal's Deferred
Compensation and Stock Option Plan (the "Deferred Compensation and Stock Option
Plan"), (i) up to 300,000 shares of Common Stock have been set aside to satisfy
the award of an unqualified stock option to Mr. Moriel; (ii) Mr. Moriel will
defer $50,000 per year of his annual salary (as described above) (the "Deferred
Compensation"); and (iii) Mr. Moriel will be entitled to receive a retirement
annuity (the "Retirement Annuity"), payable quarterly until his death, in the
amount of $50,000 per year, less the aggregate amount of benefits he receives
from other retirement plans of Norcal, excluding the ESOP benefit.
The Deferred Compensation and Stock Option Plan is currently administered
by the Compensation Committee, which has the power to interpret the plan.
Generally, in the event that (i) there is a merger, consolidation or other
reorganization in which Norcal is not the surviving entity or becomes a
subsidiary of another corporation, (ii) there is a sale of all or substantially
all of Norcal's assets, (iii) there is a sale of more than 50 percent of
Norcal's outstanding stock to one or more persons who are not shareholders of
Norcal or (iv) there is a dissolution or liquidation of Norcal (the transactions
referred to in clauses (i)-(iv) are each referred to herein as a "Corporate
Transaction"), Norcal is obligated to (i) require the successor entity to (A)
assume Mr. Moriel's option or (B) substitute a comparable option of such
successor entity (or any of, its affiliated entities), or (ii) notify Mr. Moriel
at least 30 days before a Corporate Transaction occurs so that he will have an
opportunity to purchase all or part of his vested shares prior to the
consummation of such Corporate Transaction, at which time Mr. Moriel's option
will be cancelled.
75
<PAGE> 77
Shares acquired pursuant to the exercise of the option granted under the
Deferred Compensation and Stock Option Plan are subject to certain restrictions
on transfers. In addition, with certain exceptions, transfers of such shares are
subject to Norcal's right of first refusal, which right will terminate upon the
consummation of Norcal's first public offering of Common Stock. Upon the later
of Mr. Moriel's termination of employment and the term of his option, Norcal
will have an assignable option to repurchase shares of Common Stock awarded to
Mr. Moriel pursuant to the Deferred Compensation Stock Option Plan.
The Deferred Compensation and Stock Option Plan provides that if Mr. Moriel
violates certain noncompetition and confidentiality provisions in such plan, he
will be subject to forfeiture provisions with respect to his options, shares
purchased thereunder and the Retirement Annuity.
Mr. Moriel's Deferred Compensation will accrue interest at the rate of 8
percent per year, compounded quarterly. Norcal will distribute such Deferred
Compensation to Mr. Moriel at the rate of $30,000 per year beginning with the
first day of the calendar quarter following termination of his employment with
Norcal for any reason.
1996 Non-Employee Director Stock Option Plan. Pursuant to Norcal's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), up
to 175,000 shares of Common Stock have been set aside to satisfy awards to
non-employee directors of Norcal. Upon becoming a director, each future
participant will be awarded an option to purchase 35,000 shares of Common Stock,
which option will become exercisable in three equal, annual installments,
beginning on the first anniversary of the date of grant. Each such option will
have a term of seven years and an exercise price equal to the Common Stock's
fair market value on the date of grant. Unless otherwise provided in the
applicable award agreement, options granted under the Non-Employee Director Plan
will become immediately exercisable upon a Control Event. Effective January
1996, Messrs. Molinari and Flynn, who are non-employee directors, were each
awarded an option to purchase up to 35,000 shares of Common Stock under the
Non-Employee Director Plan at an exercise price of $4.89 per share. In July
1996, Ms. Kaufman, a non-employee director, was also granted an option to
purchase up to 35,000 shares of Common Stock under the Non-Employee Director
Plan at an exercise price of $4.89 per share. The Non-Employee Director Plan is
administered by Norcal's Board of Directors.
1990 Stock Option Plan ("1990 Option Plan"). Pursuant to Norcal's 1990
Option Plan, options to purchase a maximum of 1,898,000 shares of Common Stock
may be issued to officers, employees, independent contractors and directors of
Norcal, its subsidiaries and/or its affiliates. Of that amount, options to
purchase a maximum of 600,000 shares of Common Stock may be granted to directors
of Norcal, including directors who are also employees of Norcal. Under the 1990
Option Plan, incentive stock options that meet the requirements of Section 422
of the Code may be granted to the officers and employees of Norcal, its
subsidiaries and/or certain of its affiliates. The 1990 Option Plan is currently
administered by the Compensation Committee of the Board of Directors, which has
the power to determine to whom options will be granted, the terms of each option
and to interpret the plan.
The exercise price of any stock option may not be less than 100% of the
fair market value of the Common Stock on the date the option is granted. If the
Common Stock is not publicly traded on the date of grant of an option, fair
market value may be computed in good faith by the Board of Directors or a
Committee thereof, but shall not be less than the fair market value reflected in
the most recent year-end independent appraiser's valuation report received by
the ESOP Administrative Committee. Unless otherwise provided in the option
grant, shares acquired pursuant to the exercise of options become vested over a
period of five years from the date of grant and are subject to certain
restrictions on transfer, unvested shares may be repurchased by Norcal upon
termination of the optionee's employment or engagement with Norcal (or its
subsidiaries) at the exercise price the optionee originally paid for such shares
and all shares purchased pursuant to the exercise of options are subject to
repurchase by Norcal under certain circumstances. Generally, in the event (i)
there is a merger, consolidation or other reorganization as a result of which
Norcal is not the surviving corporation or becomes a subsidiary of another
corporation and (ii) the surviving corporation does not agree to assume all
options granted under the 1990 Option Plan (or to issue options equivalent
thereto), then such options will become immediately exercisable and shares
purchased pursuant to them will immediately vest.
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<PAGE> 78
As of September 30, 1996, options to purchase 242,750 shares of Common
Stock were outstanding under the 1990 Option Plan, at an exercise price of $7.04
per share. No options were granted or exercised under the 1990 Option Plan
during the 1996 fiscal year. The following table provides certain information
with respect to options outstanding during fiscal year 1996, for the Named
Executive Officers. No stock appreciation rights ("SARs") were outstanding
during such period.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE GRANT DATE
GRANTED FISCAL PRICE EXPIRATION PRESENT VALUE
NAME (NUMBER) YEAR(D) ($/SH) DATE ($)(F)
- -------------------------------------- ---------- ------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Sangiacomo(a).............. 320,000 14.6% $ 4.89 September 320,000
30, 2002
320,000 14.6% $ 4.89(a) September 370,000
30, 2003
320,000 14.6% $ 4.89(a) September 410,000
30, 2004
Donald M. Moriel(b)................... 300,000 13.7% $ 4.89 September 300,000
30, 2002
Mark R. Lomele(c)..................... 65,000 3.0% $ 4.89(e) September 80,000
30, 2003
Kenneth James Walsh(c)................ 35,000 1.7% $ 4.89(e) September 40,000
30, 2003
Archie L. Humphrey(c)................. 75,000 3.4% $ 4.89(e) September 90,000
30, 2003
</TABLE>
- ---------------
(a) Mr. Sangiacomo's lump-sum multi-year option was granted pursuant to the 1996
Executive Stock Incentive Plan. The option is a non-qualified stock option.
The option consists of three series, each for 320,000 shares. The exercise
price for the Series A shares will remain at $4.89. The exercise price for
the Series B shares is subject to adjustment as of October 1, 1996, and the
exercise price for the Series C shares is subject to adjustment as of
October 1, 1997, to the fair market value of the stock on any such date (but
in no event less than the initial exercise price of $4.89). Each series
generally will vest over four years, with the first vesting to occur for
Series A, B and C options on September 30 of 1996, 1997 and 1998,
respectively. Vesting may be partially accelerated based upon achievement of
particular financial, operational and strategic objectives, including an
initial public offering. Under certain circumstances, the option will vest
completely if there is a change of control of Norcal. With certain
exceptions, additional vesting ceases upon termination of employment. Each
series terminates seven years after the exercise price has been fixed for
that series. Mr. Sangiacomo may purchase all or any portion of the shares in
each series, whether vested or unvested, on or after the respective initial
vesting date for each such series. Upon a termination of Mr. Sangiacomo's
employment, the Company will have an assignable option to repurchase any
such shares. The Company's repurchase option with respect to vested shares
will terminate upon an initial public offering.
(b) Mr. Moriel's lump-sum multi-year option was granted pursuant to the Deferred
Compensation and Stock Option Plan. Pursuant to an employment agreement, Mr.
Moriel will retire in 1999. The option is a non-qualified stock option. The
option expires on September 30, 2002. The option will vest as follows: 30%
will vest on each of September 30, 1996, 1997 and 1998, and 10% will vest on
May 27, 1999. Vesting of the option (1) accelerates upon termination of Mr.
Moriel's employment due to death or disability and (2) with certain
exceptions, ceases upon termination of employment for any other reason. Upon
the later of Mr. Moriel's termination of employment and the term of the
option, the Company will have an assignable option to repurchase all or any
portion of the shares acquired by Mr. Moriel pursuant to exercise of the
option.
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<PAGE> 79
(c) Options granted to Messrs. Lomele, Walsh and Humphrey were granted pursuant
to the 1996 Employee Plan. Each of the options is a non-qualified option and
expires on September 30, 2003. Each option will vest as follows: 20% will
vest on each of September 30, 1997, and 1998, and 30% will vest on each of
September 30, 1999, and 2000. Exercise price for each option is the greater
of (i) $4.89 per share or (ii) 85% of the fair market value of the shares of
Common Stock of the date of grant. In the event of a change in control, the
Compensation Committee, in its sole discretion, may take a variety of
actions with respect to the options that it considers to be in the best
interests of the Company. The Company will have an assignable option upon
termination of an individual's employment to repurchase any such shares. The
Company's repurchase option with respect to vested shares will terminate
upon an initial public offering.
(d) Calculations below include certain options granted to two former executive
officers of the Company during fiscal year 1996 in respect of 400,000 shares
of Common Stock in the aggregate, which options were terminated.
(e) Exercise price for these options is equal to the greater of (i) $4.89 per
share or (ii) 85% of the fair market value of the shares of Common Stock as
of the date of grant (as such value is determined by the Compensation
Committee).
(f) Grant Date Present Value was computed using the Black-Scholes option pricing
model. The calculations utilize certain assumptions, including the
following:
(i) the volatility is assumed to be zero as the Company's Common
Stock is not publicly traded as of the date hereof;
(ii) the risk-free rate of return for each grant is assumed to be the
U.S. Treasury zero-coupon bond rate for bonds with maturities
consistent with the expected time of exercise of each grant;
(iii) the dividend yield is assumed to be zero;
(iv) the stock price is assumed to be $4.89, which is as of September
30, 1995, the date of the most recently completed valuation;
(v) the time of exercise for each option grant listed above is
assumed to be the last vesting date of each such grant plus one
year, except that the time of exercise with respect to each
series of options is assumed to be the last vesting date plus one
year for each series. The additional year is used in the option
pricing model to compensate for the stock price used in the model
which is as of September 30, 1995, the date of the most recently
completed valuation; and
(vi) the value of the options was discounted by 3% per year to
account for assumed forfeitures.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION & SAR VALUES
<TABLE>
<CAPTION>
$ VALUE OF UNEXERCISED
NUMBER OF OUTSTANDING IN-
VALUE UNEXERCISED OPTIONS/SARS THE-MONEY OPTIONS/SARS AT
SHARES ACQUIRED REALIZED AT FISCAL YEAR-END FISCAL YEAR-END(A)
NAME IN EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------- --------------- -------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Michael J. Sangiacomo....... 0 0 139,000/896,000 0/0
Donald M. Moriel............ 0 0 95,000/210,000 0/0
Mark R. Lomele.............. 0 0 10,000/65,000 0/0
Kenneth James Walsh......... 0 0 3,000/35,000 0/0
Archie L. Humphrey.......... 0 0 10,000/75,000 0/0
</TABLE>
- ---------------
(a) These values are not presently calculable.
Pension Plans. The Norcal Waste Systems, Inc. Defined Benefit Pension Plan
(the "Norcal Pension Plan") is a defined benefit pension plan maintained for
certain employees of Norcal and its subsidiaries. Most of the other employees of
Norcal and its subsidiaries are covered by certain collective bargaining
agreements or by the Envirocal, Inc. Retirement Plan (the "Envirocal Retirement
Plan"), the plan covering certain
78
<PAGE> 80
former employees of Envirocal, Inc., one of Norcal's predecessors, and certain
of Envirocal's subsidiaries. The Norcal Pension Plan is funded as required by
ERISA and does not require employee contributions. Full vesting generally is
obtained after five years of vesting service. The calculation of annual
retirement benefits is generally based upon years of service and average annual
compensation for the five consecutive calendar years that produce the highest
such average. Compensation used in determining retirement benefits generally
consists of an employee's total annual earnings, including overtime pay and
bonuses.
The following table shows the estimated annual retirement benefit payable
on normal retirement at age 62 for unmarried employees (or a married employee
who elects a single life annuity) at specified compensation levels with various
years of service for the Norcal Pension Plan:
NORCAL PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- ------------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C>
$ 50,000 $ 8,250 $11,000 $13,750 $ 16,500
$ 65,000 10,725 14,300 17,875 21,450
$ 75,000 12,375 16,500 20,625 24,750
$ 85,000 14,025 18,700 23,375 28,050
$125,000 20,625 27,500 34,375 41,250
$150,000 and above 24,750 33,000 41,250 49,500
</TABLE>
Covered compensation is total cash compensation but not including any
payment for automobile, moving or living allowances, or employee expense
reimbursements, which corresponds to the amounts listed in the Summary
Compensation Table set forth above under the columns "Salary" and "Bonus" plus
certain payouts by the Company in respect of accrued vacation. Any amounts in
excess of limitations pursuant to Section 401(a)(17) of the Code are excluded.
The annual benefit estimates computed for this table are Single Life Benefits
and are not subject to deductions for Social Security or other offset amounts.
As of September 30, 1996, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 7.75 years; Mr. Moriel, 4.33 years; Mr. Lomele, 8.00 years; Mr.
Walsh, 8.00 years; and Mr. Humphrey, 10.00 years.
Mr. Sangiacomo is eligible also to receive a retirement benefit from the
Envirocal Retirement Plan, due to his past employment with Envirocal. The
Envirocal Retirement Plan also is funded as required by ERISA and does not
require employee contributions. The calculation of monthly retirement benefits
is generally based upon years of service and average monthly compensation for
the 60 months (whether or not consecutive) that produce the highest such
average. Compensation used in determining retirement benefits generally consists
of an employee's total earnings, including overtime pay and bonuses. Covered
compensation is total cash compensation but not including any payment for
automobile, moving or living allowances, employee expense reimbursements, or
payment in lieu of unused vacation or sick leave. Any amounts in excess of
limitations pursuant to Section 401(a)(17) of the Code are excluded.
As of September 30, 1996, Mr. Sangiacomo had an estimated 5.17 years of
credited services under the Envirocal Retirement Plan. The estimated annual
retirement benefit to which he will be entitled under the Envirocal Retirement
Plan is $16,383. That estimate is computed as a Single Life Benefit and is not
subject to deduction for Social Security or other offset amounts.
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<PAGE> 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Norcal's Common Stock as of December 15, 1996 by (i)
each person known to Norcal to beneficially own 5% or more of Norcal's Common
Stock, (ii) each director of Norcal, (iii) the Named Executive Officers, and
(iv) all directors and executive officers of Norcal as a group.
<TABLE>
<CAPTION>
SHARE BENEFICIALLY OWNED NUMBER
-------------------------------------------
STOCK OPTIONS
ESOP EXERCISABLE
BENEFICIAL OWNER(A) ACCOUNT(B) IN 60 DAYS TOTAL PERCENT
- -------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Norcal Waste Systems, Inc. ESOP(c).......... 24,134,973 0 24,134,973 100.0%
Michael J. Sangiacomo....................... 37,251 139,000 176,251 *
Donald M. Moriel............................ 9,601 5,000 14,601 *
Mark R. Lomele.............................. 15,666(d) 10,000 25,666(d) *
Kenneth James Walsh......................... 20,966 3,000 29,966 *
Archie L. Humphrey.......................... 26,823 10,000 36,823 *
John B. Molinari............................ 0 12,500 12,500 *
H. Welton Flynn............................. 0 0 0 *
Gale R. Kaufman............................. 0 0 0 *
All executive officers and directors as a
group (11 persons)........................ 24,134,973(e) 217,500 24,337,473(e) 100.0%
</TABLE>
- ---------------
* Less than 1%.
(a) Except as otherwise indicated in the notes to this table, the address of
each beneficial owner of more than 5% of the Common Stock is c/o Norcal
Waste Systems, Inc., Five Thomas Mellon Circle, San Francisco, California
94134.
(b) As ESOP participants, the individuals named in the table have shared voting
power, but no investment power, over the shares of Common Stock allocated to
such individuals' ESOP account, unless they are members of the ESOP
Administrative Committee. See note (c) below. The ESOP account includes
allocated shares as of September 30, 1996.
(c) The Trustee of the ESOP is Imperial Trust Company (the "ESOP Trustee"), 456
Montgomery Street, Suite 600, San Francisco, California 94104. An aggregate
of 24,134,973 shares of Common Stock were held by the ESOP Trustee as of
September 30, 1996, of which approximately 16,411,881 had been allocated to
the accounts of individual ESOP participants, including officers of Norcal.
All of the shares held by the ESOP Trustee are currently voted in most
matters as determined by the Administrative Committee of the ESOP. However,
in certain matters the ESOP participants direct the ESOP Trustee to vote the
shares allocated to their respective accounts. Therefore, the members of the
Administrative Committee currently have shared voting and investment power
with respect to all shares held by the ESOP Trustee. None of the members of
the Administrative Committee has sole voting power over any shares, but as
ESOP participants they have shared voting power over the shares allocated to
their individual ESOP accounts. The members of the Administrative Committee,
and the number of shares of Common Stock that were allocated to their
respective ESOP accounts as of September 30, 1995 are as follows: Archie L.
Humphrey, 26,823 shares; John A. Legnitto, 2,001 shares; and Mark R. Lomele,
15,666 shares. In addition, Messrs. Humphrey and Lomele hold options to
purchase 10,000 and 10,000 shares of Common Stock, respectively, that are
currently exercisable, with an exercise price of $7.04 per share,
substantially higher than the fair market value of Norcal's Common Stock as
of September 30, 1996. With respect to each member of the ESOP
Administrative Committee, the number of such shares in the member's
individual ESOP account, together with those subject to stock options
currently exercisable, represent less than 1% of the outstanding shares of
Common Stock as of September 30, 1996.
(d) Excludes all shares of Common Stock held by the ESOP Trustee deemed to be
beneficially owned by Mr. Lomele as a result of his membership on the ESOP
Administrative Committee which exercises shared voting and investment power
with respect to such shares (see notes (c) above and (e) below), but
80
<PAGE> 82
includes those shares of Common Stock held by the ESOP Trustee for the
benefit of Mr. Lomele as ESOP participant (see note (b) above).
(e) Includes all shares of Common Stock held by the ESOP Trustee because Mark R.
Lomele is an executive officer of Norcal as well as a member of the
Administrative Committee of the ESOP with shared voting and investment power
with respect to such shares (see note (c) above).
The ESOP
The Norcal Waste Systems, Inc. Employee Stock Ownership Plan and Trust (the
"ESOP") owns all of Norcal's outstanding shares of common stock. The ESOP is an
employee stock ownership plan intended to qualify under Sections 401(a) and
4975(e)(7) of the Code. The ESOP was adopted effective as of October 1, 1985 and
acquired the outstanding shares of Norcal in three separate transactions.
Trustee and Administrative Committee; Control of Norcal by the ESOP
The assets of the ESOP are held in trust under a trust agreement with the
ESOP Trustee. An Administrative Committee (the "Committee") that is appointed by
and serves at the pleasure of the Board of Directors is responsible for the
operation and administration of the ESOP, including the ESOP's activities as
sole shareholder of Norcal. Under ERISA, the Committee members are fiduciaries
and as such must act for the exclusive benefit of the employee participants
under the ESOP. The current members of the Committee are Archie L. Humphrey,
John A. Legnitto and Mark R. Lomele. Mr. Lomele, Chair of the Committee, is an
officer of Norcal. Mr. Humphrey is Secretary of the Committee. All of the
Committee members are employees of the Company. Norcal has agreed to indemnify
members of the Committee against any liability arising out of an alleged breach
by a member in the performance of his or her fiduciary duties, except those
resulting from a member's own gross negligence or willful misconduct. Norcal
also carries insurance against costs and liability arising from a member's
breach or alleged breach of fiduciary duty.
The ESOP Trustee has granted the Committee a proxy to vote all shares held
by the ESOP. The Committee elects Norcal's Board of Directors, may remove these
directors, and votes with respect to certain corporate transactions requiring or
presented for shareholder approval. However, with respect to any corporate
matter that requires a shareholder vote and constitutes a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transactions as
may be specified in U.S. Treasury Department regulations, voting instructions
are to be solicited from ESOP participants with respect to shares allocated to
their accounts. The Committee determines the voting of any unallocated shares
and any allocated shares for which ESOP participants do not provide voting
instructions. Because a significant number of shares are unallocated (7,723,092
shares or 32.0% of outstanding stock), currently the Committee may be able to
exercise a significant influence over such matters. If Norcal's capital stock
becomes registered under the Exchange Act, each ESOP participant will be able to
direct voting of those shares allocated to his or her account and the Committee
will have responsibility for voting only unallocated or undirected shares. The
sale of any shares of Norcal Common Stock by the ESOP requires the approval of
the Board of Directors.
Distributions
In-Service Withdrawals. Each participant who has attained age 55 and has
participated in the ESOP for at least ten years is entitled to make in-service
withdrawals with respect to common stock acquired by the ESOP after December 31,
1986, and allocated to his or her ESOP account ("Post-1986 Shares"). An eligible
participant will be entitled to withdraw up to a total of 25% of his or her
Post-1986 Shares during the first five years of the election period and will be
entitled to withdraw up to a total of 50% of his or her Post-1986 Shares during
the sixth year of the election period. It is expected that withdrawals will be
paid in cash. As of the date hereof, the ESOP held 11,654,973 Post-1986 Shares.
Post-Termination Distributions. Except for the in-service withdrawals
described above, a vested participant is not entitled to begin receiving a
distribution of his or her ESOP accounts until after his or her employment has
terminated. The Committee generally determines the time and manner of
distributions, subject to certain limitations. Distributions may be made in a
lump sum or in substantially equal annual installments over a period not
exceeding five years. Norcal expects that the ESOP's distributions will continue
81
<PAGE> 83
to be paid in cash. Norcal is obligated to repurchase any shares of its common
stock that may be distributed by the ESOP to participants following withdrawal,
retirement or termination.
Norcal Contributions and Allocations
Norcal may make contributions to the ESOP in the form of cash, cancellation
of indebtedness (on the various loans that Norcal has made to the ESOP (the
"ESOP Loans") or newly issued shares of common stock, in such amounts as may be
determined annually by the Board of Directors. The ESOP may use cash
contributions to make payments on the ESOP Loans, to make distributions of
benefits to participants (or beneficiaries) or to invest in investments other
than common stock of Norcal. Contributions to the ESOP are allocated each plan
year to those participants who complete at least 1,000 hours of service during
the plan year and are employed on September 30 (or who retire, become disabled
or die during the plan year). Of 24,134,973 total shares, 7,723,092 shares were
unallocated as of September 30, 1996.
To the extent that the ESOP utilizes cash contributions from Norcal to
repay the ESOP Loans, the contribution will result in no net cash outlay by
Norcal. Moreover, such contributions to the ESOP are generally tax-deductible.
The Credit Agreement and the Indenture relating to the Senior Notes
expressly permit Norcal to make contributions to the ESOP in order for the ESOP
to pay cash benefits due to retired, terminated or withdrawing ESOP participants
and/or to repurchase Norcal common stock distributed to such participants. To
the extent Norcal contributes funds to the ESOP for this purpose or is obligated
to repurchase common stock distributed to participants, Norcal will have less
cash available to make payments on its outstanding indebtedness. Furthermore,
the amount Norcal may contribute to the ESOP to fund such ESOP distribution
obligations (or may use to repurchase common stock distributed by the ESOP) will
increase significantly in the future as the Company's workforce ages and
retires, as additional shares of common stock are allocated to participants, or
if the value of the common stock increases. Such an increase in contributions
would reduce the amount of cash available for other purposes, including to make
debt service payments.
The ESOP Loans
In 1986 and 1987 Norcal's predecessors lent a total of $127.7 million to
their respective employee stock ownership plans in connection with the
acquisition of each of the predecessors by their respective ESOPs and merger of
the two predecessor companies. The ESOP's indebtedness to Norcal was amended and
restated pursuant to a Third Amended and Restated Loan Agreement dated as of
September 30, 1992 by and between Norcal and the ESOP (the "Old ESOP Loan
Agreement"). In 1990, in connection with the Excel Transaction, Norcal loaned
$10.7 million to the Excel ESOP pursuant to a loan agreement (as amended, the
"Excel ESOP Loan Agreement"), which amount became indebtedness of the ESOP upon
the merger of the Excel ESOP into the ESOP. At September 30, 1995 the Company
reflected on its balance sheet amounts owed by the ESOP to Norcal of $47.8
million pursuant to the Old ESOP Loan Agreement and the Excel ESOP Loan
Agreement.
In connection with the Refinancing, the ESOP's indebtedness reflects, among
other things, Norcal's funding of the ESOP's retirement of the ESOP Notes,
repayment of all amounts owed under the Old Credit Agreement, and incurrence of
new indebtedness by the Company pursuant to the Refinancing. At September 30,
1996, the outstanding principal balance owed to Norcal was $68.8 million. The
ESOP and Norcal have entered into a Fourth Amended and Restated ESOP Loan
Agreement, effective as of October 1, 1995, whereby the ESOP will repay such
outstanding indebtedness, plus unpaid accrued interest at the rate of seven
percent (7.0%) per annum, in thirteen equal installments of approximately $9.8
million each as of September 30 of each year, beginning in 1996 and ending in
2008. In addition, the ESOP will prepay such outstanding indebtedness, without
penalty, to the extent that Norcal makes contributions to the ESOP for the
purpose of making such prepayments. The ESOP's repayment of principal and
interest on such outstanding indebtedness may not exceed the sum of Norcal's
contributions to the ESOP for the purpose of making such repayments, plus any
cash dividends paid on Norcal's common stock held by the ESOP and earnings on
Norcal contributions to the ESOP, less any repayments made by the ESOP in prior
years.
82
<PAGE> 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting Arrangements with Kaufman Campaign Consultants
Kaufman Campaign Consultants ("KCC"), of which Ms. Kaufman, a director of
Norcal, is President and sole shareholder, is party to a consulting agreement
with the Company, effective May 1, 1996, pursuant to which KCC has agreed to
provide the Company with certain consulting services in the areas of political
matters, public affairs, media and public relations. The agreement has a term of
one year and provides for a monthly fee of $9,500. Pursuant to previous
arrangements and the current consulting agreement with the Company, KCC received
$69,288 and $78,800 in fees during Norcal's fiscal years ended September 30,
1996 and 1995, respectively, for consulting services provided to the Company
during such periods.
Agreements with Certain Former Officers
Norcal and Mr. Broderson, a former officer of Norcal, have entered into a
Separation Agreement and Release of Claims (the "Separation Agreement"),
effective as of March 15, 1996, relating to Mr. Broderson's resignation, as of
January 19, 1996, as an officer of Norcal and member of the Pension Investment
and Administration Committee. Pursuant to the provisions of the Separation
Agreement, Mr. Broderson is entitled to receive, among other things,
approximately $237,000 from Norcal as severance compensation, over the 15-month
period commencing March 15, 1996. The Separation Agreement also contains
provisions requiring Norcal to use its best efforts to provide, to the same
extent that any other former officer is provided such coverage, insurance
coverage for Mr. Broderson as a named insured and named fiduciary under Norcal's
Director and Officer liability and fiduciary liability insurance policies.
On July 15, 1996, David J. Pacini resigned as Director and Executive Vice
President Corporate of the Company, and Robert J. Corbolotti resigned as Senior
Vice President, Chief Financial Officer and Treasurer of the Company and Chief
Financial Officer of those subsidiaries for which Mr. Corbolotti served as an
officer. Mr. Pacini and Mr. Corbolotti have entered into consulting agreements
with the Company pursuant to which each of them is required to provide certain
transition and consulting services to the Company for a period of two years. Mr.
Pacini's consulting agreement provides for a consulting fee of $200,000 for the
first year of such agreement and $50,000 during the second. Mr. Corbolotti's
consulting agreement provides for a consulting fee of $150,000 for the first
year of such agreement and $50,000 during the second. Both consulting agreements
also contain, among other terms, noncompetition and confidentiality provisions.
The consulting agreements replace employment and stock option agreements
pursuant to which Messrs. Pacini and Corbolotti would have received annual base
compensation and a grant of stock options of $277,500 and 200,000 shares and
$202,500 and 200,000 shares, respectively.
Directors and Officers Insurance
Norcal carries insurance indemnifying its directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers of Norcal and its affiliates and as ERISA fiduciaries, to
the extent they may so act.
83
<PAGE> 85
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated statements of income for each of the three years in the
period ended September 30, 1996
Consolidated balance sheets as of September 30, 1996 and 1995
Consolidated statements of stockholder's equity (deficit) for each of
the three years in the period ended September 30, 1996
Consolidated statements of cash flows for each of the three years in the
period ended September 30, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, or
are not applicable, or the information is included in the consolidated
financial statements or notes to consolidated financial statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of Norcal Waste Systems, Inc.+
3.2 Restated Bylaws of Norcal Waste Systems, Inc.+
4.1 Indenture between Norcal Waste Systems, Inc. and IBJ Schroder Bank & Trust
Company dated as of November 21, 1995+
4.3 Form of the 12 1/2% Series B Notes due 2005+
10.1 Norcal Waste Systems, Inc. Employee Stock Ownership Plan, as amended and
restated as of October 1, 1993 (the "ESOP")+
- Amendment No. 1, dated effective October 1, 1993, executed December 29,
1994+
- Amendment No. 2, dated effective February 1, 1995, executed April 27,
1995+
- Amendment No. 3, dated effective October 1, 1993, executed September 28,
1995+
- Amendment No. 4, dated effective November 17, 1995+
10.2 Employee Stock Ownership Trust Agreement between Norcal Solid Waste
Systems, Inc. (now "Norcal Waste Systems, Inc.," hereinafter referred to as
"Norcal") and Imperial Trust Company, dated March 15, 1990+*
10.4 Revolving Credit Agreement by and among Norcal, certain of Norcal's
subsidiaries (the "Guarantors"), The First National Bank of Boston, and the
Banks named on Schedule 1 therein, dated as of November 21, 1995+
- First Amendment to Revolving Credit Agreement, dated December 1, 1995+
10.5 Security Agreement by and among Norcal, the Guarantors and The First
National Bank of Boston, dated as of November 21, 1995+
10.6 Pledge Agreement by and among Norcal, the Guarantors and The First National
Bank of Boston, dated as of November 21, 1995+
10.7 Partnership Pledge Agreement by and among Norcal, the Guarantors and The
First National Bank of Boston, dated as of November 21, 1995+
</TABLE>
84
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
10.8 Collateral Assignment of Permits and Contracts by and among Norcal, the
Guarantors and the First National Bank of Boston, dated as of November 21,
1995+
10.9 Purchase Agreement between Norcal, Bear, Stearns & Co. Inc. and Montgomery
Securities, dated November 15, 1995+
10.10 A/B Exchange Registration Rights Agreement by and among Norcal, the
Subsidiary Guarantors named therein, Bears, Stearns & Co. Inc. and
Montgomery Securities, dated as of November 21, 1995+
10.11 Memorandum of Material Settlement Terms between Norcal, the ESOP, and the
Settling Plaintiffs named therein, dated August 9, 1995+
10.12 Master Finance Lease between Caterpillar Financial Services Corporation and
Alta Equipment Leasing Co., Inc., dated as of December 21, 1994+
10.13 Master Lease Agreement between Heller Financial Leasing, Inc. and Norcal,
dated June 30, 1994+
10.14 Lease Agreement between OB-1 Associates, as landlord, and Norcal, as
tenant, for premises located at 5 Thomas Mellon Circle, San Francisco, CA,
dated April 4, 1989+
- Amendment to Lease, dated effective January 15, 1990+
- Amendment to Lease, dated effective April 1, 1990+
- Third Amendment to Lease, dated effective January 15, 1991+
10.16 Employment Agreement with Donald M. Moriel dated as of June 4, 1996+*
10.17 Separation Agreement between Norcal and Richard C. Broderson effective as
of March 15, 1996+*
10.18 Norcal Amended & Restated 1990 Stock Option Plan, effective July 23, 1990,
as amended August 10, 1990+*
10.20 Form of Indemnity Agreement (separate agreements were executed by Norcal
and each of John B. Molinari, H. Welton Flynn, Archie L. Humphrey and
Michael J. Sangiacomo as of February 27, 1992)+*
10.21 Agreement to Terminate Indemnification Trust and Modify Indemnity Agreement
between Norcal and M. Sangiacomo, H. Flynn, J. Molinari, A. Humphrey and W.
Graham, dated as of October 16, 1995+*
10.22 Waste Disposal Agreement between Oakland Scavenger Company and City and
County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
10.23 Agreement in Facilitation of Waste Disposal Agreement between City and
County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
10.24 1996 Employee Stock Incentive Plan*
10.25 1996 Executive Stock Incentive Plan, as amended*
10.26 1996 Non-Employee Director Stock Option Plan+*
10.27 Restated Consulting Agreement between Norcal and Robert Corbolotti dated
July 19, 1996+*
10.28 Restated Consulting Agreement between Norcal and David Pacini dated July
19, 1996+*
10.29 Short-Term Incentive Bonus Plan+*
10.30 Employment Agreement between Norcal and Michael J. Sangiacomo, dated as of
January 22, 1996, as amended+*
10.31 Employment Agreement between Norcal and Robert Corbolotti, dated as of June
24, 1996, effective as of January 22, 1996, as amended+*
10.32 Employment Agreement between Norcal and David Pacini, dated as of June 24,
1996, effective as of January 22, 1996, as amended+*
10.33 Option Agreement between Norcal and Michael J. Sangiacomo dated as of June
24, 1996, as amended+*
10.34 Option Agreement between Norcal and David Pacini, dated as of June 24,
1996, effective as of January 22, 1996, as amended+*
10.35 Option Agreement between Norcal and Robert Corbolotti, dated as of June 24,
1996, effective as of January 22, 1996, as amended+*
</TABLE>
85
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------------------------
<C> <S>
10.36 Summary of Material Terms of Severance Policy for Certain Key Employees+*
10.37 Fourth Amended and Restated Loan Agreement by and between Norcal and the
ESOP, effective as of October 1, 1995+
10.38 Consulting Agreement between Norcal and Kaufman Campaign Consultants dated
May 16, 1996+*
10.39 Deferred Compensation and Stock Option Plan+*
10.40 Stock Option Agreement dated as of April 4, 1996, between Norcal and John
B. Molinari+*
10.41 Stock Option Agreement dated as of January 12, 1996, between Norcal and
John B. Molinari*
10.42 Stock Option Agreement dated as of April 4, 1996, between Norcal and H.
Welton Flynn+*
10.43 Stock Option Agreement dated as of January 12, 1996, between Norcal and H.
Welton Flynn*
10.44 Stock Option Agreement dated as of July 16, 1996, between Norcal and Gale
Kaufman*
10.45 Second Amendment to Revolving Credit Agreement (Exhibit 10.4 above), dated
November 26, 1996
10.46 Form of Option Agreement in respect of 1996 Employee Stock Incentive Plan*
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Norcal
24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Identically numbered exhibit to the Company's Registration Statement on From
S-4 (File No. 33-80777); incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
Exhibits available upon request to the Company.
(b) Reports on Form 8-K.
None.
86
<PAGE> 88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 27, 1996
NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
------------------------------------
Michael J. Sangiacomo
President, Chief Executive Officer
and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
/s/ MICHAEL J. SANGIACOMO President, Chief Executive December 27, 1996
----------------------------------------- Officer and Director
MICHAEL J. SANGIACOMO
/s/ MARK R. LOMELE Acting Chief Financial December 27, 1996
----------------------------------------- Officer, Treasurer and Vice
MARK R. LOMELE President
/s/ JON D. BRASLAW Controller December 27, 1996
-----------------------------------------
JON D. BRASLAW
/s/ GALE R. KAUFMAN Director December 27, 1996
-----------------------------------------
GALE R. KAUFMAN
/s/ JOHN B. MOLINARI Director December 27, 1996
-----------------------------------------
JOHN B. MOLINARI
/s/ H. WELTON FLYNN Director December 27, 1996
-----------------------------------------
H. WELTON FLYNN
</TABLE>
87
<PAGE> 89
NORCAL WASTE SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
OF YEAR EXPENSE DEDUCTIONS END OF YEAR
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Allowance for Doubtful Accounts.................... $ 1,277 $ 1,275 $ 941 $ 1,611
======= ====== ======= =======
Insurance.......................................... $ 10,269 $ 10,236 $ 7,897 $12,608
Post Retirement Benefit Obligations................ 34,917 554 1,076 34,395
Litigation, Claims and Related Matters............. 2,995 -- 2,181 814
Property and Other Reserves........................ 2,940 -- 1,157 1,783
------- ------ ------- -------
Total.............................................. $ 51,121 $ 10,790 $ 12,311 $49,600
======= ====== ======= =======
YEAR ENDED SEPTEMBER 30, 1995
Allowance for Doubtful Accounts.................... $ 1,472 $ 879 $ 1,074 $ 1,277
======= ====== ======= =======
Insurance.......................................... $ 6,585 $ 5,880 $ 2,196 $10,269
Post Retirement Benefit Obligation................. 35,094 830 1,007 34,917
Litigation, Claims and Related Matters............. 5,141 -- 2,146 2,995
Property and Other Reserves........................ 8,610 -- 5,670 2,940
------- ------ ------- -------
Total.............................................. $ 55,430 $ 6,710 $ 11,019 $51,121
======= ====== ======= =======
YEAR ENDED SEPTEMBER 30, 1994
Allowance for Doubtful Accounts.................... $ 1,743 $ 819 $ 1,090 $ 1,472
======= ====== ======= =======
Insurance.......................................... $ 6,797 $ 3,808 $ 4,020 $ 6,585
Post Retirement Benefit Obligation................. 34,438 1,658 1,002 35,094
Litigation, Claims and Related Matters............. 9,964 -- 4,823 5,141
Property and Other Reserves........................ 8,741 -- 131 8,610
------- ------ ------- -------
Total.............................................. $ 59,940 $ 5,466 $ 9,976 $55,430
======= ====== ======= =======
</TABLE>
Supporting schedules other than the above have been omitted because they
are not applicable or not required or because the information to be set forth
therein is included in the financial statements or notes thereto herein.
88
<PAGE> 90
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------
<S> <C>
10.24 1996 Employee Stock Incentive Plan
10.25 1996 Executive Stock Incentive Plan, as amended
10.41 Stock Option Agreement dated as of January 12, 1996, between Norcal and John B.
Molinari
10.43 Stock Option Agreement dated as of January 12, 1996, between Norcal and H.
Welton Flynn
10.44 Stock Option Agreement dated as of July 16, 1996, between Norcal and Gale
Kaufman
10.45 Second Amendment to Revolving Credit Agreement, dated November 26, 1996
10.46 Form of Option Agreement in respect of 1996 Employee Stock Incentive Plan
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries
24.1 Powers of Attorney
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
89
<PAGE> 1
EXHIBIT 10.24
NORCAL WASTE SYSTEMS, INC.
1996 EMPLOYEE STOCK INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
Page
1. Purpose 1
2. Definitions 1
3. Eligibility 1
4. Stock Available for Plan 1
5. Administration 2
6. Awards 3
7. Options 4
8. Restricted Stock 7
9. Stock Appreciation Rights 8
10. Performance Awards 10
11. Dividend Equivalent Rights 12
12. Adjustment Upon Change in Capitalization 12
13. Restrictions on Transfer of Shares 12
14. Company's Repurchase Option Upon Termination of
Service 15
15. Restrictions on Other Activities 16
16. Withholding Taxes 18
17. Limitation of Rights 19
18. Non-Exclusivity of Plan 20
19. Duration and Amendment of Plan; California Law 20
20. Information Provided by Company 21
21. Miscellaneous 21
Exhibit A: Definitions A-1
-i-
<PAGE> 3
NORCAL WASTE SYSTEMS, INC.
1996 EMPLOYEE STOCK INCENTIVE PLAN
1. Purpose.
The purpose of this Plan is (a) to enable the Company to attract and
retain officers, key employees and other selected Participants who are important
to the Company, and (b) to provide such persons with additional incentive to
advance the interests of the Company. Pursuant to this Plan, the Committee will
grant Awards which provide the Participants with a proprietary interest in the
long-term growth and performance of the Company. These Awards may include
Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock
Appreciation Rights, Performance Awards and Dividend Equivalent Rights.
2. Definitions.
Capitalized terms not otherwise defined in this Plan will have the
meanings set forth in Exhibit A to this Plan.
3. Eligibility.
Awards will be granted only to persons who are officers, employees
or directors of the Company or any of its Affiliates.
4. Stock Available for Plan.
The maximum number of Shares available for Awards under this Plan
(the "Available Shares") is 5,260,500 less any Shares set forth in awards
granted pursuant to the Company's 1996 Executive Stock Incentive Plan, 1996
Non-Employee Director Stock Option Plan, Deferred Compensation and Stock Option
Plan, and 1990 Stock Option Plan (with the number of Shares granted pursuant to
such other plans to be determined by the Committee from time to time), subject
to the following adjustments and limitations:
(a) When any Award (other than a Performance Unit denominated in
dollars) is granted, the Available Shares will be reduced by the number of
Shares set forth in such Award.
(b) When any portion of an Award (other than a Performance Unit
denominated in dollars) expires, is cancelled or is otherwise terminated for any
reason, the Available Shares will be increased by the Shares allocable to
-1-
<PAGE> 4
the expired, cancelled or otherwise terminated portion of the Award.
(c) If the Company ever repurchases Shares pursuant to this Plan,
the Available Shares will be increased by the number of such repurchased Shares.
(d) Upon a change in capitalization, the number of Available Shares
will be adjusted in number and kind pursuant to Section 12.
(e) As provided in Section 260.140.45 of the California Regulations,
the total number of Shares issuable upon exercise of all outstanding Awards
(exclusive of certain rights and warrants described in Section 260.140.45) and
the total number of Shares called for under any stock bonus or similar plan will
not exceed the limit set forth in Section 260.140.45.
5. Administration.
(a) Committee Membership. This Plan will be administered by the
Committee, which will consist of two or more members of the Board. The members
of the Committee (i) will be appointed by the Board and (ii) may not be
employees of the Company. If no Committee has been appointed, the entire Board
will constitute the Committee.
(b) Committee Procedures. The Board will designate one of the
members of the Committee as chairperson. The Committee may hold meetings at such
times and places as it will determine. The acts of a majority of the Committee
members present at meetings at which a quorum exists, or acts approved in
writing by all Committee members, will be valid acts of the Committee.
(c) Committee Responsibilities. Subject to the provisions of this
Plan, the Committee will have full authority and discretion to take the
following actions:
(i) To determine when Awards are to be granted under this
Plan;
(ii) To select the Participants for each Award;
(iii) To determine the terms and conditions of each Award;
(iv) To authorize any person to execute, on behalf of the
Company, any Award Agreement or other instrument required to carry out the
purposes of this Plan;
-2-
<PAGE> 5
(v) To adopt, amend, waive or rescind rules, procedures and
restrictions relating to this Plan or to any Award;
(vi) To interpret this Plan and to apply its provisions;
(vii) To determine whether a leave of absence will be granted
to a Participant without constituting a termination of employment or service for
purposes of the Plan;
(viii) To cause the Company to loan Participants funds for any
purpose related to this Plan, including to purchase any Shares or to pay any
taxes due with respect to any Award (with such loans to be granted within the
absolute discretion of the Committee and upon such terms as the Committee may
determine); and
(ix) To take any other action it deems necessary or advisable
for the implementation and administration of this Plan.
(d) Discretion. The presence in this Plan of specific instances
where the Committee has express discretion to make determinations with respect
to this Plan or to any Award (such as the discretion to extend the term of an
Option pursuant to Section 7(e)(v) below) does not imply that the Committee does
not have discretion to make other determinations not expressly set forth in this
Plan.
(e) Finality. All decisions, interpretations and other actions of
the Committee will be final and binding on all persons.
6. Awards.
(a) General. The Committee will determine the type or types of
Award(s) to be made to each Participant. Awards may include but are not limited
to Options (which may be either Incentive Stock Options or Nonqualified Stock
Options), Restricted Stock, Stock Appreciation Rights, Performance Awards (which
may be either Performance Shares or Performance Units), or Dividend Equivalent
Rights; these Awards are further described in Sections 7 to 11, respectively.
Awards may be granted singly, in combination or in tandem. Awards may also be
made in combination or in tandem with, in replacement of, or as alternatives to,
grants or rights under any other employee plan of the Company, including the
plan of any entity acquired by the Company.
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(b) Award Agreement. The terms of any Award will be set forth in an
Award Agreement. No Award will be effective until such Award Agreement is
executed and delivered by the Company and the Participant. The terms set forth
in this Plan will apply to any Award, except to the extent such terms are
expressly modified or deleted in such Award Agreement. The Award Agreement may
also contain other terms and restrictions not set forth in this Plan. If there
is any inconsistency between the terms of this Plan and the terms of the Award
Agreement, the terms of the Award Agreement will control.
7. Options.
(a) General. Subject to the provisions of this Plan, the Committee
will have full and final authority to grant Eligible Persons Options, to
determine whether such Options will be Incentive Stock Options or Nonqualified
Stock Options, and to determine all the terms applicable to such Options. These
terms will be set forth in an Award Agreement and will include the following:
(i) whether such Option is an Incentive Stock Option or Nonqualified Stock
Option; (ii) the number of Shares that may be purchased pursuant to such Option;
(iii) the vesting provisions for such Option; (iv) the exercise price (or any
formula for determining the exercise price); (v) the term of such Option; and
(vi) such other terms as the Committee determines.
(b) Incentive Stock Options. If the Committee grants an Incentive
Stock Option, such Option must comply with the requirements of Section 422 of
the Code as in effect on the date of the grant. The Committee may amend this
Plan if it considers such amendment to be necessary or desirable to comply with
such requirements.
(c) Vesting. Each Option will become exercisable ("vest") in such
installments (which need not be equal) and at such times as may be designated by
the Committee and set forth in the Award Agreement; provided, however, that the
rate of vesting must be at least 20% per year over five years from the date such
Option is granted. To the extent not exercised, installments will accumulate and
be exercisable, in whole or in part, at any time after becoming exercisable, but
not later than the date the Option expires, as set forth in Section 7(e) below.
Upon a Participant's Termination of Service for any reason, the Option granted
to such Participant will cease to vest after such Termination Date (unless
otherwise determined by the Committee), and the Optionholder must exercise the
vested portion of such Option within the time periods set forth in Section 7(e)
below. The Committee may accelerate the exercisability of any Option or portion
thereof at any time for any reason.
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<PAGE> 7
(d) Exercise Price. The exercise price for Shares under each Option
will be determined by the Committee and set forth in the Award Agreement;
provided, however, that the exercise price for Shares must be at least 85% of
the Fair Market Value of the Shares as of the date such Option is granted,
unless the recipient of the Option is the owner of more than 10% of the total
combined voting power of all classes of stock of the Company, in which case the
exercise price must be at least 110% of such Fair Market Value.
(e) Exercise Period. Options will be for such term as the Committee
will determine; provided, however, that the term of an Option may not be greater
than ten years from the date of grant of such Option. Unless the Award Agreement
provides otherwise, an Option's term will expire as follows:
(i) Upon a Participant's Termination of Service for any
reason other than Cause, Disability or death, the Optionholder may, for a period
of three months after such Termination Date, exercise the Option to the extent,
and only to the extent, that such Option was exercisable as of the Termination
Date, after which time the Option will automatically expire.
(ii) Upon a Participant's Termination of Service for Cause,
the Optionholder may, for a period of 30 days after such Termination Date,
exercise the Option to the extent, and only to the extent, that such Option was
exercisable as of the Termination Date, after which time the Option will
automatically expire.
(iii) Upon a Participant's Termination of Service because of
the Participant's Disability or death, the Optionholder may, for a period of one
year after such Termination Date, exercise the Option to the extent, and only to
the extent, that such Option was exercisable as of the Termination Date, after
which time the Option will automatically expire.
(iv) The Committee may, subsequent to the granting of any
Option, extend the term thereof.
(f) Method of Exercise.
(i) The exercise of an Option will be made only by a written
notice delivered in person or by mail to the Secretary of the Company at the
Company's principal executive office, specifying the number of Shares to be
purchased and accompanied by payment therefor and otherwise in accordance with
the Award Agreement.
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(ii) The exercise price for any Shares purchased pursuant to
the exercise of an Option will be paid in full in cash upon such exercise,
unless otherwise provided in the Award Agreement or unless otherwise determined
by the Committee. The Committee will have discretion to determine at the time of
grant of each Option or at any later date (up to and including the date of
exercise) that the form of payment acceptable in respect of the exercise of such
Option may consist of any of the following (or any combination thereof): (A)
cash, (B) promissory note (upon terms determined by the Committee), or (C) the
transfer of Shares to the Company (upon terms determined by the Committee). Any
Shares transferred to the Company as payment of the purchase price under an
Option will be valued at their Fair Market Value on the day preceding the date
of exercise of such Option. Notwithstanding anything herein to the contrary, a
promissory note will not be an acceptable form of payment in respect of the
exercise of an Option from and after the Initial Public Offering.
(iii) Options may also be exercised through a registered
broker-dealer pursuant to such cashless exercise procedures that may, from time
to time, be deemed acceptable by the Committee.
(iv) No fractional Shares (or cash in lieu thereof) will be
issued upon exercise of an Option, and the number of Shares that may be
purchased upon exercise will be rounded to the nearest number of whole Shares.
(g) Non-transferability of Options. No Option will be transferable
by a Participant otherwise than by will or the laws of descent and distribution.
(h) Rights of Optionholder. No Optionholder will be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (i)
the Option will have been exercised pursuant to the terms of this Plan and the
Award Agreement, and (ii) the Company will have issued and delivered Shares to
the Optionholder. At that time, the Optionholder will have full voting,
dividend, and other ownership rights with respect to such Shares, subject to
such terms and conditions as may be set forth in this Plan and the Award
Agreement.
(i) Change in Control. Unless otherwise provided in the Award
Agreement, in the event of a Change in Control, the Committee, in its sole
discretion, may determine that it is in the best interests of the Company, and
if so may take all appropriate action, to:
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(i) Cause all or any portion of Options outstanding as of the
date of such Change in Control to become immediately and fully vested and
exercisable.
(ii) Cancel all outstanding Options effective as of the date
of such Change in Control and, with respect to that portion of any Option that
will have vested as of such date (the "Vested Shares"), either (A) notify the
Optionholder of the proposed Change in Control reasonably prior to its
consummation so that the Optionholder will have an opportunity to exercise the
Vested Shares immediately prior to such consummation; or (B) provide for a cash
payment to the Optionholder in an amount equal to the excess of the Committee's
determination of the fair market value of the Vested Shares as of such date over
the Exercise Price of such Vested Shares; or
(iii) Require the successor corporation to assume the
outstanding Options or substitute therefor comparable options of such successor
corporation or an Affiliate of such successor corporation.
8. Restricted Stock.
(a) Grant. The Committee may grant Eligible Persons Restricted
Stock. Each Award Agreement will contain such terms required by Section
260.140.42 of the California Regulations and such other terms as the Committee
may, in its discretion, determine, including terms relating to the lapse of any
restrictions and the provisions applicable to any Change in Control. Unless the
Award Agreement provides otherwise, Restricted Stock will be subject to the
terms set forth in this Section 8.
(b) Rights of Participant. Shares of Restricted Stock will be issued
in the name of the Participant as soon as reasonably practicable after the Award
is granted, provided that the Participant has executed an Award Agreement, the
appropriate blank stock powers and, in the discretion of the Committee, an
escrow agreement and any other documents which the Committee may require as a
condition to the issuance of such Shares. At the discretion of the Committee,
Shares issued in connection with a Restricted Stock Award will be deposited
together with the stock powers with an escrow agent (which may be the Company)
designated by the Committee. Unless the Committee determines otherwise, upon
delivery of the Shares to the escrow agent, the Participant will have all of the
rights of a shareholder with respect to such Shares, including the right to vote
the Shares and to receive all dividends paid with respect to the Shares.
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<PAGE> 10
(c) Treatment of Dividends. At the time Restricted Stock is granted,
the Committee may, in its discretion, determine that the payment to the
Participant of dividends, or a specified portion thereof, declared or paid on
such Shares by the Company will be (i) deferred until the lapsing of the
restrictions imposed upon such Shares and (ii) held by the Company for the
account of the Participant until such time. If dividends are to be deferred, the
Committee will determine whether such dividends are to be reinvested in shares
of Stock (which will be held as additional Shares of Restricted Stock) or held
in cash. If deferred dividends are to be held in cash, there may be credited at
the end of each year (or portion thereof) interest on the amount of the account
at the beginning of the year at a rate per annum as the Committee, in its
discretion, may determine.
9. Stock Appreciation Rights.
(a) General. The Committee may in its discretion, either alone or in
connection with the grant of an Option, grant Eligible Persons Stock
Appreciation Rights in accordance with this Plan, the terms of which will be set
forth in an Award Agreement. If granted in connection with an Option, a Stock
Appreciation Right will cover the same Shares covered by the Option (or such
lesser number of Shares as the Committee may determine) and will, except as
provided in this Section 9, be subject to the same terms as the related Option.
(b) Time of Grant. A Stock Appreciation Right may be granted (i) at
any time if unrelated to an Option, or (ii) if related to an Option, either at
the time of grant, or at any time thereafter during the term of the Option.
(c) Stock Appreciation Right Related to an Option.
(i) Exercise. A Stock Appreciation Right granted in
connection with an Option will be exercisable at such time or times and only to
the extent that the related Options are exercisable, and will not be
transferable except to the extent the related Option may be transferable. A
Stock Appreciation Right granted in connection with an Incentive Stock Option
will be exercisable only if the Fair Market Value of a Share on the date of
exercise exceeds the exercise price specified in the related Award Agreement.
(ii) Amount Payable. Upon the exercise of a Stock Appreciation
Right related to an Option, the Participant will be entitled to receive an
amount determined by multiplying (A) the excess of the Fair Market Value of a
Share on the date preceding the date of exercise of such
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<PAGE> 11
Stock Appreciation Right over the per Share exercise price under the related
Option, by (B) the number of Shares as to which such Stock Appreciation Right is
being exercised. Notwithstanding the foregoing, the Committee may limit in any
manner the amount payable with respect to any Stock Appreciation Right by
including such limit in the Award Agreement evidencing the Stock Appreciation
Right at the time it is granted.
(iii) Treatment of Related Options and Stock Appreciation
Rights Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in
connection with an Option, the Option will be cancelled to the extent of the
number of Shares as to which the Stock Appreciation Right is exercised, and upon
the exercise of an Option granted in connection with a Stock Appreciation Right,
the Stock Appreciation Right will be cancelled to the extent of the number of
Shares as to which the Option is exercised.
(d) Stock Appreciation Right Unrelated to an Option. The Committee
may grant to Eligible Persons Stock Appreciation Rights unrelated to Options.
Stock Appreciation Rights unrelated to Options will contain such terms and
conditions as to exercisability, vesting and duration as the Committee will
determine. Upon exercise of a Stock Appreciation Right unrelated to an Option,
the Participant's will be entitled to receive an amount determined by
multiplying (A) the excess of the Fair Market Value of a Share on the date
preceding the date of exercise of such Stock Appreciation Right over the Fair
Market Value of a Share on the date the Stock Appreciation Right was granted, by
(B) the number of Shares as to which the Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any Stock Appreciation Right by including
such limit in the Award Agreement evidencing the Stock Appreciation Right at the
time it is granted.
(e) Form of Payment. Payment of the amount determined under this
Section 9 may be made in the discretion of the Committee solely in whole Shares
in a number determined at their Fair Market Value on the date preceding the date
of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If the Committee decides to make full payment in
Shares and the amount payable results in a fractional Share, payment for the
fractional Share will be made in cash.
(f) Change in Control. The Award Agreement will set forth the
provisions applicable in the event of a Change in Control.
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10. Performance Awards.
(a) Performance Objectives. Performance Objectives for Performance
Awards may be expressed in whatever terms the Committee determines, including
(without limitation) (i) earnings per Share, (ii) pre-tax profits, (iii) net
earnings, (iv) return on equity or assets, (v) revenues, (vi) cash flow or (vii)
any combination of the foregoing. Performance Objectives may be in respect of
the performance of the Company and its subsidiaries (which may be on a
consolidated basis), a subsidiary, or a division. Performance Objectives may be
absolute or relative and may be expressed in terms of a progression within a
specified range.
(b) Performance Units.
(i) The Committee, in its discretion, may grant Eligible
Persons Performance Units, the terms of which will be set forth in an Award
Agreement. Performance Units may be denominated in Shares or in a specified
dollar amount. Contingent upon the attainment of specified Performance
Objectives within the Performance Cycle, Performance Units represent the right
to receive payment as follows: (A) in the case of Share-denominated Performance
Units, the Fair Market Value of a Share on the date the Performance Unit was
granted, the date the Performance Unit becomes vested, or any other date
specified by the Committee, (B) in the case of dollar-denominated Performance
Units, the specified dollar amount or (C) a percentage (which may be more than
100%) of the amount described in clause (A) or (B), depending on the level of
Performance Objective attainment; provided, however, that the Committee may at
the time a Performance Unit is granted specify a maximum amount payable in
respect of a vested Performance Unit. Each Award Agreement will specify the
number of Performance Units to which it relates, the Performance Objectives
which must be satisfied in order for the Performance Units to vest, and the
Performance Cycle within which such Performance Objectives must be satisfied;
provided, however, that satisfaction of any applicable Performance Objectives
will be made without regard to any change in accounting standards that may be
required after the Performance Objectives are established.
(ii) Vesting. Performance Units will become vested at such
time or times and on such terms, conditions and satisfaction of Performance
Objectives as the Committee may, in its discretion, determine at the time an
Award is granted.
(iii) Payment of Awards. Payment for vested Performance Units
will be made within 60 days after the last day of the Performance Cycle to which
such Award relates,
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unless the Award Agreement provides for the deferral of payment. Such payments
may be made entirely in Shares valued at their Fair Market Value as of the last
day of the applicable Performance Cycle or such other date specified by the
Committee, entirely in cash, or in such combination of Shares and cash as the
Committee in its discretion will determine at any time prior to such payment.
(c) Performance Shares. The Committee, in its discretion, may grant
Eligible Persons Performance Shares, the terms of which will be set forth in an
Award Agreement between the Company and the Participant. Each Award Agreement
may require that an appropriate legend be placed on Share certificates. Unless
this Award Agreement provides otherwise, Performance Shares will be subject to
the following terms and provisions:
(i) Rights of Participant. At the time an Award is made, the
Committee will provide the time or times at which the actual Shares represented
by such Award will be issued in the name of the Participant; provided, however,
that no Performance Shares will be issued until the Participant has executed an
Agreement evidencing the Award, the appropriate blank stock powers and, in the
discretion of the Committee, an escrow agreement and any other documents which
the Committee may require as a condition to the issuance of such Performance
Shares. At the discretion of the Committee, Shares issued in connection with an
Award of Performance Shares will be deposited, together with the stock powers,
with an escrow agent (which may be the Company) designated by the Committee.
Upon delivery of the Shares to the escrow agent, the Participant will have, in
the discretion of the Committee, all of the rights of a shareholder with respect
to such Shares, including the right to vote the Shares and to receive all
dividends paid with respect to the Shares.
(ii) Lapse of Restrictions. Restrictions upon Performance
Shares awarded hereunder will lapse and such Performance Shares will become
vested at such time or times and on such terms, conditions and satisfaction of
Performance Objectives as the Committee may, in its discretion, determine at the
time an Award is granted.
(d) Effect of Change in Control. The Award Agreement evidencing
Performance Units or Performance Shares will provide for the treatment of such
Awards (or portions thereof) in the event of a Change in Control.
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11. Dividend Equivalent Rights.
Dividend Equivalent Rights may be granted to Eligible Persons in
tandem with another Award or as a separate Award. The terms applicable to each
Dividend Equivalent Right will be specified in an Award Agreement. Amounts
payable in respect of Dividend Equivalent Rights may be payable currently,
deferred until the lapsing of restrictions on such Dividend Equivalent Rights,
or deferred until the vesting, exercise, payment, settlement or other lapse of
restrictions on the Award to which the Dividend Equivalent Rights relate. If the
amount payable in respect of Dividend Equivalent Rights is to be deferred, the
Committee will determine whether such amounts are to be held in cash, reinvested
in Shares or deemed to be reinvested in Shares. If amounts payable in respect of
Dividend Equivalent Rights are to be held in cash, there may be credited at the
end of each year (or portion thereof) interest on the amount of the account at
the beginning of the year at a rate per annum as the Committee, in its
discretion, may determine. Dividend Equivalent Rights may be settled in cash or
Shares or a combination thereof, in a single installment or multiple
installments, as determined by the Committee.
12. Adjustment Upon Change in Capitalization.
In the event of any change in the outstanding Shares of the Company
as a result of a stock split, reverse stock split, stock dividend or
distribution, recapitalization, combination or reclassification, the Committee
will conclusively determine the appropriate adjustments, if any, to be made with
respect to this Plan and any outstanding Awards, including (a) the maximum
number and class of Shares or other stock or securities with respect to which
Awards may be granted under this Plan, (b) the number and class of Shares or
other stock or securities which are subject to outstanding Awards granted under
this Plan and the exercise or purchase price therefor, if applicable, and (c)
the Performance Objectives. Any such adjustments will be made only by the
Committee, and when so made will be effective, conclusive and binding for all
purposes with respect to this Plan and all Awards then outstanding. No such
adjustments will be required by reason of the issuance or sale by the Company
for cash or other consideration of additional Shares or securities convertible
into or exchangeable for Shares.
13. Restrictions on Transfer of Shares.
(a) General. A person who acquires Shares pursuant to the exercise
of an Option or pursuant to any other Award under this Plan (the "Holder") may
not Transfer
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all or any portion of such Shares, whether voluntarily, involuntarily, or by
operation of law, unless: (i) such Transfer complies with all the terms of this
Plan and the applicable Award Agreement, including the right of first refusal
set forth in Section 13(b) below, (ii) each transferee executes such documents
as the Committee may require, agrees to be bound by this Plan and the applicable
Award Agreement, and acknowledges that the status or conduct of the Participant
to whom the Award was originally granted may affect the transferee's rights as a
shareholder (such as when any Shares may be repurchased by the Company); (iii)
each transferee does not, directly or indirectly, promote, participate, or
engage in any activity or business competitive with the Company; and (iv) the
Company is satisfied that such Transfer complies with applicable federal and
state securities laws. Any attempt to Transfer Shares will be void unless the
provisions of this Plan and the applicable Award Agreement are satisfied.
(b) Right of First Refusal.
(i) Applicable Transactions. The right of first refusal
("ROFR") in this Section 13(b) will apply whenever the Holder intends (or is
required by operation of law or otherwise) to sell, pledge or otherwise Transfer
any Shares, except that (A) this Section 13(b) will not apply to transfers by
the Holder (1) by will or under the laws of descent and distribution, or (2) to
one or more Permitted Transferees, and (B) this Section 13(b) will terminate
upon the effective date of the Company's Initial Public Offering.
(ii) Notice. Before making any voluntary transfer of Shares,
the Holder will give written notice to the Company. In the event of a transfer
by operation of law or other involuntary transfer, the transferee promptly will
give written notice to the Company. In either event, such notice (the "ROFR
Notice") must specify: (A) the proposed transferee(s); (B) the number of Shares
to be transferred (the "Applicable Shares"); (C) the consideration to be
received per Share; and (D) all other material terms relating to the proposed
transfer.
(iii) Consideration.
(A) If the proposed transaction is a
transfer of Shares solely for cash, then the Company's option will be to
purchase all or any portion of the Applicable Shares upon the same terms and
conditions set forth in the ROFR Notice.
(B) If the proposed transaction is a transfer of Shares
wholly or partially in exchange for
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property other than cash, the purchase price of such Applicable Shares to the
Company will be an amount in cash equal to the fair market value of such
property proposed to be received in exchange for the Applicable Shares, as
reasonably determined in good faith by the Committee (plus the cash, if any,
included in the consideration for such Applicable Shares).
(C) If the proposed transaction is a
pledge or other hypothecation of the ROFR Shares, or a gift or any other
Transfer not specifically described in Section 13(b)(iii)(A) or (B) above, then
the Company's option will be either: (1) to lend or otherwise Transfer to the
Employee such consideration as described in the ROFR Notice and otherwise to
accept the proposed Transfer of the Applicable Shares upon all the terms and
conditions stated therein; or (2) to purchase for cash all or any portion of the
Applicable Shares, in which case the purchase price will be the Fair Market
Value for the Applicable Shares, as determined by the Committee.
(D) Whenever any determination of value
must be made by the Committee pursuant to this Section 13(b)(iii), the ROFR
Notice will be deemed delayed for all time periods set forth in this Section 13
until such determination has been made.
(iv) Exercise of ROFR.
(A) The Company will have an assignable
option (but not an obligation) to purchase all or any portion of the Applicable
Shares. The Company may exercise this option by notifying the Holder of its
election to purchase all of the Applicable Shares within 30 days after the
receipt of the ROFR Notice.
(B) If the Company elects within such 30
day period to purchase all the Applicable Shares, the Holder will be obligated
to sell, and the Company (or its assignee) will be obligated to purchase, the
Applicable Shares for the consideration specified in Section 13(b)(iii) and
otherwise on the terms set forth in the ROFR Notice. All parties will use their
best efforts to consummate the transaction as promptly as possible.
(v) Non-Exercise of ROFR. The ROFR will not be deemed
exercised unless (i) the Company (or its assignee) elects within the applicable
time period specified above to purchase all of the Applicable Shares and (ii)
such purchase is consummated within 90 days after the Company's receipt of the
ROFR Notice. If the ROFR is not deemed exercised, the Holder may Transfer such
Applicable Shares to the proposed
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<PAGE> 17
transferee(s) for a period of 60 days following the first date on which the ROFR
is not exercisable, provided that the other terms of this Agreement are
satisfied and that such Transfer is not more favorable to the transferee(s) than
the terms offered to the Company.
(c) Market Standoff. In connection with a firm commitment
underwritten public offering of securities of the Company, if requested by the
Company or its principal underwriter, each Holder of any Shares: (i) will not
Transfer any Shares not included in such underwriting during the 120-day period
(or such shorter or longer period as the underwriter may require of the
principal security holders of the issuer) following the effective date of the
registration statement filed with the Securities and Exchange Commission in
connection with such offering; and (ii) will execute such instruments as the
underwriter may reasonably require to evidence compliance with this Section .
(d) Escrow. For purposes of facilitating the enforcement of the
restrictions on Transfer and the rights of repurchase set forth in this Plan or
in any Award Agreement, the Committee may, at its discretion, require any Holder
of Shares to deliver the certificate(s) for such Shares with a stock power
executed by the Holder, in blank, to the Secretary of the Company or his
designee, to hold said certificate(s) and stock power(s) in escrow, and to take
all such actions and to effectuate all such Transfers or repurchases as are in
accordance with the terms of this Plan. The certificates may be held in escrow
so long as the Shares whose ownership they evidence are subject to any Transfer
restriction or right of repurchase under this Plan or under any Award Agreement.
Each Participant, by accepting an Award, acknowledges that the Secretary of the
Company (or his designee) is so appointed as the escrow holder with the
foregoing authorities as a material inducement to the grant of an Award under
the Plan, that the appointment is coupled with an interest, and that it
accordingly will be irrevocable.
14. Company's Repurchase Option Upon Termination of Service.
(a) General. Upon a Termination of Service with respect to any
Participant, the Company will have an assignable option (but not an obligation)
(the "Repurchase Option"), to repurchase all or any portion of the Shares
acquired by the Participant (or any subsequent transferee) pursuant to the
exercise of an Option or pursuant to any other Award under this Plan. The
Company's Repurchase Option will be subject to Section 17(d) below and will
terminate on the Company's Initial Public Offering.
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<PAGE> 18
(b) Repurchase Price. The repurchase price will be the higher of (A)
the Fair Market Value of the Shares being repurchased, as of the Termination
Date, or (B) the purchase price paid to the Company for such Shares.
(c) Payment. The repurchase price may be paid, at the option of the
Company, by any of the following means, or any combination of the following
means: (i) cash; or (ii) cancellation of all or any portion of any outstanding
purchase money indebtedness owed by the Holder to the Company.
(d) Procedures for Exercise of Repurchase Option. The Company may
exercise the Repurchase Option itself or assign the Repurchase Option to one or
more other persons, including the other shareholders of the Company. Within 60
days after the Fair Market Value of the Shares has been determined, the Company
will notify the Holder if it wishes to exercise its Repurchase Option, or if it
has assigned the Repurchase Option to other persons who wish to exercise such
Repurchase Option. Such notice will set a date for the closing of the
transaction not later than 30 days from the date of such notice.
15. Restrictions on Other Activities.
(a) General.
(i) Unless the Award Agreement provides otherwise, any Award
of Options or Restricted Stock will be subject to this Section 15. The Award
Agreement for any Award not involving Options or Restricted Stock will set forth
whether, and to what extent, the provisions of this Section 15 apply to such
Award.
(ii) Subject to Section 15(a)(i) and Section 19(d), if any
Participant breaches any provision set forth in this Section 15, the Company
may, in its discretion, (A) cancel any unexercised, unexpired, unpaid or
deferred portions of any Awards, and (B) subject to Section 17(d) below,
repurchase any Shares that were acquired by the Participant (or any subsequent
transferee) pursuant to the exercise of an Option or pursuant to the grant of
Restricted Stock, with the repurchase price for such Shares being an amount
equal to the price paid to the Company for such Shares. In addition, subject to
Section 17(d) below, the Company will have an assignable option (but not an
obligation) to repurchase any other Shares held by the Participant (or any
subsequent transferee), with the purchase price for such Shares being their Fair
Market Value. Any payments for such repurchase will be upon the same terms set
forth in Section 14(c), and any such repurchase will be
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<PAGE> 19
exercised pursuant to the procedures set forth in Section 14(d) above.
(b) Noncompetition. During the Restrictive Period, the Participant
will not carry on or engage as an Interested Party in any business within the
Territory that competes, directly or indirectly, with the Business of the
Company.
(c) Assistance to Acquiror. During the Restrictive Period, the
Participant will not become associated with (whether through an investment of
capital or otherwise), provide services to, or otherwise solicit, aid, assist or
cooperate with any person, group or entity (an "Acquiror") in any effort to
effect a Change in Control transaction with respect to the Company. Nothing in
this Section 15(c) will be construed to preclude such Participant from owning
less than 1% of the outstanding common stock of an Acquiror if the Acquiror's
stock is publicly traded and the Participant acquires such stock in the open
market.
(d) Solicitation of Customers. During the Restrictive Period, the
Participant will not engage in any unfair competition with the Company. During
the Restrictive Period, the Employee will not, without the prior written consent
of the Company, directly or indirectly disclose to any person, the names or
addresses of any of the Company's customers, clients and other business
associates or any other information pertaining to them, or call on, solicit or
take away any of the Company's customers, clients or other business associates,
either for the Participant or for any other person.
(e) Solicitation of Employees and Others. During the Restrictive
Period, the Participant will not, without the prior written consent of the
Company, directly or indirectly seek to persuade any director, officer or
employee of the Company to discontinue his or her position with such entity or
to become employed or engaged in any activity competitive with the Business of
the Company.
(f) Confidential Information.
(i) The Participant will use the Company's Confidential
information exclusively for the benefit of the Company, and for no other purpose
whatsoever. The Participant will not disclose any Confidential Information to
any person unless: (A) such disclosure is in connection with his employment with
the Company; (B) the Participant first obtains the prior written consent of the
Company; or (C) the Participant is required by law to disclose such Confidential
Information.
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<PAGE> 20
(ii) If the Participant or any of his agents are requested or
required by oral questions, interrogatories, depositions, requests for
information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process to disclose any part of the Confidential
Information, the Participant will immediately notify the Company in writing of
the existence, terms and circumstances surrounding such a request or requirement
so that the Company may take such steps as it deems necessary or appropriate to
protect the confidentiality of the Confidential Information. If, in the written
opinion of the Participant's counsel, disclosure of any Confidential Information
by the Participant or any of his agents is nonetheless legally required, the
Participant or his agents may disclose to such tribunal only that portion of the
Confidential Information which such counsel advises is legally required to be
disclosed. The Participant will exercise his or her best efforts to preserve the
confidentiality of the Confidential Information, including without limitation,
cooperating with the Company to obtain an appropriate protective order or other
reliable assurance that confidential treatment will be accorded to the
Confidential Information by such tribunal and the parties before it.
(g) Adverse Actions. During the Restrictive Period, the Participant
will not take any action or omit to take any action that the Participant knows
or reasonably should know is likely to adversely affect the Company in a
material manner.
16. Withholding Taxes.
(a) General. When a Participant recognizes taxable income in
connection with any Award (a "Taxable Event"), the Participant will pay to the
Company an amount equal to the federal, state and local income taxes and other
amounts as may be required by law to be withheld by the Company in connection
with the Taxable Event (the "Withholding Taxes") prior to the issuance, or
release from escrow, of Shares or the payment of cash. The Company will have the
right to deduct from any payment of cash to a Participant an amount equal to the
Withholding Taxes.
(b) Tax Election. A Participant may make a written election (the
"Tax Election"), which may be accepted or rejected in the discretion of the
Committee, to have withheld a portion of the Shares then issuable to the
Participant having an aggregate Fair Market Value, on the date preceding the
date of such issuance, equal to the Withholding Taxes. The Committee may, by the
adoption of rules or otherwise, impose such restrictions or limitations on Tax
Elections as it considers appropriate, including
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<PAGE> 21
restrictions required to comply with Section 16(b) of the Exchange Act.
17. Limitation of Rights.
(a) Employment Rights. Neither this Plan nor any Award granted under
this Plan will give any individual a right to remain employed by the Company.
The Company reserves the right to terminate the employment of any employee at
any time, with or without Cause.
(b) Shareholder Rights. A Participant will have no dividend rights,
voting rights or other rights as a shareholder with respect to any Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Shares.
(c) Creditor Rights; Unfunded Plan. Insofar as it provides for
Awards of Shares or cash, this Plan will be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
Shares, cash, or rights thereto under the Plan, any such accounts will be used
merely as a bookkeeping convenience. The Company will not be required to
segregate any assets that may at any time be represented by Shares, cash, or
rights thereto, nor will the Company, the Board or the Committee be deemed to be
a trustee of any Shares, cash, or rights thereto to be granted under the Plan.
Any liability of the Company to any Participant with respect to a grant of
Shares, cash, or rights thereto under the Plan will be based solely upon any
contractual obligation that may be created by the Plan and any Award Agreement;
no such obligation of the Company will be deemed to be secured by any pledge or
other encumbrance on any property of the Company.
(d) Restricted Payments. Notwithstanding any other provision of this
Plan, the Company will not purchase, redeem or otherwise acquire or make
payments with respect to Shares or Options if and to the extent such payments
are restricted by (i) the Indenture dated as of November 21, 1995 among the
Company, its Affiliates and IBJ Schroeder Bank & Trust Company, as trustee, (ii)
the Revolving Credit Agreement dated as of November 21, 1995 among the Company,
its Affiliates and First National Bank of Boston, (iii) other credit agreements
the Company may enter into in the future, or (iv) applicable law, including but
not limited to Section 500 et seq. of the California Corporations Code.
(e) Government Regulations. Any other provision of this Plan
notwithstanding, the obligations of the Company with respect to Shares to be
issued pursuant to the Plan will be subject to all applicable laws, rules and
regulations, and
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<PAGE> 22
such approvals as may be required by any governmental agencies. The Company
reserves the right to restrict, in whole or in part, the delivery of Shares
pursuant to any Award until such time as any legal requirements or regulations
have been satisfied relating to the issuance of such Shares, including their
registration, qualification or exemption from registration or qualification
under the Securities Act or any applicable state securities laws.
(f) Pooling Transaction. Notwithstanding any other provision of this
Plan, in the event of a Change in Control which is also intended to constitute a
pooling transaction for accounting purposes, the Participant and Committee will
negotiate in good faith such changes that are deemed reasonably necessary by the
Company's accountants to assure that the transaction qualifies as a pooling
transaction.
18. Non-Exclusivity of Plan.
The adoption of this Plan will not be construed as amending,
modifying or rescinding any previously approved incentive arrangement or as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either applicable generally or only in specific cases.
19. Duration and Amendment of Plan; California Law.
(a) Term of the Plan. The Plan will become effective on the date it
is adopted by the Board, provided that this Plan is approved by the shareholders
of the Company (excluding any Shares issued by the Company pursuant to an Award
granted under this Plan) within 12 months before or after the date of adoption
by the Board. If this Plan is not approved by the shareholders of the Company
within that 12 month period of time, any Awards granted under this Plan will be
rescinded and will be void. This Plan will remain in effect until the tenth
anniversary of the date of adoption by the Board or its approval by the
shareholders of the Company, whichever is earlier, unless it is terminated
earlier pursuant to Section 19(b).
(b) Amendment or Termination. The Committee may, at any time and for
any reason, amend or terminate this Plan; provided, however, that (i) any
amendment of this Plan will be subject to the approval of the Company's
shareholders to the extent required by applicable laws, regulations or rules;
(ii) no amendment or termination of this Plan may adversely affect the rights of
Participants under Awards that were
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<PAGE> 23
granted before such amendment or termination; and (iii) any amendment of this
Plan that would (A) increase the number of Available Shares as set forth in
Section 4, (B) modify the requirement set forth in Section 5(a) that members of
the Committee may not be employees of the Company or (C) modify any provisions
hereof expressly restricting the term of any Award hereunder, will, in the case
of clauses (A), (B) and (C) above, be subject to the approval of the outstanding
shares of the Company (as such term is defined in Section 152 of the California
General Corporation Law).
(c) Public Company. In connection with an Initial Public Offering,
the Committee may amend this Plan to comply with the requirements of Section
162(m) of the Code and Rule 16b-3 under the Exchange Act.
(d) Compliance with California Law. The terms and provisions of this
Plan, grants of Awards hereunder and all Award Agreements executed and delivered
in connection with such grants are intended to be in compliance with all
applicable provisions of the California Corporate Securities Law of 1968 (the
"Securities Law") and the California Regulations, as such laws and regulations
are in effect from time to time. In particular, to the extent applicable, the
terms and provisions of all Awards are intended to be in compliance with Section
25102(o) of the Securities Law (or any similar successor provision).
20. Information Provided by Company. Prior to the Company's Initial Public
Offering, the Company annually will make available to each Participant the
Company's financial statements (which statements need not be audited), and each
Optionholder will, by virtue of entering into an Award Agreement, be deemed to
have agreed (and to cause the agents and advisers to whom such Optionholder
proposes to make such information available to agree) to keep such information
confidential and not to use such information for any purpose whatsoever other
than determining whether to exercise an Option.
21. Miscellaneous.
(a) Notice. Any notice to the Company required by any provision of
this Plan will be addressed to the Secretary of the Company in writing, and will
become effective when it is received by such person.
(b) Severability. If any provision of this Plan is deemed invalid,
illegal, unenforceable or not in compliance with the Securities Law or the
California Regulations, such provision will be deemed amended to the extent
necessary to conform to applicable law so as to be
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<PAGE> 24
valid, legal and enforceable and to provide the Company with the exemption set
forth in Section 25102(o) of the Securities Law; if such provision cannot be
amended as provided above, it will be stricken and the remainder of this Plan
will remain in full force and effect.
(c) Governing Law. This Plan and all determinations made and actions
taken pursuant to this Plan, to the extent not otherwise governed by the laws of
the United States, will be governed by the laws of the State of California and
will be construed accordingly.
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<PAGE> 25
NORCAL WASTE SYSTEMS, INC.
1996 EXECUTIVE STOCK INCENTIVE PLAN
Exhibit A
Definitions
For purposes of this Plan, the following terms are defined as
follows:
"Adjusted Fair Market Value" means, in the event of a Change in
Control, the greater of (a) the highest price per Share paid to holders of the
Shares in any transaction (or series of transactions) constituting or resulting
in a Change in Control, or (b) the highest Fair Market Value of a Share during
the 90 day period ending on the date of a Change in Control.
"Affiliate" means any corporation or other entity (including, but
not limited to, partnerships and joint ventures) controlling, controlled by or
under common control with the Company.
"Available Shares" has the meaning set forth in Section 4.
"Award" means the grant of any equity-based compensation to Eligible
Persons pursuant to this Plan, which includes but is not limited to an Option,
Restricted Stock, a Stock Appreciation Right, a Performance Award or a Dividend
Equivalent Right.
"Award Agreement" means the written agreement between the Company
and a Participant evidencing the grant of an Award and setting forth the terms
of such Award.
"Board" means the Board of Directors of the Company.
"Business" means (a) any aspect of the waste management business,
including refuse collecting, recycling and other waste diversion, transfer
station and hauling operations, or operation of landfills, or (b) any other
business then conducted by the Company during the applicable Restrictive Period,
or, if substantial time or resources have been devoted to a proposed business,
as proposed to be conducted by the Company at such time.
"California Regulations" means rules and regulations adopted by the
California Corporation
A-1
<PAGE> 26
Commissioner set forth in Title 10 of the California Code of Regulations,
including Sections 260.140.41, .42, .45 and .46 thereof.
"Cause" means termination of a Participant's employment with, or
service to, the Company for any one or more of the following reasons: (a)
willful misconduct which adversely affects the Company in a material manner; (b)
willful and material failure to perform reasonably assigned duties after written
notice from the Board; (c) conviction of a felony; or (d) breach of any material
provision of the Award Agreement.
A "Change in Control" means the consummation of:
(i) A merger, consolidation or reorganization involving the
Company, unless such merger, consolidation or reorganization is a "Non-Control
Transaction." A "Non-Control Transaction" means a merger, consolidation or
reorganization of the Company where:
(A) the shareholders of the Company, immediately before
such merger, consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or reorganization, at least 75%
of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation or
reorganization; and
(B) the individuals who were members of the Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least two-thirds of the members of
the board of directors of the Surviving Corporation, or a corporation
beneficially directly or indirectly owning a majority of the Voting Securities
of the Surviving Corporation; or
(ii) The sale or other disposition of all or substantially all
of the assets of the Company to any Person (other than a transfer to a
Subsidiary in which the Company retains at least 80% of the voting securities
and the value of ownership interests in such Subsidiary).
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a committee, as described in Section 5(a),
appointed by the Board to administer this Plan and to perform the functions set
forth in this Plan.
A-2
<PAGE> 27
"Company" means Norcal Waste Systems, Inc. ("Norcal"), and its
subsidiaries, including subsidiaries of subsidiaries and partnerships and other
business ventures in which Norcal has a significant equity interest, as
determined in the sole discretion of the Committee.
"Confidential Information" means all information belonging to the
Company, its customers, clients or business associates, which information is
protectible as a trade secret under California law, and which may include
without limitation, business, marketing, distribution and purchasing plans,
techniques and strategies; financial statements, budgets, projections, prices,
and costs; customer lists; and know-how, formulae, discoveries, and inventions.
"Disability" means that the Company has determined, based on
competent medical evidence, that a Participant has become incapable, mentally or
physically, of substantially performing his services and substantially
discharging his duties to the Company for a period which has lasted, or can
reasonably be expected to last, for at least six months.
"Dividend Equivalent Right" means a right to receive all or some
portion of the cash dividends that are or would be payable with respect to
Shares.
"Eligible Person" means a person eligible to receive an Award
pursuant to Section 3 of this Plan.
"ESOP" means the Norcal Waste Systems, Inc. Employee Stock Ownership
Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to the Shares and as of the
date that is relevant to such determination, the price per Share determined by
the Committee pursuant to the following standards: (a) if the Shares are traded
on a stock exchange on the date in question, then the Fair Market Value will be
equal to the closing price reported by the applicable composite-transactions
report for such date; (b) if the Shares are traded over-the-counter on the date
in question and are classified as a national market issue, then the Fair Market
Value will be equal to the last-transaction price quoted by the Nasdaq system
for such date; (c) if the Shares are traded over-the-counter on the date in
question but are not classified as a national market issue, then the Fair Market
Value will be equal to the mean between the last reported representative bid and
asked prices quoted by the Nasdaq system for such date; and (d) if none of the
foregoing
A-3
<PAGE> 28
provisions is applicable, then the Fair Market Value will be the value
established by the Committee in good faith, which value may be (i) the most
recent per-Share valuation obtained by the ESOP from third-party consultants in
connection with the ESOP's annual allocation of Shares, or (ii) a more recent
per-Share valuation obtained by the Committee, at its discretion, from an
independent valuation expert.
"Holder" means a person who acquires Shares pursuant to the exercise
of an Option or pursuant to any other Award.
"Incentive Stock Option" means an Option satisfying the requirements
of Section 422 of the Code and designated by the Committee as an Incentive Stock
Option.
"Initial Public Offering" means the consummation of the first
underwritten public offering of Shares pursuant to a registration statement
(other than on Form S-8 or successor forms) filed with, and declared effective
by, the Securities and Exchange Commission.
"Interested Party" means an owner, shareholder (other than of less
than 1% of the outstanding shares of any publicly-held class of stock), partner,
creditor, director, officer, agent, manager, operator, salesman, employee or any
other participant in any capacity that calls for the rendering of personal
services, advice or acts of management, operation or control.
"Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
"Option" means a Nonqualified Stock Option or an Incentive Stock
Option granted pursuant to Section 7.
"Optionholder" means a person holding an Option, who may be either
the Participant to whom the Option was initially granted or any subsequent
transferee permitted under this Plan.
"Participant" means a person to whom an Award has been granted
pursuant to this Plan.
"Performance Awards" means Performance Units, Performance Shares or
either or both of them.
"Performance Cycle" means the time period specified by the Committee
at the time Performance Awards are granted during which the performance of the
Company, a subsidiary or a division will be measured.
A-4
<PAGE> 29
"Performance Objectives" has the meaning set forth in Section 10.
"Performance Shares" means Shares issued or transferred to a
Participant under Section 10.
"Performance Unit" means Performance Units granted to a Participant
under Section 10.
"Permitted Transferee" means a Participant's ancestors, descendants
or spouse (other than pursuant to a decree of divorce, dissolution or separate
maintenance, a property settlement, or a separation agreement or any similar
agreement or arrangement with a spouse which is not for bona fide estate
planning purposes), or a trust, partnership, custodianship or other fiduciary
account primarily for the benefit of the Participant and/or such ancestors,
descendants or spouse.
"Plan" means this Norcal Waste Systems, Inc. 1996 Executive Stock
Incentive Plan, as it may be amended from time to time.
"Restricted Stock" means Shares issued to a Participant pursuant to
Section 8.
"Restrictive Period" means (a) the period the Participant is
employed by, or providing services to, the Company; and (b) the period beginning
on the Termination Date and continuing until the earlier of (i) three years
after such date, or (ii) such time as neither the Company nor any person
acquiring the goodwill or the stock of the Company carries on a substantially
similar Business within the Territory.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the common stock, par value $.01 per share, of the
Company.
"Stock Appreciation Right" means a right to receive all or some
portion of the increase in the value of the Shares, as provided in Section 9.
"Termination Date" means the date on which a Termination of Service
occurs.
"Termination of Service" means a Participant ceases to be an
Eligible Person, such as when an employee's employment is terminated for any
reason.
A-5
<PAGE> 30
"Territory" means, at any particular time, each and every city and
county within California or any other state where the Company is carrying on or
proposes to carry on its Business.
"Transfer" includes, without limitation, a voluntary or involuntary
sale, assignment, transfer, conveyance, pledge, hypothecation, encumbrance, or
other disposition of Awards or Shares.
A-6
<PAGE> 1
EXHIBIT 10.25
NORCAL WASTE SYSTEMS, INC.
1996 EXECUTIVE STOCK INCENTIVE PLAN, AS AMENDED
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Purpose. 1
2. Definitions. 1
3. Eligibility 1
4. Stock Available for Plan. 1
5. Administration. 2
6. Awards 3
7. Options. 4
8. Restricted Stock. 7
9. Stock Appreciation Rights. 8
10. Performance Awards. 10
11. Dividend Equivalent Rights. 12
12. Adjustment Upon Change in Capitalization. 13
13. Restrictions on Transfer of Shares 13
14. Company's Repurchase Option Upon Termination
of Service 16
15. Restrictions on Other Activities 17
16. Withholding Taxes 19
17. Limitation of Rights 19
18. Non-Exclusivity of Plan 21
19. Duration and Amendment of Plan 21
20. Miscellaneous 21
Exhibit A: Definitions A-1
</TABLE>
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<PAGE> 3
NORCAL WASTE SYSTEMS, INC.
1996 EXECUTIVE STOCK INCENTIVE PLAN, AS AMENDED
1. Purpose.
The purpose of this Plan is (a) to enable the Company to
attract and retain executive officers and other selected Participants who are
important to the Company, and (b) to provide such persons with additional
incentive to advance the interests of the Company. Pursuant to this Plan, the
Committee will grant Awards which provide the Participants with a proprietary
interest in the long-term growth and performance of the Company. These Awards
may include Incentive Stock Options, Nonqualified Stock Options, Restricted
Stock, Stock Appreciation Rights, Performance Awards and Dividend Equivalent
Rights.
2. Definitions.
Capitalized terms not otherwise defined in this Plan will have
the meanings set forth in Exhibit A to this Plan.
3. Eligibility.
Awards will be granted only to persons who are officers,
employees or directors of the Company or any of its Affiliates, but will not be
granted to any person who does not satisfy the requirements of Section
25102(f)(2) of the California Corporate Securities Law of 1968 or similar
provisions of securities laws of other applicable states.
4. Stock Available for Plan.
The maximum number of Shares available for Awards under this
Plan (the "Available Shares") is 2,887,500 subject to the following adjustments:
(a) When any Award (other than a Performance Unit denominated
in dollars) is granted, the Available Shares will be reduced by the number of
Shares set forth in such Award.
(b) When any portion of an Award (other than a Performance
Unit denominated in dollars) expires, is cancelled or is otherwise terminated
for any reason, the Available Shares will be increased by the Shares allocable
to the expired, cancelled or otherwise terminated portion of the Award.
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<PAGE> 4
(c) If the Company ever repurchases Shares pursuant to this
Plan, the Available Shares will be increased by the number of such repurchased
Shares.
(d) Upon a change in capitalization, the number of Available
Shares will be adjusted in number and kind pursuant to Section 12.
5. Administration.
(a) Committee Membership. This Plan will be administered by
the Committee, which will consist of two or more members of the Board. The
members of the Committee (i) will be appointed by the Board and (ii) may not be
employees of the Company. If no Committee has been appointed, the entire Board
will constitute the Committee.
(b) Committee Procedures. The Board will designate one of the
members of the Committee as chairperson. The Committee may hold meetings at such
times and places as it will determine. The acts of a majority of the Committee
members present at meetings at which a quorum exists, or acts approved in
writing by all Committee members, will be valid acts of the Committee.
(c) Committee Responsibilities. Subject to the provisions of
this Plan, the Committee will have full authority and discretion to take the
following actions:
(i) To determine when Awards are to be granted under
this Plan;
(ii) To select the Participants for each Award;
(iii) To determine the terms and conditions of each
Award;
(iv) To authorize any person to execute, on behalf of
the Company, any Award Agreement or other instrument required to carry out the
purposes of this Plan;
(v) To adopt, amend, waive or rescind rules,
procedures and restrictions relating to this Plan or to any Award;
(vi) To interpret this Plan and to apply its
provisions;
(vii) To determine whether a leave of absence will be
granted to a Participant without constituting a
-2-
<PAGE> 5
termination of employment or service for purposes of the Plan;
(viii) To cause the Company to loan Participants
funds for any purpose related to this Plan, including to purchase any Shares or
to pay any taxes due with respect to any Award (with such loans to be granted
within the absolute discretion of the Committee and upon such terms as the
Committee may determine); and
(ix) To take any other action it deems necessary or
advisable for the implementation and administration of this Plan.
(d) Discretion. The presence in this Plan of specific
instances where the Committee has express discretion to make determinations with
respect to this Plan or to any Award (such as the discretion to extend the term
of an Option pursuant to Section 7(e)(v) below) does not imply that the
Committee does not have discretion to make other determinations not expressly
set forth in this Plan.
(e) Finality. All decisions, interpretations and other actions
of the Committee will be final and binding on all persons.
6. Awards.
(a) General. The Committee will determine the type or types of
Award(s) to be made to each Participant. Awards may include but are not limited
to Options (which may be either Incentive Stock Options or Nonqualified Stock
Options), Restricted Stock, Stock Appreciation Rights, Performance Awards (which
may be either Performance Shares or Performance Units), or Dividend Equivalent
Rights; these Awards are further described in Sections 7 to 11, respectively.
Awards may be granted singly, in combination or in tandem. Awards may also be
made in combination or in tandem with, in replacement of, or as alternatives to,
grants or rights under any other employee plan of the Company, including the
plan of any entity acquired by the Company.
(b) Award Agreement. The terms of any Award will be set forth
in an Award Agreement. No Award will be effective until such Award Agreement is
executed and delivered by the Company and the Participant. The terms set forth
in this Plan will apply to any Award, except to the extent such terms are
expressly modified or deleted in such Award Agreement. The Award Agreement may
also contain other terms and restrictions not set forth in this Plan. If there
is any inconsistency between the terms of this Plan and the
-3-
<PAGE> 6
terms of the Award Agreement, the terms of the Award Agreement will control.
7. Options.
(a) General. Subject to the provisions of this Plan, the
Committee will have full and final authority to grant Eligible Persons Options,
to determine whether such Options will be Incentive Stock Options or
Nonqualified Stock Options, and to determine all the terms applicable to such
Options. These terms will be set forth in an Award Agreement and will include
the following: (i) whether such Option is an Incentive Stock Option or
Nonqualified Stock Option; (ii) the number of Shares that may be purchased
pursuant to such Option; (iii) the vesting provisions for such Option; (iv) the
exercise price (or any formula for determining the exercise price); (v) the term
of such Option; and (vi) such other terms as the Committee determines.
(b) Incentive Stock Options. If the Committee grants an
Incentive Stock Option, such Option must comply with the requirements of Section
422 of the Code as in effect on the date of the grant. The Committee may amend
this Plan if it considers such amendment to be necessary or desirable to comply
with such requirements.
(c) Vesting. Each Option will become exercisable ("vest") in
such installments (which need not be equal) and at such times as may be
designated by the Committee and set forth in the Award Agreement. To the extent
not exercised, installments will accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires, as set forth in Section 7(e) below. Upon a Participant's
Termination of Service for any reason, the Option granted to such Participant
will cease to vest after such Termination Date (unless otherwise determined by
the Committee), and the Optionholder must exercise the vested portion of such
Option within the time periods set forth in Section 7(e) below. The Committee
may accelerate the exercisability of any Option or portion thereof at any time
for any reason.
(d) Exercise Price. The exercise price for Shares under each
Option will be determined by the Committee and set forth in the Award Agreement;
provided, however, that the exercise price for Shares must be at least 85% of
the Fair Market Value of the Shares as of the date such Option is granted,
unless the recipient of the Option is the owner of more than 10% of the total
combined voting power of all classes of stock of the Company, in which case the
exercise price must be at least 110% of such Fair Market Value.
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(e) Exercise Period. Options will be for such term as the
Committee will determine; provided, however, that the term of an Option may not
be greater than ten year from the date of grant of such Option. Unless the Award
Agreement provides otherwise, an Option's term will expire as follows:
(i) No Option will be exercisable more than ten
years after the date it is granted.
(ii) Upon a Participant's Termination of Service
for any reason other than Cause, Disability or death, the Optionholder may, for
a period of three months after such Termination Date, exercise the Option to the
extent, and only to the extent, that such Option was exercisable as of the
Termination Date, after which time the Option will automatically expire.
(iii) Upon a Participant's Termination of Service
for Cause, the Option granted to the Participant will immediately expire, and no
rights thereunder may be exercised.
(iv) Upon a Participant's Termination of Service
because of the Participant's Disability or death, the Optionholder may, for a
period of one year after such Termination Date, exercise the Option to the
extent, and only to the extent, that such Option was exercisable as of the
Termination Date, after which time the Option will automatically expire.
(v) The Committee may, subsequent to the granting
of any Option, extend the term thereof.
(f) Method of Exercise.
(i) The exercise of an Option will be made only by
a written notice delivered in person or by mail to the Secretary of the Company
at the Company's principal executive office, specifying the number of Shares to
be purchased and accompanied by payment therefor and otherwise in accordance
with the Award Agreement.
(ii) The exercise price for any Shares purchased
pursuant to the exercise of an Option will be paid in full in cash upon such
exercise, unless otherwise provided in the Award Agreement or unless otherwise
determined by the Committee. The Committee will have discretion to determine at
the time of grant of each Option or at any later date (up to and including the
date of exercise) that the form of payment acceptable in respect of the exercise
of such Option may consist of any of the following (or any combination thereof):
(A) cash, (B) promissory note (upon terms
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determined by the Committee), or (C) the transfer of Shares to the Company (upon
terms determined by the Committee). Any Shares transferred to the Company as
payment of the purchase price under an Option will be valued at their Fair
Market Value on the day preceding the date of exercise of such Option.
Notwithstanding anything herein to the contrary, a promissory note will not be
an acceptable form of payment in respect of the exercise of an Option from and
after the Initial Public Offering.
(iii) Options may also be exercised through a
registered broker-dealer pursuant to such cashless exercise procedures that may,
from time to time, be deemed acceptable by the Committee.
(iv) No fractional Shares (or cash in lieu thereof)
will be issued upon exercise of an Option, and the number of Shares that may be
purchased upon exercise will be rounded to the nearest number of whole Shares.
(g) Transferability of Options. An Optionholder may not
Transfer any Option except as follows:
(i) By will or under the laws of descent and
distribution; or
(ii) To one or more Permitted Transferees, provided
that (A) each such transferee executes such documents as the Committee may
require, agrees to be bound by this Plan and the Award Agreement, and
acknowledges that the status or conduct of the Participant to whom the Option
was granted may affect the transferee's rights under the Option (such as when
the Option ceases to vest or when any Shares may be repurchased by the Company),
and (B) the Company is satisfied that such Transfer complies with applicable
federal and state securities laws.
(h) Rights of Optionholder. No Optionholder will be deemed for
any purpose to be the owner of any Shares subject to any Option unless and until
(i) the Option will have been exercised pursuant to the terms of this Plan and
the Award Agreement, and (ii) the Company will have issued and delivered Shares
to the Optionholder. At that time, the Optionholder will have full voting,
dividend, and other ownership rights with respect to such Shares, subject to
such terms and conditions as may be set forth in this Plan and the Award
Agreement.
(i) Change in Control. Unless otherwise provided in the Award
Agreement, in the event of a Change in Control, the following terms will apply:
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(i) All Options outstanding on the date of such
Change in Control will become immediately and fully exercisable.
(ii) Subject to Section 17(d) below, an Optionholder
will be permitted to surrender for cancellation within 60 days after such Change
in Control any Option to the extent not yet exercised, and the Optionholder will
be entitled to receive a cash payment in an amount equal to the excess, if any,
of (A)(1) in the case of a Nonqualified Stock Option, the greater of (x) the
Fair Market Value, on the date preceding the date of surrender, of the Shares
subject to the Option or portion thereof surrendered (the "Surrendered Shares")
or (y) the Adjusted Fair Market Value of the Surrendered Shares or (2) in the
case of an Incentive Stock Option, the Fair Market Value, on the date preceding
the date of surrender, of the Surrendered Shares, over (B) the aggregate
exercise price for such Surrendered Shares; provided, however, that in the case
of an Option granted within six months prior to the Change in Control to any
Optionholder who may be subject to liability under Section 16(b) of the Exchange
Act, such Optionholder will be entitled to surrender for cancellation his Option
during the 60 day period beginning upon the expiration of six months from the
date of grant of any such Option.
8. Restricted Stock.
(a) Grant. The Committee may grant Eligible Persons Restricted
Stock. Each Award Agreement will contain such terms as the Committee may, in its
discretion, determine, including terms relating to the lapse of any
restrictions. Unless the Award Agreement provides otherwise, Restricted Stock
will be subject to the terms set forth in this Section 8.
(b) Rights of Participant. Shares of Restricted Stock will be
issued in the name of the Participant as soon as reasonably practicable after
the Award is granted, provided that the Participant has executed an Award
Agreement, the appropriate blank stock powers and, in the discretion of the
Committee, an escrow agreement and any other documents which the Committee may
require as a condition to the issuance of such Shares. At the discretion of the
Committee, Shares issued in connection with a Restricted Stock Award will be
deposited together with the stock powers with an escrow agent (which may be the
Company) designated by the Committee. Unless the Committee determines otherwise,
upon delivery of the Shares to the escrow agent, the Participant will have all
of the rights of a shareholder with respect to such Shares, including the right
to vote the
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Shares and to receive all dividends paid with respect to the Shares.
(c) Change in Control. Unless otherwise provided in the Award
Agreement, the restrictions upon Shares of Restricted Stock will lapse upon a
Change in Control. The Award Agreement will set forth any such provisions.
(d) Treatment of Dividends. At the time Restricted Stock is
granted, the Committee may, in its discretion, determine that the payment to the
Participant of dividends, or a specified portion thereof, declared or paid on
such Shares by the Company will be (i) deferred until the lapsing of the
restrictions imposed upon such Shares and (ii) held by the Company for the
account of the Participant until such time. If dividends are to be deferred, the
Committee will determine whether such dividends are to be reinvested in shares
of Stock (which will be held as additional Shares of Restricted Stock) or held
in cash. If deferred dividends are to be held in cash, there may be credited at
the end of each year (or portion thereof) interest on the amount of the account
at the beginning of the year at a rate per annum as the Committee, in its
discretion, may determine.
9. Stock Appreciation Rights.
(a) General. The Committee may in its discretion, either alone
or in connection with the grant of an Option, grant Eligible Persons Stock
Appreciation Rights in accordance with this Plan, the terms of which will be set
forth in an Award Agreement. If granted in connection with an Option, a Stock
Appreciation Right will cover the same Shares covered by the Option (or such
lesser number of Shares as the Committee may determine) and will, except as
provided in this Section 9, be subject to the same terms as the related Option.
(b) Time of Grant. A Stock Appreciation Right may be granted
(i) at any time if unrelated to an Option, or (ii) if related to an Option,
either at the time of grant, or at any time thereafter during the term of the
Option.
(c) Stock Appreciation Right Related to an Option.
(i) Exercise. A Stock Appreciation Right
granted in connection with an Option will be exercisable at such time or times
and only to the extent that the related Options are exercisable, and will not be
transferable except to the extent the related Option may be transferable. A
Stock Appreciation Right granted in connection with an Incentive Stock Option
will be exercisable only if the Fair
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Market Value of a Share on the date of exercise exceeds the exercise price
specified in the related Award Agreement.
(ii) Amount Payable. Upon the exercise of a
Stock Appreciation Right related to an Option, the Participant will be entitled
to receive an amount determined by multiplying (A) the excess of the Fair Market
Value of a Share on the date preceding the date of exercise of such Stock
Appreciation Right over the per Share exercise price under the related Option,
by (B) the number of Shares as to which such Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any Stock Appreciation Right by including
such limit in the Award Agreement evidencing the Stock Appreciation Right at the
time it is granted.
(iii) Treatment of Related Options and Stock
Appreciation Rights Upon Exercise. Upon the exercise of a Stock Appreciation
Right granted in connection with an Option, the Option will be cancelled to the
extent of the number of Shares as to which the Stock Appreciation Right is
exercised, and upon the exercise of an Option granted in connection with a Stock
Appreciation Right, the Stock Appreciation Right will be cancelled to the extent
of the number of Shares as to which the Option is exercised.
(d) Stock Appreciation Right Unrelated to an Option. The
Committee may grant to Eligible Persons Stock Appreciation Rights unrelated to
Options. Stock Appreciation Rights unrelated to Options will contain such terms
and conditions as to exercisability, vesting and duration as the Committee will
determine. Upon exercise of a Stock Appreciation Right unrelated to an Option,
the Participant's will be entitled to receive an amount determined by
multiplying (A) the excess of the Fair Market Value of a Share on the date
preceding the date of exercise of such Stock Appreciation Right over the Fair
Market Value of a Share on the date the Stock Appreciation Right was granted, by
(B) the number of Shares as to which the Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit in any manner
the amount payable with respect to any Stock Appreciation Right by including
such limit in the Award Agreement evidencing the Stock Appreciation Right at the
time it is granted.
(e) Form of Payment. Payment of the amount determined under
this Section 9 may be made in the discretion of the Committee solely in whole
Shares in a number determined at their Fair Market Value on the date preceding
the date of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If
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the Committee decides to make full payment in Shares and the amount payable
results in a fractional Share, payment for the fractional Share will be made in
cash.
(f) Change in Control. Unless otherwise provided in the Award
Agreement, in the event of a Change in Control, (i) all Stock Appreciation
Rights will become immediately and fully exercisable and (ii) the other terms
set forth in Section 7(i) with respect to Options will also apply to Stock
Appreciation Rights.
10. Performance Awards.
(a) Performance Objectives. Performance Objectives for
Performance Awards may be expressed in whatever terms the Committee determines,
including (without limitation) (i) earnings per Share, (ii) pre-tax profits,
(iii) net earnings, (iv) return on equity or assets, (v) revenues, (vi) cash
flow or (vii) any combination of the foregoing. Performance Objectives may be in
respect of the performance of the Company and its subsidiaries (which may be on
a consolidated basis), a subsidiary, or a division. Performance Objectives may
be absolute or relative and may be expressed in terms of a progression within a
specified range.
(b) Performance Units.
(i) The Committee, in its discretion, may grant
Eligible Persons Performance Units, the terms of which will be set forth in an
Award Agreement. Performance Units may be denominated in Shares or in a
specified dollar amount. Contingent upon the attainment of specified Performance
Objectives within the Performance Cycle, Performance Units represent the right
to receive payment as follows: (A) in the case of Share-denominated Performance
Units, the Fair Market Value of a Share on the date the Performance Unit was
granted, the date the Performance Unit becomes vested, or any other date
specified by the Committee, (B) in the case of dollar-denominated Performance
Units, the specified dollar amount or (C) a percentage (which may be more than
100%) of the amount described in clause (A) or (B), depending on the level of
Performance Objective attainment; provided, however, that the Committee may at
the time a Performance Unit is granted specify a maximum amount payable in
respect of a vested Performance Unit. Each Award Agreement will specify the
number of Performance Units to which it relates, the Performance Objectives
which must be satisfied in order for the Performance Units to vest, and the
Performance Cycle within which such Performance Objectives must be satisfied;
provided, however, that satisfaction of any applicable Performance Objectives
will be made without regard to any
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change in accounting standards that may be required after the Performance
Objectives are established.
(ii) Vesting. Performance Units will become vested at
such time or times and on such terms, conditions and satisfaction of Performance
Objectives as the Committee may, in its discretion, determine at the time an
Award is granted.
(iii) Payment of Awards. Payment for vested
Performance Units will be made within 60 days after the last day of the
Performance Cycle to which such Award relates, unless the Award Agreement
provides for the deferral of payment. Such payments may be made entirely in
Shares valued at their Fair Market Value as of the last day of the applicable
Performance Cycle or such other date specified by the Committee, entirely in
cash, or in such combination of Shares and cash as the Committee in its
discretion will determine at any time prior to such payment.
(c) Performance Shares. The Committee, in its discretion, may
grant Eligible Persons Performance Shares, the terms of which will be set forth
in an Award Agreement between the Company and the Participant. Each Award
Agreement may require that an appropriate legend be placed on Share
certificates. Unless this Award Agreement provides otherwise, Performance Shares
will be subject to the following terms and provisions:
(i) Rights of Participant. At the time an
Award is made, the Committee will provide the time or times at which the actual
Shares represented by such Award will be issued in the name of the Participant;
provided, however, that no Performance Shares will be issued until the
Participant has executed an Agreement evidencing the Award, the appropriate
blank stock powers and, in the discretion of the Committee, an escrow agreement
and any other documents which the Committee may require as a condition to the
issuance of such Performance Shares. At the discretion of the Committee, Shares
issued in connection with an Award of Performance Shares will be deposited,
together with the stock powers, with an escrow agent (which may be the Company)
designated by the Committee. Upon delivery of the Shares to the escrow agent,
the Participant will have, in the discretion of the Committee, all of the rights
of a shareholder with respect to such Shares, including the right to vote the
Shares and to receive all dividends paid with respect to the Shares.
(ii) Lapse of Restrictions. Restrictions upon
Performance Shares awarded hereunder will lapse and such Performance Shares will
become vested at such time or times
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and on such terms, conditions and satisfaction of Performance Objectives as the
Committee may, in its discretion, determine at the time an Award is granted.
(d) Effect of Change in Control. Unless the Award Agreement
provides otherwise, in the event of a Change in Control:
(i) With respect to Performance Units, the
Participant will (A) become vested in a percentage of Performance Units as set
forth in the Award Agreement and (B) be entitled to receive in respect of all
Performance Units which become vested as a result of a Change in Control, a cash
payment within ten days after such Change in Control in an amount as determined
by the Committee and as set forth in the Award Agreement.
(ii) With respect to Performance Shares, restrictions
will lapse immediately on all or a portion of the Performance Shares as set
forth in the Award Agreement.
(iii) The Award Agreement evidencing Performance
Units or Performance Shares will provide for the treatment of such Awards (or
portions thereof) which do not become vested as the result of a Change in
Control, including, but not limited to, provisions for the adjustment of
applicable Performance Objectives.
11. Dividend Equivalent Rights.
Dividend Equivalent Rights may be granted to Eligible Persons
in tandem with another Award or as a separate Award. The terms applicable to
each Dividend Equivalent Right will be specified in an Award Agreement. Amounts
payable in respect of Dividend Equivalent Rights may be payable currently,
deferred until the lapsing of restrictions on such Dividend Equivalent Rights,
or deferred until the vesting, exercise, payment, settlement or other lapse of
restrictions on the Award to which the Dividend Equivalent Rights relate. If the
amount payable in respect of Dividend Equivalent Rights is to be deferred, the
Committee will determine whether such amounts are to be held in cash, reinvested
in Shares or deemed to be reinvested in Shares. If amounts payable in respect of
Dividend Equivalent Rights are to be held in cash, there may be credited at the
end of each year (or portion thereof) interest on the amount of the account at
the beginning of the year at a rate per annum as the Committee, in its
discretion, may determine. Dividend Equivalent Rights may be settled in cash or
Shares or a combination thereof, in a single installment or multiple
installments, as determined by the Committee.
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12. Adjustment Upon Change in Capitalization.
In the event of any change in the outstanding Shares of the
Company as a result of a stock split, reverse stock split, stock dividend or
distribution, recapitalization, combination or reclassification, the Committee
will conclusively determine the appropriate adjustments, if any, to be made with
respect to this Plan and any outstanding Awards, including (a) the maximum
number and class of Shares or other stock or securities with respect to which
Awards may be granted under this Plan, (b) the number and class of Shares or
other stock or securities which are subject to outstanding Awards granted under
this Plan and the exercise or purchase price therefor, if applicable, and (c)
the Performance Objectives. Any such adjustments will be made only by the
Committee, and when so made will be effective, conclusive and binding for all
purposes with respect to this Plan and all Awards then outstanding. No such
adjustments will be required by reason of the issuance or sale by the Company
for cash or other consideration of additional Shares or securities convertible
into or exchangeable for Shares.
13. Restrictions on Transfer of Shares.
(a) General. A person who acquires Shares pursuant to the
exercise of an Option or pursuant to any other Award under this Plan (the
"Holder") may not Transfer all or any portion of such Shares, whether
voluntarily, involuntarily, or by operation of law, unless: (i) such Transfer
complies with all the terms of this Plan and the applicable Award Agreement,
including the right of first refusal set forth in Section 13(b) below, (ii) each
transferee executes such documents as the Committee may require, agrees to be
bound by this Plan and the applicable Award Agreement, and acknowledges that the
status or conduct of the Participant to whom the Award was originally granted
may affect the transferee's rights as a shareholder (such as when any Shares may
be repurchased by the Company); (iii) each transferee does not, directly or
indirectly, promote, participate, or engage in any activity or business
competitive with the Company; and (iv) the Company is satisfied that such
Transfer complies with applicable federal and state securities laws. Any attempt
to Transfer Shares will be void unless the provisions of this Plan and the
applicable Award Agreement are satisfied.
(b) Right of First Refusal.
(i) Applicable Transactions. The right of first
refusal ("ROFR") in this Section 13(b) will apply whenever the Holder intends
(or is required by operation of
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law or otherwise) to sell, pledge or otherwise Transfer any Shares, except that
(A) this Section 13(b) will not apply to transfers by the Holder (1) by will or
under the laws of descent and distribution, or (2) to one or more Permitted
Transferees, and (B) this Section 13(b) will terminate upon the effective date
of the Company's Initial Public Offering.
(ii) Notice. Before making any voluntary transfer of
Shares, the Holder will give written notice to the Company. In the event of a
transfer by operation of law or other involuntary transfer, the transferee
promptly will give written notice to the Company. In either event, such notice
(the "ROFR Notice") must specify: (A) the proposed transferee(s); (B) the number
of Shares to be transferred (the "Applicable Shares"); (C) the consideration to
be received per Share; and (D) all other material terms relating to the proposed
transfer.
(iii) Consideration.
(A) If the proposed transaction is a
transfer of Shares solely for cash, then the Company's option will be to
purchase all or any portion of the Applicable Shares upon the same terms and
conditions set forth in the ROFR Notice.
(B) If the proposed transaction is a
transfer of Shares wholly or partially in exchange for property other than cash,
the purchase price of such Applicable Shares to the Company will be an amount in
cash equal to the fair market value of such property proposed to be received in
exchange for the Applicable Shares, as reasonably determined in good faith by
the Committee (plus the cash, if any, included in the consideration for such
Applicable Shares).
(C) If the proposed transaction is a pledge
or other hypothecation of the ROFR Shares, or a gift or any other Transfer not
specifically described in Section 13(b)(iii)(A) or (B) above, then the Company's
option will be either: (1) to lend or otherwise Transfer to the Employee such
consideration as described in the ROFR Notice and otherwise to accept the
proposed Transfer of the Applicable Shares upon all the terms and conditions
stated therein; or (2) to purchase for cash all or any portion of the Applicable
Shares, in which case the purchase price will be the Fair Market Value for the
Applicable Shares, as determined by the Committee.
(D) Whenever any determination of value must
be made by the Committee pursuant to this Section 13(b)(iii), the ROFR Notice
will be deemed delayed for all
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time periods set forth in this Section 13 until such determination has been
made.
(iv) Exercise of ROFR.
(A) The Company will have an assignable
option (but not an obligation) to purchase all or any portion of the Applicable
Shares. The Company may exercise this option by notifying the Holder of its
election to purchase all of the Applicable Shares within 30 days after the
receipt of the ROFR Notice.
(B) If the Company elects within such 30 day
period to purchase all the Applicable Shares, the Holder will be obligated to
sell, and the Company (or its assignee) will be obligated to purchase, the
Applicable Shares for the consideration specified in Section 13(b)(iii) and
otherwise on the terms set forth in the ROFR Notice. All parties will use their
best efforts to consummate the transaction as promptly as possible.
(v) Non-Exercise of ROFR. The ROFR will not be deemed
exercised unless (i) the Company (or its assignee) elects within the applicable
time period specified above to purchase all of the Applicable Shares and (ii)
such purchase is consummated within 90 days after the Company's receipt of the
ROFR Notice. If the ROFR is not deemed exercised, the Holder may Transfer such
Applicable Shares to the proposed transferee(s) for a period of 60 days
following the first date on which the ROFR is not exercisable, provided that the
other terms of this Agreement are satisfied and that such Transfer is not more
favorable to the transferee(s) than the terms offered to the Company.
(c) Market Standoff. In connection with a firm commitment
underwritten public offering of securities of the Company, if requested by the
Company or its principal underwriter, each Holder of any Shares: (i) will not
Transfer any Shares not included in such underwriting during the 120-day period
(or such shorter or longer period as the underwriter may require of the
principal security holders of the issuer) following the effective date of the
registration statement filed with the Securities and Exchange Commission in
connection with such offering; and (ii) will execute such instruments as the
underwriter may reasonably require to evidence compliance with this Section.
(d) Escrow. For purposes of facilitating the enforcement of
the restrictions on Transfer and the rights of repurchase set forth in this Plan
or in any Award Agreement, the Committee may, at its discretion, require any
Holder of Shares to deliver the certificate(s) for such Shares with a
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stock power executed by the Holder, in blank, to the Secretary of the Company or
his designee, to hold said certificate(s) and stock power(s) in escrow, and to
take all such actions and to effectuate all such Transfers or repurchases as are
in accordance with the terms of this Plan. The certificates may be held in
escrow so long as the Shares whose ownership they evidence are subject to any
Transfer restriction or right of repurchase under this Plan or under any Award
Agreement. Each Participant, by accepting an Award, acknowledges that the
Secretary of the Company (or his designee) is so appointed as the escrow holder
with the foregoing authorities as a material inducement to the grant of an Award
under the Plan, that the appointment is coupled with an interest, and that it
accordingly will be irrevocable.
14. Company's Repurchase Option Upon Termination of Service.
(a) General. Upon a Termination of Service with respect to any
Participant, the Company will have an assignable option (but not an obligation)
(the "Repurchase Option"), to repurchase all or any portion of the Shares
acquired by the Participant (or any subsequent transferee) pursuant to the
exercise of an Option or pursuant to any other Award under this Plan. The
Company's Repurchase Option will be subject to Section 17(d) below and to the
rights of the Participant (or any subsequent transferee) to surrender any Award
pursuant to a Change in Control, such as the rights set forth in Section 7(i)
above.
(b) Repurchase Price.
(i) For any Termination of Service other than for
"Cause," the repurchase price will be the Fair Market Value of the Shares being
repurchased, as of the Termination Date.
(ii) For any Termination of Service for "Cause," the
repurchase price will be the lower of (A) the Fair Market Value of the Shares
being repurchased, as of the Termination Date, or (B) the purchase price paid to
the Company for such Shares.
(c) Payment. The repurchase price may be paid, at the option
of the Company, by any of the following means, or any combination of the
following means: (i) cash; (ii) cancellation of all or any portion of any
outstanding indebtedness owed by the Holder to the Company; or (iii) an
unsecured promissory note, with the following terms: interest at the prime rate,
payable annually; principal payable in five equal installments, with the first
payment
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due within one year and the last payment within five years of the Termination
Date; and no prepayment penalties.
(d) Procedures for Exercise of Repurchase Option. The Company
may exercise the Repurchase Option itself or assign the Repurchase Option to one
or more other persons, including the other shareholders of the Company. Within
60 days after the Fair Market Value of the Shares has been determined, the
Company will notify the Holder if it wishes to exercise its Repurchase Option,
or if it has assigned the Repurchase Option to other persons who wish to
exercise such Repurchase Option. Such notice will set a date for the closing of
the transaction not later than 30 days from the date of such notice.
15. Restrictions on Other Activities.
(a) General.
(i) Unless the Award Agreement provides otherwise,
any Award of Options or Restricted Stock will be subject to this Section 15. The
Award Agreement for any Award not involving Options or Restricted Stock will set
forth whether, and to what extent, the provisions of this Section 15 apply to
such Award.
(ii) Subject to Section 15(a)(i), if any Participant
breaches any provision set forth in this Section 15, the Company may, in its
discretion, (A) cancel any unexercised, unexpired, unpaid or deferred portions
of any Awards, and (B) subject to Section 17(d) below, repurchase any Shares
that were acquired by the Participant (or any subsequent transferee) pursuant to
the exercise of an Option or pursuant to the grant of Restricted Stock, with the
repurchase price for such Shares being an amount equal to the price paid to the
Company for such Shares. In addition, subject to Section 17(d) below, the
Company will have an assignable option (but not an obligation) to repurchase any
other Shares held by the Participant (or any subsequent transferee), with the
purchase price for such Shares being their Fair Market Value. Any payments for
such repurchase will be upon the same terms set forth in Section 14(c), and any
such repurchase will be exercised pursuant to the procedures set forth in
Section 14(d) above.
(b) Noncompetition. During the Restrictive Period, the
Participant will not carry on or engage as an Interested Party in any business
within the Territory that competes, directly or indirectly, with the Business of
the Company.
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(c) Assistance to Acquiror. During the Restrictive Period, the
Participant will not become associated with (whether through an investment of
capital or otherwise), provide services to, or otherwise solicit, aid, assist or
cooperate with any person, group or entity (an "Acquiror") in any effort to
effect a Change in Control transaction with respect to the Company. Nothing in
this Section 15(c) will be construed to preclude such Participant from owning
less than 1% of the outstanding common stock of an Acquiror if the Acquiror's
stock is publicly traded and the Participant acquires such stock in the open
market.
(d) Solicitation of Customers. During the Restrictive Period,
the Participant will not engage in any unfair competition with the Company.
During the Restrictive Period, the Employee will not, without the prior written
consent of the Company, directly or indirectly disclose to any person, the names
or addresses of any of the Company's customers, clients and other business
associates or any other information pertaining to them, or call on, solicit or
take away any of the Company's customers, clients or other business associates,
either for the Participant or for any other person.
(e) Solicitation of Employees and Others. During the
Restrictive Period, the Participant will not, without the prior written consent
of the Company, directly or indirectly seek to persuade any director, officer or
employee of the Company to discontinue his or her position with such entity or
to become employed or engaged in any activity competitive with the Business of
the Company.
(f) Confidential Information.
(i) The Participant will use the Company's
Confidential information exclusively for the benefit of the Company, and for no
other purpose whatsoever. The Participant will not disclose any Confidential
Information to any person unless: (A) such disclosure is in connection with his
employment with the Company; (B) the Participant first obtains the prior written
consent of the Company; or (C) the Participant is required by law to disclose
such Confidential Information.
(ii) If the Participant or any of his agents are
requested or required by oral questions, interrogatories, depositions, requests
for information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process to disclose any part of the Confidential
Information, the Participant will immediately notify the Company in writing of
the existence, terms and circumstances surrounding such a request or requirement
so that the Company
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<PAGE> 21
may take such steps as it deems necessary or appropriate to protect the
confidentiality of the Confidential Information. If, in the written opinion of
the Participant's counsel, disclosure of any Confidential Information by the
Participant or any of his agents is nonetheless legally required, the
Participant or his agents may disclose to such tribunal only that portion of the
Confidential Information which such counsel advises is legally required to be
disclosed. The Participant will exercise his or her best efforts to preserve the
confidentiality of the Confidential Information, including without limitation,
cooperating with the Company to obtain an appropriate protective order or other
reliable assurance that confidential treatment will be accorded to the
Confidential Information by such tribunal and the parties before it.
(g) Adverse Actions. During the Restrictive Period, the
Participant will not take any action or omit to take any action that the
Participant knows or reasonably should know is likely to adversely affect the
Company in a material manner.
16. Withholding Taxes.
(a) General. When a Participant recognizes taxable income in
connection with any Award (a "Taxable Event"), the Participant will pay to the
Company an amount equal to the federal, state and local income taxes and other
amounts as may be required by law to be withheld by the Company in connection
with the Taxable Event (the "Withholding Taxes") prior to the issuance, or
release from escrow, of Shares or the payment of cash. The Company will have the
right to deduct from any payment of cash to a Participant an amount equal to the
Withholding Taxes.
(b) Tax Election. A Participant may make a written election
(the "Tax Election"), which may be accepted or rejected in the discretion of the
Committee, to have withheld a portion of the Shares then issuable to the
Participant having an aggregate Fair Market Value, on the date preceding the
date of such issuance, equal to the Withholding Taxes. The Committee may, by the
adoption of rules or otherwise, impose such restrictions or limitations on Tax
Elections as it considers appropriate, including restrictions required to comply
with Section 16(b) of the Exchange Act.
17. Limitation of Rights.
(a) Employment Rights. Neither this Plan nor any Award granted
under this Plan will give any individual a right to remain employed by the
Company. The Company
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<PAGE> 22
reserves the right to terminate the employment of any employee at any time, with
or without Cause.
(b) Shareholder Rights. A Participant will have no dividend
rights, voting rights or other rights as a shareholder with respect to any
Shares covered by his or her Award prior to the issuance of a stock certificate
for such Shares.
(c) Creditor Rights; Unfunded Plan. Insofar as it provides for
Awards of Shares or cash, this Plan will be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
Shares, cash, or rights thereto under the Plan, any such accounts will be used
merely as a bookkeeping convenience. The Company will not be required to
segregate any assets that may at any time be represented by Shares, cash, or
rights thereto, nor will the Company, the Board or the Committee be deemed to be
a trustee of any Shares, cash, or rights thereto to be granted under the Plan.
Any liability of the Company to any Participant with respect to a grant of
Shares, cash, or rights thereto under the Plan will be based solely upon any
contractual obligation that may be created by the Plan and any Award Agreement;
no such obligation of the Company will be deemed to be secured by any pledge or
other encumbrance on any property of the Company.
(d) Restricted Payments. Notwithstanding any other provision
of this Plan, the Company will not purchase, redeem or otherwise acquire or make
payments with respect to Shares or Options if and to the extent such payments
are restricted by (i) the Indenture dated as of November 21, 1995 among the
Company, its Affiliates and IBJ Schroeder Bank & Trust Company, as trustee, (ii)
the Revolving Credit Agreement dated as of November 21, 1995 among the Company,
its Affiliates and First National Bank of Boston, (iii) other credit agreements
the Company may enter into in the future, or (iv) applicable law, including but
not limited to Section 500 et seq. of the California Corporations Code.
(e) Government Regulations. Any other provision of this Plan
notwithstanding, the obligations of the Company with respect to Shares to be
issued pursuant to the Plan will be subject to all applicable laws, rules and
regulations, and such approvals as may be required by any governmental agencies.
The Company reserves the right to restrict, in whole or in part, the delivery of
Shares pursuant to any Award until such time as any legal requirements or
regulations have been satisfied relating to the issuance of such Shares,
including their registration, qualification or exemption from registration or
qualification under the Securities Act or any applicable state securities laws.
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<PAGE> 23
(f) Pooling Transaction. Notwithstanding any other provision
of this Plan, in the event of a Change in Control which is also intended to
constitute a pooling transaction for accounting purposes, the Participant and
Committee will negotiate in good faith such changes that are deemed reasonably
necessary by the Company's accountants to assure that the transaction qualifies
as a pooling transaction.
18. Non-Exclusivity of Plan.
The adoption of this Plan will not be construed as amending,
modifying or rescinding any previously approved incentive arrangement or as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either applicable generally or only in specific cases.
19. Duration and Amendment of Plan.
(a) Term of the Plan. The Plan will become effective on the
date it is adopted by the Board of Directors. The Plan will remain in effect for
ten years, unless it is terminated earlier pursuant to Section 19(b).
(b) Amendment or Termination. The Committee may, at any time
and for any reason, amend or terminate this Plan; provided, however, that (i)
any amendment of this Plan will be subject to the approval of the Company's
shareholders to the extent required by applicable laws, regulations or rules;
(ii) no amendment or termination of this Plan may adversely affect the rights of
Participants under Awards that were granted before such amendment or
termination; and (iii) any amendment of this Plan that would (A) increase the
number of Available Shares as set forth in Section 4, (B) modify the requirement
set forth in Section 5(a) that members of the Committee may not be employees of
the Company or (C) modify any provisions hereof expressly restricting the term
of any Award hereunder, will, in the case of clauses (A), (B) and (C) above, be
subject to the approval of the outstanding shares of the Company (as such term
is defined in Section 152 of the California General Corporation Law).
(c) Public Company. In connection with an Initial Public
Offering, the Committee may amend this Plan to comply with the requirements of
Section 162(m) of the Code and Rule 16b-3 under the Exchange Act.
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<PAGE> 24
20. Miscellaneous.
(a) Notice. Any notice to the Company required by any
provision of this Plan will be addressed to the Secretary of the Company in
writing, and will become effective when it is received by such person.
(b) Severability. If any provision of this Plan is deemed
invalid, illegal, or unenforceable, such provision will be deemed amended to the
extent necessary to conform to applicable law so as to be valid, legal and
enforceable; if such provision cannot be amended as provided above, it will be
stricken and the remainder of this Plan will remain in full force and effect.
(c) Governing Law. This Plan and all determinations made and
actions taken pursuant to this Plan, to the extent not otherwise governed by the
laws of the United States, will be governed by the laws of the State of
California and will be construed accordingly.
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<PAGE> 25
NORCAL WASTE SYSTEMS, INC.
1996 EXECUTIVE STOCK INCENTIVE PLAN
Exhibit A
Definitions
For purposes of this Plan, the following terms are defined as
follows:
"Adjusted Fair Market Value" means, in the event of a Change
in Control, the greater of (a) the highest price per Share paid to holders of
the Shares in any transaction (or series of transactions) constituting or
resulting in a Change in Control, or (b) the highest Fair Market Value of a
Share during the 90 day period ending on the date of a Change in Control.
"Affiliate" means any corporation or other entity (including,
but not limited to, partnerships and joint ventures) controlling, controlled by
or under common control with the Company.
"Available Shares" has the meaning set forth in Section 4.
"Award" means the grant of any equity-based compensation to
Eligible Persons pursuant to this Plan, which includes but is not limited to an
Option, Restricted Stock, a Stock Appreciation Right, a Performance Award or a
Dividend Equivalent Right.
"Award Agreement" means the written agreement between the
Company and a Participant evidencing the grant of an Award and setting forth the
terms of such Award.
"Board" means the Board of Directors of the Company.
"Business" means (a) any aspect of the waste management
business, including refuse collecting, recycling and other waste diversion,
transfer station and hauling operations, or operation of landfills, or (b) any
other business then conducted by the Company during the applicable Restrictive
Period, or, if substantial time or resources have been devoted to a proposed
business, as proposed to be conducted by the Company at such time.
A-1
<PAGE> 26
"Cause" means termination of a Participant's employment with,
or service to, the Company for any one or more of the following reasons: (a)
willful misconduct which adversely affects the Company in a material manner; (b)
willful and material failure to perform reasonably assigned duties after written
notice from the Board; (c) conviction of a felony; or (d) breach of any material
provision of the Award Agreement.
A "Change in Control" means the occurrence of any of the
following:
(a) Any "Person" (which includes a "group," as the terms
person and group are used for purposes of Section 13(d) or 14(d) of the Exchange
Act) obtains "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of the "Requisite Percentage" (as defined
below) of the combined voting power of the Company's then outstanding voting
securities ("Voting Securities"); provided, however, in determining whether a
Change in Control has occurred, Voting Securities which are acquired in a "Non-
Control Acquisition" (as hereinafter defined) will not constitute an acquisition
which would cause a Change in Control. The "Requisite Percentage" means 35% or
more of the Company's then outstanding Voting Securities if the Company has not
had its Initial Public Offering and 25% or more of the Company's then
outstanding Voting Securities if the Company has had its Initial Public
Offering. A "Non-Control Acquisition" means an acquisition by (i) an employee
benefit plan (or a trust forming a part thereof) maintained by (A) the Company
or (B) any corporation or other Person of which a majority of its voting power
or its voting equity securities or equity interest is owned, directly or
indirectly, by the Company (for purposes of this definition, a "Subsidiary") or
(ii) the Company or its Subsidiaries, or (iii) any Person in connection with a
"Non-Control Transaction" (as hereinafter defined);
(b) The individuals who, as of the date this Plan is adopted,
are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least two-thirds of the members of the Board; provided, however,
that if the election, or nomination for election by the Company's common
stockholders, of any new director is approved by a vote of at least two-thirds
of the Incumbent Board, such new director will, for purposes of this Plan, be
considered as a member of the Incumbent Board; provided further, however, that
no individual will be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as
A-2
<PAGE> 27
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest;
(c) At any time prior to the Company's Initial Public
Offering, the ESOP no longer owns more than 50% of the Company's then
outstanding Voting Securities; or
(d) The consummation of:
(i) a merger, consolidation or reorganization
involving the Company, unless such merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction" means a merger,
consolidation or reorganization of the Company where:
(A) the shareholders of the Company,
immediately before such merger, consolidation or reorganization, own directly or
indirectly immediately following such merger, consolidation or reorganization,
at least 75% of the combined voting power of the outstanding voting securities
of the corporation resulting from such merger or consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger, consolidation
or reorganization;
(B) the individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at least two-thirds
of the members of the board of directors of the Surviving Corporation, or a
corporation beneficially directly or indirectly owning a majority of the Voting
Securities of the Surviving Corporation; and
(C) no Person (other than (1) the Company,
(2) any Subsidiary, (3) any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Corporation, or any
Subsidiary, or (4) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of the Requisite
Percentage of the then outstanding Voting Securities), has Beneficial Ownership
of the Requisite Percentage of the combined voting power of the Surviving
Corporation's then outstanding voting securities.
(ii) A complete liquidation or dissolution of the
Company; or
A-3
<PAGE> 28
(iii) The sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Subsidiary in which the Company retains at least 80% of the voting
securities and the value of ownership interests in such Subsidiary).
Notwithstanding the foregoing, a Change in Control will not be
deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then-outstanding
Voting Securities as a result of the acquisition of Voting Securities by the
Company which, by reducing the number of Voting Securities then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject
Person, provided that if a Change in Control would occur (but for the operation
of this sentence) as a result of the acquisition of Voting Securities by the
Company, and after such share acquisition by the Company, the Subject Person
becomes the Beneficial Owner of any additional Voting Securities which increases
the percentage of the then-outstanding Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control will occur.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a committee, as described in Section 5(a),
appointed by the Board to administer this Plan and to perform the functions set
forth in this Plan.
"Company" means Norcal Waste Systems, Inc. ("Norcal"), and its
subsidiaries, including subsidiaries of subsidiaries and partnerships and other
business ventures in which Norcal has a significant equity interest, as
determined in the sole discretion of the Committee.
"Confidential Information" means all information belonging to
the Company, its customers, clients or business associates, which information is
protectible as a trade secret under California law, and which may include
without limitation, business, marketing, distribution and purchasing plans,
techniques and strategies; financial statements, budgets, projections, prices,
and costs; customer lists; and know-how, formulae, discoveries, and inventions.
"Disability" means that the Company has determined, based on
competent medical evidence, that a Participant has become incapable, mentally or
physically, of substantially performing his services and substantially
discharging his duties to the Company for a period which has lasted, or can
reasonably be expected to last, for at least six months.
A-4
<PAGE> 29
"Dividend Equivalent Right" means a right to receive all or
some portion of the cash dividends that are or would be payable with respect to
Shares.
"Eligible Person" means a person eligible to receive an Award
pursuant to Section 3 of this Plan.
"ESOP" means the Norcal Waste Systems, Inc. Employee Stock
Ownership Plan.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to the Shares and as
of the date that is relevant to such determination, the price per Share
determined by the Committee pursuant to the following standards: (a) if the
Shares are traded on a stock exchange on the date in question, then the Fair
Market Value will be equal to the closing price reported by the applicable
composite-transactions report for such date; (b) if the Shares are traded
over-the-counter on the date in question and are classified as a national market
issue, then the Fair Market Value will be equal to the last-transaction price
quoted by the Nasdaq system for such date; (c) if the Shares are traded
over-the-counter on the date in question but are not classified as a national
market issue, then the Fair Market Value will be equal to the mean between the
last reported representative bid and asked prices quoted by the Nasdaq system
for such date; and (d) if none of the foregoing provisions is applicable, then
the Fair Market Value will be the value established by the Committee in good
faith, which value may be (i) the most recent per-Share valuation obtained by
the ESOP from third-party consultants in connection with the ESOP's annual
allocation of Shares, or (ii) a more recent per-Share valuation obtained by the
Committee, at its discretion, from an independent valuation expert.
"Holder" means a person who acquires Shares pursuant to the
exercise of an Option or pursuant to any other Award.
"Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
"Initial Public Offering" means the consummation of the first
underwritten public offering of Shares pursuant to a registration statement
(other than on Form S-8 or successor forms) filed with, and declared effective
by, the Securities and Exchange Commission.
A-5
<PAGE> 30
"Interested Party" means an owner, shareholder (other than of
less than 1% of the outstanding shares of any publicly-held class of stock),
partner, creditor, director, officer, agent, manager, operator, salesman,
employee or any other participant in any capacity that calls for the rendering
of personal services, advice or acts of management, operation or control.
"Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
"Option" means a Nonqualified Stock Option or an Incentive
Stock Option granted pursuant to Section 7.
"Optionholder" means a person holding an Option, who may be
either the Participant to whom the Option was initially granted or any
subsequent transferee permitted under this Plan.
"Participant" means a person to whom an Award has been granted
pursuant to this Plan.
"Performance Awards" means Performance Units, Performance
Shares or either or both of them.
"Performance Cycle" means the time period specified by the
Committee at the time Performance Awards are granted during which the
performance of the Company, a subsidiary or a division will be measured.
"Performance Objectives" has the meaning set forth in
Section 10.
"Performance Shares" means Shares issued or transferred to a
Participant under Section 10.
"Performance Unit" means Performance Units granted to a
Participant under Section 10.
"Permitted Transferee" means a Participant's ancestors,
descendants or spouse (other than pursuant to a decree of divorce, dissolution
or separate maintenance, a property settlement, or a separation agreement or any
similar agreement or arrangement with a spouse which is not for bona fide estate
planning purposes), or a trust, partnership, custodianship or other fiduciary
account primarily for the benefit of the Participant and/or such ancestors,
descendants or spouse.
"Plan" means this Norcal Waste Systems, Inc. 1996 Executive
Stock Incentive Plan, as it may be amended from time to time.
A-6
<PAGE> 31
"Restricted Stock" means Shares issued to a Participant
pursuant to Section 8.
"Restrictive Period" means (a) the period the Participant is
employed by, or providing services to, the Company; and (b) the period beginning
on the Termination Date and continuing until the earlier of (i) three years
after such date, or (ii) such time as neither the Company nor any person
acquiring the goodwill or the stock of the Company carries on a substantially
similar Business within the Territory.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the common stock, par value $.01 per share, of
the Company.
"Stock Appreciation Right" means a right to receive all or
some portion of the increase in the value of the Shares, as provided in
Section 9.
"Termination Date" means the date on which a Termination of
Service occurs.
"Termination of Service" means a Participant ceases to be an
Eligible Person, such as when an employee's employment is terminated for any
reason.
"Territory" means, at any particular time, each and every city
and county within California or any other state where the Company is carrying on
or proposes to carry on its Business.
"Transfer" includes, without limitation, a voluntary or
involuntary sale, assignment, transfer, conveyance, pledge, hypothecation,
encumbrance, or other disposition of Awards or Shares.
A-7
<PAGE> 1
EXHIBIT 10.41
NORCAL WASTE SYSTEMS, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement") is entered into as of
January 12, 1996 between Norcal Waste Systems, Inc., a California corporation
(the "Company"), and John B. Molinari ("Optionee"). The parties agree as
follows:
1. Grant of Option.
(a) Pursuant to the Company's 1996 Non-Employee Director Stock
Option Plan (the "Plan"), the Company has granted Optionee a nonqualified stock
option (the "Option") to purchase 35,000 shares of the Company's common stock at
an exercise price of $4.89 per share.
(b) As long as Optionee continues to serve as a director of
the Company, (i) this Option will vest in three annual increments of 11,667
shares, 11,667 shares and 11,666 shares, respectively, on the first, second and
third anniversaries of the date of this Agreement, so that this Option will be
fully vested on January 12, 1999, and (ii) this Option will have a term of seven
years from the date of this Agreement.
2. Other Terms. The other terms of this Option will be the same as
those provided for in the Plan, a copy of which is attached to this Agreement.
Optionee has read the Plan and agrees to be bound by its terms.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
NORCAL WASTE SYSTEMS, INC.
By:/s/ Michael J. Sangiacomo /s/ John B. Molinari
____________________________ ____________________________
Michael J. Sangiacomo JOHN B. MOLINARI
President and CEO
Attachment: (1) Spousal Consent
(2) 1996 Non-Employee Director Stock Option Plan
<PAGE> 2
SPOUSAL CONSENT
I am the wife of John B. Molinari, the Optionee referred to in the
attached Stock Option Agreement (the "Agreement"). I have had an opportunity to
read the Agreement and the 1996 Non-Employee Director Stock Option Plan (the
"Plan") of Norcal Waste Systems, Inc. I am aware that the Optionee agrees to
sell all of his Shares, including any community interest I may have in the
Shares, on the occurrence of certain events. I hereby consent to the Agreement,
the Plan and the possible sale of the Shares, and agree to cooperate in enabling
my spouse to meet all obligations set forth in the Agreement and the Plan.
Dated:_________, 1996 /s/ Helen Molinari
____________________________________
HELEN MOLINARI
<PAGE> 1
EXHIBIT 10.43
NORCAL WASTE SYSTEMS, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement") is entered into as of
January 12, 1996 between Norcal Waste Systems, Inc., a California corporation
(the "Company"), and H. Welton Flynn ("Optionee"). The parties agree as follows:
1. Grant of Option.
(a) Pursuant to the Company's 1996 Non-Employee Director Stock
Option Plan (the "Plan"), the Company has granted Optionee a nonqualified stock
option (the "Option") to purchase 35,000 shares of the Company's common stock at
an exercise price of $4.89 per share.
(b) As long as Optionee continues to serve as a director of
the Company, (i) this Option will vest in three annual increments of 11,667
shares, 11,667 shares and 11,666 shares, respectively, on the first, second and
third anniversaries of the date of this Agreement, so that this Option will be
fully vested on January 12, 1999, and (ii) this Option will have a term of seven
years from the date of this Agreement.
2. Other Terms. The other terms of this Option will be the same as
those provided for in the Plan, a copy of which is attached to this Agreement.
Optionee has read the Plan and agrees to be bound by its terms.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
NORCAL WASTE SYSTEMS, INC.
By:/s/ Michael J. Sangiacomo /s/ H. Welton Flynn
____________________________ ___________________________
Michael J. Sangiacomo H. WELTON FLYNN
President and CEO
Attachment: 1996 Non-Employee Director Stock Option Plan
<PAGE> 1
EXHIBIT 10.44
NORCAL WASTE SYSTEMS, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement") is entered into as of
July 16, 1996 between Norcal Waste Systems, Inc., a California corporation (the
"Company"), and Gale Kaufman ("Optionee"). The parties agree as follows:
1. Grant of Option.
(a) Pursuant to the Company's 1996 Non-Employee Director Stock
Option Plan (the "Plan"), the Company has granted Optionee a nonqualified stock
option (the "Option") to purchase 35,000 shares of the Company's common stock at
an exercise price of $4.89 per share.
(b) As long as Optionee continues to serve as a director of
the Company, (i) this Option will vest in three annual increments of 11,667
shares, 11,667 shares and 11,666 shares, respectively, on the first, second and
third anniversaries of the date of this Agreement, so that this Option will be
fully vested on July 16, 1999, and (ii) this Option will have a term of seven
years from the date of this Agreement.
2. Shareholder Approval. Any payment from the Company to Optionee
under this Agreement or the Plan that would be treated under Section 280G of the
Internal Revenue Code (the "Code") as contingent upon a change in control
(including the acceleration of option vesting pursuant to Section 6(i) of the
Plan) will not be effective until the earlier of the date on which: (a) the
Company obtains approval of such payments from the holders of at least 75% of
the Company's outstanding voting stock in accordance with Section 280G(b)(5) of
the Code, or (b) the Company has an Initial Public Offering. The Company will
use its best efforts to obtain such shareholder approval as soon as reasonably
practicable.
3. Other Terms. Except as provided above, the other terms of this
Option will be the same as those provided for in the Plan, a copy of which is
attached to this Agreement. Optionee has read the Plan and agrees to be bound by
its terms.
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<PAGE> 2
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
NORCAL WASTE SYSTEMS, INC.
By:/s/ Michael J. Sangiacomo /s/ Gale Kaufman
____________________________ ___________________________
Michael J. Sangiacomo GALE KAUFMAN
President and CEO
Attachment: 1996 Non-Employee Director Stock Option Plan
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<PAGE> 1
EXHIBIT 10.45
SECOND AMENDMENT TO
REVOLVING CREDIT AGREEMENT
THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Second
Amendment") is made and entered into as of the 26th day of November, 1996, by
and among NORCAL WASTE SYSTEMS, INC., a California corporation (the
"Borrower"), its Subsidiaries (other than the Excluded Subsidiaries)
(collectively, the "Guarantors"), THE FIRST NATIONAL BANK OF BOSTON, a national
banking association (in its individual capacity, "FNBB"), and the other
financial institutions party hereto (collectively, the "Banks"), and FNBB as
the agent for the Banks (in such capacity, the "Agent").
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent entered
into a Revolving Credit Agreement dated as of November 21, 1995 (as heretofore
amended, the "Credit Agreement"), pursuant to which the Banks extended credit
to the Borrower on the terms set forth therein;
WHEREAS, the parties desire to amend the Credit Agreement on the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree to amend the Credit Agreement as follows:
1. DEFINITIONS. Capitalized terms used herein without definition
shall have the meanings assigned to such terms in the Credit Agreement.
2. AMENDMENTS TO SECTION 1 OF THE CREDIT AGREEMENT.
(a) Section 1 of the Credit Agreement is hereby amended by
inserting therein the following newly defined terms in the appropriate
alphabetical sequence:
Exchange. Any exchange of assets of a similar type and having
a comparable value, as defined in, and in accordance with, Section
1031 of the Code.
Maintenance Capital Expenditures. With respect to any period
the sum of (a) depreciation expense and (b) amortization expense
recognized in such period in connection with landfills operated by the
Borrower and its Subsidiaries, but only to the extent included in
determining EBITDA for such period.
<PAGE> 2
-2-
(b) Section 1 of the Credit Agreement is further amended
by amending certain defined terms therein as follows:
(i) The defined term "Adjusted EBITDA" is hereby amended
by deleting from the first sentence thereof the phrase "in the event
that the financial statements of such Person have been certified by a
reputable certified public accounting firm and furnished to the Agent"
and replacing it with the phrase "provided that the aggregate EBITDA
of such Persons who have not furnished to the Agent financial
statements certified by a reputable certified public accounting firm
shall in no event exceed ten percent (10%) of Adjusted EBITDA".
(ii) The defined term "Consolidated Cash Flow" is hereby
amended by inserting prior to the words "Capital Expenditures"
appearing in clause (c) thereof the word "Maintenance".
(iii) The defined term "GAAP" is hereby amended by
inserting at the end of such defined term the following new clause:
except with respect to the accounting treatment of
landfill liners which shall be capitalized and amortized based
upon the total expected site costs and annualized utilization
for the applicable period in accordance with the accounting
practices reflected in the consolidated financial statements
of the Borrower and its Subsidiaries as of October 31, 1996.
(iv) The defined term "Indebtedness" is hereby amended by
deleting such definition in its entirety and replacing it with the
following new definition:
Indebtedness. Collectively without duplication,
whether classified as Indebtedness, an Investment or otherwise
on the obligor's balance sheet, (a) all indebtedness for
borrowed money or credit obtained or other similar monetary
obligation, direct or indirect, (b) all obligations for the
deferred purchased price of property or services (other than
trade payables not overdue by more than ninety (90) days
incurred in the ordinary course of business), (c) all
obligations evidenced by notes, bonds, debentures or other
similar debt instruments, (d) all obligations created or
arising under any conditional sale or other title retention
agreement with respect to property acquired (even though the
rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession
or sale of such property), (e) all obligations, liabilities
and indebtedness under Capitalized Leases, (f) all
obligations, contingent
<PAGE> 3
-3-
or otherwise, under acceptance, letter of credit or similar facilities,
(g) all agreements for indemnification, (h) all liabilities or
obligations in respect of judgments or awards against such Person, (i)
all obligations, liabilities or indebtedness (contingent or otherwise)
under surety, performance bonds or any other bonding arrangements, (j)
all Indebtedness of others referred to in clauses (a) through (i) above
which is guaranteed, or in effect guaranteed, directly or indirectly in
any manner, including, without limitation, through an agreement (in
each case with respect to Indebtedness of the type referred to in
clauses (a) through (i) above) (A) to pay or purchase such Indebtedness
or to advance or supply funds for the payment or purchase of such
Indebtedness, (B) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of
enabling any Person to make payment of such Indebtedness, (C) to supply
funds to or in any other manner invest in any Person (including any
agreement to pay for property or services irrespective of whether such
property is received or such services are rendered but excluding any
contributions to any Employee Benefit Plan or Multiemployer Plan not
otherwise prohibited under the Credit Agreement) or (D) otherwise to
assure any Person against loss, and (k) all Indebtedness referred to in
clauses (a) through (j) above secured or supported by (or for which the
holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured or supported by) any lien or encumbrance on
(or other right of recourse to or against) property (including, without
limitation, accounts and contract rights), even though the owner of the
property has not assumed or become liable, contractually or otherwise,
for the payment of such Indebtedness.
(v) The defined term "Investments" is hereby amended by
deleting the phrase "or other obligation of any other Person" and
replacing it with the phrase "or other payment obligation of any Person
who is not a Borrower or Guarantor".
3. AMENDMENT TO SECTION 7.1(b)(xii) OF THE CREDIT AGREEMENT.
Section 7.1(b)(xii) of the Credit Agreement is hereby amended by deleting said
subsection in its entirety and replacing it with the following new subsection:
(xii) Unsecured Indebtedness incurred in connection with
acquisitions after the date hereof of any stocks of, partnership or
joint venture interests in, or assets of any Person and owing to the
seller(s) of such stocks, partnership or joint venture interests, or
assets; provided that (A) the principal amount of any such
Indebtedness owed (when aggregated with all such other Indebtedness
permitted pursuant to this Section 7.1(b)(xii)) shall not exceed
$25,000,000; (B) the aggregate principal amount of any such
Indebtedness owed by the Guarantors shall not exceed
<PAGE> 4
-4-
$10,000,000; (C) the final maturity of any such Indebtedness owed by
the Borrower shall extend beyond the Maturity Date; (D) the dollar
weighted average life of any such Indebtedness owed by the Borrower
shall exceed the remaining period of time until the Maturity Date; (E)
no such Indebtedness owed by the Borrower shall be guaranteed by any of
the Guarantors; (F) the principal amount of any such Indebtedness owed
by the Borrower with respect to any one such acquisition shall not
exceed $10,000,000; and (G) the principal amount of any such
Indebtedness owed by the Guarantors with respect to any one such
acquisition shall not exceed $2,000,000; and provided, further, that
such acquisition shall be otherwise permitted pursuant to the terms
hereof;
4. AMENDMENT TO SECTION 7.4(d) OF THE CREDIT AGREEMENT. Section
7.4(d) is hereby amended by deleting clause (iv) thereof and replacing it with
the following:
(iv) Exchanges in which the book value of the assets
transferred by the Borrower or any of its Subsidiaries, when
aggregated with the book value of all other Exchanges made by the
Borrower or any Subsidiary in any fiscal year, does not exceed
$10,000,000, provided that no Exchanges of landfills or of stock,
partnership or joint venture interests shall be permitted hereunder,
and (v) sales of assets with a book value which, when aggregated with
the book value of all other assets sales made pursuant to this Section
7.4(d)(v), does not exceed five percent (5%) of Consolidated Total
Assets as set forth in the most recent financial statements delivered
to the Banks pursuant to Section 6.4 hereof.
5. AMENDMENT TO SECTION 7.9 OF THE CREDIT AGREEMENT. Section 7.9
of the Credit Agreement is hereby amended by deleting said section in its
entirety and replacing it with the following new section:
SECTION 7.9. CAPITAL EXPENDITURES. The Borrower AND
its Subsidiaries shall not make or commit to make annual Capital
Expenditures (excluding any acquisition permitted by Section 7.4
hereof but including in the case of Exchanges only the net amount of
cash expended by the Borrower or any of its Subsidiaries, if positive,
in each Exchange) in any fiscal year which are in an amount in excess
of (a) one and six-tenths (1.6) times the sum of depreciation and
landfill amortization expense for such fiscal year, plus (b) THE
AMOUNT OF ANY Capital Expenditures permitted to be made under clause
(a) of this Section 7.9 in the previous fiscal year, which were not
actually made in such fiscal year.
<PAGE> 5
-5-
6. AMENDMENT TO SECTION 8.1 OF THE CREDIT AGREEMENT. Section 8.1
of the Credit Agreement is hereby amended by deleting the table set forth
therein in its entirety and by replacing it with the following new table:
Period Ratio
------ -----
Ending 9/30/97 4.00:1
12/31/97 to 9/30/98 3.75:1
12/31/98 to Maturity Date 3.50:1
7. AMENDMENT TO SECTION 8.2 OF THE CREDIT AGREEMENT. Section 8.2
of the Credit Agreement is hereby amended by deleting the table set forth
therein in its entirety and by replacing it with the following new table:
Period Ratio
------ -----
Closing Date to 9/30/97 2.00:1
12/31/97 to 9/30/98 2.10:1
12/31/98 to 9/30/99 2.20:1
12/31/99 to Maturity Date 2.30:1
8. AMENDMENTS TO SECTION 12.1 OF THE CREDIT AGREEMENT. Section
12.1 is hereby amended as follows:
(a) Section 12.1(n) of the Credit Agreement hereby
amended by deleting at the end of such subsection the word "or".
(b) Section 12.1(o) of the Credit Agreement is hereby
amended by inserting at the end of such subsection the word "or".
(c) Section 12.1 of the Credit Agreement is hereby
amended by inserting at the end of such section the following new subsection
(p):
(p) if the financial statements, certificates and
information delivered by the Borrower to the Banks pursuant to
Section 6.4(a) with respect to the fiscal year ended September
30, 1996 materially differ, in the reasonable opinion of the
Agent, in any adverse respect from the management prepared
financial information for the fiscal year ended September 30,
1996 delivered to the Banks in connection with the bank
meeting held November 14, 1996.
9. AMENDMENT TO EXHIBIT C OF THE CREDIT AGREEMENT. The Credit
Agreement is hereby further amended by deleting Exhibit C thereto in its
entirety and replacing it with Exhibit C attached hereto.
<PAGE> 6
-6-
10. REPRESENTATIONS AND WARRANTIES. The Borrower and the Guarantors
jointly and severally represent and warrant as follows:
(a) The execution and delivery of this Second Amendment and the
Credit Agreement, as modified by this Second Amendment, and the performance of
the transactions contemplated hereby and thereby (i) are within the corporate
authority of the Borrower and each of the Guarantors, (ii) have been duly
authorized by all necessary corporate proceedings on the part of the respective
Borrower or Guarantor, (iii) do not conflict with or result in any material
breach or contravention of any provision of law, statute, rule or regulation to
which the Borrower or any Guarantor is subject or any judgment, order, writ,
injunction, license or permit applicable to the Borrower or any Guarantor so as
to materially adversely affect the assets, business or any activity of the
Borrower and the Guarantors as a whole, and (iv) do not conflict with any
provision of the corporate charter or bylaws of the Borrower or any Guarantor
or any agreement or other instrument binding upon the Borrower or any
Guarantor. There have been no amendments to the charter documents or bylaws of
the Borrower or any Guarantor since November 21, 1995, except as otherwise
disclosed to the Banks.
(b) The execution and delivery of this Second Amendment and the
Credit Agreement, as modified by this Second Amendment, and the performance of
the transactions contemplated hereby and thereby will result in valid and
legally binding obligations of the Borrower and the Guarantors party thereto
enforceable against each in accordance with the respective terms and provisions
hereof and thereof, except as enforceability is limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or affecting
generally the enforcement of creditors rights and except to the extent that
availability of the remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding therefor may
be brought.
(c) The execution and delivery by the Borrower and the Guarantors
of this Second Amendment and the Credit Agreement, as modified by this Second
Amendment, and the consummation by the Borrower and the Guarantors of the
transactions contemplated hereby and thereby do not require any approval or
consent of, or filing with, any governmental agency or authority other than
those already obtained.
(d) The representations and warranties contained in the Credit
Agreement or in any document or instrument delivered pursuant to or in
connection with the Credit Agreement or this Second Amendment were true as of
the date as of which they were made and are true at and as of the Effective
Date (as such term is defined in Section 16 hereof) with the same effect as if
made at and as of that time (except that since the date of the Credit Agreement
the Borrower has acquired Butte Disposal & Recycling, Inc., such acquisition
having been previously disclosed to the Banks, and except to the extent of
changes resulting from transactions
<PAGE> 7
-7-
contemplated or permitted by the Credit Agreement and changes occurring in the
ordinary course of business which singly or in the aggregate are not materially
adverse, and to the extent that such representations and warranties relate
expressly and solely to an earlier date).
(e) The Borrower and the Guarantors have performed and complied,
and have caused the Borrower's Subsidiaries to perform and comply, with all
terms and conditions in the Credit Agreement and this Second Amendment,
required to be performed or complied with by them prior to or at the Effective
Date, and no default or event of default or condition which would result in a
default or event of default has occurred and is continuing. Notwithstanding
the foregoing, the Borrower acknowledges that it has not yet delivered to the
Agent the stock of Butte Disposal & Recycling, Inc., and has not yet caused
such new Subsidiary to become a Guarantor under the Credit Agreement and the
other Loan Documents. The Agent and the Banks hereby reserve all of their
rights under the Credit Agreement, including the right to declare an Event of
Default in the event that such actions are not taken as soon as practicable in
accordance with the terms of the Credit Agreement.
11. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects
and shall continue in full force and effect. Each of the Guarantors hereby
confirms that the guaranty contained in Section 27 of the Credit Agreement and
its Guaranteed Obligations remain in full force and effect. This Second
Amendment and the Credit Agreement shall hereafter be read and construed
together as a single document, and all references in the Credit Agreement, any
other Loan Document or any agreement or instrument related to the Credit
Agreement shall hereafter refer to the Credit Agreement as amended by this
Second Amendment.
12. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS) AND SHALL TAKE EFFECT AS A SEALED
INSTRUMENT IN ACCORDANCE WITH SUCH LAWS.
13. COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts and by different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which counterparts taken together shall be deemed to
constitute one and the same instrument.
14. HEADINGS. Headings or captions used in this Second Amendment are
for convenience of reference only and shall not define or limit the provisions
hereof.
<PAGE> 8
-8-
15. EXPENSES. The Borrower and the Guarantors hereby jointly and
severally agree to pay to the Agent, on demand by the Agent, all reasonable
out-of-pocket costs and expenses incurred or sustained by the Agent in
connection with the preparation of this Second Amendment (including reasonable
legal fees).
16. EFFECTIVENESS. This Second Amendment shall become effective
upon the satisfaction of each of the following conditions (the "Effective
Date"):
(a) This Second Amendment shall have been executed and delivered
by the Borrower, the Guarantors, the Agent and the Majority Banks; and
(b) The Borrower shall have paid to the Agent for the pro-rata
accounts of each Bank who has executed and delivered this Second Amendment on
or before November 26, 1996 an amendment fee in the amount of $1,000 times such
Bank's Commitment Percentage.
<PAGE> 9
-9-
IN WITNESS WHEREOF, the parties have executed this Second Amendment
under seal as of the date first above written.
THE BORROWER:
-------------
NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
THE GUARANTORS:
---------------
ALTA ENVIRONMENTAL SERVICES, INC.
ALTA EQUIPMENT LEASING CO., INC.
AUBURN PLACER DISPOSAL SERVICE
B & J DROP BOX
BUONATERRA, INC.
CITY GARBAGE COMPANY OF EUREKA
CONSOLIDATED ENVIRONMENTAL
INDUSTRIES, INC.
DEL NORTE DISPOSAL, INC.
DEL NORTE RECOVERY, INC.
DIXON SANITARY SERVICE
ENVIROCAL, INC.
EXCEL ENVIRONMENTAL, INC.
FOOTHILL DISPOSAL CO., INC.
GOLDEN GATE DISPOSAL &
RECYCLING COMPANY
INTEGRATED ENVIRONMENTAL
SYSTEMS, INC.
LOS ALTOS GARBAGE COMPANY
MACOR, INC.
MASON LAND RECLAMATION
COMPANY, INC.
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
<PAGE> 10
-10-
NORCAL/SAN BERNARDINO,INC.
NORCAL/SAN DIEGO, INC.
NORCAL WASTE SERVICES OF
SACRAMENTO, INC.
NORCAL WASTE SOLUTIONS, INC.
OROVILLE SOLID WASTE DISPOSAL, INC.
SAN BRUNO GARBAGE CO., INC.
SANITARY FILL COMPANY
SOUTH VALLEY REFUSE DISPOSAL, INC.
SOUTHERN HUMBOLDT DISPOSAL
SERVICE, INC.
SUNSET PROPERTIES, INC.
SUNSET SCAVENGER COMPANY
VACAVILLE SANITARY SERVICE
VALLEJO GARBAGE SERVICE, INC.
WEST COAST RECYCLING CO.
WESTERN PLACER RECOVERY COMPANY
YUBA SUTTER DISPOSAL, INC.
ZANKER ROAD RESOURCE
MANAGEMENT CO.
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
TRI-COUNTY DEVELOPMENT CO., a
general partnership
By: NORCAL WASTE SYSTEMS, INC.,
General Partner
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
By: ENVIROCAL, INC., General Partner
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
<PAGE> 11
-11-
VACAVILLE FILL, a general partnership
By: ALTA ENVIRONMENTAL
SERVICES, INC., General Partner
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
By: B & J DROP BOX, General Partner
By: /s/ MICHAEL J. SANGIACOMO
-----------------------------
Michael J. Sangiacomo
President
THE BANKS AND AGENT:
--------------------
THE FIRST NATIONAL BANK OF
BOSTON, individually and as Agent
By: /s/ TIMOTHY M. LAURION
-----------------------------
Timothy M. Laurion
Vice President
THE BANK OF NOVA SCOTIA
By: /s/ ERIC M. KNIGHT
---------------------------------
Eric M. Knight
Relationship Manager
BANQUE PARIBAS
By: /s/ NANCI MEYER
---------------------------------
Nanci Meyer
Assistant Vice President
By: /s/ STANLEY P. BERKMAN
---------------------------------
Stanley P. Berkman
General Partner
Western Region
<PAGE> 12
-12-
BHF-BANK AKTIENGESELLSCHAFT
By: /s/ PERRY FORMAN
-----------------------------
Perry Forman
Vice President
By: /s/ DAN DOBRJANSKYI
-----------------------------
Dan Dobrjanski
Assistant Treasurer
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By: /s/ JOHN KORTHUIS
-----------------------------
John Korthuis
Vice President
By: /s/ T. MORGAN EDWARDS II
-----------------------------
T. Morgan Edwards II
Deputy General Manager
UNION BANK OF CALIFORNIA, N.A.
By: /s/ JULIE BLOOMFIELD
-----------------------------
Julie Bloomfield
Vice President
WELLS FARGO BANK, N.A.
By: /s/ PETER W. CLARK
-----------------------------
Peter W. Clark
Vice President
<PAGE> 1
EXHIBIT 10.46
FORM OF NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of December __, 1996, by and
between NORCAL WASTE SYSTEMS, INC., a California corporation (the "Company"),
and __________________________ ("Optionee"). The parties agree as follows:
1. Grant of Option. Pursuant to the Company's 1996
Employee Stock Incentive Plan (the "Plan"), the Company has granted Optionee a
nonqualified stock option (the "Option") to acquire _______ shares of the
Company's common stock (the "Shares") at an exercise price equal to the greater
of (a) $4.89 per Share, or (b) the Fair Market Value of a Share as of the date
of grant of this Option.
2. Vesting. As long as Optionee remains employed by the
Company, the Option will become exercisable ("Vest") as follows:
Cumulative Percentage Cumulative Number
Date of Shares Vested of Shares Vested
-------- --------------------- -----------------
Before
9/30/97 0% -0-
9/30/97 20% _____
9/30/98 40% _____
9/30/99 70% _____
9/30/00 100% _____
Upon the termination of Optionee's employment with the Company for any reason
(whether by reason of death, disability, voluntary resignation, involuntary
termination or any other reason), all Unvested Shares will remain Unvested
Shares, no further Shares will become Vested, and the Option may not be
exercised to purchase any Unvested Shares.
3. Exercise of Option.
(a) As long as Optionee remains employed by the
Company, the Optionee may exercise this Option to purchase all or part of the
Shares that have Vested at any time on or before September 30, 2003.
(b) After Optionee's Termination of Service for
any reason, Optionee must exercise this Option within the time periods
specified in Section 7(e) of the Plan, pursuant to the procedures set forth in
Section 7(f) of the Plan.
-1-
<PAGE> 2
4. Compliance with Securities Laws. The grant and any
subsequent exercise of this Option are subject to compliance with all
applicable federal and state securities laws.
5. Other Terms. The other terms of this Option will be
the same as those provided for in the Plan. The Plan is attached hereto and is
incorporated herein by this reference. Optionee has read the Plan and agrees
to be bound by its terms.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date set forth above.
NORCAL WASTE SYSTEMS, INC.
By: ________________________ ________________________
Michael J. Sangiacomo [NAME OF OPTIONEE]
President and CEO
Attachments (1) Spousal Consent
(2) 1996 Employee Stock Incentive Plan
-2-
<PAGE> 3
SPOUSAL CONSENT
The undersigned ("Consenting Spouse") is the spouse of the
Optionee referred to in the attached Nonqualified Stock Option Agreement (the
"Agreement") and has had an opportunity to read and understand the Agreement
and the 1996 Employee Stock Incentive Plan of Norcal Waste Systems, Inc. (the
"Company"). The Consenting Spouse hereby consents to the Agreement, and agrees
to cooperate in enabling his or her spouse to meet all obligations provided for
in the Agreement and the Plan. The Consenting Spouse is aware that by the
provisions of the Agreement and the Plan, the Optionee agrees to sell all of
his or her Shares, including any community interest of the Consenting Spouse in
the Shares, on the occurrence of certain events. The Consenting Spouse
understands that the Company is relying upon this consent in entering into this
Agreement and in not taking further steps to protect its interests.
Dated:______________ _______________________________
Signature
-3-
<PAGE> 1
EXHIBIT 12.1
NORCAL WASTE SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS, EXCEPT RATIO)
FISCAL YEARS ENDING 1992 THROUGH 1996
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before Income Taxes,
Extraordinary Item and Change in
Accounting Principle.................. $(1,136) $17,096 $ 8,859 $19,588 $(39,398)
Interest Expense(a)..................... 24,326 19,909 20,920 23,900 28,958
Capitalized Interest.................... (413) 0 0 0 0
Interest Portion of Rental Charge(b).... 751 506 504 515 460
------- ------- ------- ------- -------
Income (loss) before Income Taxes,
Extraordinary Item, Interest and
Interest Portion of Rental Charge..... $23,528 $37,511 $30,283 $44,003 $ (9,980)
======= ======= ======= ======= =======
Interest Expense........................ $24,326 $19,909 $20,920 $23,900 $ 28,958
Interest Portion of Rental Charge....... 751 506 504 515 460
------- ------- ------- ------- -------
Interest Expense plus Interest Portion
of Rental Charge...................... $25,077 $20,415 $21,424 $24,415 $ 29,418
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges...... --(c) 1.84 1.41 1.80 --(d)
</TABLE>
- ---------------
(a) In addition, the Company guaranteed certain obligations of a less than 50%
owned entity in the amount of $2.0 million as of September 30, 1996. The
less than 50% owned entity incurred approximately $0.2 million of interest
expense on these obligations in the year ended September 30, 1996. This
amount was not included in the calculation of the ratio of earnings to fixed
charges as the Company had not been required to honor the guarantees and
does not expect to be required to do so.
(b) Interest portion of rentals is assumed to equal 33% of operating lease and
rental expense for the period.
(c) In 1996, earnings were insufficient to cover fixed charges by $1,549.
(d) In 1992, earnings were insufficient to cover fixed charges by $39,398.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF NORCAL WASTE SYSTEMS, INC.
Alta Environmental Services, Inc.
Alta Equipment Leasing Co., Inc.
Auburn Placer Disposal Service
B&J Drop Box
Buonaterra, Inc.
Butte Disposal & Recycling, Inc.
City Garbage Company of Eureka
Consolidated Environmental Industries, Inc.
Del Norte Disposal, Inc.
Del Norte Recovery, Inc.
Dixon Sanitary Service
Envirocal, Inc.
Excel Environmental, Inc.
Foothill Disposal Co., Inc.
Golden Gate Disposal & Recycling Company
Integrated Environmental Systems, Inc.
Los Altos Garbage Company
Macor, Inc.
Mason Land Reclamation Company, Inc.
Norcal/San Bernardino, Inc.
Norcal/San Diego, Inc.
Norcal Service Center, Inc.
Norcal Waste Services of Sacramento, Inc.
Norcal Waste Solutions, Inc.
Norcal Waste Systems of Southern California, Inc.
Oroville Solid Waste Disposal, Inc.
San Bruno Garbage Co., Inc.
Sanitary Fill Company
South Valley Refuse Disposal, Inc.
Southern Humboldt Disposal Service, Inc.
Sunset Properties, Inc.
Sunset Scavenger Company
Tri-County Development Co.*
Vacaville Fill*
Vacaville Sanitary Service
Vallejo Garbage Service, Inc.
West Coast Recycling Co.
Western Placer Recovery Company
Yuba Sutter Disposal, Inc.
Zanker Road Resource Management Co.
- ---------------
* Subsidiaries marked with an asterisk are California general partnerships. All
other subsidiaries are California corporations, with the exception of Mason
Land Reclamation Company, Inc. (Missouri corporation).
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Michael J. Sangiacomo, Mark R. Lomele and
Jon D. Braslaw, and each of them, as his or her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for and in his or
her name, place and stead, in any and all capacities, to sign on his or her
behalf the Norcal Waste Systems, Inc. (the "Company") Annual Report on Form 10-K
for its fiscal year ended September 30, 1996, and to execute any amendments
thereto, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
with the full power and authority to do and perform each and every act and thing
necessary or advisable to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
DATED: December 20, 1996
/s/ GALE R. KAUFMAN
--------------------------------------
GALE R. KAUFMAN
/s/ JOHN B. MOLINARI
--------------------------------------
JOHN B. MOLINARI
/s/ H. WELTON FLYNN
--------------------------------------
H. WELTON FLYNN
/s/ MICHAEL J. SANGIACOMO
--------------------------------------
MICHAEL J. SANGIACOMO
/s/ MARK R. LOMELE
--------------------------------------
MARK R. LOMELE
/s/ JON D. BRASLAW
--------------------------------------
JON D. BRASLAW
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 14,378
<SECURITIES> 6,889
<RECEIVABLES> 40,731
<ALLOWANCES> 1,611
<INVENTORY> 2,434
<CURRENT-ASSETS> 70,723
<PP&E> 222,595
<DEPRECIATION> 85,448
<TOTAL-ASSETS> 321,235
<CURRENT-LIABILITIES> 65,867
<BONDS> 175,451
0
0
<COMMON> 241
<OTHER-SE> 5,876
<TOTAL-LIABILITY-AND-EQUITY> 321,235
<SALES> 0
<TOTAL-REVENUES> 288,215
<CGS> 0
<TOTAL-COSTS> 261,149
<OTHER-EXPENSES> 3,014
<LOSS-PROVISION> 1,275
<INTEREST-EXPENSE> 23,913
<INCOME-PRETAX> (1,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 31,379
<CHANGES> 0
<NET-INCOME> 30,243
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
