This Quarterly Report is filed by Norcal Waste Systems, Inc.
pursuant to certain contractual requirements and not
pursuant to the Securities Exchange Act of 1934
and the rules and regulations thereunder.
QUARTERLY REPORT
For the quarterly period ended December 31, 1996
NORCAL WASTE SYSTEMS, INC.
(Exact name of company as specified in its charter)
CALIFORNIA 94-2922974
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Thomas Mellon Circle, Suite 304
San Francisco, California 94134
- --------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (415) 330-1000
----------------
Norcal Waste Systems, Inc. is currently 100% owned by an employee stock
ownership plan.
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date. On February 13,1997,
there were 24,134,973 shares of $.01 par value Common Stock outstanding.
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
December 31, September 30,
1996 1996
------------ -------------
Assets
<S> <C> <C>
Current assets:
Cash $7,264 $14,378
Marketable securities 5,552 6,889
Trust accounts, current portion 4,066 4,066
Accounts receivable, less allowance for doubtful
accounts of $1,771 at December 31, 1996 and $1,611
at September 30, 1996 39,661 39,120
Parts and supplies 2,520 2,434
Prepaid expenses 4,412 3,836
-------- --------
Total current assets 63,475 70,723
-------- --------
Property and equipment:
Land 42,868 42,691
Landfills 24,481 24,481
Buildings and improvements 43,020 43,189
Vehicles and equipment 109,007 107,822
Construction in progress 5,515 4,412
-------- --------
Total property and equipment 224,891 222,595
Less accumulated depreciation and amortization 88,377 85,448
-------- --------
Property and equipment, net 136,514 137,147
-------- --------
Franchises, permits and other intangibles, net 78,850 76,166
Trust accounts 25,407 24,209
Prepaid pension costs 2,887 3,090
Deferred financing costs, net 9,267 9,636
Other assets 232 264
-------- --------
Total other assets 116,643 113,365
-------- --------
$316,632 $321,235
======== ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
December 31, September 30,
1996 1996
------------ -------------
Liabilities and Stockholder's Equity
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt $322 $354
Capital lease obligations 960 935
Accounts payable 8,052 12,133
Accrued expenses 40,542 44,632
Deferred revenues 3,011 2,722
Other accrued liabilities 5,059 5,091
-------- --------
Total current liabilities 57,946 65,867
-------- --------
Long-term debt 174,018 172,386
Obligations under capital leases 2,815 3,065
Deferred income taxes 12,043 12,503
Landfill closure liability 19,124 18,668
Postretirement medical benefits 33,232 33,318
Other liabilities 9,227 9,311
-------- --------
Total liabilities 308,405 315,118
-------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 100,000,000 shares
authorized;
24,134,973 shares issued and outstanding 241 241
Additional paid-in-capital 166,378 166,378
Accumulated deficit (112,961) (112,915)
Unrealized gains and losses on securities (137) 581
-------- --------
53,521 54,285
Less net scheduled contribution to the ESOP (45,294) (48,168)
-------- --------
Total stockholder's equity 8,227 6,117
-------- --------
$316,632 $321,235
======== ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
December 31
1996 1995
-------- --------
<S> <C> <C>
Revenues $75,121 $67,603
Cost of operations:
Operating expenses 54,799 46,461
Depreciation and amortization 4,631 4,738
ESOP compensation expense 3,441 1,751
General and administrative 7,784 6,974
-------- -------
Total cost of operations 70,655 59,924
Operating income 4,466 7,779
Interest expense (6,255) (5,213)
Gain/(loss) on dispositions, net 10 (88)
Settlement of litigation - (3,648)
Other income/(expense) 1733 (139)
------- -------
Loss from operations before income
taxes and extraordinary item (46) (1,409)
Income tax expense - -
------- -------
Loss before extraordinary item (46) (1,409)
Extraordinary gain on early extinguishment
of long-term debt net of $0 income taxes - 31,379
------- -------
Net income (loss) $(46) $29,970
======= =======
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three months ended December 31, 1996
(in thousands)
(unaudited)
<CAPTION>
Unrealized Net
Additional gains and scheduled
Common Stock paid-in Accumulated losses on contribution
Shares Amount capital deficit securities to the ESOP Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1996 $24,135 $241 $166,378 ($112,915) $581 ($48,168) $6,117
Contributions to reduce
ESOP debt, net - - - - - 2,874 2,874
Net loss - - - (46) - - (46)
Net activity on available
for sale securities - - - - (718) - (718)
------- --------- --------- ---------- ---------- --------- ---------
Balances, December 31, 1996 $24,135 $241 $166,378 ($112,961) ($137) ($45,294) $8,227
======= ========= ========= ========== ========== ========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
December 31
1996 1995
-----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($46) $29,970
Extraordinary gain on early extinguishment of
long-term debt - (31,379)
--------- --------
Loss before extraordinary gain (46) (1,409)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,631 4,738
ESOP compensation expense 3,441 1,751
Senior notes interest and amortized financing costs (5,338) 2,548
Other (1,402) (195)
Changes in assets and liabilities, net of
effects of acquisitions and dispositions (4,238) (7,406)
--------- --------
Net cash provided by operating activities (2,952) 27
--------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (2,677) (4,981)
Payment for business acquired (2,556) -
Proceeds from dispositions 84 558
Withdrawals from trust accounts - 6,818
Withdrawals from restricted cash - 2,736
Proceeds from the sales of marketable securities 1,350 -
Other 30 (143)
--------- --------
Net cash (used in) provided by
investing activities (3,769) 4,988
--------- --------
Cash flows from financing activities:
Proceeds from senior debt - 170,172
Principal payments on long-term debt and capitalized
leases (393) (96,770)
Principal payments on subordinated debt - (73,061)
Proceeds from long-term debt and capitalized leases - 676
Deferred financing costs - (8,741)
--------- --------
Net cash (used in)provided by
financing activities (393) (7,724)
--------- --------
<PAGE>
Net decrease in cash (7,114) (2,709)
Cash, beginning balance 14,378 8,416
--------- --------
Cash, ending balance $7,264 $5,707
========= ========
Supplemental schedule of net cash paid for:
Interest $11,726 $938
========= ========
Income taxes - $1,941
========= ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements
(1) General
The interim consolidated financial statements presented herein
include Norcal Waste Systems, Inc. ("Norcal") and its
subsidiaries (collectively, Norcal and its subsidiaries are
referred to herein as 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, 1996. 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, the Company provides integrated
waste services to residential, commercial, municipal and
industrial customers in California. The Company's services
include refuse collection, recycling and other waste diversion,
transfer station and hauling operations, operation of
Company-owned landfills and third party landfill management
services (including engineering and construction management
services). The Company continues to be, with limited exceptions,
the sole provider of commercial and residential refuse
collection for the City and County of San Francisco.
(3) Business Acquisition
On November 18, 1996, the Company completed the acquisition of
substantially all of the assets of a solid waste business in
Butte County. Results of operations of this entity have been
included in the consolidated financial statements from the
acquisition date. The Company paid $2.6 million in cash and
issued a note with a face value of $2.0 million repayable over
20 years at 6.5% interest. The note has been discounted to $1.7
million to yield an imputed rate of 8.75%. The purchase price
was allocated to the assets acquired based on estimates of
their relative fair value. As a result, the financial
information included in the Company's consolidated financial
statements is subject to adjustment prospectively as subsequent
revisions to the fair value, if any, are determined.
<PAGE>
(4) Long-term Debt
<TABLE>
Long-term debt at December 31, 1996 and September 30, 1996 is summarized
as follows:
(in thousands)
<CAPTION>
December 31 September 30
----------- ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest
at 13.0% adjusting to 13.5% by November 16, 1997
if certain conditions are not met $170,460 $170,392
Note payable for business acquired due in monthly
installments through 2016, interest imputed at 8.75% 1,679 -
Notes payable to former shareholders, due in
monthly installments through 2017, interest
at 6% to 8.5% 836 850
Other Notes 1,365 1,498
----------- -----------
Total debt 174,340 172,740
Less current portion 322 354
----------- -----------
Long-term debt $174,018 $172,386
=========== ===========
</TABLE>
On November 21, 1995, the Company completed a private debt
offering of $175.0 million in Senior Notes (the "Senior Notes").
The Senior Notes mature in November 2005 with interest payable
semi-annually. The Senior Notes are redeemable at the option of
the Company, in whole or in part, at any time during or after
November 2000. Prior to this date, the Senior Notes may be
partially redeemed in the event of a public offering, or would
be required to be redeemed in the event of a change in control
of the Company. The Senior Notes are unsecured and will rank
pari passu in right of payment to all existing and future senior
indebtedness of the Company. The Notes are guaranteed, on a
senior unsecured basis, by the Company's wholly-owned
subsidiaries. The Indenture governing the Senior Notes contains
provisions which, among other things, (i) limit the Company's
and its subsidiaries' ability to declare or pay dividends or
other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal),
(ii) limit the purchase, redemption or retirement of capital
stock and (iii) limit the incurrence of additional debt. In
September 1996, the Company completed the exchange of all of its
outstanding privately-placed Senior Notes for Senior Notes with
identical terms and provisions, which exchange was registered
under the Securities Act of 1933. The interest rate on the
Senior Notes is currently 13.0% and will increase .25% per annum
on each of May 16, 1997 and November 16, 1997 to a maximum of
13.5%. The interest rate reverts to 12.5% if Norcal (in one or
more transactions) offers to purchase (whether or not any actual
purchases are made) or redeems an aggregate of $25.0 million in
principal amount of Senior Notes out of the proceeds of equity
sales.
<PAGE>
The Company received net proceeds of $170.2 million (after
original issue discount of $4.8 million). The Company used the
proceeds from the Senior Notes, proceeds from the liquidation of
an indemnification trust and cash balances to repay $94.0
million of long-term debt, $2.2 million of capital leases,
redeem subordinated notes for $73.1 million and settle
litigation of $3.6 million. The recorded value of the
subordinated notes was $102.9 million, accordingly the Company
recorded an extraordinary gain of $31.4 million in November
1995. Deferred financing costs at December 31, 1996 include
commissions and other costs related to the offering and new
Credit Agreement (see below) and are amortized over the life of
the Senior Notes and new Credit Agreement using the
straight-line method.
In conjunction with the private debt offering, the Company
entered into a new Credit Agreement (the "Credit Agreement")
with a group of lenders and the First National Bank of Boston as
Agent. The agreement, as amended in November 1996; provides for
a revolving credit facility in an amount of up to $100.0 million
(depending upon certain financial ratios), up to $25.0 million
of which may be used for letters of credit. At December 31, 1996
the Company had utilized $6.8 million of its credit facility for
letters of credit and had availability under the agreement
(based on limitations imposed by certain financial ratios) of
$28.5 million along with $18.2 million which may be utilized for
additional letters of credit.
(5) Guarantee of Securities
Norcal is a holding company and has no independent operations other than
those relating to its subsidiaries. The Senior Notes are guaranteed by all
wholly owned subsidiaries of Norcal. The guarantees of the guarantors are
full, unconditional and joint and several. Separate financial statements
of each guarantor have not been presented since management has determined
such separate financial statements are not material to investors.
<PAGE>
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion pertains to the Company's operations
for the three months ended December 31, 1996 and 1995 and should
be read in conjunction with the Company's September 30, 1996
audited consolidated financial statements contained in the
Company's Form 10-K for the fiscal year ended September 30,
1996, and the unaudited consolidated financial statements and
related notes thereto included elsewhere herein. On November 21,
1995, the Company issued 12.5% Series A Senior Notes in an
aggregate principal amount of $175.0 million, for which it
received proceeds, after original issue discount, of
approximately $170.2 million (the "Offering") The Company used
the proceeds from the Offering (less certain associated
expenses), together with certain cash balances, to retire
approximately $199.1 million of its then outstanding
indebtedness and certain of the ESOP's indebtedness to third
parties. Concurrent with the Offering, the Company entered into
a new bank credit agreement providing for a revolving credit
facility with a maximum availability of $100.0 million, of which
up to $25.0 million may be used for letters of credit.
Forward Looking Statements. Those statements followed by an
asterisk (*) are forward looking statements. Any such statements
should be considered in light of various risks and uncertainties
that could cause results to differ materially from expectations,
estimates or forecasts expressed. These risks and uncertainties
include, but are not limited to: changes in general economic
conditions, inability to maintain rates sufficient to cover
costs (particularly with respect to the Company's current rate
application in San Francisco), inability to obtain timely rate
increases, fluctuations in commodities prices, changes in the
amount of ESOP compensation expense recorded by the Company,
changes in environmental regulations or related laws and
competition. The Company does not undertake to update any
forward-looking statement that may be made from time to time by
it or on its behalf.
<PAGE>
Introduction
Norcal Waste Systems, Inc. ("Norcal") and its subsidiaries
(collectively referred to herein as the "Company") provide solid
waste management services throughout California, including
collection, transfer, disposal, landfill management, recycling
and other waste services. The Company owns 5 landfills and
operates an additional 23 for local government entities. The
Company currently serves an estimated 440,000 customers.
The Company's revenues are comprised primarily of fees charged
to residential, commercial, municipal and industrial customers
for the collection and disposal of solid waste, disposal fees
(known as "tipping fees") charged to third party waste
collectors who dispose of solid waste at the Company's transfer
stations and landfills, fees charged for landfill operations and
solid waste systems management activities for third party
landfill owners and revenues generated from the sale of
recyclable materials.
Operating expenses include labor, disposal fees paid to third
parties, fuel, equipment maintenance and rental, engineering,
consulting and other professional services and other direct
costs of operating collection, recycling, transfer station,
hauling and landfill operations. Also included are accruals for
future landfill closure, post-closure and corrective action
costs, consistent with regulatory requirements. General and
administrative expenses include management salaries,
administrative and clerical overhead costs, professional
services costs and other fees and expenses. ESOP compensation
expense reflects in part contributions made by the Company to
the ESOP based on the shares to be released. ESOP compensation
expense also includes amounts contributed by the Company to the
ESOP to fund distributions to retired, terminated or withdrawing
participants.
Results of Operations
The following table presents, for the periods indicated, the
period to period change in dollars and percentages, along with
the percentage relationship to total consolidated revenue:
<PAGE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
Operating Comparison
(in thousands)
<CAPTION>
Relationship to
Total Revenues Period to Period
Three Months Ended Change
December 31, December 31, 1996
1996 1995 $ %
----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 76.0% 83.7% $535 0.8%
Third party landfill management
services 19.2% 9.9% 7,730 11.4%
Recycled commodities sales 4.8% 6.4% (747) -1.1%
------- ------ ------ -------
Total revenues 100.0% 100.0% 7,518 11.1%
Cost of operations:
Operating expenses 72.9% 68.7% 8,338 17.9%
Depreciation and amortization 6.2% 7.0% (107) -2.3%
ESOP compensation expense 4.6% 2.6% 1,690 96.5%
General and administrative 10.4% 10.3% 810 11.6%
------- ------ ------ -------
Total cost of operations 94.1% 88.6% 10,731 17.9%
------- ------ ------ -------
Operating income 5.9% 11.4% (3,213) -41.8%
Interest expense -8.3% -7.7% (1,042) -20.0%
Gain (loss) on dispositions, net 0.0% -0.1% 98 111.4%
Settlement of litigation 0.0% -5.4% 3,648 100.0%
Other income (expense) 2.3% -0.3% 1,872 1,346.8%
------- ------ ------ --------
Loss from operations
before income taxes and
extraordinary item -0.1% -2.1% 1,363 96.7%
Income tax expense 0.0% 0.0% - -
------- ------ ------ -------
Loss before
extraordinary item -0.1% -2.1% 1,363 96.7%
------- ------ ------ -------
Extraordinary gain on early
extinguishment of long-term
debt net of $0 income taxes 0.0% 46.4% (31,379) -100.0%
------- ------ ------- -------
Net income (loss) -0.1% 44.3% (30,016) -100.2%
======= ====== ======= =======
</TABLE>
<PAGE>
Three months ended December 31, 1996 and 1995
Revenues. Revenues for the three months ended December 31, 1996
increased $7.5 million (11.1%) to $75.1 million from $67.6
million for the three months ended December 31, 1995. The
increase in revenues was primarily due to higher third-party
landfill management services revenues and waste collection and
disposal revenues partially offset by lower recycled commodities
sales revenues. Third-party landfill management services
revenues were higher due to expanded landfill operations and
solid waste management activities in San Bernardino County.
Waste collection revenues were higher primarily due to
operations acquired in mid-November, a new municipal recycling
contract and rate increases. Recycling revenues were down,
primarily due to lower paper and aluminum commodity prices and
the elimination of a recycling program in one franchise area.
Operating expenses. Operating expenses for the three months
ended December 31, 1996 increased $8.3 million (17.9%) to $54.8
million from $46.5 million for the three months ended December
31, 1995. As a percentage of revenues, operating expenses
increased to 72.9% for the three months ended December 31, 1996
from 68.7% for the three months ended December 31, 1995. The
increased costs were primarily due to a ramp up of project and
subcontractor related costs associated with the contract for
expanded third-party landfill management services in San
Bernardino County, including increased costs for new personnel
and management infrastructure. In addition payroll and related
costs, disposal costs and fuel costs were higher. These costs
increased largely due to general price increases and
inflationary pressure. These increased operating costs were
partially offset by lower recycling purchases due to lower
pricing for recyclable commodities.
ESOP compensation expense. ESOP compensation expense is
primarily based on the shares allocated as a result of the
Company's contribution to the ESOP, along with contributions to
fund distributions to retired, terminated and withdrawing
participants. ESOP compensation expense increased $1.7 million
for the three month period ended December 31, 1996, as compared
to the same period in 1995. ESOP compensation expense for the
period ended December 31, 1996 included $1.5 million resulting
from an anticipated contribution to be made to the ESOP that
would allow the ESOP to prepay a portion of its loans to the
Company and which would generate income tax benefits for the
Company. Similar future contributions may be subject to
limitations based on certain financial ratios as contained
within the Credit Agreement.* No such accrual was made for the
three months ended December 31, 1995 as the Company made a
prepaid contribution to the ESOP and recorded a corresponding
expense for the entire fiscal year in September 1996.
<PAGE>
General and administrative. General and administrative expenses
for the three months ended December 31, 1996 increased $0.8
million (11.6%) to $7.8 million from $7.0 million for the three
months ended December 31, 1995. As a percentage of revenues,
general and administrative expenses increased to 10.4% for the
three months ended December 31, 1996 from 10.3% for the three
months ended December 31, 1995. The increased costs were due to
higher payroll and related costs and other expenses. The
increase in payroll and related costs resulted from general wage
increases and additional management personnel. Other
administrative costs increased as a result of the expanded third
party landfill management services activities in San Bernardino
County.
Operating income. Operating income decreased $3.2 million
(41.8%) to $4.5 million for the three months ended December 31,
1996 from $7.7 million for the three months ended December 31,
1995. As a percentage of revenues, operating income decreased to
5.9% for the three months ended December 31, 1996 from 11.4% for
the three months ended December 31, 1995. The primary causes of
the decrease in operating income for the three months ended
December 31, 1996 were the higher operating and general and
administrative expenses, along with the higher ESOP compensation
expense as discussed above.
Interest expense. Interest expense increased by $1.1 million
(20.0%) to $6.3 million for the three months ended December 31,
1996 from $5.2 million for the three months ended December 31,
1995. The increase is due to the interest associated with the
Senior Notes issued in November 1995, along with a higher
effective interest rate on the Senior Notes in the current
period.
Settlement of litigation. Settlement of litigation for the
three months ended December 31, 1995 reflects the payment of
$3.6 million made to the holders of certain notes as issued by
the ESOP as part of the ESOP noteholder litigation settlement
agreement.
Other income (expense). Other income increased by $1.9 million
for the three months ended December 31, 1996 from an expense of
$0.1 million for the three months ended December 31, 1995. The
increase in other income was due to gains from the sale of
marketable securities and higher interest earned on cash and
trust fund balances during the quarter ended December 31, 1996.
Loss from operations before income taxes and extraordinary
item. The Company recorded a loss of $46,000 for the three
months ended December 31, 1996 compared to a loss of $1.4
million for the three months ended December 31, 1995. The loss
in 1995 was primarily due to the settlement of litigation. The
loss for the current period was due to lower operating income as
described above partially offset by higher other income.
Extraordinary gain. The Company recorded an extraordinary gain
of $31.4 million for the three months ended December 31, 1995 as
a result of the early extinguishment of subordinated notes
pursuant to the refinancing transaction.
Net income (loss). The Company recorded a small net loss for
the three months ended December 31, 1996 compared to net income
of $30.0 million for the three months ended December 31, 1995.
The net loss for the current period reflected a reduction of
operating income resulting from increased expenses and an
increase in interest expense offset by an increase in other
income. The reduction in operating income included the impact of
the ESOP compensation expense as discussed above. The net income
for the three months ended December 31, 1995 is primarily
attributable to the extraordinary gain.
Liquidity and Capital Resources
The Company's cash requirements consist principally of working
capital requirements, interest on outstanding indebtedness,
capital expenditures and deposits to trust funds to satisfy
certain environmental statutes and regulations. The Company had
working capital of $5.5 million at December 31, 1996 compared to
$4.9 million at September 30, 1996.
In addition to the improvements in working capital, as part of
the refinancing transaction the Company entered into a Credit
Agreement that provides for up to $100.0 million of additional
borrowings which, subject to certain limitations and covenant
restrictions (including financial ratios), can be drawn by the
Company to fund ongoing operations, invest in capital equipment
and/or facilities and to finance acquisitions. At December 31,
1996 the Company had utilized $6.8 million of its credit
facility for letters of credit and had availability under the
agreement (based on limitations imposed by certain financial
ratios) of $28.5 million along with $18.2 million which may be
utilized for additional letters of credit. The Company amended
the Credit Agreement in November 1996 primarily to provide
additional flexibility under the financial covenants contained
therein and increase the Company's ability to incur additional
debt (including indebtedness incurred in connection with
acquisitions). Changes in availability under the Credit
Agreement are a function of, among other things, changes in
operating results.
In September 1996, the Company applied for an increase to its
collection and disposal rates in the City of San Francisco. In
accordance with the rate procedures dictated by the Ordinance,
the Director of Public Works (the "Director") held hearings and
filed two recommended rate orders (the "Recommended Rate
Orders") in December 1996 which provide for a 9.5% increase,
which was lower than requested, primarily due to the
disallowance of ESOP expense which historically was allowed in
the rates. The Company has appealed the Recommended Rate Orders
and is currently awaiting the ruling from the Refuse Collection
and Disposal Rate Board (the "Rate Board".) The Company expects
that by the end of fiscal year 1997 potential availability under
the Credit Agreement will be reduced by up to $12.0 million if
the Recommended Rate Orders are put into effect without
modification by the Rate Board.* Other third parties have also
appealed the Recommended Rate Orders and have requested
additional reductions in the amount of increase contained
therein. If such appeals are successful, the level of rate
increase granted to the Company would be further reduced from
the amount included in the Recommended Rate Orders, thereby
increasing the unfavorable impacts on the Company's liquidity
from those described above.* The Company's operating results
could also be adversely affected if the Company's appeal is
unsuccessful and/or the third party appeals are successful.*
The Indenture governing the Senior Notes contains provisions
which, among other things, (i) limit the Company's and its
subsidiaries' ability to declare or pay dividends or other
distributions (other than dividends or distributions payable to
Norcal or any wholly owned subsidiary of Norcal or, in certain
cases, the ESOP), (ii) limit the purchase, redemption or
retirement of capital stock and (iii) limit the incurrence of
certain additional debt. At December 31, 1996, the Company was
restricted from incurring additional debt based on covenants in
the Indenture (other than additional debt is available under the
Credit Agreement or otherwise permitted under the Indenture).
Cash Flow from Operating Activities. Cash used in operating
activities was $3.0 million for the three months ended December
31, 1996 compared to cash provided of $27,000 for the same
period last year. The decrease was due to the semi-annual
payment of accrued interest on the Senior Notes of $11.4 million
on November 15, 1996, partially offset by lower income tax
payments, a lower operating loss and a smaller increase in
prepaid expenses. Cash flow from operations may be distorted by
significant interest payments which are only made semi-annually
during the first and third quarters, thereby reducing cash flow
in those periods. The Company may need to borrow on its line of
credit depending upon actual expenditures for capital
improvements in any particular quarter in order to supplement
cash flow to effect such payments.* The Company expects future
cash flow generated from operating activities and available
financing will be adequate to support ongoing activities of the
Company for at least the next 18 months.*
Cash Flow from Investing Activities. Cash used in investing
activities was $3.8 million for the three months ended December
31, 1996 compared to cash provided of $5.0 million for the same
period last year. During the current period, the Company
utilized $2.6 million to purchase substantially all of the
assets of a solid waste collection company in Butte County in
November, used $2.7 million for capital expenditures, and
generated $1.3 million from the sale of marketable securities.
For the comparable period last year, the Company generated $6.8
million from the liquidation of trust funds that were released
upon termination of an indemnification trust by current and
former directors of the Company. In addition, $2.7 million was
received from restricted cash accounts which were released upon
completion of the Refinancing Transaction and applied to the
then outstanding debt balance. The Company also generated $0.6
million from the sale of miscellaneous assets and used $5.0
million for capital expenditures.
Cash Flow from Financing Activities. During the three months
ended December 31, 1996, the Company used $0.4 million to make
scheduled note and capital lease payments compared to a use of
cash of $7.7 million for the comparable period last year. In
1995 the Company completed the Refinancing Transaction which
resulted in $8.4 million of cash used in financing activities.
In addition, the Company issued notes of $0.7 million associated
with the purchase of real estate.
Certain Other Cash Requirements. The Company is in discussions
with the City of San Francisco regarding plans for the
construction of materials recovery and other facilities for use
in connection with the Company's San Francisco operations and to
facilitate compliance with mandated recycling requirements. If
the Company and the City reach agreement on the scope of the
project, the Company believes construction of the facilities
could begin in 12 to 18 months from that time.* Over the term of
the Senior Notes, the Company estimates it will need to invest
substantial capital to acquire waste processing facilities and
household hazardous waste facilities, maintenance and
administrative complexes and equipment.* These projects,
including the San Francisco facilities, will require substantial
capital investments. The Company intends to seek continued rate
recovery for amounts expended on these projects and may seek to
finance such costs through additional secured borrowings,
including $30.0 million of borrowing for certain "Designated
Capital Expenditures" (as defined in the Indenture).*
The Company expects it may expend up to $1.7 million over the
next 12 to 18 months to upgrade and enhance the Company's
information systems.
Environmental Regulations
The Company's business activities are subject to extensive and
evolving regulation under complex federal, state and local laws
for the protection of public health and the environment. These
laws, and the numerous regulatory bodies responsible for
interpreting and enforcing them, impose significant restrictions
and requirements on the Company and also impact the
municipalities the Company serves and operators of non-owned
landfills used by the Company. The Company believes that this
regulation will continue in the future.*
Various federal and state regulations require owners or
operators of solid waste landfill sites to provide financial
assurances for the closure and post-closure monitoring and
maintenance of these sites. The Company uses independent
engineers to assist it in assessing the estimates of future
costs of complying with such regulations. A significant portion
of the landfill closure and post-closure liability relates to
the leachate and groundwater management and remediation. There
are many unknowns and uncertainties which may affect the
accuracy of the Company's estimates, including potential changes
to and interpretations of 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.
Inflation and Prevailing Economic Conditions
Historically, the Company has experienced cost increases due to
the effects of inflation on its operating expenses, particularly
the cost of compensation and benefits, and the replacement of or
additions to property and equipment. Fuel costs which fluctuate
with inflation and other market conditions also have affected
operating results. Most of the Company's operations are subject
to rate setting processes which allow for the recovery of
certain costs including labor and fuel. However, inflationary
increases in operating costs may cause the Company to incur
lower operating margins, at least until such time as new rates
can be implemented. Rate adjustments, if approved, can take
several months.*
The Company is currently negotiating union contracts, which
expired on December 31, 1996, covering approximately 700 of its
employees. While historically the Company has continued to
operate after the expiration of union contracts without any
impact on operations, there can be no assurance that the Company
will be able to renew the contracts on substantially the same
terms or that the expiration of these contracts will not have a
material impact on operations.*
Due to the Company's concentration in California, cyclical
economic conditions in California will have an impact on the
Company's results.* The Company is unable to determine the
significance a California economic downturn would have on its
operations.
Seasonality
The Company's revenues tend to be higher during spring and
summer (third and fourth fiscal quarters) than fall and winter
when lower volumes of certain types of waste, such as yard
clippings and construction and demolition debris are generated.
This typically results in decreased volume at the Company's
transfer stations, waste collection, and landfill operations
during these months.*
Accounting Matters
In October 1995, Statement of Financial Accounting Standard No.
123 "Accounting for Stock Based Compensation" (SFAS No. 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
concluded it will continue to utilize the method of accounting
prescribed by APB 25 and adopt only the disclosure requirements
of SFAS No. 123 by providing pro forma disclosure of net income.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Litigation Regarding the ESOP Notes.
On December 17, 1996, the court dismissed all claims in Bank
of America's counterclaim (denominated "Cross-Complaint")
against Norcal and the ESOP, entitled Security Pacific National
Bank, et. al. v. Norcal Waste Systems, Inc., et. al., which
alleged claims relating to the settlement between the former
holders of the ESOP Notes and Norcal and the ESOP (the
"Settlement"), and claims relating to the indemnity provisions
of certain agreements between Bank of America or Security
Pacific, on the one hand, and Norcal or the ESOP, on the other
hand (the "Indemnity Agreements"). The court dismissed all
claims with prejudice, except that the claim against the ESOP
for tortious breach of the implied covenant of good faith and
fair dealing was dismissed with prejudice insofar as it
attempted to state a tort claim and was otherwise dismissed
without prejudice. On that same date, the court granted summary
judgment to Norcal and the ESOP on their Complaint in
Intervention against Bank of America and issued a declaration
that Norcal and the ESOP have no obligation under the Indemnity
Agreements to indemnify the Bank or reimburse the Bank's costs
or litigation expenses following the settlement.
On January 7, 1997, the Bank filed an Amended Cross-Complaint
alleging a claim for breach of express indemnity and claims for
declaratory judgments that Norcal and the ESOP have
post-settlement indemnity obligations to the Bank under two
indemnity agreements, one of which was included in the original
Cross-Complaint. On January 17, 1997, Norcal and the ESOP filed
a motion to dismiss the Amended Cross-Complaint for failure to
state a claim upon which relief can be granted and for failure
to comply with the court's dismissal order. On January 22, 1997,
the Bank filed a notice stating that it thereby voluntarily
dismissed the Amended Cross-Complaint without prejudice.
<PAGE>
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting held on December 13, 1996, of the
Administrative Committee of the ESOP, the ESOP, as the sole
shareholder of the Company, approved (i) the 1996 Employee Stock
Incentive Plan and (ii) the 1996 Executive Stock Incentive Plan,
as amended. There were 24,134,973 shares of common stock
available to be voted at the meeting, all of which voted in
favor of the foregoing actions of the ESOP.
Item 5. Other Information
None
Item 6. Exhibits and Certain Reports
(a) Exhibits: 27.00 Financial Data Schedule
(EDGAR version only)
(b) Reports on Form 8-K: None
Date: February 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED FINANCIAL STATEMENTS OF NORCAL WASTE SYSTEMS, INC., FOR THE
THREE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
(IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,264
<SECURITIES> 5,552
<RECEIVABLES> 41,432
<ALLOWANCES> 1,771
<INVENTORY> 2,520
<CURRENT-ASSETS> 63,475
<PP&E> 224,891
<DEPRECIATION> 88,377
<TOTAL-ASSETS> 316,632
<CURRENT-LIABILITIES> 57,946
<BONDS> 176,833
0
0
<COMMON> 241
<OTHER-SE> 7,986
<TOTAL-LIABILITY-AND-EQUITY> 316,632
<SALES> 0
<TOTAL-REVENUES> 75,121
<CGS> 0
<TOTAL-COSTS> 70,374
<OTHER-EXPENSES> (1,743)
<LOSS-PROVISION> 281
<INTEREST-EXPENSE> 6,255
<INCOME-PRETAX> (46)
<INCOME-TAX> 0
<INCOME-CONTINUING> (46)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
