UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission file number 33-80777
NORCAL WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2922974
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Thomas Mellon Circle, Suite 304
San Francisco, California 94134
- --------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 330-1000
----------------
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 . No X .
---- ----
The number of shares of the registrant's common stock outstanding on
September 27, 1996, was 24,134,973
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
June 30, September 30,
1996 1995
-------- -------------
Assets
<S> <C> <C>
Current assets:
Cash $6,799 $8,416
Restricted cash - 2,721
Marketable securities, including trust accounts 6,352 5,645
Accounts receivable, less allowance for doubtful
accounts of $1,557 at June 30, 1996 and $1,277
at September 30, 1995 32,935 30,965
Other receivables 797 90
Parts and supplies 2,457 2,411
Prepaid expenses 6,037 4,710
-------- --------
Total current assets 55,377 54,958
-------- --------
Property and equipment:
Land 42,691 45,187
Landfills 21,090 19,720
Buildings and improvements 42,088 42,490
Vehicles and equipment 102,340 100,357
Construction in progress 10,228 5,639
-------- --------
Total property and equipment 218,437 213,393
Less accumulated depreciation and amortization 82,818 80,962
-------- --------
Property and equipment, net 135,619 132,431
-------- --------
Franchises, permits and other intangibles, net 77,244 79,956
Trust accounts 25,464 31,289
Deferred financing costs, net 9,497 252
Other assets 111 266
-------- --------
Total other assets 112,316 111,763
-------- --------
$303,312 $299,152
======== ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
June 30, September 30,
1996 1995
-------- -------------
Liabilities and Stockholder's Deficit
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt $352 $28,277
Capital lease obligations 910 3,419
Accounts payable 10,102 9,941
Accrued expenses 35,082 33,203
Income taxes payable 1,417 3,884
Deferred revenues 3,351 2,838
Other accrued liabilities 5,664 8,885
-------- --------
Total current liabilities 56,878 90,447
-------- --------
Long-term debt 172,341 67,603
Obligations under capital leases 3,308 4,071
Deferred income taxes 8,098 13,039
Landfill closure liability 21,982 21,456
Postretirement medical benefits 33,795 33,905
Other liabilities 11,017 10,468
Subordinated notes payable - 102,041
-------- --------
Total liabilities 307,419 343,030
-------- --------
Commitments and contingencies
Stockholder's deficit:
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 (110,685) (143,158)
Pension liability adjustment (5,059) (8,581)
Unrealized gains and losses on securities (247) -
-------- --------
50,628 14,880
Less net scheduled contribution to the ESOP (54,735) (58,758)
-------- --------
Total stockholder's deficit (4,107) (43,878)
-------- --------
$303,312 $299,152
======== ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $71,228 $69,632 $208,632 $200,271
Cost of operations:
Operating expenses 49,536 46,687 146,016 136,048
Depreciation and amortization 4,280 5,115 13,710 14,955
ESOP compensation expense (232) 2,325 3,311 6,060
General and administrative 7,860 6,378 22,784 18,988
------- ------- -------- --------
Total cost of operations 61,444 60,505 185,821 176,051
Operating income 9,784 9,127 22,811 24,220
Interest expense (6,404) (4,815) (17,882) (15,288)
Gain/(loss) on dispositions, net 321 12 (519) 44
Settlement of litigation - - (3,648) -
Other income/(expense) 46 835 332 2,072
------- ------- -------- --------
Income from operations before income
taxes and extraordinary item 3,747 5,159 1,094 11,048
Income tax expense - 1,912 - 4,328
------- ------- -------- --------
Income before extraordinary item 3,747 3,247 1,094 6,720
Extraordinary gain on early extinguishment
of long-term debt - - 31,379 -
------- ------- -------- --------
Net income $3,747 $3,247 $32,473 $6,720
======= ======= ======== ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
For the period ended June 30, 1996
(in thousands)
(unaudited)
<CAPTION>
Unrealized Net
Additional Pension gains and scheduled
Common Stock paid-in Accumulated liability losses on contribution
Shares Amount capital deficit adjustment securities to the ESOP Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1995 24,135 $241 $166,378 $(143,158) $(8,581) $- $(58,758) $(43,878)
Adjustments to the net
scheduled contribution
to the ESOP - - - - - - (1,516) (1,516)
Contributions to reduce
ESOP debt - - - - - - 5,539 5,539
Pension liability
adjustment - - - - 3,522 - - 3,522
Unrealized losses on
on available for
sale securities - - - - - (247) - (247)
Net income - - - 32,473 - - - 32,473
------- --------- --------- --------- ---------- --------- --------- ---------
Balances, June 30, 1996 24,135 $241 $166,378 $(110,685) $(5,059) $(247) $(54,735) $(4,107)
======= ========= ========= ========= ========== ========= ========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
June 30
1996 1995
-----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $32,473 $6,720
Extraordinary gain on early extinguishment of
long term debt (31,379) -
--------- --------
Income before extraordinary gain 1,094 6,720
Adjustments to reconcile net income to net cash
provided by operating activities.
Depreciation and amortization 14,802 15,631
ESOP compensation expense 3,091 6,060
Settlement of litigation - (5,480)
Other (2,680) 273
Changes in assets and liabilities, net of
effects of acquisitions and dispositions (10,141) 2,806
--------- --------
Net cash provided by operating activities 6,166 26,010
--------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (15,467) (14,498)
Proceeds from dispositions 1,204 579
Deposits to trust accounts (9) (3,186)
Withdrawals from trust accounts 10,158 -
Withdrawals from restricted cash 2,736 9,062
Other (320) (20)
--------- --------
Net cash used in investing activities (1,698) (8,063)
--------- --------
Cash flows from financing activities:
Proceeds from senior debt 170,172 -
Principal payments on long-term debt and capitalized
leases (97,459) (19,326)
Principal payments on subordinated debt (73,061) -
Proceeds from long-term debt and capitalized leases 676 3,153
Payment on notes receivable by ESOP 3,531 -
Deferred financing costs (9,944) -
--------- --------
Net cash used in financing activities (6,085) (16,173)
--------- --------
Net increase/(decrease) in cash (1,617) 1,774
Cash, beginning balance 8,416 5,933
--------- --------
Cash, ending balance $6,799 $7,707
========= ========
Supplemental schedule of net cash paid for:
Interest $13,597 $10,436
========= ========
Income taxes $3,713 $747
========= ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements
(1) General
The interim consolidated financial statements presented herein
include Norcal Waste Systems, Inc. and its subsidiaries (the
"Company"). These interim consolidated financial statements
should be read in conjunction with the Company's consolidated
financial statements and the notes thereto, which include
information as to significant accounting policies, for the year
ended September 30, 1995. Such interim consolidated financial
statements are unaudited but, in the opinion of management,
reflect all adjustments necessary (consisting of items of a
normal recurring nature) for a fair presentation of the
Company's interim financial position, results of operations, and
cash flows. Results of operations for interim periods are not
necessarily indicative of those of a full year.
(2) Nature of Business
Through its subsidiaries, Norcal Waste Systems, Inc. provides
integrated waste services to residential, commercial and
industrial customers throughout California. The Company's
services include refuse collection, recycling and other waste
diversion, transfer station and hauling operations, and
operation of both Company-owned and third party owned landfills.
(3) Long-term Debt and Subordinated Notes Refinancing
<TABLE>
Long-term debt at June 30, 1996 and September 30, 1995 is summarized
as follows:
(in thousands)
<CAPTION>
June 30 September 30
--------- ------------
<S> <C> <C>
Bank Loans:
Facility A and B loans, six-year term
loan dated September 30, 1992, original
principal of $149,734, interest at 9.63% $-- $93,951
Senior Notes due November 15, 2005, interest
at 12.75% adjusting to 13.5% by November 16, 1997
if certain conditions are not met 170,325 --
Subordinated Notes:
ESOP Notes in default, interest at 8% -- 48,792
Envirocal Notes, interest at 2% and 5.5% -- 53,249
Notes payable to former shareholders, due in
monthly installments through 2017, interest
at 6% to 8.5% 865 914
Other Notes 1,503 1,014
----------- -------------
Total debt 172,693 197,920
Less current portion 352 28,277
----------- -------------
Long-term debt and subordinated notes payable $172,341 $169,643
=========== =============
</TABLE>
On November 21, 1995, the Company completed a private debt offering
of $175.0 million in Senior Notes (the "Senior Notes"). The Senior
Notes mature in November 2005 with interest payable semi-annually.
The Senior Notes are 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 Senior Notes may be partially redeemed in the
event of a public offering, or would be required to be redeemed in
the event of a change in control of the Company. The Senior Notes
are unsecured and will rank pari passu in right of payment to all
existing and future senior indebtedness of the Company. The Notes
are guaranteed on a senior unsecured basis by the Company's
wholly-owned subsidiaries. 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), (ii) limit the purchase,
redemption or retirement of capital stock and (iii) limit the
incurrence of additional debt. 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 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 Notes out of the proceeds of equity sales. In
addition, based on a Registration Rights agreement entered into in
conjunction with the issuance of the Senior Notes, the Company was
obligated to file a registration statement with the Securities and
Exchange Commission and to use its best efforts to cause the
registration statement to become effective within 180 days from the
date the Senior Notes were issued. The statement was not effective
in the required time frame, thereby causing a registration default.
The Company was obligated to pay liquidated damages accruing from the
date of default until August 16, 1996 (the date the registration
statement was declared effective) in the amount of 0.5% per annum.
The Company received net proceeds from the Senior Notes of $170.2 million
(after original issuance discount of $4.8 million). Deferred financing
costs at June 30, 1996 include commissions and other costs
related to the offering and new credit agreement (see below) and
are amortized over the life of the Senior Notes and new credit
agreement using the straight-line method. The Company used the
proceeds from the Senior Notes, proceeds from the liquidation of
an indemnification trust and cash balances to repay $94.0
million of long-term debt, $2.2 million of capital leases,
redeem subordinated notes for $73.1 million and settle
litigation of $3.6 million. The recorded value of the
subordinated notes was $102.9 million, accordingly the Company
recorded an extraordinary gain of $31.4 million in November 1995.
In conjunction 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 Credit Agreement
establishes 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.
(4) Income Taxes
During fiscal 1995 the Company used the remainder of its net
operating loss carryforward for tax purposes. In the first
quarter of 1996, as a result of settlement of litigation and
related transactions the Company has determined that it is more
likely than not that it will realize certain of its deferred tax
assets for which a valuation allowance was previously
established. Consequently, the Company recognized no tax expense
on the extraordinary gain on early extinguishment of long-term
debt and anticipates an overall tax rate for 1996 of zero.
(5) Marketable Securities and Trust Accounts
As of June 30, 1996 and September 30, 1995 the Company had
classified $14.8 million and $31.3 million, respectively, as
"held to maturity" securities and $17.0 million and $5.6 million
as securities "available for sale." 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 investments held in trust account 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. Unrealized
holding gains and losses for available-for-sale securities are
excluded from earnings and are reported as a net amount in
stockholder's equity.
(6) Guarantee of Securities
Norcal is a holding company and has no independent assets or
operations other than those relating to its investments in
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.
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion reviews the Company's operations for
the three and nine months ended June 30, 1996 and should be read
in conjunction with the Company's September 30, 1995 audited
consolidated financial statements and the unaudited consolidated
financial statements and related notes thereto included
elsewhere herein. Contained within the results of operations
and liquidity sections are several references to the
"refinancing transaction." This pertains to several
transactions, collectively referred to as the "refinancing
transaction," completed on November 21, 1995, which included
issuance of senior notes in the amount of $175.0 million,
entering into a new credit agreement providing for a revolving
credit facility of up to $100 million and the simultaneous
retirement of approximately $199.1 million of the Company's then
outstanding indebtedness and certain of the ESOP's indebtedness
to third parties. (See footnotes to the consolidated financial
statements for additional information.)
Forward Looking Statements. Those statements followed by an
asterisk (*) may be perceived as 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. These include, but are not limited to:
general economic conditions, inability to maintain rates
sufficient to cover costs, inability to obtain timely rate
increases, fluctuations in commodities prices, changes in
environmental regulation or related laws, competition, changes
in tax rates, and limitations in deductions or realization of
deferred tax assets.
Introduction
Norcal Waste Systems, Inc. ("Norcal") and its subsidiaries
(collectively referred to herein as the "Company") provide
nonhazardous solid waste management services throughout
California, including collection, transfer, disposal, landfill
management, recycling and other waste services. The Company
owns 5 landfills and operates an additional 23 for local
government entities. The Company currently serves an estimated
405,000 commercial and residential customers.
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 (known as
"tipping fees") charged to third party waste collectors who
dispose of solid waste at the Company's transfer stations and
landfills, fees charged for landfill management services
provided to third party landfill owners and revenues generated
from the sale of recyclable materials.
Operating expenses include labor, disposal fees paid to third
parties, fuel, equipment maintenance and rental, engineering and
other professional services and other direct costs of operating
collection, recycling, transfer station, hauling and landfill
operations. Also included are accruals for future landfill
closure and post-closure costs, based on an estimated liability
for closure and thirty (30) years of post-closure, consistent
with regulatory requirements. General and administrative
expenses include management salaries, administrative and
clerical overhead costs, professional services costs and other
fees and expenses. ESOP compensation expense reflects in part
contributions made by the Company to the ESOP. ESOP
compensation expense also includes amounts contributed by the
Company to the ESOP to fund distributions to retired, terminated
or withdrawing participants.
Results of Operations
The following tables present, for the periods indicated, the
period to period change in dollars and percentages, along with
the percentage relationship to total consolidated revenue:
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
Operating Comparison
(in thousands)
<CAPTION>
Period to period change Period to period change
for the Three Months for the Nine Months
Ended June 30, 1996 Ended June 30, 1996
$ % $ %
----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues: $1,596 2.3% $8,361 4.2%
------- ------------ --------- ------------
Cost of operations:
Operating expenses 2,849 6.1% 9,968 7.3%
Depreciation and amortization (835) -16.3% (1,245) -8.3%
ESOP compensation expense (2,557) -110.0% (2,749) -45.4%
General and administrative 1,482 23.2% 3,796 20.0%
------- ------------ --------- ------------
Total cost of operations 939 1.6% 9,770 5.5%
Operating income 657 7.2% (1,409) -5.8%
Interest expense (1,589) 33.0% (2,594) 17.0%
Gain/(loss) on dispositions, net 309 2575.0% (563) -1279.5%
Settlement of litigation - - (3,648) -100.0%
Other income/(expense) (789) -94.5% (1,740) -84.0%
------- ------------ --------- ------------
Income from operations before
income taxes and
extraordinary item (1,412) -27.4% (9,954) -90.1%
Income tax expense (1,912) -100.0% (4,328) -100.0%
------- ------------ --------- ------------
Income/(loss) before
extraordinary item 500 15.4% (5,626) -83.7%
------- ------------ --------- ------------
Extraordinary item - gain on early
retirement of debt, net - - 31,379 100.0%
------- ------------ --------- ------------
Net income $500 15.4% $25,753 383.2%
======= ============ ========= ============
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
Percentage relationship to Total Revenues
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
------- -------- --------- --------
Cost of operations:
Operating expenses 69.6% 67.0% 70.0% 67.9%
Depreciation and amortization 6.0% 7.3% 6.6% 7.5%
ESOP compensation expense -0.3% 3.3% 1.6% 3.0%
General and administrative 11.0% 9.3% 10.9% 9.5%
------- -------- --------- --------
Total cost of operations 86.3% 86.9% 89.1% 87.9%
------- -------- --------- --------
Operating income 13.7% 13.1% 10.9% 12.1%
Interest expense -9.0% -6.9% -8.6% -7.6%
Gain/(loss) on dispositions, net 0.5% 0.0% -0.2% 0.0%
Settlement of litigation - - -1.7% -
Other income/(expense) 0.1% 1.2% 0.2% 1.1%
------- -------- --------- --------
Income from operations before
income taxes and
extraordinary item 5.3% 7.4% 0.6% 5.6%
Income tax expense - 2.7% - 2.2%
------- -------- --------- --------
Income before extraordinary
item 5.3% 4.7% 0.6% 3.4%
------- -------- --------- --------
Extraordinary item - gain on early
retirement of debt, net - - 15.0% -
------- -------- --------- --------
Net income 5.3% 4.7% 15.6% 3.4%
======= ======== ========= ========
</TABLE>
Three months ended June 30, 1996 and 1995
Revenues. Revenues increased $1.6 million (2.3%) for the three
months ended June 30, 1996, as compared to the same period in
1995. The increase in revenues was due to higher project
management, collection and transfer station/landfill revenues
(11.0%), partially offset by lower recycling and other revenues
(-8.7%). Project management and transfer station/landfill
revenues increased primarily as a result of expanded landfill
operations and solid waste management activities in San
Bernardino County . Higher collection revenues were the result
of rate increases. Recycling revenues were down significantly
due to lower prices received from the sale of recyclable
commodities, primarily paper and cardboard.
Operating Expenses. Operating expenses increased $2.8 million
(6.1%) for the three month period ended June 30, 1996, as
compared to the same period in 1995. As a percentage of
revenues, operating expenses increased to 69.6% for the three
months ended June 30, 1996 from 67.0% for the same period last
year. The increase was due primarily to higher project
management, subcontractor and other costs associated with the
expansion of the landfill operations in San Bernardino County.
Insurance costs also increased primarily as a result of new
policies that expanded insurance coverage for environmental and
fiduciary risks. 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.
Depreciation and Amortization. Depreciation and amortization
decreased $0.8 million for the three month period ended June 30,
1996, as compared to the same period in 1995. Approximately $0.4
million of the decrease is attributable to a year to date
adjustment in landfill depletion expense based on the receipt of
annual estimates of utilization and remaining capacity at the
Company's landfills prepared by independent third- party
engineers. The remainder is attributable to 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 and
decreased $2.6 million for the three month period ended June 30,
1996, as compared to the same period in 1995. ESOP compensation
expense in the period ended June 30, 1996 reflected a reduction
of $1.0 million which resulted from the year to date effects of
an unanticipated decrease in the Company's expected contribution
to the ESOP relating to the ESOP's use of $3.5 million (received
as a result of a litigation settlement) to reduce ESOP debt to
the Company.
General and Administrative. General and administrative
expenses increased $1.5 million (23.2%) for the three month
period ended June 30, 1996, as compared to the same period in
1995. As a percentage of revenues, general and administrative
expenses increased to 11.0% for the three months ended June 30,
1996 from 9.3% for the same period last year. The increase was
due to higher administrative costs associated with the new
and/or expanded landfill operations in San Bernardino and
San Diego Counties, higher payroll and related costs which
resulted from general wage increases and additional management
personnel, and increased professional services.
Operating Income. Operating income increased $0.7 million
(7.2%) for the three month period ended June 30, 1996, as
compared to the same period in 1995. As a percentage of
revenues, operating income increased to 13.7% from 13.1% for the
three months ended June 30, 1996 and 1995, respectively. The
results for the period ended June 30, 1996 were favorably
impacted by the recognition of the year to date effects of
adjustments to landfill depletion expense and ESOP compensation
expense described above. The primary causes of the decrease in
operating income for the current quarter were the significant drop
in recycling revenues due to lower commodity prices coupled with
higher operating and general and administrative expenses.
Interest Expense. Interest expense increased $1.6 million
(33.0%) to $6.4 million for the three months ended June 30,
1996, as compared to the same period 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.
Other Income (Expense). Other income for the three months
ended June 30, 1996 decreased by $0.8 million (94.5%) as
compared to the same period in 1995. The decrease in other
income was due to losses incurred from the sales of investments
held in trust accounts and equity in losses of an affiliate.
Income Tax Expense (Benefit). There was no income tax expense
during the three months ended June 30, 1996, as compared to
income tax expense of $1.9 million for the same period in 1995.
The Company anticipates an effective rate for fiscal 1996 of
zero as a result of its evaluation that it will realize certain
of its deferred tax assets for which a valuation allowance had
previously been established.* It is anticipated in fiscal 1997
and thereafter that the Company's effective tax rate may be
higher than the statutory federal rate because of the existence
of permanent differences between financial statements, tax
returns and state taxes.*
Net income. The Company reported net income for the three
months ended June 30, 1996, of $3.7 million compared to net
income of $3.2 million in 1995. Net income was impacted by the
landfill depletion expense adjustment and ESOP compensation
expense reductions discussed above. The results for the quarter
were negatively impacted by those factors discussed in Operating
Income as well as higher interest and other expenses.
Nine months ended June 30, 1996 and 1995
Revenues. Revenues increased $8.4 million (4.2%) for the nine
month period ended June 30, 1996, as compared to the same period
in 1995. The increase in revenues was due to higher project
management, collection and transfer station/landfill revenues
(10.7%), partially offset by lower recycling revenues and other
revenues (-6.5%). Transfer station/landfill and project
management revenues increased primarily as a result of expanded
landfill operations and solid waste management activities in San
Bernardino County. Higher collection revenues were the result of
rate increases. Recycling revenues were down significantly due
to lower prices received from the sale of recyclable
commodities, primarily paper and cardboard.
Operating Expenses. Operating expenses increased $10.0 million
(7.3%) for the nine month period ended June 30, 1996, as
compared to the same period in 1995. As a percentage of
revenues, operating expenses increased to 70.0% for the nine
months ended June 30, 1996, from 67.9% for the same period last
year. The increased costs were due to higher subcontractor and
project related costs, insurance and payroll and related costs.
The increase in project management, subcontractor and other
costs was associated with the expanded landfill operations in
San Bernardino County. Insurance costs also increased primarily
as a result of new policies that expanded insurance coverage for
environmental and fiduciary risks. 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.
Depreciation and Amortization. Depreciation and amortization
decreased $1.2 million for the nine month period ended June 30,
1996, as compared to 1995. Approximately $0.4 million of the
decrease is attributable to a year to date reduction in landfill
depletion expense based on the receipt of annual estimates of
utilization and remaining capacity at the Company's landfills
prepared by independent third-party engineers. The remainder is
attributable to 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 and
decreased $2.7 million for the nine month period ended June 30,
1996, as compared to the same period in 1995. ESOP compensation
expense for 1996 is based on a restructuring of Company loans to
the ESOP, which resulted in lower payment amortization. ESOP
compensation expense for the period ended June 30, 1996 also
reflected a reduction of $1.0 million which resulted from the
year to date effects of an unanticipated decrease in the
Company's expected contribution to the ESOP relating to the
ESOP's use of $3.5 million (received as a result of a litigation
settlement) to reduce ESOP debt to the Company.
General and Administrative. General and administrative
expenses increased $3.8 million (20.0%) for the nine month
period ended June 30, 1996, as compared to the same period in
1995. As a percentage of revenues, general and administrative
expenses increased to 10.9% for the nine months ended June 30,
1996 from 9.5% for the same period last year. The increase was
due to higher payroll and related costs which resulted from
general wage increases, additional management personnel, higher
administrative costs associated with the new and/or expanded
landfill operations in San Bernardino and San Diego
Counties, along with higher professional services.
Operating Income. Operating income decreased $1.4 million
(5.8%) for the nine month period ended June 30, 1996, as
compared to the same period in 1995. As a percentage of
revenues, operating income decreased to 10.9% from 12.1% for the
nine months ended June 30, 1996 and 1995, respectively. The
results for the period ended June 30, 1996 were favorably
impacted by the recognition of the year to date effects of
adjustments to landfill depletion expense and ESOP compensation
expense described above. The primary causes of the decrease in
operating income for the current period were the significant drop
in recycling revenues due to lower commodity prices coupled with
higher operating and general and administrative expenses.
Interest Expense. Interest expense increased by $2.6 million
(17.0%) to $17.9 million for the nine months ended June 30,
1996, as compared to the same period 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 the
nine months ended June 30, 1996 reflects the payment of $3.6
million made to the holders of ESOP Notes as part of the ESOP
noteholder litigation settlement agreement.
Other Income (Expense). Other income decreased by $1.7 million
(84.0%) to $0.3 million for the nine months ended June 30, 1996,
as compared to the same period in 1995. The decrease in other
income was due to non-operating expenses incurred during the
current period, including equity in losses of an affiliate,
certain expenses associated with the refinancing transaction,
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
in the first nine months of 1996, as compared to income tax
expense of $4.3 million for the same period in 1995. The
Company anticipates an effective rate for fiscal 1996 of zero as
a result of its evaluation that it will realize certain of its
deferred tax assets for which a valuation allowance had
previously been established.* It is anticipated in fiscal 1997
and thereafter that the Company's effective tax rate may be
higher than the statutory federal rate because of the existence
of permanent differences between financial statements, tax
returns and state taxes.*
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 $32.5 million
for the nine months ended June 30, 1996, as compared to net
income of $6.7 million for the same period in 1995. The net
income for the current period is attributable to the
Extraordinary Gain and the one time ESOP expense adjustment,
offset by those factors discussed in Operating Income as well as
higher interest expense, settlement of litigation and lower
other income.
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. The Company has
operated with working capital deficits for the past several
years, primarily due to the current portions of debt obligations
and other accrued liabilities. Throughout this period, the
Company has financed its operations primarily through operating
cash flow and the proceeds from divestiture of certain
operations. The Company was able to take advantage of limited
access to capital lease financing during the last year. With
the completion of the refinancing transaction in November 1995
and the impact of operations for the current period, the Company
has improved its working capital position by $34.0 million to a
working capital deficit of $1.5 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 transaction the
Company entered into a credit agreement that provides for up to
$100 million of additional borrowings 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. At
June 30, 1996 the Company had utilized $9.4 million of its credit
facility for letters of credit and had availability under the
agreement (based on limitations imposed by certain financial ratios)
of $36.1 million of which $14.6 million may be utilized for additional
letters of credit. 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), (ii) limit the purchase,
redemption or retirement of capital stock and (iii) limit the
incurrence of additional debt.
Cash Flow from Operations. Cash flow from operations decreased
76.3% to $6.2 million for the nine months ended June 30, 1996
from $26.0 million for the same period last year. The decrease
was due to the income before extraordinary item of $1.1 million
for the nine months ended June 30, 1996 compared to income of
$6.8 million for the same period a year ago, increases in
accounts receivable, prepaid expenses and reductions in accrued
interest and other items previously accrued. The Company expects
future cash flow generated from operating activities and
available financing will be adequate to support ongoing
activities of the Company and generate cash flow sufficient to
support capital expenditures and other investing and financing
activities.*
Cash Flow from Investing Activities. Cash used by investing
activities was $1.7 million for the nine months ended June 30,
1996. 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. The Company withdrew $3.4 million from other trust
funds for reimbursements of landfill closure and corrective
action activities. In addition, $2.7 million was received from
restricted cash accounts which were released upon completion of
the refinancing transaction and applied to the then outstanding
debt balance. The Company also generated $1.2 million from the
sale of miscellaneous assets and used $15.5 million on capital
expenditures during the nine month period primarily for
vehicles, containers and other equipment.
For the same period last year, the Company withdrew $9.1
million from restricted cash accounts to fund a litigation
settlement of $5.5 million which occurred in December 1994,
along with partial funding of the $14.5 million of capital
expenditures made during the period.
Cash Flow from Financing Activities. During the nine months
ended June 30, 1996, the Company used $6.1 million in cash for
financing activities. As discussed above, the Company completed
a refinancing transaction on November 21, 1995 which included
the receipt of $170.2 million from the issuance of Senior Notes
and the payment of then outstanding bank debt, certain
capitalized lease obligations and redemption of subordinated
notes. In addition, the Company incurred approximately $9.9
million in fees and expenses related to the transaction. In
addition, the Company received $3.5 million from the ESOP as
payment of notes receivable which the ESOP paid from the
proceeds of the litigation settlement.
During the same period in 1995, the Company used $16.2 million
in cash for financing activities. Financing activities for that
period consisted of principal payments on long term debt and
capital leases of $19.3 million, partially offset by proceeds
from capitalized leases of $3.2 million.
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 post-closure management and
remediation of leachate and contaminated groundwater could be
subject to periodic and substantial revision as the Company's
knowledge increase 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 the six months
ended June 30, 1996 has had a negative impact on Company results
at least 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 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
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
tentatively concluded it will continue to utilize the method of
accounting prescribed by APB 25.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Litigation Regarding the ESOP Notes.
The 1995 settlement (the "Settlement") between Norcal, the
Norcal Waste Systems, Inc. Employee Stock Ownership Plan and
Trust (the "ESOP") and the plaintiffs in Abraham, et. al. v.
Norcal Waste Systems, Inc., et. al., Case No. C94-076 CAL (the
"Abraham Action"), related to certain claims by former holders
of certain notes issued by the ESOP, requires that Norcal and
the ESOP cooperate with the plaintiffs in bringing an action
regarding the enforceability and scope of any indemnity or other
liability of any parties released in the Settlement as may be
reasonably necessary to resolve any claim of such liability made
by the remaining defendant, the Bank of America (the "Bank").
The Bank has asserted that Norcal and the ESOP have continuing
indemnification obligations to it in connection with the Abraham
Action. On June 19, 1996, Norcal and the ESOP moved to intervene
in the Abraham Action to bring a declaratory relief action
establishing that they have no obligation to indemnify the Bank
following the Settlement. On August 16, 1996 the court granted
the motion to intervene and allowed the filing of the declaratory
relief action. On September 10, 1996 the Bank filed tort, contract
and declaratory relief claims against Norcal and the ESOP arising
out of the Settlement and the events alleged in the Abraham Action
seeking compensatory and punitive damages.
Department of Labor Matter.
In accordance with the settlement between the Department of
Labor (the "Department") and the Company (the
"Department-Company Settlement"), the Internal Revenue Service
and the Department made the determinations necessary to allocate
and release the approximately $3.5 million in settlement
proceeds that had been held in escrow. In May 1996, pursuant to
those determinations, $45,000 of proceeds was deposited in one
of the Company's pension plans; and the remainder was remitted
to the ESOP, which used such proceeds to pay a portion of its
debt to the Company.
On March 29, 1996, the Bank of America (the "Bank") and the
Department entered into a settlement of the action entitled
Reich v. Bank of America, NT & SA, Case No. C96-0583 CAL (the
"Bank-Department Settlement"), which was conditioned on the
Company and the Company's pension plans (the "Plans") issuing
releases of the Bank. In April 1996, pursuant to the
Bank-Department Settlement, the Bank paid to the Plans the
aggregate amount of $4.0 million; and the Bank released the
Company, the Plans and certain related persons, including
officers, directors, agents, fiduciaries, advisers and
attorneys, from all claims, including indemnification claims,
relating to the Techno-Therm transaction, the Bank-Department
Settlement or the Department-Company Settlement. The Bank's $4.0
million payment to the Plans will result in a reduction of the
Company's pension liability balance and the pension liability
adjustment component of the Company's Stockholder's Deficit.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On September 24, 1996 Norcal issued $175.0 million in principal amount of
12-1/2% Series B Senior Notes in exchange for an identical face amount of
outstanding 12-1/2% Series A Senior Notes upon consummation of Norcal's
exchange offer.
Item 6. Exhibits and Certain Reports
3.1 Articles of Incorporation of Norcal Waste Systems, Inc.*
3.2 Restated By-laws of Norcal Waste Systems, Inc.*
4.1 Indenture Agreement between Norcal Waste Systems, Inc.
and IBJ Schroder Bank and Trust Company dated as of
November 21, 1995*
4.2 Form of 12-1/2% Series A Senior Notes due 2005 (included
in Exhibit 4.1, Exhibit A)*
4.3 Form of 12-1/2% Series B Senior Notes due 2005 (included
in Exhibit 4.1, Exhibit A)*
10.16 Employment Agreement between the Company and Donald M.
Moriel dated as of June 4, 1996*
10.17 Separation Agreement between the Company and Richard
C. Broderson effective as of March 15, 1996*
10.25 1996 Executive Stock Incentive Plan, as amended*
10.26 1996 Non-Employee Director Stock Option Plan*
10.27 Restated Consulting Agreement between the Company
and Robert Corbolotti dated July 19, 1996*
10.28 Restated Consulting Agreement between the Company
and David Pacini dated July 19, 1996*
10.29 Short-term Incentive Bonus Plan*
10.30 Employment Agreement between the Company and Michael
J. Sangiacomo, dated as of January 22, 1996, as
amended*
10.31 Employment Agreement between the Company and Robert
Corbolotti, dated as of June 24, 1996, effective as
of January 22, 1996, as amended*
10.32 Employment Agreement between the Company and David
Pacini, dated as of June 24, 1996, effective as of
January 22, 1996, as amended*
10.33 Option Agreement between the Company and Michael J.
Sangiacomo, dated as of June 24, 1996, as amended*
10.34 Option Agreement between the Company and David Pacini,
dated as of June 24, 1996, effective as of
January 22, 1996, as amended*
10.35 Option Agreement between the Company and Robert
Corbolotti, dated as of June 24, 1996, effective as
of January 22, 1996, as amended*
10.36 Summary of Material Terms of Severance Policy for
Certain Key Employees*
10.38 Consulting Agreement between the Company 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 the Company and John B. Molinari*
10.42 Stock Option Agreement dated as of April 4, 1996,
between the Company and H. Welton Flynn*
27.00 Financial Data Schedule
* Incorporated by reference to the identically numbered exhibit to Registrant's
registration statement No. 33-80777 on Form S-4, as amended and declared
effective on August 16, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORCAL WASTE SYSTEMS, INC.
(Company)
/s/ Mark R. Lomele
-------------------------------
Mark R. Lomele
Vice President and
Acting Chief Financial Officer
Dated as of: September 27, 1996
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED FINANCIAL STATEMENTS OF NORCAL WASTE SYSTEMS, INC., FOR THE NINE
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
(IN THOUSANDS EXCEPT PER SHARE DATA.)
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