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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, 1998
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF 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 21, 1998, 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 Annual
Report 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, competition, failure to achieve Year 2000 compliance and
consequences of the Company's S Corporation election. 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 405,000 residential and 50,000 commercial and
industrial customers (as of September 30, 1998) 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 50 cities and counties throughout California. The Company operates
15 landfills in California, four of which it owns, and operates 12 transfer
stations, six of which it owns, 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
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approximately $170.2 million (the "Offering"). The Company used the proceeds
from the Offering (less certain associated expenses), together with certain cash
balances, to retire approximately $199.1 million of its then outstanding
indebtedness and certain of the ESOP's indebtedness to third parties.
Concurrent with the Offering, the Company entered into a new bank credit
agreement providing for a revolving credit facility with maximum availability of
$100.0 million (which amount is scheduled to decrease by $2.5 million per
quarter beginning December 31, 1998), 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, 1998, the Company had utilized $2.1 million
for letters of credit and had availability under the Credit Agreement of
approximately $75.0 million, with an additional $22.9 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. Applying the more restrictive covenant measures in effect beginning
December 31, 1998 to the Company's estimated results of operations for the
twelve month period ending December 31, 1998 would result in a decrease in
availability under the Credit Agreement of approximately $21.3 million.* The
Company's performance relative to the covenant measures is calculated on a
quarterly basis.
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.
The Company currently operates eight landfills, six transfer stations and
six community collection centers in San Bernardino County. Since November 1,
1995, with the concurrence of San Bernardino County's Waste System Division, the
Company has closed nine of the County's landfills, thereby concentrating the
allocation of the County's waste stream among the eight remaining landfills.
The Company employs approximately 1,300 employees under union contracts.
The Company completed the acquisition of the assets of a company in Butte County
in November 1996. In addition, the Company completed the acquisition of the
assets of two small medical waste companies during 1997. Since September 30,
1998, the Company completed the acquisition of a waste collection company and
the acquisitions of the assets of two other waste collection companies in the
Los Angeles metropolitan area.
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
1998, 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, 1998, the Company had 37 franchise
agreements with municipalities and served many additional customers through
operating contracts.
Commercial services are typically provided under contracts ranging from 1
to 3 years while contracts for the larger "roll-off" container services may
provide for either temporary or longer-term services. Fees are negotiated with
each customer and are determined by such factors as frequency of collection,
type and size of equipment furnished, and the type and volume or weight of the
waste collected.
San Francisco Operations. Since 1932, the Company has provided solid waste
collection and recycling in San Francisco pursuant to the Ordinance, which
provides that, with limited exceptions, only a collector that has been granted a
permit for a specified route may collect or transport solid waste on that route.
The Company's principal operating subsidiaries have held the only permits for
substantially all the routes subject to
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the Ordinance since 1932, which routes serve virtually all of San Francisco. San
Francisco operations represent the single largest portion of the Company's
business, accounting for approximately 172,000 of its customers and
approximately 39% of its total revenues for fiscal year 1998. The Ordinance
permits refuse with "commercial value" (as defined in the Ordinance and
interpreted by the courts) to be collected without a permit. In addition, debris
boxes at construction sites do not require a permit under the Ordinance. The
Company competes for the placement of boxes at construction sites and the
collection of refuse with commercial value. Collection of refuse from state
agencies is also subject to competition.
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 are expected to 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
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agreement terminated for such causes. For fiscal year 1998, approximately 83% of
the Company's collection revenues, excluding San Francisco operations, were
generated under franchise and other agreements with remaining terms of five
years or more. In the past ten years, the Company has been successful in
renewing or extending substantially all of its franchise and other agreements.
In light of increasing competitive pressure in the waste industry, and the risks
of competitive bidding, there can be no assurance that the Company will be able
to renew existing franchise and other agreements, or that such franchise and
other agreements will yield levels of profit consistent with past levels.* See
"Risk Factors."
Changes in state or local laws could also terminate the exclusivity of
these agreements or otherwise subject the Company to greater competition in its
collection activities. Under California law, counties may be required to conduct
competitive bidding upon the expiration of collection franchise agreements,
although under certain conditions counties may extend existing franchise
agreements for one additional term (not to exceed 25 years) without such
bidding. The majority of the Company's franchise agreements are with
municipalities other than counties and are unaffected by this law. However, any
laws enacted in the future requiring competitive bidding could have a material
adverse effect on the Company's financial condition or results of operations.*
In addition, a California Court of Appeal ruled in 1994 that state facilities
such as state universities and other schools, correctional facilities, office
buildings and parks are free to conduct competitive bidding despite exclusive
franchises granted under local ordinances. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Potential Competitive Bidding."
Rates. Refuse collection customers pay a single rate that is designed to
cover not only collection services, but all the services the Company performs as
to the materials it collects, including transfer, landfill disposal and
recycling. In most jurisdictions, rate boards, city councils or other local
governmental agencies are authorized to set the rates the Company may charge at
a level that allows the Company to recover projected specified costs and realize
a profit margin. Such specified costs generally include all direct operating
costs, such as direct collection costs (such as personnel and equipment); any
applicable recycling costs; operating costs or tipping fees for transfer
stations, landfills and other facilities; interest charged on leases;
depreciation; trust fund obligations associated with closure and maintenance of
landfills; and other costs. In San Francisco, the Ordinance prescribes an
involved 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
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Company's operating margins in its recycling operations. See "Risk
Factors -- Fluctuations in Prices for Recyclable Commodities."
Transfer Stations. The Company currently operates 12 transfer stations, six
of which it owns. 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, 1998, over 80% of the waste delivered to the
Company-owned facilities came from the Company's collection operations. As a
result of the Waste Disposal Agreements, substantially all of the refuse
collected in San Francisco (other than waste diverted for recycling) is
deposited in the San Francisco transfer station owned by the Company. Certain
generators of waste (including state agencies) and certain types of waste
(including construction and demolition debris) are not subject to the Waste
Disposal Agreements and as a result waste collected from such generators and
such excluded types of waste may be taken to other transfer stations.
LANDFILLS
The Company operates 15 landfills in California, four of which it owns and
11 of which are owned by local governmental entities. Each of these landfills
generally accepts only non-hazardous waste, with the exception of certain wastes
that may be hazardous due to asbestos content.
Owners or operators of landfills face substantial liabilities, including
environmental impairment liabilities, closure and post-closure maintenance
obligations and corrective action obligations. With respect to all but one of
the third party landfills currently managed by the Company, the Company is a
contractor and is not the operator under the applicable permits. In those
circumstances, the Company is not responsible for closure and post-closure
maintenance obligation payments. In addition, in San Bernardino County, the
County has agreed to indemnify the Company for certain other liabilities. See
"Risk Factors -- Environmental Regulation and Potential Litigation," and "Risk
Factors -- Possible Liability for Environmental Remediation and Damages."
Owned Landfills. The following table sets forth certain information about
the four active landfills owned by the Company:
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LANDFILL PERMITTED LANDFILL
LANDFILL LOCATION BEGAN OPERATIONS ACREAGE(A)
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<S> <C> <C> <C>
B&J Vacaville, CA 1964 260
Cummings Road Eureka, CA 1969 30
Ostrom Road Yuba County, CA 1995 220
Pacheco Pass(b) 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 areas. Not all contiguous areas are
permittable.
(b) 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 markets the Company
currently serves with collection operations in Northern California. 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 1998
approximately 72% was received from the Company's collection, waste diversion
and transfer station operations and 28% was received from independent third
party collectors, hauling companies and self-haulers.
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Operated Landfills. The Company currently manages 11 third party-owned
landfills, 10 under contracts with the permitted operators and one under lease
from the landfill owner. These landfills are permitted for approximately 17,000
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,
landfill closures, and identification, permitting and construction of landfill
expansions. Since November 1, 1995, with the concurrence of the County's Waste
System Division, the Company has closed nine of the County's landfills, thereby
concentrating the allocation of the County's waste stream among the eight
remaining landfills. The Company currently operates eight landfills, six
transfer stations and six community collection centers in San Bernardino County.
Approximately 19% of the Company's revenues for fiscal year 1998 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
and transfer station operations. 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 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 5 years, during which time San Bernardino County plans
to spend approximately $140 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 an additional fifteen year period. At the conclusion of this
initial extension period, the Company, at its option, may extend the agreement
for up to an additional fifteen 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 began managing activities of five
county-owned landfills in San Diego County. On October 31, 1997, the County of
San Diego sold its waste system (including the four landfills operated by the
Company at that time) to a third party. On March 31, 1998, the Company ceased
operations of the landfills when the new owner assumed operations.
The Company operates two landfills in Kern County, California under
contracts expiring in April 2002 and December 2002, respectively, and one
landfill in Placer County, California under a contract expiring in August 2001.
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
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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, 1998, the aggregate current cost of its closure and 30-year
post-closure requirements is approximately $53.4 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 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, 1998, the aggregate current cost of
such remaining corrective action requirements is approximately $12.3 million and
remaining funding requirements total approximately $5.2 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 and/or ancillary to its medical
waste 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 vigorously 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.
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In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, and time
and frequency of collection.
The Company's operation of solid waste management facilities subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations, as well as financial assurance obligations relating to third party
liability, corrective actions, and closure and post-closure maintenance.
In addition to costly and restrictive regulation, other factors, the
long-term effects of which are unpredictable, may have a significant effect on
the Company's operation of landfills. Increasing public opposition to the siting
and operation of landfills is adding to the length of time required to obtain
necessary permits and approvals for new landfills and the expansion of existing
landfills. Moreover, there is a national trend to attempt to reduce the volume
of solid waste and the dependence on landfill disposal by promoting source
reduction, waste transformation and recycling programs.
During the ordinary course of its operations, the Company may from time to
time receive citations, notices and comments from regulatory authorities that
such operations are not in compliance with applicable environmental regulations.
Upon receipt of such citations, notices or comments, the Company works with the
authorities in an attempt to address the issues identified by such authorities.
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
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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 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
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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. Attempted compliance with these diversion
goals by local governments could substantially reduce the tonnage of waste
deposited in the Company's landfills.
Closure/Post-Closure. A part of the California Integrated Waste Management
Act known as the Eastin Statute requires landfill owners and operators to (i)
develop closure and post-closure maintenance plans and submit plans to both the
Waste Board and the applicable Regional Water Quality Control Board for
approval, (ii) prepare an estimate of closure and post-closure maintenance
costs, and (iii) establish a mechanism acceptable to the Waste Board to
demonstrate financial responsibility for such estimated costs.
Regulations promulgated under the Eastin Statute (the "Eastin Regulations")
impose closure and post-closure requirements governing the removal of
structures, decommissioning of environmental control systems, construction and
maintenance of final cover, grading, drainage and site face, slope protection
and erosion control (revegetation), leachate control and monitoring systems,
groundwater monitoring facilities and landfill 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 discharger must file a report of waste discharge with the regional water
quality control board (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 use 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
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threat to surface or groundwater quality. These standards also apply to new or
expanded waste disposal facilities.
The federal Clean Water Act allows states to assume the EPA's
responsibilities over point source discharges of pollutants into surface waters.
California has assumed those responsibilities under the Porter-Cologne Act.
California has also adopted regulations requiring owners and operators of
landfills to provide financial assurance for the initiation and completion of
corrective action for known or reasonably foreseeable releases of contaminants
from landfills into the groundwater, surface water or unsaturated zone.
Other States' Regulation. Although almost all of the Company's business is
currently conducted in California, the Company has historically and in the
future is likely to conduct business in other states with statutes similar to
California's that would regulate the Company's handling, transportation and
disposal of waste, and the design, operation, maintenance, closure and
post-closure care of solid waste disposal facilities and underground storage
tanks ("USTs") regulation. These states may have additional rules with which the
Company would have to comply.
Underground Storage Tank Regulation. USTs in California are regulated by
federal law under RCRA, by a California law that closely parallels the
requirements of the federal law and by local regulation. These regulations
contain extensive requirements relating to monitoring, leak detection and
prevention, permitting, reporting, and other matters, including the required
removal or closure 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 cease using by December 22,
1998 in accordance with state mandated regulations covering all single walled
USTs. The Company will be in compliance with these regulations and plans to
remove these 10 USTs during the 1999 fiscal year (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
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government actions related to such franchises, permits and agreements, it is
possible that these franchises, permits and agreements could be challenged under
a similar rationale. In that event, the municipalities involved would have to
show that their franchises, permits and agreements (i) do not regulate
interstate commerce, (ii) do not discriminate against interstate commerce and do
not impose an excessive burden on interstate trade in relation to the total
benefits conferred; or (iii) are necessary to advance legitimate local
interests. There can be no assurance that such franchises, permits and
agreements would be upheld.
Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress.
At present, it is impossible to know in what form such a bill, if any, will pass
the Congress, but the attempts to pass such a bill have been unsuccessful to
date. Although these bills appear to be intended to limit, rather than broaden,
the scope of Carbone, there can be no assurance that a bill will not be enacted
that will adversely affect the legality of exclusive franchises, agreements or
permits under the interstate commerce clause.
COMPETITION
The solid waste services industry is highly competitive and requires
substantial capital, technical expertise and human resources. The industry is
comprised of four large publicly-traded national waste service companies (Waste
Management, Inc., Browning-Ferris Industries, Inc., Allied Waste Industries,
Inc. and Republic Services, 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 continuing to undergo 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 may be at a competitive disadvantage if it is unable to identify,
adequately evaluate or respond to acquisition 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. See "Risk Factors -- Acquisition-Related Risks."
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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 Annual Report.
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 1998 were derived from services performed in the
City and County of San Francisco. In San Francisco, the Ordinance provides that,
with certain limited exceptions, only a collector that has been granted a permit
for a specified route may collect or transport solid waste on that route in the
City and County of San Francisco. Although the Company holds permits for
substantially all routes covered by the Ordinance, a permit may be revoked or
additional permits granted to third parties if, among other things, the Company
were to provide inadequate service, such 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 19% of the Company's revenues in fiscal year 1998 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 in
two 15 year increments. 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
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be made to implement legislation with a material adverse effect on the Company's
operations. The Company incurred costs in connection with its campaigns to
defeat the 1993 and 1994 initiatives and may incur significant costs in
connection with future ballot initiatives, if any. Future attempts to implement
legislation may be financed by persons having greater resources than the Company
and may be successful in modifying or repealing the Ordinance. There can be no
assurance that the Ordinance will not be modified or repealed in the future.
Potential Competitive Bidding. The Company provides waste collection
services in San Francisco pursuant to permits granted under the terms of the
Ordinance and in other communities generally pursuant to exclusive franchise or
other service agreements. In the event of the amendment or repeal of the
Ordinance or upon the expiration or termination of a franchise or service
agreement in other communities, the award of a franchise or service contract may
be determined by competitive bidding. The waste management industry is intensely
competitive and many of the Company's competitors have greater financial and
other resources than the Company and therefore there can be no assurance that
the Company will succeed in having its bid for such franchise or other service
contract accepted or that such franchise or other service contract, if accepted,
will be on terms and at prices which result in profit margins similar to those
currently earned by the Company.
Problems in Rate-Setting Process. The Company generally seeks to recover
all of its operating costs, including the costs of recycling services, landfill
closure and post-closure obligations and tipping fees in the rate-setting
proceedings that determine many of its collection, transfer station and landfill
rates. However, rate-setting bodies sometimes have been reluctant to allow all
of the Company's operating and related costs, including capital expenditures, to
be reflected in its rates. Political pressure has occasionally inhibited local
governments from allowing large rate increases and caused them instead to
increase rates gradually. Lack of public understanding of new regulatory
requirements which can significantly affect the Company's operating 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
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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.
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.
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The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. There can be no assurance that the
Company will identify all problems or risks in connection with the businesses it
acquires, including environmental problems or risks. As a result, the Company
may have acquired, or may in the future acquire, landfills or other properties
that have unknown environmental problems and related liabilities. The Company
will be subject to similar risks and uncertainties in connection with the
acquisition of facilities that formerly had been operated or owned by businesses
acquired by the Company.
A subsidiary of the Company has indemnification obligations to the City and
County of San Francisco and the owner of the landfill at which such subsidiary
deposits a substantial amount of waste with respect to damages, removal and
remedial costs associated with the deposit of hazardous and certain other types
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 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 $500,000 per claim with workers'
compensation insurance covering liabilities in excess of this amount. In
addition, certain employee and 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, 1998, the Company
had performance bonds outstanding in the aggregate amount of $24.9 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, 1998, the Company had a $1.0 million letter of credit
outstanding, which related to workers' compensation deferred premiums.
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
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outstanding indebtedness or for other reasons. The amount Norcal may contribute
to the ESOP to fund such ESOP distribution obligations (or may use to repurchase
common stock distributed by the ESOP) will increase significantly in the future
as the Company's workforce ages and retires, as additional shares of common
stock are allocated to participants, if eligible participants elect to receive
in-service withdrawals or if the value of the common stock increases.
Union Matters
As of September 30, 1998, about 68% of the Company's approximately 1,900
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. 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. Arbitration is scheduled to begin on May 12, 1999. 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 as of September 30, 1998
would increase by an additional $9.1 million, which would generally result in an
increase to the pension intangible asset with a corresponding offset to the
accrued pension liability. In addition, if Local 350 were to prevail, the
Company's estimated incremental increase in its annual employee benefits expense
would be approximately $2.4 million for pension and medical costs.* The above
estimates are based on a discount rate of 6.75%. 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.
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., Allied Waste Industries,
Inc. and
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Republic Services, 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 locate suitable acquisition
candidates, make and manage any such acquisitions successfully or that such
acquisitions will not materially and adversely affect the Company's financial
condition or results of 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, 1998, the Company had outstanding long-term debt of
$176.4 million and stockholder's equity of $44.0 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). The maximum borrowing availability under the
Credit Agreement is scheduled to decrease by $2.5 million per quarter beginning
December 31, 1998. As of September 30, 1998, the Company had availability under
the Credit Agreement of approximately $75.0 million, with an additional $22.9
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. Applying the more restrictive covenant measures in
effect beginning December 31, 1998 to the Company's estimated results of
operations for the twelve month period ending December 31, 1998 would result in
a decrease in availability under the Credit Agreement of approximately $21.3
million.* The Company's performance relative to the covenant measures is
calculated on a quarterly basis. The Company is also subject to certain
limitations on incurring additional indebtedness in the Indenture.
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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 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. Unusual changes in weather patterns can also
affect the operating results on a quarter to quarter basis.
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.
Year 2000 Compliance
Many computer systems and software applications may experience problems
handling dates beyond the year 1999. Computer systems and other equipment with
embedded chips or processors have historically used two digits, rather than
four, to define a specific year. These systems would be unable to determine
whether the digits "00" referred to the year 1900 or 2000. This could result in
system failures or miscalculations as a result
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of systems being unable to process accurately certain data before, during or
after the year 2000. This could potentially cause disruptions to the Company's
various activities and operations.
Projects. The Company has established a corporate level Year 2000 project
team to coordinate the efforts in the Company's operating units and corporate
departments to address the Year 2000 issue in three major areas: information
technology, supply chain and embedded systems. Information technology is the
computer hardware, systems and software used throughout the company's
facilities. Supply chain includes the third parties with which the Company
conducts business. Embedded systems can exist in the automated equipment and
associated software, which are used in the Company's operations. Progress
reports on the Year 2000 project are presented regularly to the Company's senior
management and periodically to the Board of Directors.
The Company is addressing Year 2000 compliance in three overlapping stages:
(i) the identification and assessment of all critical equipment, software
systems and business relationships requiring modification or replacement prior
to 2000; (ii) the renovation and testing of modifications to all significant
systems; and, (iii) the development of contingency and business continuation
plans to mitigate the extent of any disruption to the Company's operations
arising from the Year 2000 problem.
The Company has implemented a new third-party package of integrated
financial applications which the vendor has represented is Year 2000 compliant.
As a result, the Company believes that its general ledger, accounts payable,
fixed assets, inventory management, human resources, payroll, contract
management, job costing, purchasing and equipment management systems are Year
2000 compliant. The Company is in the process of renovating its remaining legacy
systems which include customer billing and customer service support systems.
Based on progress to date, the Company expects to complete the necessary code
renovation by December 31, 1998. Thereafter, the Company will begin its
validation stage by testing, verifying and validating the performance,
functionality, and integration of these systems. The Company anticipates that
this testing of legacy related systems will be completed by June 30, 1999.
The Company is also investigating the Year 2000 compliance efforts of
suppliers, contractors, and other third parties with whom the Company does
business and has material relationships to attempt to mitigate any adverse
impact on the Company's operations from significant compliance problems that may
be experienced by such parties or as a result of embedded systems. The Company
plans to monitor this through periodic meetings with and questionnaires to
suppliers, customers and other third parties.
The Company is developing contingency plans, which are expected to be
completed by the end of September 1999, to identify potential problems and
mitigate the impact on its operations of potential failures of mission-critical
systems arising from the Year 2000 issue. These plans will be designed to
protect the company's assets, continue safe operations, and enable the
resumption of any interrupted operations in a timely and efficient manner.
Contingency planning for Year 2000 issues is complicated by the possibility of
multiple and simultaneous incidents, which could significantly impede efforts to
respond to emergencies and resume normal business functions. Such incidents may
be outside of the Company's control, for example, if third parties with whom the
Company does business and has material relationships do not successfully address
their own material Year 2000 problems.
Costs. To date, the Company has spent an immaterial amount in effecting
Year 2000 compliance. The Company anticipates that its remaining costs in
effecting such compliance will not exceed $500,000, the majority of which costs
are attributable to the internal costs of employee and management time.
Risks. Factors, many of which are outside the control of the Company, that
could affect the Company's ability to be Year 2000 compliant by the end of 1999
include: the failure of suppliers, contractors, customers, governmental entities
and others to achieve compliance; the continued availability of the internal and
external resources necessary for the Company to complete Year 2000 compliance;
and the inability or failure to identify all critical Year 2000 issues or to
develop appropriate contingency plans for all Year 2000 issues that ultimately
may arise.
The foregoing disclosure is based on the Company's current expectation,
estimates and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effects of the Year 2000 issues to
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the Company may be different from the Company's current assessment. While the
Company believes that its Year 2000 project will adequately address its internal
issues, the failure of the Company's suppliers, customers and other third
parties to adequately address the issue could result in disruption to the
Company's operations and have a material adverse impact on its results of
operations, cash flow and financial condition, the extent of which the Company
cannot yet determine.
EMPLOYEES
The Company employed approximately 1,900 persons as of September 30, 1998.
Sixty-eight percent of the Company's employees are covered under union contracts
with varying terms and expiration dates. 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 consisting of
approximately 2,400 acres, including contiguous areas.
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. The Company will be relocating the headquarters to
approximately 25,000 square feet of leased office space in San Francisco by May
1999 pursuant to a lease that expires April 30, 2009. Under a lease expiring in
October 2000, the Company leases 62,000 square feet of industrial space in the
Los Angeles metropolitan area for its newly acquired Southern California
operations. Under a lease expiring in July 2003, the Company leases 309,000
square feet of industrial space in San Francisco for recycling operations. 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
In 1995, the Company and the ESOP settled litigation that had been brought
against them, together with (among others) certain financial institutions as to
which Norcal and/or the ESOP have certain indemnification obligations, by
certain former holders of prior notes issued by the ESOP (the "Settlement"). The
litigation was Abraham, et al. v. Norcal Waste Systems, Inc., et al., No.
C94-3076 CAL, in the United States District Court for the Northern District of
California. Pursuant to the Settlement, the claims against all defendants,
including Norcal and the ESOP, were dismissed with prejudice, with the exception
of certain of
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plaintiffs' claims against one of those financial institutions, as to which the
litigation is proceeding. The court ruled that the Settlement was fair and made
in good faith, and barred any claims by that financial institution, among
others, against Norcal and the ESOP for equitable indemnity or contribution
relating to plaintiffs' released claims. That financial institution later
brought claims against Norcal and the ESOP relating to the Settlement and
alleging that Norcal and the ESOP have post-Settlement indemnity obligations to
the institution. After court rulings in favor of Norcal and the ESOP, the
financial institution dismissed its remaining claims without prejudice to
bringing them again. Should the financial institution attempt to bring again
these or other claims against Norcal or the ESOP related to the Settlement or
indemnity (following any appeal from the court's rulings or otherwise), Norcal
believes that such claims would have no merit and that, given the terms of the
Settlement, it is unlikely that any ultimate unreimbursed liability on such
claims would materially exceed the amount of the financial institution's legal
fees and expenses.
SAN FRANCISCO UNION ARBITRATION
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. On February 10, 1998, the Company
filed a petition for order compelling arbitration in U.S. District Court for the
Northern District of California entitled Norcal Waste Systems, Inc., Golden Gate
Disposal and Recycling, Inc. and Sunset Scavenger Company v. Sanitary Truck
Drivers and Helpers Union Local 350, IBT. On April 23, 1998 the Company filed a
motion for order compelling such arbitration. On May 29, 1998, the Court ruled
in the Company's favor and directed the parties to proceed with arbitration.
Arbitration is scheduled to begin on May 12, 1999. 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. See "Risk Factors --
Union Matters."
If Local 350 were to prevail in the arbitration discussed above, the
Company estimates that the accumulated benefit obligation (ABO) as of September
30, 1998 would increase by an additional $9.1 million, which would generally
result in an increase to the pension intangible asset with a corresponding
offset to the accrued pension liability. In addition, if Local 350 were to
prevail, the Company's estimated incremental increase in its annual accruals for
employee benefits would be approximately $2.4 million for pension and medical
costs. The above estimates are based on a discount rate of 6.75%. The discount
rate applied under generally accepted accounting principles ("GAAP") fluctuates
with market conditions. A change in the discount rate can result in significant
adjustments to the ABO.
DIR DETERMINATION LETTER
On February 3, 1998, the Company received a determination letter from the
Department of Industrial Relations of the State of California ("DIR") adverse to
the Company. The DIR ruled that the operation of San Bernardino County Landfills
is a public work within the meaning of the labor code and therefore subject to
prevailing wage laws for construction. This determination was in response to a
request by the Company for a determination after the Southern California
Labor/Management Operating Engineers Contract Compliance Committee filed a
Complaint (Case No. 4002639/001) with the Long Beach office of the Division of
Labor Standards Enforcement. The Complaint alleged that the Company is not
paying prevailing wages and benefits required for a public work by the Labor
Code to those persons employed by the Company to operate the landfills in San
Bernardino County.
The Company filed an appeal of the DIR's ruling with the Director of the
DIR (the "Director") on March 4, 1998. On July 27, 1998, the Director issued a
decision affirming the DIR's initial determination that the operation of the San
Bernardino County landfills is a public work and is therefore subject to
prevailing wage laws. However, the Director rejected the automatic adoption of
general construction industry prevailing
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wage rates for landfill operators and referred the matter to the Labor
Commissioner of the Division of Labor Standards Enforcement (the "Commissioner")
for a determination as to the prevailing wage for landfill operators such as
those employed by the Company in San Bernardino County. The Company believes
that it will be able to satisfactorily resolve this matter either through the
Commissioner's rate determination process, or if necessary, through litigation.
If the Company is unsuccessful in such efforts, it could have a material adverse
impact on the financial condition and results of operations of the Company.
HUMBOLDT COUNTY DISPOSAL AGREEMENT
The Company's subsidiary, City Garbage Company of Eureka, Inc., is
currently in discussion with the County of Humboldt over sums due under the
Solid Waste Disposal Agreement which expired on September 28, 1998 ("Humboldt
Agreement"). The Humboldt Agreement provides for payments relating to the final
period of operations and for long-term environmental contingencies such as
certain corrective action costs and closure and post-closure maintenance costs.
The proposed actions and projected expenses were developed by independent
consulting engineers and have been approved or submitted for approval to the
applicable California regulatory agencies. The items in the termination payment
and interim closure/post-closure payment which are disputed by the County of
Humboldt total approximately $5 million. The Company anticipates that it will be
required to file suit against Humboldt County to enforce its rights to this sum
under the Solid Waste Disposal Agreement. Although the outcome of litigation is
inherently uncertain, the Company believes that it is likely to recover a
substantial majority of the amounts for which it has requested reimbursement.
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 funding
requirement to be $3.8 million and has established a mechanism with the County
of Humboldt for reimbursement of such remediation costs at the landfill. Some
portion of such reimbursements may be subject to dispute by Humboldt County. See
"Legal Proceedings -- Humboldt County Disposal Agreement." In addition, the
Company has extended a municipal water line to certain residents downgradient of
the landfill. The Company does not anticipate any material additional
expenditures to be incurred in connection with completion of this water line
project during 1999.
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 has responded 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
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of landfill leachate, if monitoring demonstrates that such work is necessary.
Sunset and Norcal currently are not able to estimate the costs that may be
associated with such work.
In the ordinary course of its business, the Company has incurred
environmental liabilities at some of its other sites including soil and water
contamination. Although the Company believes the environmental liabilities at
these sites will not have a material adverse effect on the Company, there can be
no assurance that such liabilities will not be material or that other material
liabilities will not arise in the future at these or other sites.
OTHER MATTERS
From time to time, in the normal course of its business, the Company may
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. The Company could incur substantial legal
expenses during the course of such proceedings and the outcome of one or more of
these proceedings could have an adverse impact on the Company's business. From
time to time, the Company also may be subjected to actions brought by
individuals or citizens' groups in connection with the grant or permits for its
operations or alleging violations of permits or other regulatory requirements
pursuant to which the Company operates, which, if successful, could have a
material adverse effect on the Company's business. See "Risk
Factors -- Environmental Regulation and Potential Litigation."
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to 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.
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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.
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.
25
<PAGE> 27
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, 1998.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Collection and disposal operations........ $249,824 $241,251 $225,328 $221,483 $209,140
Third party landfill management
services............................... 71,519 62,191 45,623 21,516 18,792
Recycled commodities sales................ 16,514 16,359 17,264 28,502 19,244
-------- -------- -------- -------- --------
Total revenues.................... 337,857 319,801 288,215 271,501 247,176
-------- -------- -------- -------- --------
Cost of operations:
Operating expense......................... 240,761 227,491 202,848 183,865 167,740
Depreciation and amortization............. 20,153 19,732 18,320 19,985 20,141
ESOP compensation expense(a).............. 15,152 13,128 10,291 7,923 7,319
General and administrative................ 34,181 32,476 30,965 26,446 24,849
-------- -------- -------- -------- --------
Total cost of operations.......... 310,247 292,827 262,424 238,219 220,049
-------- -------- -------- -------- --------
Operating income..................... 27,610 26,974 25,791 33,282 27,127
Interest expense............................ (26,165) (25,649) (23,913) (19,909) (20,920)
Interest income............................. 3,755 2,463 1,804 1,695 965
Gain (loss) on dispositions, net............ 3,746 119 (477) 1,279 6,744
Settlement of litigation(b)................. -- -- (3,648) -- (5,480)
Other income (expense)...................... 515 2,619 (693) 748 424
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect of change in
accounting principle...................... 9,461 6,526 (1,136) 17,095 8,860
Income tax expense.......................... -- -- -- 6,662 2,500
-------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle................................. 9,461 6,526 (1,136) 10,433 6,360
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........................... $ 9,461 $ 6,526 $ 30,243 $ 10,433 $ 8,860
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Property and Equipment, net................. $147,634 $142,933 $137,147 $132,431 $129,566
Total assets................................ 371,861 351,169 321,235 299,152 292,299
Total long-term debt, including current
portion(c)................................ 176,441 177,419 176,740 205,410 226,013
Stockholder's equity (deficit).............. 43,997 23,509 6,117 (43,878) (65,935)
</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 1994 and 1996 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 1994 and 1995 as required
to be reflected on the Company's balance sheet by GAAP.
26
<PAGE> 28
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 Annual Report 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, competition, failure to achieve Year 2000 compliance and
consequences of the Company's S Corporation election. 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 1998 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
1999 to be generally consistent with the proportion earned in fiscal year 1998,
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 pre-1997 levels.* 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 1999.*
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 19% of the Company's revenues for fiscal year 1998 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 35% of total revenues generated
in San Bernardino County in 1998. 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
27
<PAGE> 29
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 5 years, during
which time San Bernardino County plans to spend approximately $140 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, landfill project and subcontractor costs,
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 1998, the Company made contributions to
the ESOP that, in addition to funding the distribution obligation and the
scheduled loan repayment, allowed the ESOP to prepay approximately $10.2 million
of inter-company loans. The additional contribution for the prepayment resulted
in substantial tax savings and additional ESOP compensation expense of
approximately $7.4 million related to the additional shares allocated. The
Company does not anticipate making any future prepayment contributions, and will
consequently see a corresponding reduction in ESOP compensation expense for
1999 relative to 1998.* In addition, in conjunction with the Company's election
to become an S Corporation under the Internal Revenue Code effective October 1,
1998, the Company and the ESOP are contemplating changes to the ESOP loan
agreement that would effectively reduce annual contributions from the Company to
the ESOP. While the Company has not definitively determined the amount of the
reduction in such contributions, such reduction could result in a decrease to
ESOP compensation expense in 1999 of up to $4.5 million.* There can be no
assurance that such decrease will be of this magnitude. See "Accounting and
Other Matters."
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.
28
<PAGE> 30
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY STATEMENTS OF OPERATIONS
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Collection and disposal operations........................ 73.9% 75.4% 78.2%
Third party landfill management services.................. 21.2% 19.5% 15.8%
Recycled commodities sales................................ 4.9% 5.1% 6.0%
----- ----- -----
Total revenues.................................... 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses........................................ 71.3% 71.1% 70.4%
Depreciation and amortization............................. 6.0% 6.2% 6.4%
ESOP compensation expense................................. 4.5% 4.1% 3.6%
General and administrative................................ 10.1% 10.2% 10.7%
----- ----- -----
Total cost of operations.......................... 91.9% 91.6% 91.1%
----- ----- -----
Operating income..................................... 8.1% 8.4% 8.9%
Interest expense............................................ (7.7)% (8.0)% (8.3)%
Interest income............................................. 1.1% 0.8% 0.6%
Gain (loss) on dispositions, net............................ 1.1% 0.0% (0.2)%
Settlement of litigation.................................... 0.0% 0.0% (1.2)%
Other income (expense)...................................... 0.2% 0.8% (0.2)%
----- ----- -----
Income (loss) from operations before income taxes and
extraordinary item..................................... 2.8% 2.0% (0.4)%
Income tax expense.......................................... 0.0% 0.0% 0.0%
----- ----- -----
Income (loss) before extraordinary item................... 2.8% 2.0% (0.4)%
Extraordinary item -- gain on early retirement of debt, net
of $0 income taxes........................................ 0.0% 0.0% 10.9%
----- ----- -----
Net income................................................ 2.8% 2.0% 10.5%
===== ===== =====
</TABLE>
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
Revenues. Revenues in 1998 increased $18.1 million (5.7%) to $337.9 million
from $319.8 million in 1997. Third party landfill management services revenues
increased by $9.3 million due primarily to expanded landfill operations and
solid waste management activities in San Bernardino County as a result of higher
project management revenues of $13.2 million from landfill closure and expansion
project activities, partially offset by a temporary reduction of volumes to the
San Bernardino County landfills during the first half of the 1998 fiscal year
and reduced revenues in San Diego as the Company ceased operations of the San
Diego County landfills on March 31, 1998, when the new owner assumed operations.
Waste collection and disposal revenues increased by $8.6 million, $5.5 million
due to rate increases in several service areas (primarily an 11.0% increase in
San Francisco, effective March 1, 1997), with the remaining increase due to
general volume increases.
Operating Expenses. Operating expenses in 1998 increased $13.3 million
(5.9%) to $240.8 million from $227.5 million in 1997. As a percentage of
revenues, operating expenses increased slightly to 71.3% in 1998 from 71.1% in
1997. Project and subcontractor related costs increased $11.4 million due to
increased landfill closure and expansion project activities in San Bernardino
County. Payroll and related costs increased $5.8 million due to scheduled union
wage increases (primarily a 2.0% increase in San Francisco, effective January 1,
1998), higher employee benefit costs in San Francisco as a result of the April
1997 union agreement and higher health care costs. Disposal costs increased $1.5
million due to higher volumes and tipping fee increases. In 1998, the Company
accrued $1.0 million for estimated losses to be incurred on certain contractual
obligations. These increased costs were partially offset by lower landfill
related costs of $3.3 million due to the substantial completion of corrective
action activities at one of the Company's landfills
29
<PAGE> 31
and reductions for estimated closure costs. Professional services decreased $2.9
million reflecting lower engineering services for recycling facilities as well
as reduced consulting services.
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 1998 increased $2.1
million (16.0%) to $15.2 million from $13.1 million in 1997. 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 an increase in contributions related to the funding of distributions
due to a higher share value and an increased number of shares repurchased.
General and Administrative. General and administrative expenses in 1998
increased $1.7 million (5.2%) to $34.2 million from $32.5 million in 1997. As a
percentage of revenues, general and administrative expenses decreased to 10.1%
in 1998 from 10.2% in 1997. The increased costs were primarily due to general
wage increases.
Operating Income. Operating income in 1998 increased $0.6 million (2.2%) to
$27.6 million from $27.0 million in 1997. The primary cause of the increase in
operating income was increased revenues.
Interest Expense. Interest expense in 1998 increased $0.6 million (2.3%) to
$26.2 million from $25.6 million in 1997. The increase is due to a higher
effective interest rate on the Senior Notes in the current period.
Interest Income. Interest income in 1998 increased $1.3 million (52.0%) to
$3.8 million from $2.5 million in 1997. The increase is due to higher cash
balances which earned interest in 1998.
Gain (Loss) on Dispositions. The gain on dispositions in 1998 of $3.7
million represents the net impact of asset disposals, primarily real estate in
San Francisco and Kansas City
Other Income (Expense). Other income in 1998 decreased $2.1 million (80.3%)
to $0.5 million from $2.6 million in 1997. Other income in 1997 included 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 1998 or 1997. The
Company has experienced an effective tax rate of zero in 1998 and 1997 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 1998 increased $3.0 million to $9.5 million from
$6.5 million in 1997. The increase was primarily attributable to higher gains on
dispositions and higher interest income partially offset by lower other income
discussed above.
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),
30
<PAGE> 32
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 $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.
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, 1998, the Company had working capital of $28.0
million. As part of the Refinancing the Company entered into the Credit
Agreement which provides for up to $100.0 million of additional borrowings
(which amount is scheduled to decrease by $2.5 million per quarter beginning
December 31, 1998 unless certain conditions are met) 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, 1998, the Company had utilized $2.1 million of
the credit facility provided by the Credit Agreement for letters of credit and
had availability under the Credit Agreement of
31
<PAGE> 33
approximately $75.0 million, with an additional $22.9 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. Applying the more restrictive covenant measures in effect beginning
December 31, 1998 to the Company's estimated results of operations for the
twelve month period ending December 31, 1998 would result in a decrease in
availability under the Credit Agreement of approximately $21.3 million.* The
Company's performance relative to the covenant measures is calculated on a
quarterly basis.
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 was fully disallowed. 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, 1998,
interest on the Senior Notes accrued at the rate 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 1998 decreased
39.7% to $25.6 million from $42.4 million in 1997. The decrease was due to a
$10.6 million reduction in accounts payable, a $3.6 million increase in accounts
receivable and a $3.2 million increase in tax payments related to the resolution
of the IRS examination of the years 1988 to 1991.
Cash Flow from Investing Activities. Cash used by investing activities in
1998 decreased 27.3% to $16.8 million from $23.1 million in 1997. The Company
used $24.3 million on capital expenditures during 1998, primarily vehicles, real
estate and a computer software project. In 1998, the Company generated $7.3
million from the sale of miscellaneous assets, primarily real estate in San
Francisco and Kansas City.
Cash Flow from Financing Activities. Cash used by financing activities was
$1.3 million for both 1998 and 1997, consisting of principal payments on long
term debt and capital leases.
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 $53.4
million.* The Company recognizes an expense and liability for such costs based
on units of production and makes contributions to trust funds to satisfy
financial assurance requirements and fund the landfill costs. As of September
30, 1998, the Company had recorded a liability of $25.3 million for such
projected costs in accordance with generally accepted accounting principles
("GAAP") and had on deposit $25.4 million in trust accounts consistent with
regulatory requirements. The Company estimates its 1999 funding requirement at
approximately $0.3 million, although the actual requirements could vary with
changes in cost estimates and/or regulatory requirements.*
32
<PAGE> 34
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 $5.2 million
and is satisfying that obligation through deposits made to trust funds.* The
Company estimates its 1999 funding requirement at approximately $0.3 million,
although the actual requirement could vary with changes in cost estimates and/or
regulatory requirements.* The Company also has recorded a liability of $1.9
million for potential costs associated with other environmental matters.
The Company is in discussions with the City of San Francisco regarding
plans for increased diversion of waste from disposal at landfills as well as the
construction and/or relocation 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 discuss the nature, scope and financing of this project. The
Company cannot predict the timing or outcome of these discussions. 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, 1998 was $34.9 million and the
Company made cash payments during 1998 totaling approximately $1.3 million.
Payments at rates similar to those made in 1998 or greater, depending on medical
inflation rates and the aging of the persons entitled to benefits, are expected
for a significant number of years.*
The Company anticipates future increases 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. The Company may reduce its annual contributions
to the ESOP, however, in conjunction with its election to become a Subchapter S
corporation effective October 1, 1998. 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 Company expects that the new system will also be Year 2000
compliant. The Company expects the total cost of the project to replace its
management information systems to be $5.4 million, of which $4.3 million had
been spent through September 30, 1998.* See "Risk Factors -- Year 2000
Compliance."
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.
33
<PAGE> 35
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. Arbitration is scheduled to begin on May 12,
1999.
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 as of September 30, 1998 would increase by an
additional $9.1 million, which would generally result in an increase to the
pension intangible asset with a corresponding offset to the accrued pension
liability. In addition, if Local 350 were to prevail, the Company's estimated
incremental increase in its annual accruals for employee benefits would be
approximately $2.4 million for pension and medical costs.* The above estimates
are based on a discount rate of 6.75%. 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.
34
<PAGE> 36
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 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. Unusual changes in weather patterns can also affect the
operating results on a quarter to quarter basis.
ACCOUNTING AND OTHER MATTERS
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. The Company is
currently evaluating the disclosures required under this standard.
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 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 standard.
In February 1998, the FASB issued SFAS No. 132, "Disclosures about Pensions
and Other Postretirement Benefits," which standardizes the disclosure
requirements for pension and other postretirement benefits to the extent
practical and requires additional information on changes in the benefit
obligations and fair values of plan assets. 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. During 1998, the California Franchise Tax Board initiated
an audit of the Company's income tax returns for the fiscal years ended
September 30, 1993 and 1994.
The Company elected to become taxable as an S Corporation effective with
the tax year beginning October 1, 1998. In addition, in connection with the
Company's S Corporation election the Company also elected, for income tax
purposes only, to treat a substantial number of its subsidiaries as divisions of
the Company. Generally, the taxable income (or loss) of an S Corporation
(including its divisions) is not taxable at the corporate level, but is instead
passed through to its shareholders. However, because the sole shareholder of the
Company, the Norcal Waste Systems, Inc. Employee Stock Ownership Plan and Trust,
is a tax-exempt employee stock ownership plan, it will not be subject to tax on
its allocable share of the Company's taxable income. Although, S Corporations
generally are not subject to corporate-level income taxes, the Company, for so
long as it retains its status as an S Corporation, will be subject to (a)
potential income taxes related to the disposition of, or the realization of
income with respect to, certain built-in gain assets (that is, any asset, such
as real estate or securities, with a fair market value greater than its tax
basis as of October 1, 1998 or income reported which relates to taxable periods
prior to the Company becoming an S Corporation, including, for example, income
subsequently reported by reason of a pre-existing change in accounting method)
and (b) state income taxes at a rate of 1.5%. Deferred tax assets and
liabilities are eliminated when a taxable enterprise becomes a non-taxable
enterprise and the effect of recognizing or eliminating deferred tax assets or
liabilities is charged or credited to income tax expense within income from
continuing operations. Corporations that elect S Corporation status generally
are subject to tax under built-in gains provisions as previously discussed and
thus would be required to continue to recognize deferred taxes associated with
built-in gains. Deferred taxes related to built-in gains for the Company include
deferred taxes for anticipated sales of real
35
<PAGE> 37
estate and other assets. In addition, for subsidiaries of the Company that do
not elect to become Qualified Subchapter S Corporation Subsidiaries, deferred
taxes must be maintained for existing tax liabilities. The Company believes
there will not be a material adjustment to its total deferred tax liability or
any material credit to income tax expense as a result of the S Corporation
election and the evaluation of any potential built-in gains.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item.
36
<PAGE> 38
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, 1998 and
1997, 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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
December 18, 1998
37
<PAGE> 39
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,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 39,752 32,330
Marketable securities..................................... 5,552 5,552
Trust accounts, current portion (note 12)................. 1,940 4,362
Accounts receivable, less allowance for doubtful accounts
of $2,202 in 1998 and $2,017 in 1997.................... 49,789 42,677
Parts and supplies........................................ 2,200 2,436
Prepaid expenses.......................................... 2,640 2,568
-------- --------
Total current assets................................ 101,873 89,925
-------- --------
Property and equipment (note 7):
Land...................................................... 46,103 44,558
Landfills................................................. 29,419 25,206
Buildings and improvements................................ 47,422 47,325
Vehicles and equipment.................................... 130,190 116,925
Construction in progress.................................. 6,291 6,232
-------- --------
Total property and equipment........................ 259,425 240,246
Less accumulated depreciation and amortization............ 111,791 97,313
-------- --------
Property and equipment, net......................... 147,634 142,933
-------- --------
Other assets:
Franchises, permits and other intangibles, net of
amortization of $43,840 in 1998 and $40,027 in 1997
(notes 3 and 4)......................................... 73,016 76,829
Trust accounts (note 12).................................. 34,250 30,647
Prepaid pension cost (note 10)............................ -- 1,941
Deferred financing costs, net of amortization of $3,859 in
1998 and $2,518 in 1997................................. 6,920 8,261
Other (notes 10 and 12)................................... 8,168 633
-------- --------
Total other assets.................................. 122,354 118,311
-------- --------
Total assets........................................ $371,861 351,169
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt (note 6)................................. $ 337 306
Capital leases (note 7)................................. 1,114 1,040
Accounts payable.......................................... 7,984 15,379
Accrued payroll and employee benefits..................... 16,706 9,639
Accrued expenses (notes 6, 12 and 13)..................... 43,870 41,775
Income taxes payable (note 8)............................. 90 1,087
Other accrued liabilities................................. 3,731 4,867
-------- --------
Total current liabilities........................... 73,832 74,093
Long-term debt (note 6)..................................... 174,080 174,047
Obligations under capital leases (note 7)................... 910 2,025
Deferred income taxes (note 8).............................. 5,259 9,732
Landfill closure liability (note 12)........................ 25,938 22,823
Postretirement medical benefits (note 11)................... 33,601 32,844
Other liabilities........................................... 14,244 12,096
-------- --------
Total liabilities................................... 327,864 327,660
-------- --------
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....................................... (96,928) (106,389)
Pension liability adjustment (note 10).................... (2,298) --
Unrealized gains (losses) on marketable securities........ 183 (21)
-------- --------
67,576 60,209
Less net scheduled contribution to the ESOP (note 9)........ (23,579) (36,700)
-------- --------
Total stockholder's equity.......................... 43,997 23,509
-------- --------
Total liabilities and stockholder's equity.......... $371,861 351,169
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED SUBSIDIARY OF NORCAL WASTE SYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $337,857 319,801 288,215
-------- ------- -------
Cost of operations:
Operating expenses........................................ 240,761 227,491 202,848
Depreciation and amortization............................. 20,153 19,732 18,320
ESOP compensation expense (Note 9)........................ 15,152 13,128 10,291
General and administrative................................ 34,181 32,476 30,965
-------- ------- -------
Total cost of operations.......................... 310,247 292,827 262,424
-------- ------- -------
Operating income.................................. 27,610 26,974 25,791
Interest expense............................................ (26,165) (25,649) (23,913)
Interest income............................................. 3,755 2,463 1,804
Gain (loss) on dispositions, net............................ 3,746 119 (477)
Settlement of litigation (Note 6)........................... -- -- (3,648)
Other income (expense)...................................... 515 2,619 (693)
-------- ------- -------
Income (loss) before income taxes and
extraordinary item.............................. 9,461 6,526 (1,136)
Income tax expense.......................................... -- -- --
-------- ------- -------
Income (loss) before extraordinary item........... 9,461 6,526 (1,136)
Extraordinary gain on early extinguishment of long-term debt
net of $-0- income taxes (Note 6)......................... -- -- 31,379
-------- ------- -------
Net income........................................ $ 9,461 6,526 30,243
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 41
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED SUBSIDIARY OF NORCAL WASTE SYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
SCHEDULED UNREALIZED
COMMON STOCK ADDITIONAL PENSION CONTRIBUTION GAINS (LOSSES)
--------------- PAID-IN ACCUMULATED LIABILITY TO THE ON MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ESOP SECURITIES TOTAL
------ ------ ---------- ----------- ---------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1995........................ 24,135 $241 166,378 (143,158) (8,581) (58,758) -- (43,878)
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
Contributions to reduce ESOP
debt........................ -- -- -- -- -- 13,121 -- 13,121
Pension liability
adjustment.................. -- -- -- -- (2,298) -- -- (2,298)
Net unrealized gains (losses)
on
marketable securities....... -- -- -- -- -- -- 204 204
Net income.................... -- -- -- 9,461 -- -- -- 9,461
------ ---- ------- -------- ------ ------- ---- -------
Balances, September 30,
1998........................ 24,135 $241 166,378 (96,928) (2,298) (23,579) 183 43,997
====== ==== ======= ======== ====== ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 42
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED SUBSIDIARY OF NORCAL WASTE SYSTEMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 9,461 6,526 30,243
Extraordinary gain on early extinguishment of long term
debt................................................... -- -- (31,379)
-------- ------- -------
Income (loss) before extraordinary gain........... 9,461 6,526 (1,136)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 20,153 19,732 18,320
Landfill trust contributions, withdrawals, interest
income, net of landfill closure and other regulatory
expense.............................................. (2,329) (3,775) (2,053)
Pension, postretirement and insurance, net of amounts
paid................................................. 5,142 4,677 1,845
ESOP compensation expense in excess of cash payments
for redemptions...................................... 13,121 11,468 8,768
Accrued interest, amortization of discounts and
deferred financing fees.............................. 1,834 1,737 10,664
Gain on dispositions and other income.................. (4,119) (2,263) (709)
Other.................................................. (1,077) (1,108) 619
Changes in assets and liabilities, net of effects of
acquisitions and dispositions:
Increase in accounts receivable................... (7,112) (3,557) (8,399)
Increase (decrease) in accounts payable........... (7,395) 3,246 2,192
Increase (decrease) in accrued expenses and other
liabilities..................................... 6,605 6,938 (3,275)
Decrease in income taxes.......................... (5,470) (1,885) (4,817)
Other assets and liabilities...................... (3,250) 642 (1,667)
-------- ------- -------
Net cash provided by operating activities.... 25,564 42,378 20,352
-------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (24,313) (21,345) (20,842)
Acquisition of businesses................................. -- (3,640) (100)
Proceeds from dispositions................................ 7,290 447 4,498
Withdrawals from trust accounts........................... -- -- 6,795
Proceeds from the sales of marketable securities.......... -- 1,379 --
Withdrawals from restricted cash.......................... -- -- 2,735
Other..................................................... 211 42 (283)
-------- ------- -------
Net cash used in investing activities............. (16,812) (23,117) (7,197)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt and capitalized leases....... $ -- -- 170,848
Principal payments on long-term debt and capitalized
leases................................................. (1,330) (1,309) (97,698)
Principal payments on subordinated debt................... -- -- (73,061)
Payments of loans by ESOP................................. -- -- 3,531
Deferred financing costs.................................. -- -- (10,813)
-------- ------- -------
Net cash used in financing activities............. (1,330) (1,309) (7,193)
-------- ------- -------
Net increase in cash........................................ 7,422 17,952 5,962
Cash and cash equivalents, beginning of year................ 32,330 14,378 8,416
-------- ------- -------
Cash and cash equivalents, end of year...................... $ 39,752 32,330 14,378
======== ======= =======
Supplemental schedule of net cash paid for:
Interest.................................................. $ 24,558 24,075 13,883
======== ======= =======
Income taxes.............................................. $ 4,013 815 5,221
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 43
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(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 certain 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, $0.2 million and $0.4 million in 1998,
1997, and 1996, respectively. 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
42
<PAGE> 44
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, 1998 AND 1997
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.
Effective October 1, 1998, the Company has elected to change its tax status to
become an S Corporation (note 8).
(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.
43
<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 (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(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 October 1998 to February 2008. 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 1998, $5.1
million of available for sale securities were sold for proceeds of $5.2 million.
During fiscal 1997, $7.1 million of available for sale securities were sold for
proceeds of $7.1 million. The cost of securities sold is based on the specific
identification method. The gross unrealized holding gains and gross unrealized
holding losses for available for sale securities at September 30, 1998 were $0.4
million and $0.1 million, respectively, and at September 30, 1997 were $0.1
million and $0.2 million, respectively.
The Company has established restricted and unrestricted trust accounts
principally in connection with financial assurance for closure and post-closure
liabilities related to landfill operations, 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. To the extent that the Company expects the
closure/post-closure cash requirements to change, it will periodically modify
the maturity profiles of such investments. The remainder of all trust accounts
are considered available for sale. During fiscal 1998, $10.0 million of held to
maturity securities were sold for $10.2 million, which was reinvested in similar
fixed income securities with maturities more closely aligned with current
landfill closure projections. 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 for held to maturity
securities at September 30, 1998 were $0.2 million and $0.3 million,
respectively, and at September 30, 1997 were $0.2 million and $0.2 million,
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>
9/30/1998 - Cash equivalents........................... $ 3.2 1.3 4.5
10/1/1998 - 9/30/2003.................................. 10.8 20.3 31.1
10/1/2003 - 9/30/2008.................................. 4.8 1.3 6.1
----- ---- ----
Total........................................ $18.8 22.9 41.7
===== ==== ====
</TABLE>
44
<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, 1998 AND 1997
(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 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.
On October 14, 1998, the Company completed the acquisition of a waste
collection company in the Los Angeles metropolitan area. The Company paid $2.2
million in cash, assumed liabilities of $0.2 million and issued two convertible
notes with face values of $1.0 million each repayable over 5 years at 5.5%
interest. The combined notes will be discounted to $1.8 million to yield an
imputed interest rate of 8.5%. In November 1998, the Company acquired certain
assets of two waste collection companies in the Los Angeles metropolitan area
for $7.5 million, primarily in cash.
45
<PAGE> 47
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(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>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Franchises and contracts.................................. $ 9,705 11,135
Operating permit rights................................... 58,151 60,188
Excess of cost over net assets of businesses acquired..... 5,160 5,506
------- ------
$73,016 76,829
======= ======
</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 income in the
consolidated statements of income, was $0.4 million, $0.2 million and $(0.3)
million for the years ended 1998, 1997 and 1996, respectively.
(6) LONG-TERM DEBT
Long-term debt at September 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Series B 12.5% Senior Notes, due 2005................... $171,004 170,679
Note payable for business acquired, due in monthly
installments through 2016, interest imputed at
8.75%................................................. 1,622 1,658
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5%..... 734 792
Other notes............................................. 1,057 1,224
-------- -------
Total debt.................................... 174,417 174,353
Less current portion.......................... 337 306
-------- -------
Long-term debt................................ $174,080 174,047
======== =======
</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 semi-annually. The
Series A Senior Notes were redeemable at the option of the Company, in whole or
in part, at any time during or after November 2000. Prior to this date, the
Series A Senior Notes were partially redeemable in the event of a public
offering, or would have been required to be redeemed in the event of a change in
control of the Company. The Series A Senior Notes were unsecured and ranked pari
passu in right of payment to all existing and future senior indebtedness of the
Company. The Series A Senior Notes were guaranteed on a senior unsecured basis
by the Company's wholly-owned subsidiaries. The Indenture governing the Series A
Senior Notes contained provisions which, among other things, (i) limit the
Company's
46
<PAGE> 48
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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, 1998 was 13.5%.
The interest rate reverts back to 12.5% if Norcal (in one or more transactions)
offers to purchase at 110% (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, 1998 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 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, 1998, matures as follows: 1999, $0.3
million; 2000, $0.3 million; 2001, $0.3 million; 2002, $0.5 million; 2003, $0.2
million; and thereafter, $172.8 million, net of unamortized discount of $4.3
million. Included in accrued expenses at September 30, 1998 and 1997 is accrued
interest amounting to $9.0 million and $8.9 million, 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, which expires on November 21, 2000, 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. In addition, the
credit facility is reduced by $2.5 million each quarter beginning with the
quarter ending December 31, 1998 until the maturity date. 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, 1998.
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.
47
<PAGE> 49
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
At September 30, 1998, the Company had utilized $2.1 million of the credit
facility provided by the Credit Agreement for the letters of credit and had
availability under the Credit Agreement of approximately $75.0 million, with an
additional $22.9 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things.
(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>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Vehicles and equipment.................................... $ 6,535 6,535
Less accumulated amortization............................. (4,711) (3,472)
------- ------
$ 1,824 3,063
======= ======
</TABLE>
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1998 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending September 30:
1999.................................................... $1,287 3,720
2000.................................................... 654 3,797
2001.................................................... 247 3,046
2002.................................................... 55 2,603
2003.................................................... -- 1,985
Thereafter.............................................. -- 5,524
------ -------
Total minimum lease payments.................... 2,243 $20,675
====== =======
Less amount representing interest....................... 219
------
Present value of minimum lease payments................. 2,024
Less current portion.................................... 1,114
------
$ 910
======
</TABLE>
Rental expense charged to operations under all operating leases was
approximately $4.6 million, $4.4 million and $3.9 million for the years ended
1998, 1997, and 1996, respectively, including amounts under short-term rental
agreements.
48
<PAGE> 50
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(8) INCOME TAXES
Income tax expense (benefit) for the fiscal years ended September 30, 1998,
1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 465 1,635 639
State.................................................... 297 665 301
----- ------ ----
762 2,300 940
----- ------ ----
Deferred:
Federal.................................................. (465) (1,635) (639)
State.................................................... (297) (665) (301)
----- ------ ----
(762) (2,300) (940)
----- ------ ----
$ -- -- --
===== ====== ====
</TABLE>
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>
1998 1997 1996
----- ----- -----
<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............................... (55.3) (58.1) (36.5)
Amortization of nondeductible intangibles................... 9.6 14.4 3.1
Permanent differences related to debt extinguishment........ -- -- (12.4)
Other....................................................... 4.7 2.7 4.8
----- ----- -----
Income tax expense.......................................... 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The deferred tax liability at September 30, 1998 and 1997 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
49
<PAGE> 51
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit forward.................... $ 4,378 4,047
Accrued liabilities....................................... 1,595 1,960
Post retirement benefit obligations....................... 12,101 11,784
ESOP expense, including accrued interest, in excess of
cash contributions..................................... 6,133 7,105
Insurance reserves........................................ 6,747 6,693
Vacation accrual.......................................... 1,507 1,497
Pensions.................................................. 1,082 --
Bad debts................................................. 865 828
Other..................................................... 831 1,402
------- ------
35,239 35,316
Less: Valuation allowance................................... 13,799 19,029
------- ------
Net deferred tax assets........................... 21,440 16,287
------- ------
Deferred tax liabilities:
Property and equipment, basis and depreciation
differences............................................ 23,408 20,795
Franchises, permits and other intangibles................. 1,749 2,412
Pension contributions in excess of expense................ -- 797
Landfill closure reserves................................. 1,415 2,015
Marketable securities..................................... 127 --
------- ------
Gross deferred tax liabilities.................... 26,699 26,019
------- ------
Net deferred tax liabilities...................... $(5,259) (9,732)
======= ======
</TABLE>
The total valuation allowance decreased for the years ended September 30,
1998 and 1997 by $5.2 million and $5.7 million, respectively.
At September 30, 1998 and 1997, 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
recognized for financial statement purposes which represent future deductible
amounts.
The Internal Revenue Service (the "Service") has completed an examination
of the Company's income tax returns for the fiscal years ended September 30,
1988 through September 30, 1991. The Service is examining the Company's income
tax returns for the fiscal years ended September 30, 1992 through September 30,
1994. The California Franchise Tax Board is examining the Company's income tax
returns for the fiscal years ended September 30, 1993 and 1994.
It is the Company's opinion that the matters relating to these 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.
50
<PAGE> 52
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
The Company has elected to become an S Corporation effective October 1,
1998. Under S Corporation rules, taxable income and losses are passed through to
the ESOP, the Company's sole shareholder, which is exempt from tax.
The Company will still be subject to certain taxes as an S Corporation,
including a minimum state franchise tax of 1.5% and federal and California
built-in gains tax (set at the corporate tax rate) on sales of real estate and
other assets, should any occur. In addition, for subsidiaries of the Company
that do not elect to become Qualified Subchapter S Corporation Subsidiaries,
deferred taxes must be maintained for existing tax liabilities.
Deferred tax assets and liabilities are eliminated when a taxable
enterprise becomes a non-taxable enterprise and the effect of recognizing or
eliminating deferred tax assets or liabilities is charged or credited to income
tax expense in income from continuing operations. However, corporations that
elect S Corporation status generally are subject to tax under built-in gains
provisions as previously discussed and thus would be required to continue to
recognize deferred taxes associated with built-in gains and the California 1.5%
franchise tax.
The Company believes there will not be a material adjustment in the first
quarter of the 1999 fiscal year to its total deferred tax liability or any
material credit to income tax expense as a result of the S Corporation election.
(9) STOCKHOLDER'S EQUITY (DEFICIT)
(a) 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.
(b) 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.
51
<PAGE> 53
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
The following table sets out specific details of the respective stock
option plans and status as of September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1996
NON-
1996 1996 EMPLOYEE
1990 EXECUTIVE EMPLOYEE DIRECTOR
STOCK STOCK STOCK STOCK
OPTION INCENTIVE INCENTIVE OPTION
SHARES UNDER OPTION PLAN PLAN PLAN PLAN
------------------- ---------- --------- --------- --------
<S> <C> <C> <C> <C>
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,
1997...................................... 2,772,000 1,897,500 2,657,750(a) 70,000
========== ========= ========= =======
Granted..................................... -- -- 487,500 --
Canceled.................................... (2,000) -- (46,000) --
---------- --------- --------- -------
Outstanding at September 30, 1998........... 226,000 990,000 1,406,500 105,000
========== ========= ========= =======
Options available to grant at September 30,
1998...................................... 2,774,000 1,897,500 2,216,250(a) 70,000
========== ========= ========= =======
Average option price:
September 30, 1997........................ $ 7.04 5.21 5.03 4.89
September 30, 1998........................ $ 7.04 5.21 5.22 4.89
Options exercisable:
At September 30, 1996..................... 242,750 64,000 -- --
At September 30, 1997..................... 228,000 202,000 98,500 35,000
At September 30, 1998..................... 226,000 436,000 291,500 70,000
</TABLE>
- ---------------
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, 1998, 270,000
shares were vested and 30,000 shares will vest on May 27, 1999.
(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.
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,
-------------------------
1998 1997 1996
------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
As reported................................................. $9,461 6,526 30,243
Pro forma................................................... $9,036 6,202 30,106
</TABLE>
52
<PAGE> 54
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
Pro forma net income has been computed using the Black-Scholes option
pricing model and the following assumptions:
<TABLE>
<CAPTION>
EXPECTED RISK-FREE
FAIR DIVIDEND INTEREST VESTING
VALUE YIELD RATE VOLATILITY PERIOD
----- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998............................... $6.26 0.0% 5.88% 0.1% 4 years
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.
(c) 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. The 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, 1998, the outstanding principal balance owed to Norcal was $38.6
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
$10.2 million and $9.1 million for 1998 and 1997, respectively, to the ESOP
which amounts have been applied as prepayments of the loans from the Company to
the ESOP.
53
<PAGE> 55
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Loans from the Company to the ESOP.......................... $ 38,631 54,744
-------- -------
Total scheduled contribution to the ESOP.......... 38,631 54,744
ESOP compensation expense recognized in excess of
Company contributions..................................... (15,052) (18,044)
-------- -------
Net scheduled contribution to the ESOP.................... $ 23,579 36,700
======== =======
</TABLE>
Following is a summary of shares as of September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Allocated................................................... 18,278 16,412 14,842
Committed to be released.................................... 2,095 1,866 1,570
Unallocated................................................. 3,762 5,857 7,723
------ ------ ------
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 $2.0 million, $1.7
million and $1.2 million for the years ended September 30, 1998, 1997, and 1996,
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 and 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 $6.26 and $5.59 as of
September 30, 1998 and 1997, respectively.
The Company's common stock is not traded on an established market.
Presently, all shares are held by the ESOP, and all benefit 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.
54
<PAGE> 56
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(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, 1998, 1997, and
1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 3,242 2,637 2,499
Interest cost on projected benefit obligations.............. 7,513 7,198 6,624
Actual return on plan assets................................ (2,580) (14,959) (10,579)
Net amortization and (deferral)............................. (3,266) 9,348 5,480
------- ------- -------
Net periodic cost........................................... $ 4,909 4,224 4,024
======= ======= =======
</TABLE>
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998
------------------------------------ 1997
PLAN WITH ASSETS PLAN WITH ASSETS PLANS WITH ASSETS
EXCEEDING LESS THAN EXCEEDING
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFIT BENEFIT BENEFIT
OBLIGATIONS OBLIGATIONS OBLIGATIONS
---------------- ---------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $29,761 and $61,060 in
1998 and $82,208 in 1997.................. $(32,880) (64,464) (85,187)
======== ======= ========
Projected benefit obligation................... (42,864) (76,732) (103,408)
Plan assets at fair value, primarily marketable
equity securities, fixed income securities,
U.S. government obligations, money market
funds and other investments.................. 33,991 59,959 92,374
-------- ------- --------
Projected benefit obligation in excess of plan
assets....................................... (8,873) (16,773) (11,034)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions....................... 6,667 16,135 9,027
Prior service cost not yet recognized.......... 1,095 2,734 3,948
Adjustment to recognize minimum liability...... -- (6,601) --
-------- ------- --------
(Accrued liability) prepaid pension cost
recognized in the consolidated
balance sheets....................... $ (1,111) (4,505) 1,941
======== ======= ========
</TABLE>
55
<PAGE> 57
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
In accordance with FASB Statement No. 87, the Company has recorded an
additional minimum pension liability for its underfunded plan of $6.6 million as
of September 30, 1998, representing the excess of unfunded accumulated benefit
obligations over previously recorded pension liabilities. A corresponding amount
has been recognized as an intangible asset (included in other assets) except to
the extent that these additional liabilities exceed related unrecognized prior
service cost, in which case the increase in liabilities is charged directly to
stockholders' equity. At September 30, 1998, the reduction to stockholders'
equity totaled $2.3 million, net of tax benefit of $1.6 million.
It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $4.0 million,
$3.1 million and $3.5 million during 1998, 1997 and 1996, respectively.
The weighted average discount rate was 6.75%, 7.50%, and 8.0%,
respectively, for 1998, 1997, and 1996. 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.
In addition, the Company sponsors an unfunded deferred compensation and
stock option plan for one of its executives. The accumulated benefit obligation
and projected benefit obligation for this plan were $301,000 and $216,000 as of
September 30, 1998 and 1997, respectively. The Company has recorded an
additional minimum pension liability for this plan of $62,000 as of September
30, 1998. After recognizing an intangible asset related to the net transition
obligation, the reduction to stockholders' equity at September 30, 1998 totaled
$18,000, net of tax benefit of $13,000.
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, 1998, 1997, and 1996, was $1.7 million,
$1.5 million and $1.5 million, respectively. The Company's portion of the
actuarially computed value of the vested and nonvested benefits of the plans and
the net assets of the pension funds have not been determined.
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 $9.1 million as of September 30, 1998 (note 13).
(11) POSTRETIREMENT MEDICAL BENEFITS
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.
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."
56
<PAGE> 58
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
The postretirement medical benefit plans are unfunded. The following table
sets forth the status of the postretirement medical benefits plans at September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement medical benefit obligation:
Retirees.................................................... $ 9,623 12,139
Active plan participants.................................... 18,525 15,931
------- ------
Accumulated postretirement medical benefit obligation....... 28,148 28,070
Unrecognized net gain from past experience different from
that assumed and from changes in assumptions.............. 10,866 10,198
Unamortized prior service cost not yet recognized in net
periodic postretirement benefit cost...................... (4,070) (4,112)
------- ------
Accrued postretirement medical benefit liability............ $34,944 34,156
======= ======
</TABLE>
Net periodic cost for the post retirement medical benefit plans for the
years ended September 30, 1998, 1997 and 1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost on accumulated postretirement benefit
obligation................................................ $1,963 1,753 1,625
Service costs............................................... 626 163 --
Amortization of prior service cost.......................... 42 (234) (403)
Amortization of gain........................................ (500) (722) (667)
------ ----- -----
Net periodic cost........................................... $2,131 960 555
====== ===== =====
</TABLE>
For measurement purposes, an 8.18%, 9.50%, and 11.50% annual rate of
increase in the medical cost trend rate was assumed for the 1998 - 99, 1997 - 98
and 1996 - 97 years, respectively. This rate was assumed to decrease
incrementally to 4.75%, 5.50% and 7.0% after 6 years, 7 years and 9 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 6.75%, 7.50%, and 8.0% were assumed as of September 30, 1998, 1997, and
1996, respectively. By increasing the assumed medical cost trend rate by 1
percentage point in each year, the service and interest cost components for the
years ended September 30, 1998, 1997, and 1996, and the accumulated
postretirement benefit obligation at September 30, 1998, 1997, and 1996 would
increase approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service and interest component.............................. $ 411 272 220
====== ===== =====
Accumulated postretirement medical benefit obligation....... $4,007 4,098 3,058
====== ===== =====
</TABLE>
(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
57
<PAGE> 59
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
requirements on the Company and also impact the municipalities the Company
serves and operators of non-owned landfills used by the Company. The Company
believes that this regulation will continue in the future.
Compliance with current or future regulatory requirements will require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. It is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts. The Company
has made and may continue to make substantial expenditures relating to
environmental conditions primarily on its landfill properties. In the opinion of
management, compliance with present environmental protection laws will not have
a material adverse effect on the results of operations of the Company provided
costs are substantially covered in the Company's rates on a timely basis. The
Company continues to monitor these matters; however, there is no assurance that
material costs or liabilities related to environmental matters will not be
incurred in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to leachate and groundwater management and
remediation. There are many unknown and uncertain factors including regulatory
requirements, incomplete data with respect to projected volumes, quality and
cost of treatment among others. Accordingly, estimates for closure and
post-closure management and remediation of leachate and contaminated groundwater
could be subject to periodic and substantial revision as the Company's knowledge
increases concerning these factors.
At September 30, 1998 and 1997, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $25.3 million
and $27.1 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, 1998 and 1997, amounting to
approximately $0.9 million and $3.4 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 (credited) charged to operating expenses for landfill closure in 1998,
1997 and 1996, net of interest income earned on related trust accounts, were
approximately $(0.4) million, $0.2 million and $0.2 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, 1998 and 1997, the future closure
and post-closure obligation remaining to be recognized over the remaining lives
of the applicable landfills is estimated to be approximately $29.3 million and
$34.6 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 are funded annually in amounts designed to
provide the resources to accomplish closure and post-closure maintenance and
monitoring. The estimated funding requirements are $0.3 million for 1999 and
approximately $2.2 million due over the subsequent 5 year period based upon
volume used at the landfill and regulatory requirements. At September 30, 1998
and 1997, $25.4 million and $24.9 million, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. In addition, at
September 30, 1998, the Company had deposited $2.5 million in a trust fund
maintained by Humboldt County which is included in other assets.
58
<PAGE> 60
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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 $2.8 million in trust funds as of
September 30, 1998 and estimates that future contributions to trust funds of
approximately $5.2 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 September 30, 1998, the Company
has approximately $3.4 million in three 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 $2.1 million and $6.8 million at September 30, 1998 and 1997,
respectively. These letters of credit are provided primarily to secure insurance
and self-insurance obligations and for bond requirements. As of September 30,
1998, the Company has $22.9 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, 1998 and
1997, the Company's accrued liability for self-insured claims was approximately
$17.3 million and $16.4 million, respectively. The current portion of
self-insured claims at September 30, 1998 and 1997, amounting to approximately
$8.1 million and $7.6 million, respectively, is included in accrued expenses.
At September 30, 1998, the Company and the other unrelated investors were
jointly and severally liable as guarantors of affiliates' (note 5) indebtedness
totaling $0.4 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
59
<PAGE> 61
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
a demand to arbitrate this dispute under the terms of the collective bargaining
agreement between the parties. Arbitration is scheduled to begin on May 12,
1999.
If Local 350 were to prevail in the arbitration discussed above, the
Company estimates that the accumulated benefit obligation (ABO) as of September
30, 1998 would increase by an additional $9.1 million which would generally
result in an increase to the pension intangible asset with a corresponding
offset to the accrued pension liability. In addition, if Local 350 were to
prevail, the Company's estimated incremental increase in annual accruals for
employee benefits would be approximately $2.4 million for pension and medical
costs. The above estimates are based on a discount rate of 6.75%. The discount
rate applied under GAAP fluctuates given market conditions today and subject to
periodic revision. 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 certain
previous noteholders of the ESOP against, among others, certain financial
institutions as to which the Company and/or the ESOP have certain
indemnification obligations. In 1995, the litigation was settled, except for
continuing claims by the noteholders against one of those financial
institutions. That institution has claimed, among other things, that the Company
and the ESOP have continuing indemnity obligations to it in connection with the
litigation. The Company and the ESOP believe that such claims are without merit.
In any case, given the terms of the settlement agreement, the Company believes
it is unlikely that any ultimate unreimbursed liability on such claims would
materially exceed the amount of the financial institution's legal fees and
expenses.
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>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Trust accounts................................ $ 36,190 $ 36,137 $ 35,009 $ 35,108
Marketable securities......................... 5,552 5,552 5,552 5,552
Liabilities:
Senior notes.................................. 171,004 198,270 170,679 201,250
Other long term debt including current
portion.................................... 3,413 3,413 3,674 3,674
</TABLE>
60
<PAGE> 62
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
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, 1998
and September 30, 1997 has been estimated using the quoted market price for the
Notes based upon a limited number of transactions.
(16) BUSINESS SEGMENT, GEOGRAPHICAL AND OTHER 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
1998, 1997 and 1996, one customer accounted for 19%, 17% and 14% of consolidated
revenue, respectively, and 42% and 31% of consolidated accounts receivable at
September 30, 1998 and 1997, respectively. The Company's San Francisco
operations represents approximately 39%, 39% and 40% of revenues for the years
1998, 1997 and 1996, respectively, however the Company does not believe that it
is exposed to credit risk.
As of September 30, 1998, approximately 68% of the Company's employees were
represented by unions. Of this total, approximately 1% are covered under
contracts that have expired or will expire by September 30, 1999.
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
noteholders.
61
<PAGE> 63
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(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
1998................................................. $88,453 76,885 80,653 91,866
======= ====== ====== ======
1997................................................. $75,121 75,947 79,959 88,774
======= ====== ====== ======
Income from operations
1998................................................. $ 7,754 4,568 7,971 7,317
======= ====== ====== ======
1997................................................. $ 4,466 5,783 8,302 8,423
======= ====== ====== ======
Net income (loss)
1998................................................. $ 2,295 (705) 5,696 2,175
======= ====== ====== ======
1997................................................. $ (46) 856 2,550 3,166
======= ====== ====== ======
</TABLE>
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ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
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................. 49 President, Chief Executive Officer and
Director
Robert J. Coyle....................... 51 Executive Vice President, Chief
Operating Officer
Mark R. Lomele........................ 42 Senior Vice President, Chief Financial
Officer and Treasurer
George P. McGrath..................... 45 Senior Vice President, Chief
Information Officer
Donald M. Moriel...................... 64 Vice President -- Special Projects
Bennie J. Anselmo, Jr................. 53 Vice President -- Equipment
Procurement and Maintenance
David A. Cochrane..................... 42 Vice President -- Facilities
Development and Technical Services
Jon D. Braslaw........................ 37 Vice President, Corporate Controller
Kenneth James Walsh................... 51 Division Manager of Southern
California
Archie L. Humphrey.................... 46 Division Manager of Northern
California
Gale R. Kaufman....................... 44 Director
John B. Molinari(a)(b)................ 89 Director, Chairman of the Board of
Directors
H. Welton Flynn(a)(b)................. 76 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.
ROBERT J. COYLE was appointed Executive Vice President and Chief Operating
Officer of Norcal in October 1998. Mr. Coyle also serves as an executive officer
and director of all of Norcal's subsidiaries. Prior to joining Norcal in October
1998, Mr. Coyle served in a variety of executive positions during a 29 year
career with Waste Management, Inc., in Illinois, Hawaii, California, the
Netherlands and the United Kingdom. He holds a B.S. in Management from De Paul
University.
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
Financial Officer. Mr. Lomele serves as an executive officer of all of Norcal's
subsidiaries. From April 1996 to
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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.
GEORGE P. MCGRATH has served as Senior Vice President, Chief Information
Officer of Norcal since October 1998, responsible for all of the Company's
information systems. Since July 1996, Mr. McGrath has served as Vice President
and General Manager of Alta Environmental Services, Inc., a subsidiary that
markets certain types of landfill space to third parties. Prior to joining
Norcal in October 1995, Mr. McGrath served as Vice President and Area General
Manager for Chemical Waste Management in the Western Region of the United States
from October 1990 to February 1995. Mr. McGrath holds a B.S. in Psychology from
Western Michigan University.
DONALD M. MORIEL has served as Vice President -- Special Projects since
October 1998. From June 1992 to October 1998, Mr. Moriel served as Executive
Vice President and Chief Operating Officer of Norcal and from June 1994 to
October 1998 as an executive officer and a director of all of Norcal's
subsidiaries. He also serves as an executive officer and a members'
representative of Nortech. Mr. Moriel is the President and Chief Executive
Officer of Pentagon Equities Corporation, a consulting company. 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.
BENNIE J. ANSELMO, JR. has served as Vice President -- Equipment
Procurement and Maintenance and Vice President of Alta Leasing Co., 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. From
November 1996 to April 1998, Mr. Cochrane 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 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. Mr. Braslaw served as Controller from August to December 1996, as
Assistant Controller from April to July 1996, as Manager of Financial Reporting
from January 1995 to March 1996, and as a Financial Analyst from November 1989
to December 1994. 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 Kern 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 Disposal and
Recycling, Inc., the subsidiary that administers the Company's Los Angeles
operations, Vice President and General Manager of Norcal Waste Solutions, Inc.,
and Vice President of J.J.V. Disposal, 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
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<PAGE> 66
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 Municipal Court; from 1953
to 1962, he served as a judge of the San Francisco Superior Court; and from 1962
to 1977, he served as a Justice on the California Court of Appeal. He has been
an attorney in private practice since 1977. He serves on the board of directors
of Redwood Bank, and is a member of its compensation committee.
H. WELTON FLYNN has served as a director of Norcal since December 1991.
From 1949 until the present, Mr. Flynn has been the sole proprietor of an
accounting firm located in San Francisco. Since January 1996, he has served as a
member of The Public Transportation Commission of the City and County of San
Francisco. Mr. Flynn was appointed to the Public Utilities Commission for the
City and County of San Francisco in 1970 and served as its President for more
than five terms before retiring in 1991.
Each executive officer of Norcal is appointed by, and serves at the
pleasure of, the Board of Directors. There are no family relationships among
executive officers or directors of Norcal.
BOARD OF DIRECTORS
Number of Directors and Term of Office. Norcal's Bylaws currently fix the
authorized number of directors of Norcal at five. All directors hold office
until the next annual meeting of shareholders and until their successors have
been elected. The ESOP (as shareholder) has the power to remove directors at any
time. There is currently one vacancy on the Board of Directors.
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
1998, John B. Molinari, H. Welton Flynn and Gale R. Kaufman were each paid
$43,500, $38,500 and $33,500, respectively. Each non-employee director receives
an annual retainer of $18,000 and a
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<PAGE> 67
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.
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, 1998 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)(B) ($)
------------------ ------ ------- -------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Sangiacomo....... 1998 391,400 300,000 -- -- 60,612
President and Chief 1997 371,924 175,000 -- -- 44,509
Executive Officer 1996 350,000 147,500 -- 960,000 35,205
Donald M. Moriel............ 1998 300,000 187,500 -- -- 150,207(d)
Vice President, 1997 293,943 120,000 -- -- 145,491(d)
Special Projects(e) 1996 275,578 100,000 68,615 300,000 63,016(d)
Mark R. Lomele.............. 1998 200,000 125,000 -- 40,000 45,309
Senior Vice President, 1997 186,539 75,000 -- 40,000 34,813
Chief Financial Officer
and Treasurer 1996 128,233 50,000 -- 65,000(b) 28,145
Kenneth James Walsh......... 1998 178,750 70,000 -- 40,000 53,940
Division Manager -- 1997 193,253 50,000 65,556 45,000 40,453
Southern California 1996 154,617 40,000 25,502 35,000(b) 31,574
Archie L. Humphrey.......... 1998 178,750 70,000 -- 40,000 53,137
Division Manager -- 1997 167,306 50,000 -- 40,000 39,710
Northern California 1996 135,013 30,500 -- 75,000(b) 31,415
</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)).
(e) Mr. Moriel served as the Company's Executive Vice President and Chief
Operating Officer from June 1994 to October 1998. He has served as the
Company's Vice President, Special Projects since October 1998.
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<PAGE> 68
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.
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 October 1998, Norcal entered into an employment agreement with Mr.
Coyle, its Chief Operating Officer. Under the agreement, Mr. Coyle is entitled
to receive a salary of at least $240,000 per year, a hiring bonus of $40,000 and
a relocation allowance of $50,000. Mr. Coyle is eligible to participate in the
Short-Term Incentive Bonus Plan. In addition, Mr. Coyle receives insurance and
other benefits and perquisites generally available to Norcal's executive
employees. Mr. Coyle is entitled to severance benefits of $120,000 if his
employment is terminated without cause before October 1999 and $240,000 after
October 1999.
Norcal has granted Mr. Coyle a nonqualified stock option pursuant to its
1996 Employee Stock Plan (as defined below) to purchase Common Stock consisting
of three series, with each series being for 50,000 shares. The exercise price
for the Series A shares is $6.26. The exercise price for the Series B and Series
C shares will be equal to the fair market value of those share on September 30
of 1999 and 2000, respectively. Each Series generally will vest over four years,
with the first vesting for the Series A, Series B and Series C portions of the
options to occur on September 30 of 1999, 2000 and 2001, respectively. Under
certain circumstances, the option may vest completely if: (i) persons who are
directors of Norcal as of the date of adoption of the 1996 Employee Stock Plan
(the "Employee Plan 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-
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<PAGE> 69
thirds majority of the Employee Plan Incumbent Board shall be considered a
member of the Employee Plan Incumbent Board); (ii) 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; or (iii) substantially
all of Norcal's assets are sold (other than to a subsidiary of the Company, 80%
or more of the outstanding voting securities of which are owned by the Company).
In June 1996, Norcal entered into an employment agreement with Mr. Moriel,
then the Company's Executive Vice President and Chief Operating Officer and
currently its Vice President, Special Projects. 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, 270,000 shares were vested 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, Coyle and Moriel). Each employee covered by the Severance Policy
will receive an amount equal to his current base salary if there is a change in
control of Norcal and the employee is constructively terminated or terminated
without cause within 13 months after such change in control. 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, which was amended by the Company on October 29,
1998 (as amended, 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
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<PAGE> 70
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
Employee Plan will expire in April 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.
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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, McGrath, 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 1998 to purchase up
to 40,000, 40,000, 40,000, 25,000, 25,000, 20,000 and 10,000 shares of Common
Stock, respectively, under the 1996 Employee Plan. Options granted for 1998 were
issued at an exercise price of $5.59 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. 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
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<PAGE> 72
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.
As of September 30, 1998, options to purchase 226,000 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 1998. The following table provides certain information with
respect to options outstanding during fiscal year 1998 for the Named Executive
Officers. No stock appreciation rights ("SARs") were outstanding during such
period.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE EXPIRATION PRESENT
NAME GRANTED(A) TO EMPLOYEES PRICE DATE VALUE(B)
---- ---------- --------------- -------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Michael J. Sangiacomo............ 0 -- -- -- --
Donald M. Moriel................. 0 -- -- -- --
Mark R. Lomele................... 40,000 8.2% $5.59 September 30, 2005 $59,482
Kenneth James Walsh.............. 40,000 8.2% $5.59 September 30, 2005 $59,482
Archie Humphrey.................. 40,000 8.2% $5.59 September 30, 2005 $59,482
</TABLE>
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<PAGE> 73
- ---------------
(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, 2005. Each option will vest as follows: 20% will
vest on each of September 30, 1999 and 2000, and 30% will vest on each of
September 30, 2001 and 2002. 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 $6.26, which is as of September
30, 1998, the effective date of the most recently completed
valuation;
(v) the value of the options is discounted by 5% per year to account
for assumed forfeitures.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION & SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF OUTSTANDING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT FISCAL
IN VALUE FISCAL YEAR-END YEAR END EXERCISABLE/
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ------------------------- ------------------------
<S> <C> <C> <C> <C>
Michael J. Sangiacomo........ 0 0 491,000/544,000 $243,520/$510,400
Donald M. Moriel............. 0 0 275,000/ 30,000 $123,300/$ 41,100
Mark R. Lomele............... 0 0 44,000/111,000 $ 26,450/$114,790
Kenneth James Walsh.......... 0 0 26,000/ 97,000 $ 29,190/$123,010
Archie L. Humphrey........... 0 0 46,000/117,000 $ 19,310/$ 94,450
</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 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 limited to $160,000.
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<PAGE> 74
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
$160,000 and above................................. 26,400 35,200 44,000 52,800
</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, 1998, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 9.75 years; Mr. Moriel, 6.25 years; Mr. Lomele, 10.00 years; Mr.
Walsh, 10.83 years; and Mr. Humphrey, 12.92 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, 1998, Mr. Sangiacomo had an estimated 5.17 years of
credited services under the Envirocal Retirement Plan. The estimated annual
retirement benefit to which he will be entitled under the Envirocal Retirement
Plan is $16,383. That estimate is computed as a Single Life Benefit and is not
subject to deduction for Social Security or other offset amounts.
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<PAGE> 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, 1998 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
EXERCISABLE
IN
BENEFICIAL OWNER(A) ESOP ACCOUNT 60 DAYS(B) 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........................ 50,759 491,000 541,759 2.1%
Donald M. Moriel............................. 23,104 275,000 298,104 1.2%
Mark R. Lomele............................... 29,190(d) 44,000 73,190(d) *
Kenneth James Walsh.......................... 40,473 26,000 66,473 *
Archie L. Humphrey........................... 40,329 46,000 86,329 *
John B. Molinari............................. 0 57,500 57,500 *
H. Welton Flynn.............................. 0 45,000 45,000 *
Gale R. Kaufman.............................. 0 23,334 23,334 *
All executive officers and directors as a
group (11 persons)......................... 24,134,973(e) 1,007,834 25,326,662(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, 1998.
(c) The Trustee of the ESOP is Imperial Trust Company (the "ESOP Trustee"), 456
Montgomery Street, Suite 1250, San Francisco, California 94104. An
aggregate of 24,134,973 shares of Common Stock were held by the ESOP
Trustee as of September 30, 1998, of which approximately 20,372,619 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, 1998 are as follows: Archie L. Humphrey,
40,329 shares; John A. Legnitto, 13,976 shares; and Mark R. Lomele, 29,190
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,
which is higher than the fair market value of Norcal's Common Stock as of
September 30, 1998, along with options to purchase 30,000 and 26,000,
respectively, that are exercisable within 60 days at $4.89 per share and
options to purchase 8,000 and 8,000, respectively, that are exercisable
within 60 days at $5.18 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
74
<PAGE> 76
subject to stock options exercisable within 60 days, represent less than 1%
of the outstanding shares of Common Stock as of September 30, 1998.
(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 (3,762,354
shares or 15.6% 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
75
<PAGE> 77
during the sixth year of the election period. It is expected that withdrawals
will be paid in cash. As of the date hereof, the ESOP held 11,654,973 Post-1986
Shares.
Post-Termination Distributions. Except for the in-service withdrawals
described above, a vested participant is not entitled to begin receiving a
distribution of his or her ESOP accounts until after his or her employment has
terminated. The Committee generally determines the time and manner of
distributions, subject to certain limitations. Distributions may be made in a
lump sum or in substantially equal annual installments over a period not
exceeding five years. Norcal expects that the ESOP's distributions will continue
to be paid in cash. Norcal is obligated to repurchase any shares of its common
stock that may be distributed by the ESOP to participants following withdrawal,
retirement or termination.
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, 3,762,354 shares were
unallocated as of September 30, 1998.
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 pay dividends or make contributions or loans 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,
1998, the outstanding principal balance owed to Norcal was $23.6 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
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<PAGE> 78
ESOP's repayment of principal and interest on such outstanding indebtedness may
not exceed the sum of Norcal's contributions to the ESOP for the purpose of
making such repayments, plus any cash dividends paid on Norcal's common stock
held by the ESOP and earnings on Norcal contributions to the ESOP, less any
repayments made by the ESOP in prior years.
Norcal and the ESOP are contemplating changes to the Fourth Amended and
Restated ESOP Loan Agreement in light of certain tax planning strategies
relating to the Company's S Corporation election. If adopted, these changes
would defer amortization of loan principal balances, which would result in a
deferral of share allocations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." After making its S Corporation
election, the Company may reduce its annual contributions to the ESOP, which
could prevent the ESOP from prepaying certain of its outstanding indebtedness to
the Company.
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 16, 1996, pursuant to which KCC has agreed to
provide the Company with certain consulting services in the areas of political
affairs, 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, 1999. Under the agreement, KCC receives a monthly fee of $9,500.
KCC received an aggregate of $114,000 in fees during fiscal year 1998.
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 balance sheets as of September 30, 1998 and 1997
Consolidated statements of income for each of the three years in the
period ended September 30, 1998
Consolidated statements of stockholder's equity (deficit) for each
of the three years in the period ended September 30, 1998
Consolidated statements of cash flows for each of the three years in
the period ended September 30, 1998
Notes to Consolidated Financial Statements
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<PAGE> 79
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 Notes due 2005+
10.1 Norcal Waste Systems, Inc. Employee Stock Ownership Plan, as
amended and restated as of October 1, 1993 (the "ESOP")+
- Amendment No. 1, dated effective October 1, 1993, executed
December 29, 1994+
- Amendment No. 2, dated effective February 1, 1995,
executed April 27, 1995+
- Amendment No. 3, dated effective October 1, 1993, executed
September 28, 1995+
- Amendment No. 4, dated effective November 17, 1995+
10.1.1 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, filed as Exhibit 10.45 to the Company's
Form 10-K for the fiscal year ended September 30, 1996,
filed December 27, 1996, and incorporated herein by this
reference.
10.4.2 Third Amendment to Revolving Credit Agreement, dated May 12,
1997, filed as Exhibit 10.1 to the Company's Quarterly
Report for the quarter ended March 31, 1997, filed May 15,
1997, and incorporated herein by this reference.
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, Guarantors and The First National Bank of Boston,
dated as of the 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, Bear, Stearns & Co.
Inc. and Montgomery Securities, dated as of November 21,
1995+
</TABLE>
78
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
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+*
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 Amended 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+
</TABLE>
79
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.38 Consulting Agreement between Norcal and Kaufman Campaign
Consultants, dated May 16, 1996+*
10.38.2 Extension No. 2 of Consulting Agreement, dated October 20,
1998
10.39 Deferred Compensation and Stock Option Plan+*
10.40 Stock Option Agreement, dated as of April 4, 1996, between
Norcal and John B. Molinari+*
10.41 Stock Option Agreement, dated as of January 12, 1996,
between Norcal and John B. Molinari+*
10.42 Stock Option Agreement, dated as of April 4, 1996, between
Norcal and H. Welton Flynn+*
10.43 Stock Option Agreement, dated as of January 12, 1996,
between Norcal and H. Welton Flynn+*
10.44 Stock Option Agreement, dated as of July 16, 1996, between
Norcal and Gale Kaufman+*
10.45 Indemnification Agreement with Gale R. Kaufman, dated as of
July 24, 1997, filed as Exhibit 10.1 to the Company's
Quarterly Report for the quarter ended June 30, 1997, filed
August 14, 1997, and incorporated herein by this reference*
10.46 Golden Gateway Commons Building III Office Lease, dated
January 12, 1996, filed as Exhibit 10.1 to the Company's
Quarterly Report for the quarter ended December 31, 1997,
filed February 13, 1998, and incorporated herein by this
reference
10.47 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated April 8, 1998, filed as Exhibit 10.1 to
the Company's Quarterly Report for the quarter ended June
30, 1998, filed August 17, 1998, and incorporated herein by
this reference
10.48 Employment Agreement, between Norcal and Robert J. Coyle,
dated as of October 26, 1998*
10.49 Nonqualified Stock Option Agreement, dated as of October 26,
1998 between Norcal and Robert J. Coyle*
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 Annual Report for the fiscal year ended September 30, 1997, filed
December 24, 1997.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None.
80
<PAGE> 82
SIGNATURES
Dated: December 21, 1998 NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
----------------------------------
Michael J. Sangiacomo
President, Chief Executive Officer
and Director
81
<PAGE> 83
NORCAL WASTE SYSTEMS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGES
BEGINNING OF TO BALANCE AT
YEAR EXPENSE DEDUCTIONS END OF YEAR
------------ ------- ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Allowance for Doubtful Accounts............... $ 2,017 $ 940 $ 755 $ 2,202
======= ======= ======= =======
Insurance..................................... $16,449 $11,259 $10,405 $17,303
Post Retirement Benefit Obligations........... 34,156 2,131 1,342 34,945
Litigation, Claims and Related Matters........ 612 -- 128 484
Property and Other Reserves................... 2,941 250 979 2,212
------- ------- ------- -------
Total............................... $54,158 $13,805 $12,824 $55,139
======= ======= ======= =======
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
======= ======= ======= =======
</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.
82
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.29 Amended Short-Term Incentive Bonus Plan
10.38.2 Extension No. 2 of Consulting Agreement dated October 20,
1998
10.48 Employment Agreement between Norcal and Robert J. Coyle,
dated as of October 26, 1998
10.49 Nonqualified Stock Option Agreement between Norcal and
Robert J. Coyle, dated as of October 26, 1998
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 10.29
NORCAL WASTE SYSTEMS, INC.
SHORT-TERM INCENTIVE BONUS PLAN
AMENDED 10/29/98
<PAGE> 2
OBJECTIVES OF THE SHORT-TERM INCENTIVE BONUS PLAN
The objectives of the Short-term Incentive Bonus Plan are to:
o Establish a competitive Total Cash Compensation Program for key managers.
o Attract, retain and focus the efforts of key managers on critical company
goals.
o Provide key managers with an attractive Total Cash Compensation Program
with earnings potential that vary with actual business performance.
o Reinforce and reward key managers for the achievement of superior
operating results.
o Better align shareholder and management's interests in enhanced company
value.
o Shift fixed compensation expenses (base salary) to more variable types of
compensation (incentive plans).
o Provide for administrative consistency by developing a formal plan.
<PAGE> 3
SHORT-TERM INCENTIVE BONUS PLAN
The Short-term Incentive Bonus Plan is an important element in Norcal's Total
Cash Compensation program. The funding for this plan is based solely on company
performance. If the company does not achieve a profit before taxes and after
provisions for the Short-term Incentive Bonus Plan, then no incentive bonuses
will be paid under this plan.
Beyond this initial performance criteria, the funding of the Short-term
Incentive Plan would be based on incremental company performance as measured
against targets established by the business plan. Due to the highly regulated
nature of the business, and an ambitious business planning process, simply
achieving business plan targets is an accomplishment worth recognizing. The
incremental performance levels identified for this plan are:
<TABLE>
<CAPTION>
PERFORMANCE LEVEL AWARD LEVEL
(% OF PLAN) (% OF TARGET)
<S> <C>
120% 200%
110% 150%
100% 100%
90% 75%
85% 50%
<85% 0
</TABLE>
In any plan year where the actual EBITDA is less than the prior year's EBITDA,
the maximum bonus payable will be at 100% of the target level.
<PAGE> 4
Because Norcal seeks to grow and diversify while remaining profitable, the
following performance measures should be identified with respect to the
management group:
o EBITDA - This goal supports an operating profits focus that is common in
the industry, and it provides the cash flow needs that will enable the
company to continue to reduce debt levels.
o YEAR-TO-YEAR REVENUE GROWTH (%) - If Norcal is to significantly increase
its shareholder value, it will have to increase its year-to-year historical
revenue gains, both through acquisitions and through expansion of its
customer base - the company should estimate desired levels of revenue
increases anticipated through both acquisitions and market expansions, and
then set annual revenue growth percentage goals to meet those targets.
Revenue growth is also supported by timely rate increases achieved through
careful monitoring of expense loads. A subset of this category should be
REVENUE DIVERSIFICATION - Norcal should strive to reduce the level of its
revenues that come from San Francisco (not on an absolute basis, but as a
percentage of total revenues). This performance goal is directed at
minimizing risk associated with having a concentrated level of revenue
resident in one source (i.e., San Francisco).
o YEAR-TO-YEAR INCREASE IN PROFIT MARGIN (%) - This goal is directed at
moving the company from regulated revenue sources to non-regulated revenue
sources - non-regulated business carries higher profitability margins and
could require less of the administrative overhead required to meet
regulated business requirements.
o RISK MANAGEMENT - The company's ability to succeed in its industry could be
hampered by a failure to maintain high levels of safety experience and
environmental compliance. Management must take the lead in ensuring that
Norcal meets all customer and government expectations if it is to
distinguish itself from its competitors.
<PAGE> 5
For fiscal year 1996, 50% of the bonus calculation will be within the
discretion of the Compensation Committee and/or the Board of Directors and 50%
will be based on EBITDA achieved.
For fiscal year 1997 and later years, the portion of the bonus calculation that
is discretionary will be specified each year and the remaining amount will be
based on achieving criteria in the following table as determined in each year's
business plan.
PERFORMANCE WEIGHTING
- - Annual incentives should be closely tied to what employees can influence
and/or control. The plan provides different weightings for each of the
aforementioned performance measures, depending on position in the company.
- - The following table illustrates how weighting will be applied on a position-
by-position basis:
<TABLE>
<CAPTION>
REVENUE RISK PROFIT
LEVEL EBITDA GROWTH MANAGEMENT MARGIN TOTAL
- ---------------------------------- ------ ------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
President/Chief Executive Officer 50% 50% -- -- 100%
EVP/Chief Operating Officer 50% 50% -- -- 100%
SVP/Chief Financial Officer 50% 50% -- -- 100%
VP - Corporate Controller 50% 50% -- -- 100%
VP/Division Mgr. - No. Cal
Landfills and Technical Services 25% -- 50% 25% 100%
Regional Manager - Northern
California 25% 25% 25% 25% 100%
Regional Manager - Southern
California 25% 25% 25% 25% 100%
Group General Manager - San
Francisco Non-Regulated Companies 25% 25% 25% 25% 100%
Group General Manager - San
Francisco Regulated Companies 25% 25% 25% 25% 100%
Group General Manager - San
Francisco Peninsula Companies 25% 25% 25% 25% 100%
Group General Manager - North
Coast Companies 25% 25% 25% 25% 100%
Other Employees
> Landfill and Operations Groups 25% 25% 25% 25% 100%
> Corporate Staff 50% 50% -- -- 100%
> Director - Risk Management 25% 25% 50% -- 100%
> Corporate Safety Manager 25% 25% 50% -- 100%
</TABLE>
<PAGE> 6
Short-term Incentive Plan payments will be made based on company performance
assessed at the close of each fiscal year. Actual payments to participants will
be made as soon as possible after the close of the fiscal year.
PLAN PARTICIPANTS
An initial listing of Short-term Incentive Plan participants has been
developed. This listing is a guideline for the inclusion of individuals to
participate in this plan based on a criteria of being assigned to a management
position with a Salary Grade of 24 or above.
At the end of the fiscal year, this listing will be reviewed. Individuals may be
deleted from or added to this listing. The appropriate manager will propose
additions or deletions to the senior management in charge of this area. Any
changes in plan participation requires the approval of the Chief Executive
Officer.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PARTICIPANT LISTING & AWARD OPPORTUNITIES INCENTIVE AWARD %
- -------------------------------------------------------------------------------------------------------------
SALARY
POSITION GRADE THRESHOLD TARGET MAXIMUM
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chief Executive Officer 45 30% 60% 120%
Executive Vice President 41 25% 50% 100%
Chief Financial Officer 37 25% 50% 100%
Corporate Controller 32 15% 30% 60%
Regional Manager - Northern California 33 15% 30% 60%
Regional Manager - Southern California 35 15% 30% 60%
VP Technical Services/Division Manager 32 12.5% 25% 50%
Group General Manager - S.F. Non-Regulated Companies 32 12.5% 25% 50%
Group General Manager - S.F. Regulated Companies 32 12.5% 25% 50%
Group General Manager - S.F. Peninsula Companies 32 12.5% 25% 50%
Group General Manager - North Coast Companies 32 12.5% 25% 50%
Grades 29-31 and Grade 28 General Manager 10% 20% 40%
Grades 26-28 (excluding Grade 28 General Managers) 7.5% 15% 30%
Grades 24-25 5% 10% 20%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.38.2
December 10, 1998
Ms. Gale Kaufman
Kaufman Campaign Consultants
1510 J Street, Suite 210
Sacramento, CA 95814
Dear Gale:
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 16, 1996 and extended per a
letter agreement dated December 11, 1997. I would like to formalize the
extension of the agreement under the same terms and conditions as contained in
the original document through September 30, 1999.
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 15, 1996 and the
extension letter dated December 11, 1997, constitute the understanding under
which you provide services to Norcal. Please acknowledge by signing this letter
and returning it to me at your earliest convenience.
Very truly yours,
/s/ Michael J. Sangiacomo
----------------------------------------
Michael J. Sangiacomo
President & Chief Executive Officer
Kaufman Campaign Consultants
By: /s/ Gale R. Kaufman
---------------------------
Gale R. Kaufman
<PAGE> 1
EXHIBIT 10.48
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
October 26, 1998 between NORCAL WASTE SYSTEMS, INC., a California corporation
("Employer"), and ROBERT J. COYLE ("Employee").
The parties agree as follows:
1. Employment.
1.1 Position.
(a) Employer hereby hires Employee as Employer's Chief
Operating Officer ("COO") and Employee hereby accepts such employment, all on
the terms and conditions specified herein. Employee shall do and perform all
services and acts necessary or advisable to fulfill the duties and
responsibilities of such position.
(b) Employee shall be responsible and report to Employer's
Chief Executive Officer ("CEO"). Employee shall manage the day-to-day operations
of Employer, with the specific objectives of:
(i) Margin improvement;
(ii) Maintaining and extending terms of existing and acquired
franchises and contracts;
(iii) Maintaining, managing and renewing collective bargaining
agreements;
(iv) Keeping all executive officers informed of all material
facts and developments concerning Employer's operations;
(v) Making regular reports on Employer's operations to the CEO
and to the Board of Directors of Employer and any committees and/or
subcommittees thereof (collectively, the "Board"), as well as making other
special reports as required by the CEO and/or the Board;
(vi) Hiring, firing, promoting, demoting and disciplining
operations personnel, in a manner which is consistent with Employer's human
resources and other policies and all applicable laws;
(vii) Training such persons as may be designated by the CEO
with respect to any or all aspects of Employer's operations;
(viii) Overseeing the due diligence relating to operational
issues in connection with any acquisition, joint venture or other cooperative
venture to be made or entered
<PAGE> 2
into by Employer and managing the integration of any such newly acquired or
developed operations; and
(ix) At all times conducting himself and using his best
efforts to cause the business of Employer to be conducted in accordance with all
laws, regulations and codes of business applicable, from time to time, to
Employer's business and in accordance with such rules, regulations and
directives as Employer may promulgate from time to time.
Employee also shall perform such other duties as the CEO or Board
shall from time to time determine.
1.2 Time and Effort. Employee shall devote his full energies,
interest, abilities, and productive time and best efforts and abilities to the
performance of this Agreement and shall not engage in any other business duties
or pursuits whatsoever, or directly or indirectly render any services of a
business, commercial, or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of Employer.
1.3 Non-Competition with Employer. During his employment, Employee
shall not, directly or indirectly, own, promote, participate, or engage in any
activity or other business competitive with Employer's business.
1.4 Employment for Unspecified Term. This Agreement constitutes an
"at will" employment agreement and provides for employment for an unspecified
term, commencing as of the date of this Agreement and continuing until
terminated by either party, as specified in Paragraphs 3.1 or 3.2 below, or by
death or Disability, as specified in Paragraph 3.3 below.
2. Compensation and Benefits.
2.1 Basic Salary. Employer shall pay a basic salary to Employee at
the rate of $240,000 per year, pro-rated for any partial year and payable in
equal bi-weekly installments except as otherwise agreed between Employer and
Employee (the "Basic Salary"); provided, however, that no Basic Salary shall be
due or payable during any period of unpaid leave, in accord with Employer's
regular policies as they may exist or be changed from time to time. The Basic
Salary shall be subject to periodic review and may be adjusted by Employer in
its sole and absolute discretion.
2.2 Bonus.
(a) Employee shall participate in the existing bonus program,
as more specifically set forth on Exhibit A. Employee's initial bonus shall be
based on Employer's 1999 fiscal year (beginning October 1, 1998 and ending on
September 30, 1999).
(b) The Board, in its sole and absolute discretion, from time
to time may modify such bonus program.
(c) The right to receive a full bonus with respect to a fiscal
year shall vest on the last day of such fiscal year, subject to the
determination of the final bonus amount in
2
<PAGE> 3
accordance with the bonus plan then in effect, whether or not Employee is
employed by Employer on the date scheduled for payment thereof.
2.3 Benefits.
(a) During his employment, Employee shall be entitled to
participate on the same basis and subject to the same qualifications as all
other executive and managerial employees of similar level of Employer in any
benefit plans Employer makes available from time to time for all its employees,
including pension benefits and participation in Employer's ESOP, life insurance
coverage in an amount equal to two times Employee's current Basic Salary up to a
maximum of $500,000, and medical, dental, vision and disability insurance,
educational assistance, and participation in the Employer's employee assistance
program, all in accordance with Employer's plans as they exist from time to
time; provided, however, that nothing in this Paragraph 2.3 shall, in any manner
whatsoever, directly or indirectly require or obligate Employer to adopt or
implement, or prevent, preclude or otherwise prohibit Employer from amending,
modifying, curtailing, discontinuing or otherwise terminating any benefit plan
at any time (whether during or after the term hereof).
(b) During his employment, Employee shall be entitled to
receive an automobile allowance of $750 per month, which amount may be increased
from time to time by the Board in its sole and absolute discretion. The
aggregate annual amount of such automobile allowance, pro-rated for any partial
year, shall be paid concurrently with the Basic Salary, in 26 equal bi-weekly
installments. Employer will provide parking for Employee or reimburse Employee
for Employee's parking related expenses.
(c) During his initial year of employment, Employee shall be
entitled to three weeks vacation. After such initial year of employment,
Employee shall be entitled to vacation in accordance with Employer's personnel
policies in effect from time to time applicable generally to other similarly
situated executives.
2.4 Stock Options. Simultaneous with the execution and delivery of
this Agreement, Employee and Employer are entering into a Nonqualified Stock
Option Agreement, substantially in the form of Exhibit B hereto. The options
granted under such Agreement will be granted pursuant to the Company's 1996
Employee Stock Incentive Plan.
2.5 Business Expenses. Upon presentation of proper expense
statements or such other supporting information as Employer may reasonably
require, Employer will reimburse Employee for Employee's reasonable and
necessary business expenses (including telephone and travel expenses) incurred
or paid by Employee in connection with the performance of Employee's duties
hereunder, subject to (i) such policies as Employer may from time to time
establish for its employees and (ii) the approval of the CEO.
2.6 Sign-On Bonus. After the commencement of Employee's employment
and upon Employee's request, Employer shall pay to Employee a one-time sign-on
bonus of $40,000.
3
<PAGE> 4
2.7 Relocation Expenses. After the commencement of Employee's
employment and upon Employee's request, Employer shall pay to Employee a
one-time payment of $50,000 to cover relocation expenses.
2.8 Withholding. All amounts indicated above are before any required
withholding for taxes. Employer may withhold from any and all payments,
compensation or other remuneration paid to Employee such amounts as Employer
believes it is required to withhold under any federal, state, local or foreign
law, rule or regulation.
3. Termination.
3.1 Termination by Either Party. Either party may terminate this
Agreement, for any reason, with or without Cause, upon at least 90 days written
notice to the other, except as provided in Paragraphs 3.2 and 3.3 below.
3.2 Termination for Cause. In the event Employer terminates
Employee's employment for Cause (as defined in Paragraph 4.1), then Employee
shall be entitled to no severance benefits, and termination may be made
effective immediately, without previous notice, in the discretion of Employer.
In the event of such termination, Employer will provide Employee with immediate
written notice of termination.
3.3 Termination by Death or Disability. This Agreement will
terminate automatically upon Employee's death or Disability (as defined in
Paragraph 4.2), in which case Employee or his estate will be entitled only to
compensation earned through the date of such death or Disability, and Employee
shall be entitled to no other severance benefits.
3.4 Severance Benefits.
(a) Employee will be entitled to the severance benefits
described in Paragraph 3.4(b) below only in the event that (i) Employer
terminates Employee's employment without Cause, and (ii) Employee signs a
release of all claims in a form substantially similar to Exhibit C hereto.
(b) Employee's severance benefits will consist of the
following:
(i) if Employer terminates Employee's employment without
Cause prior to October 26, 1999, Employee will be entitled to an amount equal to
$120,000. Such amount will be payable in 26 equal bi-weekly installments
commencing on the regular payday following the first full pay period after the
date of termination.
(ii) if Employer terminates Employee's employment without
cause on or after October 26, 1999, Employee will be entitled to an amount equal
to one year of Employee's Basic Salary as in effect at the time of Employee's
termination. Such amount will be payable in 26 equal bi-weekly installments,
commencing on the regular payday following the first full pay period after the
date of termination.
4
<PAGE> 5
4. Definitions. As used herein, the terms below are defined as
follows:
4.1 Cause. Cause is defined as (a) any violation by Employee of
Employer's written policies as they may exist from time to time prohibiting
discrimination in the workplace, including prohibition of harassment, on the
ground of race, sex, age or any other legally prohibited basis; (b) any state,
federal or other felony conviction, including but not limited to entry of a plea
of nolo contendere upon a felony criminal charge; (c) the commission by Employee
of any material act of dishonesty, fraud, misrepresentation, embezzlement, theft
or act of moral turpitude; (d) any breach of this Agreement, including but not
limited to (i) any wilful or material failure to perform the responsibilities of
his position as described in Paragraph 1.1, the negligent or neglectful
performance of such responsibilities, or the failure, refusal or inability to
follow the legal directives of Employer's CEO or the Board that are within the
scope of the responsibilities of Employee's position as described in Paragraph
1.1 or (ii) the intentional, negligent or neglectful failure of Employee to
abide by the covenants set forth in Paragraph 6 below; (e) gross neglect,
recklessness, misconduct or other acts that in any way have an adverse effect on
Employer's reputation or business; (f) Employee being frequently under the
influence of alcoholic beverages or drugs (other than the taking of drugs or
medicine prescribed by a licensed physician); or (g) the happening of any other
event which, under the provisions of any laws applicable to Employer or its
activities, disqualifies Employee from acting in any capacity provided for
herein.
4.2 Disability. Disability is defined as a physical or mental
disability which renders Employee unable to perform substantially all the
responsibilities required of him by this Agreement for 90 consecutive days, or
for 180 non-consecutive days over a period of 24 months or less. The existence
of such Disability shall be determined by a physician or physicians of
Employer's choosing.
5. Confidential Information, Business Opportunities and Non-
Disparagement.
5.1 Confidential Information. Employee hereby acknowledges that in
order to perform Employee's duties as an employee of Employer, Employee has
received, and will in the future be given access to, certain confidential,
secret and proprietary information in the form of records, data, specifications,
formulas, technology, inventions, devices, products, methods, know-how,
processes, financial data, customer and/or vendor information and practices,
customer lists, marketing methods, cost and pricing information, employee
information and trade secrets (collectively, "Confidential Information")
developed and owned by Employer concerning the business, products and/or
services of Employer. Employer acknowledges and agrees that it is the policy of
Employer to maintain the Confidential Information as secret and confidential.
5.2 Restricted Use. Except as otherwise specifically provided
herein, Employee will not, directly or indirectly, sell, use, publish,
disseminate, misappropriate or otherwise disclose to any person or to any entity
whatsoever (or permit to be sold, used, published, disseminated, misappropriated
or otherwise disclosed by any person or entity whatsoever) any Confidential
Information acquired pursuant to Employee's employment with Employer (whether
acquired prior to or subsequent to the execution of this Agreement). Employee
acknowledges and agrees that the unauthorized sale, use, publication,
dissemination, misappropriation or other disclosure of any Confidential
Information obtained by Employee may
5
<PAGE> 6
constitute unfair competition. Employee promises and agrees not to engage in any
such unfair competition.
5.3 Permitted Disclosure. Employee may disclose the Confidential
Information only to the extent reasonably necessary and required in the
discharge of Employee's duties as an employee of Employer. If Employee is
required by law to disclose any Confidential Information, prior to such
disclosure Employee shall inform Employer of the situation and if requested by
Employer or Employer's counsel cooperate in obtaining any and all appropriate
protective orders.
5.4 Duplication. Employer agrees to take all reasonable precautions
to protect the integrity of all Confidential Information, including all
documents and other material entrusted to Employer containing or embodying
Confidential Information. Employee shall not, without the prior written consent
of Employer, or except in connection with Employee performing the
responsibilities of Employee's position as described in Paragraph 1.1,
duplicate, or cause or permit to be duplicated, any material (including, without
limitation, written, typed, or printed material, or material embodied in other
forms including embodiment on computer discs and tapes) included in the
Confidential Information covered hereby.
5.5 Return of Information. Employee will immediately, upon the
request of Employer, return to Employer all originals, copies or other
embodiments of any Confidential Information received under this Agreement or
otherwise. Employee will not retain, or cause or permit to be retained, any
copies or other embodiments of the materials so returned.
5.6 Books and Records. All books, records and other documents
relating to the business and customer accounts of Employer, whether prepared by
Employee or otherwise coming into his possession, shall be and remain the
exclusive property of Employer, and Employee shall not, directly or indirectly,
assert any interests or property rights therein. Upon termination of this
Agreement, all books, records, other documents, and all copies thereof shall
immediately be returned to Employer.
5.7 Business Opportunities; Discoveries and Inventions. Employee
agrees that during the term of this Agreement Employee will take any and all
business developments, opportunities and potentially profitable situations
relating to business of Employer to the CEO for exploitation by Employer.
Employee agrees promptly to disclose to Employee any and all knowledge possessed
or acquired by Employee by any means whatsoever during the term of this
Agreement which relates in any way to any materials, inventions, discoveries,
developments, concepts, ideas or innovations, whether copyrightable or
patentable or not, relating to the business of Employer. For the compensation
and benefits received hereunder, Employee hereby assigns and agrees to assign to
Employer his entire right, title, and interest in and to any of the
aforedescribed materials, inventions, discoveries, developments, concepts, ideas
or innovations. All such materials, inventions, discoveries, developments,
concepts, ideas and innovations shall be the property of Employer, and Employee
shall, without further compensation, do all things necessary to enable Employer
to perfect title in such materials, inventions, discoveries, developments,
concepts, ideas and innovations and to obtain and maintain effective patent or
copyright protection in the United States and foreign countries thereon,
including, without
6
<PAGE> 7
limitation, rendering assistance and executing necessary documents. THIS
PARAGRAPH 5.7 DOES NOT APPLY TO AN INVENTION WHICH QUALIFIES FULLY UNDER SECTION
2870 OF THE LABOR CODE OF THE STATE OF CALIFORNIA.
5.8 Remedies. The parties stipulate that as between them the
Confidential Information consists of important, material and confidential trade
secrets (except to the extent that such information either is or becomes
published or is or becomes a matter of public knowledge, in each case, through
no wrongful action of Employee). The parties further agree that the remedy at
law for any breach of this Article 5 would be inadequate and that, in addition
to any other remedies Employer may have, Employer shall be entitled to temporary
or permanent injunctive relief without the necessity of proving actual damages.
Notwithstanding the preceding sentence, the parties further agree it is
foreseeable that the breach by Employee of this Agreement may result in
substantial loss of profits or other damages to Employer and that, in addition
to any other remedies Employer may have, Employer shall be entitled to monetary
damages upon proof. No right or remedy herein conferred on or reserved to
Employer is intended to be exclusive of any other remedy or right, and each and
every right or remedy shall be cumulative and in addition to any right or remedy
given hereunder or now or hereafter existing at law or in equity or by statute.
5.9 Solicitation of Customers. During the term of this Agreement and
for a period of three years thereafter, regardless of the reason for the
termination of Employee's employment hereunder, Employee will not, without the
prior written consent of Employer, directly or indirectly, disclose to any
person, the names or addresses of any of Employer's customers, clients and other
business associates or any other information pertaining to them, or call on,
solicit or take away any of Employer's customers, clients or other business
associates, either for the Employee or for any other person.
5.10 Solicitation of Employees and Others. During the term of this
Agreement and for a period of three years thereafter, regardless of the reason
for the termination of Employee's employment hereunder, Employee will not,
without the prior written consent of Employer, directly or indirectly, seek to
persuade or otherwise induce any director, officer or employee of Employer to
discontinue his or her position with such entity or to become employed or
engaged in any activity competitive with the business of Employer.
5.11 Non-Disparagement. During the term of this Agreement and at all
times thereafter, regardless of the reason for the termination of Employee's
employment hereunder, Employee will not make any direct or indirect
communication in which Employee expressly or impliedly makes any statement or
conveys any information derogatory of Employer.
5.12 Scope of Covenants. Each of the covenants of Employee contained
in this Article 5 and Article 6 shall be construed as a separate and independent
covenant covering the respective subject matter of the covenant in each of the
separate counties in each of the states of the United States of America and each
country of the world. To the extent that any covenant shall be determined to be
judicially unenforceable in any one or more county, state or country, that
covenant shall not be affected with respect to every other county, state or
country, each covenant being construed as severable and independent. In the
event that any of Employee's obligations under Articles 5 or 6 of this Agreement
are deemed by a court or arbitrator to be
7
<PAGE> 8
excessive in scope, geographic coverage, duration or otherwise not fully
enforceable, such obligations shall be enforced to the maximum degree legally
permissible.
5.13 Term. Except as otherwise specifically provided herein, each of
the covenants of Employee contained in this Article 5 shall apply both during
the term of this Agreement and at all times thereafter, regardless of the reason
for the termination of Employee's employment hereunder.
6. Covenants. Employee covenants and agrees that unless approved in
advance expressly in writing by the CEO or the Board (or as otherwise specified
below), during the term of this Agreement and for a period of three years
thereafter, Employee shall not engage in:
(a) Any direct or indirect communication with anyone for the purpose
of, or on the subject of, procuring, assisting, defeating or identifying any
possible transaction in which a substantial amount of the assets of Employer
might be acquired.
(b) Any direct or indirect communication with, or disclosure to,
anyone of Employer's interest, if any, in pursuing discussions regarding a
potential acquisition, or of the terms, conditions or other facts with respect
to any such possible acquisition or financing.
(c) Any direct or indirect communication with any investment banker,
or other potential acquisition or financing intermediary regarding Employer.
(d) Any direct or indirect disclosure of any information regarding
the business or operations of Employer, including but not limited to
confidential financial, customer, or personnel information, except as expressly
permitted by the CEO and to the extent such disclosure can be made without
violation of the trade/secret proprietary information provisions in Article 5
above.
(e) Entering into any arrangement, agreement or understanding,
without the prior written approval of CEO, which materially affects Employer
including but not limited to:
(i) Hiring or firing of managerial employees, consultants,
advisers or agents;
(ii) Entry or termination of material contracts;
(iii) Operations planning, including strategic planning; and
(iv) Pursuit of business development opportunities.
7. Representations and Warranties of the Employee as to Conflicts.
Employee hereby represents and warrants to Employer that his employment by
Employer does not and will not violate any agreement or instrument to which
Employee is a party or by which Employee is bound, and Employee agrees that he
will indemnify and hold harmless Employer against any claims, damages,
liabilities and expenses (including reasonable attorneys' fees) which may be
incurred, including amounts paid in settlement, by and of them in connection
with any claim based upon or related to a breach of Employee's representation
and warranty set forth in this
8
<PAGE> 9
Article 7. In the event of any claim based upon or related to a breach of
Employee's representation and warranty set forth in this Article 7, Employer
will give prompt notice thereof, in writing, to Employee and Employee shall have
the right to defend such claim with counsel reasonably satisfactory to the
Employer.
8. Miscellaneous.
8.1 Notice. All notices, requests and other communications required
or permitted to be given hereunder shall be in writing and shall be deemed given
(a) upon receipt, if given by personal delivery, (b) upon delivery, if given by
electronic facsimile, and (c) upon the third business day following mailing, if
mailed by deposit in the United States mail, with certification and postal
charges prepaid, addressed as follows:
If to Employer:
Norcal Waste Systems, Inc.
5 Thomas Mellon Circle
San Francisco, California 94134
Attn: President and Chief Executive
Officer
Fax: (415) 330-1124
If to Employee:
Robert J. Coyle
[Address]
8.2 Delegation of Duties. Employee may not delegate the services and
obligations he is required to perform under this Agreement. Any attempt by
Employee to delegate his duties hereunder shall be null and void.
8.3 Amendment. This Agreement may be modified or amended only by and
to the extent of the written agreement of Employer and Employee.
8.4 Previous Agreements; Conflict. No representations, oral or
otherwise, express or implied, other than those contained in this Agreement have
been relied upon by either Employee or Employer. This Agreement and the exhibits
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between Employer and Employee with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof. If
there is any inconsistency between the terms of this Agreement and the terms of
any exhibit or attachment hereto, the terms of this Agreement will control.
8.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California.
9
<PAGE> 10
8.6 Section Headings. The various section headings are inserted for
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement or any section thereof.
8.7 Severability. Subject to Paragraph 5.12 hereof, if any provision
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such provision will be deemed amended to the minimum
extent necessary to conform to applicable law so as to be valid, legal and
enforceable; if such provision cannot be amended as provided above, it will be
stricken and the remainder of this Agreement will remain in full force and
effect.
8.8 Cumulative Remedies. No right or remedy herein conferred on or
reserved to either party is intended to be exclusive of any other right or
remedy, and each and every right or remedy shall be cumulative and in addition
to any right or remedy given hereunder or now or hereafter existing at law or in
equity or by statute.
8.9 Arbitration. Except with respect to a claim for equitable
relief, any controversy or claim arising out of, or relating to, this Agreement,
or the making, performing or interpretation thereof, shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect; and any such arbitration shall be held
in the City of San Francisco, in San Francisco County, in the State of
California.
8.10 Waiver. Waiver of any default or breach of this Agreement or of
any warranty, representation, covenant or obligation contained herein shall not
be deemed or construed to constitute a waiver of any term or provision (or
portion thereof) waived in any other instance.
8.11 Key-Man Insurance. Employee agrees to make himself available
and to undergo, at Employer's request and expense, any physical examination or
other procedure necessary to allow Employer to obtain a key-man insurance policy
on Employee. If Employer obtains such policy, it will maintain the policy at its
expense and all proceeds will be the sole property of Employer.
8.12 Employer. As used in Paragraphs 1.3, 4.1, 5.1 through 5.12,
6(a) through (e), 7 and 8.4, "Employer" shall include Norcal Waste Systems,
Inc., a California corporation, and its subsidiaries, affiliated companies,
stockholders, officers, directors, managers, employees, agents, attorneys,
consultants, advisors, representatives and assigns.
8.13 Executive Acknowledgment. Employee acknowledges that he has
been given the opportunity to consult with legal counsel concerning the rights
and obligations arising under this Agreement, that he has read and understands
each and every provision of this Agreement, and that he is fully aware of the
legal effect and implications of this Agreement.
8.14 Survival. Employee agrees that the obligations set forth in
Paragraphs 5.1 through 5.12, 6(a) through (e) and 7 hereof shall survive the
termination of this Agreement.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement in one or
more counterparts which, taken together, shall constitute one agreement.
EMPLOYER:
NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
------------------------------------
Michael J. Sangiacomo
President and Chief
Executive Officer
EMPLOYEE:
/s/ ROBERT J. COYLE
----------------------------------------
ROBERT J. COYLE
11
<PAGE> 1
EXHIBIT 10.49
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is
entered into as of October 26, 1998, by and between NORCAL WASTE SYSTEMS, INC.,
a California corporation (the "Company"), and ROBERT J. COYLE ("Optionee"). The
parties agree as follows:
1. Grant of Option. Pursuant to the Company's 1996 Employee Stock
Incentive Plan (the "Plan"), the Company will grant to Optionee the following
nonqualified stock options (collectively the "Options") to acquire shares of the
Company's common stock (collectively, the "Shares"):
(a) On October 26, 1998, the Company will grant to
Optionee a nonqualified stock option to acquire 50,000 Shares at a per share
exercise price equal to the Fair Market Value of a Share on that date (the "1998
Option"). As long as Optionee remains employed by the Company, the 1998 Option
will become exercisable ("Vest") as follows:
<TABLE>
<CAPTION>
Cumulative Percentage Cumulative Number
Date of Shares Vested of Shares Vested
------ --------------------- ----------------
<S> <C> <C>
Before
9/30/99 0% -0-
9/30/99 20% 10,000
9/30/00 40% 20,000
9/30/01 70% 35,000
9/30/02 100% 50,000
</TABLE>
Additionally, as long as Optionee remains employed by the
Company, Optionee may exercise the 1998 Option to purchase all or part of the
Shares underlying the 1998 Option that have Vested at any time on or before
September 30, 2005.
(b) On September 30, 1999, the Company will grant to
Optionee a nonqualified stock option to acquire 50,000 Shares at a per share
exercise price equal to the Fair Market Value of a Share on that date (the "1999
Option"). As long as Optionee remains employed by the Company, the 1999 Option
will Vest as follows:
<PAGE> 2
<TABLE>
<CAPTION>
Cumulative Percentage Cumulative Number
Date of Shares Vested of Shares Vested
------ --------------------- ----------------
<S> <C> <C>
Before
9/30/00 0% -0-
9/30/00 20% 10,000
9/30/01 40% 20,000
9/30/02 70% 35,000
9/30/03 100% 50,000
</TABLE>
Additionally, as long as Optionee remains employed by the
Company, Optionee may exercise the 1999 Option to purchase all or part of the
Shares underlying the 1999 Option that have Vested at any time on or before
September 30, 2006.
(c) On September 30, 2000, the Company will grant to
Optionee a nonqualified stock option to acquire 50,000 Shares at a per share
exercise price equal to the Fair Market Value of a Share on that date (the "2000
Option"). As long as Optionee remains employed by the Company, the 2000 Option
will Vest as follows:
<TABLE>
<CAPTION>
Cumulative Percentage Cumulative Number
Date of Shares Vested of Shares Vested
------ --------------------- ----------------
<S> <C> <C>
Before
9/30/01 0% -0-
9/30/01 20% 10,000
9/30/02 40% 20,000
9/30/03 70% 35,000
9/30/04 100% 50,000
</TABLE>
Additionally, as long as Optionee remains employed by the
Company, Optionee may exercise the 2000 Option to purchase all or part of the
Shares underlying the 2000 Option that have Vested at any time on or before
September 30, 2007.
(d) Upon the termination of Optionee's employment with the
Company for any reason (whether by reason of death, disability, voluntary
resignation, involuntary termination or any other reason), all ungranted Options
shall remain ungranted Options and all Unvested Shares will remain be Unvested
Shares, no further Shares will be granted or become Vested, and the granted
Options, if any, may not be exercised to purchase any Unvested Shares.
2. Exercise of Option. After Optionee's Termination of Service
for any reason, Optionee must exercise the Options, to the extent exercisable,
within the time periods
2
<PAGE> 3
specified in Section 7(e) of the Plan, pursuant to the procedures set forth in
Section 7(f) of the Plan.
3. Compliance with Securities Laws. The grant and any subsequent
exercise of the Options are subject to compliance with all applicable federal
and state securities laws.
4. Other Terms. The other terms of the Options will be the same
as those provided for in the Plan, except that the definition of "Cause" will
have the meaning set forth in Paragraph 4.1 of that certain Employment
Agreement, dated October 26, 1998, by and between the Company and Optionee (the
"Employment Agreement"). The Plan is attached hereto and is incorporated herein
by this reference. Optionee has read the Plan and agrees to be bound by its
terms. If there is any inconsistency between the terms of this Agreement and the
terms of the Employment Agreement, the terms of the Employment Agreement will
control.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
NORCAL WASTE SYSTEMS, INC.
By: /s/ Michael J. Sangiacomo /s/ Robert J. Coyle
------------------------------- -----------------------------
Michael J. Sangiacomo Robert J. Coyle
President and CEO
Attachments (1) Spousal Consent
(2) 1996 Employee Stock Incentive Plan
3
<PAGE> 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 1994 THROUGH 1998
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) before Income Taxes,
Extraordinary Item and Change
in Accounting Principle .............. $ 9,461 $ 6,526 $ (1,136) $17,096 $ 8,859
Interest Expense(a) ..................... 26,400 25,853 24,326 19,909 20,920
Capitalized Interest .................... (235) (204) (413) 0 0
Interest Portion of Rental charge(b) .... 956 882 751 506 504
Income (loss) before Income Taxes,
Extraordinary Item, Interest and
Interest Portion of Rental charge .... $ 36,582 $ 33,057 $ 23,528 $37,511 $30,283
Interest Expense ........................ $ 26,400 $ 25,853 $ 24,326 $19,909 $20,920
Interest Portion of Rental Charge ....... 956 882 751 506 504
Interest Expense plus Interest Portion
of Rental Charge ..................... $ 27,356 $ 26,735 $ 25,077 $20,415 $21,424
Ratio of Earnings to Fixed Charges ...... 1.34 1.24 -- (c) 1.84 1.41
</TABLE>
- ----------------
(a) In addition, the Company guaranteed certain obligations of a less than
50% owned entity in the amounts of $0.4 million, $1.2 million and $2.0
million as of September 30, 1998, 1997 and 1996, respectively. The less
than 50% owned entity incurred approximately $0.1 million, $0.2 million
and $0.2 million of interest expense on these obligations in the years
ended September 30, 1998, 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
SUBSIDIARIES OF NORCAL
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.
J.J.V. Disposal, Inc.
Los Altos Garbage Company
Macor, Inc.
Mason Land Reclamation Company, Inc.
Norcal Disposal and Recycling, Inc.
Norcal/San Bernardino, 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 EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 39,752
<SECURITIES> 5,552
<RECEIVABLES> 51,991
<ALLOWANCES> 2,202
<INVENTORY> 2,200
<CURRENT-ASSETS> 101,873
<PP&E> 259,425
<DEPRECIATION> 111,791
<TOTAL-ASSETS> 371,861
<CURRENT-LIABILITIES> 73,832
<BONDS> 174,990
0
0
<COMMON> 241
<OTHER-SE> 43,756
<TOTAL-LIABILITY-AND-EQUITY> 371,861
<SALES> 0
<TOTAL-REVENUES> 337,857
<CGS> 0
<TOTAL-COSTS> 309,307
<OTHER-EXPENSES> (8,016)
<LOSS-PROVISION> 940
<INTEREST-EXPENSE> 26,165
<INCOME-PRETAX> 9,461
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,461
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
