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PROSPECTUS
Filed Pursuant to Rule
424(b)3
File No. 33-80777
NORCAL WASTE SYSTEMS, INC.
OFFER TO EXCHANGE ITS
12 1/2% SERIES B SENIOR NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OF ITS OUTSTANDING
12 1/2% SERIES A SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON SEPTEMBER
20, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
Norcal Waste Systems, Inc., a California corporation ("Norcal," together
with its subsidiaries, the "Company"), hereby offers, upon the terms and subject
to the conditions set forth in this prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate of up to $175,000,000 principal amount of
12 1/2% Series B Senior Notes due 2005 (the "New Notes") for an identical face
amount of outstanding 12 1/2% Series A Senior Notes due 2005 (the "Old Notes"
and, with the New Notes, the "Notes"). The terms of the New Notes are identical
in all material respects to the terms of the Old Notes except for certain
transfer restrictions and registration rights relating to the Old Notes. The New
Notes will be issued pursuant to, and entitled to the benefits of, the Indenture
(as defined) governing the Old Notes. See "The Exchange Offer."
The New Notes will be redeemable at the option of Norcal, in whole or in
part, at any time on and after November 15, 2000, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. On and prior to November 15, 1998, up to 35% of the original
aggregate principal amount of the Notes may, at the option of Norcal, be
redeemed with the proceeds from Public Equity Offerings (as defined) at a
redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption, provided that at least 65%
of the original aggregate principal amount of the Notes remains outstanding
immediately following such redemption. In the event of a Change of Control (as
defined), Norcal will be required to offer to purchase all outstanding Notes at
101% of the principal amount thereof, plus accrued and unpaid interest to the
date of repurchase. See "Description of the Notes."
The New Notes will be senior unsecured obligations of Norcal and will rank
pari passu in right of payment with all existing and future senior indebtedness
of Norcal and senior in right of payment to all existing and future subordinated
indebtedness of Norcal. The New Notes will be guaranteed on a senior unsecured
basis (the "Guarantees") by Norcal's wholly owned subsidiaries (the "Subsidiary
Guarantors"). The Guarantees will be senior unsecured obligations of the
Subsidiary Guarantors and will rank pari passu in right of payment with all
existing and future senior indebtedness of the Subsidiary Guarantors and senior
in right of payment to all existing and future subordinated indebtedness of the
Subsidiary Guarantors. Substantially all of the assets of Norcal and its
subsidiaries have been pledged to secure obligations of Norcal and the
subsidiaries to lenders under the New Credit Agreement (as defined). Holders of
such indebtedness will have priority in right of payment over the holders of the
New Notes to the extent of such pledged assets. At June 30, 1996, the aggregate
principal amount of outstanding senior indebtedness of the Company, other than
the Notes, was $6.6 million, of which $5.6 million was secured. See
"Capitalization" and "Description of the Notes."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the A/B Exchange Registration Rights Agreement
dated as of November 21, 1995 (the "Registration Rights Agreement"). Holders of
Old Notes that are accepted for exchange and exchanged for New Notes will
receive, in cash, accrued interest thereon to, but not including, the original
issuance date of the New Notes. Such interest will be paid together with accrued
interest on the New Notes, on the first interest payment date for the New Notes.
Interest on the Old Notes accepted for exchange and exchanged in the Exchange
Offer will cease to accrue on the date next preceding the date of original
issuance of the New Notes. Interest on the
(continued on next page)
SEE "RISK FACTORS" ON PAGE 12 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN
THE NOTES.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 16, 1996.
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(continued from previous page)
New Notes will be payable semi-annually on May 15 and November 15 of each year,
commencing November 15, 1996. Interest on the New Notes will accrue from the
date of the original issuance until the initial payment date at the rate of
12.75% per annum and will increase by an additional 0.25% per annum on each of
November 16, 1996, May 16, 1997 and November 16, 1997; provided that the
interest rate on the Notes shall revert to 12.5% at such time as Norcal (in one
or more transactions) shall have offered to purchase (whether or not any actual
purchases are made) or redeemed an aggregate of $25.0 million in principal
amount of Notes out of the proceeds of equity sales. The maximum interest rate
on the New Notes will be 13.5% per annum.
The Company is making the Exchange Offer in reliance on the position of the
staff (the "Staff") of the Division of Corporation Finance of the Securities and
Exchange Commission (the "Commission") as set forth in certain interpretive
letters addressed to third parties in other transactions. However, the Company
has not sought its own interpretive letter and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (hereinafter,
holders of the Notes are each individually referred to as a "Holder" and
collectively as the "Holders") (other than a Holder who is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and that such Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. See "The Exchange Offer -- Resale of New Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. To the extent any broker-dealer participates in the Exchange Offer
and so notifies Norcal, or causes Norcal to be so notified in writing, the
Company has agreed that, for a period of up to six months after the effective
date hereof, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
Norcal will not receive any proceeds from the Exchange Offer and will pay
all the expenses incident to the Exchange Offer, subject to certain limitations.
Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. In the event Norcal terminates the Exchange Offer
and does not accept for exchange any Old Notes, it will promptly return the Old
Notes to the holders thereof. See "The Exchange Offer."
Prior to the Exchange Offer, there has been no public market for the Old
Notes or the New Notes. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. If a market for the New Notes should develop, the New Notes
could trade at a discount from their principal amount. Norcal does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. There can be no assurance that
an active public market for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange pursuant to the Exchange Offer.
The Exchange Agent for the Exchange Offer is IBJ Schroder Bank & Trust
Company.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term includes any amendments thereto) on Form S-4 under the Securities Act with
respect to the New Notes offered by this Prospectus (the "Registration
Statement"). This Prospectus does not contain all information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement, or other document are not necessarily complete although the material
terms of any such material contract, agreement or document have been summarized
herein. With respect to each such contract, agreement, or other document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matter involved.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and at Citicorp Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. As a result of the filing of the Registration
Statement with the Commission, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligations of
the Company under the Exchange Act to file periodic reports and other
information with the Commission may be suspended, under certain circumstances,
if the New Notes are held of record by fewer than 300 holders at the beginning
of any fiscal year and the New Notes are not listed on a national securities
exchange.
Whether or not the Company is subject to the reporting requirements of the
Exchange Act in the future, the Company has agreed that, for so long as any of
the Notes remain outstanding, it will furnish to the trustee and holders of the
Notes, make available to investors who so request in writing, and file with the
Commission (unless the Commission will not accept such a filing), copies of
annual and quarterly reports and other information, documents and reports
required pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition,
the Company has agreed that, for so long as any Old Notes remain outstanding, it
will furnish to holders of Old Notes and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
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SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and consolidated financial
statements and notes thereto included elsewhere in this Prospectus. Investors
should carefully consider the information set forth in "Risk Factors" in
evaluating whether to participate in the Exchange Offer. Unless the context
otherwise requires, references in this Prospectus to "Norcal" are to Norcal
Waste Systems, Inc. and references to the "Company" are to Norcal and its
subsidiaries. References in this Prospectus to fiscal years are to the Company's
fiscal years ended September 30.
THE COMPANY
Norcal Waste Systems, Inc. is a vertically integrated waste management
company that through its subsidiaries provides services to approximately 360,000
residential and 45,000 commercial and industrial customers (as of June 30, 1996)
throughout the State of California. The Company's principal activities include
refuse collection, recycling and other waste diversion, transfer station and
hauling operations, and operation of both Company-owned and third party-owned
landfills. According to the National Solid Waste Management Association
("NSWMA"), the Company is the seventh largest waste management company in the
United States based on 1994 revenues. For fiscal year 1995, the Company's total
revenues and EBITDA (as defined) were $271.5 million and $60.8 million,
respectively. For the nine months ended June 30, 1996, the Company's total
revenues and EBITDA were $208.6 million and $38.7 million, respectively.
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. Since the early 1970s, the Company has expanded the
geographic scope of its operations and provides waste management services to 39
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.
According to the NSWMA, the solid waste industry generates domestic private
sector revenues of $32 billion annually. The industry is highly fragmented:
while the three largest waste management companies in the United States
accounted for approximately 30% of estimated industry revenues in 1994, the next
seven largest companies accounted for not more than 5%. Over 9,500 independent
companies accounted for the balance of private sector revenues. The waste
management industry has been consolidating as a result of a number of factors
including the increasing complexity and costs associated with waste management
operations and regulatory compliance. The Company expects consolidation to
continue because many smaller independent operators and municipalities lack the
capital resources, management, operating skills or technical expertise necessary
to operate effectively in such an environment.
Norcal is currently 100% owned by its employees through an employee stock
ownership plan (the "ESOP").
CERTAIN CHARACTERISTICS OF THE COMPANY
Management believes that the following characteristics are evidence of the
Company's strong foundation and provide a platform from which the Company can
grow and take advantage of consolidation within the waste management industry.
Stable Core Operations. The Company possesses a number of core operations
supported by long-standing franchises, contracts and permits. In San Francisco,
the Ordinance supporting the Company's operations provides that, with limited
exceptions, only collectors that have been granted specific permits by the City
may collect or transport solid waste in the City and County of San Francisco.
Norcal's subsidiaries have held the only permits for virtually all routes
governed by the Ordinance since its enactment by the electorate in 1932. The
Ordinance will remain in effect indefinitely, unless amended or repealed by
voters in a citywide election. The Company's San Francisco operations accounted
for 45% of its total revenues and 50% of
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EBITDA in fiscal year 1995 and 41% of its total revenues and 51% of EBITDA for
the nine months ended June 30, 1996.
The balance of the Company's revenues and EBITDA is generated by operations
throughout the rest of California. In these areas, the Company provides refuse
collection and other waste management services pursuant to franchise agreements
or contracts with local government entities that are at inception typically five
to twenty years in duration. In fiscal year 1995, 62% of the Company's revenues
excluding San Francisco operations were generated under agreements which have
remaining terms of 5 years or more, assuming no early termination of such
agreements.
Proven Ability to Maintain Franchises. The Company has historically been
successful in renewing waste management services contracts with local
governments and municipalities and has, over all, expanded the scope of its
services in the process. Such renewals have typically been on terms comparable
to those in the original contracts. In the past ten years, the Company has
renewed or extended its franchise contracts 43 times. In the same period, the
Company was unable to renew only two minor franchise agreements. The Company
believes this past success is attributable to the quality of service provided
and the strong reputation within these municipalities that the Company enjoys.
However, the Company believes that competition in the waste management industry
continues to intensify and, as a result, providing services on a cost-effective
basis will become increasingly important in maintaining its existing franchises.
High Degree of Vertical Integration. In fiscal year 1995, the Company
controlled approximately 85% of the waste tonnage deposited at Company-owned
landfills through its collection and transfer station operations. Of the total
waste tonnage the Company collected in the same period, the Company estimates
that approximately 69% was deposited at either its owned landfills or a third
party-owned landfill with which it holds a long-term disposal contract at
favorable rates. The Company believes that, over time, integration allows it to
realize higher margins by providing a constant waste stream to the landfills it
owns and by mitigating the effect on the Company of short-term fluctuations in
disposal costs at third party landfills.
Substantial Owned Landfill Capacity. As of June 30, 1996, the Company
estimated that its five owned landfills encompass a total of 676 acres permitted
for landfill use. Four of these landfills have substantial remaining unused
capacity, and waste currently being deposited at the fifth landfill will, upon
closure of the landfill, be diverted to another Company-owned site. The Company
believes that its owned disposal capacity provides it with a competitive
advantage due to the increasing cost and difficulty of permitting and developing
new landfill capacity.
Third Party Landfill Operator. The Company operates 23 landfills in
California for third party owners which, together with the Company's five owned
landfills, constitute one of the largest groups of landfills operated in the
state by any waste management company. In 1995, the Company added significant
landfill management services in Southern California under a new contract in San
Diego County and in San Bernardino County. Landfill management services
performed for third party owners generate fee-based revenue with reduced
exposure to environmental liability, and aid the Company in establishing itself
in new geographic markets and with new customers.
Experience in Recycling. The Company has been engaged in recycling since
the 1920s. Today, it collects recyclable materials under arrangements with
various municipalities and commercial customers and processes these materials in
its own facilities. California law requires each local government to recycle or
otherwise divert from landfills 25% of its solid waste. As of January 1, 2000,
this amount will increase to 50%. As statutes mandating recycling or diversion
become more stringent, the Company believes that there will be more demand for
its recycling services. The Company believes that its substantial experience and
demonstrated expertise in providing full service recycling programs will improve
its ability to meet this demand.
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THE REFINANCING
In 1987, the Company's two predecessors merged to form the Company, which
was wholly owned by the ESOP. 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. At December 31, 1990, the aggregate debt of the Company and
the ESOP totalled $281.3 million. 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. See "History of the Company and the Refinancing Plan."
On November 21, 1995, Norcal issued Old Notes in an aggregate principal
amount of $175.0 million (the "Offering"). 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 (the "New Credit
Agreement"). As of June 30, 1996, availability under the New Credit Agreement
(based on limitations imposed by certain financial ratios) was approximately $36
million.
The Company received net proceeds from the Offering of approximately $165.1
million, which proceeds were used, 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. The financing provided by
the Offering and the New Credit Agreement, together with the transactions
effected through the application of the initial proceeds thereof, are
collectively referred to herein as the "Refinancing." See "Capitalization" and
"Description of Other Indebtedness - New Credit Agreement."
BUSINESS STRATEGY
The Company's strategy is to maintain and build upon its existing core
businesses and grow and diversify its revenue base through acquisitions and
development of new contracts and franchises. In its existing businesses, the
Company intends to (i) continue to focus on improving operational efficiencies
through measures such as cost controls, route audits and the increased use of
automation; (ii) augment services provided to its existing customers through
expansion of recycling services and new programs such as yard waste collection;
and (iii) continue to expand disposal capacity at existing landfills. These core
operations contribute to the Company's revenues and EBITDA.
In order to grow and diversify its revenue base beyond existing operations
the Company intends to (i) expand management services at third party-owned
landfills and (ii) make selective acquisitions of waste management operations
that can be effectively integrated into contiguous Company operations or that
operate in geographic markets not currently served by the Company. Through
application of cash flow from its existing operations as well as from other
sources of capital, the Company intends to exploit the economies of scale
available in "tuck-in" acquisitions and also to diversify its geographic revenue
base. The Company's ability to effect acquisitions and implement its strategy is
subject to changes in market conditions and certain other risks. See "Risk
Factors."
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RISK FACTORS
Holders of Old Notes should evaluate all the information set forth in this
Prospectus and, in particular, the specific factors set forth under "Risk
Factors" in connection with the Exchange Offer, which factors pertain to the
following: substantial leverage, possible inability to service debt, effective
subordination of the Notes, restrictions imposed by the New Credit Agreement,
bonding requirements, effect of holding company structure, possible invalidity
of the guarantees, effect of bankruptcy on original issue discount, geographic
concentration of business, changes in legislation and political uncertainty,
environmental regulation and potential litigation, possible liability for
environmental remediation and damages, limited environmental liability
insurance, required payments for ESOP participant benefits, dependence on senior
management, control of Norcal by the ESOP, competitive industry and integration
of acquisitions, the repurchase of the Notes upon a change of control and other
events, absence of public market and the consequences of a failure to exchange.
THE EXCHANGE OFFER
Securities Offered.................. Up to $175.0 million aggregate
principal amount of 12 1/2% Series B
Senior Notes due 2005. The terms of
the New Notes and Old Notes are
identical in all material respects,
except for certain transfer
restrictions and registration rights
relating to the Old Notes.
The Exchange Offer.................. New Notes are being offered in exchange
for a like principal amount of Old
Notes. As of the date hereof, $175.0
million aggregate principal amount of
Old Notes are outstanding. Norcal
will issue the New Notes to holders
promptly following the Expiration
Date. See "Risk
Factors - Consequences of Failure to
Exchange."
Registration Rights Agreement....... The Old Notes were sold on November 21,
1995 to institutional investors. In
connection therewith, the Company
executed and delivered for the
benefit of the holders of the Old
Notes the Registration Rights
Agreement providing, among other
things, for the Exchange Offer. The
Registration Rights Agreement also
provides that if Norcal fails to
cause a registration statement
relating to the Exchange Offer to
become effective within 180 days
after the Closing Date, or to
consummate the Exchange Offer within
45 days after effectiveness, then
Norcal will be required to pay
certain specified amounts to the
holders of the Old Notes. See "The
Exchange Offer - Purpose of the
Exchange Offer."
Expiration Date; Withdrawal of
Tender.............................. The Exchange Offer will expire 5:00
p.m., New York City time, on
September 20, 1996, unless the
Exchange Offer is extended, in which
case the term "Expiration Date" means
the latest date and time to which the
Exchange Offer is extended. Tenders
may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer - Withdrawal of Tenders."
Conditions to the Exchange Offer.... The Exchange Offer is subject to
certain customary conditions, which
may be waived by Norcal. Norcal
currently expects that each of the
conditions will be satisfied and that
no waivers will be necessary. See
"The Exchange Offer - Conditions of
the Exchange Offer."
Procedures for Tendering Old
Notes............................... Each holder of Old Notes wishing to
accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof,
in accordance with the instructions
contained herein
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<PAGE> 8
and therein, and mail or otherwise
deliver such Letter of Transmittal,
or such facsimile, together with the
Old Notes and any other required
documentation to the exchange agent
(the "Exchange Agent") at the address
set forth herein. See "The Exchange
Offer - Procedures for Tendering Old
Notes" and "Plan of Distribution."
Use of Proceeds..................... There will be no proceeds to the
Company from the exchange of Notes
pursuant to the Exchange Offer.
Federal Income Tax Consequences..... The exchange of Notes pursuant to the
Exchange Offer will not be a taxable
event for federal income tax
purposes. See "Certain Federal Income
Tax Considerations."
Special Procedures for Beneficial
Owners.............................. Any beneficial owner whose Old Notes
are registered in the name of a
broker, dealer, commercial bank,
trust company or other nominee and
who wishes to tender should contact
such registered holder promptly and
instruct such registered holder to
tender on such beneficial owner's
behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter
of Transmittal and delivering the Old
Notes, either make appropriate
arrangements to register ownership of
the Old Notes in such owner's name or
obtain a properly completed bond
power from the registered holder. The
transfer of registered ownership may
take considerable time. See "The
Exchange Offer - Procedures for
Tendering Old Notes."
Guaranteed Delivery Procedures...... Holders of Old Notes who wish to tender
their Old Notes and whose Old Notes
are not entirely available or who
cannot deliver their Old Notes, the
Letter of Transmittal or any other
documents required by the Letter of
Transmittal to the Exchange Agent
prior to the Expiration Date must
tender their Old Notes according to
the guaranteed delivery procedures
set forth in "The Exchange
Offer - Procedures for Tendering Old
Notes."
Acceptance of Old Notes and Delivery
of New Notes......................... Norcal will accept for exchange any
and all Old Notes which are properly
tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on
the Expiration Date. The New Notes
issued pursuant to the Exchange Offer
will be delivered promptly following
the Expiration Date. See "The
Exchange Offer - Terms of the
Exchange Offer."
Exchange Agent...................... IBJ Schroder Bank & Trust Company is
serving as Exchange Agent in
connection with the Exchange Offer.
See "The Exchange Offer - Exchange
Agent."
CONSEQUENCES OF EXCHANGING OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the New Notes issued pursuant to the
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<PAGE> 9
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and that such Holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. In addition, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdiction or an exemption from registration or qualification is available and
complied with. The Company has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified limitations therein, to register or
qualify the New Notes for offer or sale under the securities or blue sky laws of
such jurisdictions as any holder of the Notes reasonably requests in writing.
Such registration or qualification may require the imposition of certain
restrictions or conditions (including suitability requirements for offerees or
purchasers) in connection with the offer or sale of any New Notes. If a holder
of Old Notes does not exchange such Old Notes for New Notes pursuant to the
Exchange Offer, such Old Notes will continue to be subject to the restrictions
on transfer contained in the legend thereon. In general, the Old Notes may not
be offered or sold unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "The Exchange Offer - Consequences of
Failure to Exchange," "- Resale of New Notes" and "Plan of Distribution."
The Old Notes are currently eligible for trading in the Private Offerings,
Resale and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old Notes
may continue to be traded in the PORTAL market. Following consummation of the
Exchange Offer, the New Notes will not be eligible for PORTAL trading.
THE NEW NOTES
The Exchange Offer applies to $175.0 million aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes. See "Description of the Notes."
Securities Offered.................. $175,000,000 aggregate principal amount
of 12 1/2% Series B Senior Notes due
2005
Maturity............................ November 15, 2005.
Interest............................ Interest on the New Notes will accrue
from the date of the original
issuance until the initial payment
date at the rate of 12.75% per annum
and will increase by an additional
0.25% per annum on each of November
16, 1996, May 16, 1997 and November
16, 1997; provided that the interest
rate on the New Notes shall revert to
12.5% at such time as Norcal (in one
or more transactions) shall have
offered to purchase (whether or not
any actual purchases are made) or
redeemed an aggregate of $25.0
million in principal amount of Notes
out of the proceeds of equity sales.
The maximum interest rate on the New
Notes will be 13.5% per annum.
Interest Payment Date............... May 15 and November 15 of each year,
commencing November 15, 1996.
Guarantees.......................... The New Notes will be guaranteed on a
senior unsecured basis by the
Subsidiary Guarantors. See
"Description of the
Notes - Guarantees."
8
<PAGE> 10
Optional Redemption................. The New Notes will be redeemable at
Norcal's option, in whole or in part,
on and after November 15, 2000 at the
redemption prices set forth herein,
plus accrued and unpaid interest, if
any, to the redemption date.
In addition, on and prior to November
15, 1998, Norcal may, at its option,
redeem up to 35% of the original
aggregate principal amount of the New
Notes with the net proceeds of Public
Equity Offerings at a redemption
price of 110% of the principal amount
thereof, together with accrued and
unpaid interest, if any, to the date
of redemption; provided that at least
65% of the original aggregate amount
of the New Notes remains outstanding
immediately following such
redemption.
Change of Control................... Upon the occurrence of a Change of
Control (as defined), Norcal will be
required to offer to purchase all
outstanding New Notes at a purchase
price of 101% of the principal amount
thereof, plus accrued and unpaid
interest, if any, to the repurchase
date.
Ranking............................. The New Notes will be senior unsecured
obligations of Norcal and will rank
pari passu in right of payment with
all existing and future senior
indebtedness of Norcal and senior in
right of payment to all existing and
future subordinated indebtedness of
Norcal. The Guarantees will be senior
unsecured obligations of the
Subsidiary Guarantors and will rank
pari passu in right of payment to all
existing and future subordinated
indebtedness of the Subsidiary
Guarantors. Substantially all the
assets of Norcal and its subsidiaries
have been pledged to secure
obligations of Norcal and the
subsidiaries to lenders under the New
Credit Agreement. Holders of such
indebtedness will have priority in
right of payment over the holders of
the New Notes to the extent of such
pledged assets. As of June 30, 1996,
the Company's outstanding senior
indebtedness, other than the Notes,
was $6.6 million, of which $5.6
million was secured. See "Description
of the Notes - Ranking."
Certain Covenants................... The Indenture contains certain
covenants that, among other things,
limit the ability of the Company to
incur additional indebtedness, pay
dividends or make other
distributions, purchase any capital
stock, redeem or repurchase any
subordinated indebtedness, make
certain investments, create certain
liens, enter into sale and leaseback
transactions, enter into certain
transactions with affiliates, sell
assets, or enter in certain mergers
and consolidations. See "Description
of the Notes - Certain Covenants."
Absence of a Public Market for the
New Notes........................... The New Notes are new securities for
which there is currently no
established market. Accordingly,
there can be no assurance as to the
development or liquidity of any
market for the New Notes. The Company
does not intend to apply for listing
on a securities exchange of the New
Notes.
9
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated historical and pro forma financial
data of the Company. The summary financial data for each of the years in the
five year period ended September 30, 1995, have been derived from the audited
Consolidated Financial Statements of the Company. The summary financial data
for, and as of, each of the nine month periods ending June 30, 1995 and 1996
have been derived from the unaudited Consolidated Financial Statements. The data
presented below are qualified by, and should be read in conjunction with, the
Consolidated Financial Statements and notes thereto, the unaudited Consolidated
Balance Sheet and Statements of Operations and Cash Flows and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. Results for the unaudited
nine month period ended June 30, 1996 are not necessarily indicative of the
results to be expected for the Company's full fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $252,834 $253,925 $255,149 $247,176 $271,501 $200,271 $208,632
Operating expenses............... 188,391 174,123 173,515 167,740 183,865 136,048 146,016
General and administrative....... 29,358 24,752 26,286 24,849 26,446 18,988 22,784
Restructuring expenses including
asset writedowns(a)............ 35,168 36,533 0 0 0 0 0
Operating income (loss).......... (30,478) (11,235) 25,724 27,126 33,282 24,220 22,811
Interest expense................. 30,666 28,958 23,900 20,920 19,909 15,288 17,882
Settlement of litigation(c)...... 0 0 0 5,480 0 0 3,648
Income (loss) from continuing
operations..................... (50,093) (39,081) 18,141 6,359(b) 10,433 6,720 1,094
OTHER DATA:
EBITDA(d)........................ $ 34,158 $ 54,507 $ 55,074 $ 54,387 $ 60,804 $ 44,926 $ 38,727
Depreciation &
amortization................... 26,679 26,233 22,704 20,142 19,985 14,955 13,710
Capital expenditures............. 7,642 9,587 9,836 14,622 19,603 14,498 15,467
Ratio of earnings to fixed
charges(e)..................... -- -- 1.8x 1.4x 1.8x 1.7x 1.1x
PRO FORMA DATA:(F)
Interest expense............................................................ $ 24,397 $ 17,657
Ratio of EBITDA to interest expense(g)...................................... 2.6x 2.2x
Ratio of total long term debt to EBITDA..................................... 2.9x N/A
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------
($ IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash.................................................................................. $ 6,799
Property and equipment, net........................................................... 135,619
Franchises and permits, net........................................................... 77,244
Total assets.......................................................................... 303,312
Total long-term debt, including current portion....................................... 176,911
Total stockholder's deficit(h)........................................................ (4,107)
</TABLE>
- ---------------
(a) Restructuring expenses in fiscal years 1991 and 1992 include 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.
(b) Net of a non-recurring gain of $6,928 from asset and subsidiary sales.
(c) Data for fiscal year 1994 and the nine months ended June 30, 1996 represent
non-recurring expenses incurred in connection with the settlement of
litigation involving the Old Subordinated Notes and the ESOP Notes,
respectively.
10
<PAGE> 12
(d) EBITDA is defined as earnings from continuing operations before interest,
taxes, depreciation and amortization, loss on dispositions of assets and
restructuring expenses, non-cash portion of ESOP compensation expense,
minority interest in net income (loss) of subsidiaries, gain on
dispositions and other income (expense). EBITDA is presented here to
provide additional information about the Company's ability to meet its
future debt service, capital expenditure and working capital requirements.
EBITDA is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and should not be considered as an
alternative either to net income (loss) as an indicator of the Company's
operating performance, or to cash flows as a measure of the Company's
liquidity.
(e) Ratio of earnings to fixed charges is calculated as earnings from continuing
operations before income taxes and cumulative effects of changes in
accounting principles, adjusted to add back fixed charges and divided by
fixed charges. Fixed charges consist of interest expense, capitalized
interest and that portion of rental expense deemed to be representative of
interest expense (one-third). In fiscal years 1991 and 1992, earnings were
insufficient to cover fixed charges by $61,043 and $39,398, respectively.
(f) Data presented give effect to the Refinancing and assume (i) the Refinancing
was consummated at the beginning of fiscal year 1995, (ii) the Notes were
outstanding during fiscal year 1995 and interest accrued thereon at a rate
of 12.5% per annum through March 31, 1996, and 12.75% thereafter and (iii)
indebtedness outstanding as of September 30, 1995, after giving pro forma
effect to the Refinancing, was outstanding for the fiscal year. See
"Capitalization."
(g) For purposes of this ratio, interest expense in fiscal year 1995 and for the
nine months ended June 30, 1996 excludes an estimated $950 and $990,
respectively, in amortization of deferred financing costs incurred in
connection with the Refinancing. Also, EBITDA has been reduced by $384 for
fiscal year 1995 to reflect the discontinuance of an operation as if such
discontinuance had occurred at the beginning of that fiscal year.
(h) Stockholder's deficit includes contra-equity accounts to reflect scheduled
contributions to the ESOP of $54,735 to repay indebtedness of the ESOP owed
to the Company, an adjustment to recognize minimum pension liability of
$5,059 and an adjustment to recognize an unrealized loss on available for
sale securities of $247.
11
<PAGE> 13
RISK FACTORS
Holders of Old Notes should carefully consider all of the information
contained in this Prospectus, especially the risk factors described or matters
cross-referenced in the following paragraphs, before deciding to tender their
Old Notes in the Exchange Offer.
SUBSTANTIAL LEVERAGE
As of June 30, 1996, the Company had outstanding long-term debt of $176.9
million and a stockholder's deficit of $4.1 million. This level of indebtedness
and the debt service obligations arising therefrom pose substantial risks to
holders of the Notes. In particular, (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 necessary capital expenditures; (iii) the New
Credit Agreement provides for total maximum borrowing availability of $100.0
million (subject to certain limitations based on the Company's financial
performances), $25.0 million of which may be utilized for letters of credit, and
all of the indebtedness incurred pursuant to the New Credit Agreement is
scheduled to become due prior to the time any principal payments may be made on
the Notes (except for certain optional redemptions); and (iv) 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. See "-- Effective Subordination of the Notes" for current
availability under the New Credit Agreement.
POSSIBLE INABILITY TO SERVICE DEBT
In late 1990, the Company had a high level of indebtedness and experienced
severe constraints on its liquidity and was unable to make scheduled payments on
its indebtedness. The Company renegotiated its senior credit agreements in
September 1992. There can be no assurance that the Company will generate
sufficient cash to service its indebtedness, including its obligations under the
Notes. In addition, borrowings under the New Credit Agreement bear interest at
fluctuating rates, which could increase the Company's interest payment
obligations and could reduce the amounts that would be available for payment of
interest and principal on other indebtedness of the Company if prevailing
interest rates increase. See "History of the Company and the Refinancing,"
"Capitalization" and "Description of Other Indebtedness - New Credit Agreement."
The Company's ability to make scheduled payments on its indebtedness,
including payments on the 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. This indebtedness may be
secured and to the extent of such security would have priority in right of
payment over the Notes. 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. See
"- Required Payments for ESOP Participant Benefits."
EFFECTIVE SUBORDINATION OF THE NOTES
The Old Notes are and the New Notes will be senior unsecured obligations of
Norcal and will rank pari passu in right of payment with all existing and future
senior indebtedness of Norcal and senior in right of payment to all existing and
future subordinated indebtedness of Norcal. The Guarantees will be senior
unsecured obligations of the Subsidiary Guarantors and will rank pari passu in
right of payment with all existing and future senior indebtedness of the
Subsidiary Guarantors and senior in right of payment to all existing and future
subordinated indebtedness of the Subsidiary Guarantors. Subject to certain
restrictions, the Indenture governing the Notes allows the Company to incur
additional senior indebtedness, including secured indebtedness. Holders of
secured indebtedness of Norcal and its subsidiaries will have priority in right
of payment over the holders of the Notes to the extent of the assets
constituting the collateral for such secured indebtedness. Substantially all of
12
<PAGE> 14
the assets of Norcal and the Subsidiary Guarantors have been pledged to secure
obligations of Norcal and the Subsidiary Guarantors to lenders under the New
Credit Agreement. Accordingly, the Old Notes are and the New Notes will be
effectively subordinated to any secured indebtedness of Norcal and its
subsidiaries, including indebtedness under the New Credit Agreement, to the
extent of the assets securing such indebtedness. See "Description of Other
Indebtedness - New Credit Agreement."
On June 30, 1996, the aggregate principal amount of outstanding senior
indebtedness of the Company, other than the Notes, was $6.6 million, of which
$5.6 million was secured. As of June 30, 1996, availability under the New Credit
Agreement (based on limitations imposed by certain financial ratios) was
approximately $36 million. See "Description of Other Indebtedness - New Credit
Agreement."
RESTRICTIONS IMPOSED BY NEW CREDIT AGREEMENT
The New Credit Agreement requires the Company to maintain specified
financial ratios and tests, among other obligations, including an interest
coverage ratio, a debt service coverage ratio, a minimum net worth test and a
debt-to-EBITDA ratio, as defined in the New Credit Agreement. Among other
things, the New Credit Agreement restricts the Company's ability to incur new
indebtedness and make acquisitions. A failure to comply with the restrictions
contained in the New Credit Agreement could lead to a default thereunder which
could result in an acceleration of the associated indebtedness, if any, together
with accrued and unpaid interest. Such an acceleration would constitute a
default under the Indenture relating to the Notes. See "Description of Other
Indebtedness - New Credit Agreement."
BONDING REQUIREMENTS
The Company is required, in most instances, to post bid and/or performance
bonds in connection with contracts or projects with government entities and to
provide other financial assurances covering the closure, post-closure monitoring
and corrective activities for certain waste management facilities. There can be
no assurance that adequate bonding coverage will be available in the future.
EFFECT OF HOLDING COMPANY STRUCTURE
Norcal has no business operations other than those relating to the
ownership of 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 the Subsidiary
Guarantors have been pledged as collateral for their guarantees of Norcal's
obligations under the New 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 New Credit Agreement. In the event
of a default under the New Credit Agreement, the right of Norcal to liquidate
these assets would be subject to the prior claims of the lenders under the New
Credit Agreement.
POSSIBLE INVALIDITY OF GUARANTEES
Norcal's obligations on the Old Notes are and the New Notes will be
guaranteed, jointly and severally, on a senior unsecured basis, by each of the
Subsidiary Guarantors. Under federal or state fraudulent transfer laws, the
Guarantees could be subject to the claim that, since the Guarantees were
incurred for the benefit of Norcal (and only indirectly for the benefit of the
Subsidiary Guarantors), the obligations of the Subsidiary Guarantors thereunder
were incurred for less than reasonably equivalent value or fair consideration.
If a court in a lawsuit by any unpaid creditors or representative of creditors
of a Subsidiary Guarantor, such as a trustee in bankruptcy, were to conclude
that at the time the Guarantees were incurred, such Subsidiary Guarantor (i)
incurred the Guarantee with the intent to hinder, delay or defraud any present
or future creditor, or (ii) did not receive reasonably equivalent value in
exchange for issuing the Guarantee, and (a) was insolvent, (b) was rendered
insolvent by the transaction, (c) was engaged or was about to engage in a
business transaction for which its remaining assets constituted unreasonably
small capital to carry on its business, or (d) intended to
13
<PAGE> 15
incur, or believed that it would incur, debts beyond its ability to pay as they
matured, the court could avoid any such Guarantee. To the extent the Guarantee
of any Subsidiary Guarantor is avoided or is held unenforceable for any reason,
holders of the Notes will cease to have any claim against such Subsidiary
Guarantor and will be creditors solely of Norcal and of any Subsidiary Guarantor
whose Guarantee was not avoided or held unenforceable. In that event, the claims
of holders of the Notes against the issuer of any invalid Guarantee will be
subject to the prior payment in full of all liabilities of such Subsidiary
Guarantor, and there can be no assurance that, after providing for all claims,
there will be sufficient assets to satisfy the claims of the holders of the
Notes relating to any voided Guarantee.
The Notes also may be subject to review under federal or state fraudulent
transfer laws. Approximately $34.1 million of the proceeds from the Offering
were loaned to the ESOP on a non-recourse basis (the "New ESOP Loan") to retire
the ESOP Notes as a condition to consummating a settlement of certain pending
litigation against the ESOP and Norcal and implementing the Refinancing. If a
court in a lawsuit by any unpaid creditor or representative of creditors of
Norcal, such as a trustee in bankruptcy, were to conclude that at the time
Norcal issued the Notes and made the New ESOP Loan, Norcal (i) did so with the
intent to hinder, delay or defraud any present or future creditor, or (ii) did
not receive reasonably equivalent value in exchange for the New ESOP Loan, and
met any of the conditions set forth in clauses (a)-(d) of the foregoing
paragraph, such court could subordinate up to $34.1 million in face amount of
the Notes to existing and future claims of creditors of Norcal or take other
action detrimental to the holders of the Notes. See "Business - Litigation and
Related Matters - Litigation Regarding the ESOP Notes."
Norcal believes that the benefits derived from applying approximately $34.1
million of the proceeds of the Offering to the New ESOP Loan for the stated
purposes, including the concurrent consummation of the above-referenced
settlement and the Refinancing, constituted reasonably equivalent value to
Norcal in exchange for making the New ESOP Loan. However, there can be no
assurance that a court would concur in such belief.
The measure of insolvency for these purposes will vary depending on the law
of the jurisdiction being applied. Generally, a company will be considered
insolvent for these purposes if the sum of the company's debts is greater than
all the company's property at a fair valuation or if the present fair saleable
value of the company's assets is less than the amount that will be required to
pay its probable liability on its existing debts as they become absolute and
mature.
EFFECT OF BANKRUPTCY ON ORIGINAL ISSUE DISCOUNT
The Old Notes were issued with original issue discount. In the event that
Norcal becomes the subject of proceedings under the United States Bankruptcy
Code (Title 11, United States Code), the claims of holders of Notes may be
limited to the sum of (i) the price paid by the first buyers (not including the
Initial Purchasers) of the Old Notes (97.241% of principal value) and (ii) that
portion of the original issue discount which is not deemed to constitute
"unmatured interest" for purposes of the United States Bankruptcy Code. Any
original issue discount that was not accreted at the time of the commencement of
the bankruptcy proceedings would constitute "unmatured interest." For a
discussion of the federal income tax implications of original issue discount,
see "Certain Federal Income Tax Considerations - Other Tax Considerations -
Original Issue Discount."
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 45% and 41% of
the Company's revenues and 50% and 51% of EBITDA for fiscal year 1995 and the
nine month period ended June 30, 1996, respectively, were derived from services
performed in the City and County of San Francisco. 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
14
<PAGE> 16
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 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 Company were to provide inadequate service. In addition,
the terms of the Company's Waste Disposal Agreements (as defined) require the
disposal of all waste collected in San Francisco at its Sanitary Fill transfer
station. In the event that the Ordinance were repealed or amended, the Company
believes that such terms would preserve a portion of its San Francisco-based
revenues. See "- Changes in Legislation and Political Uncertainty,"
"Business - Collection Operations - San Francisco Operations" and "- Franchise
Agreements and Permits."
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.
See "- Environmental Regulation and Potential Litigation."
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. See
"- Environmental Regulation and Potential Litigation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 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. See "Business - Collection Operations - San Francisco
Operations."
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
15
<PAGE> 17
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
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 corporate-related expenses. Given these potential
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 (including the San Francisco permits and the
Waste Disposal Agreements) 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. See
"Business - Environmental Regulation - State and Local Regulation - Potential
Flow Control Legislation."
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 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 the Company or
its affiliates will not have an adverse effect on the Company's business or
prospects. See "Business -- Environmental Regulation," "-- Specific
Environmental Issues," "-- Litigation and Related Matters" and "-- Competition";
"Management -- Executive Officers and Directors," "-- Board of Directors" and
"Certain Relationships and Related Transactions."
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).
16
<PAGE> 18
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 a rate increase. Even if such expenditures can be passed on,
the Company may experience significant delays in doing so. 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. See "Business - Specific Environmental
Issues."
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 very 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. See
"Business - Environmental Regulation."
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. Although the Company intends to
subject all material acquisitions to an extensive due diligence review, there
can be no assurance that the Company will identify all problems or risks in
connection with the
17
<PAGE> 19
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.
LIMITED ENVIRONMENTAL LIABILITY INSURANCE
The Company has obtained environmental impairment liability insurance,
which covers the sudden or gradual onset of environmental damage to third
parties, on all of the Company's owned and operated facilities. The current
policy has a limit of $10.0 million per loss with an annual aggregate limit for
all losses of $10.0 million. 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.
See "Business - Insurance, Bonding and Letters of Credit."
REQUIRED PAYMENTS FOR ESOP PARTICIPANT BENEFITS
The New Credit Agreement and the Indenture 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 to make debt service payments, including payments on the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "The ESOP."
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. See "Management."
CONTROL OF NORCAL BY THE ESOP
All of the issued and outstanding common stock of Norcal is currently owned
by the ESOP. An Administrative Committee that is appointed by and serves at the
pleasure of the Board of Directors of Norcal is responsible for the operation
and administration of the ESOP, including the ESOP's activities as sole
shareholder of Norcal. The Committee elects Norcal's Board of Directors, may
remove these directors, and votes with respect to corporate matters requiring or
presented for shareholder approval. With respect to any corporate matter which
requires a vote of shareholders 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, each ESOP participant
may direct the voting of shares of common stock allocated to his or her ESOP
account. 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 (9,292,554 shares or
38.5% 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 Securities Exchange Act of 1934, as amended (the "Exchange
Act"), each ESOP participant will be able to direct voting of those shares
allocated to his or her
18
<PAGE> 20
account with respect to all corporate matters requiring a shareholder vote and
the Committee will have responsibility for voting unallocated and undirected
shares. See "The ESOP - Trustee and Administrative Committee."
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 Laidlaw Waste
Systems, Inc. and their affiliates, 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 New Credit Agreement and 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. See
"Business - Competition."
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 New Credit Agreement
restricts the Company's ability to make acquisitions. See "Business - Strategy,"
"- Competition" and "Description of Other Indebtedness - New Credit Agreement."
REPURCHASE OF THE NOTES UPON A CHANGE OF CONTROL AND OTHER EVENTS
Upon a Change of Control (as defined), Norcal must offer to purchase the
Notes then outstanding at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest to the date of purchase.
Prepayment or repurchase of the Notes, including repurchase pursuant to a
Change of Control, would constitute an event of default under the New Credit
Agreement. Prior to commencing such an offer to purchase, Norcal may be required
to (i) repay in full all indebtedness of the Company that would prohibit the
repurchase of the Notes, including that under the New Credit Agreement, or (ii)
obtain any requisite consent to permit the repurchase. If Norcal is unable to
repay all of such indebtedness or is unable to obtain the necessary consents,
then Norcal may be unable to offer to repurchase the Notes and such failure will
constitute an Event of Default under the Indenture. There can be no assurance
that Norcal will have sufficient funds available at the time of any Change of
Control to effect the repurchase of the Notes. See "Description of Other
Indebtedness - New Credit Agreement" and "Description of the Notes."
19
<PAGE> 21
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 recent periods, a substantial portion of the Company's
recycling revenues have been derived from the sale of various grades of recycled
paper and paper products, the prices for which have suffered substantial
declines since the fourth quarter of the Company's 1995 fiscal year.
ABSENCE OF PUBLIC MARKET
The New Notes are being offered exclusively to holders of the Old Notes.
The Old Notes were issued to a limited number of institutional investors on
November 21, 1995. There is no existing trading market for the New Notes, and
although the Company has been advised that Bear, Stearns & Co. Inc. and
Montgomery Securities (the "Initial Purchasers") currently intend to make a
market in the New Notes, the Initial Purchasers are not obligated to do so and
may discontinue any such market-making at any time without notice. In addition,
any market-making activities in the Old Notes may be limited during the pendency
of the Exchange Offer. The Old Notes are currently eligible for trading in the
PORTAL market. The New Notes will not be eligible for trading in the PORTAL
market and the Company does not intend to list the New Notes on any securities
exchange or on any automated dealer quotation system. Accordingly, there can be
no assurance that an active trading market for the New Notes will develop, or,
if it develops, that it will continue. Moreover, certain restrictions or
conditions (including suitability requirements for offerees or purchasers) may
be imposed in connection with the offer or sale of New Notes in California.
Future trading prices for the Notes will depend on many factors, including,
among others, the Company's operating results, the market for similar securities
and changes in prevailing interest rates. See "Description of the Notes" and
"Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes contained in the legend thereon. In general, Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently intend to register the Old Notes under the Securities Act. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
20
<PAGE> 22
HISTORY OF THE COMPANY AND THE REFINANCING
Norcal's two predecessors trace the beginnings of their operations to the
early 1920s. In 1932, a City of San Francisco ordinance was passed that
permitted them to perform substantially all solid waste collection services in
San Francisco. In the early 1970s, each of these predecessors formed holding
companies that acquired additional solid waste businesses outside of San
Francisco.
In late 1987, the two predecessors of the Company, each of which was then
wholly owned by its respective employee stock ownership plan, merged to form
Norcal. At the same time, one of the plans merged into the other, with the ESOP
being the survivor. Following these mergers, the ESOP and the Company were
subject to substantial indebtedness incurred in connection with the ESOP
acquiring 100% ownership of the Company as follows: (i) $36.6 million aggregate
principal amount of subordinated notes bearing interest at the rate of 8.0% per
annum issued by the ESOP in 1986 to former shareholders of one of the
predecessors (the "ESOP Notes"); (ii) $41.8 million aggregate principal amount
of subordinated notes bearing interest at the rate of 9.05% per annum issued by
the other predecessor in 1987 to former shareholders to, among other things,
redeem outstanding shares (the "Old Subordinated Notes"); and (iii)
approximately $117.8 million of bank borrowings obtained by the Company's
predecessors in 1986 and 1987, which funds were loaned by such predecessors to
their respective employee stock ownership plans for the acquisitions of such
predecessors.
By late 1990, the Company had significantly expanded the geographic and
functional scope of its operations, making a number of acquisitions and
incurring substantial capital expenditures in various lines of business. A
significant amount of such capital expenditures was incurred with respect to
recycling facilities in response to emerging consumer interest and new
regulations. In large part, the Company funded these activities through
additional bank borrowings and capital leases. The Company's operations expanded
beyond its core business to include such diverse activities as asbestos
abatement, debris box and container manufacturing, construction support
services, tire shredding and wood chipping.
At December 31, 1990, the aggregate principal amount of the Company's total
indebtedness had increased to $244.7 million and was comprised of $156.2 million
in outstanding loans, $46.7 million in capitalized lease obligations and $41.8
million of Old Subordinated Notes. In addition, the aggregate principal amount
of the ESOP Notes was $36.6 million. The Company also had outstanding letters of
credit aggregating $22.1 million in principal amount issued on its behalf. 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 transactions, and additional
indebtedness incurred to finance certain acquisitions and fund capital
expenditures 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. The long-term portion of the
Company's bank borrowings as well as the Old Subordinated Notes and ESOP Notes
and capitalized lease obligations were reflected as current obligations at
September 30, 1991 in the Company's consolidated financial statements. The audit
reports with respect to fiscal years 1991 and 1992 included an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern.
Under a substantially new executive management team, the Company completed
a strategic review of its operations, which identified various businesses and
operations to be closed or sold. The Company discontinued or disposed of 11
operations, representing $50.0 million (or 20%) of the Company's 1990 fiscal
year revenues. This strategic review also resulted in the sale of non-operating
properties, the abandonment and write down of certain development projects,
management changes, personnel reductions and other cost-saving measures. The
Company also secured a series of rate increases.
During 1992, the Company renegotiated its agreements with its banks and
equipment lessors. The Third Amended and Restated Credit Agreement, dated as of
September 30, 1992, as amended, among Norcal and its lenders (the "Old Credit
Agreement"), extended the maturity of such indebtedness to September 30, 1998
but also required the sale of certain subsidiaries to fund $40.0 million in
principal payments. Norcal satisfied this requirement by repaying $37.0 million
under the Old Credit Agreement from asset sales and other sources
21
<PAGE> 23
of cash and depositing $6.0 million into a reserve account. Norcal utilized
approximately $91.5 million of proceeds from the Refinancing, together with
certain cash balances, to repay outstanding amounts under, and terminate, the
Old Credit Agreement.
In December 1994, Norcal effected a settlement with the holders of the Old
Subordinated Notes regarding litigation that was brought in August 1991.
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 redeemed the Class A and B Notes for approximately $39.3 million
with a portion of the proceeds from the Refinancing. This amount represented the
discounted present value of the Class A and B Notes as provided for by the terms
of the indenture under which the notes were issued.
In August 1995, Norcal and the ESOP reached a settlement (the "Settlement")
with certain holders of the ESOP Notes regarding litigation that was brought in
July 1994. 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. See
"Business - Litigation and Related Matters."
On November 21, 1995, as part of the Refinancing, Norcal issued Old Notes
in an aggregate principal amount of $175.0 million, for which it received net
proceeds of approximately $165.1 million. Norcal used the net proceeds from the
Refinancing, together with certain cash balances, to retire substantially all of
its then outstanding indebtedness and certain of the ESOP's indebtedness to
third parties. As of June 30, 1996 the Company's total debt was $176.9 million,
consisting principally of the Notes. See "Capitalization."
Norcal is currently 100% employee-owned through the ESOP. The Company's
principal executive offices are located at Five Thomas Mellon Circle, San
Francisco, California 94134. Its telephone number is (415) 330-1000.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes
pursuant to the Exchange Offer.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
at September 30 and June 30, 1996. The table should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- ---------
($ IN THOUSANDS)
<S> <C> <C>
Cash(a)....................................................... $ 11,137 $ 6,799
========= =========
Long-term debt, including current portion:
Old Credit Agreement........................................ $ 93,951 $ 0
Capitalized lease obligations............................... 7,489 4,218
New Credit Agreement(b)..................................... -- --
Senior Notes................................................ -- 170,325(c)
Class A and B Notes......................................... 53,249 --
ESOP Notes.................................................. 48,792 --
Other Notes................................................. 1,929 2,368
--------- ---------
Total long-term debt................................ 205,410 176,911
Stockholder's deficit:
Common stock................................................ 241 241
Additional paid-in capital.................................. 166,378 166,378
Accumulated deficit......................................... (143,158) (110,685)
Pension liability adjustment(d)............................. (8,581) (5,059)
Net scheduled contribution to the ESOP...................... (58,758)(e) (54,735)(f)
Unrealized losses on securities............................. -- (247)
--------- ---------
Total stockholder's deficit......................... (43,878) (4,107)
--------- ---------
Total capitalization........................... $ 161,532 $ 172,804
========= =========
</TABLE>
- ---------------
(a) Cash at September 30, 1995 includes $2,721 of restricted cash as required by
the Old Credit Agreement. Since consummation of the Refinancing, the
Company has had no restricted cash.
(b) Maximum availability of $100,000, $25,000 of which may be utilized for
letters of credit. At June 30, 1996, availability under the New Credit
Agreement (based on limitations imposed by certain financial ratios) was
approximately $36,000.
(c) Net of original issue discount of $4,675.
(d) Represents the adjustment required to recognize the minimum liability of
accumulated benefit obligation over pension plan assets.
(e) Represents the unpaid balance on the ESOP Notes and loans made to the ESOP
of $80,148, less ESOP compensation expense recognized in excess of tax
deductible Company contributions of $21,390.
(f) Represents the unpaid balance on the ESOP Notes and loans made to the ESOP
of $78,332, less ESOP compensation expense recognized in excess of tax
deductible Company contributions of $23,597.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information presented below for, and as
of the end of, each of the years in the five year period ended September 30,
1995, is derived from the Consolidated Financial Statements of the Company and
its subsidiaries, which financial statements have been audited by KPMG Peat
Marwick LLP, independent auditors. The Consolidated Financial Statements as of
each of the years in the three year period ended September 30, 1995, and the
auditor's report thereon, are included elsewhere in this Prospectus. The
selected historical consolidated financial information for each of the nine
month periods ended June 30, 1995 and 1996 has been derived from the unaudited
Consolidated Balance Sheet and Statement of Operations and Cash Flows which, in
the opinion of management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of the results for such
periods. Results for the unaudited nine month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the Company's full
fiscal year. The information presented below is qualified by, and should be read
in conjunction with, the Consolidated Financial Statements and notes thereto,
the unaudited Consolidated Financial Statements and notes thereto, and the other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................................... $252,834 $253,925 $255,149 $247,176 $271,501 $200,271 $208,632
Cost of operations:
Operating expenses........................ 188,391 174,123 173,515 167,740 183,865 136,048 146,016
Depreciation and amortization............. 26,679 26,233 22,704 20,142 19,985 14,955 13,710
ESOP compensation expense(a).............. 3,715 3,519 6,920 7,319 7,923 6,060 3,311
General and administrative................ 29,358 24,752 26,286 24,849 26,446 18,988 22,784
Restructuring expenses including asset
writedowns(b)........................... 35,168 36,533 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total cost of operations........... 283,312 265,160 229,425 220,050 238,219 176,051 185,821
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)..................... (30,478) (11,235) 25,724 27,126 33,282 24,220 22,811
Interest expense............................ (30,666) (28,958) (23,900) (20,920) (19,909) (15,288) (17,882)
Gain (loss) on dispositions................. 0 0 11,477 6,745 1,279 44 (519)
Settlement of litigation(c)................. 0 0 0 (5,480) 0 0 (3,648)
Other income (expense)...................... 101 795 6,287 1,388 2,443 2,072 332
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and cumulative
effects of changes in accounting
principles.............................. (61,043) (39,398) 19,588 8,859 17,095 11,048 1,094
Income tax expense (benefit)................ (10,950) (317) 1,447 2,500 6,662 4,328 0
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations.............................. (50,093) (39,081) 18,141 6,359 10,433 6,720 1,094
Extraordinary gain on early extinguishment
of long-term debt......................... 0 0 0 0 0 0 31,379
Loss from discontinued operations and
cumulative effect on prior years of
accounting changes(d)..................... (48,910) 0 0 2,500 0 0 0
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $(99,003) $(39,081) $ 18,141 $ 8,859 $ 10,433 $ 6,720 $ 32,473
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(e)................................... $ 34,158 $ 54,507 $ 55,074 $ 54,387 $ 60,804 $ 44,926 $ 38,727
Capital expenditures........................ 7,642 9,587 9,836 14,622 19,603 14,498 15,467
Ratio of earnings to fixed charges(f)....... -- -- 1.8x 1.4x 1.8x 1.7x 1.1x
PRO FORMA DATA:(g)
Interest expense....................................................................... $ 24,397 $ 17,657
Ratio of EBITDA to interest expense(h)................................................. 2.6x 2.2x
Ratio of total long-term debt to EBITDA................................................ 2.9x N/A
Ratio of earnings to fixed charges(f).................................................. 1.5x 1.0x
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
----------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
BALANCE SHEET DATA:
Cash(i)..................................................... $ 7,637 $ 2,183 $ 13,443 $ 18,620 $ 11,137 $ 6,799
Property and equipment, net................................. 187,214 160,242 143,706 129,566 132,431 135,619
Franchises and permits, net................................. 100,099 91,706 86,590 82,587 79,956 77,244
Total assets................................................ 346,292 322,763 305,655 292,299 299,152 303,312
Total long-term debt, including current portion(j).......... 266,657 271,860 258,186 226,013 205,410 176,911
Total stockholder's equity (deficit)(k)..................... (60,173) (99,162) (81,864) (65,935) (43,878) (4,107 )
</TABLE>
- ---------------
(a) Includes non-cash ESOP compensation expense aggregating $3,646, $3,373,
$6,788, $7,031 and $7,528 for the five fiscal years ended 1995 and $6,060
and $2,206 for the nine months ended June 30, 1995 and 1996, respectively.
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 expenses in 1991 and 1992 include 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 fiscal year 1994 and the nine months ended June 30, 1996 represent
non-recurring expenses incurred in connection with the settlement of
litigation involving the Old Subordinated Notes and the ESOP Notes,
respectively.
(d) Cumulative effects of changes in accounting principles include changes for
postretirement benefit of $29,600, without tax benefit, and a loss from
discontinued operations of $19,310, without tax benefit, in 1991; and
changes in income taxes of $2,500 in 1994.
(e) EBITDA is defined as earnings from continuing operations before interest,
taxes, depreciation and amortization, loss on dispositions of assets and
restructuring expenses, non-cash portion of ESOP compensation expense,
minority interest in net income (loss) of subsidiaries, gain on dispositions
and other income (expense). EBITDA is presented here to provide additional
information about the Company's ability to meet its future debt service,
capital expenditure and working capital requirements. EBITDA is not a
measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered as an alternative either to
net income (loss) as an indicator of the Company's operating performance, or
to cash flows as a measure of the Company's liquidity. The following table
presents a reconciliation of EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------------------- ------------------
RECONCILIATION OF EBITDA 1991 1992 1993 1994 1995 1995 1996
-------- -------- ------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before
income taxes and cumulative effects of changes
in accounting principles........................ $(61,043) $(39,398) $19,588 $ 8,859 $17,096 $11,048 $ 1,094
Add:
Interest expense................................ 30,666 28,958 23,900 20,920 19,909 15,288 17,882
Depreciation and amortization................... 26,679 26,233 22,704 20,142 19,985 14,955 13,710
Restructuring expense, including asset
writedowns.................................... 35,168 36,533 0 0 0 0 0
Settlement of litigation........................ 0 0 0 5,480 0 0 3,648
Non-cash ESOP compensation expense.............. 3,646 3,373 6,788 7,031 7,528 6,060 2,206
Less:
Minority interest in net income (loss) of
subsidiaries.................................. 857 397 142 (88) (9) 309 0
Gain (loss) on dispositions, net................ 0 0 11,477 6,745 1,279 44 (519)
Other income (expense).......................... 101 795 6,287 1,388 2,444 2,072 332
-------- ------- -------- ------- ------- ------- -------
EBITDA.................................... $ 34,158 $ 54,507 $55,074 $54,387 $60,804 $44,926 $38,727
======== ======= ======== ======= ======= ======= =======
</TABLE>
(f) Ratio of earnings to fixed charges is calculated as earnings from continuing
operations before income taxes and cumulative effects of changes in
accounting principles, adjusted to add back fixed charges and divided by
fixed charges. Fixed charges consist of interest expense, capitalized
interest and that portion of rental expense deemed to be representative of
interest expense (one third). In fiscal years 1991 and 1992, earnings were
insufficient to cover fixed charges by $61,043 and $39,398, respectively.
(g) Data presented give effect to the Refinancing and assume (i) the Refinancing
was consummated at the beginning of the fiscal year, (ii) the Notes were
outstanding during the fiscal year and interest accrued thereon at a rate of
12.5% per annum through March 31, 1996, and 12.75% thereafter and (iii)
indebtedness outstanding as of September 30, 1995, after giving pro forma
effect to the Refinancing, was outstanding for the fiscal year. See
"Capitalization."
(h) For purposes of this ratio, interest expense in fiscal year 1995 and for the
nine months ended June 30, 1996 excludes an estimated $950 and $990,
respectively, in amortization of deferred financing costs incurred in
connection with the Refinancing. Also, EBITDA has been reduced by $384 for
fiscal year 1995 to reflect the discontinuance of an operation as if such
discontinuance had occurred at the beginning of that fiscal year.
(i) Actual cash includes restricted cash of $6,250, $12,687 and $2,721 as of
September 30, 1993, 1994, and 1995, respectively, as provided in the Old
Credit Agreement for fixed asset purchases and certain specified
transactions. Since consummation of the Refinancing, the Company has had no
restricted cash.
(j) Includes indebtedness of the ESOP as required to be reflected on the
Company's balance sheet by GAAP and net of original issue discount of $4,675
on the Notes.
(k) Stockholder's equity (deficit) includes contra-equity accounts to reflect
scheduled contributions to the ESOP to repay indebtedness of the ESOP of
$82,325, $79,778, $73,980, $68,056, $58,758 and $54,735, adjustments to
recognize minimum pension liability of $2,957, $5,411, $12,052, $10,907,
$8,581 and $5,059 as of September 30, 1991, 1992, 1993, 1994, 1995 and June
30, 1996, respectively.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto and
"Selected Consolidated Financial Information."
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 (known as "tipping fees") charged to third party
waste collectors who dispose of solid waste at the Company's transfer stations
or landfills, and fees for landfill management services charged to third party
landfill owners. Fees charged to collection customers cover not only refuse
collection services, but all services the Company provides (e.g., recycling,
transfer station and landfill operation services, including regulatory costs).
Collection activities typically are conducted by the Company pursuant to
franchises or permits with varying terms issued by local government agencies.
The collection fees the Company may charge residential customers are generally
established by rate boards or other local governmental agencies which allow a
specified return on allowed costs. Rates for commercial and industrial customers
are generally subject to competitive considerations if not covered by a formal
rate-setting mechanism. The Company generally applies for rate increases every
one to three years in each of its franchise areas to reflect on a timely basis
changes in its costs of providing services; however, the Company's costs are
variable and may change from year to year due to inflation and other factors.
Therefore, between rate increases, the Company's revenues tend to remain stable
while its costs tend to increase, causing the Company's operating income to
reflect this timing difference. The timing and amount of rate increases are
affected by many factors, including the prevailing competitive and political
environments. See "Risk Factors - Changes in Legislation and Political
Uncertainty - Problems in Rate-Setting Process" and "Business - Collection
Operations - Rates."
Commercial and industrial collection revenues tend to vary with the level
of overall economic activity, as well as with seasonal changes in certain types
of business activities. Residential revenues tend to be affected by increases or
decreases in residential population. 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. In the aggregate, the costs (including
significant capital costs) related to recycling do not fluctuate in accordance
with changes in prices of 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 recent periods, a substantial portion of the Company's recycling
revenues have been derived from the sale of various grades of recycled paper and
paper products, the prices for which have suffered substantial declines since
the fourth quarter of the Company's fiscal year 1995. See "Business - Collection
Operations - Recycling and Waste Diversion."
The Company receives solid waste at its landfills and transfer stations
from its own collection companies as well as from third parties. The cost to the
Company of providing transfer station and landfill services to its collection
customers is included in the collection rates. The tipping fees the Company
charges third parties for depositing solid waste are generally determined
through "cost-plus" rate-setting proceedings or are based upon competitive
market factors. Tipping fees charged to third parties are based on weight or
volume of waste deposited.
The Company receives management fees from third party owners of landfills
for landfill operations services. These services are generally provided under
long-term contracts. Revenues from these contracts are generally determined on a
cost-plus basis set as a fee per ton for all waste accepted at the landfill.
Since early 1990, collection, disposal and landfill waste volumes and
pricing for services rendered have been under pressure due to the weak
California economy, increased requirements for waste recycling and competition
from landfills both within and outside of the state. Increasingly, public
awareness of environmental concerns and regulatory mandates have increased the
rate of recycling and diversion of solid waste from
26
<PAGE> 28
disposal in landfills. The Company has been pursuing rate increases in its
franchise areas to recover, on a timely basis, landfill regulatory costs, as
well as increased capital and operating costs.
Operating expenses include labor, disposal fees paid to third parties,
fuel, equipment maintenance, equipment rental, engineering, permit costs and
other direct costs of operating collection, recycling, transfer station and
hauling, and landfill operations. Certain landfill developmental expenses are
capitalized and depreciated over the estimated useful life of the site and
include acquisition, engineering and permit costs.
Landfill closure expense consists of accruals for ongoing compliance with
regulatory closure and post-closure requirements. Under generally accepted
accounting procedures ("GAAP"), the Company accrues a liability for closure and
30 years of post-closure maintenance costs on an annual basis in order to match
expense with utilization of landfill capacity. As required by regulations, the
Company also funds trust deposits in anticipation of such liability. The amount
of these deposits differ from the GAAP accruals. There are many unknown and
uncertain factors involved in estimating this liability; the most significant
are changes in regulatory requirements, projected waste volumes and the cost of
treatment of leachate during the post-closure period. Accordingly, estimates for
closure and post-closure costs are subject to periodic revision. See
"- Liquidity and Capital Resources - Other Cash Requirements" and
"Business - Landfills - Financial Assurance Obligations."
General and administrative expenses include management salaries and
clerical and administrative overhead, as well as certain professional services
and corporate costs.
Acquisition costs allocated to intangible assets, namely franchises and
operating permits, are amortized using the straight-line method over their
estimated lives ranging from 3 to 40 years, typically based on the remaining
term of the franchise or permit when acquired.
ESOP compensation expense reflects in part contributions made by the
Company to the ESOP. Annual contributions to the ESOP are subject to the
approval of the Board of Directors and various limitations imposed by the
Internal Revenue Code. The Company's contributions to the ESOP are generally
tax-deductible, as are certain dividends on common stock held by the ESOP. These
contributions are utilized by the ESOP primarily (i) to repay the ESOP's
indebtedness to the Company and (ii) to fund the payment of benefits to retired,
terminated or withdrawing ESOP participants. To the extent ESOP contributions
are used to repay indebtedness owed to the Company, such contributions result in
no cash outlay by the Company. The debt repayment by the ESOP results in an
allocation of Company common stock to ESOP participants' accounts pursuant to a
formula which reflects the ratio of annual to aggregate scheduled principal and
interest payments. This formula generally provides for an accelerated allocation
of shares when compared only to principal repayments. The Company anticipates
that benefit payments to ESOP participants will increase significantly as the
Company's workforce ages and retires, as additional common stock is allocated to
participants' ESOP accounts or if the value of such common stock increases. If
such benefit payments are made by the ESOP in cash, the aggregate number of
allocated shares to ESOP participants will not be reduced. Pursuant to the Code,
this obligation to provide cash for funding ESOP distributions to retired,
terminated or withdrawing participants would not apply if Norcal's common stock
were to be traded in an established market, such as would be the case following
a public offering of such stock. See "Risk Factors - Required Payments for ESOP
Participant Benefits."
The amount of contributions made by the Company each year to the ESOP
differs from ESOP compensation expense recognized on the Company's annual
statement of operations. One major component of ESOP compensation expense is
computed using the shares allocated method, which particular expense is derived
by a formula based on the percentage of total shares allocated for such year and
the original cost of all such shares as reflected by the total amount of
principal to be repaid on ESOP indebtedness incurred to acquire such shares.
Such expense generally does not match on a year-to-year basis the aggregate cost
of shares actually allocated to participants' accounts, as such expense
generally reflects the average cost of such shares. The ESOP compensation
expense also includes amounts contributed by the Company to the ESOP to fund
distributions to retired, terminated or withdrawing participants. The
accompanying balance sheets include as a reduction in stockholder's equity an
amount that represents the aggregate principal amounts which the Company has
scheduled to contribute to the ESOP in future years attributable to a portion of
the
27
<PAGE> 29
ESOP's indebtedness and an offset relating to an amount recognized as
compensation expense in the financial statements which will also be recognized
as a tax deduction as contributions are made to enable the ESOP to repay its
loans.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, income and expense
items expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses............................. 68.0 67.8 67.7 67.9 70.0
Depreciation and amortization.................. 8.9 8.1 7.4 7.5 6.6
ESOP compensation expense...................... 2.7 3.0 2.9 3.0 1.6
General and administrative..................... 10.3 10.0 9.7 9.5 10.9
----- ----- ----- ----- -----
Total cost of operations.................... 89.9 89.0 87.7 87.9 89.1
----- ----- ----- ----- -----
Operating income................................. 10.1 11.0 12.3 12.1 10.9
Interest expense................................. (9.4) (8.5) (7.3) (7.6) (8.6)
Gain (loss) on dispositions, net................. 4.5 2.7 0.5 0.0 (0.2)
Settlement of litigation......................... 0.0 (2.2) 0.0 0.0 (1.7)
Other income (expense)........................... 2.5 0.6 0.8 1.1 0.2
Income tax expense............................... (0.5) (1.0) (2.5) 2.2 0.0
----- ----- ----- ----- -----
Income (loss) from continuing operations....... 7.1 2.6 3.8 3.4 0.6
Extraordinary gain on early extinguishment of
long-term debt................................. 0.0 0.0 0.0 0.0 15.0
Cumulative effect on prior years of accounting
changes........................................ 0.0 1.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Net income............................. 7.1% 3.6% 3.8% 3.4% 15.6%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED JUNE 30, 1996 COMPARED WITH NINE MONTHS ENDED JUNE 30, 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 new and/or expanded landfill
operations and solid waste management activities in San Bernardino and San Diego
Counties. 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 new and/or expanded landfill
operations and solid waste management activities in San Bernardino and San Diego
Counties. 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.
28
<PAGE> 30
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.
29
<PAGE> 31
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 ESOP expense adjustment, offset by those 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
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 by 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 was
due primarily to an increase in recycling revenues of $11.9 million along with
increases in residential, commercial and industrial, and transfer
station/landfill revenues of $5.1 million, $6.9 million and $3.3 million,
respectively. The increase in recycling revenues resulted from higher prices
received from the sale of commodities, while the increases in residential and
commercial and industrial revenues were the result of rate increases received in
several service areas, including San Francisco. The increase in landfill
revenues was due to new business in Southern California along with increases in
tipping fees at several locations.
Operating Expenses. Operating expenses for 1995 increased by 9.6% to
$183.9 million from $167.7 million for 1994. As a percentage of revenues,
operating expenses decreased to 67.7% for 1995 from 67.8% for 1994. Net of the
effect of disposed operations, which had operating expenses of $1.5 million for
1995 and $4.5 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 of $7.2 million, $2.8 million, $2.5 million,
$1.5 million, $1.5 million and $4.6 million, respectively. 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.
Depreciation and Amortization. Net of the effect of disposed operations,
which had depreciation and amortization of $0.1 million in 1994, there was no
net change in depreciation and amortization from continuing operations.
General and Administrative. General and administrative expenses for 1995
increased by 6.5% to $26.4 million from $24.8 million for 1994. As a percentage
of revenues, general and administrative expenses decreased slightly to 9.7% for
1995 from 10.0% for 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 of $0.8 million, along with higher outside data
processing, travel and outside equipment rental costs.
Interest Expense. Interest expense for 1995 decreased by 4.9% 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. See "History of the Company and
the Refinancing."
30
<PAGE> 32
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 a subsidiary and other related entities. The gain on dispositions of
$6.7 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.
Other Income (Expense). Other income for 1995 increased by $6.5 million to
$2.4 million from a loss of $4.1 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 Old Credit Agreement and the recognition of a $5.5 million
expense related to the settlement of litigation in 1994 that did not recur in
1995.
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" ("FAS 109"), 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.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993
The results of operations of the Company during 1994 were affected by the
sale of the stock of two subsidiaries and substantially all of the assets of a
third subsidiary during the first quarter. During 1993, the Company sold the
stock of one subsidiary and transferred a landfill and the associated assets and
liabilities to a municipality.
Revenues. Revenues for 1994 decreased by 3.1% to $247.2 million from
$255.1 million for 1993. Net of the effect of disposed operations, which
comprised revenues of $6.4 million in 1994 and $30.1 million in 1993, revenues
from continuing operations for 1994 increased by $15.7 million or 7.0%. The
increase was primarily due to rate increases received at several operating
subsidiaries, which led to higher residential and commercial revenues of $5.7
million and $3.2 million, respectively. In addition, recycling revenues
increased $3.1 million due to higher prices received from the sale of recyclable
commodities.
Operating Expenses. Operating expenses for 1994 decreased by 3.3% to
$167.7 million from $173.5 million for 1993. As a percentage of revenues,
operating expenses decreased to 67.8% for 1994 from 68.0% for 1993. Net of the
effect of disposed operations, which had attributable operating expenses of $4.4
million in 1994 and $22.5 million in 1993, operating expenses from continuing
operations increased by $12.3 million or 8.2%. The increase was primarily due to
higher payroll and related costs and disposal expense of $5.7 million and $1.7
million, respectively. The increase in payroll and related costs was due to
scheduled wage increases pursuant to existing contracts along with the addition
of personnel to support increased business activity. Disposal expense increased
as a result of paying higher disposal fees at several operating subsidiaries.
Depreciation and Amortization. Depreciation and amortization for 1994
decreased by 11.5% to $20.1 million from $22.7 million for 1993. Net of the
effect of disposed operations, which had attributable depreciation and
amortization of $0.1 million and $2.1 million in 1994 and 1993, respectively,
depreciation and amortization for continuing operations decreased by $0.6
million or 2.9%. The decrease was primarily due to a reduction in depreciation
from a significant number of containers that became fully depreciated at the end
of 1993.
General and Administrative. General and administrative expenses for 1994
decreased by 5.7% to $24.8 million from $26.3 million for 1993. As a percentage
of revenues, general and administrative expenses decreased to 10.0% for 1994
from 10.3% for 1993. Net of the effect of the disposed operations, which had
attributable general and administrative expenses of $0.9 million and $3.5
million in 1994 and 1993,
31
<PAGE> 33
respectively, general and administrative expenses for continuing operations
increased by $1.1 million or 4.8%. The increase was primarily due to an increase
in payroll and related costs of $0.7 million, which resulted from merit
increases and the addition of key management personnel.
Interest Expense. Interest expense for 1994 decreased by 12.6% to $20.9
million from $23.9 million for 1993. The decrease was due to lower interest
rates in 1994 and payments of $45.5 million pursuant to debt obligations during
1994. The reduction in interest related to the debt payments was partially
offset by higher interest accrued on the ESOP Notes and the Old Subordinated
Notes. See "History of the Company and the Refinancing."
Gain on Dispositions. The gain on dispositions of $6.7 million for 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. The gain on dispositions of $11.5 million for 1993 primarily resulted
from the gain on the sale of the stock of a subsidiary and the transfer of the
Company's interest in a landfill and associated assets and liabilities to a
municipal authority.
Other Income (Expense). Other income for 1994 decreased to a loss of $4.1
million from income of $6.3 million for 1993, a decrease of $10.4 million. The
decrease was primarily due to the recognition of $5.5 million in expense
incurred in connection with the 1994 settlement of litigation related to the Old
Subordinated Notes and the recognition of other income in 1993 that did not
recur in 1994. In 1993, $3.4 million in other income was recognized due to a
reduction in reserves for self-insured workers compensation claims as a result
of significant settlement activity and evaluation of contractual coverage with
respect to prior self-insured claims. In addition, $1.2 million was received in
1993 from an insurance settlement.
Income Tax Expense (Benefit). Income tax expense for 1994 increased by
78.6% to $2.5 million from $1.4 million for 1993. The effective income tax rate
for 1994 was 28%, which is less than the federal statutory income tax rate of
34%, due to the current utilization of deferred deductions upon which no
deferred benefit was previously recognized.
Effect of Accounting Change. Effective October 1, 1993, the Company
adopted FAS 109. The Company recognized a cumulative adjustment related to
available net operating losses, which increased income by $2.5 million for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in a capital-intensive industry. From 1988 through
1990, the Company expended substantial amounts of capital on acquisitions,
equipment purchases, facilities expansions, and other business investments, and
to fund working capital needs. Funds to support these activities were provided
by bank borrowings, capital lease financing and, to a lesser extent, operating
cash flow. From 1991 until the Refinancing, the Company financed its operations
from operating cash flow and did not have access to external financing, other
than limited capital lease financing. The Company has assessed its needs for
equipment replacement and believes that cash needed for new equipment over the
next three years will be adequately provided by operations, borrowing
availability under the New Credit Agreement and capital lease financing.
However, if cash flow from operations were inadequate and funds from other
sources were unavailable to accommodate timely replacement of such equipment,
the Company's operations could be adversely effected. 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 approximately $36 million, of which $15.6 million
may be utilized for additional letters of credit. See "History of the Company
and the Refinancing."
As of September 30, 1993, 1994 and 1995, the Company had working capital
deficits of $47.8 million, $33.5 million and $35.5 million, respectively. The
deficits in working capital were substantially due to the current portion of
debt payments and other accrued liabilities. With the consummation of the
Refinancing in November 1995, the Company improved its working capital position
by $34.0 million to a working capital deficit of $1.5 million at June 30, 1996
from a deficit of $35.5 million at September 30, 1995.
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Cash Flow From Operating Activities. Cash provided from operating
activities was $37.9 million, $38.9 million and $36.9 million for 1993, 1994 and
1995, respectively. The increase from 1993 to 1994 was primarily attributable to
improved operating results for continuing operations, the closure or sale of
low-margin or unprofitable operations, and lower interest expenses. 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 operations was $6.2 million for the nine months ended June
30, 1996 compared to $26.0 million for the same period last year. The decrease
was primarily 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, along with increases in accounts receivable, prepaid
expenses and reductions in accrued interest and other items previously accrued.
Cash Flow From Investing Activities. In 1993, investing activities
generated $9.7 million in proceeds from the sale of assets, primarily the sale
of the stock of a subsidiary for $9.0 million, along with $0.7 million in net
proceeds realized from the sale of other non-operating assets. Such proceeds
were used to repay indebtedness as required by the Old Credit Agreement. During
1993, the Company also deposited $6.3 million into a restricted cash account
which was required by the Old Credit Agreement and could be utilized in
subsequent periods for capital expenditures or principal payments. Capital
expenditures totalled $9.8 million in 1993, of which 84% were vehicle and
equipment expenditures.
In 1994, investing activities generated proceeds from asset and subsidiary
sales of $21.6 million, along with withdrawals from restricted cash accounts of
$11.3 million and withdrawals from trust funds of $3.5 million. Investing
activities also included deposits to restricted cash accounts of $17.5 million
which included $6.0 million deposited to a collateral account, primarily in
connection with settlement of claims related to the Old Subordinated Notes. The
proceeds from asset sales were generated primarily by the sale of the stock of
two subsidiaries and substantially all of the assets of a third subsidiary,
along with the sale of certain properties and facilities. The withdrawals from
restricted cash were used to make debt payments and to partially fund the $14.6
million of capital expenditures made by the Company during 1994. Vehicle and
equipment expenditures comprised 66% of 1994 capital expenditures. The
withdrawals from trust funds were related to the release of the Company from
liability in connection with the transfer of the Company's interest in a
landfill in 1993 and were used to repay indebtedness as required by the Old
Credit Agreement.
Investing activities for 1995 included capital expenditures of $19.6
million, of which 58.4% was for vehicles and equipment. Withdrawals from
restricted cash were $10.2 million, which included $5.0 million to fund most of
the payments made in connection with the settlement of claims related to the Old
Subordinated Notes and $5.2 million to fund a portion of capital expenditures.
As of September 30, 1995, the Company had $2.7 million in restricted cash
accounts and funds and investments currently valued at $6.7 million in an
indemnification trust recorded in trust accounts on the balance sheet. Upon
consummation of the Refinancing, these funds were available without
restrictions.
Cash used in investing activities for the nine months ended June 30, 1996
and 1995 was $1.7 million and $8.1 million, respectively. During the nine months
ended June 30, 1996, the Company received $6.8 million from the liquidation of
indemnification trust funds terminated upon consummation of the Refinancing. 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 simultaneously applied to the then outstanding
debt balance. The Company also generated $1.2 million in proceeds from the sale
of miscellaneous assets and used $15.5 million to fund capital expenditures
during the nine months ended June 30, 1996. Cash used by investing activities
during the nine months ended June 30, 1995 included $14.5 million in capital
expenditures and $3.2 million in trust account deposits partially offset by
withdrawals from restricted cash accounts of $9.1 million.
Cash Flow From Financing Activities. During 1994 and 1995, the Company
entered into lease arrangements providing for $6.2 million of available funding
for equipment purchases, of which $5.5 million had been funded as of September
30, 1995. Approximately $4.3 million is payable over sixty months with interest
based on a premium over U.S. Treasury rates at the time of funding. The balance
of $1.2 million is payable over eighty-four months with variable interest based
on a premium over the one month commercial
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paper rate at the start of each month. During 1995, the ESOP repaid $3.1 million
of its debt to the Company from proceeds it received from a litigation
settlement.
Principal payments on long-term debt and capitalized leases were $25.7
million, $45.5 million and $32.2 million for 1993, 1994 and 1995, respectively.
At September 30, 1995, the current portion of long-term debt and capital leases
was $31.7 million.
During the nine months ended June 30, 1996 the Company used $6.1 million in
cash for financing activities as compared to $16.2 million in cash for the nine
months ended June 30, 1995. As discussed above, the Refinancing, which was
consummated on November 21, 1995, included the receipt of $170.2 million from
the issuance of the Old Notes and the payment of bank debt and certain
capitalized lease obligations. The Company incurred approximately $9.9 million
in fees and expenses related to the Refinancing. 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. Cash used in financing
activities for the nine months ended June 30, 1995 included $19.3 million of
principal payments on long-term debt, partially offset by proceeds from
capitalized leases of $3.2 million.
Other Cash Requirements. The Company has material financial obligations
relating 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 groundwater monitoring, gas
monitoring, leachate treatment and disposal and other post-closure monitoring
for an estimated period of 30 years after closure will be approximately $55.6
million. The Company recognizes an expense and related liability in its
financial statements and funds trust deposits for such costs prior to landfill
closure. The amount of the deposits differ from the liabilities accrued pursuant
to GAAP. As of June 30, 1996, the Company had a recorded liability of $25.0
million for such projected costs in accordance with GAAP and had on deposit
$19.3 million in trust accounts consistent with regulatory requirements. The
Company intends to deposit approximately $3.2 million in fiscal year 1996, and
varying amounts for the foreseeable future, into closure and post-closure
maintenance trust accounts to meet funding obligations imposed by government
regulation. The Company anticipates that these cost estimates will change and be
subject to inflation, and that they can be recovered in rates. See
"Business - Landfills - Financial Assurance Obligations," "- Environmental
Regulation - State and Local Regulation - Closure/ Post-Closure," "- Specific
Environmental Issues" and Note 12 to Consolidated Financial Statements.
The Company also has significant financial obligations with respect to
certain environmental statutes and regulations protecting the ground and surface
water in the vicinity of its California landfills. These obligations are
estimated to be approximately $8.2 million as of September 30, 1995. The Company
is meeting its obligations by accruing for and funding trust deposits for such
costs. As of June 30, 1996, the Company had recognized $2.2 million for such
projected costs. The Company estimates its remaining funding obligations for
fiscal year 1996 for these obligations to be $0.5 million. The Company has
recorded a liability of $1.3 million for potential remediation costs related to
other environmental matters. See "Business - Landfills - Financial Assurance
Obligations" and "- Specific Environmental Issues."
As of June 30, 1996, the Company has a recorded liability of approximately
$2.2 million for certain future payments including closure and post-closure
costs relating to the disposal of its interest in a landfill. The Company
expects to make future payments against this liability of $0.8 million, $0.8
million, $0.4 million and $0.2 million in the years 1996, 1997, 1998 and 1999,
respectively.
The Company is in discussions with the City of San Francisco regarding
plans for the construction of materials recovery facilities ("MRFs") 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 this project and financing, the
Company believes construction of the MRFs could begin as early as fiscal year
1997. Over the term of the Notes, the Company estimates that it will need to
invest substantial capital to acquire (through construction, purchase, lease,
expansion or refurbishment) waste processing facilities including MRFs and
household hazardous waste facilities, maintenance and administrative complexes,
and equipment. The Company intends to seek rate recovery related to the costs of
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such capital improvements and may seek to finance such costs through additional
secured borrowings, including $30.0 million of borrowings for Designated Capital
Expenditures (as defined in the Indenture) for a portion of such costs. See
"Description of the Notes - Certain Covenants."
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 these
former employee-shareholders will terminate upon the earlier of October 1, 2000
or final resolution of legal claims against third parties reserved pursuant to
the Settlement, most of the Company's obligations extend for the lifetime of
such former employee-shareholders. The accrued post-retirement medical benefit
liability as of June 30, 1996 was $34.8 million and the costs incurred for 1995
were $0.8 million. The Company estimates that, as of June 30, 1996, the costs
remaining to be incurred for 1996 will be approximately $0.3 million. Payments
at rates similar to those made in 1995 or greater, depending on medical
inflation rates and the aging of persons entitled to benefits, are expected for
a significant number of years. See "History of the Company and the Refinancing"
and "Business - Litigation and Related Matters."
The Company may incur future litigation expense in connection with certain
claims that may be brought related to the Settlement and other legal matters.
The Company expects to make cash outlays for the remainder of 1996 of
approximately $2.0 million for costs in connection with environmental
remediation activities, litigation and tax disputes and associated professional
fees which had been accrued in prior years. See "History of the Company and the
Refinancing" and "Business - Litigation and Related Matters."
The Company utilized its remaining federal income tax net operating loss
carryforwards during fiscal year 1995. As a result, the Company now must fund
its federal income tax obligations, as well as its other tax obligations, out of
cash flow from operations without benefit of such carryforwards.
Beginning in 1996 the Company expects an increase of $1.0 million to $3.0
million in its annual ESOP compensation expense to fund benefit payments as
required by the Code as participants elect to make in-service withdrawals. 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. See "The
ESOP - Distributions."
The Company believes that the net proceeds from the Refinancing and cash
flow from operations will be sufficient to meet the needs of the Company for the
foreseeable future. In the event the Company undertakes to expand its business
and requires additional funds, it may seek to raise such funds through bank
financing or public or private offerings of its securities, although its ability
to do so will be restricted by the Indenture and the New Credit Agreement. There
can be no assurance that the Company will be able to raise funds on favorable
terms, if at all. See "Description of Other Indebtedness - New Credit Agreement"
and "Description of the Notes."
INFLATION
Historically, the Company has experienced cost increases due to the effect
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. These effects have been partially offset by
operating efficiencies, and recovery of such costs through the rate-setting
process. The Company's ability to price services to recover cost increases fully
is dependent upon authorization by rate-setting agencies and may be subject to
delay. See "Risk Factors - Changes in Legislation and Political
Uncertainty - Problems in Rate-Setting Process" and "Business - Collection
Operations - Rates" and "- Employees."
ACCOUNTING MATTERS
The Company is contemplating 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 will not have any material effect on the
Company's operations or its
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ability to service its obligations. There can be no assurance that the Company
will be able to effect such a quasi reorganization.
In March 1995, Statement of Financial Accounting Standard No. 121
"Accounting for Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed Of " ("SFAS 121") was issued. This Statement requires that long lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This Statement is
effective for financial statements for fiscal years beginning after December 15,
1995. Management adopted SFAS 121 in the first quarter of fiscal year 1995.
Adoption of SFAS 121 did not result in the recognition of any impairment losses.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP"). This statement requires that employers recognize
compensation expense at the fair value of the shares as contrasted to the
historical cost as required by EITF 89-8. Additional guidance is provided as to
the accounting treatment of dividends, redemptions and various other matters.
Application of all of the guidance in this SOP is elective for shares acquired
by employee stock ownership plans on or before December 31, 1992. The Company
has decided not to elect the implementation of this SOP at this time. If
additional shares were to be acquired by the ESOP in the future these new shares
would have to be accounted for in accordance with this SOP. Further, if the
Company decided to adopt this SOP in the future it would be required to restate
previously issued financial statements for fiscal year ended 1995 and
thereafter. Implementation of this SOP will not have an impact on the future
cash flows of the Company.
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.
SEASONALITY
The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) than fall and winter due to lower volumes of certain
types of waste, such as yard clippings and construction and demolition debris
during fall and winter. This typically results in decreased volume at the
Company's transfer stations, waste collection, and landfill operations during
these months.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $175.0 million
aggregate principal amount of New Notes for a like aggregate principal amount of
Old Notes properly tendered on or prior to the Expiration Date and not withdrawn
as permitted pursuant to the procedures described below. The Exchange Offer is
being made with respect to all of the Old Notes.
As of the date of this Prospectus, $175.0 million aggregate principal
amount of the Old Notes was outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about August 20, 1996, to all
holders of Old Notes known to the Company. The Company's obligation to accept
Old Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions set forth under "Certain Conditions to the Exchange Offer" below. The
Company currently expects that each of the conditions will be satisfied and that
no waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on November 21, 1995 in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
(i) file with the Commission a registration statement relating to the Exchange
Offer (or a shelf registration statement relating to resales of the Old Notes)
not later than 45 days after the date of issuance of the Old Notes, (ii) use its
best efforts to cause the registration relating to the Exchange Offer to become
effective under the Securities Act not later than 180 days after the date of
issuance of the Old Notes (or the shelf registration statement to become
effective under the Securities Act) and (iii) cause the Exchange Offer to be
consummated not later than 45 days after the date of the effectiveness of the
Registration Statement (each a "Registration Default").
Under the Registration Rights Agreement, Norcal's failure to meet these
requirements obligates it to pay each holder of Old Notes certain liquidated
damages ("Liquidated Damages"), accruing from the date of such Registration
Default, in an amount equal to one-half of one percent (0.5%) per annum of the
principal amount of the Old Notes held by such holder during the first 90-day
period immediately following the occurrence of the first such Registration
Default increasing by an additional one-half of one percent (0.5%) per annum of
the principal amount of such Old Notes during each subsequent 90-day period, up
to a maximum amount of liquidated damages equal to two percent (2.0%) per annum
of the principal amount of such Old Notes, which provision for Liquidated
Damages will continue until such Registration Default has been cured. Liquidated
Damages accrued as of any interest payment date will be payable on such date.
Norcal did not cause an exchange offer registration statement to become
effective under the Securities Act within 180 days after the Closing Date (i.e.,
May 19, 1996). Accordingly, interest on the Old Notes is currently 13.25% per
annum, reflecting 0.5% per annum of Liquidated Damages payable in respect of
such Registration Default. Effectiveness of this Registration Statement cures
the Registration Default. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement. For the tax treatment of
Liquidated Damages, see "Certain Federal Income Tax Consequences -- Other Tax
Considerations".
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by the Depository Trust Company. The Company is
generally not required to file any registration statement to register any
outstanding Old Notes. Holders of Old Notes who do not tender their Old Notes or
whose Old Notes are tendered but not accepted would have to rely on exemptions
to registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Old Notes.
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The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a Holder (other than any Holder who is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and that such Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. See "- Resale of New Notes."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
September 20, 1996, unless Norcal, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. Norcal expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
exchange of any Old Notes, by giving oral or written notice to the Exchange
Agent and by giving written notice of such extension to the holders thereof or
by timely public announcement no later than 9:00 a.m. New York City time, on the
next business day after the previously scheduled Expiration Date. During any
such extension, all Old Notes previously tendered will remain subject to the
Exchange Offer unless properly withdrawn.
Norcal expressly reserves the right to terminate or amend the Exchange
Offer and not to accept for exchange any Old Notes not theretofore accepted for
exchange upon the occurrence of any of the events specified below under "Certain
Conditions to the Exchange Offer." If any such termination or amendment occurs,
Norcal will notify the Exchange Agent and will either issue a press release or
give oral or written notice to the holders of the Old Notes as promptly as
practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time.
PROCEDURES FOR TENDERING OLD NOTES
The tender to Norcal of Old Notes by a holder thereof as set forth below
and the acceptance thereof by Norcal will constitute a binding agreement between
the tendering holder and Norcal upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees,
to the Exchange Agent at its address set forth below on or prior to the
Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
The method of delivery of Old Notes, Letters of Transmittal and all other
required documents is at the election and risk of the holders. If such delivery
is by mail, it is recommended that registered mail properly insured, with return
receipt requested, be used. In all cases, sufficient time should be allowed to
insure timely delivery. No Old Notes or Letters of Transmittal should be sent to
the Company.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the
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Old Notes who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a firm which is a
member of a recognized Medallion Program approved by the Securities Transfer
Association Inc. or registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a clearing agency, an
insured credit union, a savings association or a commercial bank or trust
company having an office or a correspondent in the United States or any other
member of a signature guarantee program within the meaning of Rule 17Ad-15 under
the Exchange Act (each an "Eligible Institution"). If Old Notes are registered
in the name of a person other than a signer of the Letter of Transmittal, the
Old Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory form
as determined by Norcal in its sole discretion, duly executed by the registered
holder with the signature thereon guaranteed by an Eligible Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility, The Depository Trust Company, for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the book-entry
transfer facility's system may make book-entry delivery of Old Notes by causing
such book-entry transfer facility to transfer such Old Notes into the Exchange
Agent's account with respect to the Old Notes in accordance with the book-entry
transfer facility's procedures for such transfer. Although delivery of Old Notes
may be effected through book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility, an appropriate Letter of Transmittal with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission from an Eligible Institution setting forth
the name and address of the tendering holder, the names in which the Old Notes
are registered and, if possible, the certificate numbers of the Old Notes to be
tendered, and stating that the tender is being made thereby and guaranteeing
that within three business days after the Expiration Date, the Old Notes in
proper form for transfer (or a confirmation of book-entry transfer of such Old
Notes into the Exchange Agent's account at the book-entry transfer facility),
will be delivered by such Eligible Institution together with a properly
completed and duly executed Letter of Transmittal (and any other required
documents). Unless Old Notes being tendered by the above-described method are
deposited with the Exchange Agent within the time period set forth above
(accompanied or preceded by a properly completed Letter of Transmittal and any
other required documents), Norcal may, at its option, reject the tender. Copies
of the Notice of Guaranteed Delivery which may be used by Eligible Institutions
for the purposes described in this paragraph are available from the Exchange
Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of New
Notes in exchange for Old Notes tendered pursuant to a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) by an Eligible Institution will be made only against deposit of
the Letter of Transmittal (and any other required documents) and the tendered
Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
Norcal in its sole discretion, which determination shall be final
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<PAGE> 41
and binding. Norcal reserves the absolute right to reject any and all tenders of
any particular Old Notes not properly tendered or not to accept any particular
Old Notes which acceptance might, in the judgment of Norcal or its counsel, be
unlawful. Norcal also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by Norcal
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such reasonable period of time as Norcal shall determine. Neither
the Company, the Exchange Agent nor any other person shall be under any duty to
give notification of any defect or irregularity with respect to any tender of
Old Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
Norcal, proper evidence satisfactory to Norcal of their authority to so act must
be submitted.
By tendering, each holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being acquired
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the holder, that neither the holder nor any such
other person has an arrangement or understanding with any person to participate
in the distribution of such New Notes and that neither the holder nor any such
other person is an "affiliate," as defined under Rule 405 of the Securities Act,
of the Company, or if it is an affiliate it will comply with the registration
and prospectus requirements of the Securities Act to the extent applicable.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be determined by
Norcal in its sole discretion, which determination will be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange and which are properly withdrawn will be
returned to the holder thereof without cost to such holder as soon as
practicable after such withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.
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<PAGE> 42
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
Norcal will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, Norcal shall be deemed to have accepted properly tendered Old Notes for
exchange when, as and if Norcal has given oral or written notice thereof to the
Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the Company's judgment,would reasonably be expected to impair
materially the ability of the Company to proceed with the Exchange Offer or
have a material adverse effect on the contemplated benefits of the Exchange
Offer to the Company; or
(b) there shall have occurred any change, or any development involving
a prospective change, in the business or financial affairs of Norcal or any
of its subsidiaries, which, in the Company's judgment, would reasonably be
expected to impair materially the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) the Exchange Offer does or would violate any applicable law or
applicable interpretation of the staff of the Commission; or
(d) any governmental approval has not been obtained, which approval,
in the Company's judgment, is reasonably necessary for the consummation of
the Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any law,
statute, rule or regulation (or an amendment to any existing law statute,
rule or regulation) which, in the Company's judgment, would reasonably be
expected to impair materially the ability of the Company to proceed with
the Exchange Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(f) there shall have occurred (i) any general suspension of,
shortening of hours for, or limitation on prices for, trading in securities
on the New York Stock Exchange (whether or not mandatory), (ii) a
declaration of a banking moratorium or any suspension of payments in
respect of banks by Federal or state authorities in the United States
(whether or not mandatory), (iii) a commencement of a war, armed
hostilities or other international or national crisis directly or
indirectly involving the United States,
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<PAGE> 43
(iv) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the
United States, or (v) in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable judgment. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, Norcal will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939. In any
such event the Company is required to use every reasonable effort to obtain the
withdrawal of any stop order at the earliest possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
By Hand/Overnight Courier: By Mail:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
Attn.: Reorganization Department Attn.: Reorganization Department
One State Street P.O. Box 84
Securities Processing Window, Floor SC-1 Bowling Green Station
New York, New York, 10004 New York, New York 10274-0084
By Facsimile:
(212) 858-2611
Attn.: Customer Service
Telephone: (212) 858-2103
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
SOLICITATION OF TENDERS; FEES AND EXPENSES
Norcal has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith. The Company will
also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
and other related documents to the beneficial owners of the Old Notes and in
handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $600,000, which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
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No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the carrying value of the Old Notes as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of New Notes for Old Notes. Expenses incurred in
connection with the issuance of the New Notes will be amortized over the term of
the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Norcal does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
Norcal may in the future seek to acquire subject to the terms of the
Indenture untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. Norcal has no
present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
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<PAGE> 45
RESALE OF NEW NOTES
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a Holder (other than any Holder who is a broker-dealer or an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and that such Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder who is an "affiliate" of the Company or who
has an arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, or any broker-dealer who
purchased Old Notes from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act (i) could not rely on the
applicable interpretations of the Staff and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act. A
broker-dealer who holds Old Notes that were acquired for its own account as a
result of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the New Notes reasonably requests in writing. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any New Notes.
44
<PAGE> 46
BUSINESS
Norcal Waste Systems, Inc. is a vertically integrated waste management
company that through its subsidiaries provides services to approximately 360,000
residential and 45,000 commercial and industrial customers throughout the State
of California. The Company's principal activities include refuse collection,
recycling and other waste diversion, transfer station and hauling operations,
and operation of both Company-owned and third party owned landfills. According
to NSWMA, the Company is the seventh largest waste management company in the
United States based on 1994 revenues. For fiscal year 1995, the Company's total
revenues and EBITDA were $271.5 million and $60.8 million, respectively. For the
nine months ended June 30, 1996, the Company's total revenues and EBITDA were
$208.6 million and $38.7 million, respectively.
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. Since the early 1970s, the Company has expanded the
geographic scope of its operations and currently provides waste management
services to 39 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.
INDUSTRY BACKGROUND
According to the NSWMA, the solid waste industry generates domestic private
sector revenues of $32 billion annually. The industry is highly fragmented:
while the three largest waste management companies in the United States
accounted for approximately 30% of estimated industry revenues in 1994, the next
seven largest companies accounted for not more than 5%. Over 9,500 independent
companies accounted for the balance of private sector revenues. The waste
management industry has been consolidating as a result of a number of factors
including the increasing complexity and costs associated with waste management
operations and regulatory compliance. The Company expects consolidation to
continue because many smaller independent operators and municipalities lack the
capital resources, management, operating skills or technical expertise necessary
to operate effectively in such an environment.
In recent years, landfill ownership and operation have become subject to
increasingly stringent and complex environmental safety regulations. The
Subtitle D regulations of the Resource Conservation and Recovery Act of 1976
("RCRA") require landfill operators to upgrade existing disposal facilities and
impose significant closure and post-closure monitoring and financial assurance
requirements. The regulations also require landfill operators to measure, review
and record incoming waste more carefully, to maintain daily cover standards, to
operate more safely and to limit public access to their facilities. The
California Integrated Waste Management Act and its attendant regulations impose
additional requirements for landfills in California. As a result of regulatory
changes and other factors, a number of independent landfill owners and
operators, particularly municipalities in the markets in which the Company
operates, are discontinuing or privatizing waste management operations.
Heightened public concern for the environment has led to increased public
demand for, and more stringent regulations concerning, recycling. California law
now requires that municipalities divert 25% of solid waste from landfill
disposal through source reduction, recycling and composting. In 2000, this
requirement will increase to 50%. The Company has provided recycling services
since the 1920s.
As a result of these industry dynamics, waste management service providers
are experiencing increasing requirements for capital, skilled management and
technical expertise. Such dynamics, along with increasing competition, have
contributed to increasingly complex operational requirements and reduced
margins, causing small operators to close landfills and sell collection-related
operations, and municipalities to cease providing waste services. Consequently,
the Company expects that opportunities to acquire solid waste collection and
disposal businesses will continue and that significant potential also exists for
the Company to operate landfills owned by third-parties on a contract basis. In
addition, the Company believes that because of its substantial experience with
and investment in recycling and waste diversion, it is positioned to benefit
from continued growth in these segments of the industry.
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<PAGE> 47
STRATEGY
The Company's strategy is to maintain and build upon its existing core
businesses and grow and diversify its revenue base through acquisitions and the
development of new contracts and franchises. In its existing operations the
Company intends to:
Maintain Efficient Operations. The Company will concentrate on maintaining
its existing cost base and operational efficiency. The Company continuously
seeks operating efficiencies, including strict control of operating expenses,
route audits and the use of automation when practicable. The Company believes
its successful track record of contract and franchise renewals is due in part to
such efficiencies.
Augment Existing Services. The Company seeks to increase revenues and
profits by offering additional services to existing customers. The Company has
realized success with this strategy by regularly proposing new programs, such as
recycling and yard waste collection, to the municipalities it serves. As it
negotiates with municipal authorities, the Company typically markets these
proposals to the community in an effort to build political support for the new
service and related rate increases.
Expand Disposal Capacity. The Company possesses substantial unpermitted
capacity at its owned landfills and regularly seeks opportunities to make such
unpermitted capacity useable. The Company's expansion plans include an
application that was approved in April 1996 to expand one of its landfills to an
estimated remaining life of approximately 50 years from its current estimate of
16 years. In addition, the Company recently began operations at a new landfill
in Yuba County, California, which the Company developed as a greenfield project,
with an estimated life of over 40 years. The Company's intention is to increase
the flow to its owned landfills of waste it collects and to market its landfill
capacity to third-party haulers.
In order to grow and diversify its revenue base beyond existing operations
the Company intends to:
Expand Management Services at Third Party-Owned Landfills. The Company
will seek to build on its reputation as a leading provider of landfill operation
and management services to third party landfill owners in California.
Increasingly complex and expensive regulations make third party operation more
attractive to many landfill owners, especially municipalities. The Company is
one of the largest providers of landfill management services in California and
believes it is well-positioned to expand revenues from its landfill operation
services. This line of business is attractive to the Company because it
generates revenues with a minimal expenditure of capital and reduced
environmental risk and aids the Company in establishing itself in new geographic
markets and with new customers. See "- Landfills - Operated Landfills."
Increase Vertical Integration and Geographic Diversification. The Company
seeks to augment its existing operations by acquiring: (i) collection franchises
or operations in areas where the Company has available landfill capacity and
(ii) waste management businesses with strong presence in geographic markets not
currently served by the Company. The Company will seek to maximize operating
efficiencies of acquired companies by internalizing disposal costs (through
directing waste to landfills owned or operated by the Company and increasing
revenues at Company owned landfills), consolidating selling, general and
administrative expenses, improving routing and equipment utilization, and
installing the Company's financial controls.
The Company's ability to effect acquisitions and expansion and to implement
its strategy is subject to changes in market conditions and certain other risks.
See "Risk Factors."
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<PAGE> 48
COLLECTION OPERATIONS
The Company provides refuse collection services to residential, commercial
and industrial customers in California. Residential customers accounted for
approximately 42% of the Company's refuse collection revenues in fiscal year
1995, and commercial and industrial customers accounted for the remaining 58%.
Residential collection services involve curbside collection and
transportation of waste to a transfer station or, in certain instances, directly
to a landfill. 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 June 30, 1996, the Company had 37 franchise
agreements with municipalities and served many additional customers through
operating contracts.
Commercial and industrial customers include high-rise office buildings,
retail establishments, construction contractors and industrial plants. The
Company provides containers varying in size from 1 to 8 cubic yards to
commercial customers and 6 to 50 cubic yard "roll-offs" to industrial customers.
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. The Company has recently implemented an aggressive marketing program
for commercial and industrial customers in an effort to build upon and expand
its existing customer base.
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
172,000 of its customers and approximately 45% of its total revenues for fiscal
year 1995 and approximately 41% of its total revenues for the nine months ended
June 30, 1996. The Ordinance permits refuse with "commercial value" (as defined
in the Ordinance and interpreted by the courts) to be collected without a
permit. The Company competes for the collection of this refuse in San Francisco
with other collectors.
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
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 believes that
it has maintained its permits for more than sixty years in part because, as a
locally-based and employee-owned company providing high quality service at a low
price to residential customers, it has built a strong relationship with the
government and citizens of San Francisco. The Company regularly monitors the
political climate in San Francisco and continually works at maintaining its good
relationship with residents by being actively involved in the community. The
Company also believes, based on polling data gathered in 1993 and 1994, that
this good will was a factor in defeating two initiatives placed on the San
Francisco ballot in those years that, if enacted, would have repealed or amended
the Ordinance and opened residential and commercial refuse collection to
competition. The voters rejected these initiatives by votes of 76% to 24% and
65% to 35%, respectively. 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 Company were to provide inadequate service. Even if
the Ordinance were repealed or amended, certain aspects of the Company's
operations in San Francisco are subject to agreements (the "Waste Disposal
Agreements") that are not subject to this Ordinance and that clarify the
relationships between San Francisco, the Company, and
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<PAGE> 49
the third party-owner of the landfill at which all non-hazardous solid waste
collected in San Francisco is deposited. The Waste Disposal Agreements require
that all waste collected in San Francisco be deposited at the Company's Sanitary
Fill transfer station. As a result the Company believes such Waste Disposal
Agreements would preserve a portion of its San Francisco based revenues, even if
the Ordinance were repealed or amended. Furthermore, the Company believes it
would be extremely difficult to create an alternative to this transfer station
anywhere in or around San Francisco because of community resistance, permitting
requirements and the requirements of the California Environmental Quality Act.
See "- Environmental Regulation - State and Local Regulation - Flow Control" and
"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 one of
the Waste Disposal Agreements, and are subject to annual increases for inflation
and regulatory costs. 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.
Debris boxes at construction sites and the transportation, collection and
disposal of refuse with commercial value do not require a permit under the
Ordinance. The Company competes with a limited number of small independent
haulers for this business in San Francisco.
Franchise Agreements and Permits. Outside of San Francisco, the Company
provides most collection services pursuant to franchise agreements with local
governmental entities that obligate it to collect from all residences and,
often, commercial establishments within a specified area. Such franchise
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. Other franchise agreements allow
competition for specified categories of commercial waste such as construction
debris. A local governmental entity may enter into multiple franchise agreements
with different collection companies, each covering a distinct territory within
its jurisdiction. The Company has multiple franchise 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, franchise agreements typically have terms of between five and
20 years. Although the Company's franchise 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 1995, 62% of the Company's revenues, excluding San Francisco
operations, were generated under franchises and contracts with remaining terms
of five years or more, assuming no early termination of such franchises or
contracts. The Company has historically been successful in renewing waste
management services contracts with local governments and municipalities and at
times has expanded the scope of its services in the process. In the past ten
years, the Company has renewed or extended its franchise contracts 43 times. In
light of increasing competitive pressure in the waste industry, and the risks of
competitive bidding, there can be no assurance that the Company's historically
high renewal rates will continue, or that such renewals will yield historic
levels of profit. See "-Landfills - Operated Landfills" and "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
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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 accrued on capital leases;
depreciation; trust fund payments 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. In San Francisco, the Company was granted an increase to its refuse
collection and disposal rates which became effective January 1, 1995 and an
additional minor increase effective January 1, 1996. Although rate increases are
generally 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 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.
See "Risk Factors - Changes in Legislation and Political Uncertainty - Problems
in Rate-Setting Process."
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 policy 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. The Company collects
recyclable materials through curbside pickup, high-rise office building pickup,
restaurant and bar glass collection, curbside yard waste collection and
neighborhood buy-back centers. Its recyclable material processing activities
range from simple sorting and separating activities at its transfer stations and
landfills to operation of three materials recovery facilities (each a "MRF").
The Company's sophisticated MRF in Marysville, California, processes selected
mixed solid wastes through a series of mechanized conveyors, magnets, screens,
chutes and hand-sorting lines to separate metals, glass, wood, paper, cement and
other materials from the waste stream. Materials collected through recycling
programs and recovered through the Company's operations are processed and, to
the extent possible, sold on the open market. Such materials include paper,
glass, aluminum and other metals. In recent periods, 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."
Transfer Stations. Solid waste is delivered to transfer stations by
collection trucks operated by the Company, independent collection companies and
self-haulers. Waste from industrial customers is typically sorted to divert
certain easily separable materials such as large amounts of wood, metal or
cardboard for recycling. The remaining solid waste, as well as all mixed
residential refuse delivered to the transfer station, is compacted and placed in
large trailers for transportation to landfills.
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<PAGE> 51
The Company owns and operates six major 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 June 30, 1996, over 80% of the waste
delivered to these facilities comes from the Company's collection operations.
Sanitary Fill, a wholly owned subsidiary of Norcal which operates the Company's
largest transfer station, is located in San Francisco and processes and
transfers approximately 2,400 tons of solid waste per day on average, of which
approximately 87% comes from the Company's San Francisco collection operations.
The City and County of San Francisco requires that all refuse collected in San
Francisco by refuse collectors be deposited at Sanitary Fill. Sanitary Fill has
agreed to indemnify the City and County of San Francisco and the owner of the
landfill at which Sanitary Fill deposits a substantial amount of waste against
damages and removal and remedial costs associated with the deposit of hazardous
and certain other types of waste at the landfill. However, certain costs
resulting from Sanitary Fill's indemnification obligations may be reimbursed
under this agreement through a reserve fund maintained by the City and County of
San Francisco, that is being funded by a rate surcharge over time up to a
maximum of $15.0 million. As of June 30, 1996, the fund balance was $3.0
million. The Company's five other transfer stations process between
approximately 100 and 300 tons of solid waste per day on average.
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. Two of its landfills also accept, on
a limited basis, hazardous asbestos-containing waste or non-hazardous
contaminated soils. Licensed engineers or geologists manage the Company's owned
landfills, a practice which the Company believes improves its control over
potential environmental risks.
Landfills are divided into fill areas or "cells" for the deposit of waste.
Before acceptance at the Company's landfills, waste quantities are weighed and
loads are spot-checked for hazardous or other prohibited wastes in order to
prevent their disposal at the landfill. At some of the Company's landfills,
personnel inspect incoming loads for significant quantities of easily separable
material for recycling or recovery. The balance of the waste is deposited in
cells, compacted by heavy earth moving equipment and covered daily with a layer
of soil. Environmental laws and regulations require the Company to prepare
landfill cells by excavating the fill area and lining them with synthetic and
clay soil composite liners. Upon completion of a cell, the Company applies a
soil cover layer, and upon closure the landfill is covered by soil, synthetic
and vegetative layers. These methods help maintain sanitary conditions and
prepare the sites for post-closure use. See "- Environmental Regulation."
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 and the contracts governing the Company's
activities indemnify it in certain circumstances, thereby reducing its exposure
to environmental liabilities.
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Owned Landfills. The following table sets forth certain information about
the five landfills owned by the Company:
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LANDFILL LANDFILL ACREAGE
BEGAN ----------------------
LANDFILL LOCATION OPERATIONS TOTAL(A) PERMITTED
- -------------------------------- -------------------------- ------------- -------- ---------
<S> <C> <C> <C> <C>
B & J........................... Vacaville, CA 1964 640 256
Cummings Road(b)................ Eureka, CA 1969 100 31
Ostrom Road(c).................. Yuba County, CA 1995 892 221
Pacheco Pass(d)................. Santa Clara County, CA 1963 136 65
Yuba-Sutter(e).................. Marysville, CA 1967 180 103
</TABLE>
- ---------------
(a) Includes all contiguous acres at each site. Not all contiguous acres are
permittable.
(b) The Company is currently in negotiations that may result in the closure of
this landfill and the diversion of waste currently deposited there to a site
owned by a third-party.
(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) A portion of this landfill that is no longer in operation is owned by an
unaffiliated party. 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) Upon closure of this landfill, which the Company expects will occur by the
end of fiscal year 1996, the waste stream is intended to be transferred to
the Ostrom Road Landfill located 14 miles away.
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. 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 seven years. Although certain of the Company's
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. See "Risk Factors - Environmental Regulation and Potential
Litigation - Difficulty of Obtaining Landfill Permits."
Of the waste deposited at Company-owned landfills for fiscal year 1995
approximately 85% was received from the Company's collection, waste diversion
and transfer station operations and 15% was received from independent third
party collectors, hauling companies and self-haulers.
Operated Landfills. The Company currently operates 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. On November 1,
1995, the Company commenced operation of the nine remaining 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 operation of all active
landfills, closure and monitoring of non-active landfills and identification,
permitting and construction of new landfills. The Company's agreement with the
County terminates on June 30, 2001. The Company, at its option, may extend the
agreement for up to thirty more years, so long as the projected waste stream to
the landfills meets certain levels. However, each party may earlier terminate
the contract under certain circumstances, including, beginning July 1, 1999,
termination by the County so long as it municipalizes such operations or uses a
competitive procedure to select a contractor. The Company's business strategy
includes (i) expanding its landfill management and other operational services to
new municipalities and (ii) emphasizing its long-term waste management
engineering and planning services as it has in San Bernardino County.
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<PAGE> 53
In March 1995, the Company was awarded by competitive bid a five year
contract to operate five landfills covering 703 permitted acres in San Diego
County. The Company's other landfill operation is in Placer County in 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. The Company has received approval to expand the unused, permitted
capacity of one of its owned landfills to 256 acres. Assuming no material change
in the landfill's service area and governmental compliance with legislated waste
diversion goals, the landfill's expected remaining useful life will exceed 50
years. In 1993, the Company successfully completed permitting and, in 1995,
began operations at a landfill in Yuba County, California that it began
developing as a greenfield project in 1981. Covering 221 permitted acres, this
landfill is the first new nonhazardous landfill in California to receive an
operating permit since Subtitle D became effective in October 1993. 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 attempt to expand its landfills or develop new ones. However,
such impediments to development and expansion of landfills are faced by the
industry as a whole. See "- Environmental Regulation - Federal Regulation" and
"Risk Factors - Changes in Legislation and Political Uncertainty - Difficulty of
Obtaining Landfill Permits."
Monitoring. The Company has implemented the environmental safeguards
required by each applicable regulatory agency. Such safeguards include
monitoring of groundwater and surface water quality and testing for possible
landfill gas emissions. Environmental monitoring at the Company's landfills
generally is performed by independent environmental engineering firms. Resulting
data are compiled and reported directly to the applicable regulatory agency by
the Company. Such monitoring typically takes place on a quarterly basis or more
frequently if deemed appropriate by the Company.
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. See "- Environmental Regulation - - State
and Local Regulation - Closure/Post-Closure."
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 generally has been successful in obtaining rate increases intended to
allow funding for the full 30-year post-closure period by the time of site
closure.
The Company estimates, that as of September 30, 1995, the aggregate cost of
its closure and 30-year post-closure requirements is approximately $55.6
million. As of June 30, 1996, the Company had recorded aggregate closure and
post-closure liabilities in accordance with GAAP of approximately $25.0 million
and had on deposit $19.3 million in closure and post-closure maintenance trusts
consistent with regulatory requirements. The Company expects to make trust fund
deposits of approximately $3.2 million in 1996 for closure and post-closure
costs, and expects to make deposits of varying amounts for the foreseeable
future. The Company believes that over time it will be able to recover virtually
all of such costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 12 to Consolidated Financial
Statements.
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 from its
landfills into the groundwater, surface water or unsaturated zone, whether such
releases occur before or after closure of the landfill. As of June 30, 1996, the
Company had on deposit $0.4 million in corrective action trust funds and
believes, based on estimates by independent consulting engineers, that an
additional
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<PAGE> 54
$6.0 million will be required to be funded in corrective action trust funds in
future years. The Company believes these are recoverable costs that may be
passed on to ratepayers through inclusion in rate applications.
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 and by July
1997 will need to fund an additional $0.1 million into trusts for this purpose.
The Company has obtained an insurance policy for one of its landfills not
covered by the method described above. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Other Cash Requirements."
The foregoing estimates of closure, post-closure and corrective action
liabilities and the related funding obligations 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. See "Risk
Factors - Environmental Regulation and Potential Litigation."
SPECIAL WASTE AND HAZARDOUS WASTE
The Company provides limited waste management services in connection with
four types of special waste: medical waste, waste water sludge, asbestos and
non-hazardous contaminated soils. Revenues from special and hazardous waste
services collectively represented less than 4% of the Company's consolidated
revenues in fiscal years 1993, 1994 and 1995 and have declined as a percentage
of revenues from year to year.
California's Water Resources Control Board has adopted a system that
classifies landfills depending on the types of waste that may be received and
the degree to which the wastes pose a threat to water quality. All but one of
the landfills that the Company owns or operates in California are Class III
landfills, and are not allowed to accept waste for disposal that is hazardous or
otherwise likely to degrade water quality. The Company's B&J Landfill is a Class
II landfill, and is allowed to accept non-hazardous waste that is capable of
degrading water quality if not properly handled. In addition, the Company
expects that completed or planned design changes and permit applications with
respect to one other landfill will enable it to accept Class II waste.
The Company generally is restricted under federal and state statutes from
collecting hazardous or toxic wastes or from accepting them at its transfer
station and landfill facilities. The Company, however, 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.
PROPERTIES AND FACILITIES
The principal properties of the Company consist of landfills, transfer
stations, waste recovery facilities and other land and improvements. The Company
owns an aggregate of 304 acres of property on which its California operations,
maintenance, storage, warehousing and administration facilities are situated. It
owns six major 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 2,938 acres on ten 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
1995, the Company entered into a contract to sell the property for $4.2 million,
conditioned on a number of events, including the acquisition by the potential
buyers of government assistance in financing certain property remediation.
Provided these conditions are met, the transaction is expected to close by the
end of 1996. The contract grants the Company the right to repurchase a portion
of the property for a term of ten years after the date of closing.
The Company owns a 302-acre site situated in San Benito and Santa Clara
Counties that formerly was used to spread waste water sludge. The soil quality
suffered from such activities but was returned to normal
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<PAGE> 55
agricultural condition in 1993. The Company may use it again to spread waste
water sludge on a more limited basis and for other waste diversion activities.
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 24,000
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. See Note 7 to Consolidated Financial Statements.
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 Laidlaw
Waste Systems, Inc.) 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 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. 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 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, 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 is
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 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. See "Risk Factors - Acquisition - Related Risks."
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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 $10.0 million
per loss with an annual aggregate limit for all losses of $10.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. 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
$1,000,000 per loss with an annual aggregate limit for all losses of $1,000,000,
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, 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. 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. See
"Certain Relationships and Related Transactions - Directors and Officers
Insurance" and Note 13 to Consolidated Financial Statements.
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 June 30, 1996, the Company had
available performance bonds outstanding in the aggregate amount of $24.8
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 June 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.
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.
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
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relating to third party liability, corrective actions, and closure and
post-closure maintenance. See "- Landfills - Financial Assurance Obligations."
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.
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, composting and recycling. Some states, such as
California, have required that local jurisdictions adopt comprehensive waste
reduction and recycling programs. See "- Landfills - Landfill Development" and
"- State and Local Regulation - The California Integrated Waste Management Act."
During the ordinary course of its landfill and other 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
problem. 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 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 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. See "- State and Local Regulation."
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
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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 or 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 without regard to fault or its respective
contribution to the release. Thus, a party can be responsible even if it
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 be 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 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.
If runoff or leachate from the Company's landfills is discharged into waters of
the United States, the Clean Water Act 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.
Various 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
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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 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 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 of 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 costs 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 can have a significant impact on the Company's cash flow. See
"- Landfills - Financial Assurance Obligations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 many 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 discharger 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
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requirements," that limits the quantity and manner of the discharge to meet
water quality standards and to ensure the protection of beneficial uses 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 may 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.
See "- Landfills - Financial Assurance Obligations," "- Specific
Environmental Issues" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information concerning required capital
expenditures incident to compliance with the foregoing laws and regulations.
Underground Storage Tank Regulation. USTs in California are regulated by
federal law under RCRA and 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, 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.
Since commencement by the Company of a program for removal of all
single-walled underground fuel and oil tanks, 54 of the 68 USTs proposed to be
removed under the program have been removed and the associated contaminated soil
has been remediated. The Company plans to remove the remainder of the tanks by
1998. Removing USTs can be costly because of the possibility of discovering
contaminated soil and contaminated 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 the remaining 14 USTs will cost
approximately $0.6 million over three years, exclusive of any material
remediation that is subsequently determined to be necessary. With the exception
of three sites at which the Company anticipates that up to an additional $0.8
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.
See "- Specific Environmental Issues - Los Altos Garbage" and "- Tunnel and
Beatty Site."
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 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
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"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 (including the San
Francisco permits and the Waste Disposal Agreements) 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
these flow control mechanisms (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 and permits 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. 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.
SPECIFIC ENVIRONMENTAL ISSUES
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 bottled water to certain nearby residents. 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 $5.2 million
of corrective action costs, $1.9 million of which it has already paid. The
Company is in the process of negotiating with the County of Humboldt regarding
the mechanism by which the County will satisfy its obligation for reimbursement
of such remediation costs at the landfill by the end of the current disposal
agreement on September 30, 1998. In addition, the Company is currently extending
a municipal water line to certain residents downgradient of the landfill. The
Company plans to seek indemnification from third parties for a portion of the
estimated $1.9 million cost of the water line, of which $1.0 million has already
been spent. See "- Landfills - Owned Landfills," "- Financial Assurance
Obligations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
West Coast Recycling. In 1988 and 1989, two areas of hydrocarbon
contamination were discovered under property operated by West Coast Recycling
Co., a subsidiary of Norcal, in San Francisco. One area was contaminated by an
undetermined source. A monitoring well installed in 1989 indicates that the
groundwater has not been affected. Based upon investigations by independent
environmental consultants, the Company believes that a substantial portion of
the contamination at the other area originated from an off-site UST. The Company
is continuing its investigation into the extent of contamination in both areas.
Based on its assessment of the investigations and estimates of the independent
environmental consultant, the Company believes that costs associated with the
remediation of both areas will range from $70,000 to $400,000, the latter
estimate based on the assumption that remediation of the groundwater and other
remedial actions will be required. However, there can be no assurance that more
extensive and costly efforts will not be required. The Company will seek to hold
the responsible parties liable for those costs and is attempting to address the
issue with the neighboring tank owner. However, there can be no assurance that
the Company's efforts will be successful or that such parties will have the
financial resources to cover those costs.
Tunnel and Beatty Site. Several areas of hydrocarbon contamination of soil
and groundwater resulting from underground storage tanks were found at this
Company-owned site located on the border of San Francisco and San Mateo
Counties. A portion of this site was formerly operated as a landfill. The
Company is continuing its investigation of the extent of the contamination at
this site and in 1993 submitted a summary report and work plan for preliminary
assessment to the San Mateo County Environmental Health Services,
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the lead agency on this site. The plan only calls for monitoring of this site.
The agency concurred with the proposed work plan, but requested soil borings to
evaluate the soil contamination. The Company is in the process of implementing
the work plan. The Company believes that, at this time, groundwater monitoring
rather than remediation will be required. The Company estimates that the cost of
remediating or disposing of contaminated soils may be as high as $400,000.
However, there can be no assurance that greater contamination will not be found
or that more extensive and costly efforts will not be required to remediate this
site.
Los Altos Garbage. In 1982, Los Altos Garbage Company, a subsidiary of
Norcal, experienced a 3,000-gallon gasoline leak from an underground tank.
Studies by independent environmental consultants indicated that leaks from
off-site sources also may have affected this site. Remedial actions are
currently underway, and although the precise cost of remediation is not known,
the Company's independent environmental consultants have estimated that the
initial cost will be $245,000, with additional costs of approximately $25,000 in
each of the next five years. On March 5, 1996, the Company sold the property
containing the contamination to an unrelated third party pursuant to an
agreement (the "Los Altos Agreement") whereby the Company would be responsible
for the first $175,000 of costs incurred in connection with the remediation of
said contamination and the buyer would be responsible for the next $400,000,
including a minimum of $200,000 for the operation, maintenance and monitoring of
a groundwater treatment system. In addition, the Los Altos Agreement calls for
the Company to bear a portion of the remediation expenses incurred with respect
to any new contamination discovered at the site during the next six years, up to
a maximum additional liability of $175,000.
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 Water 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 are 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 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.
EMPLOYEES
At June 30, 1996, the Company employed approximately 1,900 persons, of whom
approximately 240 were local managers or corporate executives, 1,390 were hourly
employees involved in collection, transfer, materials recovery and disposal
operations, and 270 were sales, clerical, data processing or other
administrative employees. At June 30, 1996, approximately 65% of the Company's
employees were represented by labor unions under collective bargaining
agreements expiring on various dates through 1997, including 38% of the
Company's employees who are represented by agreements expiring by December 31,
1996.
At the Company's headquarters, approximately 65 employees perform central
functions including administration, personnel, accounting, environmental
control, and data processing.
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LITIGATION AND RELATED MATTERS
Litigation Regarding the ESOP Notes. On August 9, 1995, Norcal and the
ESOP reached the Settlement with certain holders of ESOP Notes (the
"Plaintiffs") who, on July 29, 1994, filed two lawsuits (the "Actions") 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 named defendants, in
addition to Norcal and the ESOP, were: Bank of America, Security Pacific
National Bank, Chase Manhattan Bank, Bank of California, California Federal
Bank, Michael J. Sangiacomo, Manuel C. Conte, Peter Gardella, John DeMartini,
Fiore Garbarino, John B. Molinari, Leroy Moretti, Robert L. Anderson, Archie
Humphrey and James Paye. Norcal defrayed the legal expenses of certain
defendants, including those of Messrs. Sangiacomo and Molinari. The complaints
alleged claims for fraud, fraudulent concealment, negligent misrepresentation,
constructive fraud, breach of fiduciary duty, negligence, breach of contract,
breach of indenture, tortious breach of implied covenant, breach of implied
contract, tortious interference with contract, unjust enrichment, money due on
notes, and violations of ERISA. The Actions were each 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 suits arose out of the 1986 transaction in which the ESOP purchased
Plaintiffs' stock in one of Norcal's predecessors in exchange for cash and the
ESOP Notes (the "1986 Transaction"), the merger of Norcal's two predecessors in
1987 (the "1987 Transaction") and the 1990 merger of the Excel Environmental,
Inc. employee stock ownership plan into the ESOP (the "1990 Transaction"). On
June 30, 1995, the court granted partial summary judgment to Plaintiffs in
connection with the cause of action for breach of the indenture governing the
ESOP Notes (the "ESOP Notes Indenture") against Norcal, the ESOP, and Security
Pacific National Bank in its role as the ESOP Notes Indenture trustee (and Bank
of America as successor to Security Pacific National Bank). The court held that
the ESOP Notes Indenture had been breached because the ESOP Notes had not been
redeemed in connection with the 1987 and 1990 Transactions. The court reserved
ruling on the defendants' cross-motions for summary judgment on this cause of
action, which were based on grounds, among others, that the claim was barred by
the applicable statute of limitations and, as to Norcal, by the provisions of
the ESOP Notes Indenture that prohibit recourse against Norcal.
Pursuant to the Settlement, on November 21, 1995, Norcal paid, and provided
funds to the ESOP to pay, a total of approximately $36.8 million to the
Plaintiffs and certain other noteholders (collectively, "Settling Plaintiffs")
who, together, held all but four of the ESOP Notes, representing outstanding
principal and accrued interest totalling approximately $51.6 million as of
September 30, 1995. Norcal agreed to continue to provide certain post-retirement
health and welfare benefits to certain Settling Plaintiffs until the earlier of
resolution of Settling Plaintiffs' reserved claims against third parties and
October 1, 2000.
As part of the 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 Actions, based on the ESOP Notes
or the ESOP Notes 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 Actions (the "Released
Parties"), with one exception. Settling Plaintiffs have not released and are
permitted to proceed upon claims (the "Excluded Claims") in Action No. C94-3076
CAL against certain banks (and counsel to one of them) based upon their roles as
former trustees under the ESOP Notes Indenture, 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. Those banks are defendant
Security Pacific National Bank (and defendant Bank of America solely as
successor to Security Pacific) and U.S. Trust Company of New York (and its
counsel, neither of which is currently a defendant), which succeeded Security
Pacific National Bank as the ESOP Notes Indenture Trustee (collectively,
Security Pacific National Bank (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 Bank
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of America and Security Pacific National Bank. Action No. C94-2730 CAL was
dismissed with prejudice in its entirety.
The 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 arising out of the
Excluded Claims (the "Indemnified Claims"), including any claims against Norcal
for indemnification that may be brought 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 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"). Norcal believes that the
prospect of any material unreimbursed recovery against Norcal (other than
described below), by the Indenture Trustee Parties or otherwise, arising out of
Settling Plaintiffs' pursuit of the Excluded Claims is remote, given these
mechanisms in the Settlement.
The Settlement requires that Norcal and the ESOP cooperate with Settling
Plaintiffs in bringing an action regarding the enforceability and scope of any
indemnity or other liability of any Released Parties as may be reasonably
necessary to resolve any claim of such liability brought by any of the Indenture
Trustee Parties. The Indenture Trustee Party defendants have asserted that
Norcal and the ESOP have continuing indemnification obligations to them in
connection with Settling Plaintiffs' pursuit of the Excluded Claims. On August
16, 1996 the court granted the motion of Norcal and the ESOP to intervene in
Action No. C94-3076 CAL to bring a declaratory relief action establishing that
they have no obligation to indemnify the Indenture Trustee Party defendants
following the Settlement. After the declaratory relief action is filed, it is
possible that the Bank may file counterclaims against Norcal and/or the ESOP
arising out of the Settlement or the events alleged in Action C94-3076 CAL.
On September 29, 1995, the court entered an order in Action No. C94-3076
CAL (the "Good Faith Determination") finding that the 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 or Security
Pacific National Bank) 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 the 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.
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To the extent that, as a result of Settling Plaintiffs' pursuit of the
Excluded Claims, the Indenture Trustee Parties or any other Released Parties
bring additional claims against Norcal, the ESOP, or other parties to which
Norcal or the ESOP has indemnification obligations (the "Additional Claims"),
such claims will be covered by Settling Plaintiffs' indemnity, and any liability
or legal expenses incurred by Norcal (other than its own or the ESOP's defense
costs), either directly or as a result of its indemnification obligations, will
be payable from the Escrowed Recovery, if any, and the Deferred Settlement
Payment. Thus, if Additional Claims are filed, Norcal will bear its own and the
ESOP's defense costs and the legal expenses of any parties Norcal has
indemnified that are named in such Claims; but the legal expenses of such
indemnified parties will be recoverable from the Escrowed Recovery, if any, and
the defense costs incurred by the Indemnified Norcal Parties as to which Norcal
or the ESOP has contractual indemnification obligations will reduce the Deferred
Settlement Payment. While there is a possibility that the funds in the Escrow
Account could have been disbursed by the time such expenses are incurred and
Norcal then would have to collect against the more than 152 Settling Plaintiffs,
Norcal believes such eventuality is remote.
Norcal believes that it is unlikely that it would be liable to pay an
amount in damages on the Additional Claims that is materially greater than any
recovery by Settling Plaintiffs from the Indenture Trustee Parties (aside from
any liability for the Indenture Trustee Parties' litigation expenses), and thus
any award of damages (aside from such expenses) on the Additional Claims is not
likely to exceed the Escrowed Recovery (before reduction for indemnified defense
costs). Norcal believes that the only meaningful potential exposure to Norcal is
that Norcal and the ESOP may bear, in addition to their own legal expenses, the
legal expenses of persons and entities indemnified by them with respect to these
matters.
On November 21, 1995, the ESOP paid the holders of the four remaining ESOP
Notes, who were defendants in the Actions, a total payment of approximately
$937,400, funded by a loan from Norcal, in exchange for cancellation of their
ESOP Notes, which represented outstanding principal and accrued interest
totalling approximately $1.4 million as of October 31, 1995, and releases
equivalent to the ones provided by the Settling Plaintiffs.
Department of Labor Matter. 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, which encompassed the 1986, 1987 and
1990 Transactions, as well as a transaction involving investments by certain of
the Company's pension plans (the "Plans"), through Bank of America (the "Bank"),
the trustee of the Plans, in Techno-Therm, Inc., a Colorado corporation in which
Mr. Sangiacomo and certain former executive officers of Norcal also invested
(the "Techno-Therm Transaction"). Pursuant to the settlement (the
"Norcal-Secretary Settlement"), the $3.5 million settlement payment, which was
fully funded by insurance proceeds, was allocated between the Plans 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 Techno-Therm
Transaction, with $45,000 deposited in one of the Plans. The remainder of the
settlement payment was deposited in the ESOP, which used the proceeds to pay a
portion of its debt to Norcal. Among other things, the Norcal-Secretary
Settlement required the Plans' assets, with certain exceptions, to be managed by
an "investment manager" within the meaning of ERISA. 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
Techno-Therm Transaction 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, NT & SA, No. C 96-0583 CAL, in the United States District Court 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,
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including indemnification claims, relating to the Techno-Therm Transaction, the
Bank-Secretary Settlement or the Norcal-Secretary Settlement. The Bank Action
and Norcal's declaratory relief action were dismissed with prejudice. The Bank's
$4.0 million aggregate payment to the Plans will reduce their pension liability
balance and consequently reduce the Company's stockholder deficit.
IRS Dispute. The Internal Revenue Service (the "Service") is currently
conducting an audit of the Company's income tax returns for the fiscal years
ending September 30, 1988 through 1991. The Service is also examining certain
transactions involving employee benefit plans sponsored by the Company.
Although the Service has not completed its income tax audit, it has
proposed a number of adjustments (some of which have been agreed to by the
Company), and may propose additional adjustments. Thus far, 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-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 and the landfill closure and
post-closure costs.
Due to the existence of substantial net operating losses generated during
the years covered by the audit and the establishment of appropriate reserves,
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 may be substantially reduced or
deferred.
The Service has also asserted that the role played by a subsidiary of
Norcal in connection with the investment by certain of the Company's pension
plans in the Techno-Therm Transaction 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 agreement with the
Service and the Department of Labor regarding certain aspects of the transaction
that would permit the Company to resolve this matter in a way that would not
have a material adverse effect on the Company's financial condition.
The Service is also investigating the transactions pursuant to which the
ESOP acquired and subsequently disposed of Excel Environmental, Inc., and in
accordance with that investigation, the Service has 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 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 Company has been orally advised by the Service that
it intends to issue a technical advice memorandum that generally concurs with
the views espoused by the Company as to how the Excel transaction should be
treated for tax purposes. Accordingly, the Company believes this matter will be
resolved in a manner that will not have a material adverse effect on the
Company's financial condition.
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 or permits or other
regulatory requirements pursuant to which the Company operates, which, if
successful, could have a material adverse effect on the Company's
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business. See "- Specific Environmental Issues" and "Risk
Factors - Environmental Regulation and Potential Litigation."
From time to time, the Company is involved in routine litigation arising in
the ordinary course of its business. The Company believes that the costs of
settlements or judgments arising from such suits will not have a material
adverse effect on its consolidated financial position or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
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...................... 46 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
Gale R. Kaufman............................ 42 Director
John B. Molinari(a)(b)..................... 86 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. Prior
to his current positions, since March 1982 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 its
formation. Mr. Moriel's son-in-law is the Vice President and General Manager of
Norcal's Vallejo Garbage Service subsidiary and Group Manager of two additional
subsidiaries.
Mark R. Lomele has served as 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. Since
April 1996, he has 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 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 since December 1990. Mr. Anselmo served as Director
of Equipment Procurement for Golden Gate Disposal Company from January 1988
until his transfer to Norcal in December 1990. Mr. Anselmo began his career
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with Golden Gate Disposal Company in 1963, serving as shop foreman and shop
superintendent, among other capacities.
David A. Cochrane has served since February 1995 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. 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.
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. See "Certain Relationships and
Related Transactions."
John B. Molinari has served as a director of Norcal and its predecessor
since 1986 and as Chairman of the Board since October 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.
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. The ESOP's
Administrative Committee has selected a person (who is not an employee of the
Company) to fill this vacancy, subject to his acceptance, which the Company
expects to occur after consummation of the Exchange Offer.
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") 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 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. See "- Executive Compensation - 1990 Stock Option
Plan" and "- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions."
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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
1995, John B. Molinari and H. Welton Flynn were each paid $19,750 and $18,000,
respectively. Effective January 1996, each non-employee director will receive 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. See "- 1996 Non-Employee Director Stock Option
Plan." All directors are eligible to receive option grants under the 1996
Executive Stock Incentive Plan. See "-- 1996 Executive Stock Incentive Plan."
For information regarding consulting fees paid to a non-employee director, see
"Certain Transactions -- Consulting Arrangements with Kaufman Campaign
Consultants." For information concerning arrangements for indemnification of
directors, see "Certain Relationships and Related Transactions - Directors and
Officers Insurance."
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.
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, 1995 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 $100,000 during the last completed fiscal
year (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER(b)
FISCAL SALARY BONUS(a) COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)
- ----------------------------------- ------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael J. Sangiacomo.............. 1995 333,846 175,000 -- 94,582
President and Chief 1994 279,230 150,000 -- 42,277
Executive Officer 1993 225,480 50,000 -- 17,545
Donald M. Moriel................... 1995 261,539 110,000 -- 31,247
Executive Vice President and 1994 214,230 100,000 -- 14,286
Chief Operating Officer 1993 197,974 40,000 -- 4,615
Richard C. Broderson(c)............ 1995 185,962 57,000 -- 29,378
Vice President, 1994 168,270 50,000 -- 12,744
Chief Financial Officer 1993 150,000 25,000 -- 4,178
and Treasurer
Mark R. Lomele..................... 1995 117,066 42,000 -- 44,288
Vice President and 1994 109,078 40,000 -- 18,344
Controller 1993 99,885 20,000 -- 7,303
David A. Cochrane.................. 1995 93,082 25,000 -- 16,744
Vice President 1994 78,483 15,000 -- 5,407
1993 31,900(d) 0 -- --
</TABLE>
- ---------------
(a) Bonuses for fiscal years 1994 and 1995 are indicated for the fiscal year in
which they were earned based on the achievement of certain business plan
targets. See "- Management Incentive Bonus Plan."
(b) 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.
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(c) In January 1996, Mr. Broderson ceased to be an officer of Norcal.
(d) This represents the amount earned in fiscal year 1993 after Mr. Cochrane
started with Norcal in April of that year.
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 if his
employment is terminated constructively or without cause or he resigns at any
time more than 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.
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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.
Norcal and Mr. Broderson 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 will be
entitled to receive, among other things, approximately $237,000 from Norcal as
severance compensation, payable in bi-weekly installments 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. The
Separation Agreement contains mutual general releases by each of Norcal and Mr.
Broderson with respect to any claims that each of them may have had as of March
15, 1996.
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 constructively terminated or terminated
without cause within 13 months after such change in control. As of the date of
this Prospectus, no employee of the Company has been designated to be covered by
the Severance Policy.
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. 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, directors, consultants, independent
contractors or advisors 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, (iv) the
term of such option and (v) such other terms as the committee determines.
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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.
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.
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.
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
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<PAGE> 74
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. Pursuant to Norcal's 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 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 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.
As of July 31, 1996, options to purchase 244,000 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 1995 fiscal year or the ten month period ended July 31, 1996. The following
table provides certain information with respect to options outstanding during
fiscal year 1995, for the Named Executive Officers. No stock appreciation rights
("SARs") were outstanding during such period.
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<PAGE> 75
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION & SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING $ VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS/
SHARES VALUE SARS AT FISCAL YEAR-END SARS AT FISCAL YEAR-END(A)
ACQUIRED REALIZED ------------------------- --------------------------
NAME IN EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- ----------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Michael J. Sangiacomo..... 0 0 75,000/0 0/0
Donald M. Moriel.......... 0 0 5,000/0 0/0
Richard C. Broderson...... 0 0 0/0 0/0
Mark R. Lomele............ 0 0 10,000/0 0/0
David A. Cochrane......... 0 0 0/0 0/0
</TABLE>
- ---------------
(a) Based on a deemed fair market value of $4.89 per share of Common Stock on
September 30, 1995, as determined by the Administrative Committee of the
ESOP based on an independent appraisal.
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 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. 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 June 30, 1996, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 7.50 years; Mr. Moriel, 4.08 years; Mr. Broderson, 3.50 years; Mr.
Lomele, 7.75 years; and Mr. Cochrane, 3.25 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
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<PAGE> 76
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. 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 June 30, 1996, Mr. Sangiacomo had an estimated 5.17 years of credited
service 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> 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OYSTER POINT
In 1989, Norcal entered into an agreement (the "Property Exchange
Agreement") with an unaffiliated party to purchase property located in Brisbane,
California. To facilitate the seller's desire to structure the purchase as a
non-taxable transaction, Norcal requested that Mr. Sangiacomo, who is currently
a director, the President and the Chief Executive Officer of Norcal, and other
persons (collectively, the "Indemnitees") purchase other property located in
South San Francisco, California (the "Oyster Point Property") which would
eventually be exchanged for the Brisbane property.
In March 1991, Mr. Sangiacomo contributed $25,000 toward a down payment on
the Oyster Point Property and borrowed $275,000 from Norcal to enable him to
participate in the repayment of a purchase money note he and the Indemnitees had
given to acquire the property. Mr. Sangiacomo provided Norcal with a promissory
note (the "Promissory Note") dated April 5, 1991 to evidence the loan, bearing
interest at the rate of 6.85% per annum, which was to accrue and be payable
together with the $275,000 principal on the loan upon demand of Norcal.
Including accrued interest, the largest outstanding balance on the promissory
note at any time since September 30, 1993 was $325,939. Pursuant to the Property
Exchange Agreement and a separate indemnification agreement, Norcal agreed to
indemnify the Indemnitees from any and all liabilities of any kind arising out
of or related to their ownership of the Oyster Point Property and to reimburse
all monies advanced by the Indemnitees toward the acquisition or maintenance of
the Oyster Point Property and/or the costs of continuing ownership thereof.
The exchange contemplated by the Property Exchange Agreement was never
consummated and the Indemnitees sold the Oyster Point Property in December 1993
at a substantial loss. To satisfy its indemnification obligation to Mr.
Sangiacomo, Norcal in October 1994 repaid Mr. Sangiacomo the $25,000 he had
contributed to the down payment and forgave all of the principal and accrued
interest on the Promissory Note. At the same time, Mr. Sangiacomo paid over to
Norcal his $72,500 share of the net sale proceeds of the Oyster Point Property.
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
$37,500 in fees from October 1, 1995 through June 30, 1996 and $78,800 in fees
during Norcal's fiscal year ended September 30, 1995 for consulting services
provided to the Company during such periods.
CONSULTING AGREEMENTS WITH CERTAIN FORMER OFFICERS
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 informed the Company that they
resigned in order to pursue a financial services business together.
Mr. Pacini and Mr. Corbolotti have entered into consulting agreements with
the Company pursuant to which each of them will 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, non-competition and confidentiality provisions.
The consulting agreements replace employment and stock option agreements
pursuant to which Messrs. Pacini and Corbolotti would have
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<PAGE> 78
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 and as ERISA fiduciaries, to the extent they may so act.
For information pertaining to indemnification for certain claims see
"Business - Litigation and Related Matters" and "The ESOP."
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<PAGE> 79
SECURITY OWNERSHIP OF THE ESOP AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Norcal's Common Stock as of July 31, 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>
SHARES 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(d)................ 37,251 75,000 112,251 *
Donald M. Moriel(d)..................... 9,601 5,000 14,601 *
Gale R. Kaufman......................... 0 0 0 *
Richard C. Broderson(e)................. 8,950 0 8,950 *
Mark R. Lomele.......................... 15,666(f) 10,000 25,666(f) *
David A. Cochrane....................... 4,291 0 4,291 *
John B. Molinari........................ 0 12,500 12,500 *
H. Welton Flynn......................... 0 0 0 *
All executive officers and directors
as a group (9 persons)................ 24,134,973(g) 202,500 24,337,473(g) 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 and "The ESOP - Trustee and
Administrative Committee." The ESOP account includes allocated shares as of
September 30, 1995.
(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, 1995, of which approximately 14,842,419 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: Jonathan
M. Angin, 11,413 shares; Archie L. Humphrey, 26,823 shares; John A.
Legnitto, 2,001 shares; and Mark R. Lomele, 15,666 shares. In addition,
Messrs. Angin, Humphrey and Lomele hold options to purchase 7,500, 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,
1995. 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
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<PAGE> 80
outstanding shares of Common Stock as of September 30, 1995. See "The ESOP"
and "- Trustee and Administrative Committee."
(d) See "Management - Executive Compensation - Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" with respect
to certain stock options granted to each of Messrs. Sangiacomo and Moriel
that vest as of September 30, 1996, in the amount of 320,000 and 90,000
shares, respectively.
(e) In January 1996, Mr. Broderson ceased to be an officer of Norcal.
(f) 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 (f) below), but
includes those shares of Common Stock held by the ESOP Trustee for the
benefit of Mr. Lomele as ESOP participant (see note (b) above).
(g) 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. See
"- The ESOP Loans" and "History of the Company and the Refinancing."
TRUSTEE AND ADMINISTRATIVE COMMITTEE
The assets of the ESOP are held in trust under a trust agreement with
Imperial Trust Company, as 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. 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 Jonathan M. Angin, Archie L. Humphrey, John A.
Legnitto and Mark R. Lomele. There is one vacancy on the Committee. 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. See
"Management - Executive Officers and Directors."
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. 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. See
"Risk Factors - Control of Norcal by the ESOP."
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<PAGE> 81
PARTICIPATION AND VESTING
All employees of the Company are eligible to participate in the ESOP,
unless the terms of their employment are covered by a collective bargaining
agreement under which they are not eligible to participate in the ESOP and under
other limited circumstances. Each eligible employee will become a participant on
a specified date after completion of 1,000 hours of service in any specified
year. As of September 30, 1995, there were 1,648 employees who were participants
in the ESOP and 326 former employees and 16 beneficiaries of deceased employees
who were vested but who had not yet received a complete distribution of their
vested benefits. A participant generally becomes fully vested in his or her
accounts under the ESOP after he or she completes at least 1,000 hours of
service in each of five plan years.
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
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. See "Risk Factors - Required Payments for ESOP
Participant Benefits."
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, 9,292,554 shares were
unallocated as of September 30, 1995.
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 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
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<PAGE> 82
"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. See "History of the Company and the Refinancing."
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 June 30, 1996,
the outstanding principal balance owed to Norcal was $78.3 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 repayment, 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.
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<PAGE> 83
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT AGREEMENT
On November 21, 1995, as part of the Refinancing, the Company entered into
the New Credit Agreement with The First National Bank of Boston, as the Agent
and the sole Lender. The New Credit Agreement established a revolving credit
facility in the maximum amount of $100 million, up to $25 million of which may
be utilized for letters of credit. Thereafter, on December 1, 1995, The First
National Bank of Boston assigned portions of its commitment as a Lender to six
additional banks, who became parties to the New Credit Agreement by an amendment
executed on such date (such six additional banks, together with The First
National Bank of Boston, are hereinafter collectively referred to as the
"Lenders").
The New Credit Agreement has a five-year term. Amounts outstanding under
the New Credit Agreement bear interest at a floating rate, consisting of the
Base Rate plus the applicable margin (initially 0.50%) or the Eurodollar Rate
plus the applicable margin (initially 2.50%). Norcal will pay a commitment fee
on unused amounts of the revolving credit facility that ranges from 0.50% to
0.375%, depending on the maintenance of certain financial ratios.
The actual amount of borrowing availability under the New Credit Agreement
at any given time is based on certain financial ratios, and may be substantially
less than $100 million. Maximum availability under the New Credit Agreement will
be reduced by $2.5 million per quarter beginning in the quarter following 36
months after Closing, unless Norcal achieves and maintains a certain senior debt
rating with respect to the Notes or a specified leverage ratio. In addition,
certain mandatory prepayments are to be made from specified portions of the net
proceeds of certain asset sales, equity issuances and subordinated debt
issuances. See "Risk Factors - Effective Subordination of the Notes" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Norcal's obligations under the New Credit Agreement are guaranteed by the
wholly owned subsidiaries of Norcal, and substantially all of the assets of
Norcal and its subsidiaries, including the capital stock of the wholly owned
subsidiaries, are pledged to secure the obligations under the New Credit
Agreement and the related guarantees.
The New Credit Agreement contains numerous restrictive covenants, including
among other things, limitations on the ability of the Company to incur
additional indebtedness, to create liens and other encumbrances, to make certain
payments and investments, to sell or otherwise dispose of assets, to make
capital expenditures, or to merge or consolidate with another entity. Further,
the Company is required to obtain approval of the Lenders (i) for any
acquisition with a purchase price (defined to include cash and certain assumed
liabilities) in excess of $20.0 million or (ii) with respect to the Company's
fiscal years ending September 30, 1996 and September 30, 1997, for any
acquisition if, at the time of such acquisition, the aggregate purchase price of
acquisitions already completed in such fiscal year exceeds 100% of the prior
year's consolidated EBITDA (as defined in the New Credit Agreement). In
addition, the New Credit Agreement requires that Norcal and its subsidiaries
maintain certain financial ratios, including an interest coverage ratio, a debt
service coverage ratio, and a debt-to-EBITDA ratio (as defined therein). Norcal
and its subsidiaries also are required to maintain a minimum net worth. At June
30, 1996, availability under the New Credit Agreement (based on limitations
imposed by such financial ratios) was approximately $36 million.
The New Credit Agreement includes various events of default customary for
senior credit facilities of similar size and nature, including without
limitation failure to pay any amounts payable under the New Credit Agreement
when due, failure to comply with covenants (with certain grace periods), change
of control (as defined), certain defaults with respect to other agreements for
borrowed funds in excess of a certain amount, material unsatisfied and unstayed
judgments, and the commencement of reorganization, bankruptcy or insolvency
proceedings. In addition, the New Credit Agreement restricts the Company's
ability to amend the payment terms and guarantee provisions of the Notes or the
Indenture, or to amend any other provision in a manner materially adverse to the
interests of the Lenders under the New Credit Agreement.
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EQUIPMENT LEASES
The Company had outstanding lease obligations under lease arrangements of
$4.2 million as of June 30, 1996. Approximately $3.2 million of the outstanding
balance as of June 30, 1996 represents leases with initial terms of sixty
months, which terminate between August 1999 and November 2000, and with interest
based on a premium over treasury rates at the time of funding. The remainder
represents leases with initial terms of 84 months, with variable interest based
on a premium over the one month commercial paper rate at the start of each month
and final payments due in December 2001. See "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.".
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DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were issued and the New Notes are to be issued pursuant to an
indenture dated as of November 21, 1995 (the "Indenture") among Norcal, the
Guarantors listed therein, and IBJ Schroder Bank and Trust Company, as Trustee
(the "Trustee"). The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act") and in effect on the Closing Date.
The Notes are subject to all such terms, and holders of the Notes are referred
to the Indenture and the Trust Indenture Act for a statement thereof. The
following summary of certain provisions of the Indenture describes the material
terms of the Indenture but does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. The definitions of certain terms used in the following
summary are set forth below under "Certain Definitions." The Indenture is an
exhibit to the Registration Statement of which this Prospectus is a part.
On November 21, 1995, Norcal issued $175.0 million aggregate principal
amount of Old Notes under the Indenture. The terms of the New Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for New Notes. The Trustee will authenticate and deliver New Notes for
original issue only in exchange for a like principal amount of Old Notes. Any
Old Notes that remain outstanding after the consummation of the Exchange Offer,
together with the New Notes, will be treated as a single class of securities
under the Indenture. Accordingly, all references herein to specified percentages
in aggregate principal amount of the outstanding Notes shall be deemed to mean,
at any time after the Exchange Offer is consummated, such percentage in
aggregate principal amount of the Old Notes and New Notes then outstanding.
PRINCIPAL, MATURITY AND INTEREST
The aggregate principal amount of the Notes is limited to $175 million.
Each Note will mature on November 15, 2005 and interest on the Old Notes and the
New Notes will be payable semi-annually in arrears on May 15 and November 15 of
each year, commencing May 15, 1996, and November 15, 1996, respectively, to the
Person in whose name such Note is registered at the close of business on the May
1 or November 1 preceding such interest payment date. Interest on the Old Notes
accrued from the date of original issuance at the rate of 12.5% per annum, which
rate increased by 0.25% per annum on May 16, 1996, and will increase by an
additional 0.25% per annum on each of November 16, 1996, May 16, 1997 and
November 16, 1997. Interest on the New Notes will accrue from the date of
original issuance until the initial payment date at the rate of 12.75% per
annum, and will increase by an additional 0.25% per annum on each of November
16, 1996, May 16, 1997 and November 16, 1997. The maximum interest rate on the
Notes will be 13.5%. Notwithstanding the foregoing, the interest rate on the
Notes will revert to 12.5% per annum at such time as Norcal (in one or more
transactions) shall have offered to purchase (whether or not any actual
purchases are made) or redeemed an aggregate of $25.0 million in principal
amount of Notes out of the proceeds of the sale of Capital Stock (other than
Disqualified Stock) of Norcal (other than as a result of an issuance to any
Subsidiary or to an employee stock ownership plan). Any such offers may be made
at any time while the Notes are outstanding and shall be made to all holders of
Notes at a price not less than 110% of the principal amount thereof. Any such
redemptions must be made pursuant to the second paragraph under "- Optional
Redemptions." Interest on the New Notes will accrue from and including their
dates of issuance, payable semi-annually in arrears on each May 15 and November
15 after such issuance. Holders whose Old Notes are accepted for exchange will
receive, in cash, accrued interest thereon to, but not including, the date of
issuance of the New Notes, such interest to be payable with the first interest
payment on the New Notes. Interest on the Old Notes shall cease accruing after
the issuance of the New Notes issued in exchange therefor.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Principal, premium, if any, and interest will be payable at the offices
of the Trustee and the Paying Agent, provided that, at the option of Norcal,
payment of interest may be made by check mailed to the address of the Person
entitled thereto as it appears in the register of the Notes maintained by the
Registrar.
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RANKING
The Old Notes are and the New Notes will be senior unsecured obligations of
Norcal that rank pari passu in right of payment with all existing and future
unsecured Senior Indebtedness of Norcal and senior in right of payment to all
existing and future Subordinated Indebtedness of Norcal. In addition, the
Guarantees are senior unsecured obligations of the Subsidiary Guarantors that
rank pari passu in right of payment with all existing and future unsecured
Guarantor Senior Indebtedness and senior in right of payment to all existing and
future Subordinated Indebtedness of the Subsidiary Guarantors. The holders of
any secured Indebtedness of Norcal's Subsidiaries will be entitled to payment of
their Indebtedness from the assets of such Subsidiaries prior to the holders of
any general unsecured obligations of Norcal, including the Notes. Further, the
obligations of Norcal and its Subsidiaries under the New Credit Agreement are
secured by substantially all of Norcal's and its Subsidiaries' assets. At June
30, 1996, the aggregate principal amount of outstanding Senior Indebtedness and
Guarantor Senior Indebtedness of Norcal and its Subsidiaries, other than the
Notes, was $6.6 million, of which $5.6 million was secured, and Norcal would
have had no Indebtedness which would have ranked junior to the Notes in right of
payment. See "Risk Factors - Effective Subordination of the Notes."
The definition of "Subsidiary" in the Indenture excludes any "Unrestricted
Subsidiary" and, as a result, Unrestricted Subsidiaries generally will not be
bound by the restrictive provisions of the Indenture. Although Norcal will have
no Unrestricted Subsidiaries at the Closing Date, the Board of Directors will
have the ability under certain circumstances to designate certain Subsidiaries
as Unrestricted Subsidiaries after Closing Date. In addition, subject to the
provisions of the Indenture, the Board may designate Unrestricted Subsidiaries
as Subsidiaries. See the definitions of "Subsidiary" and "Unrestricted
Subsidiary" and "- Certain Covenants - Limitation on Restricted Payments."
GUARANTEES
All the Wholly Owned Subsidiaries of Norcal have unconditionally
guaranteed, on a joint and several basis, Norcal's obligations to pay principal
of, premium, if any, and interest on the Notes (the "Guarantees"). Each of the
Guarantees is a senior unsecured obligation of the Subsidiary Guarantor
providing such Guarantee, and ranks pari passu in right of payment with all
existing and future Guarantor Senior Indebtedness, except to the extent of
assets securing such Guarantor Senior Indebtedness, and senior in right of
payment to all existing and future Subordinated Indebtedness of such Subsidiary
Guarantor. The obligations of each Subsidiary Guarantor under its Guarantee are
limited so as to reduce the risk that they would be found to constitute a
fraudulent conveyance under applicable law. See "Risk Factors - Possible
Invalidity Holding of Guarantees."
The Indenture provides that, subject to the provisions described in the
next succeeding paragraph, no Subsidiary Guarantor may consolidate or merge with
or into (whether or not such Subsidiary Guarantor is the surviving entity or
Person) another corporation, entity or Person unless (i) the entity or Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor
under the Notes and the Indenture pursuant to a supplemental indenture, in a
form reasonably satisfactory to the Trustee, (ii) immediately after such
transaction, no Default or Event of Default exists, (iii) such Subsidiary
Guarantor or the entity or Person formed by or surviving any such consolidation
or merger will have Consolidated Net Worth (immediately after the transaction)
equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor
immediately preceding the transaction, and (iv) Norcal will, at the time of such
transaction after giving pro forma effect thereto, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph under
"- Certain Covenants - Limitation on Incurrence of Additional Indebtedness." The
foregoing will not prohibit a merger between Subsidiary Guarantors or, if such
transaction is otherwise permitted by the covenant "Limitation on Mergers,
Consolidations and Sales of Substantially All Assets," a merger between Norcal
and a Subsidiary Guarantor.
The Indenture provides that in the event of a sale or other disposition, by
way of merger, consolidation, foreclosure or otherwise, of all or substantially
all of the assets of any Subsidiary Guarantor or of all of the
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Equity Interests of such Subsidiary Guarantor, then such Subsidiary Guarantor
(in the event of a sale or other disposition of all of the Equity Interests of
such Subsidiary Guarantor) or the corporation acquiring the property (but not
such Subsidiary Guarantor) (in the event of a sale or other disposition of all
or substantially all of the assets of such Subsidiary Guarantor) will be,
without further action on the part of the Trustee, Norcal, a Subsidiary
Guarantor or any other Person, unconditionally released and relieved of any
obligations under the applicable Guarantee; provided that the Net Cash Proceeds
from such sale or other disposition shall be applied in accordance with the
provisions of the Indenture described under "- Certain Covenants - Limitation on
Asset Sales" and the Trustee shall have received the Officers' Certificate
referred to therein; and provided further, that the guarantee of such Subsidiary
Guarantor with respect to the New Credit Agreement and any renewals, extensions,
replacements, refinancings, amendments and modifications thereof, if any, has
been or is simultaneously released.
The Indenture provides that any entity which becomes a Wholly Owned
Subsidiary after the Closing Date (other than an entity which has been
designated as an Unrestricted Subsidiary in accordance with the terms of the
Indenture) will, jointly and severally, guarantee irrevocably and
unconditionally all principal, premium, if any, and interest on the Notes on a
senior basis, provided that such guarantee is not prohibited by law or by the
terms of an agreement that existed prior to the transaction pursuant to which
such entity became a Wholly Owned Subsidiary and that was not entered into in
connection with such transaction.
OPTIONAL REDEMPTION
The Notes will not be redeemable at Norcal's option prior to November 15,
2000. Thereafter, the Notes will be subject to redemption at the option of
Norcal, in whole or in part, upon not less than 40 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------- ----------
<S> <C>
2000...................................................... 106.250%
2001...................................................... 104.167%
2002...................................................... 102.083%
2003 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, on and prior to November 15, 1998, Norcal
may redeem up to 35% of the aggregate principal amount of the Notes originally
outstanding at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of one or more Public Equity Offerings of Norcal; provided that at
least 65% of the aggregate principal amount of the Notes originally issued
remains outstanding immediately after the occurrence of such redemption; and
provided, further, that such notice of redemption shall be given not later than
30 days after the date of the closing of any such Public Equity Offering and
such redemption shall occur within 30 days after the date of such notice.
SELECTION AND NOTICE
If fewer than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of any applicable depositary, legal and securities exchange
requirements, or, if the Notes are not so listed, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate and in such manner
as complies with any depositary and legal requirements; provided that no Notes
of $1,000 principal amount or less shall be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
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MANDATORY REDEMPTION
Except as set forth below under "- Repurchase at the Option of Holders,"
Norcal is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control. Upon the occurrence of a Change of Control, each holder
of Notes will have the right to require Norcal to offer to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase (the "Change of
Control Payment"). Within 30 days following any Change of Control, Norcal will
mail a notice to each holder and the Trustee describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes pursuant to the procedures required by the Indenture and described in such
notice. Norcal will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control Offer.
On the Change of Control Payment date (which will be no earlier than 30
days nor later than 60 days from the date of such notice), Norcal will (1)
accept for payment all Notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof so
tendered, and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted, together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by Norcal. Norcal, the
depositary or the Paying Agent will promptly mail to each holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. Norcal will publicly
announce the results of the Change of Control Offer on, or as soon as
practicable after, the Change of Control Payment date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that Norcal repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
Asset Sales. The Indenture also contains provisions in respect of offers
to purchase Notes with Excess Proceeds in the event of Asset Sales. See
"- Certain Covenants - Limitation on Asset Sales."
New Credit Agreement Effects. The New Credit Agreement provides that
Norcal will be prohibited from purchasing any Notes prior to the final maturity
of the New Credit Agreement (except, under certain circumstances, for optional
redemptions described in the second paragraph under "- Optional Redemption") and
may also provide that certain change of control events with respect to Norcal
would constitute a default thereunder or give rise to a right of the Agent or
the lenders thereunder to terminate the New Credit Agreement or all or part
thereof. Any future credit agreements or other agreements relating to Senior
Indebtedness to which Norcal becomes a party may contain similar restrictions
and provisions. In the event a Change of Control occurs or an Asset Sale Offer
is required by the Indenture at a time when Norcal is prohibited from purchasing
Notes, Norcal could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If
Norcal does not obtain such consent or repay such borrowings, Norcal may remain
prohibited from purchasing Notes. In such case, Norcal's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the New Credit Agreement. If Norcal
did receive any such consent, its ability to pay cash to the holders of the
Notes upon a repurchase may still be limited by Norcal's then existing financial
resources.
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CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. The Indenture
provides that Norcal will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
or otherwise become responsible for the payment of (collectively, "incur"), any
Indebtedness (including Acquired Debt and Seller Debt), other than Permitted
Indebtedness; provided, however, that (A) Norcal may incur Indebtedness
(including Acquired Debt and Seller Debt) and (B) Norcal's Subsidiaries may (1)
incur Acquired Debt, (2) incur Seller Debt, provided that with respect to each
acquisition or series of related acquisitions in connection with which such
Seller Debt is incurred, the aggregate Seller Debt incurred shall not exceed $2
million, (3) guarantee Indebtedness of Norcal permitted to be incurred under the
Indenture, provided that all such guarantees shall have the same relative
priority to such Subsidiary's other Indebtedness as the Indebtedness being
guaranteed has to Norcal's other Indebtedness, (4) incur Capital Lease
Obligations and purchase money Obligations, provided, as to purchase money
Obligations, that any related Liens meet the requirements of clause (viii) of
the definition of Permitted Liens and (5) incur Indebtedness other than that
described in clauses (1) through (4) above in an amount not to exceed $15
million, if:
(i) the Consolidated Interest Coverage Ratio for Norcal's most
recently ended four full fiscal quarters (for which internal financial
statements are available) immediately preceding the date on which such
additional Indebtedness is to be incurred would have been at least 2.25 to
1.0, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom) as if the additional Indebtedness had been
incurred at the beginning of such four quarter period; and
(ii) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof.
Notwithstanding the foregoing, Norcal and its Subsidiaries may incur the
following Indebtedness ("Permitted Indebtedness"):
(i)(1) Indebtedness of Norcal under the New Credit Agreement
(including letters of credit thereunder and reimbursement obligations with
respect thereto), as the same may be amended, refinanced or replaced, in a
principal amount outstanding at any time not to exceed $100 million, less
(a) any Net Cash Proceeds applied pursuant to the covenant "- Limitation on
Asset Sales" to repay or prepay such Indebtedness that results in a
permanent reduction in any revolving credit or other commitment relating
thereto or the maximum amount that may be borrowed thereunder, and (b) the
amount of any scheduled principal payments actually made in connection
therewith, and (2) guarantees of the Indebtedness described in clause (1)
above by any Subsidiary of Norcal;
(ii) Existing Indebtedness of Norcal and its Subsidiaries outstanding
on the Closing Date;
(iii) Indebtedness of Norcal represented by the Notes and Indebtedness
of the Subsidiary Guarantors represented by the Guarantees;
(iv) Indebtedness of Norcal or its Subsidiaries incurred in exchange
for, or the net proceeds of which are used to extend, refinance, renew,
replace, defease or refund Indebtedness permitted by the Indenture to be
incurred pursuant to the first paragraph of this covenant (including
without limitation Indebtedness under the New Credit Agreement in excess of
that permitted to be incurred pursuant to clause (i) of this paragraph) and
pursuant to clauses (ii), (iii) and this clause (iv) of this paragraph
("Refinancing Indebtedness"); provided, however, that (A) the principal
amount of such Refinancing Indebtedness shall not exceed the principal
amount (or accreted amount in the case of any Indebtedness issued with
original issue discount) of the Indebtedness (including unused commitments)
so extended, refinanced, renewed, replaced, substituted or refunded (plus
costs of issuance and prepayment), (B) such Refinancing Indebtedness ranks,
relative to the Notes and the Guarantees, no more senior than the
Indebtedness being refinanced thereby, (C) such Refinancing Indebtedness
bears interest at a rate not higher than a market rate, (D) such
Refinancing Indebtedness (1) shall have an Average Life equal to or greater
than, and a stated maturity later than, the Average Life and stated
maturity, respectively, of the Indebtedness being extended, refinanced,
renewed, replaced, substituted or refunded or (2) shall not have
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a scheduled maturity, principal repayment, sinking fund payment or
mandatory redemption on or prior to the maturity of the Notes and (E)
neither Norcal nor any of its Subsidiaries shall be the primary obligor of
such Refinancing Indebtedness, except to the extent that such Person was
the primary obligor of the Indebtedness so extended, refinanced, renewed,
replaced, substituted or refunded; provided, however, Norcal or any of its
Subsidiaries may guarantee such Refinancing Indebtedness if such Person
would have been permitted under the Indenture to guarantee the Indebtedness
so refinanced.
(v) Indebtedness of Norcal to any of its Wholly Owned Subsidiaries or
any of Norcal's Wholly Owned Subsidiaries to Norcal or to any other Wholly
Owned Subsidiary of Norcal; provided that if any Wholly Owned Subsidiary
ceases to be a Wholly Owned Subsidiary of Norcal or transfers such
Indebtedness (other than to Norcal or to another Wholly Owned Subsidiary of
Norcal), such events shall be deemed, in each case, to constitute the
incurrence of such Indebtedness by Norcal or such Wholly Owned Subsidiary,
as the case may be, at the time of such event;
(vi) if no Event of Default shall have occurred and be continuing at
the time or as a consequence of the incurrence of such Indebtedness,
Indebtedness represented by Hedging Obligations entered into in the
ordinary course of business related to Indebtedness of Norcal and its
Subsidiaries otherwise permitted to be incurred pursuant to the Indenture
not exceeding the underlying obligations;
(vii) Indebtedness of Norcal or any of its Subsidiaries represented by
surety bonds, appeal bonds, performance bonds, workmen's compensation,
unemployment insurance and other types of social security or other
obligations of a like nature, in each case incurred in the ordinary course
of business;
(viii) if no Event of Default shall have occurred and be continuing at
the time or as a consequence of the incurrence of such Indebtedness, other
Indebtedness of Norcal or any of its Subsidiaries for the sole purpose of
financing Designated Capital Expenditures, in an aggregate principal amount
not to exceed $30 million; and
(ix) if no Event of Default shall have occurred and be continuing at
the time or as a consequence of the incurrence of such Indebtedness, other
Indebtedness of Norcal in a principal amount not to exceed $10 million at
any one time outstanding.
Limitation on Restricted Payments. The Indenture provides that Norcal will
not, and will not permit any of its Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any distribution on account of, or any
contribution in respect of, its Capital Stock (including, without limitation,
any payment in connection with any merger or consolidation involving Norcal),
other than dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of Norcal or dividends or distributions payable to Norcal or
any Wholly Owned Subsidiary of Norcal; (ii) purchase, redeem or otherwise
acquire or retire for value any Capital Stock of Norcal or any Subsidiary of
Norcal or other Affiliate of Norcal (other than any such Capital Stock owned by
Norcal or any Wholly Owned Subsidiary of Norcal); (iii) make any principal
payment on, purchase, repurchase, redeem, prepay, defease, or otherwise acquire
or retire for value any Indebtedness of Norcal that is subordinated in right of
payment to the Notes or any Guarantee thereof, in each case prior to scheduled
maturity, repayment or sinking fund payment; or (iv) make any Investment other
than a Permitted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), if at the time of and after giving effect to such Restricted
Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) Norcal would not, at the time of such Restricted Payment and after
giving pro forma effect thereto, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
"- Limitation on Incurrence of Additional Indebtedness"; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Norcal and its Subsidiaries on or after the
Closing Date would exceed the sum of (A) 50% of the Consolidated Net Income
of Norcal accrued on a cumulative basis for the period beginning from the
Closing Date to the last day of the last full fiscal quarter immediately
preceding the fiscal quarter in
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which such Restricted Payment occurs (or, if such Consolidated Net Income
for such period is a deficit, minus 100% of such deficit), plus (B) 100% of
the aggregate net cash proceeds received by Norcal as capital contributions
or from the issue or sale since the Closing Date of Capital Stock or of
convertible debt securities of Norcal that have been converted into Capital
Stock (other than Capital Stock or convertible debt securities sold to a
Subsidiary of Norcal or an employee stock ownership plan of Norcal and
other than Disqualified Stock or debt securities that have been converted
into Disqualified Stock), plus (C) 100% of the aggregate net cash proceeds
received by Norcal from the issue or sale since the Closing Date of Capital
Stock (other than Disqualified Stock) to an employee stock ownership plan,
but (if such employee stock ownership plan incurs any Indebtedness to or
guaranteed by Norcal or any of its Subsidiaries to finance the acquisition
of such Capital Stock) only to the extent that any such proceeds are equal
to any increase in Consolidated Net Worth resulting from principal
repayments made by such employee stock ownership plan with respect to the
Indebtedness incurred by it to finance the purchase of such Capital Stock,
plus (D) an amount equal to the portion (proportionate to Norcal's or a
Subsidiary's equity interest in such Unrestricted Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Subsidiary; provided, however,
that such amount shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of any Restricted Payments previously made by Norcal
or any Subsidiary to such Unrestricted Subsidiary which were permitted to
be made pursuant to this covenant, plus (E) $5 million.
The foregoing provisions will not prohibit the following Restricted
Payments:
(i) the payment of any dividend or making of any distribution within
60 days after the date of declaration thereof, if at the date of
declaration such dividend or distribution would have complied with the
provisions of the Indenture;
(ii) the payment of any dividend on shares of Capital Stock payable
solely in shares of Capital Stock (other than Disqualified Stock);
(iii) the payment of any dividend or making of any distribution
payable from a Subsidiary to Norcal or any Wholly Owned Subsidiary of
Norcal;
(iv) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of Norcal in exchange for, or out of the proceeds of
the substantially concurrent sale (other than to a Subsidiary of Norcal or
an employee stock ownership plan of Norcal) for cash of, other Equity
Interests of Norcal (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition or obtained from
such concurrent sale will be excluded from clauses (B) and (C) of paragraph
(c) above;
(v) the repayment, repurchase, redemption, defeasance or other
acquisition or retirement for value of any Indebtedness of Norcal that is
subordinated to the Notes with the net proceeds of Refinancing Indebtedness
or in exchange for, or out of the proceeds of, the substantially concurrent
sale (other than to a Subsidiary of Norcal or an employee stock ownership
plan) of Equity Interests of Norcal (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such repayment, repurchase, redemption, defeasance or other
acquisition or obtained from such concurrent sale will be excluded from
clauses (B) and (C) of paragraph (c) above;
(vi) (A) any purchases of Capital Stock, (B) any contributions or
dividends paid to the ESOP or (C) any loans to the ESOP, in each case only
to the extent made in connection with the distribution of retirement,
termination or diversification withdrawal benefits to ESOP participants or
beneficiaries pursuant to the terms of the ESOP and the provisions of ERISA
and the Code; and
(vii) any contributions or dividends paid to the ESOP, in each case
only to the extent used by the ESOP (A) to pay administrative expenses of
the ESOP in an amount not to exceed $300,000 a year or (B) to repay
Indebtedness of the ESOP owed to Norcal or its Subsidiaries.
Payments made pursuant to clauses (ii), (iii), (iv) and (v), and, to the extent
payments under clauses (vi) and (vii) were expensed in accordance with GAAP and
thus reduced Consolidated Net Income for the
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relevant period, payments made pursuant to clauses (vi) and (vii), of the
immediately preceding paragraph, shall not constitute Restricted Payments for
purposes of the calculation set forth in paragraph (c) above.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that Norcal will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction of any kind
on the ability of any Subsidiary to: (i) pay dividends or make any other
distributions to Norcal or any of its Subsidiaries (x) on its Capital Stock or
(y) with respect to any other interest or participation in, or measured by, its
profits; (ii) pay any Indebtedness or other Obligations owed to Norcal or any
Subsidiary; (iii) make loans or advances to Norcal or any Subsidiary; (iv)
transfer any of its property or assets to Norcal or any Subsidiary; (v) grant
liens or security interests upon its property or assets in favor of the holders
of the Notes; or (vi) guarantee the Notes or any renewals or refinancings
thereof; except for such encumbrances or restrictions existing under or by
reason of: (A) applicable law, (B) the New Credit Agreement, (C) Existing
Indebtedness of Subsidiaries outstanding on the date of the Indenture, (D) any
instrument governing Indebtedness or Capital Stock of a Person acquired by
Norcal or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person so acquired, (E) by reason
of customary non-assignment provisions in leases entered into in the ordinary
course of business consistent with past practice, (F) restrictions upon the
transfer of any interest in property or assets subject to Liens not prohibited
under "- Limitation on Liens" and (G) Refinancing Indebtedness; provided that
the restrictions contained in the agreements governing such Refinancing
Indebtedness are not on the whole materially more restrictive than those
contained in the agreements governing the Indebtedness being refinanced.
Limitation on Liens. The Indenture provides that Norcal will not, and will
not permit any of its Subsidiaries to, create, incur, assume or suffer to exist
any Liens (other than Permitted Liens) upon any of their respective properties
securing (i) any Indebtedness of Norcal unless the Notes are equally and ratably
secured or (ii) any Indebtedness of a Subsidiary Guarantor unless the Guarantees
are equally and ratably secured; provided, however, that if such Indebtedness is
expressly subordinated to the Notes or the Guarantees, the Lien securing such
Indebtedness will be subordinated and junior to any Lien securing the Notes or
the Guarantees, with the same relative priority as such Subordinated
Indebtedness of Norcal or a Subsidiary Guarantor will have with respect to the
Notes or the Guarantees, as the case may be.
Substantially all of the assets of Norcal and its Subsidiaries have been
pledged to secure obligations of Norcal and the Subsidiaries to lenders under
the New Credit Agreement.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
Norcal will not, and will not permit any of its Subsidiaries to, enter into any
Sale and Leaseback Transaction unless either (i) at the time such transaction is
entered into, Norcal or such Subsidiary, as the case may be, would be able to
incur Indebtedness in an amount equal to the Attributable Indebtedness, and
Liens, if any, with respect to such Sale and Leaseback Transaction pursuant to
the covenants "Limitation on Incurrence of Additional Indebtedness" and
"Limitation on Liens" or (ii) Norcal or such Subsidiary receives proceeds from
such Sale and Leaseback Transaction at least equal to the fair market value
thereof (as determined in good faith by Norcal's Board of Directors, whose
determination in good faith, evidenced by a resolution of such Board, shall be
conclusive) and such proceeds are applied in the same manner and to the same
extent as the Net Cash Proceeds and Excess Proceeds from an Asset Sale pursuant
to the covenant "Limitation on Asset Sales."
Limitation on Transactions with Affiliates. The Indenture provides that
Norcal will not, and will not permit any of its Subsidiaries to, directly or
indirectly, in a transaction or a series of related transactions, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into or make any contract, agreement,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to Norcal or the relevant
Subsidiary than those that would have been obtained in a comparable transaction
by Norcal or such Subsidiary with an unrelated Person and (ii) Norcal delivers
to the Trustee (a) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1 million,
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a resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction involving aggregate consideration in excess of $5 million,
an opinion as to the fairness to Norcal or such Subsidiary of such Affiliate
Transaction from a financial point of view issued by a nationally recognized
investment banking firm or, in the case of a transaction involving the sale,
lease, transfer or purchase of assets subject to valuation, such as real estate,
a written appraisal by either a nationally recognized appraisal firm or an
appraisal firm generally recognized within the industry as having expertise
regarding the specific assets subject to valuation; provided, however that the
following shall not be deemed to be Affiliate Transactions: (A) transactions
between or among Norcal and/or its Wholly Owned Subsidiaries, (B) transactions
permitted by the provisions of the Indenture described under "- Limitation on
Restricted Payments"; (C) reasonable fees and compensation paid to, and
indemnities to, and directors and officers and ERISA-based fiduciary liability
insurance provided on behalf of, officers, directors, agents or employees of
Norcal, any Subsidiary of Norcal, the ESOP, or any member of the Administrative
Committee of the ESOP, in each case in the ordinary course of business and as
determined in good faith by the Board of Directors of Norcal, (D) any employment
agreement entered into by Norcal or any of its Subsidiaries in the ordinary
course of business that either (1) is approved by the Board of Directors of
Norcal or (2) provides for annual compensation of $100,000 or less and is on
terms comparable to those generally made available by entities engaged in the
same or similar businesses and (E) grants or sales of Common Stock, and options
to purchase Common Stock, by Norcal pursuant to employee benefit plans approved
by the Board of Directors of Norcal.
Limitation on Asset Sales. The Indenture provides that Norcal will not,
and will not permit any of its Subsidiaries to, directly or indirectly,
consummate an Asset Sale to any Person other than Norcal or a Wholly Owned
Subsidiary of Norcal unless (i) Norcal (or the Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors of Norcal,
whose determination shall be conclusive and evidenced by a Board resolution set
forth in an Officers' Certificate delivered to the Trustee) of the assets sold
or otherwise subject to disposition and (ii) at least 85% of the consideration
therefor received by Norcal or such Subsidiary is in the form of Cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on
Norcal's or such Subsidiary's most recent balance sheet or in the notes thereto)
of Norcal or any Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any such
assets, and (y) any notes or other obligations received by Norcal or any such
Subsidiary from such transferee that are immediately converted by Norcal or such
Subsidiary into Cash or Cash Equivalents (to the extent of the Cash or Cash
Equivalents received) will be deemed to be Cash for purposes of this provision.
Within 360 days after the date of any Asset Sale, Norcal may apply the Net Cash
Proceeds from such Asset Sale to either (a) permanently reduce Indebtedness,
other than Subordinated Indebtedness, of Norcal or the Subsidiary whose assets
were sold in such Asset Sale, provided that any such reduction of Indebtedness
of such Subsidiary shall not exceed the amount of Net Cash Proceeds received
from the sale of assets of such Subsidiary or (b) acquire property or assets to
be used in any line of business in which Norcal or any of its Subsidiaries was
engaged on the Closing Date or in any line of business reasonably related
thereto; provided that when any proceeds not in the form of Cash or Cash
Equivalents become Net Cash Proceeds, the requirements contained in this
paragraph shall apply thereto. Pending the final application of any such Net
Cash Proceeds, Norcal may temporarily invest such Net Cash Proceeds in Cash
Equivalents or reduce Indebtedness under the New Credit Agreement. Any Net Cash
Proceeds from an Asset Sale that are not applied or invested as provided in the
second sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
Norcal shall, within 30 days of the occurrence of such event, make an offer to
all holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date fixed for the closing of such
offer, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, Norcal may use the excess of such Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
Notes tendered by holders thereof exceeds the amount of Excess
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Proceeds, the Trustee shall select the Notes or portions thereof to be purchased
on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset to zero.
Notwithstanding the foregoing, $2.0 million of Net Cash Proceeds received
from Asset Sales in any fiscal year shall not constitute Excess Proceeds and
thus shall not be subject to the restrictions contained in this covenant.
The Indenture provides that Norcal will not, and will not permit any Wholly
Owned Subsidiary to, directly or indirectly, make any Asset Sale of any of the
Capital Stock of any Wholly Owned Subsidiary of Norcal except pursuant to an
Asset Sale of all of the Capital Stock of such Wholly Owned Subsidiary.
The New Credit Agreement prohibits, and any agreement governing Senior
Indebtedness incurred after the Closing Date may prohibit, the purchase of Notes
with the proceeds of any Asset Sale unless all Senior Indebtedness thereunder
has been paid in full.
Provisions of Reports and Other Information. The Indenture provides that
whether or not Norcal is required to file with the Commission annual and
quarterly reports and other information, documents and reports pursuant to
Section 13(a) or 15(d) of the Exchange Act ("SEC Reports") it will deliver
copies of such reports to the Trustee within (5) days after it would be required
to file such reports with the Commission if it were subject to the Exchange Act.
Norcal's obligation to file reports with the Commission will begin the earlier
of (i) 180 days following the Closing Date, or (ii) when it otherwise would be
required to file under Section 13(a) or 15(d) of the Exchange Act. Norcal will
continue to file SEC reports with the Commission (unless the Commission will not
accept such a filing) and with the Trustee even if Norcal ceases to be required
to file such reports pursuant to the Exchange Act. Whether or not required by
the Exchange Act to file SEC Reports with the Commission, so long as any Notes
are outstanding, Norcal will furnish copies of the SEC Reports to the holders of
Notes at the time Norcal is required to file the same with the Trustee and make
such information available to investors who request it in writing. In addition,
Norcal has agreed that, for so long as any Old Notes remain outstanding, it will
furnish to the holders of Old Notes and to prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Limitation on Mergers, Consolidations and Sales of Substantially All
Assets. The Indenture provides that Norcal may not consolidate or merge with or
into (whether or not Norcal is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) Norcal is the surviving corporation, or
the entity or the Person formed by or surviving any such consolidation or merger
(if other than Norcal) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made, is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the entity formed by or surviving any such
consolidation or merger (if other than Norcal), or the entity to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made, as the case may be, assumes all the obligations of Norcal under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately prior to or after
giving effect to such transaction no Default or Event of Default shall have
occurred and be continuing; and (iv) Norcal or the entity or Person formed by or
surviving any such consolidation or merger (if other than Norcal) or to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made, as the case may be, (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of Norcal immediately preceding the transaction and (B) will, immediately
after such transaction and after giving pro forma effect thereto, be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of the covenant "Limitation on Incurrence of Additional Indebtedness";
provided, however, that any Wholly Owned Subsidiary Guarantor may merge into
Norcal without compliance with clauses (iii) and (iv) above.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default in the payment of interest on any Notes when the same
becomes due and payable and such default continues for a
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period of 30 days; (ii) default in the payment of principal of, and premium, if
any, on any Notes when the same becomes due and payable, whether at maturity,
upon redemption or otherwise; (iii) default in the performance or breach of the
terms set forth under the covenant "Limitation on Mergers, Consolidations and
Sales of Substantially All Assets"; (iv) failure by Norcal or any Subsidiary of
Norcal to comply in any respect with any of the other applicable covenants or
agreements in the Indenture and such failure continues for a period of 45 days
after receipt of a written notice with respect thereto from the Trustee or the
holders of at least 25% of the aggregate principal amount of the Notes then
outstanding; (v) default under any mortgage, indenture, guarantee or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness of Norcal or any of its Subsidiaries whether such Indebtedness
existed as of the Closing Date or was created thereafter, if (x) either (a) as a
result of such default, the maturity of such Indebtedness has been accelerated
prior to its expressed maturity or (b) such default results from the failure to
pay when due, whether at final maturity or otherwise (after any applicable grace
periods), any principal of, or interest on, such Indebtedness and (y) the
principal amount of such Indebtedness aggregates $5.0 million or more; (vi)
failure by Norcal or any of its Subsidiaries to pay final, nonappealable
judgments aggregating in excess of $5.0 million (to the extent not covered by
insurance or a Specified Indemnity Amount) which judgments are not paid,
discharged or stayed for a period of 60 days; or (vii) certain events of
bankruptcy, insolvency or reorganization of Norcal or any Subsidiary.
If any Event of Default occurs and is continuing, the Trustee by notice to
Norcal, or the holders of at least 25% in principal amount of the then
outstanding Notes by written notice to Norcal and the Trustee, may accelerate
the maturity of all Notes and declare the entire principal thereof and the
interest accrued thereon to be due and payable immediately. The holders of a
majority in principal amount of the then outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than non-payment of principal, premium, if any, and interest which has
become due solely as a result of such acceleration, have been cured or waived as
provided in the Indenture. In the event of any Event of Default specified in
clause (v) above, such Event of Default and all consequences thereof (including,
without limitation, any acceleration or resulting payment default) shall be
annulled and rescinded, automatically and without any action by the Trustee or
the holders of the Notes, if, within 15 days after such Event of Default arose
in the case of Indebtedness under the New Credit Agreement, or within 30 days
after such Event of Default arose in the case of other Indebtedness, (x) the
Indebtedness that is the basis for such Event of Default has been discharged,
(y) the holders thereof have rescinded the acceleration giving rise to such
Event of Default or (z) the payment default under the Indebtedness that is the
basis for such Event of Default has either been cured or waived (provided that,
under this clause (z), (i) in the case of a waiver of a payment default on any
Indebtedness the principal amount of which aggregates $10.0 million or more, the
Event of Default shall be reinstated upon the earlier of the 31st day after the
grant of the waiver and the expiration of the waiver by its terms (if such
payment default has not been previously cured) and (ii) in the case of a payment
default on any Indebtedness the principal amount of which aggregates more than
$5.0 million but less than $10.0 million, the Event of Default shall be
reinstated upon the expiration of the waiver by its terms (if such payment
default has not been previously cured)). Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to Norcal or any of its Subsidiaries, all outstanding
Notes will become due and payable forthwith without further action or notice.
The Trustee may withhold from holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the non-payment of principal or interest) if it determines that withholding
notice is in their interests.
The Indenture provides that no holder of a Note may pursue any remedy under
the Indenture unless (i) the Trustee shall have received written notice of a
continuing Event of Default, (ii) the Trustee shall have received a request from
holders of at least 25% in principal amount of the Notes to pursue such remedy,
(iii) the Trustee shall have been offered indemnity reasonably satisfactory to
it, (iv) the Trustee shall have failed to act for a period of 30 days after
receipt of such notice and offer of indemnity, and (v) during such 30-day
period, holders of at least 25% in aggregate principal amount of the Notes do
not give the Trustee a direction which in the opinion of the Trustee is
inconsistent with such request; provided, however, such provision does not
affect the right of a holder of a Note to sue for enforcement of overdue payment
thereon.
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Norcal is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and Norcal is required upon becoming aware of any
Default or Event of Default, to deliver to the Trustee a statement specifying
such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of a
majority in aggregate principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in aggregate principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for
Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes, (iii)
reduce the rate of or change the time for payment of interest on any Note, (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Notes (except a rescission of acceleration of the
Notes by the holders of a majority in aggregate principal amount of the Notes
then outstanding and a waiver of the payment default that resulted from such
acceleration), provided, however, that an Event of Default arising under clause
(v) in the first paragraph under the caption "- Events of Default and Remedies"
above, may be annulled and rescinded automatically as described in the second
paragraph under such caption, (v) make any Note payable in money other than that
stated in the Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Notes to
receive payments of principal of or premium, if any, or interest on the Notes,
(vii) waive a redemption payment with respect to any Note, (viii) make a change
that would adversely affect the contractual ranking of the Notes or (ix) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
Norcal, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of Norcal's obligations to holders of Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the holders of Notes or that does not
adversely affect the legal rights under the Indenture of any such holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
PAYMENTS FOR CONSENT
The Indenture prohibits Norcal and any of its Subsidiaries from, directly
or indirectly, paying or causing to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the Notes
unless such consideration is offered to be paid or agreed to be paid to all
holders of the Notes which so consent, waive or agree to amend in the time frame
set forth in solicitation documents relating to such consent, waiver or
agreement.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Norcal may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) Norcal's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
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(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
Norcal's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, Norcal may, at its option and at any
time, elect to have the obligations of Norcal and the Subsidiary Guarantors
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment) described under "Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Norcal must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and Norcal must specify whether the Notes
are being defeased to maturity or to a particular redemption date; (ii) in the
case of Legal Defeasance, Norcal shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) Norcal has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there has been
a change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the holders
of the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, Norcal shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time during
the period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which Norcal or any of its Subsidiaries is a party or by which
Norcal or any of its Subsidiaries is bound; (vi) Norcal must have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) Norcal must have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by Norcal with the
intent of preferring the holders of Notes over the other creditors of Norcal or
with the intent of defeating, hindering, delaying or defrauding creditors of
Norcal or others; and (viii) Norcal must have delivered to the Trustee an
Officers' Certificate stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and Norcal may require a
holder to pay any taxes and fees required by law or permitted by the Indenture.
Norcal is not required to transfer or exchange any Note selected for redemption.
Also, neither the Registrar nor Norcal is required to transfer or exchange any
Note for a period of 15 Business Days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of such Note
for all purposes.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of Norcal, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
Notes to be resold as set forth herein will initially be issued in the form
of one or more Global Notes (the "Global Note"). The Global Note will be
deposited on the Closing Date with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of Cede & Co., as nominee
of the Depositary (such nominee being referred to herein as the "Global Note
Holder").
Notes that are issued as described below under "- Certificated Securities,"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Such Certificated Securities may, unless the Global
Note has previously been exchanged for Certificated Securities, be exchanged for
an interest in the Global Note representing the principal amount of Notes being
transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
Norcal expects that pursuant to procedures established by the Depositary
(i) upon deposit of the Global Note, the Depositary will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Note and (ii) ownership of the Notes evidenced by the
Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent. For
certain other restrictions on the transferability of the Notes, see "Notice to
Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither Norcal
nor the Trustee will have any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Notes.
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Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, Norcal and the
Trustee may treat the persons in whose names Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither Norcal nor the Trustee has or will have any responsibility
or liability for the payment of such amounts to beneficial owners of Notes.
Norcal believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such payments,
in amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Certificated Securities. Subject to certain conditions, any person having
a beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for Notes in the form of Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). All such certificated
Notes would be subject to the legend requirements described herein under "Notice
to Investors." In addition, if (i) Norcal notifies the Trustee in writing that
the Depositary is no longer willing or able to act as a depositary and Norcal is
unable to locate a qualified successor within 90 days or, if at any time the
Depositary ceases to be a "clearing agency" registered under the Exchange Act,
or (ii) Norcal, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Global Note Holder of its Global Note,
Notes in such form will be issued to each person that the Global Note Holder and
the Depositary identify as being the beneficial owner of the related Notes.
Neither Norcal nor the Trustee will be liable for any delay by the Global
Note Holder or the Depositary in identifying the beneficial owners of Notes and
Norcal and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or the Depositary for all
purposes.
Next Day Settlement and Payment. The Indenture requires that payments in
respect of the Notes represented by the Global Note (including principal,
premium, if any, interest and Liquidated Damages, if any) be made by wire
transfer of next day funds to the accounts specified by the Global Note Holder.
With respect to any Certificated Securities, Norcal will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of next day funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are expected to be eligible
to trade in the PORTAL Market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. Norcal expects that secondary trading in any
Certificated Securities will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person or any of its Subsidiaries existing at the time
such other Person merged with or into or became a Subsidiary of such specified
Person (including any Indebtedness of an Unrestricted Subsidiary at the time it
is designated a Subsidiary) and (ii) Indebtedness encumbering any asset acquired
by such specified Person or assumed by such specified Person in connection with
the acquisition of assets, in each case, not incurred in connection with, or in
anticipation of, a Person becoming a Subsidiary or such acquisition.
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"Affiliate" of any specified Person means any other Person who directly or
indirectly through one or more intermediaries controls or is controlled by, or
is under common control with, such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided, however, that the beneficial ownership of 10% or more of
the voting securities of a Person shall be deemed to be control.
"Asset Sale" means, with respect to any Person, the sale, lease,
conveyance, disposition or other transfer by such Person of any of its assets
(including the sale or other transfer of any Equity Interests of any Subsidiary)
other than (i) the sale or lease of obsolete, damaged, materially worn or
unusable equipment in the ordinary course of business consistent with past
practice, (ii) the issuance by Norcal of its Capital Stock, (iii) dispositions
of Cash and Cash Equivalents, (iv) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Norcal governed by the
provisions of the Indenture described under "Certain Covenants - Merger,
Consolidation, or Sale of Assets", (v) Sale and Leaseback Transactions in
compliance with clause (i) under the covenant "Limitation on Sale and Leaseback
Transactions," and (vi) the sale of the following properties to the extent the
net proceeds from such sales do not exceed $10 million in the aggregate: (A)
certain real property owned by Mason Land Reclamation, Inc. located in Kansas
City, Missouri; (B) certain real property owned by Tri-County Development, known
as Lynch Canyon in Solano County, California; (C) certain real property owned by
Biosystems Management, Inc., located in San Benito County, California; (D)
certain real property in Vallejo, California adjacent to Vallejo Garbage
Service; and (E) certain real property owned by Macor, Inc. in Placer County,
California.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount of
rent required to be paid by such Person under the lease during the primary term
thereof, without giving effect to any renewals at the option of the lessee,
discounted from the respective due dates thereof to such date at the rate of
interest per annum implicit in the terms of the lease. As used in the preceding
sentence, the net amount of rent under any lease for any such period shall mean
the sum of rental and other payments required to be paid with respect to such
period by the lessee thereunder excluding any amounts required to be paid by
such lessee on account of maintenance and repairs, insurance, taxes,
assessments, water rates or similar charges. In the case of any lease which is
terminable by the lessee upon payment of a penalty, such net amount of rent
shall also include the amount of such penalty, but no rent shall be considered
as required to be paid under such lease subsequent to the first date upon which
it may be so terminated.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the product of (x) the
numbers of years from such date to the date of each successive scheduled
principal payment of such Indebtedness multiplied by (y) the amount of such
principal payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" means, as to any Person, the Obligations of such
Person in respect of a lease that would at such time be required to be
classified and accounted for as capitalized lease obligations under GAAP and the
amount of such obligations at any date shall be the capitalized amount of such
obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person formed as a
corporation, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock, including without
limitation, common stock and preferred stock of such Person and (ii) with
respect to any Person formed other than as a corporation, any and all
partnership or other equity interests of such other Person.
"Cash" means money or currency or a credit balance in a Deposit Account.
"Cash Equivalents" means (i) direct obligations of the United States of
America or any agency thereof having maturities of not more than one year from
the date of acquisition, (ii) time deposits and certificates of deposit of any
domestic commercial bank of recognized standing having capital and surplus in
excess of $500 million, with maturities of not more than one year from the date
of acquisition, (iii) repurchase obligations
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issued by any bank described in clause (ii) above with a term not to exceed 30
days; (iv) commercial paper rated at least A-1 or the equivalent thereof by
Standard & Poor's Corporation or at least P-1 or the equivalent thereof by
Moody's Investors Service, Inc., in each case maturing within one year after the
date of acquisition and (v) shares of any money market mutual fund, or similar
fund, in each case having assets in excess of $500 million, which invests
predominantly in investments of the types described in clauses (i) through (iv)
above.
"Change of Control" means, with respect to Norcal, the occurrence of any of
the following: (i) the sale, lease, exchange or other transfer, in one or a
series of related transactions, of all or substantially all of Norcal's assets,
or the sale of substantially all of the Capital Stock or assets of Norcal's
Subsidiaries that constitutes a sale of substantially all of Norcal's assets, to
any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the
Exchange Act); (ii) the adoption of a plan by the stockholders of Norcal
relating to the liquidation or dissolution of Norcal; (iii) the acquisition of
beneficial ownership by any such "person" or "group" (other than the ESOP), of a
direct or indirect interest in more than 50% of the voting power of the then
outstanding Capital Stock of Norcal entitled to vote generally in the election
of the Board of Directors of Norcal, (iv) a merger or consolidation of Norcal
with or into another entity or the merger of another entity into Norcal or any
other transaction, as a result of which the stockholders of Norcal immediately
prior to such transaction own, in the aggregate, less than a majority of the
outstanding voting capital stock of the surviving or resulting entity; and (v)
the first day on which a majority of the members of the Board of Directors of
Norcal are not Continuing Directors. Notwithstanding the foregoing, the voting
of shares pursuant to ESOP participant direction or the distribution of Capital
Stock by the ESOP pursuant to the terms of the ESOP in one or a series of
transactions shall not constitute a "Change of Control".
"Closing Date" means the date of consummation of the offering and initial
sale of the Old Notes.
"Common Stock" of any person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow" means, with respect to any Person for any period,
Consolidated Net Income of such Person for such period plus, in each case to the
extent deducted in computing such Consolidated Net Income, the sum of (without
duplication) (i) Consolidated Interest Expense of such Person for such period,
(ii) the provision for taxes based on net income of such Person and its
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP, (iii) the depreciation and amortization expense of such Person and
its Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, (iv) any losses from Asset Sales and other dispositions of
assets not in the ordinary course of business, (v) any losses classified as
extraordinary, nonrecurring or unusual, and the related tax effects, each as
determined in accordance with GAAP and (vi) any non-cash expense determined in
accordance with GAAP in connection with a transaction between such Person and an
employee stock ownership plan.
"Consolidated Interest Coverage Ratio" means, with respect to any Person
for any period, the ratio of (A) Consolidated Cash Flow of such Person for such
period to (B) the sum of (i) Consolidated Interest Expense of such Person for
such period plus (ii) the product of (a) all preferred stock cash dividend
requirements of such Person and its Subsidiaries (excluding preferred stock cash
dividend requirements in respect of preferred stock owned by such Person or a
Subsidiary of such Person) for such period times (b) a fraction, the numerator
of which is one and the denominator of which is one minus the effective
aggregate federal, state and local statutory tax rates of such Person and its
Subsidiaries on a consolidated basis for such period. For purposes of this
ratio, Consolidated Cash Flow and Consolidated Interest Expense shall be
calculated after giving effect on a pro forma basis for the relevant period to
(i) the incurrence or repayment of any Indebtedness of such Person or any of its
Subsidiaries at any time during or subsequent to the last day of the relevant
period and on or prior to the computation date, as if such incurrence or
repayment and the application of the proceeds thereof, as the case may be,
occurred on the first day of the relevant period, (ii) any Asset Sales or other
asset dispositions of such Person and its Subsidiaries occurring at any time
during or subsequent to the last day of the relevant period and on or prior to
the computation date, as if such Asset Sale or other disposition and the
application of the proceeds therefrom occurred on the first day of the relevant
period and (iii) any acquisition of assets or Capital Stock of an entity
(occurring by merger or otherwise) occurring at any time during or subsequent to
the last day of the relevant period and on or prior to the
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computation date, as if such acquisition occurred on the first day of the
relevant period and, in connection with any such acquisition, taking into
account, to the extent permitted by GAAP and Regulation S-X under the Securities
Act and interpretations thereof by the staff of the Commission, any savings in
respect of owners' compensation expense reasonably expected to result from such
acquisition, in an amount not to exceed $750,000 per acquisition, as certified
by Norcal in an Officers' Certificate to the Trustee. If such Person or any of
its Subsidiaries directly or indirectly guarantees Indebtedness of a third
Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if such Person or any Subsidiary of such Person had
directly incurred or otherwise assumed such guaranteed Indebtedness. In
calculating such ratio, interest on Indebtedness determined on a fluctuating
basis as of the computation date and which will continue to be so determined
thereafter shall be determined to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the computation date.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum (without duplication) of:
(i) the interest expense of such Person and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP;
(ii) all fees, commissions, discounts and other charges of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP, with respect to letters of credit and bankers'
acceptances and the costs (net of benefits) associated with Hedging
Obligations;
(iii) amortization or write-off of debt discount and deferred
financing costs (other than deferred financing costs incurred on or prior
to the Closing Date) in connection with any Indebtedness of such Person and
its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; and
(iv) interest capitalized by such Person and its Subsidiaries during
such period determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the net income (or loss) of such Person and its
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided, however, that (A) there shall be excluded therefrom: (i)
net gains (but not losses) from Asset Sales and other dispositions of assets not
in the ordinary course of business; (ii) any gains (but not losses) classified
as extraordinary, nonrecurring or unusual, including any gain in connection with
the retirement at a discount of the Class A and B Notes and the ESOP Notes, and
the related tax effects, each as determined in accordance with GAAP; (iii) the
net income (if positive) of any Person acquired by such Person or a Subsidiary
of such Person in a pooling of interests transaction for any period prior to the
date of the transaction; (iv) the net income of any Subsidiary of such Person to
the extent that the declaration or payment of dividends or similar distributions
by such Subsidiary is not permitted by the operation of its charter or any
agreement, contract, instrument, statute, rule or governmental regulation
applicable to such Subsidiary; and (v) the net income of any other entity
accounted for by the equity method of accounting, except to the extent of the
amount of dividends or distributions paid in cash to such Person or a Subsidiary
thereof by such entity in an amount not to exceed such Person's interest in such
entity's net income and (B) there shall be included therein the amount of
dividends or distributions paid in cash to such Person or a Subsidiary thereof
by an Unrestricted Subsidiary in an amount not to exceed such Person's interest
in such Unrestricted Subsidiary's net income.
"Consolidated Net Worth" means, with respect to any Person, as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups subsequent
to the date of the Indenture in the book value of any asset owned by such Person
or a consolidated Subsidiary of such Person, (y) all investments as of such date
in
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unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in
each case, represented by Permitted Investments), and (z) all unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the foregoing as determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of Norcal who (i) was a member of such Board of Directors
on the Closing Date or (ii) was nominated for election or elected to such Board
of Directors with the approval of a majority of the Continuing Directors who
were members of such Board at the time of such nomination or election.
"Default" means any event or condition that with the passage of time or the
giving of notice or both would be an Event of Default.
"Deposit Account" means a demand, savings, passbook, money market or like
account with a commercial bank, savings and loan association or like
organization or a government securities dealer, other than an account evidenced
by a negotiable certificate of deposit.
"Designated Capital Expenditures" means capital expenditures for the
acquisition (through construction, purchase, lease, expansion or modernization)
and equipping of a materials recovery facility in San Francisco, other waste
processing facilities including materials recovery facilities and household
hazardous waste facilities, and maintenance and administrative complexes, and
equipment.
"Disqualified Stock" means (i) any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, requires the payment of
mandatory dividends or matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final stated maturity of the
Notes, or (ii) any warrants, options or other rights to acquire any such Capital
Stock described in clause (i) above; provided that Disqualified Stock shall not
include Capital Stock which (1) has a maturity date later than that of the Notes
and (2) provides the holders thereof the right upon a change of control to
require the issuer thereof to repurchase all or part of such Capital Stock after
the holders of the Notes have had the option to require Norcal to repurchase
their Notes upon a Change of Control.
"ESOP" means the Norcal Waste Systems, Inc. Employee Stock Ownership Plan
and Trust.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into or exchangeable for Capital Stock).
"Existing Indebtedness" means Indebtedness of Norcal and its Subsidiaries
in existence on the Closing Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect from time to time.
"Guarantor Senior Indebtedness" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor, whether outstanding on
the Closing Date or thereafter created, incurred, assumed or guaranteed by such
Subsidiary Guarantor, other than Indebtedness as to which the instrument
creating or evidencing the same or the assumption or guarantee thereof expressly
provides that such Indebtedness is subordinated or junior to the Guarantees.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, whether or not recourse
is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments,
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including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business which are not overdue by more than 90 days or are being contested in
good faith), (v) every Capital Lease Obligation or purchase money financing of
such Person, (vi) the maximum fixed redemption or repurchase price of
Disqualified Stock of such Person at the time of determination, (vii) the
aggregate preference in respect of preferred stock of any Subsidiary (other than
preferred stock held by Norcal or any of its Subsidiaries) in the event of any
voluntary or involuntary liquidation or winding up, (viii) every obligation of
the type referred to in clauses (i) through (vii) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise or such Person is required to record as debt on its
balance sheet in accordance with GAAP; and (ix) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any obligation of the
type referred to in clauses (i) through (viii).
"Investment" means any direct or indirect advance, loan or other extension
of credit or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition or ownership by such Person of
property or assets of, or Equity Interests, bonds, notes, debentures or other
securities (including, without limitation, any interest in any partnership or
joint venture) issued by, any other Person or any guarantee, endorsement,
agreement to provide funds for the payment of, or other arrangement (other than
arrangements referred to in clause (ii) of the second proviso to the first
sentence of the definition of "Unrestricted Subsidiary") pursuant to which
Norcal or any Subsidiary is, or becomes directly or indirectly liable with
respect to, any Indebtedness or other obligation of an Unrestricted Subsidiary
(valued as of any date of determination at the maximum liability of Norcal and
its Subsidiaries with respect to such Indebtedness or other obligation).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statute) of any jurisdiction).
"Net Cash Proceeds" means the aggregate Cash proceeds and Cash Equivalents
received by Norcal or any of its Subsidiaries in respect of any Asset Sale,
including any Cash or Cash Equivalents received by way of (i) conversion of any
Indebtedness received in connection with such Asset Sale, (ii) deferred payment
of principal pursuant to, or liquidation of, any Indebtedness received in
connection with such Asset Sale or (iii) any dividends on or distributions in
respect of, or the direct or indirect sale, exchange, conversion or other
disposition of, any Equity Interests received by Norcal or any of its
Subsidiaries in respect of any Asset Sale, in each case net of Transaction
Costs.
"New Credit Agreement" means the Credit Agreement among Norcal, the Lenders
referred to therein and The First National Bank of Boston, as Agent, as amended,
extended, renewed, refinanced, replaced, restated, supplemented or otherwise
modified from time to time, together with the related documents and any
agreement governing Indebtedness (together with all ancillary collateral and
other documents, including guarantees of any Subsidiary) incurred to refund or
refinance all or a portion of the borrowings and commitments then outstanding or
permitted to be outstanding under either the New Credit Agreement or such
agreement.
"Obligations" means all obligations for principal, premium, interest,
penalties, expenses, fees, indemnifications, reimbursements, damages and other
liabilities and all other obligations of every nature payable under the
documentation governing any Indebtedness.
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"Permitted Investments" means (a) any acquisition of property or assets to
be used in any line of business in which Norcal or any of its Subsidiaries was
engaged at the Closing Date or in any line of business reasonably related
thereto, (b) Investments by Norcal or any Subsidiary in a Person engaged or to
be engaged in any line of business in which Norcal or any of its Subsidiaries
was engaged at the Closing Date, or any business reasonably related thereto, if
as a result of such Investment (i) such Person becomes a Wholly Owned Subsidiary
of Norcal or (ii) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Norcal or a Wholly Owned Subsidiary, (c) any Investments by
Norcal, or by a Subsidiary thereof, in Norcal or a Wholly Owned Subsidiary
Guarantor, (d) any Investments in Cash or Cash Equivalents, (e) intercompany
Indebtedness among Norcal and its Wholly Owned Subsidiaries permitted under the
covenant "- Limitation on Incurrence of Additional Indebtedness" and payments in
respect thereof, (f) Investments existing on the Closing Date, (g) Investments
made as a result of the receipt of non-cash consideration from an Asset Sale
made pursuant to the covenant "- Limitation on Asset Sales", (h) loans and
advances to employees not exceeding $1 million outstanding in the aggregate at
any one time, (i) Investments by Norcal or any of its Subsidiaries in one or
more Unrestricted Subsidiaries of Norcal, provided that (1) the amount of all
such Investments in Unrestricted Subsidiaries made on or after the Closing Date
shall not exceed in the aggregate the sum of (x) $10 million plus (y) an amount
equal to the portion (proportionate to Norcal's or a Subsidiary's equity
interest in such Unrestricted Subsidiary) of the fair market value of the net
assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Subsidiary; provided that the amount under this clause (y) shall
not exceed the amount of any such Permitted Investment previously made by Norcal
or any Subsidiary in such Unrestricted Subsidiary, (2) such Unrestricted
Subsidiary must be engaged in any line of business in which Norcal or any of its
Subsidiaries was engaged on the Closing Date or any business reasonably related
thereto, (3) any sale or disposition of such Investment or any portion thereof
will constitute an Asset Sale within the meaning of the covenant "Limitation on
Asset Sales" and (4) such Unrestricted Subsidiary may not use the proceeds from
such Permitted Investment in a manner which, if used by Norcal or one of its
Subsidiaries directly, would result in a Restricted Payment prohibited by
clauses (i), (ii) or (iii) of the first paragraph of the covenant "Limitation on
Restricted Payments" and (j) the loan by Norcal to the ESOP on the Closing Date
of proceeds from the sale of the Notes sufficient to retire, and settle
litigation regarding, the ESOP Notes.
"Permitted Liens" means: (i) Liens in favor of Norcal and its Subsidiaries;
(ii) Liens securing Obligations under the New Credit Agreement and Obligations
under any guarantee by any Subsidiary of the New Credit Agreement in an
aggregate principal amount outstanding at any time not to exceed $100 million,
plus any non-principal Obligations in connection therewith, less any Net Cash
Proceeds applied pursuant to the covenant "-- Limitation on Asset Sales" to
repay or prepay such Obligations that results in a permanent reduction in any
revolving credit or other commitment relating thereto or the maximum amount that
may be borrowed thereunder; (iii) Liens on property of a Person existing at the
time such Person is merged into or consolidated with Norcal or any of its
Subsidiaries in a transaction not prohibited by the terms of the Indenture;
provided, however, that such Liens were in existence prior to and were not
granted in contemplation of such merger or consolidation; (iv) Liens on property
existing at the time of acquisition thereof by Norcal or any of its Subsidiaries
in a transaction not prohibited by the terms of the Indenture; provided,
however, that such Liens were in existence prior to the contemplation of such
acquisition; (v) statutory Liens of landlords and warehousemen's, carriers',
mechanics', suppliers', materialmen's or repairmen's or other like liens, or
Liens relating to surety or appeal bonds, performance bonds, pledges or deposits
to secure performance (in lieu of performance bonds) under contracts other than
contracts for the payment of money, workmen's compensation, unemployment
insurance and other types of social security or other obligations of a like
nature incurred in the ordinary course of business; (vi) Liens existing on the
Closing Date; (vii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded; (viii)
purchase money Liens granted in connection with the acquisition of assets in the
ordinary course of business and consistent with past practice, provided that (A)
such Liens secure only Indebtedness that is not in excess of 100% of the
purchase price or cost of such assets, (B) such Liens attach only to the
property so acquired with the purchase money Indebtedness secured thereby and
(C) such purchase money Indebtedness shall be incurred, and the
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Lien securing such Indebtedness shall be created, within 180 days of such
acquisition; (ix) easements, rights-of-way, zoning restrictions, minor defects
or irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of Norcal or any of its
Subsidiaries; (x) judgment and attachment Liens not giving rise to a Default or
Event of Default; (xi) any interest or title of a lessor in the property subject
to any lease, whether characterized as capitalized or operating, entered into by
Norcal or any of its Subsidiaries in the ordinary course of business; (xii)
Liens securing Acquired Debt; provided that (A) the Indebtedness secured shall
not exceed the fair market value of the assets so acquired (as determined by the
Board of Directors in good faith at the time of such acquisition) and (B) such
Indebtedness shall be incurred and the Lien securing such Indebtedness shall be
created, within 180 days after such acquisition; (xiii) Liens securing
guarantees by any of Norcal's Subsidiaries of Indebtedness of Norcal permitted
pursuant to clause (B)(3) of the first paragraph under "- Certain
Covenants - Limitation on Incurrence of Additional Indebtedness"; (xiv) Liens
securing Hedging Obligations that relate to Indebtedness secured by Liens
otherwise permitted by the Indenture, provided that the Liens securing such
Hedging Obligations shall cover only the property that is covered by the Liens
securing such Indebtedness; (xv) Liens in favor of collecting or payor banks
having a right of setoff, revocation, refund or chargeback with respect to money
or investments of Norcal or any Subsidiary on deposit with or in possession of
such bank; (xvi) Liens upon any property of a Person existing at the time such
Person becomes a Subsidiary, provided that any such Lien has not been created in
contemplation of such transaction and does not attach to any other property of
Norcal or any Subsidiary; (xvii) Liens securing Indebtedness permitted to be
incurred pursuant to clause (ix) of the second paragraph under "- Certain
Covenants - Limitation on Incurrence of Additional Indebtedness"; and (xviii)
extensions, renewals or regrantings of any Liens referred to in clauses (i)
through (xvii) above in connection with any Refinancing Indebtedness on terms no
less favorable to the holders of the Notes than those being so extended, renewed
or regranted.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust, association or joint venture, or a governmental agency or
subdivision thereof or other entity.
"Public Equity Offering" means a bona fide underwritten sale to the public
of Common Stock of Norcal pursuant to a registration statement (other than on
Form S-8 or any other form relating to securities issuable under any benefit
plan of Norcal) that is declared effective by the Commission and completed
following the Closing Date, and results in aggregate gross proceeds to Norcal of
at least $25 million.
"Sale and Leaseback Transaction" means any arrangement relating to a
property owned on the date of the Indenture or acquired thereafter whereby
Norcal or one of its Subsidiaries transfers such property to a Person and leases
such property back from such Person.
"Seller Debt" means, with respect to any Person, Indebtedness incurred by
such Person in connection with the acquisition of another Person or assets of
such other Person, which Indebtedness is owing to such other Person.
"Senior Indebtedness" means, with respect to Norcal, any Indebtedness of
Norcal, whether outstanding on the Closing Date or thereafter created, incurred,
assumed or guaranteed by Norcal, other than Indebtedness as to which the
instrument creating or evidencing the same or the assumption or guarantee
thereof expressly provides that such Indebtedness is subordinated or junior to
the Notes.
"Specified Indemnity Amount" means, for the purposes of clause (vi) of the
first paragraph under "- Events of Default and Remedies," in the case of a
final, nonappealable judgment against Norcal in a matter pertaining to the
Abraham litigation as described under "Business - Litigation and Related
Matters," the sum of (x) amounts which have previously been paid in full or
partial satisfaction of such judgment, plus (y) the amount of cash or cash
equivalents which is on deposit in the Escrow Account on the date any such
judgment becomes a final, nonappealable judgment, for payment to or for the
benefit of Norcal, such amount to be certified in writing by the escrow agent
for such account in a form acceptable to the Trustee; provided, however, that in
the event a court having jurisdiction over such matter enters an order enforcing
such judgment against Norcal, such amount shall thereupon be deemed to be
reduced to zero (and the 60-day period referenced in the aforementioned clause
(vi) shall be deemed to have commenced on the date such judgment became a final,
nonappealable judgment) for purposes of such clause (vi).
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"Subordinated Indebtedness" means any Indebtedness of Norcal (whether
outstanding on the date hereof or hereafter incurred) which is contractually
subordinate or junior in right of payment of principal, premium and interest to
the Notes and other Senior Indebtedness.
"Subordinated Indebtedness of a Subsidiary Guarantor" means any
Indebtedness of such Subsidiary Guarantor (whether outstanding on the date
hereof or hereafter incurred) which is contractually subordinate or junior in
right of payment of principal, premium and interest to the Guarantees and other
Guarantor Senior Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Equity Interests entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person or any
combination thereof. Unless specifically provided to the contrary herein,
Unrestricted Subsidiaries shall not be included in the definition of Subsidiary
for any purpose of the Indenture (other than for the purposes of the definition
of "Unrestricted Subsidiary" herein) but shall be deemed an "Affiliate" of such
Person.
"Subsidiary Guarantors" means each of (i) Norcal's Wholly Owned
Subsidiaries existing on the Closing Date, (ii) any other direct or indirect
Wholly Owned Subsidiary of Norcal that executes a Guarantee or supplemental
indenture in accordance with the provisions of the Indenture and required by the
Indenture to remain or become a Subsidiary Guarantor and (iii) the respective
successors and assigns of the foregoing required by the Indenture to remain or
become a Subsidiary Guarantor.
"Transaction Costs" means the direct costs relating to any Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions), taxes paid or payable as a result thereof (after taking
into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a lien on the asset or assets that are the subject of such Asset Sale
and any reserve for adjustment in respect of the sale price of such asset or
assets.
"Unrestricted Subsidiary" means a Subsidiary of Norcal (a) no portion of
the Indebtedness or any other obligation (contingent or otherwise) of which (i)
is guaranteed by Norcal or any other Subsidiary of Norcal (other than another
Unrestricted Subsidiary) (ii) is recourse to or obligates Norcal or any other
Subsidiary of Norcal (other than another Unrestricted Subsidiary) in any way or
(iii) subjects any property or asset of Norcal or any other Subsidiary of Norcal
(other than another Unrestricted Subsidiary), directly or indirectly,
contingently or otherwise, to satisfaction thereof, (b) with which Norcal or any
other Subsidiary of Norcal (other than another Unrestricted Subsidiary) is not
subject to any contract, agreement, arrangement or understanding or is not
subject to an obligation of any kind whether written or oral, other than with
respect to a transaction that complies with the provisions under the "Limitation
on Transactions with Affiliates" covenant and (c) to which neither Norcal nor
any other Subsidiary of Norcal (other than another Unrestricted Subsidiary) has
any obligation (i) to subscribe for additional shares of Equity Interests
therein, or (ii) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary to achieve certain levels of financial performance;
provided that in no event shall Norcal or any borrower, guarantor or other
obligor under or with respect to the New Credit Agreement or any Indebtedness of
Norcal be deemed an Unrestricted Subsidiary; provided further, that Norcal and
any Subsidiary may guarantee, endorse, agree to provide funds for the payment or
maintenance of, or otherwise be or become directly or indirectly liable with
respect to, any Indebtedness or other obligation of an Unrestricted Subsidiary
to the extent that (i) Norcal or such Subsidiary could make an Investment in the
amount of such Indebtedness or other obligation in such Unrestricted Subsidiary
pursuant to the "Limitation on Restricted Payments" covenant or (ii) in the case
of liabilities in respect of obligations other than Indebtedness, such liability
arises by operation of law and not, directly or indirectly, by reason of any
agreement binding upon Norcal or any Subsidiary of Norcal, and any such
guarantee, endorsement or agreement with respect to Indebtedness shall be deemed
an incurrence of Indebtedness by Norcal or such Subsidiary for the purposes of
the "Limitation on Incurrence of Additional Indebtedness" covenant. No
Unrestricted Subsidiary shall acquire any Capital Stock or other Equity
Interests
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of any Subsidiary. The Board of Directors of Norcal may designate any Subsidiary
(other than any borrower, guarantor or other obligor under or with respect to
the New Credit Agreement or any Indebtedness of Norcal) an Unrestricted
Subsidiary; provided that any such designation shall be deemed to be the making
of a Restricted Payment at the time of such designation in an amount equal to
the Investment in such Subsidiary subject to the restrictions contained in the
"Limitation on Restricted Payments" covenant. The Board of Directors of Norcal
may designate any Unrestricted Subsidiary a Subsidiary; provided, however, that
immediately after giving effect to such designation (x) Norcal could incur $1.00
of additional Indebtedness under the Consolidated Interest Coverage Ratio test
described in the first paragraph of the "Limitation on Incurrence of Additional
Indebtedness" covenant and (y) no Default or Event or Default shall have
occurred and be continuing, including without limitation under the "Limitation
on Restricted Payments" covenant. Any designation shall be evidenced by promptly
filing with the Trustee a copy of the board resolution giving effect to such
designation, and Officers' Certificate certifying that such designation complied
with the foregoing provisions. No Subsidiary may be redesignated more than once
in any 13-month period.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (ii) obligations of a person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian, with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided, however, that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
of which all of the outstanding Capital Stock or other ownership interests
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. To the extent any such broker-dealer participates in the
Exchange Offer and so notifies Norcal, or causes Norcal to be so notified in
writing, the Company has agreed that, for the lesser of (i) a period of six
months after the date of this Prospectus and (ii) such period of time as such
broker-dealers must comply with the prospectus delivery requirements of the
Securities Act in order to resell such New Notes, it will make this Prospectus,
as amended or supplemented, available to such broker-dealer for use in
connection with any such resale, and will promptly send additional copies of
this Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. In
addition, until November 14, 1996 (90 days after the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
Norcal will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers or any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
New Notes pursuant to the Exchange Offer hereby agrees to notify Norcal prior to
using the Prospectus in connection with the sale or transfer of New Notes, and
acknowledges and agrees that, upon receipt of notice from Norcal of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements therein not misleading or which may impose upon
Norcal disclosure obligations that may have a material adverse effect on the
Company (which notice Norcal agrees to deliver promptly to such broker-dealer),
such broker-dealer will suspend use of the Prospectus until Norcal has notified
such broker-dealer that delivery of the Prospectus may resume and has furnished
copies of any amendment or supplement to the Prospectus to such broker-dealer.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the material federal income tax
consequences anticipated to result with respect to (i) the exchange of Old Notes
for New Notes pursuant to the Exchange Offer and (ii) the ownership and
disposition of New Notes. Holders of Old Notes should be aware that
uncertainties in the tax law exist with respect to some of the federal income
tax consequences of the Exchange Offer and that no ruling has been, or will be,
requested from the Internal Revenue Service (the "Service") on any tax matters
related thereto, nor will any opinion of counsel be sought with respect to any
of such issues. Moreover, the tax rules applicable to debt-for-debt exchanges
and the taxation of debt instruments in many cases are quite complex.
The discussion below is based upon provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), as well as final, temporary and proposed
Treasury regulations, administrative rulings and pronouncements, and judicial
decisions now in effect (or, in the case of certain Treasury regulations,
proposed), all of which are subject to change (possibly with retroactive effect)
or different interpretations. Accordingly, no assurances can be given that the
Service will agree with the federal income tax consequences summarized below.
The following summary does not purport to deal with all aspects of federal
income taxation that may be relevant to a Noteholder's decision to participate
in the Exchange Offer, nor is it intended to be applicable to all categories of
Noteholders, some of whom may be subject to special rules. For instance, the
discussion may not be applicable to life insurance companies, tax-exempt
organizations, dealers in securities or currencies, holders who acquired Old
Notes or New Notes as a hedge or as part of a hedging, straddle or conversion
transaction or holders whose "functional currency" (as defined in Code Section
985) is other than the United States dollar. The discussion is further limited
to persons who are citizens or residents of the United States and who have held
Old Notes, and intend to hold New Notes, as "capital assets" (generally,
property held for investment) within the meaning of Code Section 1221. As the
discussion below addresses only federal income tax considerations, holders of
Old Notes and New Notes should consult with their own tax advisors regarding the
state, local and foreign tax consequences of owning and disposing of such Notes.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
Because a New Note is identical in all material respects to an Old Note, an
exchange of one security for the other pursuant to the Exchange Offer should be
treated for federal income tax purposes as a non-event. Accordingly,
consummation of the Exchange Offer should be without income tax consequences to
holders of Old Notes, without regard to whether such holders exchange or retain
their Old Notes.
For federal income tax reporting purposes, Norcal will treat the issuance
of the New Notes pursuant to the Exchange Offer as a non-event. This means that
the New Notes should be treated for federal income tax purposes as a mere
continuation of the Old Notes. Thus, each holder would have an adjusted tax
basis and a holding period for a New Note identical to such holder's adjusted
tax basis and holding period for the related Old Note. Furthermore, each New
Note will be deemed to have been issued as of November 21, 1995 with a slight
amount of original issue discount and an issue price of $972.41 per $1000 of
stated principal. See "Other Tax Considerations - Original Issue Discount,"
below.
The foregoing is based on the assumption that consummation of the exchange
will not result in a material modification of the Old Notes for federal income
tax purposes. In the unlikely event that such a material modification were found
to occur, the resulting exchange of securities would not be treated as a mere
non-event for federal income tax purposes, and the actual tax consequences would
depend on whether the Old Notes and New Notes constituted "securities" for
federal income tax purposes.
In the event the exchange of such Notes pursuant to the Exchange Offer was
not a mere non-event for tax purposes, and either the Old Notes or the New Notes
failed to qualify as "securities" for federal income tax purposes, then (i) a
holder would be required to recognize gain or loss on the exchange in an amount
equal to the difference between the principal amount of the New Notes and the
holder's adjusted tax basis in the
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Old Notes exchanged therefor and (ii) subject to the discussion of the Effect of
Interest Rate Adjustment (see below), the New Notes would be treated as having
been newly issued without original issue discount.
However, because the Old Notes and New Notes are interest-only corporate
debt instruments with maturities of almost 10 years, such notes should
constitute "securities" for federal income tax purposes. Therefore, in the event
the exchange of such Notes pursuant to the Exchange Offer was not a mere
non-event for tax purposes, such exchange should nevertheless constitute a
tax-free recapitalization pursuant to Code Section 368(a)(1)(E) in which neither
gain nor loss would be recognized by holders of Old Notes. In addition, the
income tax consequences of the exchange to holders of the Old Notes with respect
to issues involving adjusted tax basis, holding periods, and the timing and
character of income recognition would also not be materially different than the
tax consequences that would have been applicable if the exchange were simply
viewed as a non-event for federal income tax purposes, except that the New Notes
would be treated as having been issued with an "issue price" equal to their
stated principal amount. Accordingly, holders are advised to consult with their
own tax advisors regarding the reporting of original issue discount and market
discount with respect to the New Notes.
The remainder of the discussion below summarizes the material federal
income tax consequences to holders of either Old Notes or New Notes following
consummation of the exchange pursuant to the Exchange Offer. Unless otherwise
indicated, any reference to Notes is equally applicable to Old Notes and New
Notes.
TAX TREATMENT TO HOLDERS OF THE NOTES
Holders of the Notes must treat stated interest on the Notes as ordinary
income for federal income tax purposes in accordance with their respective
methods of tax accounting. Subject to the discussion of the Constant Yield
Election and Effect of Interest Rate Adjustment (see below), holders using the
accrual method of tax accounting must include stated interest in income as it
accrues on a daily basis and holders using the cash method of tax accounting
must include stated interest in income as it is actually or constructively
received by them. In addition to interest income, holders will be required to
report original issue discount as discussed below.
Generally, a holder will recognize gain or loss upon the sale, retirement
or other disposition of a Note in an amount equal to the difference between the
amount realized (less the portion of such proceeds which represents accrued
interest, which will be taxable as such) from such sale, retirement, or other
disposition and the holder's adjusted tax basis for such Note. Assuming that no
intention exists at the time of the original issuance to call the Notes prior to
maturity, such gain or loss generally will constitute capital gain or loss,
except to the extent of any "accrued market discount," and will be long-term
capital gain or loss if the holding period for such Notes is more than one year.
Under current law, net capital gains of noncorporate taxpayers are taxable
at lower maximum rates than the maximum rates imposed upon ordinary income.
However, legislation is currently pending before Congress which, if enacted in
its proposed form, would substantially reduce the tax rate applicable to net
capital gain of many taxpayers (including corporate taxpayers). It is uncertain
whether this or any other tax legislation regarding capital gains tax rates will
be enacted this year or in any subsequent year.
OTHER TAX CONSIDERATIONS
Original Issue Discount. As indicated above, the Notes were issued with
slightly more than a de minimis amount of original issue discount for federal
income tax purposes. The amount of such discount with respect to any Note
generally will be equal to the excess of (i) its "stated redemption price at
maturity" (which in the case of a Note, and subject to the discussion of the
Effect of Interest Rate Adjustment (see below), generally will be its stated
principal amount) over (ii) its "issue price". Under applicable Treasury
regulations, the "issue price" of all of the Notes should equal the price paid
upon issuance by the first buyer of an Old Note. (For this purpose, the first
buyer does not include a bond house, broker, or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler to the
public.) Accordingly, the Initial Purchasers will not be treated as the first
buyer of a Note for this purpose.
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A holder of a Note generally will be required to include in gross income
for federal income tax purposes the amount of original issue discount accrued
during any applicable period, determined in accordance with the constant yield
method and the debt instrument's yield to maturity. Accordingly, such discount
must be included in gross income in advance of the receipt of the cash
attributable to such discount.
A holder that acquires a Note at an "acquisition premium" (that is, at a
purchase price greater than the excess of (i) the Note's stated redemption price
at maturity over (ii) the original issue discount remaining to be amortized on
the Note as of the date of purchase) may be permitted to reduce the amount of
original issue discount required to be included in gross income. The amount and
timing of such reduction will depend on the amount of such "acquisition premium"
relative to the amount of unamortized original issue discount.
A holder generally will be entitled to increase its adjusted tax basis in a
Note by the amount of original issue discount included in such holder's income.
Norcal will furnish annually to the Service and to record holders of Notes
(to whom it is required to furnish such information), information relating to
original issue discount accruing during the calendar year. Holders will be
required to determine for themselves whether, by reason of the rules described
above, they are eligible to report a reduced amount of original issue discount
for federal income tax purposes.
Market Discount. If a holder purchases a Note for an amount that is less
than the Note's stated redemption price at maturity, reduced by the amount of
any unamortized original issue discount, such difference will be treated as
"market discount" for federal income tax purposes. Market discount generally
will be de minimis and hence disregarded, however, if it is less than the
product of 0.25 percent of the stated redemption price at maturity of the Note
and the number of remaining complete years to maturity of the Note. Under the
market discount rules, a holder is generally required to treat any principal
payment on, or any gain on the sale, exchange, retirement or other disposition
of, a Note as ordinary income to the extent of any accrued market discount which
has not previously been included in income. If such Note is disposed of in a
nontaxable transaction (other than certain specified nonrecognition
transactions), accrued market discount will be includable as ordinary income to
the holder as if such holder had sold the Note at its then current fair market
value. In addition, the holder may be required to defer, until the maturity of
the Note or its earlier disposition in a taxable transaction, the deduction of
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Note.
Market discount is considered to accrue ratably during the period from the
date of acquisition to the maturity of a Note, unless the holder elects to
accrue on a constant yield basis. A holder of a Note may elect to include market
discount in income currently as it accrues (on either a ratable or constant
interest basis), in which case the rule described above regarding deferral of
interest deduction will not apply. This election to include market discount
currently applies to all market discount obligations acquired during or after
the first taxable year to which the election applies, and may not be revoked
without the consent of the Service.
Amortizable Bond Premium. A holder that acquires a Note at an "amortizable
bond premium" may elect to deduct a portion of such premium with respect to the
Note in each taxable year in which he holds the Notes. Amortizable bond premium
is generally defined as the excess of the holder's tax basis in a bond over the
stated redemption price at maturity of the bond. The election to amortize bond
premium applies to all taxable bonds held by the holder at the beginning of the
first taxable year to which the election applies and to all taxable bonds that
the holder acquires thereafter, and is binding for all subsequent taxable years
for all taxable bonds of the holder unless the Service consents to a revocation
of the election. A holder who elects to amortize bond premium must reduce his
tax basis in the related obligation by the amount of the aggregate deduction
allowable for amortizable bond premium.
Effect of Interest Rate Adjustment. In certain circumstances related to
the use of proceeds from subsequent sales of Capital Stock to purchase or offer
to purchase outstanding Notes (see "Description of the Notes - Principal,
Maturity and Interest"), the stated interest rate on the Notes may increase
semi-annually in 25 basis point increments to a maximum rate of 13.5% per annum
and thereafter may revert back at any time to the initial stated interest rate
of 12.5% per annum (the "Interest Rate Adjustment"). As of the date of the
Exchange Offer, such circumstances have caused Interest Rate Adjustments in the
aggregate amount of
111
<PAGE> 113
25 basis points (0.25%) per annum. Norcal intends to treat stated interest
payments on the Notes up to 12.5% per annum as "qualified stated interest" for
purposes of the applicable Treasury regulations. Stated interest payments in
excess of such 12.5% rate will be treated by Norcal as additional interest at
the time any such payments are made, and will not be included in the "stated
redemption price at maturity" of such Notes for purposes of the original issue
discount reporting rules. As such, all stated interest on the Notes generally
would be reported as ordinary income to the holders in accordance with their
normal method of accounting.
Norcal's position regarding the treatment of the Interest Rate Adjustment
is subject to uncertainty, and there can be no assurance that the Service will
agree with Norcal's proposed treatment. Further, there are no legal authorities
which specifically address this issue. Although Norcal believes its position is
consistent with both the Treasury regulations under Code Sections 1271-1275,
which were in final form at the time the Notes were issued, and the Treasury
regulations under such Code Sections, which were in proposed form at the time
the Notes were issued, these regulations are subject to differing
interpretations. In addition, the Treasury regulations which were in proposed
form at the time the Notes were issued have subsequently been promulgated in
final form but generally do not apply to debt instruments issued prior to August
13, 1996 and, therefore, by their terms would not be applicable to the Notes.
Nevertheless, Norcal believes its reporting position is also consistent with
such final regulations.
In the event Norcal's position on this issue were determined to be
incorrect, it is possible that stated interest on the Notes in excess of 12.5%
per annum would be added to the "stated redemption price at maturity" of the
Notes and, hence, be treated as additional original issue discount. Such
discount may have to be included in income by holders prior to the receipt of
the cash attributable to such discount. In addition, such contrary treatment may
require holders (i) to accelerate the timing for reporting taxable income with
respect to the Notes into earlier periods and (ii) to report additional taxable
income for any period in an amount that exceeds the related increase in interest
payments for such period due to such Interest Rate Adjustment. See "- Original
Issue Discount."
Payment of Liquidated Damages. Due to the Registration Default (see "The
Exchange Offer -- Purpose of the Exchange Offer"), Norcal has become obligated
to pay Liquidated Damages to the Holders for so long as the Registration Default
continues. The Liquidated Damages will continue to accrue on the Notes until the
Registration Statement becomes effective. At the time the Notes were issued,
Norcal believed that the likelihood of a Registration Default was remote.
Accordingly, any payments of Liquidated Damages are likely to be taxable to the
Holders as additional interest income in accordance with their respective
methods of tax accounting. However, there can be no assurance that the Internal
Revenue Service will agree with Norcal's determination that the likelihood of
the Registration Default was remote or the treatment of the Liquidated Damages
for tax purposes.
Effect of Change of Control. Upon a Change of Control, Norcal is required
to offer to redeem all outstanding Notes for a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest. Under applicable
regulations, such Change of Control redemption requirement will not affect the
yield or maturity date of the Notes unless, based on all the facts and
circumstances as of the issue date of the Notes, it is more likely than not that
a Change of Control giving rise to the redemption will occur. Norcal does not
believe a change in control is more likely than not to occur, and thus will not
treat the Change of Control redemption provisions of the Notes as affecting the
calculation of the yield or maturity of any Note.
Constant Yield Election. A holder of a Note may elect to include in income
all interest, discount and premium based on a constant yield method determined
with respect to such holder's basis. If such election is made with respect to a
Note having market discount, such holder will be deemed to have elected
currently to include market discount on a constant yield basis with respect to
all debt instruments having market discount acquired during the year of election
or thereafter. If made with respect to a Note having amortizable bond premium,
such holder will be deemed to have made an election to amortize premium
generally with respect to debt instruments having amortizable bond premium held
by the taxpayer during the year of election or thereafter.
Backup Withholding. A 31 percent "backup" withholding tax and certain
information reporting requirements may apply to payments of principal, premium
and interest made to, and the proceeds of the
112
<PAGE> 114
disposition of a Note by, certain holders. Backup withholding will apply only if
(i) the holder fails to furnish the holder's Taxpayer Identification Number
("TIN") to the payor, (ii) the Internal Revenue Service (the "Service") notifies
the payor that the holder has furnished an incorrect TIN, (iii) the Service
notifies the payor that the holder has failed to report properly payments of
interest and dividends or (iv) under certain circumstances, the taxpayer fails
to certify, under penalty of perjury, that the taxpayer has both furnished a
correct TIN and not been notified by the Service that the taxpayer is subject to
backup withholding for failure to report interest and dividend payments. Backup
withholding will not apply with respect to payments made to certain exempt
recipients, such as corporations and financial institutions. Holders should
consult their tax advisors regarding their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against such holder's federal income tax liability and may
entitle such holder to a refund, provided that the required information is
furnished to the Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF SUCH
HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF NOTES
SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the New Notes and the Guarantees will be passed upon for
Norcal by Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional
Corporation, San Francisco, California and with respect to New York law will be
passed upon for Norcal by Cleary, Gottlieb, Steen & Hamilton, New York, New
York.
EXPERTS
The consolidated financial statements of Norcal Waste Systems, Inc. as of
September 30, 1995 and 1994 and for each of the years in the three year period
ended September 30, 1995, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP refers to a change in the method of accounting for income taxes.
113
<PAGE> 115
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YEAR END FINANCIAL INFORMATION
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets, September 30, 1995 and 1994........................ F-3
Consolidated Statements of Operations for the Years Ended September 30, 1995,
1994
and 1993...................................................................... F-5
Consolidated Statements of Stockholder's Deficit for the Years Ended September
30, 1995, 1994 and 1993........................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995,
1994 and 1993................................................................. F-7
Notes to Consolidated Financial Statements, September 30, 1995.................. F-9
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Consolidated Balance Sheets, June 30, 1996 and September 30, 1995............... F-29
Consolidated Statements of Income for the Three Months and the Nine Months Ended
June 30, 1996 and 1995......................................................... F-31
Consolidated Statement of Stockholder's Deficit for the Nine Months Ended
June 30, 1996................................................................. F-32
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 1996
and 1995...................................................................... F-33
Notes to Consolidated Financial Statements, June 30, 1996....................... F-34
</TABLE>
F-1
<PAGE> 116
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, 1995 and
1994, and the related consolidated statements of operations, stockholder's
deficit and cash flows for each of the years in the three year period ended
September 30, 1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1995 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
November 10, 1995, except as to
Note 17 which is as of
November 21, 1995
F-2
<PAGE> 117
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 8,415,725 $ 5,932,821
Restricted cash............................................... 2,720,933 12,687,399
Marketable securities......................................... 5,645,324 --
Accounts receivable, less allowance for doubtful accounts of
$1,277,241 in 1995 and $1,471,828 in 1994.................. 31,055,381 26,595,016
Parts and supplies............................................ 2,411,259 2,193,165
Prepaid expenses.............................................. 4,709,544 5,122,958
------------ ------------
Total current assets.................................. 54,958,166 52,531,359
------------ ------------
Property and equipment:
Land.......................................................... 45,186,775 44,053,884
Landfills..................................................... 19,719,644 18,651,211
Buildings and improvements.................................... 42,489,746 40,236,831
Vehicles and equipment........................................ 100,357,483 110,065,408
Construction in progress...................................... 5,639,394 4,196,145
------------ ------------
Total property and equipment.......................... 213,393,042 217,203,479
Less accumulated depreciation and amortization................ 80,962,315 87,637,469
------------ ------------
Property and equipment, net........................... 132,430,727 129,566,010
------------ ------------
Franchises, permits and other intangibles, net of amortization
of $32,227,307 in 1995 and $28,746,486 in 1994 (note 3)....... 79,956,220 82,587,118
Investment in and receivable from affiliated companies (note 4). 30,826 3,150,313
Trust accounts (note 12)........................................ 31,288,784 24,115,503
Other assets.................................................... 487,317 349,150
------------ ------------
Total other assets.................................... 111,763,147 110,202,084
------------ ------------
$299,152,040 $292,299,453
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 118
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion:
Long-term debt (note 5).................................. $ 28,277,322 $ 18,350,153
Capital leases (note 7).................................. 3,418,708 9,365,004
Accounts payable............................................ 9,941,486 8,565,009
Accrued expenses............................................ 33,203,138 27,399,148
Income taxes payable (note 8)............................... 3,883,988 639,395
Deferred revenues........................................... 2,838,070 2,545,031
Other accrued liabilities................................... 8,884,646 19,175,273
------------ ------------
Total current liabilities........................... 90,447,358 86,039,013
Long-term debt (note 5)....................................... 67,602,058 99,271,932
Obligations under capital leases (note 7)..................... 4,070,434 4,355,064
Deferred income taxes (note 8)................................ 13,038,992 10,368,632
Landfill closure liability (note 12).......................... 21,456,271 18,513,038
Postretirement medical benefits (note 11)..................... 33,904,793 34,080,967
Other liabilities............................................. 10,468,887 10,935,504
Subordinated notes payable (note 6)........................... 102,040,888 94,670,717
------------ ------------
Total liabilities................................... 343,029,681 358,234,867
------------ ------------
Commitments and contingencies (notes 7, 8, 9, 10, 11, 12, 13
and 14)
Stockholder's deficit (note 9):
Common stock, $.01 par value; 100,000,000 shares authorized;
24,134,973 shares issued and outstanding................. 241,350 241,350
Additional paid-in capital.................................. 166,377,780 166,377,780
Accumulated deficit......................................... (143,157,703) (153,591,164)
Pension liability adjustment (note 10)...................... (8,581,313) (10,906,995)
------------ ------------
14,880,114 2,120,971
Less net scheduled contribution to the ESOP (note 9).......... (58,757,755) (68,056,385)
------------ ------------
Total stockholder's deficit......................... (43,877,641) (65,935,414)
------------ ------------
$ 299,152,040 $ 292,299,453
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 119
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................................. $271,500,581 $247,176,123 $255,149,462
Cost of operations:
Operating expenses................................. 183,864,653 167,740,263 173,516,485
Depreciation and amortization...................... 19,985,358 20,141,390 22,703,835
ESOP compensation expense (note 9)................. 7,922,730 7,318,916 6,920,430
General and administrative......................... 26,446,182 24,849,348 26,285,513
------------ ------------ ------------
Total cost of operations................... 238,218,923 220,049,917 229,426,263
Operating income..................................... 33,281,658 27,126,206 25,723,199
Interest expense..................................... (19,908,899) (20,919,989) (23,899,829)
Gain on dispositions, net............................ 1,279,012 6,744,725 11,477,380
Settlement of litigation (note 14)................... -- (5,480,000) --
Other income......................................... 2,443,967 1,388,543 6,287,414
------------ ------------ ------------
Income from operations before income taxes
and cumulative effects of changes in
accounting principle..................... 17,095,738 8,859,485 19,588,164
Income tax expense (note 8).......................... 6,662,277 2,500,000 1,447,000
------------ ------------ ------------
Income from operations before cumulative
effects of changes in accounting
principle................................ 10,433,461 6,359,485 18,141,164
Cumulative effect on prior years of change in
accounting for income taxes (note 8)............... -- (2,500,000) --
------------ ------------ ------------
Net income................................. $ 10,433,461 $ 8,859,485 $ 18,141,164
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 120
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 DEFICIT
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET
COMMON STOCK ADDITIONAL PENSION SCHEDULED
--------------------- PAID-IN ACCUMULATED LIABILITY CONTRIBUTION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TO THE ESOP TOTAL
---------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1992... 24,134,973 $241,350 166,377,780 (180,591,813) (5,411,415) (79,777,833) (99,161,931)
Contributions to reduce
ESOP debt.................... -- -- -- -- -- 5,797,748 5,797,748
Pension liability adjustment... -- -- -- -- (6,641,057) -- (6,641,057)
Net income..................... -- -- -- 18,141,164 -- -- 18,141,164
---------- -------- ------------ ------------- ----------- ----------- -----------
Balances, September 30, 1993... 24,134,973 241,350 166,377,780 (162,450,649) (12,052,472) (73,980,085) (81,864,076)
Contributions to reduce
ESOP debt.................... -- -- -- -- -- 5,923,700 5,923,700
Pension liability adjustment... -- -- -- -- 1,145,477 -- 1,145,477
Net income..................... -- -- -- 8,859,485 -- -- 8,859,485
---------- -------- ------------ ------------- ----------- ----------- -----------
Balances, September 30, 1994... 24,134,973 241,350 166,377,780 (153,591,164) (10,906,995) (68,056,385) (65,935,414)
Contributions to reduce
ESOP debt.................... -- -- -- -- -- 9,298,630 9,298,630
Pension liability adjustment... -- -- -- -- 2,325,682 -- 2,325,682
Net income..................... -- -- -- 10,433,461 -- -- 10,433,461
---------- -------- ------------ ------------- ----------- ----------- -----------
Balances, September 30, 1995... 24,134,973 $241,350 166,377,780 (143,157,703) (8,581,313) (58,757,755) (43,877,641)
========== ======== ============ ============= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 121
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
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 10,433,461 $ 8,859,485 $ 18,141,164
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............. 19,985,358 20,141,390 22,703,835
Trust contributions and interest income,
net of landfill closure and other
regulatory expense..................... (2,804,999) 13,554 2,417,362
Postretirement expense, net of amounts
paid................................... (176,174) 656,385 1,381,311
Pension and insurance net of amounts
paid................................... 2,125,399 (697,039) (3,575,342)
ESOP compensation expense in excess of
cash payments for redemptions.......... 7,528,045 7,031,388 6,788,011
Equity in net income of unconsolidated
affiliates............................. (517,220) (532,118) (547,321)
Change in provision for losses on accounts
receivable............................. (104,587) (156,600) (693,143)
Amortization of subordinated note
discounts.............................. 734,816 1,141,000 1,010,620
Accrued interest on subordinated notes.... 5,295,625 8,507,012 7,930,797
(Settlement of) Accrual for litigation.... (5,480,000) 5,480,000 --
Minority interests in net gain (loss) of
subsidiaries........................... 8,606 88,407 (142,448)
Gain on dispositions...................... (1,279,012) (6,744,725) (11,477,380)
Other income.............................. (1,100,615) (498,224) (535,839)
Changes in assets and liabilities, net of
effects of dispositions:
Increase in accounts receivable...... (4,355,778) (1,319,191) (151,031)
(Increase) decrease in parts and
supplies.......................... (218,094) (115,598) 64,652
Decrease (increase) in prepaid
expenses.......................... 413,414 (160,805) 1,298,748
(Increase) decrease in other
assets............................ (202,221) 1,572,577 750,604
Increase (decrease) in accounts
payable........................... 1,376,477 2,004,537 (1,292,414)
(Decrease) increase in accrued
expenses and other liabilities.... (1,676,817) (4,642,060) (6,890,092)
Increase (decrease) in income taxes
payable........................... 3,244,593 (366,439) 860,595
Increase (decrease) in deferred
revenues.......................... 293,039 (271,308) (172,161)
Increase (decrease) in deferred
income
taxes............................. 2,670,360 (2,275,000) --
Increase in other long term
liabilities....................... 718,814 1,217,120 --
------------ ------------ ------------
Net cash provided by operating
activities...................... 36,912,490 38,933,748 37,870,528
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 122
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)
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment.......... $(19,603,355) $(14,622,131) $ (9,835,660)
Proceeds from dispositions, net................ 6,056,804 21,578,971 9,678,788
Deposits to trust accounts..................... (594,641) (684,381) (6,635,263)
Withdrawals from trust accounts................ -- 3,533,153 6,131,146
Investment in marketable securities............ (5,608,420) -- --
Deposits to restricted cash.................... -- (17,549,322) (6,250,000)
Withdrawals from restricted cash............... 10,203,156 11,309,272 --
Other.......................................... (20,000) (435,323) (252,945)
------------ ------------ ------------
Net cash (used in) provided by
investing activities................. (9,566,456) 3,130,239 (7,163,934)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt and capitalized
leases...................................... 4,211,622 2,169,619 --
Principal payments on long-term debt and
capitalized leases.......................... (32,155,505) (45,493,780) (25,696,728)
Payments of loans by ESOP...................... 3,080,753 -- --
------------ ------------ ------------
Net cash used in financing
activities........................... (24,863,130) (43,324,161) (25,696,728)
============ ============ ============
Net increase (decrease) in cash.................. 2,482,904 (1,260,174) 5,009,866
Cash, beginning of year.......................... 5,932,821 7,192,995 2,183,129
------------ ------------ ------------
Cash, end of year................................ $ 8,415,725 $ 5,932,821 $ 7,192,995
============ ============ ============
Supplemental schedule of net cash paid for:
Interest.................................... $ 13,911,620 $ 11,328,296 $ 14,490,002
============ ============ ============
Income taxes................................ $ 747,325 $ 1,274,000 $ 545,600
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 123
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
(1) NATURE OF BUSINESS
Through its subsidiaries, Norcal Waste Systems, Inc. (the Company) provides
integrated waste services to residential, commercial and industrial customers
primarily in 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. The Company
continues to be, with limited exceptions, the sole provider of commercial and
residential refuse collection for the City 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 but two 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 its franchise agreements
and permits.
(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. Certain
properties available for sale have been written down to their estimated net
realizable value.
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,
F-9
<PAGE> 124
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and
permits 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
permanent 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
operations. 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 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 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.
F-10
<PAGE> 125
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Restricted Cash
The restricted cash account was established in accordance with the Third
Amended and Restated Credit Agreement (the Old Credit Agreement) (Note 5).
Withdrawals from this account are restricted to certain expenditures requiring
written notice from the Company to the collateral agent and are limited as
specified in the agreement.
(j) Marketable Securities
Marketable securities represent 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 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 deficit, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The cost of marketable securities held at September 30, 1995
approximated market value. Fair value exceeded amortized cost for all securities
held such that gross unrealized holding gains equaled the net unrealized holding
gains at September 30, 1995. There were no sales of available for sale
securities during fiscal 1995.
(k) Trust Accounts
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
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 at September 30,
1995 were $445,024 and $233,491, respectively.
(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 franchise 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>
1995 1994
------------ ------------
<S> <C> <C>
Franchises and contracts.................................. $ 9,122,582 $ 9,413,134
Operating permit rights................................... 64,260,175 66,296,491
Excess of cost over net assets of businesses acquired..... 6,573,463 6,877,493
----------- -----------
$ 79,956,220 $ 82,587,118
=========== ===========
</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 are engaged in the waste
collection and disposal business, under the exercise of an option, for
F-11
<PAGE> 126
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$5 million in cash. The gain on disposal of $1,177,013 is included in gain on
dispositions in the consolidated statement of operations.
The Company's equity in earnings of unconsolidated affiliates included in
other income in the consolidated statements of operations, was $517,220,
$532,118 and $547,321 for the years ended 1995, 1994 and 1993, respectively.
(5) LONG-TERM DEBT
Long-term debt at September 30, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Bank loans:
Facility A and B loans, six-year term loan dated
September 30, 1992, original principal balance of
$149,733,818........................................ $93,950,741 $116,189,326
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8 1/2%.... 913,906 989,106
Other notes.............................................. 1,014,733 443,653
----------- -----------
Total debt..................................... 95,879,380 117,622,085
Less current portion........................... 28,277,322 18,350,153
----------- -----------
Long-term debt........................................... $67,602,058 $ 99,271,932
=========== ===========
</TABLE>
The Facility A and B loans are governed by the Old Credit Agreement, dated
as of September 30, 1992, and as subsequently amended, between the Company and a
group of lenders (the "Lenders"). The Old Credit Agreement requires the Company
to maintain certain financial ratios and imposes certain restrictions on, among
other things, additional debt, excess cash flow, acquisitions, subordinated note
payments, and other activities of the Company. The Old Credit Agreement also
requires the sale of certain identified subsidiaries in calendar 1995, the
proceeds of which are to be applied to the bank loans. These subsidiaries have
total assets of $27,835,471 at September 30, 1995 and total revenues of
$24,652,665 for the year then ended. Management believes that the sale of these
identified subsidiaries would not have a material impact on the financial
condition of the Company. To the extent the Company has not sold the identified
subsidiaries for a specified period, the Lenders have the option, but not the
obligation, to sell them. However, the Lenders have agreed to temporarily
forebear from exercising their option to require the Company to sell these
subsidiaries.
The interest rates for the Facility A and B loans are currently variable at
prime plus 2.0% or Eurodollar rate plus 3.75%. These rates increased from prime
plus 1.5% or Eurodollar rate plus 3.25% effective with the consummation of the
exchange of the old subordinated notes for the Class A and B Notes (Note 6). At
September 30, 1995, 1994 and 1993 the prime rate was 8.75%, 7.75% and 6.0%,
respectively. At September 30, 1995, 1994 and 1993, the Eurodollar rate was
5.88%, 4.88% and 3.25%, respectively. The interest rates at September 30, 1995
under the Bank loans were at 9.63%.
The long-term portion of the debt outstanding at September 30, 1995,
matures as follows: 1997, $34,184,191; 1998, $32,145,160; 1999, $205,488; 2000,
$211,349; and thereafter, $855,870. These amounts exclude paydowns required by
the sale of identified subsidiaries and non-operating assets.
Substantially all of the property and equipment of the Company and its
subsidiaries is pledged as collateral for the loans and letters of credit under
the Old Credit Agreement. The Company has also pledged the common stock of all
of its wholly owned subsidiaries as collateral for the loans. Subsidiaries of
the Company have guaranteed the debt under the Old Credit Agreement and capital
lease obligations of the Parent and certain affiliates, to the specific extent
provided for in the guarantees.
F-12
<PAGE> 127
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, under the Old Credit Agreement, use of distributions and
contributions is restricted to payments to the ESOP to be used to retire the
ESOP's obligations to the Company and to satisfy the repurchase obligations
(Note 9).
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 letter of credit
commitment at an annual rate per annum equal to 5/8 of 1%, plus an amount equal
to 1.75% of the face amount of each letter of credit (which, was increased from
1.25% effective with the consummation of exchange of the Old Subordinated Notes
for the Class A and B Notes), plus a letter of credit administration fee of 1/4
of 1% of the letter of credit commitment.
In November 1995, the Company received a commitment from a bank to
underwrite a new credit agreement (Note 17).
(6) SUBORDINATED NOTES PAYABLE
Norcal ESOP Notes in Default (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 $36,560,000. The discounted present value of the ESOP
Notes as of September 30, 1995 and 1994 is $32,398,263 and $31,088,085,
respectively. The ESOP Notes are recorded net of a discount of $4,161,737 and
$5,471,915, respectively, to reflect a market rate of interest at the date of
issuance. The ESOP Notes bear interest at a fixed rate of 8% per annum and were
discounted to yield 13.3%. The discount is amortized over the life of the notes.
Although the Company is not an obligor or guarantor on the ESOP Notes, they are
recorded as a liability on the Company's consolidated balance sheets in
accordance with generally accepted accounting principles (GAAP) with a
corresponding increase to stockholder's deficit (Note 9).
The stated payment terms of the ESOP Notes payable as of September 30, 1995
are as follows:
<TABLE>
<S> <C>
Interest in arrears............................................. $16,393,482
Principal in arrears............................................ 4,125,000
Future principal payments:
1996.......................................................... 2,650,000
1997.......................................................... 5,362,500
1998.......................................................... 6,625,000
1999.......................................................... 7,500,000
2000.......................................................... 8,207,500
Thereafter.................................................... 2,090,000
-----------
52,953,482
Less amount representing discount............................... 4,161,737
-----------
$48,791,745
===========
</TABLE>
During 1992 and 1991, the Company incurred significant losses and
deteriorations of working capital. Consequently, the Company failed to make
certain payment obligations and was not in compliance with certain related
covenants with respect to its lenders, leasing companies and subordinated debt
holders. The Company entered into its Old Credit Agreement during 1992 which
modified its indebtedness with certain lenders and also reached agreements with
respect to its capital lease obligations.
F-13
<PAGE> 128
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ESOP Notes and related interest remain in default and cannot 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 are met. Interest
payments due under the ESOP Notes have not been paid since 1991 and scheduled
principal payments have not been made in 1995 and 1994; accordingly, the ESOP
Notes are in default. The discounted present value of the ESOP Notes together
with accrued interest have been included as long-term liabilities in the
accompanying 1995 financial statements, in that payments on the ESOP Notes
cannot be made under the terms of the Old Credit Agreement and the Indenture
governing the Class A and B Notes until certain restructuring conditions are
met. A settlement of claims by holders of ESOP Notes against Norcal, the ESOP
and others was reached in August 1995 subject to certain conditions as more
fully described in Note 14.
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 consist of Class
A Notes in the amount of $41,785,000 and Class B Notes in the amount of
$9,294,129. The Class A Notes are due September 30, 2002 and bear interest at
5.5% per annum through December 31, 1996 and 9.05% per annum thereafter. The
Class B Notes are due September 30, 2003 and bear simple interest at 2% per
annum. Beginning on March 31, 1999, and quarterly thereafter, the Company is
required to make eight equal quarterly payments on the Class A Notes in amounts
which are equal to 40% of the total outstanding principal amount as of January
1, 1999 plus the aggregate amount of unpaid interest accrued prior to December
31, 1998, if any. Beginning on March 31, 2001, and quarterly thereafter, the
Company is required to make seven equal quarterly payments on Class A Notes in
amounts which are equal to 60% of the sum of total outstanding principal amount
as of January 1, 1999 plus the aggregate amount of all interest accrued and
unpaid as of December 31, 1998, if any. Interest on the Class B Notes accrued on
or before December 31, 2002 and the principal amount of the notes are payable in
four equal quarterly installments beginning December 31, 2002. The Company's
payments of principal and interest are subordinated to the Company's senior
indebtedness. The Company has the option to redeem the Class A and B Notes
anytime beginning six months after the effective date of the exchange and
continuing thereafter for 30 months at a redemption price calculated at the time
of the redemption based on the present value of the unpaid principal and future
scheduled interest payments on the Class A and B Notes using a 13% discount rate
for the Class A Notes and an 11% discount rate for the Class B Notes. The notes
may be redeemed at par plus accrued interest thereafter. Under certain
circumstances, certain prepayments of the notes are required (Note 14).
The payment terms of the principal of the Class A and B Notes are as
follows:
<TABLE>
<S> <C>
1999 Class A.................................................. $ 6,267,750
2000 Class A.................................................. 8,357,000
2001 Class A.................................................. 12,833,964
2002 Class A.................................................. 14,326,286
2003 Class B.................................................. 9,294,129
-----------
51,079,129
Excess of carrying value over principal......................... 2,170,014
-----------
Total................................................. $53,249,143
==========
</TABLE>
F-14
<PAGE> 129
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Class A and 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 $41,785,000.
The discounted present value of the Old Subordinated Notes as of the date of
exchange and September 30, 1994 was $34,993,879 and $34,682,003, respectively.
The Old Subordinated Notes were recorded net of a discount of $6,791,121 and
$7,102,997, respectively, to reflect a market rate of interest at the date of
issuance. The Old Subordinated Notes bore interest at a fixed rate of 9.05% per
annum and were discounted to yield 14.5%. The discount was being amortized over
the life of the Old Subordinated Notes.
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
$52,686,798, at the settlement date and the future payments required by the
Class A and B Notes will be recognized as interest expense over the life of the
Class A and B Notes at an imputed interest rate which approximates 5.8%.
(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>
1995 1994
----------- ------------
<S> <C> <C>
Vehicles and equipment................................... $17,092,286 $ 40,117,285
Less accumulated amortization............................ (8,426,401) (25,587,047)
------------ ------------
$ 8,665,885 $ 14,530,238
============ ============
</TABLE>
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1995 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending September 30:
1996...................................................... $3,959,394 $1,209,569
1997...................................................... 1,334,547 1,132,410
1998...................................................... 1,334,547 842,488
1999...................................................... 1,286,219 467,566
2000...................................................... 684,659 85,500
Thereafter................................................ 279,933 560,000
----------- ----------
Total minimum lease payments.............................. 8,879,299 $4,297,533
==========
Less amount representing interest......................... 1,390,157
-----------
Present value of minimum lease payments................... 7,489,142
Less current portion...................................... 3,418,708
-----------
$4,070,434
===========
</TABLE>
F-15
<PAGE> 130
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense charged to operations under all operating leases was
approximately $2,811,777, $2,841,816, and $2,700,968 for the years ended 1995,
1994, and 1993, respectively, including amounts under short-term rental
agreements.
(8) INCOME TAXES
As discussed in Note 1, the Company adopted SFAS No. 109 as of October 1,
1993. The cumulative effect of the change in accounting for income taxes of
$2,500,000 was determined as of October 1, 1993 and is reported separately in
the consolidated statement of operations for the year ended September 30, 1994.
Prior year financial statements have not been restated to apply the provisions
of SFAS No. 109.
Income tax expense for the fiscal years ended September 30, 1995, 1994, and
1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................... $4,562,285 $2,188,000 $ 315,000
State..................................... 1,599,992 87,000 1,132,000
---------- ---------- ---------
6,162,277 2,275,000 1,447,000
---------- ---------- ---------
Deferred:
Federal................................... 425,000 225,000 --
State..................................... 75,000 -- --
---------- ---------- ---------
500,000 225,000 --
---------- ---------- ---------
$6,662,277 $2,500,000 $1,447,000
========== ========== =========
</TABLE>
Total income tax expense differed from the amount computed by applying the
federal statutory income tax rate of 34% to income from operations as a result
of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% 35.0% 34.8%
State taxes, net of federal benefit......................... 6.0 6.0 6.0
Permanent differences on affiliate sold..................... 6.5 -- --
Change in valuation allowance............................... (14.6) (43.3) --
Amortization of nondeductible intangibles................... 5.1 9.2 1.3
Current utilization of previously deferred deductions and
state net operating loss.................................. -- 22.3 --
Utilization of net operating losses carried forward......... -- -- (32.0)
Other....................................................... 1.0 (1.0) (2.7)
----- ----- -----
Income tax expense.......................................... 39.0% 28.2% 7.4%
===== ===== =====
</TABLE>
F-16
<PAGE> 131
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax liability at September 30, 1995 and 1994 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>
1995 1994
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Old Subordinated Notes, interest recapture.............. $ 2,320,000 $ --
Net operating loss carryforwards........................ -- 4,360,000
Alternative minimum tax credit carryforward............. 3,183,000 2,275,000
Accrued liabilities..................................... 4,785,000 10,558,000
Post retirement benefit obligations..................... 13,967,000 14,973,000
ESOP expense, including accrued interest, in excess of
cash contributions.................................... 14,979,000 15,930,000
Pension expense in excess of contributions.............. 3,550,000 2,984,000
Litigation settlement................................... -- 2,192,000
Insurance reserves...................................... 4,787,000 2,476,000
Landfill closure reserves............................... 1,175,000 --
Vacation accrual........................................ 1,071,000 897,000
Bad debts............................................... 465,000 527,000
Other................................................... 1,702,000 629,000
------------ ------------
51,984,000 57,801,000
Less:
Valuation allowance................................... 35,744,992 38,238,632
------------ ------------
Net deferred tax assets....................... 16,239,008 19,562,368
------------ ------------
DEFERRED TAX LIABILITIES
Property and equipment, basis and depreciation
differences........................................... 25,616,000 25,789,000
Franchises, permits and other intangibles............... 3,662,000 4,142,000
------------ ------------
Gross deferred tax liabilities................ 29,278,000 29,931,000
------------ ------------
Net deferred tax liabilities.................. $(13,038,992) $(10,368,632)
============ ============
</TABLE>
The total valuation allowance decreased for the years ended September 30,
1995 and 1994 by $2,493,640 and $3,835,000, respectively.
At September 30, 1995, 1994, and 1993, the Company concluded it was unable
to implement tax planning strategies which would have enabled the Company to
further 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 currently conducting an
audit of the Company's income tax returns for the fiscal years ended September
30, 1988 through September 30, 1991. The Service is also examining certain
transactions involving employee benefit plans sponsored by the Company. Although
the Service has not completed its income tax audit, it has proposed a number of
adjustments (some of which have been agreed to by the Company), and may propose
additional adjustments. 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 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
F-17
<PAGE> 132
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized or (ii) agree with the manner in which the Company has calculated
certain deductions related to its landfill 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 and the
landfill closure and post-closure costs.
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 may be substantially reduced
or deferred as a result of the income tax audit.
The Service has also asserted that the role played by a subsidiary of the
Company in connection with an investment by the Company's pension plans
constituted a "prohibited transaction" for which the Company is liable for
penalties under the Internal Revenue Code. The Company disagrees with the
Service's assertion, but has nevertheless reached an agreement with the Service
and the Department of Labor regarding certain aspects of the transaction that
would permit the Company to resolve this matter in a way that would not have a
material adverse effect on the Company's financial condition.
The Service is also investigating the transactions pursuant to which the
ESOP acquired and subsequently disposed of the stock of another corporate
entity. The Service has sought technical advice from its national office as to
how these particular transactions should be treated for tax purposes. The
Service is seeking guidance among other things, as to: (i) whether the ESOP
should be subject to sanctions including possible revocation of its qualified
status; (ii) whether the Company should be subject to "prohibited transaction"
taxes; and (iii) what the resulting income tax consequences of this acquisition
and disposition should be to the Company and the ESOP. 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 material adverse
tax consequences to the Company or the ESOP as a result of these transactions.
The Company has been orally advised by the Service that it intends to issue a
technical advice memorandum in the near future which generally concurs with the
views espoused by the Company as to how the transaction should be treated for
tax purposes. Accordingly, the Company believes this matter will also be
resolved in a manner that will not have a material adverse effect on the
Company's financial condition.
It is the Company's opinion that these matters relating to the IRS
examination 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 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 a Stock Option Plan that provides for the granting of both
Incentive Stock Options and Non-Qualified Stock Options for up to 3,000,000
shares of Common Stock. The options may be granted to officers, employees,
directors and independent contractors of the Company. Participation in the Stock
Option Plan is determined by the Compensation Committee of the Board of
Directors. Pursuant to the Stock
F-18
<PAGE> 133
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option Plan, the price at which an option is granted shall not be lower than the
fair market value of the Common Stock. The term of an option cannot exceed ten
years. The options generally are exercisable pursuant to any vesting
requirements imposed by the Compensation Committee upon the grant of the option.
Following is a summary of the stock option transactions for the years ended
September 30, 1995 and 1994:
<TABLE>
<CAPTION>
OPTION
SHARES PRICE
------- ------
<S> <C> <C>
Outstanding, September 30, 1993.................................... 285,850 $7.04
Granted.......................................................... -- --
Canceled......................................................... (19,750) 7.04
------- -----
Outstanding, September 30, 1994.................................... 266,100 7.04
Granted.......................................................... -- --
Canceled......................................................... (5,600) 7.04
------- -----
Outstanding, September 30, 1995.................................... 260,500 $7.04
======= =====
</TABLE>
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 the 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. The related Company loans to the ESOP are
repayable through the year 2001.
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 bank loans and subordinated notes are reflected as
liabilities of the Company (Notes 5 and 6) and the Company's future scheduled
contribution to the ESOP, as described below, is reflected as a reduction of
stockholder's equity.
The ESOP covers substantially all 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 value of assets allocated to the accounts based on years of
service and compensation.
During 1995 the ESOP received a $3,080,753 settlement with respect to
certain litigation. These proceeds were used to pay down Company loans 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>
1995 1994
------------ ------------
<S> <C> <C>
Loans from the Company to the ESOP...................... $ 47,750,225 $ 65,163,697
ESOP Notes.............................................. 32,398,263 31,088,085
----------- -----------
Total scheduled contribution to the ESOP................ 80,148,488 96,251,782
ESOP compensation expense recognized in excess of
Company contributions................................. (21,390,733) (28,195,397)
----------- -----------
Net scheduled contribution to the ESOP.................. $ 58,757,755 $ 68,056,385
=========== ===========
</TABLE>
F-19
<PAGE> 134
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the ESOP is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
ESOP compensation expense..................... $7,922,730 $7,318,916 $ 6,920,430
========== ========== ===========
Interest expense related to ESOP debt......... $9,224,143 $8,373,377 $10,239,799
========== ========== ===========
</TABLE>
Following is a summary of shares as of September 30:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Allocated...................................... 13,777,384 12,793,875 12,050,921
Committed to be released....................... 1,065,559 983,509 742,955
Unallocated.................................... 9,292,030 10,357,589 11,341,097
---------- ---------- ----------
24,134,973 24,134,973 24,134,973
========== ========== ==========
</TABLE>
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 $394,685, $287,529, and
$137,627 for the years ended 1995, 1994, and 1993 respectively. The fair value
of the shares as established by independent appraisers was $2.61 and $1.60 as of
September 30, 1994 and 1993, respectively. The fair value has not yet been
determined as of September 30, 1995.
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, 1994 and
1993 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.
(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.
F-20
<PAGE> 135
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost for the years ended September 30, 1995, 1994, and
1993 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.................................... $ 2,278,758 $ 2,373,187 $ 1,946,822
Interest cost on projected benefit
obligations............................... 6,324,928 5,989,103 5,767,149
Actual return on plan assets................ (9,269,340) (1,139,115) (3,114,143)
Net amortization and (deferral)............. 4,191,987 (3,428,628) (1,692,368)
----------- ----------- -----------
Net periodic cost................. $ 3,526,333 $ 3,794,547 $ 2,907,460
=========== =========== ===========
</TABLE>
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at September 30, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
----------------- ----------------
PLANS WITH ASSETS PLANS WITH ASSETS
LESS THAN LESS THAN
ACCUMULATED ACCUMULATED
BENEFIT BENEFIT
OBLIGATIONS OBLIGATIONS
----------------- ----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $69,828,466 in 1995 and $64,551,416
in 1994.......................................... $ (71,981,742) $ (66,408,712)
============ ============
Projected benefit obligation........................ (88,028,132) (80,685,444)
Plan assets at fair value, primarily marketable
equity securities, fixed income securities, U.S.
government obligations, money market funds and
other investments................................ 66,967,877 59,299,026
------------ ------------
Projected benefit obligation in excess of plan
assets........................................... (21,060,255) (21,386,418)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions...................................... 24,236,625 24,948,601
Prior service cost not yet recognized............... 391,078 235,126
Reduction of stockholder's equity to recognize
minimum liability................................ (8,581,313) (10,906,995)
------------ ------------
Net pension liability recognized in the consolidated
balance sheets................................... $ (5,013,865) $ (7,109,686)
============ ============
Accrued pension cost included in:
Accrued expenses -- current...................... (3,284,397) (3,284,397)
Long-term pension liability...................... (1,729,468) (3,825,289)
------------ ------------
Net pension liability recognized in the consolidated
balance sheets................................... $ (5,013,865) $ (7,109,686)
============ ============
</TABLE>
The Company has unrecognized losses from past experience different from
that assumed and effects of changes in assumptions amounting to $24,236,625 and
$24,948,601 at September 30, 1995 and 1994, respectively. Of these amounts,
$8,581,313 and $10,906,995 at September 30, 1995 and 1994, respectively, have
been charged to stockholder's equity representing the excess of the accumulated
benefit obligation ($5,013,865 and $7,109,686, respectively) over plan assets
and the excess of cumulative contributions
F-21
<PAGE> 136
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
($3,567,448 and $3,797,309, respectively) over net periodic pension cost. Since
the accumulated benefit obligation exceeds the fair value of plan assets, the
Company has recognized a liability equal to the unfunded accumulated benefit
obligation.
It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $3,282,327,
$4,280,322 and $3,507,860 during 1995, 1994 and 1993, respectively.
The weighted average discount rate was 7.75%, 8%, and 7.5% respectively,
for 1995, 1994, and 1993. 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%. The actual annual rate of
return on investments may be lower than projected, which could result in an
increased unfunded status of the plans.
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, 1995, 1994, and 1993, was $1,585,532,
$1,539,173, and $1,446,006, 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 Financial Accounting Standards 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 plan at September
30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Accumulated postretirement medical benefit obligation:
Retirees.................................................. $12,514,896 $12,567,447
Fully eligible active plan participants................... 10,737,533 9,906,229
----------- -----------
Accumulated postretirement medical benefit obligation....... 23,252,429 22,473,676
Unrecognized net gain from past experience different from
that assumed and from changes in assumptions.............. 7,597,738 8,149,380
Unamortized prior service credit not yet recognized in net
periodic postretirement benefit cost primarily resulting
from plan changes......................................... 4,067,626 4,470,911
----------- -----------
Accrued postretirement medical benefit liability............ $34,917,793 $35,093,967
=========== ===========
</TABLE>
Net periodic cost for the post retirement medical benefit plan for the
years ended September 30, 1995, 1994 and 1993 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest cost on accumulated postretirement
benefit obligation........................... $1,757,631 $2,070,062 $2,554,194
Amortization of prior service cost............. (403,285) (403,285) --
Amortization of gain........................... (523,948) (9,275) --
---------- ---------- ----------
Net periodic cost.............................. $ 830,398 $1,657,502 $2,554,194
========== ========== ==========
</TABLE>
F-22
<PAGE> 137
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For measurement purposes, 11.75%, 12%, and 12% medical cost trend rate was
assumed for the calculation of accumulated postretirement benefit obligation at
September 30, 1995, 1994, and 1993, respectively. This rate was assumed to
decrease incrementally to 6.75%, 7%, and 7% after 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 7.75%,
8.0%, and 7.5% were assumed as of September 30, 1995, 1994, and 1993,
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, 1995, 1994, and 1993, and the accumulated postretirement benefit obligation
at September 30, 1995, 1994, and 1993 would increase approximately as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest component........................... $ 247,831 $ 323,518 $ 344,000
========== ========== ==========
Accumulated postretirement medical benefit
obligation................................. $3,384,349 $3,097,888 $4,044,000
========== ========== ==========
</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 for the outstanding term of the ESOP Notes subject
to certain conditions. 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 may 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.
F-23
<PAGE> 138
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1995 and 1994, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $24,427,811 and
$21,751,000 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, 1995 and 1994, amounting to approximately
$3,243,536 and $3,238,000, respectively, is included in accrued expenses and is
determined by the amount of required funding of various trust funds in
accordance with various jurisdictional requirements. Amounts charged to
operating expenses for landfill closure in 1995, 1994 and 1993, net of interest
income on related trust accounts, were approximately $1,990,563, $2,874,000 and
$6,189,000, 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, 1995 and 1994,
the future closure and post-closure obligation remaining to be recognized over
the remaining lives of the applicable landfills is estimated to be approximately
$30,466,618 and $36,458,000, 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 $3,300,000 for 1996 and
approximately $17,500,000 due over the subsequent 5 year period based upon
volume used at the landfill and rate recovery mechanisms. At September 30, 1995
and 1994, $17,293,897 and $12,330,395, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. In addition to
establishing trust funds, the Company also provides financial assurance for one
of its landfills through the issuance of a bond for $3,850,000 at September 30,
1995.
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 $1,435,980 in trust funds as of September
30, 1995 and estimates that future contributions to trust funds of approximately
$6,771,761 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 $10 million per
loss with an annual aggregate limit for all losses of $10 million, covering
pollution conditions that result in bodily injury or property damage to third
parties, including clean-up costs. This policy also covers underground tank
liability 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 million per landfill to a maximum of $5 million
Company-wide. To satisfy this requirement the Company has established financial
assurance mechanisms for each landfill and by July 1997 will need to fund an
additional $1 million into trusts for this purpose. The Company has
approximately $775,000 in each of the four separate trust funds at September 30,
1995.
(13) COMMITMENTS AND CONTINGENCIES
The Company has arranged stand-by letters of credit with various expiration
dates totaling $16,677,314 and $12,478,182 at September 30, 1995 and 1994,
respectively. These letters of credit are provided primarily
F-24
<PAGE> 139
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to secure insurance and self-insurance obligations and for bond requirements. As
of September 30, 1995, the Company has $4,561,680 in standby letters of credit
availability.
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. During 1993, as a result
of significant settlement activity and evaluation of contractual coverage with
respect to prior self-insured claims, the Company was able to reduce the reserve
by $3,400,000 which is included in other income in 1993. At September 30, 1995
and 1994, the Company's accrued liability for self-insured claims was
approximately $10,269,178 and $6,585,000, respectively.
The Company has employment agreements with various executive officers and
key employees. These agreements generally continue until terminated by the
executive or the Company and provide for salary continuation for a specified
number of months under certain circumstances. As of September 30, 1995, if all
of the employees under contract were to be terminated by the Company without
good cause (as defined) under these contracts, the Company's liability would be
approximately $1.3 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 $5,480,000 for personal injury
claims was included in other accrued liabilities at September 30, 1994 and as a
charge in Other Income (Loss) for the year then ended. Norcal issued $51,079,129
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 the ESOP Note
settlement, discussed below, the Company is required to redeem the Class A and B
Notes within 60 days of that settlement. If the ESOP Note settlement is
successfully consummated, the redemption of the Class A and B Notes will result
in the recognition of a gain since there was no gain recognized for financial
statement purposes on the conversion of the debt instruments in 1994.
In 1994, certain holders of ESOP Notes commenced litigation against the
Company, the ESOP, and various other parties to which the Company may have
indemnification obligations. The complaint alleged claims for fraud, breach of
fiduciary duty, money due on notes and other causes of action arising out of the
1986 transaction in which the ESOP purchased plaintiffs' Old Norcal stock in
exchange for cash and the ESOP Notes (see Note 6), the Old Norcal transaction
with Envirocal, Inc. in 1987, Norcal's transaction with Excel Environmental,
Inc. in 1990 and certain other transactions.
On August 9, 1995, a settlement (the Settlement) was reached between the
holders of all but four of the ESOP Notes (Settling Plaintiffs), Norcal and the
ESOP whereby, if the conditions to the Settlement are satisfied, Norcal will pay
$3,648,000 in settlement of personal injury claims and provide funds to the ESOP
in the amount of $33,174,000 to satisfy those ESOP Notes in full and provide for
their extinguishment prior to December 31, 1995. Although the Company is not an
obligor or a guarantor on the ESOP Notes, they have been 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 will result in a gain
to the Company. The Company has also agreed to continue to provide certain
post-retirement health and welfare benefits to certain Settling Plaintiffs until
the earliest of the resolution of remaining claims and October 1, 2000. The
Settlement is subject to a number of conditions, including that the Company
obtain net financing proceeds in excess of $190 million. The ESOP has offered
the holders of the four remaining ESOP Notes a total payment of approximately
$937,400, to be funded by Norcal, in exchange for cancellation of their ESOP
Notes, which
F-25
<PAGE> 140
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represent outstanding principal and accrued interest totalling approximately
$1,400,000 as of September 30, 1995, and releases equivalent to those provided
by the Settling Plaintiffs.
Pursuant to the Settlement, one of the actions will be dismissed in its
entirety. The Settling Plaintiffs have not released and may proceed upon claims
(the "Excluded Claims") in the other action 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 indenture governing the ESOP Notes that
requires indemnification of the trustee by the ESOP for liability incurred
without the trustee's negligence or bad faith. The 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 indemnity is to be paid from any amounts
Settling Plaintiffs recover from the Trustee Parties, which shall be placed in
escrow (the Escrowed Recovery). Norcal has also agreed to place in escrow, on
the earlier of the fifth anniversary of the effective date of the settlement and
final resolution of the Excluded Claims, $500,000 reduced by certain attorneys'
fees and costs incurred by certain parties indemnified by Settling Plaintiffs.
Management believes that in any further litigation related to the Excluded
Claims, it is unlikely that Norcal would be liable to pay an amount in damages
(aside from the Trustee Parties' litigation expenses) that would materially
exceed the Escrowed Recovery (before deduction for indemnified defense costs).
Thus, in light of these mechanisms of the settlement, the Company believes that
its only meaningful potential exposure after the settlement is effected is legal
expenses relating to the Company, the ESOP and indemnified parties.
On September 29, 1995, the court entered an order finding that the
Settlement is fair and made in good faith and barring claims in the remaining
action against the released parties for implied equitable indemnity and
contribution (the Good Faith Determination). On October 20, 1995, one of the
Trustee Parties filed a petition for writ of mandamus in the United States Court
of Appeals for the Ninth Circuit requesting that the district court, among other
things, vacate the Good Faith Determination and allow discovery on the good
faith issues. If the Good Faith Determination were reversed, vacated or
modified, the Trustee Parties might not be prohibited from proceeding against
some or all of the released parties on claims for implied equitable indemnity
and contribution, but the Settling Plaintiffs' indemnification of Norcal and
related parties would extend to such claims.
In 1993, the Secretary of the United States Department of Labor (Secretary)
filed a complaint against individual members of the Envirocal ESOP
Administrative Committee and the Envirocal ESOP seeking restoration of all
losses incurred as a result of alleged fiduciary breaches in connection with the
1987 merger of Envirocal and Norcal Solid Waste Systems, Inc. The Secretary also
examined certain other transactions involving the ESOP and the Company's pension
plans (the Plans).
On October 19, 1995, the Company entered into a settlement agreement with
the Secretary that provides that the Company will make a payment by November 18,
1995 of $3.5 million, which will be fully funded by insurance proceeds. A
portion of the settlement will be deposited in the applicable Plans in amounts
determined by the Secretary and the IRS to be sufficient to correct in full any
alleged "prohibited transactions" and the remainder of which will be deposited
into the ESOP. The Secretary has not released and may proceed with claims
against the trustee for the Plans (the Trustee) except for any claims as to
which the Trustee is indemnified by Norcal. The amount of any judgment by the
Secretary against the Trustee would be paid to the Plans. In connection with the
Secretary's pursuit of claims against the Trustee, the Trustee may file claims
against the Company and various parties that the Company has indemnified. It is
the intent of the settlement that the Company not be economically responsible in
connection with the Secretary's pursuit of claims against the Trustee, either
directly or as a result of indemnification obligations except that the Company
bear its own litigation expenses and those of the indemnified parties (other
than the Trustee). The
F-26
<PAGE> 141
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement contains setoff and recoupment provisions for this purpose whereby the
Company would recover the amount of any liability of it or its indemnified
parties to the Trustee from the Secretary's recovery from the Trustee, up to the
amount of that recovery. The Company believes that in light of these mechanisms,
any claims by the Trustee will not have a material adverse effect on the
Company's financial condition. The Company has agreed to bring an action to
determine the enforceability and scope of any indemnity obligation of Norcal to
the Trustee in connection with the Secretary's claims against the Trustee.
Norcal may choose not to prosecute vigorously such action if it waives the
benefits of the setoff and recoupment provisions and contributes $500,000 to the
Plans.
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>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Trust accounts........................................... $31,222,142 $23,516,178
LIABILITIES
Long-term debt, including current portion................ 95,879,380 --
Subordinated notes payable:
Class A and B Notes................................... 38,489,000 --
ESOP Notes............................................ 34,016,000 --
</TABLE>
The fair value of trust accounts has been estimated based on market values
provided by the trustee. The fair value of long-term debt has been estimated as
the face value of the debt at September 30, 1995. The fair value of the Class A
and B Notes has been estimated as of September 30, 1995 based on the calculated
redemption price of the notes under the terms of the settlement agreement (Note
6). The fair value of the ESOP Notes at September 30, 1995 has been estimated at
the redemption price contained within the Settlement (Note 14). At September 30,
1994, no estimate of the fair value of the long term debt and the subordinated
notes payable was made by the Company.
(16) BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment -- the provision of solid
waste management services primarily consisting of collection, transfer and
disposal to industrial, commercial, residential and municipal customers. During
1995, 1994 and 1993, no single customer accounted for as much as 10% of
consolidated revenue.
The Company operates primarily in seven different geographical areas within
the State of California. The San Francisco geographical region represents
approximately 45%, 44% and 41% of revenues for the years 1995, 1994 and 1993,
respectively.
F-27
<PAGE> 142
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) EVENTS SUBSEQUENT TO DATE OF AUDIT REPORT
Private Debt Offering
The Company closed a private debt offering (the Offering) of $175 million
in Senior Notes (the Senior Notes). The Senior Notes are to mature on November
15, 2005 with interest payable semi-annually. Interest on the Senior Notes will
accrue from the date of the original issue until the initial payment date at the
rate of 12.5% per annum and will increase by an additional 0.25% per annum on
each of May 16, 1996, November 16, 1996, May 16, 1997 and November 16, 1997. The
maximum interest rate on the Senior Notes will be 13.5%. Notwithstanding the
foregoing, the interest rate on the Senior Notes will revert to 12.5% per annum
at such time as Norcal (in one or more transactions) shall have offered to
purchase (whether or not any actual purchases are made) or redeemed an aggregate
of $25.0 million in principal amount of the Senior Notes out of the proceeds of
the sale of Capital Stock of Norcal. Any such offers may be made any time while
the Senior Notes are outstanding and shall be made to all holders of the Senior
Notes at a price not less than 110% of the principal amount thereof. 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 equity offering, or will be required
to be redeemed in the event of a change in control of the Company. The Senior
Notes are unsecured and 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.
Concurrent with the Offering, Norcal entered into a new bank credit
facility providing for a $100 million revolving credit facility with a $25
million suballocation for letters of credit (the New Credit Agreement). The New
Credit Agreement will mature in five years. 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.
The Company used the net proceeds from the Offering to repay substantially
all of its outstanding indebtedness including the Class A and B Notes, as well
as the ESOP Notes (Note 6).
Guarantee of Securities
Norcal Waste Systems, Inc is a holding company and has no independent
assets or operations other than its investments in subsidiaries. The new
registered unsecured Senior Notes will be guaranteed by certain direct and
indirect subsidiaries of the Company. 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 the
Company are individually and in the aggregate inconsequential. Separate
financial statements of each guarantor have not been presented since management
has determined they are not material to the investors.
F-28
<PAGE> 143
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)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
ASSETS
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
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 144
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)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1995
--------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT
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 67,602
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 10,469
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
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 145
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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED 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/(loss) from operations before income taxes
and extraordinary item......................... 3,747 5,159 1,094 11,048
Income tax expense.................................... -- 1,912 -- 4,328
------- ------- ------- --------
Income/(loss) 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
======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 146
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE NINE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED NET
COMMON STOCK ADDITIONAL PENSION GAINS AND SCHEDULED
--------------- 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 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)
======= ==== ======== ========= ======= ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 147
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)
(UNAUDITED)
<TABLE>
<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 (loss) 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
Payments 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
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 148
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(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
Long-term debt at June 30, 1996 and September 30, 1995 is summarized as
follows:
<TABLE>
<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 interest rate on
the Senior Notes is 12.75% and increases 0.25% per annum on each of November 16,
1996, May 16, 1997 and November 16, 1997 to a maximum of 13.5%. The interest
rate
F-34
<PAGE> 149
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company received net proceeds 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 the new credit
agreement (see below) and are amortized over the lives of the Notes and the 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 for $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 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
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.
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.
F-35
<PAGE> 150
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.............. 2
Summary............................ 3
Risk Factors....................... 12
History of the Company and the
Refinancing...................... 21
Use of Proceeds.................... 22
Capitalization..................... 23
Selected Consolidated Financial
Information...................... 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 26
The Exchange Offer................. 37
Business........................... 45
Management......................... 67
Certain Relationships and Related
Transactions..................... 76
Security Ownership of the ESOP and
Management....................... 78
The ESOP........................... 79
Description of Other
Indebtedness..................... 82
Description of the Notes........... 84
Plan of Distribution............... 108
Certain Federal Income Tax
Considerations................... 109
Legal Matters...................... 113
Experts............................ 113
Index to Financial Statements...... F-1
</TABLE>
UNTIL NOVEMBER 14, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THE ORIGINAL DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$175,000,000
NORCAL WASTE SYSTEMS, INC.
OFFER TO EXCHANGE ITS
12 1/2% SERIES B SENIOR
NOTES DUE 2005
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ALL OF ITS OUTSTANDING
12 1/2% SERIES A SENIOR
NOTES DUE 2005
------------------------
PROSPECTUS
------------------------
AUGUST 16, 1996
- ------------------------------------------------------
- ------------------------------------------------------
