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THIS ANNUAL 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
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 33-80777
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NORCAL WASTE SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2922974
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
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FIVE THOMAS MELLON CIRCLE, SAN FRANCISCO, CA 94134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 330-1000
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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 December 15, 1997, there
were 24,134,973 shares of $.01 par value Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING INFORMATION
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described below in "Risk Factors" and elsewhere in this Form 10-K
include, but are not limited to: changes in general economic conditions,
inability to maintain rates sufficient to cover costs, inability to obtain
timely rate increases, fluctuations in commodities prices, changes in
environmental regulations or related laws, inability to settle union labor
contract disputes and competition. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on its
behalf.
HISTORY AND CERTAIN RECENT DEVELOPMENTS
Norcal Waste Systems, Inc. ("Norcal" or the "Company"), a California
corporation, is a vertically integrated waste management company. Norcal
provides services to approximately 400,000 residential and 50,000 commercial and
industrial customers (as of September 30, 1997) throughout the State of
California through 26 operating subsidiaries. The Company's principal activities
include refuse collection, recycling and other waste diversion, transfer station
and hauling operations, and management of both Company-owned and third
party-owned landfills.
The Company traces its roots to the 1920s and, pursuant to a City of San
Francisco Ordinance enacted in 1932 (the "Ordinance"), has provided
substantially all of the residential and commercial refuse collection in San
Francisco since that time. The Company currently provides waste management
services to 38 cities and counties throughout California. The Company operates
22 landfills in California, four of which it owns, and owns and operates six
transfer stations and three materials recovery facilities ("MRFs"). Norcal is
currently 100% owned by an employee stock ownership plan (the "ESOP").
In 1987, the Company's two predecessors merged to form the Company.
Beginning in late 1990, the Company experienced severe constraints on its
liquidity, due in large part to a severe recession in California, regulatory
changes that required pre-funding for landfill closure and post-closure
obligations, significant indebtedness outstanding after the merger, and
additional indebtedness incurred to finance certain acquisitions and to fund
capital expenditures, including those in connection with mandated increased
recycling. In early 1991, the Company was unable to pay required amounts on
certain of its outstanding indebtedness and did not make contributions to the
ESOP to enable the ESOP to service its indebtedness. As a result, the Company
and the ESOP defaulted on substantially all of their outstanding debt.
In December 1994, Norcal effected a settlement with the holders of certain
subordinated notes (the "Old Subordinated Notes") issued by one of the Company's
predecessors in 1987 to former shareholders. Pursuant to the settlement, Norcal
paid approximately $5.5 million in cash to settle certain claims, and issued
$51.0 million aggregate principal amount of new subordinated notes (the "Class A
and B Notes") in exchange for all of the Old Subordinated Notes which, together
with accrued interest, aggregated $59.5 million. Norcal subsequently redeemed
the Class A and B Notes for approximately $39.3 million with a portion of the
proceeds from the Refinancing (as defined herein). In August 1995, Norcal and
the ESOP reached a settlement with certain holders of other subordinated notes
(the "ESOP Notes") issued by the ESOP in 1986 to former shareholders of the
Company's other predecessor. As of November 21, 1995, the outstanding aggregate
balance of the ESOP Notes was $53.5 million, including accrued but unpaid
interest. Norcal utilized approximately $37.8 million of proceeds from the
Refinancing to effect the settlement and provide for the retirement of the ESOP
Notes.
On November 21, 1995, Norcal issued 12 1/2% Series A Senior Notes ("Series
A Senior Notes") in an aggregate principal amount of $175.0 million, for which
it received proceeds, after original issue discount, of approximately $170.2
million (the "Offering"). The Company used the proceeds from the Offering (less
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.
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Concurrent with the Offering, the Company entered into a new bank credit
agreement providing for a revolving credit facility with maximum availability of
$100.0 million, of which up to $25.0 million may be utilized for letters of
credit (such credit agreement, as amended, is hereafter referred to as the
"Credit Agreement"). The financing provided by the Offering and the Credit
Agreement together with the transactions effected through the application of the
initial proceeds thereof, are collectively referred to herein as the
"Refinancing." The Credit Agreement was amended in November 1996 primarily to
provide additional flexibility under the financial covenants contained therein
and increase the Company's ability to incur certain types of additional debt
(including indebtedness incurred in connection with acquisitions). As of
September 30, 1997, the Company had utilized $6.8 million for letters of credit
and had availability under the Credit Agreement of approximately $75.0 million,
with an additional $18.2 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things. In addition, certain covenant measures in the
Credit Agreement become more restrictive over time. As a result, if the
Company's results of operations in fiscal year 1998 are consistent with fiscal
year 1997, availability under the Credit Agreement would decrease by
approximately $30.0 million.
In September 1996, the Company exchanged all of the outstanding Series A
Senior Notes for an identical principal amount of 12 1/2% Series B Senior Notes
(the "Senior Notes") registered under the Securities Act of 1933.
At September 30, 1997, the Company operated 12 landfills, three transfer
stations and six community collection centers in San Bernardino County. During
fiscal year 1997, with the concurrence of San Bernardino County's Waste System
Division, the Company closed five of the County's landfills, thereby
concentrating the allocation of the County's waste stream among the 12 remaining
landfills.
The Company employs approximately 1,300 employees under union contracts. Of
this total, approximately 20% are covered under contracts that have expired or
will expire by December 31, 1997. The Company is currently in the process of
negotiation with representatives of the various unions. The Company completed
the acquisition of the assets of a company in Butte County for approximately
$4.5 million in November 1996. This was the Company's first acquisition since
the completion of the Refinancing. In addition, the Company completed the
acquisition of the assets of two small medical waste companies during 1997.
COLLECTION OPERATIONS
The Company provides refuse collection services to residential, commercial
and industrial customers in California. Residential customers accounted for
approximately 43% of the Company's refuse collection revenues in fiscal year
1997, and commercial and industrial customers accounted for the remaining 57%.
Services to residential customers are typically provided pursuant to
municipal contracts or franchises that obligate the Company to collect from all
residences in a specified area. At inception, these contracts typically extend
for 5 to 20 years. As of September 30, 1997, the Company had 36 franchise
agreements with municipalities and served many additional customers through
operating contracts.
Commercial services are typically provided under contracts ranging from 1
to 3 years while contracts for the larger "roll-off" container services may
provide for either temporary or longer-term services. Fees are negotiated with
each customer and are determined by such factors as frequency of collection,
type and size of equipment furnished, and the type and volume or weight of the
waste collected.
San Francisco Operations. Since 1932, the Company has provided solid waste
collection and recycling in San Francisco pursuant to the Ordinance, which
provides that, with limited exceptions, only a collector that has been granted a
permit for a specified route may collect or transport solid waste on that route.
The Company's principal operating subsidiaries have held the only permits for
substantially all the routes subject to the Ordinance since 1932, which routes
serve virtually all of San Francisco. San Francisco operations represent the
single largest portion of the Company's business, accounting for approximately
171,000 of its customers and approximately 39% of its total revenues for fiscal
year 1997. The Ordinance permits refuse with "commercial value" (as defined in
the Ordinance and interpreted by the courts) to be collected without a permit.
In addition, debris boxes at construction sites do not require a permit under
the Ordinance. The
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Company competes for the placement of boxes at construction sites and the
collection of refuse with commercial value.
The Company's San Francisco permits continue until terminated under the
provisions of the Ordinance. Termination, or the award of permits to a
competitor, could occur if, among other things, the Company were to provide
inadequate service. None of the Company's permits has been terminated since
their initial grant in 1932. A vote to repeal or amend the Ordinance could also
adversely affect the status of the Company's permits. The Company defeated two
initiatives placed on the San Francisco ballot in 1993 and 1994 that, if
enacted, would have repealed or amended the Ordinance and opened residential and
commercial refuse collection to competition. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Ballot Initiatives Affecting
Ordinance."
If a similar initiative passes in the future, the Company believes that
although a portion of the Company's operations may be immediately affected,
California statutory law would not allow the Company to be completely displaced
by another exclusive waste collection provider for five years unless a buy-out
arrangement were reached between the Company and San Francisco on mutually
satisfactory terms or the permits were terminated pursuant to the existing
provisions of the Ordinance. Furthermore, the Company believes it would be
difficult to create an alternative to its transfer station anywhere in or around
San Francisco because of community resistance, permitting requirements and the
requirements of the California Environmental Quality Act. See "Risk
Factors -- Changes in Legislation and Political Uncertainty -- Potential Flow
Control Legislation."
The Company currently deposits solid waste collected in San Francisco at an
independently owned landfill at favorable rates. These rates are set by an
agreement between San Francisco, the Company and the third party owner of the
landfill, and are subject to annual increases for inflation and regulatory
costs. This agreement is one of several agreements to which the Company is a
party (the "Waste Disposal Agreements") relating to certain operations in San
Francisco that clarify the relationships among the City and County of San
Francisco, the Company and the third-party owner of the landfill at which all
non-hazardous solid waste collected in San Francisco is deposited. The Waste
Disposal Agreements continue until the earlier of the year 2053 or the deposit
of 15 million tons of waste in the landfill. Although estimates are uncertain,
the Company believes, based on historical disposal volumes, the Waste Disposal
Agreements will remain in force until at least 2011.*
Franchise and Other Agreements. Outside of San Francisco, the Company
provides most collection services pursuant to franchise and other agreements
with local governmental entities that obligate the Company to collect from all
residences and, often, commercial establishments within a specified area. Such
agreements typically grant near-exclusivity, although some expressly allow
limited activities by others, such as residential self-hauling and recycling by
charitable or non-profit organizations. Certain agreements allow competition for
specified categories of commercial waste such as construction debris. A local
governmental entity may enter into multiple franchise or other agreements with
different collection companies, each covering a distinct territory within its
jurisdiction. The Company has multiple agreements with certain governmental
entities, in some cases representing the entity's entire jurisdiction and in
other cases representing only part of that entity's jurisdiction. The Company's
collection agreements typically contain general indemnifications by the
applicable operating subsidiary of the Company, as well as, in some cases,
indemnification obligations with respect to costs and damages arising from
hazardous waste.
At inception, the Company's franchise and other agreements relating to its
collection operations typically have terms of between five and 20 years.
Although the Company's franchise and other agreements generally provide for
termination under specified circumstances, such as failure to provide adequate
and continuous service, failure to comply with applicable laws, or insolvency or
bankruptcy, the Company has never had an agreement terminated for such causes.
For fiscal year 1997, approximately 71% of the Company's collection revenues,
excluding San Francisco operations, were generated under franchise and other
agreements with remaining terms of five years or more. In the past ten years,
the Company has been successful in renewing or extending substantially all of
its franchise and other agreements. In light of increasing competitive pressure
in the waste industry, and the risks of competitive bidding, there can be no
assurance that the Company will be able to renew existing franchise and other
agreements, or that such franchise and other agreements will yield levels of
profit consistent with past levels.* See "Risk Factors."
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Changes in state or local laws could also terminate the exclusivity of
these agreements or otherwise subject the Company to greater competition in its
collection activities. Under California law, counties may be required to conduct
competitive bidding upon the expiration of collection franchise agreements,
although under certain conditions counties may extend existing franchise
agreements for one additional term (not to exceed 25 years) without such
bidding. The majority of the Company's franchise agreements are with
municipalities other than counties and are unaffected by this law. However, any
laws enacted in the future requiring competitive bidding could have a material
adverse effect on the Company's financial condition or results of operations.*
In addition, a California Court of Appeal ruled in 1994 that state facilities
such as state universities and other schools, correctional facilities, office
buildings and parks are free to conduct competitive bidding despite exclusive
franchises granted under local ordinances. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Potential Competitive Bidding."
Rates. Refuse collection customers pay a single rate that is designed to
cover not only collection services, but all the services the Company performs as
to the materials it collects, including transfer, landfill disposal and
recycling. In most jurisdictions, rate boards, city councils or other local
governmental agencies are authorized to set the rates the Company may charge at
a level that allows the Company to recover projected specified costs and realize
a profit margin. Such specified costs generally include all direct operating
costs, such as direct collection costs (such as personnel and equipment); any
applicable recycling costs; operating costs or tipping fees for transfer
stations, landfills and other facilities; interest charged on leases;
depreciation; trust fund obligations associated with closure and maintenance of
landfills; and other costs. In San Francisco the Ordinance prescribes an
involved rate-setting procedure under which a rate board determines rates for
residential customers.
The Company generally applies for rate increases every one to three years
in each of its franchise areas to reflect changes in its costs of providing
services. Although rate increases have generally been satisfactory, at times the
Company has not succeeded in fully coordinating the timing and amount of rate
increases with increases in its expenses or capital expenditures or has not
succeeded in obtaining rate increases to cover increased costs, including ESOP
and other corporate-related 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" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Outside of San Francisco, commercial and industrial fees are generally
regulated by local governments and vary from customer to customer depending on
such factors as frequency of collection, volume or weight of waste, type of
equipment furnished by the Company, and distance from the customer site to the
Company's disposal facility. Although rates for commercial and industrial
customers in San Francisco are subject to negotiation and are not directly
regulated, historically the Company's practice has been to raise these rates
consistent with percentage increases in residential rates.
Recycling and Waste Diversion. The Company provides a variety of recycling
services, including materials recovery services and other waste diversion
services (collectively, "recycling services"), under arrangements with various
local governments and directly with commercial customers. At times a substantial
portion of the Company's recycling revenues have been derived from the sale of
various grades of recycled paper and paper products. Prices of recyclable
commodities are volatile and cause fluctuations in the Company's recycling
revenues. In addition, the costs associated with mandated recycling efforts and
the resulting increase in supply of, and reduction in sales prices for,
recyclable materials place pressure on the Company's operating margins in its
recycling operations. See "Risk Factors -- Fluctuations in Prices for Recyclable
Commodities."
Transfer Stations. The Company owns and operates six transfer stations.
Transfer station ownership allows the Company to exercise greater control over
the waste stream from its collection operations and promotes greater efficiency
in its recycling and waste transportation activities. As of September 30, 1997,
over 80% of the waste delivered to these facilities came from the Company's
collection operations. The City and
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County of San Francisco requires that all refuse collected in San Francisco by
refuse collectors be deposited at a transfer station owned by the Company.
LANDFILLS
The Company operates 22 landfills in California, four of which it owns, 14
of which are owned by local governmental entities and four of which are owned by
a private entity. Each of these landfills generally accepts only non-hazardous
waste, with the exception of certain wastes that may be hazardous due to
asbestos content.
Owners or operators of landfills face substantial liabilities, including
environmental impairment liabilities, closure and post-closure maintenance
obligations and corrective action obligations. With respect to all but one of
the third party landfills currently managed by the Company, the Company is a
contractor and is not the operator under the applicable permits. In those
circumstances, the Company is not responsible for closure and post-closure
maintenance obligation payments. In addition, in San Bernardino County, the
County has agreed to indemnify the Company for certain other liabilities.
Owned Landfills. The following table sets forth certain information about
the four active landfills owned by the Company:
<TABLE>
<CAPTION>
YEAR LANDFILL BEGAN APPROXIMATE PERMITTED
LANDFILL LOCATION OPERATIONS LANDFILL ACREAGE(A)
----------------------- ----------------------- ------------------- ---------------------
<S> <C> <C> <C>
B & J.................. Vacaville, CA 1964 260
Cummings Road(b)....... Eureka, CA 1969 30
Ostrom Road............ Yuba County, CA 1995 220
Pacheco Pass(c)........ Santa Clara County, CA 1963 60
</TABLE>
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(a) Includes all permitted landfill acres. Total landfill area is approximately
2,400 acres, including contiguous acres. Not all contiguous acres are
permittable.
(b) The Company has entered into an agreement that may result in the closure of
this landfill and the diversion of waste currently deposited there as soon
as October 1, 1998.
(c) 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.
The Company owns landfills with capacity to service each of the markets the
Company currently serves. At such time as a Company-owned landfill no longer has
remaining capacity the Company intends to either redirect waste being deposited
at such landfill to another Company-owned landfill with substantial remaining
capacity or to a third party-owned landfill. The Company's B & J and Ostrom Road
landfills have Class II permits, which allow these landfills to accept
non-hazardous waste that is capable of degrading water quality if not properly
handled, in addition to municipal solid waste.
Of the waste deposited at Company-owned landfills for fiscal year 1997
approximately 82% was received from the Company's collection, waste diversion
and transfer station operations and 18% was received from independent third
party collectors, hauling companies and self-haulers.
Operated Landfills. The Company currently manages 18 third party-owned
landfills, 17 under contracts with the permitted operators and one under lease
from the landfill owner. These landfills are permitted for approximately 20,000
tons-per-day total capacity. Landfill operating agreements with third party
owners generally provide for payment to the Company of a fee based on tonnage
received.
The Company has a contract with San Bernardino County, pursuant to which
the Company operates all active landfills in San Bernardino County and is
primarily responsible for implementing the County's strategic plan which
addresses the County's long-term waste disposal needs. The Company's other
responsibilities include closure and monitoring of non-active landfills and
identification, permitting and construction of landfill expansions. During 1997,
in cooperation with the County's Waste System Division, the Company closed five
of the County's landfills, thereby concentrating the allocation of the County's
waste stream among the
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remaining landfills. At September 30, 1997, the Company operated 12 landfills,
three transfer stations and six community collection centers in San Bernardino
County.
Approximately 17% of the Company's revenues for fiscal year 1997 were
derived from services performed for San Bernardino County. The Company's
revenues from San Bernardino County are derived from two categories of services.
The core service is the performance of ongoing landfill operations activities.
Over the term of the contract the amount of revenues from this core service will
vary primarily as a result of changes in volume of waste deposited at landfills
and changes in the Company's per ton compensation rate. The other component of
revenues represents activities associated with the planning and implementation
of the strategic plan to regionalize landfill operations in San Bernardino
County. This includes planning, engineering and construction management for
landfill expansions, transfer station construction and landfill closures. It is
anticipated that the majority of these activities will be completed over the
next 6 years, during which time San Bernardino County plans to spend
approximately $200 million.* While revenues generated from these activities are
significant, the Company generally earns lower margins than on its collection
and disposal operations due to the fact that there is little capital investment
required to generate the additional revenues and revenues are provided on a cost
plus profit margin basis per the agreement. In addition, this business involves
substantial subcontractor, consulting and other related expenses paid to third
parties. The Company's agreement with San Bernardino County terminates on June
30, 2001. The Company, at its option, may extend the agreement for up to an
additional thirty years, so long as the projected waste stream to the landfills
meets certain levels. However, each party may terminate the contract for
default, failure to reach an agreement regarding the reconfiguration of the
landfills and other facilities following a reduction in tonnage, or the
bankruptcy or insolvency of the other party. In addition, beginning July 1,
1999, San Bernardino County may terminate the contract so long as it
municipalizes such operations or uses a competitive procedure to select a
contractor, and either party may terminate the contract for failure to reach an
agreement regarding the redetermination of the Company's per ton compensation
rate (which rate must be redetermined every three or four years, at the option
of San Bernardino County).
On March 1, 1995, the Company commenced daily management activities of five
landfills in San Diego County. On August 12, 1997, the San Diego County Board of
Supervisors approved the sale of the County's waste system (including the four
landfills operated by the Company at that time) to a third party. On October 31,
1997, the sale of the County's waste system was completed. The Company expects
to transfer the operation of the four landfills to the new owner in 1998. The
Company believes the transfer will not have a material adverse effect on the
Company's financial condition, results of operations or cash flow.*
The Company operates one landfill in Kern County, California and one
landfill in Placer County, California under contracts expiring in April 2002 and
August 2001, respectively.
Financial Assurance Obligations. Extensive regulation of landfills not only
affects their siting and operations but also imposes long-term obligations on
landfill owners or operators to make substantial efforts to close landfills and
maintain them following closure for at least 30 years. The Company believes that
where it operates landfills owned by local governmental entities, those
entities, as the holders of the relevant permits, are responsible for closure
and post-closure maintenance obligations.
For each landfill it owns, the Company is required to demonstrate financial
assurance for closure and post-closure maintenance costs. The Company makes
periodic deposits to trust funds intended to provide adequate funding at the
time of landfill closure, consistent with the Company's current estimates for
all closure costs and, under current California law, at least 30 years of
post-closure maintenance costs. In addition, with respect to one closed
landfill, the Company has posted a performance bond to fund post-closure
obligations up to $3.9 million. The Company estimates, that as of September 30,
1997, the aggregate current cost of its closure and 30-year post-closure
requirements is approximately $61.7 million.* The foregoing estimate of closure
and post-closure liabilities is based on currently available information and
current environmental and regulatory requirements and may change if applicable
regulations or the assumptions relied on or facts and circumstances relating to
the Company's landfills change.
California regulations also require the Company to provide financial
assurance contingency funds for the initiation and completion of corrective
action for certain possible releases of contaminants that may occur
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from its landfills into the groundwater, surface water or unsaturated zone,
whether such releases occur before or after closure of the landfill. The Company
makes periodic deposits to trust funds intended to provide such contingency
funds. The Company estimates, that as of September 30, 1997, the aggregate
current cost of such corrective action requirements is approximately $8.1
million and remaining funding requirements total approximately $2.4 million.*
The foregoing estimates are based on current 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.
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 trust funds for each landfill. The Company has obtained an
insurance policy for one of its landfills not covered by the method described
above.
SPECIAL WASTE AND HAZARDOUS WASTE
The Company provides limited waste management services in connection with
five types of special waste: medical waste, waste water sludge, asbestos,
non-hazardous contaminated soil and ash.
In addition, the Company operates permanent household hazardous waste
collection facilities in four communities and periodically collects household
hazardous waste in other communities as part of special programs designed to
help reduce deposits of hazardous waste in the solid waste stream. The Company
also provides limited hauling and disposal services for asbestos and may also
handle hazardous waste from its load checking activities at its facilities. The
Company currently has no other plans to collect or dispose of hazardous or toxic
materials.
ENVIRONMENTAL REGULATION
The Company's business activities are subject to extensive and evolving
regulation under various complex, and at times overlapping and conflicting,
federal, state and local laws for the protection of public health and the
environment. These laws, and the numerous regulatory bodies responsible for
interpreting and enforcing them, impose significant restrictions and
requirements on the Company's activities. The Company believes that such
regulation will increase in the future.
To operate landfills, transfer stations and other waste processing
facilities, the Company must possess and maintain various governmental
approvals, operating permits and licenses, and in certain instances, must secure
various land use approvals. Obtaining approvals and permits to acquire, develop
or expand solid waste management facilities is difficult, time-consuming and
expensive and is sometimes opposed by local citizen groups or other private
parties. Once obtained, operating permits are subject under certain
circumstances to modification or revocation by the issuing agency and may be
altered by changing laws and regulations.
In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, and time
and frequency of collection.
The Company's operation of solid waste management facilities subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations, as well as financial assurance obligations relating to third party
liability, corrective actions, and closure and post-closure maintenance.
In addition to costly and restrictive regulation, other factors, the
long-term effects of which are unpredictable, may have a significant effect on
the Company's operation of landfills. Increasing public opposition to the siting
and operation of landfills is adding to the length of time required to obtain
necessary permits and approvals for new landfills and the expansion of existing
landfills. Moreover, there is a national trend to attempt to reduce the volume
of solid waste and the dependence on landfill disposal by promoting source
reduction, waste transformation and recycling programs.
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During the ordinary course of its operations, the Company may from time to
time receive citations, notices and comments from regulatory authorities that
such operations are not in compliance with applicable environmental regulations.
Upon receipt of such citations, notices or comments, the Company works with the
authorities in an attempt to address the issue. In some instances, where the
Company operates a landfill or transfer station pursuant to an agreement with a
county or other governmental body, responsibility for the matters referenced in
such citations, notices or comments lies with such governmental body. Failure to
correct the problems to the satisfaction of the authorities could lead to fines
or a curtailment or cessation of the landfill or transfer station's operations.
Compliance with current or future regulatory requirements may require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. While the Company intends to apply for
rate increases whenever possible to cover such increased costs, there is no
assurance that it will be able to pass all or a portion of these costs on to its
customers.
Federal Regulation
The principal federal statutes affecting the Company's business operations
are:
The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates
the handling, storage, treatment, transportation and disposal of hazardous and
non-hazardous wastes and requires states to develop programs to insure the safe
disposal of solid waste. Subtitle D of RCRA establishes a framework for federal,
state and local government cooperation in controlling the management of
nonhazardous solid waste, and prohibits the operation of municipal solid waste
landfills that fail to meet minimum federal standards for protecting human
health and the environment. Under these regulations, state and local governments
retain primary responsibility for ensuring enforcement and compliance with state
and federal minimum standards by landfills within their jurisdictions.
The United States Environmental Protection Agency (the "EPA") adopted
regulations under Subtitle D of RCRA that provide minimum standards or criteria
establishing landfill location restrictions, design standards, operating
criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements and corrective action
requirements. These regulations establish stringent requirements for liner
design, leachate (liquid that has leached from the landfill and become
contaminated through contact with solid waste) collection systems, groundwater
testing wells and methane gas control systems. A landfill that fails to meet the
Subtitle D criteria will be deemed to be engaged in "open dumping" in violation
of RCRA. Most of these regulations have been in effect in California for several
years. The EPA has approved California's application to operate California's
permitting program for solid waste landfills under Subtitle D.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund" or "CERCLA"). CERCLA imposes liability for the investigation
and clean up of, or natural resource damages from, facilities from which there
has been, or is threatened, a release of a hazardous substance into the
environment. Current owners or operators of the site, parties who were owners or
operators at the time the hazardous substance was disposed of, and all
generators of transporters of a hazardous substance that is released from a site
are potentially responsible parties. Liability under CERCLA is strict, joint and
several, meaning that it can be imposed upon any potentially responsible party
even if such party complied with all laws and regulations in effect at the time
of the act giving rise to liability or has generated no more than a very small
portion of a facility's contamination. Many of the more than 700 substances
listed by the EPA as "hazardous substances" (including asbestos) can be found in
household waste.
CERCLA investigation and cleanup costs can 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
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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.
The discharge of runoff or leachate from the Company's landfills into waters of
the United States would require the Company to apply for and obtain a discharge
permit, conduct sampling and monitoring and under certain circumstances, reduce
the quantity of pollutants in the discharge. Also, under new federal storm water
regulations, many landfills, transfer stations and other Company operations are
now required to obtain storm water discharge permits and to develop a storm
water pollution prevention and monitoring program.
The Clean Air Act. The Clean Air Act, as amended, provides for federal,
state and local regulation of emissions of air pollutants into the atmosphere.
The EPA has proposed new source performance standards regulating air emissions
of certain pollutants (methane and non-methane organic compounds) from municipal
solid waste landfills. The EPA may also issue regulations controlling the
emissions of particular regulated air pollutants from municipal solid waste
landfills. In addition, the EPA has issued standards regulating the handling of
asbestos-containing materials.
Occupational Safety and Health Act of 1970 ("OSHA"). OSHA establishes
certain health and safety standards for the workers employed by the Company.
Certain of these standards, including standards for notices of hazards, safety
in evacuation, and the handling of asbestos, may apply to certain of the
Company's operations.
State and Local Regulation
Each state in which the Company now operates or may operate in the future
has laws and regulations for the protection of human health and the environment
that affect various operations of the Company. These laws and regulations
govern, among other things, solid waste disposal, water and air pollution and,
in most cases, the design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. Among the principal California
statutes affecting the Company's business operations are:
The California Integrated Waste Management Act. The California Integrated
Waste Management Act of 1989 establishes a framework for the regulation of
landfills and other solid waste facilities in California through a system of
solid waste facilities permits administered jointly by the California Integrated
Waste Management Board (the "Waste Board") and the local enforcement agency
(generally a county health or environmental department). Periodic site
inspections and permit reviews are undertaken by the local enforcement agency to
ensure that the landfill operations comply with current health, safety and
environmental regulations. Among those regulations are minimum performance
standards for proper operation, closure, post-closure maintenance and ultimate
re-use of landfill sites to assure that public health and safety and the
environment are protected from pollution due to the disposal of solid waste.
The California Integrated Waste Management Act also requires each local
government to divert 25% of its waste from landfill disposal through source
reduction, recycling and composting. This required level will increase to 50% by
the beginning of calendar year 2000. Compliance with these diversion goals could
substantially reduce the tonnage of waste deposited in the Company's landfills.
Closure/Post-Closure. A part of the California Integrated Waste Management
Act known as the Eastin Statute requires landfill owners and operators to (i)
develop closure and post-closure maintenance plans and submit plans to both the
Waste Board and the applicable Regional Water Quality Control Board for
approval,
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(ii) prepare an estimate of closure and post-closure maintenance costs, and
(iii) establish a mechanism acceptable to the Waste Board to demonstrate
financial responsibility for such estimated costs.
Regulations promulgated under the Eastin Statute (the "Eastin Regulations")
impose closure and post-closure requirements governing the removal of
structures, decommissioning of environmental control systems, construction and
maintenance of final cover, grading, drainage and site face, slope protection
and erosion control (revegetation), leachate control and monitoring systems,
groundwater monitoring facilities and landfill gas monitoring and control
systems. Landfill owners and operators must submit preliminary closure and
post-closure maintenance plans at the time of the application for any existing
solid waste facilities permit review or upon the first application for a permit.
Existing permit reviews generally occur in connection with modifications for the
permit or, if earlier, five years following the most recent permit review. In
addition, final closure and post-closure plans must be submitted two years
before the anticipated date of landfill closure. The EPA has approved
California's application to operate its existing solid waste program under
Subtitle D.
The Eastin Regulations require the owner or operator of each landfill to
(i) estimate the cost associated with closing the landfill in accordance with
the foregoing requirements, including the costs of conducting post-closure
maintenance for a period of at least 30 years after closure, (ii) certify such
cost estimates to the Waste Board and the local enforcement agency, and (iii)
demonstrate that the owner or operator has the financial resources to conduct
closure and post-closure maintenance activities. One of the means by which an
owner or operator can demonstrate financial assurance is to establish a
statutory trust fund whereby the owner or operator is committed to make yearly
contributions over the remaining life of the landfill. This is the primary
mechanism used by the Company for the landfills that it has responsibility for
closing. Each year's minimum trust fund deposits are based upon a regulatory
formula using the ratio of the landfill's annual capacity filled, to the
remaining permitted capacity, multiplied by the remaining cost estimate to be
funded. Because these costs can be substantial, the annual trust fund
contributions could have a significant impact on the Company's cash flow if the
Company were unsuccessful in collecting such costs in tipping or collection
fees.
Hazardous Waste Control Law and Carpenter-Presley-Tanner Hazardous
Substance Account Act. The California Environmental Protection Agency's
Department of Toxic Substances Control has broad authority under the Hazardous
Waste Control Law, similar in may respects to Subtitle D of RCRA, to regulate
generators and transporters of hazardous waste and facilities that treat, store
or dispose of hazardous waste. California also has enacted the
Carpenter-Presley-Tanner Hazardous Substance Account Act, which is the state's
"Superfund" law, with provisions similar to those of the federal CERCLA.
The Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"). The
Porter-Cologne Act regulates the discharge of waste that may affect waters of
California, whether surface or subsurface, and whether by point or non-point
sources of discharge. This would include the discharge of waste into a landfill.
Each discharge must file a report of waste discharge with the regional board
having jurisdiction over the location of the proposed discharge, and the
regional board issues a permit, known as "waste discharge requirements," that
limits the quantity and manner of the discharge to meet water quality standards
and to ensure the protection of beneficial used of the receiving waters.
Pursuant to the Porter-Cologne Act, in 1984, California adopted regulations
imposing design, siting, and operational standards for waste disposal sites to
minimize the extent to which landfill runoff and leachate may pose a threat to
surface or groundwater quality. These standards also apply to new or expanded
waste disposal facilities.
The federal Clean Water Act allows states to assume the EPA's
responsibilities over point source discharges of pollutants into surface waters.
California has assumed those responsibilities under the Porter-Cologne Act.
California has also adopted regulations requiring owners and operators of
landfills to provide financial assurance for the initiation and completion of
corrective action for known or reasonably foreseeable releases of contaminants
from landfills into the groundwater, surface water or unsaturated zone.
Other States' Regulation. Although almost all of the Company's business is
currently conducted in California, the Company has historically and in the
future is likely to conduct business in other states with
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statutes similar to California's that would regulate the Company's handling,
transportation and disposal of waste, and the design, operation, maintenance,
closure and post-closure care of solid waste disposal facilities and underground
storage tanks ("USTs") regulation. These states may have additional rules with
which the Company would have to comply.
Underground Storage Tank Regulation. USTs in California are regulated by
federal law under RCRA, by a California law that closely parallels the
requirements of the federal law and by local regulation. These regulations
contain extensive requirements relating to monitoring, leak detection and
prevention, permitting, reporting, and other matters, including the required
removal or closure in place of tanks that are no longer in use. In connection
with its business operations, the Company maintains numerous USTs, all of which
are used for the storage of petroleum products, a hazardous substance.
The Company has 10 USTs that it is required to remove by December 31, 1998
(including the remediation of any associated contaminated soil). Removing USTs
can be costly because of the possibility of discovering contaminated soil and
groundwater, and the need to remove or remediate such contamination. Based upon
its experience in its UST removal program, the Company expects that removal of
its 10 USTs will cost approximately $0.4 million, exclusive of any material
remediation that is subsequently determined to be necessary.* With the exception
of two sites at which the Company anticipates that up to an additional $0.5
million may be required to remediate contamination, the Company is not aware of
any USTs that will require significant soil or groundwater remediation.*
However, in most instances the Company has not conducted soil or groundwater
testing sufficient to assess fully the extent and cost of required remediation.
These costs will not be known until such tests are completed or the USTs are
removed.
Owners and operators of USTs containing petroleum also must demonstrate
financial responsibility to pay for corrective action and third party claims
arising from a release from their USTs. The Company has purchased insurance to
make this demonstration.
Flow Control. Many states and municipalities attempt to direct the flow of
municipal solid waste through a variety of means, including the passage of laws
and ordinances requiring solid waste to be processed or disposed of at a
particular facility. In addition, some municipalities grant franchises and
permits that have the effect of limiting who may collect solid waste and where
such waste may be brought for disposal. In 1994, the United States Supreme
Court, in the case of Carbone v. Town of Clarkstown, held unconstitutional a
local ordinance that required all solid waste generated within or brought into
the locality to be disposed of at a particular transfer station that the town
had guaranteed a certain minimum tonnage of solid waste, in order to help
finance the construction of the transfer station. The Court held that the
ordinance discriminated against interstate commerce by allowing only the favored
facility to process solid waste from the town and effectively "hoarding"
commerce in the service of processing solid waste for the benefit of local
economic interests. The Court found that the primarily economic reasons for
enacting the ordinance could not justify the law's discrimination against
interstate commerce.
Although the Company believes there are many significant differences
between the facts in Carbone and the circumstances relating to the collection
franchises, permits and agreements held by the Company and to government actions
related to such franchises, permits and agreements, it is possible that these
franchises, permits and agreements could be challenged under a similar
rationale. In that event, the municipalities involved would have to show that
their franchises, permits and agreements (i) do not regulate interstate
commerce, (ii) do not discriminate against interstate commerce and do not impose
an excessive burden on interstate trade in relation to the total benefits
conferred; or (iii) are necessary to advance legitimate local interests. There
can be no assurance that such franchises, permits and agreements would be
upheld.
Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress.
At present, it is impossible to know in what form such a bill, if any, will pass
the Congress, but the attempts to pass such a bill have been unsuccessful to
date. Although these bills appear to be intended to limit, rather than broaden,
the scope of Carbone, there can be no assurance that a bill will not be enacted
that will adversely affect the legality of exclusive franchises, agreements or
permits under the interstate commerce clause.
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COMPETITION
The solid waste services industry is highly competitive and requires
substantial capital, technical expertise and human resources. The industry is
comprised of five large publicly-traded national waste service companies (Waste
Management, Inc., Browning-Ferris Industries, Inc., USA Waste Services, Inc.,
Republic Waste Industries, Inc. and Allied Waste Industries, Inc.) and several
smaller publicly-traded regional companies, as well as numerous regional and
local companies of varying sizes and competitive resources. Many of the
Company's competitors have significantly greater financial and operating
resources and a lower cost of capital than the Company and can take advantage of
less capital intensive environmental regulatory financial assurance obligations
than those with which the Company is required to comply. Additionally, in
smaller markets, the Company may be at a competitive disadvantage with respect
to regional and local companies which may have significantly lower operating
costs. In its landfill activities, the Company also competes with cities and
counties that conduct their own waste disposal services. These municipalities
may have the advantages of access to tax revenues and tax exempt financings as
well as the ability to direct the collection and disposal of waste in their
respective jurisdictions.
Most of the Company's collection operations are conducted pursuant to
franchise agreements, permits and licenses that make the Company the exclusive
provider of most waste services in a specific geographic area. However, each of
these arrangements has a specific duration except in San Francisco, and the
Company may become subject to competition if these arrangements are not extended
prior to maturity. The Company competes for collection services primarily on the
basis of service and price. Transfer station activities are often tied to
collection operations so the same competitive considerations apply. Competition
among landfills is based upon price, service and the proximity of the landfill
to the waste generator. Competition for operation of landfills under contract is
based on price and service. The Company believes that from time to time,
competitors offer substantially lower prices for their services in an effort to
maintain or expand market share or win a competitively bid municipal contract.
The industry is undergoing significant consolidation, characterized by the
acquisition of smaller regional and local operations by larger entities,
mergers, the privatization of operations that local governments no longer wish
to conduct and the reduced presence of smaller regional and local operations
caused by the ability of larger entities to bid for franchises and contracts at
prices such smaller operations cannot match. Because of the difficulty in
obtaining approvals to operate in communities that already have established
service providers, competition for the acquisition of other companies and
price-related competition upon the renewal of existing contracts and franchises
are increasingly intense. In addition, the Company believes that a number of its
competitors have full-time personnel primarily dedicated to locating, evaluating
and securing business expansion opportunities and acquisitions -- including
environmental and regulatory experts, engineers, attorneys, lobbyists, financial
and accounting personnel and finders. The Company does not have employees solely
dedicated to acquisition or business expansion activity and may be at a
competitive disadvantage if it is unable to identify, adequately evaluate or
respond to business opportunities or incurs higher costs than are borne by its
competitors to do so. Accordingly, it may become uneconomical for the Company to
make further acquisitions, or the Company may be unable to locate suitable
acquisition candidates, particularly in markets the Company does not already
serve.
RISK FACTORS
The following is a discussion of certain risks and uncertainties that could
cause results to differ materially from predictions, estimates and expectations
expressed by the Company in this Form 10-K.
Geographic Concentration of Business
The Company is dependent on a number of franchise contracts and operating
permits for a significant portion of its revenues and operating income.
Approximately 39% of the Company's revenues and substantially more of its
operating income in fiscal year 1997 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
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in the City and County of San Francisco. Although the Company holds permits for
substantially all routes covered by the Ordinance, a permit may be revoked or
additional permits granted to third parties if, among other things, the Company
were to provide inadequate service, such as a failure to collect refuse properly
or overcharging. The granting of additional permits due to inadequate service is
required if 20% or more of the customers on a route sign a petition stating that
the Company's service has been inadequate and the Director of the Department of
Public Health finds such statement to be correct. Further, the Ordinance could
be repealed or amended by the vote of the electorate in a way that is
unfavorable to the Company. A change in the Ordinance and the possible loss by
the Company of one or more of its permits could have a material adverse effect
on the Company's business, financial condition and results of operations.
However, the Company believes that California law would not allow it to be
completely displaced by another exclusive waste collection provider for five
years if the Ordinance were repealed, unless the permits were terminated
pursuant to the existing provisions of the Ordinance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Approximately 17% of the Company's revenues in fiscal year 1997 were
derived from services performed for the County of San Bernardino. The Company's
agreement with San Bernardino County terminates on June 30, 2001. The Company,
at its option, may extend the agreement for up to an additional thirty years, so
long as the projected waste stream to the landfills meets certain levels.
However, each party may terminate the contract for default, failure to reach an
agreement regarding the reconfiguration of the landfills and other facilities
following a reduction in tonnage, or the bankruptcy or insolvency of the other
party. In addition, beginning July 1, 1999, San Bernardino County may terminate
the contract so long as it municipalizes such operations or uses a competitive
procedure to select a contractor, and either party may terminate the contract
for failure to reach an agreement regarding the redetermination of the Company's
per ton compensation rate (which rate must be redetermined every three or four
years, at the option of San Bernardino County).
Substantially all of the Company's assets and operations are located in
California. An economic slowdown in California (such as occurred in the early
1990s) or a change in California's environmental or related regulations that
negatively affects the waste management industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
Changes in Legislation and Political Uncertainty
The waste management industry is subject to federal, state and local
statutes, regulations, ballot initiatives and judicial decisions that impose
significant risks and compliance burdens on the Company. The adoption or
promulgation of new, or the amendment of existing, legislation and regulations
could cause the Company to lose franchises, reduce the value of its existing
franchises or require the Company to modify its waste disposal facilities and
methods of operation at substantial cost. In addition, because operations of
waste management companies are the subject of a high level of public concern,
unfavorable publicity may have an adverse effect on the Company.
Ballot Initiatives Affecting Ordinance. In November 1993 and November 1994,
initiatives were placed on the San Francisco general ballot which, if passed,
would have repealed or amended the Ordinance and would have opened refuse
collection in San Francisco to competition. Although these initiatives were
defeated (by votes of 76% to 24% and 65% to 35%, respectively), there can be no
assurance that other attempts will not be made to implement legislation with a
material adverse effect on the Company's operations. The Company incurred costs
in connection with its campaigns to defeat the 1993 and 1994 initiatives and may
incur significant costs in connection with future ballot initiatives, if any.
Future attempts to implement legislation may be financed by persons having
greater resources than the Company and may be successful in modifying or
repealing the Ordinance. There can be no assurance that the Ordinance will not
be modified or repealed in the future.
Potential Competitive Bidding. The Company provides waste collection
services in San Francisco pursuant to permits granted under the terms of the
Ordinance and in other communities generally pursuant to exclusive franchise or
other service agreements. In the event of the amendment or repeal of the
Ordinance or upon the expiration or termination of a franchise or service
agreement in other communities, the award of a
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franchise or service contract may be determined by competitive bidding. The
waste management industry is intensely competitive and many of the Company's
competitors have greater financial and other resources than the Company and
therefore there can be no assurance that the Company will succeed in having its
bid for such franchise or other service contract accepted or that such franchise
or other service contract, if accepted, will be on terms and at prices which
result in profit margins similar to those currently earned by the Company.
Problems in Rate-Setting Process. The Company generally seeks to recover
all of its operating costs, including the costs of recycling services, landfill
closure and post-closure obligations and tipping fees in the rate-setting
proceedings that determine many of its collection, transfer station and landfill
rates. However, rate-setting bodies sometimes have been reluctant to allow all
of the Company's operating and related costs, including capital expenditures, to
be reflected in its rates. Political pressure has occasionally inhibited local
governments from allowing large rate increases and caused them instead to
increase rates gradually. Lack of public understanding of new regulatory
requirements which can significantly affect the Company's operating costs,
especially relating to recycling mandates and landfill closure and post-closure
maintenance, has sometimes made it difficult for the Company to obtain rate
increases to cover such costs. In addition, certain municipalities, including
San Francisco, have not allowed the Company to recover through its rates some or
all ESOP or other corporate-related expenses. Given these difficulties, there
can be no assurance that the Company will succeed in obtaining timely rate
increases sufficient to cover all costs or sufficient to maintain profit margins
at historic levels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Potential Flow Control Legislation. Many states and municipalities attempt
to direct the flow of municipal solid waste through a variety of means,
including the passage of laws and ordinances requiring solid waste to be
processed or disposed of at a particular facility. In addition, some
municipalities grant franchises and permits that have the effect of limiting who
may collect solid waste and where such waste may be brought for disposal. In
1994, the United States Supreme Court, in the case of Carbone v. Town of
Clarkstown, held unconstitutional a local ordinance that required all solid
waste generated within or brought into the locality to be disposed of at a
particular transfer station for which the town had guaranteed a certain minimum
tonnage of solid waste in order to help finance the construction of the transfer
station. Although there are many significant differences between the facts in
Carbone and the circumstances relating to the collection franchises, permits and
agreements held by the Company and to government actions related to such
franchises, permits and agreements, it is possible that these franchises,
permits and agreements could be challenged under a similar rationale. There can
be no assurance such a challenge would not be successful or would not adversely
affect the enforceability of the Company's exclusive franchises, permits and
agreements. Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress
but the attempts to pass such bills have been unsuccessful to date. At present,
it is impossible to predict the form in which such a bill, if any, will pass.
There can be no assurance that a bill will not be enacted that will adversely
affect the enforceability of exclusive franchise agreements or permits under the
interstate commerce clause of the U.S. Constitution.
Adverse Publicity. Because the Company's business is dependent on approvals
of political bodies, unfavorable publicity affecting public attitudes or
perceptions of the Company could result in political pressure, including
government action, which may have an adverse effect on the Company's business.
The Company has in the past and may from time to time in the future receive
unfavorable publicity relating to litigation, regulatory actions and other
claims, including those involving environmental issues and employment practices.
Also, in the ordinary course of its business, the Company makes political
contributions to various state and local elected officials or candidates for
elective office and pays substantial compensation to consultants, lobbyists and
business opportunity finders, including persons who are former officials or were
formerly employed by officials of municipalities with which the Company does
business or may seek to do business. These activities could become the subject
of unfavorable publicity. There can be no assurance that unfavorable publicity
relating to Norcal or its affiliates will not have an adverse effect on the
Company's business or prospects.
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Environmental Regulation and Potential Litigation
The Company's operations are subject to, and substantially affected by,
numerous federal, state and local laws and regulations that govern environmental
protection, zoning, public health and safety and other matters. In recent years,
these regulations have become increasingly stringent (particularly in
California).
These requirements and standards change and, to comply with new
requirements, the Company may from time to time be required to make significant
capital and operating expenditures. These expenditures may be necessary to
modify, replace or supplement equipment and facilities at substantial cost and
without any resulting increase in revenues. In addition, the Company will be
required to make substantial expenditures to satisfy statutory obligations
concerning closure and post-closure maintenance of the landfills it owns. The
Company may be unable to pass some or all of these expenditures on to its
customers through rate increases. Even if such expenditures can be passed on,
the Company may experience significant delays in recovering these expenditures.
Moreover, the cost of closure and post-closure monitoring may exceed the amount
the Company has set aside in trust funds and reserves to satisfy its regulatory
obligations.
Environmental regulations may also impose restrictions on the Company's
operations. In order to develop and operate a landfill or other solid waste
management facility, for example, the Company usually must obtain, maintain in
effect and periodically renew several permits and often must obtain zoning,
environmental or other land use approvals. These permits and approvals are
difficult and time consuming to obtain or renew and may, under certain
circumstances, be modified or revoked by the issuing agency. Additionally, from
time to time, the Company may be subjected to actions brought by citizens'
groups or other private parties in connection with the grant of permits or
alleging violations of permits or other regulatory requirements. There can be no
assurance that the Company will successfully obtain and maintain in effect the
permits and approvals required for the successful operation and growth of its
business. The Company's failure to obtain or maintain in effect a significant
permit could adversely affect the Company's business and financial condition.
In the normal course of its business, the Company may become subject to
various judicial and administrative proceedings involving federal, state or
local agencies, or private parties. These proceedings may seek to impose fines
on the Company, to revoke or deny renewal of an operating permit or license held
by the Company, or to require the Company to remediate environmental problems.
The Company could incur substantial legal expenses during the course of such
proceedings and the outcome of one or more of these proceedings could have an
adverse impact on the Company's business.
Possible Liability for Environmental Remediation and Damages
With limited exceptions, federal and state laws impose joint, several and
strict liability upon present and former owners, operators and users of
facilities that release certain hazardous substances into the environment and
the generators and transporters of those substances, regardless of the care
exercised by such persons and regardless of when the hazardous substance is
first detected in the environment. All such persons may be liable for the costs
of site investigation, clean up and natural resource damage. Many of such
hazardous substances can be found in household waste. The Company may face
claims for remediation of environmental contamination, personal injury, property
damage or damage to natural resources with respect to facilities it currently or
formerly owned, operated or used. Costs for remediation of, and damages and
penalties for, environmental contamination can be substantial and if incurred by
the Company such liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. There can be no assurance that the
Company will identify all problems or risks in connection with the businesses it
acquires, including environmental problems or risks. As a result, the Company
may have acquired, or may in the future acquire, landfills or other properties
that have unknown environmental problems and related liabilities. The Company
will be subject to similar risks and uncertainties in connection with the
acquisition of facilities that formerly had been operated or owned by businesses
acquired by the Company.
A subsidiary of the Company has indemnification obligations with respect to
damages, removal and remedial costs associated with the deposit of hazardous and
certain other types of waste to the City and
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County of San Francisco and the owner of the landfill at which such subsidiary
deposits a substantial amount of waste. Neither the Company nor the subsidiary
maintains insurance with respect to these indemnification obligations, although
certain costs resulting from such obligations may be reimbursed through a
reserve fund maintained by the City and County of San Francisco or through rate
increases. There can be no assurance that the reserve fund or rate increases
will be adequate to satisfy such indemnification obligations. The Company's
collection agreements typically contain general indemnifications by the
applicable operating subsidiary of the Company, as well as, in some cases,
indemnification obligations with respect to costs and damages arising from
hazardous waste.
Insurance, Bonding and Letters of Credit
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. Liability for environmental damage
significantly in excess of these limits could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to obtain such insurance in the
future. The Company also has underground storage tank liability insurance to
satisfy financial assurance requirements mandated under state and federal law.
The current policy has a limit of $1.0 million per loss with an annual aggregate
limit for all losses of $1.0 million, covering pollution conditions emanating
from the Company's locations which result in bodily injury or property damage
beyond the boundaries of these locations.
The Company carries a broad range of insurance coverage that it considers
adequate to protect its assets and operations from "risk of loss." The Company's
commercial general liability, general business automobile liability, and
umbrella and excess liability policies provide an aggregate of $50.0 million
coverage for any single occurrence, subject to a variety of exclusions and a
self-insurance requirement of $500,000. Substantially all of the Company's
present workers' compensation liabilities are self-insured and some of its
pre-existing workers' compensation liabilities are self-insured; however, this
liability is capped at a maximum of $350,000 per claim with workers'
compensation insurance covering liabilities in excess of this amount. In
addition, employee and certain retiree healthcare liabilities are self-insured.
Norcal also provides director and officer and ERISA fiduciary insurance.
The Company is required to post performance bonds in connection with
certain contracts on which it bids. In addition, the Company is usually required
to post a performance bond or a bank letter of credit at the time of execution
of a municipal collection contract. Some of these performance bonds are secured
by letters of credit posted by the Company. At September 30, 1997, the Company
had performance bonds outstanding in the aggregate amount of $22.3 million, and
had provided its surety companies with letters of credit of approximately $1.1
million to secure the Company's obligations to indemnify the surety companies.
If the Company were to be unable to obtain surety bonds or letters of credit in
sufficient amounts or at reasonable rates, it might be precluded from bidding on
certain contracts, entering into additional municipal collection contracts or
obtaining or retaining landfill operating permits. See "Risk
Factors -- Competitive Industry."
As of September 30, 1997, the Company had $5.7 million of additional
letters of credit outstanding, most of which relate to workers' compensation
deferred premiums and landfill operation contract matters.
Required Payments for ESOP Participant Benefits
To the extent Norcal contributes funds to the ESOP in order for the ESOP to
pay cash benefits due to retired, terminated or withdrawing ESOP participants,
or to the extent Norcal is obligated to repurchase common stock distributed to
participants, Norcal will have less cash available to make payments on its
outstanding indebtedness or for other reasons. The amount Norcal may contribute
to the ESOP to fund such ESOP distribution obligations (or may use to repurchase
common stock distributed by the ESOP) will increase significantly in the future
as the Company's workforce ages and retires, as additional shares of
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common stock are allocated to participants, if eligible participants elect to
receive in-service withdrawals or if the value of the common stock increases.
Union Matters
As of September 30, 1997, about 64% of the Company's approximately 2,000
employees were represented by unions. While the Company believes that it
generally has had good relations with its union employees, the Company was the
subject of a work stoppage during 1997. On April 24, 1997, employees represented
by the Sanitary Truck Drivers and Helpers Union Local 350 International
Brotherhood of Teamsters ("Local 350") initiated a strike against certain San
Francisco operations of the Company. The strike was resolved on April 26, 1997
when Local 350 voted to accept a five-year contract. While this strike was
resolved quickly, there can be no assurances that the Company will not be
subject to future work stoppages or that such stoppages will not continue for
extended periods. On December 17, 1997 certain employees represented by
Operating Engineers Local Union #3 of the International Union of Operating
Engineers ("Local #3") voted to authorize Local #3 to call a strike related to
one of the Company's operations in the Sacramento Valley of California. The
contracts for Local #3 employees expired on November 30, 1997 and negotiations
on a new agreement are continuing. The Company does not anticipate a work
stoppage but there can be no assurance that an agreement can be reached or that
a work stoppage will not occur. Approximately 20% of the Company's union
employees are covered under contracts that have expired or will expire by
December 31, 1997. There can be no assurance that the Company will be able to
reach agreement with these employees or that expiration of these contracts will
not have a material adverse impact on the Company's business, financial
condition and results of operations. In the event that the Company is subjected
to an extended strike or other work stoppage, there could be a material adverse
effect on the Company's business, financial condition and results of operations.
In connection with the resolution of the San Francisco strike, a provision
of the new contract effects an increase in pension benefits. The Company
believes that it was agreed that the increase to certain pension benefits was to
be prospective. Subsequently, Local 350 asserted that it understood the increase
to be retroactive. The Company has served upon Local 350 a demand to arbitrate
this dispute under the terms of the collective bargaining agreement between the
parties. No arbitration date has yet been set. If the position taken by Local
350 were to prevail in an arbitration or otherwise, it could have a material
adverse effect on the Company's financial condition and results of operations.
Under generally accepted accounting principles ("GAAP") any deficiency between
the liability for pension benefits (defined as the Accumulated Benefit
Obligation ("ABO")) and the market value of plan assets can result in a charge
to the minimum pension liability in the equity section of the Company's balance
sheet. If Local 350 were to prevail in the arbitration discussed above, the
Company estimates that the ABO would increase by an additional $8.4 million,
which would result in a charge to the minimum pension liability of $4.2 million.
In addition, if Local 350 were to prevail, the Company estimates that its annual
employee benefits expense would increase by approximately $3.0 million for
additional pension and medical costs.* The above estimates are based on a
discount rate of 7.5%. The discount rate applied under GAAP fluctuates with
market conditions. A change in the discount rate can result in significant
adjustments to the ABO.
Alternatively, arbitration between the Company and Local 350 could
determine that there has been no meeting of the minds regarding the pension
benefits provision in the contract and the provision could have to be
renegotiated. If the matter is not satisfactorily renegotiated, the Company
could be subject to another work stoppage.
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.
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Competitive Industry
The solid waste industry is highly competitive. Operations require
substantial technical, managerial and financial resources. The Company competes
with large publicly-traded national solid waste companies, including Waste
Management, Inc., Browning-Ferris Industries, Inc., USA Waste Services, Inc.,
Republic Waste Industries, Inc. and Allied Waste Industries, Inc. and their
affiliates, several smaller publicly-traded regional companies and other
regional and local companies, some of which have significantly greater financial
and other resources, lower cost of capital and more established market positions
than the Company. Additionally, in smaller markets, the Company may be at a
competitive disadvantage with respect to regional and local companies, which may
have significantly lower operating costs. The Company's competitors also may not
be subject to restrictions on their ability to incur new indebtedness, obtain
necessary performance bonds or letters of credit, or make capital expenditures,
strategic acquisitions or engage in certain expansions of their businesses such
as those imposed on the Company by the Credit Agreement and the indenture
relating to the Senior Notes (the "Indenture"). As a result, competitors of the
Company may be better able to compete more aggressively for new permits and
franchises (including those held by the Company), pay higher prices for
acquisition candidates, withstand economic downturns and volatility in prices
for recyclable commodities and bear the costs of new regulations.
Acquisition-Related Risks
The Company intends to grow, in part, through the acquisition of additional
franchises, contracts, permits and other businesses. 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 financial condition or results from operations. To fund
significant expansion, the Company may require financing for amounts which
exceed the amount of its internally generated cash and borrowing capacity under
existing credit facilities. There can be no assurance that such financing will
be available. Moreover, the Company's lack of a publicly traded equity security
and its alternative cost of financing, which may be higher than that of its
competitors, could limit the amount the Company could prudently pay for
acquisition candidates. Also, the Credit Agreement and the Indenture restrict
the Company's ability to make acquisitions.
Substantial Leverage
As of September 30, 1997, the Company had outstanding long-term debt of
$177.4 million and stockholder's equity of $23.5 million. This level of
indebtedness and the debt service obligations arising therefrom may have one or
more of the following effects on the Company: (i) the Company's ability to
obtain additional financing in the future may be limited; (ii) a significant
portion of the Company's cash provided from operations is and will be dedicated
to servicing the Company's indebtedness, thereby reducing the funds available to
the Company for operations and capital expenditures; and (iii) the Company may
be more vulnerable to economic downturns or other adverse developments than less
leveraged competitors and thus may be limited in its ability to withstand
competitive pressures. Furthermore, the Credit Agreement provides for total
maximum borrowing availability of $100.0 million (subject to certain limitations
imposed by certain financial ratios), $25.0 million of which may be utilized for
letters of credit, all of which indebtedness is scheduled to become due prior to
the time any principal payments may be made on the Senior Notes (except for
certain optional redemptions). As of September 30, 1997, the Company had
availability under the Credit Agreement of approximately $75.0 million, with an
additional $18.2 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things. In addition, certain covenant measures in the
Credit Agreement become more restrictive over time. As a result, if the
Company's results of operations in fiscal year 1998 are consistent with fiscal
year 1997,
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availability under the Credit Agreement would decrease by approximately $30.0
million. The Company is also subject to certain limitations on incurring
additional indebtedness in the Indenture.
Possible Inability to Service Debt
The Company's ability to make scheduled payments on its indebtedness,
including interest payments on the Senior Notes, depends on its financial and
operating performance (including its ability to generate EBITDA), which, in
turn, is subject to prevailing economic conditions and to financial, business
and other events, many of which are beyond its control (including delays in
obtaining rate increases, the ability to renew franchises at historical profit
margin levels, and fluctuations in prices for recyclable commodities). Moreover,
the Company may incur additional indebtedness in the future. There can be no
assurances that the Company's cash flow will be sufficient to repay its debt.
The Company's ability to make scheduled payments also may be affected by its
obligations to provide cash to fund ESOP distributions to retired, terminated or
withdrawing participants.
Effect of Holding Company Structure
Norcal has no operations other than those relating to its subsidiaries and
depends on the earnings and cash flows of, and dividends from, such subsidiaries
to pay its obligations, including payments of principal and interest on its
indebtedness. The ability of Norcal's subsidiaries to pay such dividends will be
subject to, among other things, state law and contractual restrictions.
Substantially all of the assets of Norcal's wholly-owned subsidiaries (the
"Subsidiary Guarantors") have been pledged as collateral for their guarantees of
Norcal's obligations under the Credit Agreement and the capital stock of (or
partnership interests in) all the Subsidiary Guarantors has been pledged as
collateral for Norcal's obligations under the Credit Agreement. In the event of
a default under the Credit Agreement, the rights of Norcal with respect to the
liquidation of these assets would be subject to the prior claims of the lenders
under the Credit Agreement. A default under the Senior Notes constitutes an
event of default under the Credit Agreement. Similarly, certain defaults under
other indebtedness in excess of $5.0 million (including indebtedness under the
Credit Agreement) constitute an event of default under the Indenture.
Seasonality
The Company's revenues tend to be higher during the spring and summer
months (third and fourth fiscal quarters) due to higher volumes of certain types
of waste, such as yard clippings and construction and demolition debris. Such
increased volumes result in higher revenues and earnings from the Company's
transfer stations, waste collection, and landfill operations during such months.
In addition, project management revenues are highest in the fourth quarter as a
result of the favorable construction conditions.
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 of low commodity prices. A
substantial portion of the Company's recycling revenues are derived from the
sale of various grades of recycled paper and paper products, the prices for
which have suffered substantial declines since 1995.
EMPLOYEES
The Company employed approximately 2,000 persons as of September 30, 1997.
Sixty-four percent of the Company's employees are covered under union contracts
with varying terms and expiration dates. Approximately 20% of these union
employees are covered under contracts that have expired or will expire by
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December 31, 1997. While historically the Company has continued to operate after
the expiration of union contracts without any impact on operations, there can be
no assurance that the Company will be able to reach agreement with the employees
or that expiration of these contracts will not have a material adverse impact on
operations. On December 17, 1997 certain employees represented by Operating
Engineers Local Union #3 of the International Union of Operating Engineers
("Local #3") voted to authorize Local #3 to call a strike related to one of the
Company's operations in the Sacramento Valley of California. The contracts for
Local #3 employees expired on November 30, 1997 and negotiations on a new
agreement are continuing. The Company does not anticipate a work stoppage but
there can be no assurance that an agreement can be reached or that a work
stoppage will not occur. On April 24, 1997, employees represented by the
Sanitary Truck Drivers and Helpers Union Local 350 International Brotherhood of
Teamsters ("Local 350") initiated a strike against certain of the Company's San
Francisco operations. On April 26, 1997, employees represented by Local 350
voted to accept a five-year contract which provides for an aggregate 13.4% wage
increase and certain amendments to provide early retirement and increase other
benefits. The first-year cost of the contract was included in the most recent
rate increase approved in San Francisco and the Company intends to seek rate
recovery of scheduled future cost increases through the rate setting process.
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 historical levels. For a discussion of outstanding issues related to the
union contract, see "Risk Factors -- Union Matters."
ITEM 2. PROPERTIES
The principal properties of the Company consist of landfills, transfer
stations, waste recovery, administrative and maintenance facilities and other
land and improvements. The Company owns an aggregate of 309 acres of property on
which its California operations, maintenance, storage, warehousing and
administration facilities are situated. It owns six transfer stations, five of
which are located at the Company's collection sites. The Company also operates
three MRFs. The Company owns four active landfills in California and
approximately 2,900 acres on eight sites primarily in California that are used
as a source of landfill cover, as potential expansion sites for Company
operations or for other purposes.
The Company's headquarters are located in approximately 20,000 square feet
of leased office space in San Francisco, California, pursuant to a lease that
expires April 30, 1999. Under a lease expiring in 2007, the Company leases
29,000 square feet of industrial space in Oakland, California, where the
Company's medical waste treatment and disposal subsidiary conducts business.
The Company owns a 302-acre site situated in San Benito and Santa Clara
Counties in California that formerly was used to spread waste water sludge. The
soil quality suffered from such activities but was returned to normal
agricultural condition in 1993. The Company may use the site again to spread
waste water sludge on a more limited basis and for other waste diversion
activities.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION REGARDING THE ESOP NOTES.
On July 29, 1994, a lawsuit entitled Abraham, et al. v. Norcal Waste
Systems, Inc., et al., later assigned Case No. C94-3076 CAL in the United States
District Court for the Northern District of California (the "Abraham Action"),
was filed against Norcal, the ESOP, and various parties to which Norcal has
certain indemnification obligations, including past and present directors and
officers of Norcal, members of the ESOP Administrative Committee, and banks that
acted as financial advisers, trustees or lenders to Norcal. The suit was filed
by certain holders ("Plaintiffs") of notes issued by the ESOP ("ESOP Notes")
under the indenture dated as of December 19, 1986 between the ESOP and Security
Pacific National Bank as Indenture Trustee ("1986 Indenture"). The complaint
alleged a variety of claims in connection with the 1986 transaction in which the
ESOP purchased Plaintiffs' stock in one of Norcal's predecessors in exchange for
cash and the ESOP Notes, and certain later transactions involving Norcal or its
predecessors.
On August 9, 1995, Norcal and the ESOP reached a settlement (the "Abraham
Settlement") with Plaintiffs and certain other noteholders ("Settling
Plaintiffs"). Settling Plaintiffs did not release and are
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permitted to proceed upon claims (the "Excluded Claims") against certain banks
(and counsel to one of them) based upon their roles as former trustees under the
1986 Indenture (the "Indenture Trustee Parties"), but only insofar as those
claims are not indemnifiable under a provision of the 1986 Indenture that
requires indemnification by the ESOP for loss, liability or expense incurred by
the trustee without the trustees negligence or bad faith. The Indenture Trustee
Parties include Security Pacific National Bank ("Security Pacific"), and Bank of
America solely as successor to Security Pacific. Plaintiffs dismissed with
prejudice all claims against all defendants except the Excluded Claims against
Bank of America and Security Pacific.
The Abraham Settlement provides that Settling Plaintiffs shall indemnify
Norcal, the ESOP and certain related persons, including Norcal's and the ESOP's
current counsel and financial advisers and past and present officers, directors,
affiliates and subsidiaries (collectively, the "Indemnified Norcal Parties"),
against claims (the "Indemnified Claims") brought against any of the Indemnified
Norcal Parties by the Indenture Trustee Parties or other parties released in the
Settlement ("Released Parties") caused by, arising out of or related to the
Excluded Claims, including claims against Norcal for indemnification by Released
Parties who are sued by the Indenture Trustee Parties as a result of settling
Plaintiffs' pursuit of the Excluded Claims. Settling Plaintiffs' indemnification
extends to reasonable attorneys' fees and costs incurred in connection with such
Indemnified Claims, with the exception of Norcal's and the ESOP's own defense
costs. The indemnity is to be paid from certain funds to be placed in escrow
(the "Escrow Account") and not disbursed to Settling Plaintiffs until the later
of the resolution of all Indemnified Claims or, if no Indemnified claims are
brought, then nine months after deposit. The funds to be placed in the Escrow
Account consist of (i) any amounts Settling Plaintiffs recover from the
Indenture Trustee Parties (the "Escrowed Recovery"); and (ii) a deferred
settlement payment by Norcal, to be paid on the earlier of the fifth anniversary
of the effective date of the Abraham Settlement and final resolution of Settling
Plaintiffs' claims against the Indenture Trustee Parties, in the amount of
$500,000 reduced by certain attorneys' fees and costs as to which Norcal or the
ESOP is contractually obligated to provide indemnification and/or reimbursement
(the "Deferred Settlement Payment"). No Settling Plaintiff is personally liable
on the indemnity beyond his, her or its interest in or distribution from the
Escrow Account.
On September 29, 1995, the court entered an order (the "Good Faith
Determination") finding that the Abraham Settlement was fair and made in good
faith under all applicable legal standards and barring any claim against the
Released Parties, including Norcal and ESOP, by any other joint tortfeasor
(including Bank of America and Security Pacific) for equitable contribution or
equitable indemnity that in any way relates to the released claims. If, as a
result of an appeal from a judgment, or otherwise, the Good Faith Determination
were reversed, vacated or modified in such a way that the Indenture Trustee
Parties were not prohibited from proceeding against some or all of the Released
Parties on such claims, Settling Plaintiffs' indemnification of Norcal and
related parties would still extend to such claims.
On December 17, 1996, the court granted summary judgment to Norcal and the
ESOP on their declaratory relief action against Bank of America and issued a
declaration that following the Abraham Settlement, Norcal and the ESOP have no
obligations under the indemnity provisions of certain agreements between Bank of
America or Security Pacific, on the one hand, and Norcal or the ESOP, on the
other (the "Indemnity Agreements") to defend or reimburse Bank of America for
its attorney's fees or litigation expenses or to indemnify Bank of America for
any damages or settlement it pays to Plaintiffs in connection with the Abraham
Action.
On the same date, the court dismissed a complaint by Bank of America
against Norcal and the ESOP that alleged claims relating to the Abraham
Settlement and purported post-Settlement obligations under 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.
Thereafter, Bank of America brought additional claims against Norcal and
the ESOP relating to the Abraham Settlement and purported post-Settlement
indemnity obligations but dismissed those claims without prejudice after Norcal
and the ESOP filed a motion to dismiss. In the future, Bank of America may
attempt to bring these or other claims against Norcal or the ESOP relating to
the Abraham Settlement or post-
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Settlement indemnity obligations and may appeal the court's rulings on these
issues. Any such claims would be "caused by or related to the Excluded Claims"
and, as such, would be Indemnified Claims covered by Settling Plaintiffs'
indemnity. Accordingly, any liability incurred by Norcal (other than its own or
the ESOP's defense costs) in connection with such claims would be payable from
the Escrowed Recovery, if any, and potentially the Deferred Settlement Payment.
Norcal believes that it is unlikely that it would be liable to pay an amount in
damages on such claims that is materially greater than any recovery by Settling
Plaintiffs from Bank of America (aside from any liability for damages in the
amount of Bank of America's litigation expenses), and thus any award of damages
(aside from such expenses) on such claims is not likely to exceed the Escrowed
Recovery (before reduction for indemnified defense costs).
On September 15, 1997, after a trial on certain of Plaintiffs' claims in
the first phase of the Abraham Action, the jury found that Bank of America had
breached fiduciary duties it owed to Plaintiffs but had not breached a
contractual obligation to Plaintiffs under the 1986 Indenture and was not
negligent in the performance of its duties under the Indenture. The jury also
found that the acts or omissions of Bank of America were not the cause of
Plaintiffs' damages. The action is proceeding to resolve the remaining issues,
including Plaintiffs' other claims against Bank of America in the second phase
of the case.
PLACER RANCH LITIGATION.
On June 17, 1994, Placer Ranch Partners, Placer Ranch Partners 160, and
Stanford Ranch, Inc. filed suit in Placer County Superior Court against the
Company and Western Placer Recovery Company, a subsidiary of the Company that
operates the Western Placer Regional Landfill. Also named as defendants were the
Western Placer Waste Management Authority, the landfill owner (the "Authority"),
and the County of Placer, its Board of Supervisors, its Department of Public
Works and its Department of Health and Medical Services. The case is presently
entitled Placer Ranch Partners, Inc. v. Western Placer Waste Management
Authority, Western Placer Recovery Co. and Norcal Waste Systems, Inc. The
original complaint alleged that the defendants have failed to operate the
landfill in accordance with applicable environmental laws, rules, regulations,
permits and orders and failed to obtain required operating permits. The original
complaint also contended that the defendants' ownership and operation of the
landfill constitutes a nuisance, trespass, and inverse condemnation of adjacent
properties, and alleges civil rights violations. Based on the foregoing, the
lawsuit sought injunctive relief and damages in an unspecified amount.
The Fifth Amended Complaint filed by the single remaining Plaintiff, Placer
Ranch Partners, Inc., (the currently operative complaint), contains allegations
of nuisance and trespass against the Company and the Authority, and alleges a
taking claim exclusively as to the Authority. These claims arise primarily from
the fear that methane gas and groundwater contamination, both of which exist on
site at the landfill to some degree, will at a future time encroach on
Plaintiff's property. Plaintiff seeks substantial monetary damages for alleged
loss or diminution of value of its property. Plaintiff also seeks injunction
relief involving substantial additional expenditures for corrective action and
remediation at the landfill. Trial is scheduled for March 24, 1998. The landfill
is heavily regulated by the State Integrated Waste Management Board and the
Regional Water Quality Control Board.
The Company believes that Plaintiff's criticisms of the landfill operations
are without merit, and in any event are properly addressed to the Authority in
light of the limited operational role played by the Company. In addition,
Plaintiff's property, which is and has been zoned exclusively for agricultural
use, has not been significantly damaged by landfill operations. The Company
intends to continue its vigorous defense of the case which is conducted jointly
with the Authority. Preparation for trial will be expensive and the incurrence
of significant costs in any period could have a material adverse effect on the
Company's results of operations for such period. The Company anticipates that
Plaintiff's claims will be rejected or will result in only a nominal recovery.*
However, if the matter were to be resolved against the Company, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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PENSION DISPUTE.
In connection with the new contract between the Company and the Sanitary
Truck Drivers and Helpers Union Local 350 International Brotherhood of Teamsters
("Local 350"), a dispute has arisen between the Company and Local 350 regarding
certain pension benefits. The Company believes that it was agreed that an
increase to certain pension benefits was to be prospective. Subsequently, Local
350 asserted that it understood the increase to be retroactive. The Company has
served upon Local 350 a demand to arbitrate this dispute under the terms of the
collective bargaining agreement between the parties. No arbitration date has yet
been set. Although the ultimate outcome of such a proceeding cannot be
determined at this time and the results of legal proceedings cannot be predicted
with certainty, the Company, after consultation with outside labor counsel,
believes it should prevail and therefore the resolution of this matter will not
have a material adverse effect on the financial condition or results of
operations of the Company. However, if the Company does not prevail, there could
be a material adverse impact on the financial condition and results of
operations of the Company. Arbitration could conclude that there has been no
meeting of the minds on this provision of the contract and the provision could
have to be renegotiated. If the matter is not satisfactorily renegotiated, the
Company could be subject to another work stoppage. See "Risk Factors -- Union
Matters."
ENVIRONMENTAL LIABILITIES.
Cummings Road Landfill. In 1987, contamination was confirmed in the
groundwater underlying and in the vicinity of the Company's Cummings Road
Landfill in Humboldt County, California. Investigations indicated that the
landfill was the source of the contamination. In response to civil claims, the
Company made cash payments, restricted use of certain property, exchanged
property and provided an alternative water supply to certain residents and
businesses affected or potentially affected by the impacted groundwater. As part
of a revised corrective action plan submitted to and in 1994 approved by the
Regional Water Quality Control Board various landfill improvements have been
made including a trench to intercept upgradient groundwater to divert it away
from the landfill. The Company currently estimates its remaining expenditures to
be incurred to be $1.4 million and has established a mechanism with the County
of Humboldt to secure reimbursement of such remediation costs at the landfill by
the end of the current disposal agreement on September 30, 1998. In addition,
the Company has extended a municipal water line to certain residents
downgradient of the landfill. The Company estimates immaterial additional
expenditures to be incurred in connection with completion of this water line
project during 1998.
On September 30, 1997, a subsidiary of the Company and The Pacific Lumber
Company ("Pacific Lumber") executed a settlement agreement formalizing an
agreement in principle previously reported regarding the Cummings Road Landfill.
Pacific Lumber subsequently filed a dismissal with prejudice, which the court
entered on October 8, 1997.
Sierra Point Landfill. On March 25, 1996, the California Regional Water
Quality Control Board (the "Regional Board") issued a formal request for
information pursuant to the California Waste Code to Sunset Scavenger Company
("Sunset"), a subsidiary of Norcal, regarding Sunset's ownership, prior to 1980,
of the now closed Sierra Point landfill in the City of Brisbane. Preliminary
research indicates that landfilling ceased at the site prior to 1972 and closure
work was completed by 1982. The Regional Board issued the information request in
connection with its review of the existing Waste Discharge Requirement ("WDRs")
order for the landfill. On April 17, 1996, the Regional Board adopted updated
WDRs naming seven parties, but not Sunset or Norcal, as responsible for
performing specified post-closure landfill monitoring, maintenance and,
potentially, corrective action or work at the landfill if monitoring indicates
that is necessary. Although neither Sunset nor Norcal were named in the WDRs,
the Regional Board staff stated at the April 17, 1996 hearing that they may
propose to add Sunset or Norcal as parties to the WDRs or to a site cleanup
requirements ("SCRs") order in the future. Sunset is preparing its response to
the information request, but it is not possible at this stage of the
administrative proceeding to determine what, if any, Sunset or Norcal's
liabilities may be at the landfill. If Sunset or Norcal ultimately is named in
the WDRs or SCRs order, either or both may be required to fund or perform a
share of the post-closure work. Such work could include pumping and treatment of
landfill leachate, if monitoring demonstrates that such work is necessary.
Sunset and Norcal currently are not able to estimate the costs that may be
associated with such work.
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In the ordinary course of its business, the Company has incurred
environmental liabilities at some of its other sites including soil and water
contamination. Although the Company believes the environmental liabilities at
these sites will not have a material adverse effect on the Company, there can be
no assurance that such liabilities will not be material or that other material
liabilities will not arise in the future at these or other sites.
OTHER MATTERS.
From time to time, in the normal course of its business, the Company may
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. The Company could incur substantial legal
expenses during the course of such proceedings and the outcome of one or more of
these proceedings could have an adverse impact on the Company's business. From
time to time, the Company also may be subjected to actions brought by
individuals or citizens' groups in connection with the grant or permits for its
operations or alleging violations of permits or other regulatory requirements
pursuant to which the Company operates, which, if successful, could have a
material adverse effect on the Company's business. See "Risk
Factors -- Environmental Regulation and Potential Litigation."
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to the
normal course of business 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is 100% owned by the ESOP and is not publicly
traded. As of December 15, 1997, there were 1,763 employees who were
participants in the ESOP.
The Company has declared no cash dividends on its common stock since 1988.
The Indenture relating to the Senior Notes provides that the Company may not,
and may not permit any of its subsidiaries to, directly or indirectly, declare
or pay any dividend or make any distribution on account of, or any contribution
in respect of, its capital stock, other than dividends or distributions payable
in capital stock (other than stock, or any security convertible into common
stock, with certain mandatory dividend or redemption provisions) of the Company
or dividends or distributions payable from a subsidiary to the Company or any
wholly-owned subsidiary of the Company, if at the time of and after giving
effect to such dividend, distribution or contribution, certain conditions are
not met. This provision does not prohibit certain purchases of capital stock
distributed by the ESOP, certain contributions or dividends paid to the ESOP, or
certain loans to the ESOP.
Pursuant to the Credit Agreement, neither the Company nor any of its
subsidiaries may declare or pay any distributions (including dividends) on or in
respect of any class of capital stock other than (i) distributions payable
solely in its capital stock; (ii) distributions of cash by a subsidiary of the
Company to a Subsidiary Guarantor or to the Company; (iii) certain distributions
made to the ESOP; (iv) distributions made by the Company to repurchase any
capital stock of the Company distributed by the ESOP, to the extent made under
certain circumstances; and (v) other distributions not to exceed $1,000,000 in
the aggregate per fiscal year, subject to certain events of default.
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
26
<PAGE> 27
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information
regarding the Company for the five years ended September 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Collection and disposal operations........ $241,251 $225,328 $221,483 $209,140 $216,592
Third party landfill management
services............................... 62,191 45,623 21,516 18,792 19,011
Recycled commodities sales................ 16,359 17,264 28,502 19,244 19,546
--------- --------- --------- --------- ---------
Total revenues.................... 319,801 288,215 271,501 247,176 255,149
--------- --------- --------- --------- ---------
Cost of operations:
Operating expenses........................ 226,977 202,848 183,865 167,740 173,515
Depreciation and amortization............. 19,732 18,320 19,985 20,141 22,704
ESOP compensation expense (a)............. 13,128 10,291 7,923 7,319 6,920
General and administrative................ 32,990 30,965 26,446 24,849 26,286
--------- --------- --------- --------- ---------
Total cost of operations.......... 292,827 262,424 238,219 220,049 229,425
--------- --------- --------- --------- ---------
Operating income............. 26,974 25,791 33,282 27,127 25,724
Interest expense............................ (25,649) (23,913) (19,909) (20,920) (23,900)
Interest income............................. 2,463 1,804 1,695 965 1,081
Gain (loss) on dispositions, net............ 119 (477) 1,279 6,744 11,477
Settlement of litigation (b)................ -- (3,648) -- (5,480) --
Other income (expense)...................... 2,619 (693) 748 424 5,206
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ 6,526 (1,136) 17,095 8,860 19,588
Income tax expense.......................... -- -- 6,662 2,500 1,447
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. 6,526 (1,136) 10,433 6,360 18,141
Extraordinary gain on early extinguishment
of long-term debt, net of $0 income
taxes..................................... -- 31,379 -- -- --
Cumulative effect on prior years of change
in accounting for income taxes............ -- -- -- 2,500 --
--------- --------- --------- --------- ---------
Net income........................ $ 6,526 $ 30,243 $ 10,433 $ 8,860 $ 18,141
========= ========= ========= ========= =========
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Property and equipment, net............... $142,933 $137,147 $132,431 $129,566 $143,706
Total assets.............................. 351,169 321,235 299,152 292,299 305,655
Total long-term debt, including current
portion(c)............................. 177,419 176,740 205,410 226,013 258,186
Stockholder's equity (deficit)............ 23,509 6,117 (43,878) (65,935) (81,864)
</TABLE>
- ---------------
(a) Non-cash ESOP compensation expense is calculated under the shares allocated
method based upon repayment on the ESOP's indebtedness to the Company,
funded by contributions from the Company.
(b) Data for 1996 and 1994 represent non-recurring expenses incurred in
connection with the settlement of litigation involving the ESOP Notes and
the Old Subordinated Notes, respectively.
(c) Includes indebtedness of the ESOP in fiscal years 1993 to 1995 as required
to be reflected on the Company's balance sheet by GAAP.
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise indicated, references in the discussion below to a
particular year are references to the Company's fiscal year ended September 30.
FORWARD LOOKING INFORMATION
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described earlier (see "Risk Factors" in Item 1) and elsewhere in
this Form 10-K include, but are not limited to: changes in general economic
conditions, inability to maintain rates sufficient to cover costs, inability to
obtain timely rate increases, fluctuations in commodities prices, changes in
environmental regulations or related laws, inability to settle union labor
contract disputes and competition. The Company does not undertake to update any
forward-looking statement that may be made from time to time by it or on its
behalf.
GENERAL
The Company's revenues are comprised primarily of fees charged to
residential, commercial and industrial customers for the collection and disposal
of solid waste, disposal fees charged to third parties who dispose at the
Company's transfer stations and landfills, fees charged for landfill operations
and solid waste systems management activities for third party landfill owners,
and revenues generated from the sale of recyclable materials.
Collection and disposal revenues are subject to pressures from a variety of
sources, including increased competition, reductions and diversion of solid
waste and regulatory changes. Revenues are generated through rates charged to
customers. Residential rates are generally covered by formal rate setting
mechanisms as established by rate boards or other local government
jurisdictions, which provide a specified return on allowable costs. Commercial
and industrial rates are generally subject to competitive considerations if not
covered by formal rate setting mechanisms. The rate setting process may result
in the exclusion of certain costs and/or delays in cost recovery. To the extent
that certain operating costs are excluded from the allowable costs to be
recovered, operating margins will be negatively impacted.* The Company believes
the trend of increasing pressure on collection rates, and therefore profit
margins, will continue in the future.*
Approximately 39% of the Company's revenues and substantially more of its
operating income in fiscal year 1997 were derived from services performed in the
City and County of San Francisco. While the Company anticipates the proportion
of its total revenues earned from its San Francisco operations in fiscal year
1998 to be generally consistent with the proportion earned in fiscal year 1997,
the Company expects the proportion of the Company's total operating income
earned from its San Francisco operations to decline significantly and be
generally comparable to the proportion of revenues in 1998.* This decline in
proportion of operating income is expected as a result of the Company's
anticipated recognition of certain inflationary cost increases and costs of new
recycling programs for which no additional rate recovery is anticipated in
1998.*
During 1996, the Company commenced management of the operations in San
Bernardino County under a new contract. In addition to the operations and
engineering activities with respect to all active landfill sites, the contract
includes the opportunity to generate substantial revenues through the
development and implementation of the County's Solid Waste Strategic Plan.
Approximately 17% of the Company's revenues for fiscal year 1997 were derived
from services performed for San Bernardino County. The Company's revenues from
San Bernardino County are derived from two categories of services. The core
service is the performance of ongoing landfill operations activities. Revenues
from this component accounted for approximately 33% of total revenues generated
in San Bernardino County in 1997. Over the term of the contract the amount of
revenues from this core service will vary primarily as a result of changes in
volume of waste deposited at landfills and changes in the Company's per ton
compensation rate. The other component of revenues represents activities
associated with the planning and implementation of the strategic plan to
regionalize landfill operations in San Bernardino County. This includes
planning, engineering and construction management for landfill expansions,
transfer station construction and landfill closures. It is anticipated that the
<PAGE> 31
majority of these activities will be completed over the next 6 years, during
which time San Bernardino County plans to spend approximately $200 million.* The
Company's agreement with San Bernardino County terminates on June 30, 2001. See
"Business -- Operated Landfills."
Although the Company generates significant revenues from its services for
San Bernardino County, the Company generally earns lower margins than on its
collection and disposal operations, due to the fact that there is little capital
investment required to generate the additional revenues, and profit margins are
limited by the contract. The additional revenues generate additional earnings
but tend to reduce the overall profit margin as compared to historical levels.
This business involves substantial sub-contractor, consulting and other related
expenses paid to third parties.
The revenues derived from the sale of recyclable materials are volatile and
fluctuate in accordance with changes in prices of recyclable commodities which
in turn are, in many cases, dependent on worldwide supply of and demand for such
recyclable commodities. In the aggregate, the costs related to recycling
operations do not fluctuate in accordance with changes in the prices of
recyclable commodities and as a result the Company may experience increases or
decreases in profitability depending on changes in the prices for recyclable
commodities.
Operating expenses include labor, disposal fees paid to third parties,
fuel, equipment maintenance and rentals, engineering, consulting and other
professional services and other direct costs of operations. Also included are
accruals for landfill closure and corrective action costs, consistent with
regulatory requirements. General and administrative expenses include management
salaries, administrative and clerical overhead, professional services costs and
other fees and expenses.
ESOP compensation expense includes amounts contributed by the Company to
the ESOP to allow the ESOP to repay its intercompany loans to the Company along
with amounts to fund distributions to retired, terminated or withdrawing
participants. The total contributions are subject to various limitations imposed
by the Internal Revenue Code of 1986, as amended, and are generally tax
deductible. The debt repayments by the ESOP result in allocation of Company
common stock to ESOP participants' accounts pursuant to an allocation formula.
Distribution payments are made by the ESOP to retired, terminated or withdrawing
participants based on their vested allocated shares of Company common stock. The
Company expects future contributions to the ESOP to fund distributions to
increase significantly as additional employees reach retirement age, as
additional shares are allocated to employee accounts, if eligible participants
elect to receive in-service withdrawals and if the appraised value of the
Company common stock increases.* During 1997, the Company made contributions to
the ESOP that, in addition to funding the distribution obligation and the
scheduled loan payment, allowed the ESOP to prepay approximately $9.1 million of
intercompany loans. This additional contribution resulted in substantial tax
savings and additional ESOP compensation expense relative to the additional
shares allocated. The Company may make similar additional contributions to the
ESOP in excess of the scheduled contribution in future periods corresponding to
tax advantages afforded by the accelerated contributions.*
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
<PAGE> 32
RESULTS OF OPERATIONS
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY STATEMENTS OF OPERATIONS
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Collection and disposal operations............................ 75.4% 78.2% 81.6%
Third party landfill management services...................... 19.5% 15.8% 7.9%
Recycled commodities sales.................................... 5.1% 6.0% 10.5%
------ ------ ------
Total revenues............................................. 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses............................................ 71.0% 70.4% 67.7%
Depreciation and amortization................................. 6.2% 6.4% 7.4%
ESOP compensation expense..................................... 4.1% 3.6% 2.9%
General and administrative.................................... 10.3% 10.7% 9.7%
------ ------ ------
Total cost of operations................................... 91.6% 91.1% 87.7%
------ ------ ------
Operating income...................................... 8.4% 8.9% 12.3%
Interest expense................................................ (8.0)% (8.3)% (7.3)%
Interest income................................................. 0.8% 0.6% 0.6%
Gain (loss) on dispositions, net................................ 0.0% (0.2)% 0.4%
Settlement of litigation........................................ 0.0% (1.2)% 0.0%
Other income (expense).......................................... 0.8% (0.2)% 0.3%
------ ------ ------
Income (loss) from operations before income taxes and
extraordinary item.................................. 2.0% (0.4)% 6.3%
------ ------ ------
Income tax expense.............................................. 0.0% 0.0% 2.5%
------ ------ ------
Income (loss) before extraordinary item............... 2.0% (0.4)% 3.8%
------ ------ ------
Extraordinary item -- gain on early retirement of debt, net of
$0 income taxes............................................... 0.0% 10.9% 0.0%
Net income.................................................... 2.0% 10.5% 3.8%
====== ====== ======
</TABLE>
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
Revenues. Revenues in 1997 increased $31.6 million (11.0%) to $319.8
million from $288.2 million in 1996. Third party landfill management services
revenues increased by $16.6 million due to expanded landfill operations and
solid waste management activities in San Bernardino County, a contractual rate
increase effective July 1, 1996 and higher volumes. Waste collection and
disposal revenues increased by $15.9 million due to rate increases in several
service areas (primarily an 11.0% increase in San Francisco, effective March 1,
1997), operations acquired in November 1996, unusual flood clean-up and disposal
activities in the Sacramento Valley of California and general volume increases.
Recycling revenues decreased $0.9 million primarily from the elimination of a
recycling program in one service area in October 1996.
Operating Expenses. Operating expenses in 1997 increased $24.2 million
(11.9%) to $227.0 million from $202.8 million in 1996. As a percentage of
revenues, operating expenses increased slightly to 71.0% in 1997 from 70.4% in
1996. Project and subcontractor related costs increased $10.5 million due to
expanded third party landfill management services in San Bernardino County.
Payroll and related costs increased $6.3 million due to union wage increases
(primarily a 4.7% increase in San Francisco, effective January 1, 1997),
additional operational personnel in San Bernardino County, operations acquired
in November 1996 and additional labor costs related to unusual flood clean-up
and disposal activities. Professional services increased
<PAGE> 33
$2.1 million in connection with increased legal, consulting and other services.
Disposal costs increased $1.7 million due to higher volumes and tipping fee
increases.
Depreciation and Amortization. Depreciation and amortization in 1997
increased $1.4 million (7.7%) to $19.7 million from $18.3 million in 1996.
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the cost of shares allocated as determined by the Company's contribution to the
ESOP, along with contributions to fund distributions to retired, terminated and
withdrawing participants. ESOP compensation expense in 1997 increased $2.8
million (27.2%) to $13.1 million from $10.3 million in 1996. The increase in
expense can be attributed to higher contributions made to the ESOP that allowed
the ESOP to make scheduled loan payments and prepayment of additional principal
along with increases in contributions related to the funding of distributions.
General and Administrative. General and administrative expenses in 1997
increased $2.0 million (6.5%) to $33.0 million from $31.0 million in 1996. As a
percentage of revenues, general and administrative expenses decreased to 10.3%
in 1997 from 10.7% in 1996. The increased costs were due primarily to higher
costs in connection with professional and consulting services.
Operating Income. Operating income in 1997 increased $1.2 million (4.6%) to
$27.0 million from $25.8 million in 1996. The primary cause of the increase in
operating income was increased revenues.
Interest Expense. Interest expense in 1997 increased $1.7 million (7.1%) to
$25.6 million from $23.9 million in 1996. The increase is due to a higher
effective interest rate on the Senior Notes in the current period and interest
from a note issued for an acquisition in November 1996.
Interest Income. Interest income in 1997 increased $0.7 million (36.5%) to
$2.5 million from $1.8 million in 1996. The increase is due to higher cash
balances which earned interest in 1997.
Other Income (Expense). Other income in 1997 increased $3.3 million to $2.6
million from an expense of $0.7 million in 1996. Other income in 1997 was due to
gains of $1.4 million from the sale of marketable securities and a $1.0 million
settlement with a third party in connection with a dispute over a landfill
engineering matter at one of its landfills.
Income Tax Expense. There was no income tax expense in 1997 or 1996. The
Company has experienced an effective tax rate of zero in 1997 and 1996 as a
result of realizing certain of its deferred tax assets for which a valuation
allowance had previously been established.
Net Income. Net income in 1997 was $6.5 million and was attributable to
higher other income from gains on the sale of marketable securities and a
settlement with a third party in connection with a dispute over a landfill
engineering matter at one of its landfills, higher operating income, and higher
interest income in 1997 compared to 1996. In addition, 1996 included a $3.6
million charge for the settlement of litigation. Net income in 1996 was
attributable to the extraordinary gain.
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
Revenues. Revenues in 1996 increased $16.7 million (6.2%) to $288.2 million
from $271.5 million in 1995. Third party landfill management services revenues
increased $24.1 million due to new and expanded landfill operations and solid
waste management activities in San Bernardino County effective November 1, 1996.
In addition, the Company commenced operations of five landfills under a contract
with San Diego County on March 1, 1995. Waste collection and disposal revenues
increased $3.8 million as a result of rate increases in several service areas.
Recycled commodities sales revenues decreased $11.2 million due to lower prices
received from the sale of recyclable commodities, primarily paper and cardboard.
Operating Expenses. Operating expenses in 1996 increased $18.9 million
(10.3%) to $202.8 million from $183.9 million in 1995. As a percentage of
revenues, operating expenses increased to 70.4% in 1996 from 67.7% in 1995.
Project and subcontractor related costs increased $18.8 million due to new and
expanded third-party landfill management services activities in San Bernardino.
Payroll and related costs increased $5.1 mil-
<PAGE> 34
lion a result of additional hires to support new and expanded third-party
landfill management services activities in Southern California and scheduled
union wage increases. Fuel costs increased $1.0 million, reflecting a general
increase in fuel prices. These increased operating costs were partially offset
by decreased recycling purchases of $3.7 million due to lower costs for
recyclable commodities and lower landfill costs of $2.1 million resulting from
increased capacity and changes to estimated closure costs at the Company-owned
landfills.
Depreciation and Amortization. Depreciation and amortization in 1996
decreased $1.7 million (8.3%) to $18.3 million from $20.0 million in 1995. The
decrease is attributable to a reduction in landfill depletion expense based on
increased capacity at the Company's landfills along with a reduction in
depreciation expense from a number of assets that became fully depreciated at
September 30, 1995 along with the buyouts of expiring capital leases during
fiscal year 1995.
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the Company's contribution to the ESOP, along with contributions to fund
distributions to retired, terminated and withdrawing participants. ESOP
compensation expense in 1996 increased $2.4 million (30.0%) to $10.3 million
from $7.9 million in 1995. The increase in expense can be attributed to higher
contributions made to the ESOP that allowed the ESOP to make scheduled loan
payments and prepayment of additional principal along with increases in
contributions related to the funding of distributions.
General and Administrative. General and administrative expenses in 1996
increased $4.6 million (17.4%) to $31.0 million from $26.4 million in 1995. As a
percentage of revenues, general and administrative expenses increased to 10.7%
in 1996 from 9.7% in 1995. Payroll and related costs increased $3.3 million
resulting from increased administrative personnel to support new and expanded
third-party landfill management services in Southern California, general wage
increases and additional management personnel. Other administrative costs
increased as a result of the new and expanded third-party landfill management
services in Southern California.
Operating Income. Operating income in 1996 decreased $7.5 million (22.5%)
to $25.8 million from $33.3 million in 1995. As a percentage of revenues,
operating income decreased to 8.9% in 1996 from 12.3% in 1995. The primary
causes of the decrease in operating income in 1996 were the significant drop in
recycling revenues due to lower commodity prices coupled with higher operating,
ESOP compensation and general and administrative expenses.
Interest Expense. Interest expense in 1996 increased by $4.0 million
(20.1%) to $23.9 million from $19.9 million in 1995. The increase is due to a
higher effective interest rate associated with the Company's Senior Notes issued
as part of the refinancing transaction in November 1995.
Gain (Loss) on Dispositions. The loss on dispositions in 1996 of $0.5
million represents the net impact of asset disposals, primarily real estate. The
gain on dispositions in 1995 of $1.3 million primarily represented the gain on
the sale of the Company's 50% ownership interest in an affiliated company.
Settlement of Litigation. Settlement of litigation in 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 in 1996 decreased $1.4 million to an
expense of $0.7 million from income of $0.7 million in 1995. The decrease in
other income was due to non-operating expenses incurred during 1996, including
equity in losses of an affiliate, certain expenses associated with the
refinancing transaction and losses incurred from the sales of investments held
in trust accounts. Other income in 1995 consisted primarily of equity in
earnings of an affiliate which was sold in July 1995.
Income Tax Expense. There was no income tax expense in 1996 compared to
income tax expense of $6.7 million in 1995. The Company experienced an effective
rate in fiscal 1996 of zero as a result of realizing certain of its deferred tax
assets for which a valuation allowance had previously been established.
Extraordinary Gain. The Company recorded an extraordinary gain of $31.4
million as a result of the early extinguishment of subordinated notes pursuant
to the refinancing transaction.
<PAGE> 35
Net Income. The Company recorded net income of $30.2 million in 1996
compared to net income of $10.4 million in 1995. The net income in 1996 is
attributable to the extraordinary gain, offset by those factors discussed in
Operating Income as well as higher interest expense, settlement of litigation
and higher other expense.
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. As of September 30, 1997, the Company had working capital of $15.8
million. As part of the Refinancing the Company entered into the Credit
Agreement which provides for up to $100.0 million of additional borrowings and
which, subject to certain limitations and covenant restrictions (including
financial ratios), can be drawn by the Company to fund ongoing operations,
invest in capital equipment and/or facilities and to finance acquisitions. The
Credit Agreement expires in November 2000. At September 30, 1997, the Company
had utilized $6.8 million of the credit facility provided by the Credit
Agreement for letters of credit and had availability under the Credit Agreement
of approximately $75.0 million, with an additional $18.2 million available for
letters of credit. Certain acquisitions could increase availability under the
Credit Agreement, due to the Company's ability to include certain pro forma
financial information of acquired entities in calculating its financial ratios
to determine availability. Changes in availability under the Credit Agreement
are a function of changes in operating results, among other things. In addition,
certain covenant measures in the Credit Agreement become more restrictive over
time. As a result, if the Company's results of operations in fiscal year 1998
are consistent with fiscal year 1997, availability under the Credit Agreement
would decrease by approximately $30.0 million.
In February 1997, the San Francisco Refuse Collection and Disposal Rate
Board (the "Rate Board") issued two rate orders (the "Orders") approving an
11.0% rate increase to the Company's refuse collection rates for the City of San
Francisco effective March 1, 1997. The Orders disallowed 50% of the ESOP expense
requested by the Company for rate reimbursement, and, after March 1, 1998, ESOP
expense will be fully disallowed. The Company expects that the full disallowance
of the ESOP expense may have an adverse effect on availability under the Credit
Agreement.* The Rate Board also directed the Department of Public Works to
examine solid waste rate setting methods in other jurisdictions and to propose
changes in the current system for regulation of refuse collection and disposal
to the San Francisco Board of Supervisors. A significant modification to the
rate setting methodology could have a material adverse effect on the Company's
financial condition and results of operations.
The Indenture governing the Senior Notes contains provisions which, among
other things, (i) limit the Company's and its subsidiaries' ability to declare
or pay dividends or other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal or, in certain cases,
the ESOP), (ii) limit the purchase, redemption or retirement of capital stock
and (iii) limit the incurrence of additional debt.
The Senior Notes mature in November 2005. As of September 30, 1997,
interest on the Senior Notes accrued at the rate of 13.25% per annum, which rate
increased by an additional 0.25% per annum on November 16, 1997, to the maximum
of 13.5% per annum. However, the interest rate on the Senior Notes is subject to
decrease to 12.5% at such time the Company (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.
Cash Flow from Operations. Cash flow from operations in 1997 increased
108.2% to $42.4 million from $20.4 million in 1996. The increase was due to the
income of $6.5 million in 1997 compared to a loss before extraordinary item of
$1.1 million in the prior year, a smaller change in accounts receivable as a
percentage of sales, lower tax payments and higher non-cash insurance and ESOP
expenses in 1997.
Cash Flow from Investing Activities. Cash used by investing activities in
1997 increased $15.9 million to $23.1 million from $7.2 million in 1996. The
Company used $21.3 million on capital expenditures during 1997, primarily
vehicles, containers and other equipment, and used $3.6 million for
acquisitions. In 1997, the
<PAGE> 36
Company generated $1.4 million from the sales of marketable securities and $0.4
million from the sale of miscellaneous assets.
Cash Flow from Financing Activities. Cash used by financing activities was
$1.3 million for 1997, consisting of principal payments on long term debt and
capital leases. Cash used by financing activities was $7.2 million for 1996. As
discussed above, the Company completed the Refinancing on November 21, 1995
which included the receipt of $170.2 million (after original issue discount)
from the issuance of Senior Notes and utilized the funds for the payment of then
outstanding bank debt, certain capitalized lease obligations and redemption of
subordinated notes. In addition, the Company incurred approximately $10.8
million in fees and expenses related to the transaction. The Company also
received $3.5 million from the ESOP as payment of loans to the ESOP paid from
the insurance proceeds received in conjunction with a litigation settlement.
OTHER CASH REQUIREMENTS
The Company has material financial obligations related to closure and
post-closure costs with respect to landfills it owns. While the amount of these
future obligations cannot be determined definitively at this time, the Company
estimates the costs in current dollars for final closure of landfills it owns,
as well as related post-closure activities for an estimated period of thirty
years after the closure of each respective landfill, at approximately $61.7
million.* The Company recognizes an expense and liability for such costs based
on units of production and makes contributions to trust funds to satisfy
financial assurance requirements and fund the landfill costs. As of September
30, 1997, the Company had recorded a liability of $27.1 million for such
projected costs in accordance with generally accepted accounting principles
("GAAP") and had on deposit $24.9 million in trust accounts consistent with
regulatory requirements. The Company estimates its 1998 funding requirement at
approximately $2.4 million, although the actual requirements could vary with
changes in cost estimates and/or regulatory requirements.*
The Company also has significant financial obligations with respect to
certain environmental statutes and regulations protecting the groundwater and
surface water in the vicinity of its landfills. The Company estimates the
remaining funding associated with this issue to be approximately $2.4 million
and is satisfying that obligation through deposits made to trust funds.* The
Company estimates its 1998 funding requirement at approximately $1.4 million,
although the actual requirement could vary with changes in cost estimates and/or
regulatory requirements.* The Company also has recorded a liability of $2.4
million for potential costs associated with other environmental matters.
The Company is in discussions with the City of San Francisco regarding
plans for the construction of materials recovery and other facilities for use in
connection with the Company's San Francisco operations and to facilitate
compliance with mandated recycling requirements. The Company and the City are
continuing to negotiate the nature, scope and financing of this project. The
Company cannot predict the timing of an agreement with the City and therefore is
unable to accurately project the timing of initiation of construction. Over the
term of the Senior Notes, the Company may need to invest substantial capital to
acquire or construct waste processing facilities, household hazardous waste
facilities, maintenance and administrative complexes, and equipment.* The
Company intends to seek continued rate recovery for amounts expended on any
projects and may seek to finance such capital expenditures through additional
secured borrowings, including up to $30.0 million of borrowing for certain
"Designated Capital Expenditures" (as defined in the Indenture).*
The Company is obligated to provide, subject to certain conditions,
post-retirement health and welfare benefits to certain former
employee-shareholders (as well as their spouses and dependents) of two of its
predecessors. Although the Company's obligation with respect to some of its
former employee-shareholders will terminate upon the earlier of October 1, 2000
or the final resolution of legal claims against third parties reserved pursuant
to the settlement of litigation, most of the Company's obligations extend for
the lifetime of such former employee-shareholders. The accrued post-retirement
medical benefit liability as of September 30, 1997 was $34.2 million and the
Company made cash payments during 1997 totaling approximately $1.2 million.
Payments at rates similar to those made in 1997 or greater, depending on medical
inflation rates and the aging of the persons entitled to benefits, are expected
for a significant number of years.*
<PAGE> 37
The Company anticipates future increases in the ESOP contributions related
to funding the distributions to retired, terminated or withdrawing participants
based on their vested allocated shares of Company common stock.* The Company
expects the contributions to increase as additional employees reach retirement
age, as additional shares are allocated to employee accounts, if eligible
participants elect to receive in-service withdrawals and if the value of the
Company common stock increases. In addition, accelerated contributions made to
realize tax benefits will increase ESOP compensation expense and will have a
negative impact on earnings. While Norcal may consider a public offering of its
common stock as a potentially desirable way to eliminate the ESOP-related
requirements to either repurchase stock or fund cash distributions for retired,
terminated or withdrawing employees, there can be no assurance that Norcal would
be able to effect such an offering or otherwise create a trading market for its
stock.*
During 1997 the Company began a project to replace its management
information systems with an established third party package of integrated
financial applications. In addition to providing increased flexibility and
functionality, the new system will also be Year 2000 compliant. The Company
expects the total cost of the project to be $3.4 million, of which $1.2 million
had been spent through September 30, 1997.*
ENVIRONMENTAL REGULATIONS
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to the leachate and groundwater management
and remediation. There are many unknown and uncertain factors including
regulatory requirements, incomplete data with respect to projected volumes,
quality and cost of treatment among others. Accordingly, estimates for closure
and post-closure management and remediation of leachate and contaminated
groundwater could be subject to periodic and substantial upward revision as the
Company's knowledge increases concerning these factors.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
Historically, the Company has experienced cost increases due to the effects
of inflation on its operating expenses, particularly the cost of compensation
and benefits, and the replacement of or additions to property and equipment.
Fuel costs which fluctuate with inflation and other market conditions also have
affected operating results. Most of the Company's operations are subject to rate
setting processes which allow for the recovery of certain costs including labor
and fuel. However, inflationary increases in operating costs may cause the
Company to incur lower operating margins, at least until such time as new rates
can be implemented. Rate adjustments, if approved, can take several months.
On April 24, 1997, employees represented by the Sanitary Truck Drivers and
Helpers Union Local 350 International Brotherhood of Teamsters ("Local 350")
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-year
contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. The Company has served upon Local 350
a demand to arbitrate this dispute under the terms of the collective bargaining
agreement between the parties. No arbitration date has yet been set.
Under generally accepted accounting principles ("GAAP") any deficiency
between the liability for pension benefits (defined as the Accumulated Benefit
Obligation ("ABO")) and the market value of plan assets can result in a charge
to the minimum pension liability in the equity section of the Company's balance
<PAGE> 38
sheet. If Local 350 were to prevail in the arbitration discussed above, the
Company estimates that the ABO would increase by an additional $8.4 million,
which would result in a charge to the minimum pension liability of $4.2 million.
In addition, if Local 350 were to prevail, the Company estimates that its annual
accruals for employee benefits would increase by approximately $3.0 million for
additional pension and medical costs.* The above estimates are based on a
discount rate of 7.5%. The discount rate applied under GAAP fluctuates with
market conditions. A change in the discount rate can result in significant
adjustments to the ABO.
Although the ultimate outcome of such a proceeding cannot be determined at
this time and the results of legal proceedings cannot be predicted with
certainty, the Company, after consultation with outside labor counsel, believes
it should prevail and therefore the resolution of this matter will not have a
material adverse effect on the financial condition or results of operations of
the Company. However, if the Company does not prevail, as discussed above, there
could be a material adverse impact on the financial condition and results of
operations of the Company. Arbitration could conclude that there has been no
meeting of the minds on this provision of the contract and the provision could
have to be renegotiated. If the matter is not satisfactorily renegotiated, the
Company could be subject to another work stoppage. See "Risk Factors -- Union
Matters."
Included in the five-year contract referred to above is an aggregate 13.4%
wage increase. The first year cost of the contract is included in the rate
recently approved in San Francisco and the Company intends to seek rate recovery
of scheduled future cost increases through the rate setting process.* 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 levels at
historical levels.
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* The
Company is unable to determine the significance a California economic downturn
would have on its operations.
SEASONALITY
The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) due to higher volumes of certain types of waste,
such as yard clippings and construction and demolition debris. Such increased
volumes result in higher revenues and earnings from the Company's transfer
stations, waste collection, and landfill operations during such months. In
addition, project management revenues are highest in the fourth quarter as a
result of favorable construction conditions.
ACCOUNTING AND OTHER MATTERS
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation."
As permitted by SFAS No. 123, the Company has elected to continue measuring its
compensation expense using the principles of Accounting Principles Board Opinion
No. 25 and has provided the pro forma disclosure required under SFAS No. 123.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position,
Environmental Remediation Liabilities ("SOP No. 96-1"). SOP No. 96-1 provides
authoritative guidance on the recognition, measurement, presentation and
disclosure of environmental remediation liabilities. The provisions of SOP No.
96-1 are effective for fiscal years ending after December 15, 1996. The
Company's prior accounting practices with respect to environmental liabilities
were substantially in compliance with the provisions of SOP No. 96-1 and the
adoption of SOP No. 96-1 did not have a material effect to the Company's
financial position, results of operations or cash flows.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The standard must be adopted by fiscal year 1999. SFAS No. 130 does not
change any accounting measurements, but requires presentation of comprehensive
income and a reconciliation thereof to net income. The principal differences
between comprehensive and net income are certain adjustments made directly to
shareholders' equity, such as minimum pension liability.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires financial information to
be reported on the basis that is used internally
<PAGE> 39
for evaluating segment performance and deciding how to allocate resources to
segments. The standard must be adopted by fiscal 1999. The Company is currently
evaluating the disclosures required under this new standard.
The Internal Revenue Service's audit of the Company's income tax returns
for the fiscal years ended September 30, 1992 through 1994, which was initiated
in 1996, is ongoing.
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Norcal Waste Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Norcal
Waste Systems, Inc. (the Company) and subsidiaries as of September 30, 1997 and
1996, and the related consolidated statements of income, stockholder's equity
(deficit) and cash flows for each of the years in the three year period ended
September 30, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1997 in conformity with generally accepted
accounting principles.
San Francisco, California
December 19, 1997
<PAGE> 41
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
Assets
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................... $ 32,330 $ 14,378
Marketable securities........................................................................ 5,552 6,889
Trust accounts, current portion (note 12).................................................... 4,362 4,066
Accounts receivable, less allowance for doubtful accounts of $2,017 in 1997 and $1,611 in
1996....................................................................................... 42,677 39,120
Parts and supplies........................................................................... 2,436 2,434
Prepaid expenses............................................................................. 2,568 3,836
-------- --------
Total current assets....................................................................... 89,925 70,723
Property and equipment:
Land......................................................................................... 44,558 42,691
Landfills.................................................................................... 25,206 24,481
Buildings and improvements................................................................... 47,325 43,189
Vehicles and equipment....................................................................... 116,925 107,822
Construction in progress..................................................................... 6,232 4,412
-------- --------
Total property and equipment............................................................... 240,246 222,595
Less accumulated depreciation and amortization............................................... 97,313 85,448
-------- --------
Property and equipment, net................................................................ 142,933 137,147
-------- --------
Other assets:
Franchises, permits and other intangibles, net of amortization of $40,027 in 1997 and $35,952
in 1996 (notes 3 and 4).................................................................... 76,829 76,166
Trust accounts (note 12)..................................................................... 30,647 24,209
Prepaid pension cost (note 10)............................................................... 1,941 3,090
Deferred financing costs, net of amortization of $2,518 in 1997 and $1,177 in 1996........... 8,261 9,636
Other........................................................................................ 633 264
-------- --------
Total other assets......................................................................... 118,311 113,365
-------- --------
Total assets.......................................................................... $351,169 $321,235
======== ========
Liabilities and Stockholder's Equity
Current liabilities:
Current portion:
Long-term debt (note 6).................................................................... $ 306 $ 354
Capital leases (note 7).................................................................... 1,040 935
Accounts payable............................................................................. 15,379 12,133
Accrued payroll and employee benefits........................................................ 9,337 7,657
Accrued expenses (notes 6, 12 and 13)........................................................ 42,077 39,697
Income taxes payable (note 8)................................................................ 1,087 --
Other accrued liabilities.................................................................... 4,867 5,091
-------- --------
Total current liabilities.................................................................. 74,093 65,867
Long-term debt (note 6)........................................................................ 174,047 172,386
Obligations under capital leases (note 7)...................................................... 2,025 3,065
Deferred income taxes (note 8)................................................................. 9,732 12,503
Landfill closure liability (note 12)........................................................... 22,823 18,668
Postretirement medical benefits (note 11)...................................................... 32,844 33,318
Other liabilities.............................................................................. 12,096 9,311
-------- --------
Total liabilities.......................................................................... 327,660 315,118
-------- --------
Commitments and contingencies (notes 7, 8, 9, 10, 11, 12, 13 and 14)
Stockholder's equity (note 9):
Common stock, $.01 par value; 100,000,000 shares authorized;
24,134,973 shares issued and outstanding................................................... 241 241
Additional paid-in capital................................................................... 166,378 166,378
Accumulated deficit.......................................................................... (106,389) (112,915)
Unrealized gains (losses) on marketable securities........................................... (21) 581
-------- --------
60,209 54,285
Less net scheduled contribution to the ESOP (note 9)........................................... (36,700) (48,168)
-------- --------
Total stockholder's equity................................................................. 23,509 6,117
-------- --------
Total liabilities and stockholder's equity............................................ $351,169 $321,235
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 42
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $319,801 $288,215 $271,501
-------- -------- --------
Cost of operations:
Operating expenses....................................... 226,977 202,848 183,865
Depreciation and amortization............................ 19,732 18,320 19,985
ESOP compensation expense (note 9)....................... 13,128 10,291 7,923
General and administrative............................... 32,990 30,965 26,446
-------- -------- --------
Total cost of operations.............................. 292,827 262,424 238,219
-------- -------- --------
Operating income.................................... 26,974 25,791 33,282
Interest expense........................................... (25,649) (23,913) (19,909)
Interest income............................................ 2,463 1,804 1,695
Gain (loss) on dispositions, net........................... 119 (477) 1,279
Settlement of litigation (note 6).......................... -- (3,648) --
Other income (expense)..................................... 2,619 (693) 748
-------- -------- --------
Income (loss) before income taxes and extraordinary
item.................................................. 6,526 (1,136) 17,095
Income tax expense (note 8)................................ -- -- 6,662
-------- -------- --------
Income (loss) before extraordinary item.................. 6,526 (1,136) 10,433
Extraordinary gain on early extinguishment of long-term
debt net of $0 income taxes (note 6)..................... -- 31,379 --
-------- -------- --------
Net income....................................... $ 6,526 $ 30,243 $ 10,433
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 43
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK ADDITIONAL PENSION SCHEDULED GAINS (LOSSES) ON
--------------- PAID-IN ACCUMULATED LIABILITY CONTRIBUTION MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TO THE ESOP SECURITIES TOTAL
------ ------ ---------- ----------- ---------- ------------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1994................. 24,135 $241 $166,378 $(153,591) $(10,907) $ (68,056) $ -- $(65,935)
Contributions to reduce
ESOP debt............ -- -- -- -- -- 9,298 -- 9,298
Pension liability
adjustment........... -- -- -- -- 2,326 -- -- 2,326
Net income............. -- -- -- 10,433 -- -- -- 10,433
------ ------ ---------- ----------- ---------- ------------- ------ --------
Balances, September 30,
1995................. 24,135 241 166,378 (143,158) (8,581) (58,758) -- (43,878)
Contributions and
adjustment to ESOP
debt................. -- -- -- -- -- 10,590 -- 10,590
Pension liability
adjustment........... -- -- -- -- 8,581 -- -- 8,581
Net unrealized gains
(losses) on
marketable
securities........... -- -- -- -- -- -- 581 581
Net income............. -- -- -- 30,243 -- -- -- 30,243
------ ------ ---------- ----------- ---------- ------------- ------ --------
Balances, September 30,
1996................. 24,135 241 166,378 (112,915) -- (48,168) 581 6,117
Contributions to reduce
ESOP debt............ -- -- -- -- -- 11,468 -- 11,468
Net unrealized gains
(losses) on
marketable
securities........... -- -- -- -- -- -- (602) (602)
Net income............. -- -- -- 6,526 -- -- -- 6,526
------ ------ ---------- ----------- ---------- ------------- ------ --------
Balances, September 30,
1997................. 24,135 $241 $166,378 $(106,389) $ -- $ (36,700) $ (21) $ 23,509
====== ======= ========= =========== ========== =========== =============== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 44
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 6,526 $ 30,243 $10,433
Extraordinary gain on early extinguishment of long term debt.......... -- (31,379) --
------- -------- -------
Income (loss) before extraordinary gain........................ 6,526 (1,136) 10,433
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 19,732 18,320 19,985
Landfill trust contributions, withdrawals, interest income, net of
landfill closure and other regulatory expense....................... (3,775) (2,053) (2,805)
Pension, postretirement and insurance, net of amounts paid............ 4,677 1,845 1,949
ESOP compensation expense in excess of cash payments for
redemptions......................................................... 11,468 8,768 7,528
Accrued interest, amortization of discounts and deferred financing
fees................................................................ 1,737 10,664 6,031
Settlement of litigation.............................................. -- -- (5,480)
Gain on dispositions and other income................................. (2,263) (709) (2,380)
Other................................................................. (1,108) 619 (613)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Increase in accounts receivable....................................... (3,557) (8,399) (4,356)
Increase in accounts payable.......................................... 3,246 2,192 1,376
Increase (decrease) in accrued expenses and other liabilities......... 6,938 (3,275) (1,677)
Increase (decrease) in income taxes................................... (1,885) (4,817) 5,915
Other assets and liabilities.......................................... 642 (1,667) 1,006
------- -------- -------
Net cash provided by operating activities............................... 42,378 20,352 36,912
------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment................................. (21,345) (20,842) (19,603)
Acquisition of businesses............................................. (3,640) (100) --
Proceeds from dispositions............................................ 447 4,498 6,057
Withdrawals from trust accounts....................................... -- 6,795 --
Deposits to trust accounts............................................ -- -- (595)
Proceeds from the sales of marketable securities...................... 1,379 -- --
Investment in marketable securities................................... -- -- (5,608)
Withdrawals from restricted cash...................................... -- 2,735 10,203
Other................................................................. 42 (283) (20)
------- -------- -------
Net cash used in investing activities............................... (23,117) (7,197) (9,566)
------- -------- -------
Cash flows from financing activities:
Proceeds from long-term debt and capitalized leases................... -- 170,848 4,212
Principal payments on long-term debt and capitalized leases........... (1,309) (97,698) (32,156)
Principal payments on subordinated debt............................... -- (73,061) --
Payments of loans by ESOP............................................. -- 3,531 3,081
Deferred financing costs.............................................. -- (10,813) --
------- -------- -------
Net cash used in financing activities............................... (1,309) (7,193) (24,863)
------- -------- -------
Net increase in cash.................................................... 17,952 5,962 2,483
Cash and cash equivalents, beginning of year............................ 14,378 8,416 5,933
------- -------- -------
Cash and cash equivalents, end of year.................................. $32,330 $ 14,378 $ 8,416
======= ======== =======
Supplemental schedule of net cash paid for:
Interest.............................................................. $24,075 $ 13,883 $13,912
======= ======== =======
Income taxes.......................................................... $ 815 $ 5,221 $ 747
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 45
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, 1997 AND 1996
1. NATURE OF BUSINESS
Through its subsidiaries, Norcal Waste Systems, Inc. (the Company) provides
integrated waste services to residential, commercial, municipal and industrial
customers in California. The Company's services include refuse collection,
recycling and other waste diversion, transfer station and hauling operations,
operation of Company owned landfills and third party landfill management
services (including engineering and construction management services). The
Company continues to be, with limited exceptions, the sole provider of
commercial and residential refuse collection for the City and County of San
Francisco (note 16).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Norcal Waste
Systems, Inc. and its subsidiaries, all of which are wholly owned. The Company
uses the equity method for its investments in companies which are 50% or less
owned and are not consolidated. All significant intercompany accounts and
transactions have been eliminated.
The Company's outstanding common stock is 100% owned by the Norcal Waste
Systems, Inc. Employee Stock Ownership Plan and Trust (the Norcal ESOP or the
ESOP).
(b) Revenue Recognition
The Company recognizes revenue when services are performed. Revenues billed
in advance are deferred and recorded as income in the period in which the
related services are rendered. A significant amount of the Company's revenue is
subject to rate regulation by local jurisdictions under franchise agreements and
permits.
The Company performs project services on managed landfills relating to
landfill closure, landfill expansion and various regulatory compliance tasks.
Revenues are recognized on the percentage-of-completion method. Determination of
the percentage complete is based on estimates of subcontractors of actual job
progress and expenses incurred. Project costs include all direct and indirect
costs related to contract performance including subcontractors, materials and
internal labor. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
(c) Parts and Supplies
The Company's parts and supplies are recorded at cost (first-in,
first-out).
(d) Property and Equipment
Property and equipment, including major renewals and betterments, are
stated at cost. Property and equipment under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. Ordinary
maintenance and repairs are charged directly to operations. The Company
capitalizes interest costs for significant projects under development. The
amount capitalized and netted against interest expense in the consolidated
statements of income was $0.2 million and $0.4 million in 1997 and 1996,
respectively, and $-0- in 1995. 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
<PAGE> 46
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)
SEPTEMBER 30, 1997 AND 1996
held under capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.
Landfills are carried at cost which includes acquisition, engineering and
permitting costs related to landfills which are currently in operation. These
costs are amortized as the landfill is used, based on engineering estimates of
the available capacity. Engineering, legal and other costs associated with the
development of new landfills and expansion at existing landfills are deferred
pending receipt of all necessary operating permits, at which time they are
capitalized as landfill costs. The Company is required to close, monitor, and
maintain landfill sites for a period of thirty years or more after closure. The
estimated costs and changes thereto in current dollars attributable to future
closure and post-closure costs are accrued in landfill closure liabilities for
each site based upon the capacity used in the current year in relation to the
total remaining capacity as of the beginning of the year.
(e) Intangible Assets
The excess of cost over net assets of acquired businesses is amortized on
the straight-line method over periods not exceeding 40 years. Franchises,
permits and contracts are amortized on the straight-line method over their
estimated lives ranging from 3 to 40 years. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed Of," the Company's
policy is to review the estimated undiscounted future cash flows for each
operation on an annual basis and to compare it to the remaining net book value
to ascertain if a provision for impairment is necessary.
(f) Income Taxes
The Company utilizes the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." 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 contributions by the Company to the
ESOP relating to ESOP debt service payments, the historical cost of the shares
and the number of shares allocated by reason of such payments. Shares allocable
to participants for a given year are determined based on the ratio of the
current year's debt 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.
<PAGE> 47
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
(h) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a remaining maturity at the time of purchase of three months or
less. Cash and cash equivalents are principally comprised of cash invested in
demand accounts and money market instruments and are stated at cost plus accrued
interest.
(i) Marketable Securities and Trust Accounts
Marketable securities represent primarily investments in fixed income
securities of federal government entities which are considered as available for
sale securities and are recorded at market value using the closing price as
quoted on a national securities exchange. The available for sale securities
mature at various dates from February 1998 to September 2010. Unrealized gains
and losses, which occur when the cost basis differs from the fair value, are
included as a separate component of stockholder's equity, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." During fiscal 1997, $7.1
million of available for sale securities were sold for proceeds of $7.1 million.
During fiscal 1996, $10.4 million of available for sale securities were sold for
proceeds of $10.1 million. The cost of securities sold is based on the specific
identification method. The gross unrealized holding gains and gross unrealized
holding losses (in thousands) for available for sale securities at September 30,
1997 were $114 and $150, respectively, and at September 30, 1996 were $1,327 and
$151, respectively.
The Company has established restricted and unrestricted trust accounts
principally in connection with landfill operations with respect to closure and
post-closure liabilities, financial assurance for the initiation and completion
of corrective action and liabilities to third parties for bodily injury/property
damage. Amounts are principally invested in fixed income securities of federal
government entities with maturities from two to ten years. The Company considers
certain of its trust accounts to be held to maturity and, consequently, has
stated these investments at amortized cost in accordance with SFAS No. 115. The
remainder of all trust accounts are considered available for sale. During fiscal
1997, $3.9 million of held to maturity securities were sold for proceeds of $3.9
million. The gross unrealized holding gains and gross unrealized holding losses
(in thousands) for held to maturity securities at September 30, 1997 were $239
and $139, respectively, and at September 30, 1996 were $86 and $224,
respectively.
The maturity dates for the Company's investments are as follows (in
millions):
<TABLE>
<CAPTION>
AVAILABLE HELD TO
MATURITY DATE FOR SALE MATURITY COMBINED
----------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
9/30/1997 - Cash equivalents................... $ 5.2 $ 0.7 $ 5.9
10/1/1997 - 9/30/2001.......................... 2.4 4.1 6.5
10/1/2001 - 9/30/2007.......................... 12.3 14.9 27.2
10/1/2007 - 9/30/2010.......................... 0.2 0.7 0.9
----- ----- -----
Total................................ $20.1 $ 20.4 $ 40.5
===== ===== =====
</TABLE>
(j) Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
accounting and reporting standards for stock-based compensation plans. This
Statement allows companies to choose between the "fair value based method of
accounting" as defined in this Statement and the "intrinsic value based method
of accounting" as prescribed
<PAGE> 48
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has elected to remain with the accounting
requirements under APB 25. The pro forma disclosures of net income required by
SFAS No. 123, as if the fair value based method of accounting had been applied,
are included in note 9.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(l) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. BUSINESS ACQUISITIONS
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 was discounted to $1.7 million to yield an imputed
rate of 8.75%. The acquisition was accounted for under the purchase method of
accounting; accordingly, the purchase price was allocated to the assets acquired
(principally operating permits) based on estimates of their relative fair value.
In February and April 1997, the Company acquired certain assets for $1.1
million in cash from businesses operating in the collection and disposal of
medical wastes.
4. FRANCHISES, PERMITS AND OTHER INTANGIBLES
When the Company acquires businesses with definitive franchise or other
agreements with specific terms, a portion of the purchase price is allocated to
the franchise based upon its estimated fair value at the date of acquisition. In
certain instances, permits or other legal documents evidence the Company's right
to do business for an indefinite period and are similar to goodwill. Any amounts
in excess of amounts allocated to franchises and permits are included in excess
of cost over net assets of businesses acquired. A summary of intangible assets,
net of accumulated amortization at September 30, is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Franchises and contracts.................................. $11,135 $ 8,168
Operating permit rights................................... 60,188 62,224
Excess of cost over net assets of businesses acquired..... 5,506 5,774
------- -------
$76,829 $76,166
======= =======
</TABLE>
5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The investments in unconsolidated affiliates are included in other assets
in the accompanying consolidated balance sheets. The Company's equity in
earnings/(losses) of unconsolidated affiliates included in other
<PAGE> 49
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
income in the consolidated statements of income (in thousands), was $200, $(284)
and $517 for the years ended 1997, 1996 and 1995, respectively.
On July 28, 1995, the Company sold its 50% ownership interest in an
affiliated company and other related entities, which were engaged in the waste
collection and disposal business, for $5 million in cash. The gain on disposal
of $1.2 million is included in gain on dispositions in the consolidated
statements of income.
6. LONG-TERM DEBT
Long-term debt at September 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Series B 12.5% Senior Notes, due 2005.......................... $170,679 $170,392
Note payable for business acquired, due in monthly installments
through 2016, interest imputed at 8.75%...................... 1,658 --
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5%............ 792 850
Other notes.................................................... 1,224 1,498
-------- --------
Total debt................................................... 174,353 172,740
Less current portion......................................... 306 354
-------- --------
Long-term debt............................................ $174,047 $172,386
======== ========
</TABLE>
On November 21, 1995, the Company completed a private debt offering, (the
"Refinancing") of $175.0 million in Series A Senior Notes. The Series A Senior
Notes were to mature in November 2005 with interest payable semiannually. The
Series A Senior Notes were redeemable at the option of the Company, in whole or
in part, at any time during or after November 2000. Prior to this date, the
Series A Senior Notes were partially redeemable in the event of a public
offering, or would have been required to be redeemed in the event of a change in
control of the Company. The Series A Senior Notes were unsecured and ranked pari
passu in right of payment to all existing and future senior indebtedness of the
Company. The Series A Senior Notes were guaranteed on a senior unsecured basis
by the Company's wholly-owned subsidiaries. The Indenture governing the Series A
Senior Notes contained 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
Series A Senior Notes for Series B Senior Notes (Senior Notes) with an identical
principal balance and terms. The exchange was completed under the Securities Act
of 1933. The interest rate on the Senior Notes at September 30, 1997 was 13.25%
and increased .25% per annum on November 16, 1997 to a maximum of 13.5%. The
interest rate reverts back to 12.5% if Norcal (in one or more transactions)
offers to purchase (whether or not any actual purchases are made) or redeems an
aggregate of $25.0 million in principal amount of Senior Notes out of the
proceeds of equity sales.
The Company received net proceeds from the private debt offering of $170.2
million (after original issuance discount of $4.8 million). Deferred financing
costs at September 30, 1997 include commissions and other costs related to the
offering and the new credit agreement (see below) and are being amortized over
the life of the Senior Notes and the new credit agreement. The Company used the
proceeds from the Series A Senior Notes, proceeds from the liquidation of
indemnification trusts and cash balances to repay $94.0 million of long-term
debt, $2.2 million of capital leases, redeem and cancel subordinated notes for
$73.4 million and
<PAGE> 50
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
settle litigation for $3.6 million. The recorded value and associated accrued
interest of the subordinated notes that the Company redeemed was $103.3 million.
The Company recognized an extraordinary gain of $31.4 million in connection with
the redemption.
The debt outstanding at September 30, 1997, matures as follows (in
thousands): 1998, $306; 1999, $308; 2000, $391; 2001, $291; 2002, $570; and
thereafter, $172,487, net of unamortized discount of $4,619. Included in accrued
expenses at September 30, 1997 and 1996 is accrued interest amounting to $8,904
and $8,791, respectively.
Concurrent with the private debt offering, the Company entered into a new
Credit Agreement with a group of lenders and the First National Bank of Boston
as Agent. The agreement established a revolving credit facility in an amount of
up to $100 million, up to $25 million of which can be used for letters of
credit. Substantially all of the assets of the Company and its wholly owned
subsidiaries are pledged to secure the obligations of the Company and such
subsidiaries. Subsidiaries of the Company have guaranteed the debt under the
Credit Agreement on a joint and several basis (note 17). The Credit Agreement
provides for certain positive and negative covenants including restrictions on
indebtedness, investments, and distributions among others, and financial
covenants including leverage ratio, interest coverage ratio, consolidated net
worth, and debt service ratio. There are no compensating balance requirements or
any informal arrangements in connection with any of the loans. The Company must
pay to the lenders a commitment fee on the daily average amount of the unused
credit commitment at an annual rate per annum equal to 0.05%, plus an amount
equal to 2.25% of the face amount of each letter of credit. Except as set forth
below, there were no borrowings outstanding under the Credit Agreement at
September 30, 1997.
In the event of a default under the Credit Agreement, the rights of Norcal
with respect to the liquidation of all of the assets of Norcal's wholly owned
subsidiaries and the capital stock of the wholly owned subsidiaries would be
subject to the prior claims of the lenders under the Credit Agreement. A default
under the Senior Notes constitutes an event of default under the Credit
Agreement. Similarly, certain defaults under other indebtedness in excess of
$5.0 million (including indebtedness under the Credit Agreement) constitute an
event of default under the Indenture.
At September 30, 1997, the Company had utilized $6.8 million for letters of
credit and had availability under the Credit Agreement of approximately $75.0
million, with an additional $18.2 million available for letters of credit.
Changes in availability under the Credit Agreement are a function of changes in
operating results, among other things. In addition, certain covenant measures in
the Credit Agreement become more restrictive over time.
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
buildings, vehicles and equipment. At September 30, the gross amount of property
and equipment and related accumulated amortization recorded under capital leases
were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Vehicles and equipment........................... $ 6,535 $ 6,534
Less accumulated amortization.................... (3,472) (2,232)
------ ------
$ 3,063 $ 4,302
====== ======
</TABLE>
<PAGE> 51
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1997 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending September 30:
1998................................................... $ 1,310 $ 2,316
1999................................................... 1,288 1,949
2000................................................... 658 1,660
2001................................................... 248 1,081
2002................................................... 54 485
Thereafter............................................. -- 657
------ ------
Total minimum lease payments........................ 3,558 $ 8,148
======
Less amount representing interest........................ 493
------
Present value of minimum lease payments.................. 3,065
Less current portion..................................... 1,040
------
$ 2,025
======
</TABLE>
Rental expense charged to operations under all operating leases was
approximately $4.4 million, $3.9 million and $2.8 million for the years ended
1997, 1996, and 1995, respectively, including amounts under short-term rental
agreements.
8. INCOME TAXES
Income tax expense (benefit) for the fiscal years ended September 30, 1997,
1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 1,635 $ 639 $4,562
State.......................................... 665 301 1,600
------- ----- ------
$ 2,300 $ 940 $6,162
======= ===== ======
Deferred:
Federal........................................ $(1,635) $(639) $ 425
State.......................................... (665) (301) 75
------- ----- ------
(2,300) (940) 500
------- ----- ------
$ -- $ -- $6,662
======= ===== ======
</TABLE>
<PAGE> 52
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
Total income tax expense differed from the amount computed by applying the
federal statutory income tax rate of 35% to income as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate........................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit.................. 6.0 6.0 6.0
Change in valuation allowance........................ (58.1) (36.5) (14.6)
Amortization of nondeductible intangibles............ 14.4 3.1 5.1
Permanent differences related to debt
extinguishment..................................... -- (12.4) --
Permanent differences on affiliate sold.............. -- -- 6.5
Other................................................ 2.7 4.8 1.0
---- ---- ----
Income tax expense................................... 0.0% 0.0% 39.0%
==== ==== ====
</TABLE>
The deferred tax liability at September 30, 1997 and 1996 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>
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforward........... $ 4,047 $ 3,862
Accrued liabilities................................... 1,960 2,298
Post retirement benefit obligations................... 11,784 14,117
ESOP expense, including accrued interest, in excess of
cash contributions................................. 7,105 8,344
Insurance reserves.................................... 6,693 5,175
Landfill closure reserves............................. -- 2,414
Vacation accrual...................................... 1,497 1,400
Bad debts............................................. 828 661
Other................................................. 1,402 706
------- -------
35,316 38,977
Less: Valuation allowance............................... 19,029 24,716
------- -------
Net deferred tax assets............................ $16,287 $ 14,261
------- -------
Deferred tax liabilities:
Property and equipment, basis and depreciation
differences........................................ 20,795 22,080
Franchises, permits and other intangibles............. 2,412 3,011
Pension contributions in excess of expense............ 797 1,269
Landfill closure reserves............................. 2,015 --
Marketable securities................................. -- 404
------- -------
Gross deferred tax liabilities..................... 26,019 26,764
------- -------
Net deferred tax liabilities....................... $(9,732) $(12,503)
======= =======
</TABLE>
The total valuation allowance decreased for the years ended September 30,
1997 and 1996 by $5.7 million and $11.0 million, respectively.
<PAGE> 53
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
At September 30, 1997, 1996, and 1995, the Company concluded it was unable
to implement tax planning strategies which would have enabled the Company to
reduce deferred tax liabilities. Consequently, the Company has provided a
valuation allowance for deferred tax assets attributable to substantial expenses
and losses recognized for financial statement purposes which represent future
deductible amounts.
The Internal Revenue Service (the "Service") has completed an audit of the
Company's income tax returns for the fiscal years ended September 30, 1988
through September 30, 1991. The Service and the Company have reached a
settlement which must be approved by the Joint Committee.
The Service has also initiated an audit of the Company's income tax returns
for the fiscal years ended September 30, 1992 through September 30, 1994.
It is the Company's opinion that these matters relating to the IRS
examinations are adequately provided for or that the resolution of such matters
will not have a material adverse impact on the financial condition of the
Company; however, there can be no assurance that the impact of such matters on
its results of operations or cash flows for any given reporting period will not
be material.
9. STOCKHOLDER'S EQUITY (DEFICIT)
Capital Structure
The Company's Articles of Incorporation allow for the issuance of Preferred
Stock in one or more series, at such designations, rates of dividends,
redemption prices, liquidation payments, voting rights and conversion, exchange
or other special rights to be determined at the time of issuance. None is
presently issued or outstanding.
Stock Options
The Company has four stock option plans that provide for the granting of
Incentive Stock Options and Non-Qualified Stock Options for the purchase of
Common Stock. The options may be granted to officers, employees, directors and
independent contractors of the Company. Participation in the Stock Option Plans
is determined by the Compensation Committee of the Board of Directors, based on
the parameters of each respective plan. The term of an option granted under any
of the option plans cannot exceed ten years and may be further limited by the
specific restrictions as detailed in the individual plans. The options generally
are exercisable pursuant to any vesting requirements imposed by the Compensation
Committee upon the grant of the options.
<PAGE> 54
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
The following table sets out specific details of the respective stock
option plans and status as of September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1996
1996 1996 NON-
1990 EXECUTIVE EMPLOYEE EMPLOYEE
STOCK STOCK STOCK DIRECTOR
OPTION INCENTIVE INCENTIVE STOCK
SHARES UNDER OPTION PLAN PLAN PLAN OPTION PLAN
- --------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1995............ 260,500 -- -- --
Granted...................................... -- 1,390,000 527,500 105,000
Canceled..................................... (17,750) (400,000) -- --
---------- ---------- ---------- --------
Outstanding at September 30, 1996............ 242,750 990,000 527,500 105,000
Granted...................................... -- -- 472,500 --
Canceled..................................... (14,750) -- (35,000) --
---------- ---------- ---------- --------
Outstanding at September 30, 1997............ 228,000 990,000 965,000 105,000
========== ========== ========== ========
Options available to grant at September 30,
1996....................................... 2,757,250 1,897,500 3,095,250(a) 70,000
========== ========== ========== ========
Options available to grant at September 30,
1997....................................... 2,772,000 1,897,500 2,657,750(a) 70,000
========== ========== ========== ========
Average option price:
September 30, 1996......................... $ 7.04 $ 4.89 $ 4.89 $ 4.89
September 30, 1997......................... $ 7.04 $ 5.21 $ 5.23 $ 4.89
Options exercisable:
At September 30, 1995...................... 260,500 -- -- --
At September 30, 1996...................... 242,750 64,000 -- --
At September 30, 1997 ..................... 228,000 202,000 98,500 35,000
</TABLE>
- ---------------
(a) To the extent shares are granted under the 1990 Stock Option Plan, the
1996 Executive Stock Incentive Plan, the Deferred Compensation and Stock
Option Plan (defined below) or the 1996 Non-Employee Director Stock Option
Plan, the number of shares available under the 1996 Employee Stock
Incentive Plan is reduced by a corresponding amount.
In addition to the plans summarized above the Company has granted a
nonqualified stock option pursuant to a plan (the "Deferred Compensation and
Stock Option Plan") to an officer to purchase up to 300,000 shares of common
stock at an exercise price of $4.89 per share. At September 30, 1997, 180,000
shares were vested; 90,000 shares and 30,000 shares will vest on September 30,
1998 and May 27, 1999, respectively.
The Company applies APB 25 in accounting for its Plans. Had the Company
determined compensation cost using the fair value based method of accounting, as
defined by SFAS No. 123, for its stock options, the Company's net income would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
As reported.................................... $6,526 $30,243 $10,433
Pro forma...................................... $6,202 $30,106 $10,433
</TABLE>
<PAGE> 55
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
Pro forma net income has been computed using the Black-Scholes option
pricing model and the following assumptions:
<TABLE>
<CAPTION>
EXPECTED RISK-FREE
DIVIDEND INTEREST VESTING
FAIR VALUE YIELD RATE VOLATILITY PERIOD
--------------- -------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1997.................... $5.59 0.0% 6.18% 0.1% 4 years
1996.................... $5.18 0.0% 5.34% - 6.45% 0.1% 3 - 6 years
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because the estimated compensation cost will be recognized over the
options' vesting periods. There were no stock options granted in the year ended
September 30, 1995.
Employee Stock Ownership Plan
In 1986, one of the Company's predecessors (Old Norcal) established an
employee stock ownership plan and trust (the ESOP) which purchased all of the
Company's outstanding stock. Old Norcal borrowed funds from a lender group and
in turn Old Norcal loaned funds to the ESOP which were used together with
certain subordinated notes (the ESOP Notes) for the purpose of purchasing the
stock. In addition, in connection with two other transactions, the Company
borrowed funds from lender groups and in turn loaned funds to the ESOP.
The ESOP will obtain funds to repay the Company loans primarily through the
receipt of tax deductible contributions made by the Company. For financial
statement purposes, the Company's future scheduled contribution to the ESOP, as
described below, is reflected as a reduction of stockholder's equity.
The ESOP covers most of the employees of the Company and is
noncontributory. The benefits are based on the employee's account balance which
is a function of contributions, forfeitures, income and appreciation or
depreciation in the value of assets allocated to the accounts based on years of
service and compensation.
During 1996 the ESOP received $3.5 million in insurance proceeds related to
settlement of litigation. During 1995 the ESOP received a $3.1 million
litigation settlement. These proceeds were applied against Company loans to the
ESOP.
In connection with the Refinancing (note 6) the ESOP's indebtedness
reflects, among other things, Norcal's funding of the ESOP's retirement of the
ESOP Notes, repayment of all amounts owed under the Old Credit Agreement, and
incurrence of new indebtedness by the Company pursuant to the Refinancing. At
September 30, 1997, the outstanding principal balance owed to Norcal was $54.7
million. The ESOP and Norcal 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 installments of approximately $9.8 million each as
of September 30 of each year, beginning in 1996. In addition, the ESOP will
prepay such outstanding indebtedness, without penalty, to the extent that Norcal
makes contributions to the ESOP for the purpose of making such prepayments
subject to certain limitations. The Company made additional contributions of
$9.1 million and $9.0 million for 1997 and 1996, respectively, to the ESOP which
amounts have been applied as prepayments of the loans from the Company to the
ESOP.
<PAGE> 56
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
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>
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Loans from the Company to the ESOP..................... $ 54,744 $ 68,798
-------- --------
Total scheduled contribution to the ESOP.......... 54,744 68,798
ESOP compensation expense recognized in excess of
Company contributions................................ (18,044) (20,630)
-------- --------
Net scheduled contribution to the ESOP............... $ 36,700 $ 48,168
======== ========
</TABLE>
Following is a summary of shares as of September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Allocated............................................ 16,412 14,842 13,777
Committed to be released............................. 1,866 1,570 1,066
Unallocated.......................................... 5,857 7,723 9,292
------ ------ ------
24,135 24,135 24,135
====== ====== ======
</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 $1.7 million, $1.2
million and $0.4 million for the years ended September 30, 1997, 1996, and 1995,
respectively. The amount of the repurchase obligation will increase
significantly in the future as the Company's workforce ages and retires as
additional shares are allocated to participants, if eligible participants elect
to receive in-service withdrawals, or if the value of common stock increases.
The fair value of the shares as established by the ESOP Administrative Committee
based on the valuation of independent appraisers was $5.59 and $5.18 as of
September 30, 1997 and 1996, respectively.
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 prior to
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 prior to 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.
<PAGE> 57
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
10. PENSION PLANS
The Company has two noncontributory funded defined benefit pension plans
covering a portion of their employees. Benefits are based on a formula which
includes years of service and average compensation. Nonparticipating employees
generally are covered under one of several multi-employer union plans to which
the Company contributes.
Net periodic pension cost for the years ended September 30, 1997, 1996, and
1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.......................................... $ 2,637 $ 2,499 $ 2,279
Interest cost on projected benefit obligations.... 7,198 6,624 6,325
Actual return on plan assets...................... (14,959) (10,579) (9,269)
Net amortization and (deferral)................... 9,348 5,480 4,192
------- ------- ------
Net periodic cost............................... $ 4,224 $ 4,024 $ 3,527
======= ======= ======
</TABLE>
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
Both plans have plan assets that exceed the accumulated benefit
obligations.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at September 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$82,208 in 1997 and $70,987 in 1996...................... $ (85,187) $(73,323)
========= ========
Projected benefit obligation................................ (103,408) (89,179)
Plan assets at fair value, primarily marketable equity
securities, fixed income securities, U.S. government
obligations, money market funds and other investments.... 92,374 77,669
--------- --------
Projected benefit obligation in excess of plan assets....... (11,034) (11,510)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions....... 9,027 14,094
Prior service cost not yet recognized....................... 3,948 506
--------- --------
Prepaid pension cost recognized in the consolidated balance
sheets................................................... $ 1,941 $ 3,090
========= ========
</TABLE>
The Company has unrecognized losses from past experience different from
that assumed and effects of changes in assumptions amounting to $9.0 million and
$14.1 million at September 30, 1997 and 1996, respectively. At September 30,
1997, the excess cumulative contributions over net periodic pension costs of
$1.9 million has been reflected as a prepaid pension cost on the balance sheet.
It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $3.1 million,
$3.5 million and $3.3 million during 1997, 1996 and 1995, respectively.
<PAGE> 58
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
The weighted average discount rate was 7.50%, 8.0%, and 7.75% respectively,
for 1997, 1996, and 1995. The expected long-term rate of return on assets and
rate of increase in future compensation levels used in determining the benefit
obligations for all three years was 9.0% and 5.0%, respectively.
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, 1997, 1996, and 1995, was $1.5 million,
$1.5 million and $1.6 million, respectively. The Company's portion of the
actuarially computed value of the vested and nonvested benefits of the plans and
the net assets of the pension funds have not been determined.
The Company is currently in a dispute with one of its unions with respect
to an increase in pension benefits. If the union were to prevail the Company
estimates that the accumulated benefit obligation would increase by an
additional $8.4 million as of September 30, 1997 (note 13).
11. POSTRETIREMENT MEDICAL BENEFITS
The Company recognizes postretirement medical benefits in the financial
statements over the term of the affected employee's service with the Company as
required by Statement of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The postretirement medical benefit plans are unfunded. The following table
sets forth the status of the postretirement medical benefits plans at September
30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement medical benefit obligation:
Retirees....................................................... $12,139 $12,176
Fully eligible active plan participants........................ 15,931 9,744
------- -------
Accumulated postretirement medical benefit obligation............ 28,070 21,920
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions........................ 10,198 8,810
Unamortized prior service (cost) credit not yet recognized in net
periodic postretirement benefit cost........................... (4,112) 3,665
------- -------
Accrued postretirement medical benefit liability................. $34,156 $34,395
======= =======
</TABLE>
Net periodic cost for the postretirement medical benefit plans for the
years ended September 30, 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on accumulated postretirement benefit
obligation............................................. $1,916 $1,625 $1,758
Amortization of prior service cost....................... (234) (403) (403)
Amortization of gain..................................... (722) (667) (524)
------ ------ ------
Net periodic cost...................................... $ 960 $ 555 $ 831
====== ====== ======
</TABLE>
<PAGE> 59
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
For measurement purposes, 10.00%, 11.50%, and 11.75% medical cost trend
rate was assumed for the calculation of accumulated postretirement benefit
obligation at September 30, 1997, 1996, and 1995, respectively. This rate was
assumed to decrease incrementally to 5.50%, 7.0% and 6.75% after 7 years, 9
years and 10 years, respectively, and remain at that level thereafter. The
medical cost trend rate has a significant effect on the amounts reported. The
weighted average discount rates of 7.50%, 8.0%, and 7.75% were assumed as of
September 30, 1997, 1996, and 1995, 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, 1997, 1996, and 1995, and the
accumulated postretirement benefit obligation at September 30, 1997, 1996, and
1995 would increase approximately as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest component....................................... $ 272 $ 220 $ 248
Accumulated postretirement medical benefit obligation.... $4,098 $3,058 $3,384
</TABLE>
In connection with the ESOP's purchase of stock from the former Old Norcal
employee-shareholders, the Company has agreed to provide certain post-retirement
health and welfare benefits to certain settling plaintiffs until the earlier of
the resolution of certain claims against third parties or October 1, 2000. In
connection with the ESOP's purchase of stock from the former Envirocal
employee-shareholders, the Company has agreed to provide certain former
Envirocal employee-shareholders with certain lifetime post-retirement health and
welfare benefits subject to certain conditions.
12. LANDFILL CLOSURE, POST-CLOSURE LIABILITIES, ENVIRONMENTAL LIABILITIES, TRUST
ACCOUNTS, COMMITMENTS AND FUNDING
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.
Compliance with current or future regulatory requirements will require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. It is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts. The Company
has made and may continue to make substantial expenditures relating to
environmental conditions primarily on its landfill properties. In the opinion of
management, compliance with present environmental protection laws will not have
a material adverse effect on the results of operations of the Company provided
costs are substantially covered in the Company's rates on a timely basis. The
Company continues to monitor these matters; however, there is no assurance that
material costs or liabilities related to environmental matters will not be
incurred in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to leachate and groundwater management and
remediation. There are many unknown and uncertain factors including regulatory
requirements, incomplete data with respect to projected volumes, quality and
cost of treatment among others. Accordingly, estimates for closure and
post-closure management and remediation of leachate
<PAGE> 60
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
and contaminated groundwater could be subject to periodic and substantial
revision as the Company's knowledge increases concerning these factors.
At September 30, 1997 and 1996, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $27.1 million
and $25.4 million, respectively, based on the total estimated closure costs and
post-closure maintenance and monitoring at each date, in current dollars, and
the percentage of estimated landfill capacity remaining. The current portion of
landfill closure liability at September 30, 1997 and 1996, amounting to
approximately $3.4 million and $7.2 million, 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 along with
the estimate of closure/post-closure work to be performed in the next year.
Amounts charged to operating expenses for landfill closure in 1997, 1996 and
1995, net of interest income earned on related trust accounts, were
approximately $0.2 million, $0.2 million and $2.0 million, respectively.
Included in each year's expense are amounts that represent the effects of
changes in cost and capacity estimates that are being recognized over the
remaining life of each site. At September 30, 1997 and 1996, the future closure
and post-closure obligation remaining to be recognized over the remaining lives
of the applicable landfills is estimated to be approximately $34.6 million and
$35.0 million, respectively. While the Company believes its estimates of closure
and post-closure costs are reasonable, such amounts are based upon current laws,
technology and information available on the properties. Accordingly, the
Company's estimates may be subject to substantial upward revision.
In accordance with State of California legislation, and other governmental
jurisdictions, the Company has established restricted and unrestricted trust
funds for each owned landfill which will be funded annually in amounts designed
to provide the resources to accomplish closure and post-closure maintenance and
monitoring. The estimated funding requirements are $2.4 million for 1998 and
approximately $7.7 million due over the subsequent 5 year period based upon
volume used at the landfill and regulatory requirements. At September 30, 1997
and 1996, $24.9 million and $20.2 million, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. Withdrawals of
funds from certain restricted trust accounts may require approval of regulatory
agencies. In addition to establishing trust funds, the Company also provides
financial assurance for one of its landfills through the issuance of a bond for
$3.9 million.
In addition, in accordance with State of California legislation, the
Company is required to provide financial assurance for the initiation and
completion of corrective action for potential releases of contaminants from its
landfills. The Company has on deposit $1.9 million in trust funds as of
September 30, 1997 and estimates that future contributions to trust funds of
approximately $2.4 million over the remaining lives of the respective landfills
will be required to satisfy these obligations. In the event of a release prior
to full funding, the Company may be required to pay for the corrective action or
to accelerate funding of the trust funds.
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. The Company also carries an underground
tank policy to satisfy financial assurance requirements mandated under federal
law.
California landfill operators must demonstrate financial assurance to
compensate third parties for bodily injury and property damage arising out of
landfill operations. Under the method adopted by the Company, the regulations
require funding of $1.0 million per landfill to a maximum of $5.0 million
Company-wide. To satisfy this requirement the Company has established financial
assurance mechanisms for each landfill. As of
<PAGE> 61
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
September 30, 1997, the Company has approximately $4.3 million in four separate
trust funds and has secured an insurance policy for the other landfill.
13. COMMITMENTS AND CONTINGENCIES
The Company has arranged stand-by letters of credit with various expiration
dates totaling $6.8 million and $9.4 million at September 30, 1997 and 1996,
respectively. These letters of credit are provided primarily to secure insurance
and self-insurance obligations and for bond requirements. As of September 30,
1997, the Company has $18.2 million in stand-by 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. At September 30, 1997 and
1996, the Company's accrued liability for self-insured claims was approximately
$16.4 million and $12.6 million, respectively. The current portion of
self-insured claims at September 30, 1997 and 1996, amounting to approximately
$7.6 million and $6.3 million, respectively, is included in accrued expenses.
At September 30, 1997, the Company and the other unrelated investors were
jointly and severally liable as guarantors of affiliates' (note 5) indebtedness
totaling $1.2 million.
On April 24, 1997, employees represented by the Sanitary Truck Drivers and
Helpers Union Local 350 International Brotherhood of Teamsters ("Local 350")
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-year
contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. The Company has served upon Local 350
a demand to arbitrate this dispute under the terms of the collective bargaining
agreement between the parties. No arbitration date has yet been set. Arbitration
between the Company and Local 350 could determine that there has been no meeting
of the minds regarding the pension benefits provision in the contract and the
provision could have to be renegotiated. If the matter is not satisfactorily
renegotiated, the Company could be subject to another work stoppage.
If Local 350 were to prevail in the arbitration discussed above, the
Company estimates that the accumulated benefit obligation (ABO) would increase
by an additional $8.4 million which would result in a charge to the minimum
pension liability of $4.2 million. In addition, if Local 350 were to prevail,
the Company estimates that its annual accruals for employee benefits would
increase by approximately $3.0 million for additional pension and medical costs.
The above estimates are based on a discount rate of 7.5%. The discount rate
applied under GAAP fluctuates with market conditions. A change in the discount
rate can result in significant fluctuations in the ABO.
14. LITIGATION
The Company and the ESOP were defendants in litigation brought by previous
noteholders of the ESOP against, among others, certain financial institutions as
to which Norcal and/or the ESOP have certain indemnification obligations. The
litigation between the ESOP noteholders and all other parties, including Norcal
and the ESOP, was settled in 1995, but there continues to be litigation between
the noteholders and certain of those financial institutions which contend that
the Company and the ESOP have continuous
<PAGE> 62
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
indemnity obligations. Given the terms of the settlement agreement with the ESOP
noteholders, the Company believes it is unlikely that its ultimate unreimbursed
expense would materially exceed the amount of the financial institutions' legal
fees.
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that all such matters relating to
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>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Trust accounts........................ $ 35,009 $ 35,108 $ 28,275 $ 28,187
Marketable securities................. 5,552 5,552 6,889 6,889
Liabilities:
Senior Notes.......................... 170,679 201,250 170,392 170,392
Other long term debt including current
portion............................ 3,674 3,674 2,348 2,348
</TABLE>
Trust accounts and marketable securities -- The fair value of the trust
accounts and marketable securities has been estimated based on market values
provided by the respective trustees and quoted market prices.
Senior Notes -- The fair value of the senior notes at September 30, 1997
has been estimated using the quoted market price for the Notes based upon a
limited number of transactions. The fair value at September 30, 1996 was
estimated to be the carrying amount of the Notes because of the lack of an
established market.
16. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment -- solid waste management
services primarily consisting of collection, transfer, disposal and landfill
management to industrial, commercial, residential and municipal customers. In
1997 and 1996, one customer accounted for 17% and 14% of consolidated revenue,
respectively, and 31% and 27% of consolidated accounts receivable at September
30, 1997 and September 30, 1996, respectively. During 1995, no single customer
accounted for as much as 10% of consolidated revenue or accounts receivable. The
Company operates primarily in seven different geographical areas within the
State of California. The San Francisco geographical region represents
approximately 39%, 40% and 45% of revenues for the years 1997, 1996 and 1995,
respectively, however the Company does not believe that it is exposed to
<PAGE> 63
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1996
credit risk. The 1997 Rate Order issued by the San Francisco Rate Board has
eliminated certain expenses of the Company for rate recovery purposes which will
adversely affect revenues on a unit basis.
As of September 30, 1997, approximately 64% of the Company's employees were
represented by unions. Of this total approximately 22% are covered under
contracts that have expired or will expire by September 30, 1998.
The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities.
17. GUARANTEE OF SECURITIES
Norcal is a holding company and has no independent operations other than
those relating to its subsidiaries. The Senior Notes are guaranteed by certain
direct and indirect subsidiaries of Norcal. The guarantor subsidiaries are all
wholly owned subsidiaries and the guarantees of the guarantors are full,
unconditional and joint and several. The direct and indirect nonguarantor
subsidiaries of Norcal are individually and in the aggregate inconsequential.
Separate financial statements of each guarantor have not been presented since
management has determined such separate financial statements are not material to
investors.
18. SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The following table summarizes the unaudited quarterly results of
operations (in thousands):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues
1997...................................... $75,121 $75,947 $79,959 $88,774
======= ======= ======= =======
1996...................................... $67,602 $69,802 $71,228 $79,583
======= ======= ======= =======
Income from operations
1997...................................... $ 4,466 $ 5,783 $ 8,302 $ 8,423
======= ======= ======= =======
1996...................................... $ 7,678 $ 5,349 $ 9,784 $ 2,980
======= ======= ======= =======
Net income (loss)
1997...................................... $ (46) $ 856 $ 2,550 $ 3,166
======= ======= ======= =======
1996...................................... $29,971 $(1,246) $ 3,747 $(2,229)
======= ======= ======= =======
</TABLE>
In the fourth quarter of 1996, operating results were adversely impacted by
the Company's decision to increase the contributions to the ESOP by $9.0
million, having the effect of reducing current taxes payable, and resulting in
an increased ESOP compensation expense relative to the additional shares
allocated. The contribution was applied as a prepayment of the loans from the
Company to the ESOP.
<PAGE> 64
ITEM 9.CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
<PAGE> 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions and offices with Norcal of the current
executive officers and directors of Norcal are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- ----------------------------------
<S> <C> <C>
Michael J. Sangiacomo............. 48 President, Chief Executive Officer
and Director
Donald M. Moriel.................. 63 Executive Vice President and Chief
Operating Officer
Mark R. Lomele.................... 41 Senior Vice President, Chief
Financial Officer and Treasurer
Bennie J. Anselmo, Jr............. 52 Vice President -- Equipment
Procurement and Maintenance
David A. Cochrane................. 41 Vice President -- Facilities
Development and Technical Services
Jon D. Braslaw.................... 36 Vice President, Corporate
Controller
Kenneth James Walsh............... 50 Division Manager of Southern
California
Archie L. Humphrey................ 45 Division Manager of Northern
California
Gale R. Kaufman................... 43 Director
John B. Molinari(a)(b)............ 88 Director, Chairman of the Board of
Directors
H. Welton Flynn(a)(b)............. 75 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. He also
serves as an executive officer of Nortech Waste LLC, a joint venture in which
the Company is a minority investor ("Nortech"). 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. He
also serves as an executive officer and a director of Nortech. Since March 1992
and prior to his current positions, Mr. Moriel, through a wholly owned
consulting company unaffiliated with Norcal, Pentagon Equities Corporation
located in Davis, California, served as a consultant to three Norcal
subsidiaries located in Solano County, California. Mr. Moriel has been President
and Chief Executive Officer of Pentagon Equities Corporation since it formation.
Mr. Moriel's son-in-law is the Vice President and General Manager of Norcal's
Vacaville Sanitary Service subsidiary and Group Manager of five additional
subsidiaries.
MARK R. LOMELE has served as Senior Vice President, Chief Financial Officer
and Treasurer of Norcal since January 1997 and as a Vice President since
November 1990. From September 1988 to July 1996, Mr. Lomele served as Norcal's
Corporate Controller and from July 1996 to January 1997 as Acting Chief
<PAGE> 66
Financial Officer. Mr. Lomele serves as an executive officer of all of Norcal's
subsidiaries. From April 1996 to September 1996 he also served as General
Manager of Nortech. 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 and Vice President of Alta Equipment and Leasing
Company, Inc. since November 1990. Mr. Anselmo served as Director of Equipment
Procurement for Golden Gate Disposal Company from January 1988 until his
transfer to Norcal in November 1990. Mr. Anselmo began his career with Golden
Gate Disposal Company in 1962, serving as shop foreman and shop superintendent,
among other capacities.
DAVID A. COCHRANE has served since February 1995 as Vice
President -- Facilities Management and Technical Services of Norcal. Prior to
that Mr. Cochrane served Norcal as Director of Technical Services since October
1994, and as Corporate Manager for Landfill Engineering since April 1993. Since
November 1996, Mr. Cochrane has served as Vice President of Alta Environmental
Services, Inc., a subsidiary that markets certain types of landfill space to
third parties, and as Vice President of B&J Drop Box, subsidiary that owns a
landfill in Vacaville, CA, and Western Placer Recovery, Inc., a subsidiary that
operates a landfill in Roseville, CA. Before joining Norcal in April 1993, Mr.
Cochrane served since April 1990 as an executive manager for Emcon Associates,
an environmental and engineering consulting firm that has provided services to
the waste industry, including Norcal and its subsidiaries. He holds a B.A. in
Geology from Humboldt State University.
JON D. BRASLAW has served as Vice President, Corporate Controller since
January 1997. Prior to that time, Mr. Braslaw served as Controller from August
1996 to December 1996, as Assistant Controller from April to July 1996, and as
Manager of Financial Reporting since January 1995. He holds a B.A. in Economics
from the University of California at Santa Barbara.
KENNETH JAMES WALSH has been an employee of Norcal since 1966. During this
period, Mr. Walsh has performed extensive operations functions. Mr. Walsh has
worked at seven Norcal subsidiary companies, and has been the Division Manager
of Southern California since 1990. He is responsible for overall management of
the contracts with San Bernardino and San Diego Counties. Mr. Walsh is currently
Vice President of Norcal Waste Systems of Southern California, the subsidiary
that administers the Company's Southern California operations, Vice President
and Division Manager of Norcal/San Bernardino, Inc., the subsidiary that
administers the Company's San Bernardino County operations, and Norcal/San
Diego, Inc., the subsidiary that administers the Company's San Diego County
operations, and Vice President and General Manager of Norcal Waste Solutions,
Inc.
ARCHIE L. HUMPHREY has served as Division Manager for all Northern
California operations except San Francisco operations and Integrated
Environmental Systems, Inc., a subsidiary that owns and operates a medical waste
incinerator, since November 1996 and is a Vice President of 13 subsidiaries of
the Company. Mr. Humphrey has also been a member of the Administrative Committee
of the ESOP since 1986 and its Secretary since 1992. From August 1995 to
November 1996, Mr. Humphrey served as Division Manager for North Coast
operations of the Company. Mr. Humphrey served as a Regional Manager for the
Company's Solano County operations from October 1992 until August 1995 and as a
director of the Company from November 1991 until February 1996. Mr. Humphrey
holds a B.A. in Sociology from California State University at Sacramento.
GALE R. KAUFMAN became a director of Norcal in July 1996. Since 1987, Ms.
Kaufman has been the president of Kaufman Campaign Consultants, a political
campaign and consulting firm. From 1992 to 1995, she was the Director of the
Speaker's Office of Majority Services of the California State Assembly. Since
May 1993, she has provided certain consulting services to Norcal, including
overall campaign responsibility in connection with Norcal's defeat of certain
City of San Francisco ballot initiatives. Ms. Kaufman has a B.A. in Political
Science from George Washington University.
JOHN B. MOLINARI has served as a director of Norcal and its predecessor
since 1986 and as Chairman of the Board since December 1990. From 1948 to 1953,
Mr. Molinari served as a judge of the San Francisco
<PAGE> 67
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 committees.
H. WELTON FLYNN has served as a director of Norcal since December 1991.
From 1949 until the present, Mr. Flynn has been the sole proprietor of an
accounting firm located in San Francisco. Since January 1996, he has served as a
member of The Public Transportation Commission of the City and County of San
Francisco. Mr. Flynn was appointed to the Public Utilities Commission for the
City and County of San Francisco in 1970 and served as its President for more
than five terms before retiring in 1991.
Each executive officer of Norcal is appointed by, and serves at the
pleasure of, the Board of Directors. There are no family relationships among
executive officers or directors of Norcal.
BOARD OF DIRECTORS.
Number of Directors and Term of Office. Norcal's Bylaws currently fix the
authorized number of directors of Norcal at five. All directors hold office
until the next annual meeting of shareholders and until their successors have
been elected. The ESOP (as shareholder) has the power to remove directors at any
time. There is currently one vacancy on the Board of Directors.
Committees of the Board. The Compensation Committee recommends to the Board
of Directors the salary, benefit and incentive compensation levels of Norcal's
executive officers as well as the contractual provisions of their employment
contracts, and administers Norcal's 1990 Stock Option Plan (the "1990 Option
Plan"), the 1996 Employee Stock Incentive Plan (the "1996 Employee Plan"), the
Deferred Compensation and Stock Option Plan (the "Deferred Compensation Stock
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, the
1996 Employee Plan and the 1996 Stock Plan and establishing and amending rules
and regulations related thereto. The members of the Compensation Committee are
Messrs. Molinari and Flynn. The Audit Committee recommends the firm of
independent certified public accountants to be appointed to audit Norcal's
financial statements, reviews the scope and results of the audit, reviews with
management Norcal's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of Norcal and
reviews the non-audit services to be performed by the independent accountants.
The members of the Audit Committee are Messrs. Molinari and Flynn.
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
1997, John B. Molinari, H. Welton Flynn and Gale R. Kaufman were each paid
$38,000, $34,000 and $29,000, respectively. Each non-employee director receives
an annual retainer of $18,000 and a payment of $1,000 plus expenses for each
board meeting attended and $1,000 plus expenses for each committee meeting
attended that is held at a different time or place than a board meeting.
Non-employee directors are also eligible to receive option grants under the 1996
Non-Employee Director Stock Option Plan. All directors are eligible to receive
option grants under the 1996 Stock Plan and the 1996 Employee Plan.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions. Messrs. Molinari and Flynn were appointed to the Compensation
Committee in May 1992. Neither has ever been an officer or employee of Norcal or
any of its subsidiaries. Mr. Sangiacomo, President and Chief Executive Officer
of Norcal, participates fully with the committee members in recommending to
Norcal's Board of Directors the salaries, benefits and incentive compensation
for Norcal's executive officers, excluding his own.
<PAGE> 68
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning the compensation paid or accrued during the three fiscal
years ended September 30, 1997 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 $100,000 during the last completed fiscal
year (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS(A) COMPENSATION OPTIONS COMPENSATION(C)
PRINCIPAL POSITION YEAR ($) ($) ($) (NUMBER) ($)
- ------------------------------ ------ -------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Sangiacomo......... 1997 371,924 175,000 -- -- 44,509
President and Chief 1996 350,000 147,500 -- 960,000 35,205
Executive Officer 1995 333,846 175,000 -- -- 94,582
Donald M. Moriel.............. 1997 293,943 120,000 -- -- 145,491(d)
Executive Vice President and 1996 275,578 100,000 68,615 300,000 63,016(d)
Chief Operating Officer 1995 261,539 110,000 -- -- 31,247
Mark R. Lomele................ 1997 186,539 75,000 -- 40,000 34,813
Senior Vice President, Chief 1996 128,233 50,000 -- 65,000(b) 28,145
Financial Officer and
Treasurer 1995 117,066 42,000 -- -- 44,288
Kenneth James Walsh........... 1997 193,253 50,000 65,556 45,000 40,453
Division Manager -- 1996 154,617 40,000 25,502 35,000(b) 31,574
Southern California 1995 120,990 38,000 -- -- 20,160
Archie L. Humphrey............ 1997 167,306 50,000 -- 40,000 39,710
Division Manager -- 1996 135,013 30,500 -- 75,000(b) 31,415
Northern California 1995 105,926 32,000 -- -- 69,336
</TABLE>
- ---------------
(a) Bonuses are indicated for the fiscal year in which they were earned based on
the achievement of certain business plan targets.
(b) Options for fiscal year 1996 include certain options that were granted
during fiscal year 1997 with respect to employment during fiscal year 1996.
(c) Unless otherwise indicated in a note to this table, this amount consists
primarily of increases in the value of the individual's ESOP account as a
result of an allocation of additional shares of Norcal's Common Stock to
such account as well as an increase in the estimated fair market value per
share of such stock. This figure also includes premiums paid by Norcal on
behalf of the Named Executive Officers for group life insurance during each
of the years indicated, pro-rated for partial years of service.
(d) Represents amounts earned with respect to a deferred annuity to be paid as
part of the Deferred Compensation Stock Option Plan (as hereinafter
defined), along with compensation relating to the increase in the value of
his ESOP account (see footnote (c)).
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 an employment agreement with Mr.
Sangiacomo, its President and Chief Executive Officer. Under the agreement, Mr.
Sangiacomo is entitled to receive a salary of at least $350,000 per year and is
eligible to participate in the Short-Term Incentive Bonus Plan. In addition, Mr.
Sangiacomo receives insurance and other benefits and perquisites generally
available to Norcal's executive employees.
Mr. Sangiacomo is entitled to certain severance payments (i) if his
employment is terminated constructively or without cause after a change in
control of Norcal or (ii) if he resigns at any time more than 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.
<PAGE> 69
Norcal has granted Mr. Sangiacomo a nonqualified stock option pursuant to
its 1996 Stock Plan (as defined below) to purchase Common Stock consisting of
three series, with each series being for 320,000 shares. The initial exercise
price for all shares was $4.89. The exercise price for the Series B shares was
adjusted to $5.18, the fair value of the stock on October 1, 1996. The exercise
price for the Series C shares was adjusted to $5.59, the fair value of the stock
on October 1, 1997. 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; (ii) persons who
are directors of Norcal as of the date of adoption of the 1996 Stock Plan (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) at any time prior to an initial public
offering, the ESOP no longer owns more than 50% of the Company's then
outstanding voting securities; (iv) 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; (v) Norcal is liquidated or dissolved;
or (vi) 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 an employment agreement with Mr. Moriel,
its Chief Operating Officer. Under the agreement, Mr. Moriel is entitled to
receive a salary of at least $275,000 per year, with $50,000 of such annual
salary deferred pursuant to the Deferred Compensation Stock Option Plan. Mr.
Moriel is eligible to participate in the Short-Term Incentive Bonus Plan. In
addition, Mr. Moriel receives 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 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 is entitled to certain severance benefits if (i) his employment
is terminated without cause and (ii) he signs a release relating to certain
claims. Such severance benefits would include, until the earlier of 18 months
after his employment termination or May 1999, payment of an amount equal to his
average annual compensation (salary plus bonus) for the two previous years.
Norcal granted Mr. Moriel a nonqualified stock option under the Deferred
Compensation 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: as of
September 30, 1997, 180,000 shares were vested, 90,000 shares will vest on
September 30, 1998, and 30,000 shares will vest on May 27, 1999. The option will
vest completely upon Mr. Moriel's termination as a result of disability or
death. Subject to certain provisions of the Deferred Compensation and Stock
Option Plan, Mr. Moriel may exercise his option with respect to the shares that
have vested at any time on or before September 30, 2002.
In April 1996, the Board of Directors adopted a severance pay policy (the
"Severance Policy") which would be triggered by a change in control of Norcal.
The program covers up to ten key employees of the Company (but not Messrs.
Sangiacomo and Moriel). Each employee covered by the Severance Policy will
receive an amount equal to his current base salary if there is a change in
control of Norcal and the employee is
<PAGE> 70
constructively terminated or terminated without cause within 13 months after
such change in control. The Company has not designated any specific employees to
be covered by the Severance Policy at this time.
Short-Term Incentive Bonus Plan. In April 1996, the Company adopted a
Short-Term Incentive Bonus Plan (the "1996 Bonus Plan") providing variable cash
bonuses for up to approximately 70 of the Company's executive and management
employees (including the Named Executive Officers). Under the 1996 Bonus Plan,
cash bonuses will be based on a percentage of each participant's base salary,
with such percentages varying depending on how closely Norcal (or its regional
operations, as the case may be) achieves specific financial, operational and
strategic objectives. No bonuses will be paid unless the Company's profit before
taxes exceeds the aggregate amount of bonuses due to be paid pursuant to the
1996 Bonus Plan. Depending on the employee, cash bonuses will range from 5% to
30% of base salary if 85% of the target is achieved to between 20% and 120% of
base salary if 120% of the target is achieved. The Company has retained the
discretion to modify such bonuses as it deems appropriate. The Board of
Directors may, from time to time, modify the 1996 Bonus Plan.
1996 Executive Stock Incentive Plan ("1996 Stock Plan"). Pursuant to
Norcal's 1996 Stock Plan, up to 2,887,500 shares of Common Stock have been set
aside to satisfy awards that may be granted to officers, employees or directors
of the Company or its affiliates. Awards may consist of incentive or
nonqualified stock options, restricted stock, stock appreciation rights,
performance awards and dividend equivalent rights. The 1996 Stock Plan will
expire in January 2006.
The 1996 Stock Plan is administered by a committee of non-employee
directors (currently, the Compensation Committee), which has the power to
determine when and to whom awards will be granted and the terms of each award.
The terms of any award will be set forth in an award agreement, which may modify
or delete provisions of the 1996 Stock Plan that would otherwise apply to such
award or which may contain other terms and restrictions not set forth in the
1996 Stock Plan.
With respect to awards of options, the committee has authority to determine
(i) the number of shares of Common Stock that may be purchased pursuant to each
option, (ii) the option's vesting provisions, (iii) the exercise price (provided
in general that the exercise price for shares must be at least 85% of the fair
market value of the shares as of the grant date), (iv) the term of such option
and (v) such other terms as the committee determines.
The 1996 Stock Plan generally provides that, upon a Control Event (as
defined in the Plan), all outstanding options will become immediately and fully
exercisable, and optionholders may surrender any option to the extent not yet
exercised in exchange for a cash payment.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Stock Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Stock Plan.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition and confidentiality provisions in the 1996 Stock
Plan are subject to certain forfeiture provisions with respect to their options
or shares.
Effective April 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 15,000 shares of Common
Stock under the 1996 Stock Plan at an exercise price of $4.89 per share.
1996 Employee Stock Incentive Plan (the "1996 Employee Plan"). Pursuant to
the 1996 Employee Plan, up to 5,260,500 shares of Common Stock (less any such
shares set forth in awards granted pursuant to the 1996 Stock Plan, the 1990
Option Plan, the Non-Employee Director Plan and the Deferred Compensation Stock
Option Plan) have been set aside to satisfy awards that may be granted to
officers, employees or directors of the Company or its affiliates. Awards may
consist of incentive or nonqualified stock options, restricted stock, stock
appreciation rights, performance awards and dividend equivalent rights. The 1996
<PAGE> 71
Employee Plan will expire in December 2006. The 1996 Employee Plan is
administered by a committee of non-employee directors (currently, the
Compensation Committee), which has the power to determine when and to whom
awards will be granted and the terms of each award. The terms of any award will
be set forth in an award agreement, which may modify or delete provisions of the
1996 Employee Plan that would otherwise apply to such award or which may contain
other terms and restrictions not set forth in the 1996 Employee Plan.
With respect to the awards of options, the committee has authority to
determine (i) the number of shares of Common Stock that may be purchased
pursuant to each option, (ii) the option's vesting provisions (provided that the
rate of vesting must be at least 20% per year over five years from the date the
option is granted), (iii) the exercise price (provided in general that the
exercise price for shares must be at least 85% of the fair market value of the
shares as of the grant date), (iv) the term of such option (provided that the
term of an option may not be greater than ten years from the date of grant
thereof) and (v) such other terms as the committee determines.
The 1996 Employee Plan generally provides that, in the event of certain
changes in control, the committee, in its sole discretion, may take a variety of
actions (including acceleration of unvested options) with respect to outstanding
awards that it considers to be in the best interests of the Company.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Employee Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Employee Plan, which option will terminate upon the consummation of the
Company's first public offering of Common Stock.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition, confidentiality and other provisions in the 1996
Employee Plan are subject to certain forfeiture provisions with respect to their
options or shares.
Messrs. Lomele, Humphrey, Walsh, Braslaw, Cochrane and Anselmo, who are
employees of the Company and/or certain subsidiaries, were each awarded options
with respect to their employment during fiscal year 1997 to purchase up to
40,000, 40,000, 45,000, 25,000, 20,000 and 10,000 shares of Common Stock,
respectively, under the 1996 Employee Plan. Options granted for 1997 were issued
at an exercise price of $5.18 per share. These options have a seven-year term
(commencing on the date of grant) and vest over four years from the date of
grant.
Deferred Compensation Stock Option Plan. Pursuant to Norcal's Deferred
Compensation Stock Option Plan, (i) up to 300,000 shares of Common Stock have
been set aside to satisfy the award of an unqualified stock option to Mr.
Moriel;) (ii) Mr. Moriel will defer $50,000 per year of his annual salary (as
described above) (the "Deferred Compensation"); and (iii) Mr. Moriel will be
entitled to receive a retirement annuity (the "Retirement Annuity"), payable
quarterly until his death, in the amount of $50,000 per year, less the aggregate
amount of benefits he receives from other retirement plans of Norcal, excluding
the ESOP benefit.
The Deferred Compensation 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.
<PAGE> 72
Shares acquired pursuant to the exercise of the option granted under the
Deferred Compensation 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 Stock Option Plan provides that if Mr. Moriel
violates certain noncompetition and confidentiality provisions in such plan, he
will be subject to forfeiture provisions with respect to his options, shares
purchased thereunder and the Retirement Annuity.
Mr. Moriel's Deferred Compensation will accrue interest at the rate of 8
percent per year, compounded quarterly. Norcal will distribute such Deferred
Compensation to Mr. Moriel at the rate of $30,000 per year beginning with the
first day of the calendar quarter following termination of his employment with
Norcal for any reason.
1996 Non-Employee Director Stock Option Plan. Pursuant to Norcal's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), up
to 175,000 shares of Common Stock have been set aside to satisfy awards to
nonemployee 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 (as defined therein).
Effective January 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 35,000 shares of Common
Stock under the Non-Employee Director Plan at an exercise price of $4.89 per
share. In July 1996, Ms. Kaufman, a non-employee director, was also granted an
option to purchase up to 35,000 shares of Common Stock under the Non-Employee
Director Plan at an exercise price of $4.89 per share. The Non-Employee Director
Plan is administered by Norcal's Board of Directors.
1990 Stock Option Plan ("1990 Option Plan"). Pursuant to Norcal's 1990
Option Plan, options to purchase a maximum of 1,898,000 shares of Common Stock
may be issued to officers, employees, independent contractors and directors of
Norcal, its subsidiaries and/or its affiliates. Of that amount, options to
purchase a maximum of 600,000 shares of Common Stock may be granted to directors
of Norcal, including directors who are also employees of Norcal. Under the 1990
Option Plan, incentive stock options that meet the requirements of Section 422
of the Code may be granted to the officers and employees of Norcal, its
subsidiaries and/or certain of its affiliates. The 1990 Option Plan is currently
administered by the Compensation Committee of the Board of Directors, which has
the power to determine to whom options will be granted, the terms of each option
and to interpret the plan.
The exercise price of any stock option may not be less than 100% of the
fair market value of the Common Stock on the date the option is granted. If the
Common Stock is not publicly traded on the date of grant of an option, fair
market value may be computed in good faith by the Board of Directors or a
Committee thereof, but shall not be less than the fair market value reflected in
the most recent year-end independent appraiser's valuation report received by
the ESOP Administrative Committee. Unless otherwise provided in the option
grant, shares acquired pursuant to the exercise of options become vested over a
period of five years from the date of grant and are subject to certain
restrictions on transfer, unvested shares may be repurchased by Norcal upon
termination of the optionee's employment or engagement with Norcal (or its
subsidiaries) at the exercise price the optionee originally paid for such shares
and all shares purchased pursuant to the exercise of options are subject to
repurchase by Norcal under certain circumstances. Generally, in the event (i)
there is a merger, consolidation or other reorganization as a result of which
Norcal is not the surviving corporation or becomes a subsidiary of another
corporation and (ii) the surviving corporation does not agree to assume all
options granted under the 1990 Option Plan (or to issue options equivalent
thereto), then such options will become immediately exercisable and shares
purchased pursuant to them will immediately vest.
<PAGE> 73
As of September 30, 1997, options to purchase 228,000 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 fiscal year 1997. The following table provides certain information with
respect to options outstanding during fiscal year 1997 for the Named Executive
Officers. No stock appreciation rights ("SARs") were outstanding during such
period.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE EXPIRATION PRESENT
NAME OPTIONS GRANTED(A) EMPLOYEES PRICE DATE VALUE(B)
- ---------------------------- --------------------- ---------- --------- -------------------- -------
<S> <C> <C> <C> <C> <C>
Michael J. Sangiacomo....... 0 -- -- -- --
Donald M. Moriel............ 0 -- -- -- --
Mark R. Lomele.............. 40,000 8.5% $5.18 September 30, 2004 $54,156
Kenneth James Walsh......... 45,000 9.5% $5.18 September 30, 2004 $60,926
Archie L. Humphrey.......... 40,000 8.5% $5.18 September 30, 2004 $54,156
</TABLE>
- ---------------
(a) Options granted to Messrs. Lomele, Walsh and Humphrey were granted pursuant
to the 1996 Employee Plan. Each of the options is a non-qualified option and
expires on September 30, 2004. Each option will vest as follows: 20% will
vest on each of September 30, 1998 and 1999, and 30% will vest on each of
September 30, 2000 and 2001. In the event of a change in control, the
Compensation Committee, in its sole discretion, may take a variety of
actions with respect to the options that it considers to be in the best
interests of the Company. The Company will have an assignable option upon
termination of an individual's employment to repurchase any such shares. The
Company's repurchase option with respect to vested shares will terminate
upon an initial public offering.
(b) Grant Date Present Value was computed using the Black-Scholes option pricing
model. The calculations utilize certain assumptions, including the
following:
(i) the volatility is assumed to be zero as the Company's Common Stock is
not publicly traded as of the date hereof;
(ii) the risk-free rate of return for each grant is assumed to be the U.S.
Treasury zero-coupon bond rate for bonds with maturities consistent
with the expected time of exercise of each grant;
(iii) the dividend yield is assumed to be zero;
(iv) the stock price is assumed to be $5.59, which is as of September 30,
1997, the effective date of the most recently completed valuation;
(v) the value of the options is discounted by 3% per year to account for
assumed forfeitures.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION & SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED VALUE FISCAL YEAR-END FISCAL YEAR-END
NAME IN EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------- ----------- -------- ------------------------- ------------------------
<S> <C> <C> <C> <C>
Michael J. Sangiacomo...... 0 0 267,000/768,000 $115,840/$239,360
Donald M. Moriel........... 0 0 185,000/120,000 $126,000/$ 84,000
Mark R. Lomele............. 0 0 23,000/ 92,000 $ 9,100/$ 52,800
Kenneth James Walsh........ 0 0 10,000/ 73,000 $ 4,900/$ 38,050
Archie L. Humphrey......... 0 0 25,000/100,000 $ 10,500/$ 58,400
</TABLE>
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
<PAGE> 74
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, which corresponds to the amounts listed in the Summary
Compensation Table set forth above under the columns "Salary" and "Bonus" plus
certain payouts by the Company in respect of accrued vacation. Any amounts in
excess of limitations pursuant to Section 401(a)(17) of the Code are excluded.
The annual benefit estimates computed for this table are Single Life Benefits
and are not subject to deductions for Social Security or other offset amounts.
As of September 30, 1997, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 8.75 years; Mr. Moriel, 5.33 years; Mr. Lomele, 9.00 years; Mr.
Walsh, 9.00 years; and Mr. Humphrey, 11.00 years.
Mr. Sangiacomo is eligible also to receive a retirement benefit from the
Envirocal Retirement Plan, due to his past employment with Envirocal. The
Envirocal Retirement Plan also is funded as required by ERISA and does not
require employee contributions. The calculation of monthly retirement benefits
is generally based upon years of service and average monthly compensation for
the 60 months (whether or not consecutive) that produce the highest such
average. Compensation used in determining retirement benefits generally consists
of an employee's total earnings, including overtime pay and bonuses. Covered
compensation is total cash compensation but not including any payment for
automobile, moving or living allowances, employee expense reimbursements, or
payment in lieu of unused vacation or sick leave. Any amounts in excess of
limitations pursuant to Section 401(a)(17) of the Code are excluded.
As of September 30, 1997, Mr. Sangiacomo had an estimated 5.17 years of
credited services under the Envirocal Retirement Plan. The estimated annual
retirement benefit to which he will be entitled under the Envirocal Retirement
Plan is $16,383. That estimate is computed as a Single Life Benefit and is not
subject to deduction for Social Security or other offset amounts.
<PAGE> 75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Norcal's Common Stock as of December 15, 1997 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>
NUMBER OF SHARES BENEFICIALLY OWNED
-------------------------------------------------------------
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...................... 46,280 267,000 313,280 1.1%
Donald M. Moriel........................... 18,625 185,000 203,625 *
Mark R. Lomele............................. 24,711(d) 23,000 47,711(d) *
Kenneth James Walsh........................ 35,994 10,000 45,994 *
Archie L. Humphrey......................... 35,850 25,000 60,850 *
John B. Molinari........................... 0 29,167 29,167 *
H. Welton Flynn............................ 0 16,667 16,667 *
Gale R. Kaufman............................ 0 11,667 11,667 *
All executive officers and directors as a
group
(11 persons)............................. 24,134,973(e) 591,500 24,726,473(e) 100.0%
</TABLE>
- ---------------
* Less than 1%.
(a) Except as otherwise indicated in the notes to this table, the address of
each beneficial owner of more than 5% of the Common Stock is c/o Norcal
Waste Systems, Inc., Five Thomas Mellon Circle, San Francisco, California
94134.
(b) As ESOP participants, the individuals named in the table have shared voting
power, but no investment power, over the shares of Common Stock allocated to
such individuals' ESOP account, unless they are members of the ESOP
Administrative Committee. See note (c) below. The ESOP account includes
allocated shares as of September 30, 1997.
(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, 1997, of which approximately 18,277,898 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, 1997 are as follows: Archie L.
Humphrey, 35,850 shares; John A. Legnitto, 9,653 shares; and Mark R. Lomele,
24,711 shares. In addition, Messrs. Humphrey and Lomele hold options to
purchase 10,000 and 10,000 shares of Common Stock, respectively, that are
exercisable within 60 days, 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, 1997, along with options to purchase 15,000 and 13,000,
respectively, that are exercisable within 60 days at $4.89 per share. 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 exercisable within 60 days, represent less than 1%
of the outstanding shares of Common Stock as of September 30, 1997.
<PAGE> 76
(d) Excludes all shares of Common Stock held by the ESOP Trustee deemed to be
beneficially owned by Mr. Lomele as a result of his membership on the ESOP
Administrative Committee which exercises shared voting and investment power
with respect to such shares (see notes (c) above and (e) below), but
includes those shares of Common Stock held by the ESOP Trustee for the
benefit of Mr. Lomele as ESOP participant (see note (b) above).
(e) Includes all shares of Common Stock held by the ESOP Trustee because Mark R.
Lomele is an executive officer of Norcal as well as a member of the
Administrative Committee of the ESOP with shared voting and investment power
with respect to such shares (see note (c) above).
THE ESOP
The Norcal Waste Systems, Inc. Employee Stock Ownership Plan and Trust (the
"ESOP") owns all of Norcal's outstanding shares of common stock. The ESOP is an
employee stock ownership plan intended to qualify under Sections 401(a) and
4975(e)(7) of the Code. The ESOP was adopted effective as of October 1, 1985 and
acquired the outstanding shares of Norcal in three separate transactions.
TRUSTEE AND ADMINISTRATIVE COMMITTEE; CONTROL OF NORCAL BY THE ESOP
The assets of the ESOP are held in trust under a trust agreement with the
ESOP Trustee. An Administrative Committee (the "Committee") that is appointed by
and serves at the pleasure of the Board of Directors is responsible for the
operation and administration of the ESOP, including the ESOP's activities as
sole shareholder of Norcal. Under ERISA, the Committee members are fiduciaries
and as such must act for the exclusive benefit of the employee participants
under the ESOP. The current members of the Committee are Archie L. Humphrey,
John A. Legnitto and Mark R. Lomele. Mr. Lomele, Chair of the Committee, is an
officer of Norcal. Mr. Humphrey is Secretary of the Committee. All of the
Committee members are employees of the Company. Norcal has agreed to indemnify
members of the Committee against any liability arising out of an alleged breach
by a member in the performance of his or her fiduciary duties, except those
resulting from a member's own gross negligence or willful misconduct. Norcal
also carries insurance against costs and liability arising from a member's
breach or alleged breach of fiduciary duty.
The ESOP Trustee has granted the Committee a proxy to vote all shares held
by the ESOP. The Committee elects Norcal's Board of Directors, may remove these
directors, and votes with respect to certain corporate transactions requiring or
presented for shareholder approval. However, with respect to any corporate
matter that requires a shareholder vote and constitutes a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transactions as
may be specified in U.S. Treasury Department regulations, voting instructions
are to be solicited from ESOP participants with respect to shares allocated to
their accounts. The Committee determines the voting of any unallocated shares
and any allocated shares for which ESOP participants do not provide voting
instructions. Because a significant number of shares are unallocated (5,857,075
shares or 24.3% of outstanding stock), currently the Committee may be able to
exercise a significant influence over such matters. If Norcal's capital stock
becomes registered under the Exchange Act, each ESOP participant will be able to
direct voting of those shares allocated to his or her account and the Committee
will have responsibility for voting only unallocated or undirected shares. The
sale of any shares of Norcal Common Stock by the ESOP requires the approval of
the Board of Directors.
DISTRIBUTIONS
In-Service Withdrawals. Each participant who has attained age 55 and has
participated in the ESOP for at least ten years is entitled to make in-service
withdrawals with respect to common stock acquired by the ESOP after December 31,
1986, and allocated to his or her ESOP account ("Post-1986 Shares"). An eligible
participant will be entitled to withdraw up to a total of 25% of his or her
Post-1986 Shares during the first five years of the election period and will be
entitled to withdraw up to a total of 50% of his or her Post-1986 Shares during
the sixth year of the election period. It is expected that withdrawals will be
paid in cash. As of the date hereof, the ESOP held 11,654,973 Post-1986 Shares.
<PAGE> 77
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.
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, 5,857,075 shares were
unallocated as of September 30, 1997.
To the extent that the ESOP utilizes cash contributions from Norcal to
repay the ESOP Loans, the contribution will result in no net cash outlay by
Norcal. Moreover, such contributions to the ESOP are generally tax-deductible.
The Credit Agreement and the Indenture relating to the Senior Notes
expressly permit Norcal to make contributions to the ESOP in order for the ESOP
to pay cash benefits due to retired, terminated or withdrawing ESOP participants
and/or to repurchase Norcal common stock distributed to such participants. To
the extent Norcal contributes funds to the ESOP for this purpose or is obligated
to repurchase common stock distributed to participants, Norcal will have less
cash available to make payments on its outstanding indebtedness. Furthermore,
the amount Norcal may contribute to the ESOP to fund such ESOP distribution
obligations (or may use to repurchase common stock distributed by the ESOP) will
increase significantly in the future as the Company's workforce ages and
retires, as additional shares of common stock are allocated to participants, if
eligible participants elect to receive in-service withdrawals or if the value of
the common stock increases. Such an increase in contributions would reduce the
amount of cash available for other purposes, including to make debt service
payments.
THE ESOP LOANS
In 1986 and 1987 Norcal's predecessors lent a total of $127.7 million to
their respective employee stock ownership plans in connection with the
acquisition of each of the predecessors by their respective ESOPs and merger of
the two predecessor companies. In 1990, in connection with the Excel
Transaction, Norcal loaned $10.7 million to the Excel ESOP pursuant to a 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.
In connection with the Refinancing, the ESOP's indebtedness reflects, among
other things, Norcal's funding of the ESOP's retirement of the ESOP Notes,
repayment of all amounts owed under the Old Credit Agreement, and incurrence of
new indebtedness by the Company pursuant to the Refinancing. At September 30,
1997, the outstanding principal balance owed to Norcal was $54.7 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 installments of approximately $9.8 million each as
of September 30 of each year, beginning in 1996. In addition, the ESOP will
prepay such outstanding indebtedness, without penalty, to the extent that Norcal
makes contributions to the ESOP for the purpose of making such prepayments. The
ESOP's repayment of principal and interest on such outstanding indebtedness may
not exceed the sum of Norcal's contributions to the ESOP for the purpose of
making such repayments, plus any cash dividends paid
<PAGE> 78
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS WITH KAUFMAN CAMPAIGN CONSULTANTS.
Kaufman Campaign Consultants ("KCC"), of which Ms. Kaufman, a director of
Norcal, is President and sole shareholder, is party to a consulting agreement
with the Company, effective May 1, 1996, pursuant to which KCC has agreed to
provide the Company with certain consulting services in the areas of political
matters, public affairs, media and public relations. The agreement, which had an
original term of one year, has been extended by the Company and KCC through
September 30, 1998. Under the agreement, KCC receives a monthly fee of $9,500.
KCC received an aggregate of $111,500 in fees during fiscal year 1997.
DIRECTORS AND OFFICERS INSURANCE.
Norcal carries insurance indemnifying its directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers of Norcal and its affiliates and as ERISA fiduciaries, to
the extent they may so act.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated statements of income for each of the three years in
the period ended September 30, 1997
Consolidated balance sheets as of September 30, 1997 and 1996
Consolidated statements of stockholder's equity (deficit) for each
of the three years in the period ended September 30, 1997
Consolidated statements of cash flows for each of the three years
in the period ended September 30, 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, or are not
applicable, or the information is included in the consolidated financial
statements or notes to consolidated financial statements.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of Norcal Waste Systems, Inc.+
3.2 Restated Bylaws of Norcal Waste Systems, Inc.+
4.1 Indenture between Norcal Waste Systems, Inc. and IBJ Schroder Bank & Trust
Company dated as of November 21, 1995+
4.3 Form of the 12 1/2% Series B Notes due 2005+
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------
<S> <C>
10.1 Norcal Waste Systems, Inc. Employee Stock Ownership Plan, as amended and
restated as of October 1, 1993 (the "ESOP")+
- Amendment No. 1, dated effective October 1, 1993, executed December 29,
1994+
- Amendment No. 2, dated effective February 1, 1995, executed April 27,
1995+
- Amendment No. 3, dated effective October 1, 1993, executed September 28,
1995+
- Amendment No. 4, dated effective November 17, 1995+
10.1.1 Amendment No. 5, dated effective October 1, 1996, executed January 30,
1997
10.2 Employee Stock Ownership Trust Agreement between Norcal Solid Waste
Systems, Inc. (now "Norcal Waste Systems, Inc.," hereinafter referred to
as "Norcal") and Imperial Trust Company, dated March 15, 1990+*
10.4 Revolving Credit Agreement by and among Norcal, certain of Norcal's
subsidiaries (the "Guarantors"), The First National Bank of Boston, and
the Banks named on Schedule 1 therein, dated as of November 21, 1995+
- First Amendment to Revolving Credit Agreement, dated December 1, 1995+
10.4.1 Second Amendment to Revolving Credit Agreement, dated November 26, 1996+++
10.4.2 Third Amendment to Revolving Credit Agreement, dated May 12, 1997++++
10.5 Security Agreement by and among Norcal, the Guarantors and The First
National Bank of Boston, dated as of November 21, 1995+
10.6 Pledge Agreement by and among Norcal, the Guarantors and The First
National Bank of Boston, dated as of November 21, 1995+
10.7 Partnership Pledge Agreement by and among Norcal, the Guarantors and The
First National Bank of Boston, dated as of November 21, 1995+
10.8 Collateral Assignment of Permits and Contracts by and among Norcal, the
Guarantors and the First National Bank of Boston, dated as of November 21,
1995+
10.9 Purchase Agreement between Norcal, Bear, Stearns & Co. Inc. and Montgomery
Securities, dated November 15, 1995+
10.10A/B Exchange Registration Rights Agreement by and among Norcal, the Subsidiary
Guarantors named therein, Bears, Stearns & Co. Inc. and Montgomery
Securities, dated as of November 21, 1995+
10.11 Memorandum of Material Settlement Terms between Norcal, the ESOP, and the
Settling Plaintiffs named therein, dated August 9, 1995+
10.12 Master Finance Lease between Caterpillar Financial Services Corporation
and Alta Equipment Leasing Co., Inc., dated as of December 21, 1994+
10.13 Master Lease Agreement between Heller Financial Leasing, Inc. and Norcal,
dated June 30, 1994+
10.14 Lease Agreement between OB-1 Associates, as landlord, and Norcal, as
tenant, for premises located at 5 Thomas Mellon Circle, San Francisco, CA,
dated April 4, 1989+
- Amendment to Lease, dated effective January 15, 1990+
- Amendment to Lease, dated effective April 1, 1990+
- Third Amendment to Lease, dated effective January 15, 1991+
10.14.1 Fourth Amendment to Lease, dated effective October 21, 1997
10.16 Employment Agreement with Donald M. Moriel dated as of June 4, 1996+*
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------
<S> <C>
10.18 Norcal Amended & Restated 1990 Stock Option Plan, effective July 23, 1990,
as amended August 10, 1990+*
10.18.1 Amendment No. 1 to Norcal Waste Systems, Inc. Amended and Restated 1990
Stock Option Plan, dated effective June 1, 1997*
10.20 Form of Indemnity Agreement (separate agreements were executed by Norcal
and each of John B. Molinari, H. Welton Flynn, Archie L. Humphrey and
Michael J. Sangiacomo as of February 27, 1992)+*
10.21 Agreement to Terminate Indemnification Trust and Modify Indemnity
Agreement between Norcal and M. Sangiacomo, H. Flynn, J. Molinari, A.
Humphrey and W. Graham, dated as of October 16, 1995+*
10.22 Waste Disposal Agreement between Oakland Scavenger Company and City and
County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
10.23 Agreement in Facilitation of Waste Disposal Agreement between City and
County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
10.24 1996 Employee Stock Incentive Plan+*
10.24.1 Amendment No. 1 to 1996 Employee Stock Incentive Plan*
10.25 1996 Executive Stock Incentive Plan, as amended+*
10.25.1 Amendment No. 1 to 1996 Executive Stock Incentive Plan, as amended*
10.26 1996 Non-Employee Director Stock Option Plan+*
10.26.1 Amendment No. 1 to 1996 Non-Employee Director Stock Option Plan*
10.27 Restated Consulting Agreement between Norcal and Robert Corbolotti dated
July 19, 1996+*
10.28 Restated Consulting Agreement between Norcal and David Pacini dated July
19, 1996+*
10.29 Short-Term Incentive Bonus Plan+*
10.30 Employment Agreement between Norcal and Michael J. Sangiacomo, dated as of
January 22, 1996, as amended+*
10.33 Option Agreement between Norcal and Michael J. Sangiacomo dated as of June
24, 1996, as amended+*
10.36 Summary of Material Terms of Severance Policy for Certain Key Employees+*
10.37 Fourth Amended and Restated Loan Agreement by and between Norcal and the
ESOP, effective as of October 1, 1995+
10.38 Consulting Agreement between Norcal and Kaufman Campaign Consultants dated
May 16, 1996+*
10.38.1 Extension No. 1 of Consulting Agreement dated December 11, 1997
10.39 Deferred Compensation and Stock Option Plan+*
10.40 Stock Option Agreement dated as of April 4, 1996, between Norcal and John
B. Molinari+*
10.41 Stock Option Agreement dated as of January 12, 1996, between Norcal and
John B. Molinari+*
10.42 Stock Option Agreement dated as of April 4, 1996, between Norcal and H.
Welton Flynn+*
10.43 Stock Option Agreement dated as of January 12, 1996, between Norcal and H.
Welton Flynn+*
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- --------------------------------------------------------------------------
<S> <C>
10.44 Stock Option Agreement dated as of July 16, 1996, between Norcal and Gale
Kaufman+*
10.45 Indemnification Agreement with Gale R. Kaufman dated as of July 24,
1997+++++*
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Norcal
27.1 Financial Data Schedule
</TABLE>
Exhibits available upon request to the Company.
- ---------------
+ Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-4 (File No. 33-80777), as
amended and declared effective on August 16, 1996.
++ Incorporated by reference to the identically numbered exhibit to the
Company's Form 10-K for the fiscal year ending September 30, 1996, filed
December 27, 1996.
+++ Incorporated by reference to Exhibit 10.45 to the Company's Form 10-K for
the fiscal year ending September 30, 1996, filed December 27, 1996.
++++ Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report for the quarter ending March 31, 1997, filed May 15, 1997.
+++++ Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report for the quarter ending June 30, 1997, filed August 14, 1997.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
None.
<PAGE> 82
SIGNATURES
Dated: December 19, 1997 NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
------------------------------------
Michael J. Sangiacomo
President, Chief Executive Officer
and Director
<PAGE> 83
NORCAL WASTE SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
CHARGES
BALANCE AT TO BALANCE AT
BEGINNING OF YEAR EXPENSE DEDUCTIONS END OF YEAR
----------------- ------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997
Allowance for Doubtful Accounts......... $ 1,611 $ 1,307 $ 901 $ 2,017
====== ====== ====== ======
Insurance............................... $12,608 $12,231 $ 8,390 $16,449
Post Retirement Benefit Obligations..... 34,395 960 1,199 34,156
Litigation, Claims and Related
Matters.............................. 814 -- 202 612
Property and Other Reserves............. 1,783 1,170 12 2,941
------ ------ ------ ------
Total........................... $49,600 $14,361 $ 9,803 $54,158
====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1996
Allowance for Doubtful Accounts......... $ 1,277 $ 1,275 $ 941 $ 1,611
====== ====== ====== ======
Insurance............................... $10,269 $10,236 $ 7,897 $12,608
Post Retirement Benefit Obligations..... 34,917 554 1,076 34,395
Litigation, Claims and Related
Matters.............................. 2,995 -- 2,181 814
Property and Other Reserves............. 2,940 -- 1,157 1,783
------ ------ ------ ------
Total........................... $51,121 $10,790 $ 12,311 $49,600
====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1995
Allowance for Doubtful Accounts......... $ 1,472 $ 879 $ 1,074 $ 1,277
====== ====== ====== ======
Insurance............................... $ 6,585 $ 5,880 $ 2,196 $10,269
Post Retirement Benefit Obligation...... 35,094 830 1,007 34,917
Litigation, Claims and Related
Matters.............................. 5,141 -- 2,146 2,995
Property and Other Reserves............. 8,610 -- 5,670 2,940
------ ------ ------ ------
Total........................... $55,430 $ 6,710 $ 11,019 $51,121
====== ====== ====== ======
</TABLE>
Supporting schedules other than the above have been omitted because they
are not applicable or not required or because the information to be set forth
therein is included in the financial statements or notes thereto herein.
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
10.1.1 Amendment No. 5, dated effective October 1, 1996, executed January 30, 1997
10.14.1 Fourth Amendment to Lease, dated effective October 21, 1997
10.18.1 Amendment No. 1 to Norcal Waste Systems, Inc. Amended and Restated 1990 Stock
Option Plan, dated effective June 1, 1997
10.24.1 Amendment No. 1 to 1996 Employee Stock Incentive Plan
10.25.1 Amendment No. 1 to 1996 Executive Stock Incentive Plan, as amended
10.26.1 Amendment No. 1 to 1996 Non-Employee Director Stock Option Plan
10.38.1 Extension No. 1 of Consulting Agreement dated December 11, 1997
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Norcal
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1.1
NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
Amendment No. 5 to the Amended and Restated Plan
WHEREAS, Norcal Waste Systems, Inc. (the "Company") maintains the
Norcal Waste Systems, Inc. Employee Stock Ownership Plan (the "Plan") on behalf
of certain Eligible Employees of the Company and its Affiliates; and
WHEREAS, it is desirable to amend the Plan to provide for domestic
partner benefits;
NOW, THEREFORE, the Plan is hereby amended, effective as of October 1,
1996, by adding the following subsection (i) at the end of Section 16 thereof:
(i) Domestic Partners. The Committee shall administer the Plan so as
to treat a Participant's "Domestic Partner" as his spouse for all purposes under
the Plan. "Domestic Partner" shall mean any person who has registered a domestic
partnership with a governmental body pursuant to state or local law authorizing
such registration. The Committee may require evidence of such registration as
a condition of recognizing such "Domestic Partner" status.
To record the adoption of this Amendment No. 5 to the amended
and restated Plan, the Company and the
-1-
<PAGE> 2
Administrative Committee have caused it to be executed on this 30th day of
January, 1997.
NORCAL WASTE SYSTEMS, INC. ADMINISTRATIVE COMMITTEE OF
THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By /s/ Michael J. Sangiacomo By /s/ Mark B. Lomele
----------------------------- ------------------------------
By /s/ Roxanne L. Frye
-----------------------------
-2-
<PAGE> 1
EXHIBIT 10.14.1
LEASE AMENDMENT #4
OB-1 Associates, a California Joint Venture, hereinafter referred to as
"Lessors" and Norcal Waste Systems, Inc., a California Corporation, hereinafter
referred to either as "Norcal" or "Lessee", hereby agree to amend, on the
following terms and conditions, that Lease of commercial space entered into on
April 4, 1989, between Lessor and Lessee, as amended January 15, 1990, April 1,
1990 and January 15, 1991. The premises covered by the above described Lease
consist of Suite 304, containing approximately 11,748 square feet, Suite 225,
containing approximately 6503 square feet, Suite 245, containing approximately
1817 square feet, Suite 152, containing approximately 1,318 square feet, and
Suite 151, containing approximately 3,690 square feet.
As to Suite 151, Lessor hereby agrees to release Lessee from 3,000 square feet,
which is a part of the approximately 3,690 square feet, of Suite 151. The 3,000
square feet area is shown in Exhibit "A," attached hereto and made a part
hereof. As to Suite 152, Lessor hereby agrees to release Lessee from this space
as of October 31, 1997, and as to Suite 245, Lessor hereby agrees to release
Lessee from this space as of December 31, 1997, at which time Lessee will
surrender Suite 245 to Lessor. Lessee warrants and represents, as a material
inducement to Lessor to enter into this Lease Amendment, that no subtenant,
assignee, or sublessee of Lessee, or of Lessee's affiliate company, Macor, has
any right or claim to the occupancy of Suite 245 on or after January 1, 1998.
Lessor agrees to reduce Lessee's rent on Suite 245 for the months of November
and December, 1997, to the rate of $1,000 per month, instead of the current
monthly rent of $3,088.90. In the event that any subtenant, assignee or
sublessee of Lessee, or of Lessee's affiliate company, Macor, asserts any claim
or right to the occupancy of Suite 245 for any period on or after January 1,
1998, Lessee shall continue to be responsible for the full rent of $3,088.90 per
month on Suite 245 until such subtenant, assignee, or sublessee of Lessee or of
Lessee's affiliate company, Macor, has vacated Suite 245, and the surrender by
Lessee of Suite 245 to Lessor shall not occur until Suite 245 is so vacated. Any
failure of Lessee to deliver Suite 245 to Lessor in a condition free of all
subtenants, assignees or sublessees of Lessee or of Lessee's affiliate company,
Macor, on or before January 1, 1998, shall not invalidate the surrender by
Lessee to Lessor of Suites 151 and 152 hereunder.
Lessee shall completely vacate said 3,000 square feet of Suite 151 effective
immediately upon execution of this Lease Amendment and shall immediately be
released from all terms and conditions of that portion of the Lease relating to
the occupancy of said 3,000 square foot area. Lessee shall completely vacate
Suite 152 as of the close of business on October 31, 1997. Suite 245 shall be
returned to Lessor in an as-is condition.
<PAGE> 2
All space covered by this Amendment shall be returned to Lessor in an as-is
condition after removal of Lessee's personal property.
Time is of the essence of this agreement.
Dated: October 21, 1997 Dated: October 21, 1997
LESSOR: LESSEE:
OB-1 ASSOCIATES NORCAL WASTE SYSTEMS, INC.
A California Joint Venture A California Corporation
By: /s/ George P. Yerby By: /s/ Michael J. Sangiacomo
George Yerby Michael J. Sangiacomo
Managing General Partner President and Chief
Executive Officer
Exhibit "A" Floor Plan San Francisco Executive Park - Ground Floor
<PAGE> 1
EXHIBIT 10.18.1
NORCAL WASTE SYSTEMS, INC.
AMENDED AND RESTATED
1990 STOCK OPTION PLAN
Amendment No. 1
WHEREAS, Norcal Waste Systems, Inc. (the "Company") maintains the
Norcal Waste Systems, Inc. 1990 Stock Option Plan (the "Plan") on behalf of
certain officers, employees, directors and independent contractors of the
Company and its Affiliates; and
WHEREAS, it is desirable to amend the Plan to provide for domestic
partner benefits;
NOW, THEREFORE, the Plan is hereby amended, effective as of June 1,
1997, by adding the following subsection (c) at the end of Section 2 thereof:
(c) Domestic Partners. The Board or the Committee shall administer the
Plan so as to treat an Optionee's "Domestic Partner" as his spouse for all
purposes under the Plan. "Domestic Partner" shall mean any person who has
registered a domestic partnership with a governmental body pursuant to state or
local law authorizing such registration. The Board or the Committee may require
evidence of such
-1-
<PAGE> 2
registration as a condition of recognizing such "Domestic Partner" status.
To record the adoption of this Amendment No. 1 to the amended
and restated Plan, the Company and the Board or the Committee have caused the
Company to execute it on this 26th day of June, 1997.
NORCAL WASTE SYSTEMS, INC.
By /s/ Michael J. Sangiacomo
-----------------------------
Michael J. Sangiacomo
President
By /s/ Roxanne Frye
-----------------------------
Roxanne Frye
Secretary
-2-
<PAGE> 1
EXHIBIT 10.24.1
NORCAL WASTE SYSTEMS, INC.
1996 EMPLOYEE STOCK INCENTIVE PLAN
Amendment No. 1
WHEREAS, Norcal Waste Systems, Inc. (the "Company") maintains the
Norcal Waste Systems, Inc. 1996 Employee Stock Incentive Plan (the "Plan") on
behalf of certain Eligible Persons; and
WHEREAS, it is desirable to amend the Plan to provide for domestic
partner benefits;
NOW, THEREFORE, the Plan is hereby amended, effective as of June 1,
1997, by adding the following subsection (f) at the end of Section 5 thereof:
(f) Domestic Partners. The Committee shall administer the Plan so as
to treat a Participant's "Domestic Partner" as his spouse for all purposes under
the Plan. "Domestic Partner" shall mean any person who has registered a domestic
partnership with a governmental body pursuant to state or local law authorizing
such registration. The Committee may require evidence of such registration as
a condition of recognizing such "Domestic Partner" status.
-1-
<PAGE> 2
To record the adoption of this Amendment No. 1 to the Plan, the Company
and the Committee have caused it to be executed on this 26th day of June, 1997.
NORCAL WASTE SYSTEMS, INC. 1996 NORCAL WASTE SYSTEMS,
INC. EMPLOYEE STOCK
INCENTIVE PLAN COMMITTEE
By /s/ Michael J. Sangiacomo By /s/ John B. Molinari
----------------------------- ------------------------------
Michael J. Sangiacomo
President By /s/ H. Welton Flynn
------------------------------
By /s/ Roxanne Frye
-----------------------------
Roxanne Frye
Secretary
-2-
<PAGE> 1
EXHIBIT 10.25.1
NORCAL WASTE SYSTEMS, INC.
1996 EXECUTIVE STOCK INCENTIVE PLAN, AS AMENDED
Amendment No. 1
WHEREAS, Norcal Waste Systems, Inc. (the "Company") maintains the
Norcal Waste Systems, Inc. 1996 Executive Stock Incentive Plan, as amended (the
"Plan") on behalf of certain Eligible Persons; and
WHEREAS, it is desirable to amend the Plan to provide for domestic
partner benefits;
NOW, THEREFORE, the Plan is hereby amended, effective as of June 1,
1997, by adding the following subsection (f) at the end of Section 5 thereof:
(f) Domestic Partners. The Committee shall administer the Plan so as
to treat a Participant's "Domestic Partner" as his spouse for all purposes under
the Plan. "Domestic Partner" shall mean any person who has registered a domestic
partnership with a governmental body pursuant to state or local law authorizing
such registration. The Committee may require evidence of such registration as
a condition of recognizing such "Domestic Partner" status.
-1-
<PAGE> 2
To record the adoption of this Amendment No. 1 to the Plan, the Company
and the Committee have caused it to be executed on this 26th day of June, 1997.
NORCAL WASTE SYSTEMS, INC. 1996 NORCAL WASTE SYSTEMS,
INC. EXECUTIVE STOCK
INCENTIVE PLAN COMMITTEE
By /s/ Michael J. Sangiacomo By /s/ John B. Molinari
----------------------------- ------------------------------
Michael J. Sangiacomo
President By /s/ H. Welton Flynn
-------------------------------
By /s/ Roxanne Frye
-----------------------------
Roxanne Frye
Secretary
-2-
<PAGE> 1
EXHIBIT 10.26.1
NORCAL WASTE SYSTEMS, INC.
1996 Non-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Amendment No. 1
WHEREAS, Norcal Waste Systems, Inc. (the "Company") maintains the
Norcal Waste Systems, Inc. 1996 Non-Employee Director Stock Option Plan (the
"Plan") on behalf of certain Non-Employee Directors of the Company; and
WHEREAS, it is desirable to amend the Plan to provide for domestic
partner benefits;
NOW, THEREFORE, the Plan is hereby amended, effective as of June 1,
1997, by adding the following subsection (d) at the end of Section 5 thereof:
(d) Domestic Partners. The Board shall administer the Plan so as to
treat a Participant's "Domestic Partner" as his spouse for all purposes under
the Plan. "Domestic Partner" shall mean any person who has registered a domestic
partnership with a governmental body pursuant to state or local law authorizing
such registration. The Board may require evidence of such registration as a
condition of recognizing such "Domestic Partner" status.
-1-
<PAGE> 2
To record the adoption of this Amendment No. 1 to the Plan, the Board
has directed the Company to execute it on this 26th day of June, 1997.
NORCAL WASTE SYSTEMS, INC.
By /s/ Michael J. Sangiacomo
-----------------------------
Michael J. Sangiacomo
President
By /s/ Roxanne Frye
-----------------------------
Roxanne Frye
Secretary
-2-
<PAGE> 1
EXHIBIT 10.38.1
[NORCAL WASTE SYSTEMS, INC. LETTERHEAD]
December 11, 1997
Ms. Gale R. Kaufman
Kaufman Campaign Consultants
1510 J. Street, Suite 210
Sacramento, CA 95814-4202
Dear Gale:
During the last eighteen months Kaufman Campaign Consultants has been providing
Norcal Waste Systems Inc. ("Norcal") with consulting services in the areas of
political affairs, public affairs, and media and public relations. The services
have been provided pursuant to an agreement, originally signed May 16th, 1996.
The agreement provides for extension by mutual consent of the parties on a month
to month basis thereafter. I would like to formalize the extension of the
agreement under the same terms and conditions as contained in the original
document, for a period of ten (10) months, from December 1, 1997 through
September 30, 1998. The term of the agreement will then coincide with the
Company's fiscal year and future service can be extended as part of the year end
process.
As stated in the original agreement, the relationship between you and Norcal
will be that of an independent contractor relationship and that the agreement
will not be construed to constitute you an employee of Norcal or the formation
of a partnership or joint venture between you and Norcal.
Consistent with the original agreement, you will receive aggregate fees covering
all services rendered pursuant to this consulting agreement of $9,500 per
month on or before the 5th day of each and every month.
This letter, along with the original agreement letter dated May 16, 1996,
constitute the understanding under which you provide services to Norcal. Please
acknowledge by signing this letter and returning it at your earliest
convenience.
Very Truly Yours,
/s/ Michael J. Sangiacomo
Michael J. Sangiacomo
President and Chief Executive Officer
Kaufman Campaign Consultants
By: /s/ Gale R. Kaufman
-----------------------
Gale R. Kaufman
<PAGE> 1
EX-12.1
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1
NORCAL WASTE SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS, EXCEPT RATIO)
FISCAL YEARS ENDING 1993 THROUGH 1997
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before
Income Taxes,
Extraordinary Item
and Change in
Accounting
Principle ........ $ 6,526 $ (1,136) $ 17,096 $ 8,859 $ 19,588
Interest Expense(a) .......... 25,853 24,326 19,909 20,920 23,900
Capitalized Interest ......... (204) (413) 0 0 0
Interest Portion of
Rental Charge(b) . 882 751 506 504 515
-------- -------- -------- -------- --------
Income (loss) before
Income Taxes,
Extraordinary
Item, Interest and
Interest Portion
of Rental Charge . $ 33,057 $ 23,528 $ 37,511 $ 30,283 $ 44,003
======== ======== ======== ======== ========
Interest Expense ............. 25,853 $ 24,326 $ 19,909 $ 20,920 $ 23,900
Interest Portion of
Rental Charge .... 882 751 506 504 515
-------- -------- -------- -------- --------
Interest Expense plus
Interest Portion
of Rental Charge . $ 26,735 $ 25,077 $ 20,415 $ 21,424 $ 24,415
======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges .... 1.24 --(c) 1.84 1.41 1.80
</TABLE>
- ---------------
(a) In addition, the Company guaranteed certain obligations of a less than 50%
owned entity in the amount of $1.2 million and $2.0 million as of September
30, 1997 and 1996, respectively. The less than 50% owned entity incurred
approximately $0.2 million and $0.2 million of interest expense on these
obligations in the years ended September 30, 1997 and 1996, respectively.
This amount was not included in the calculation of the ratio of earnings to
fixed charges as the Company had not been required to honor the guarantees
and does not expect to be required to do so.
(b) Interest portion of rentals is assumed to equal 33% of operating lease and
rental expense for the period.
(c) In 1996, earnings were insufficient to cover fixed charges by $1,549.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF NORCAL WASTE SYSTEMS, INC.
Alta Environmental Services, Inc.
Alta Equipment Leasing Co., Inc.
Auburn Placer Disposal Service
B&J Drop Box
Buonaterra, Inc.
Butte Disposal & Recycling, Inc.
City Garbage Company of Eureka
Consolidated Environmental Industries, Inc.
Del Norte Disposal, Inc.
Dixon Sanitary Service
Envirocal, Inc.
Foothill Disposal Co., Inc.
Golden Gate Disposal & Recycling Company
Integrated Environmental Systems, Inc.
Los Altos Garbage Company
Macor, Inc.
Mason Land Reclamation Company, Inc.
Norcal/San Bernardino, Inc.
Norcal/San Diego, Inc.
Norcal Service Center, Inc.
Norcal Waste Services of Sacramento, Inc.
Norcal Waste Solutions, Inc.
Norcal Waste Systems of Southern California, Inc.
Oroville Solid Waste Disposal, Inc.
Recycle Central, Inc.
San Bruno Garbage Co., Inc.
Sanitary Fill Company
South Valley Refuse Disposal, Inc.
Sunset Properties, Inc.
Sunset Scavenger Company
Vacaville Fill*
Vacaville Sanitary Service
Vallejo Garbage Service, Inc.
West Coast Recycling Co.
Western Placer Recovery Company
Yuba Sutter Disposal, Inc.
- ---------------
* California general partnership. All other subsidiaries are California
corporations, with the exception of Mason Land Reclamation Company, Inc.
(Missouri corporation).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRCTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN
THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 32,330
<SECURITIES> 5,552
<RECEIVABLES> 44,694
<ALLOWANCES> 2,017
<INVENTORY> 2,436
<CURRENT-ASSETS> 89,925
<PP&E> 240,246
<DEPRECIATION> 97,313
<TOTAL-ASSETS> 351,169
<CURRENT-LIABILITIES> 74,093
<BONDS> 176,072
0
0
<COMMON> 241
<OTHER-SE> 23,268
<TOTAL-LIABILITY-AND-EQUITY> 351,169
<SALES> 0
<TOTAL-REVENUES> 319,801
<CGS> 0
<TOTAL-COSTS> 291,520
<OTHER-EXPENSES> (5,201)
<LOSS-PROVISION> 1,307
<INTEREST-EXPENSE> 25,649
<INCOME-PRETAX> 6,526
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,526
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
