This Quarterly Report is filed by Norcal Waste Systems, Inc.
pursuant to certain contractual requirements and not
pursuant to the Securities Exchange Act of 1934
and the rules and regulations thereunder.
AMENDMENT NO. 1 TO QUARTERLY REPORT
For the quarterly period ended March 31, 1998
NORCAL WASTE SYSTEMS, INC.
(Exact name of company as specified in its charter)
CALIFORNIA 94-2922974
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Thomas Mellon Circle, Suite 304
San Francisco, California 94134
- --------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (415) 330-1000
----------------
Norcal Waste Systems, Inc. is currently 100% owned by an employee stock
ownership plan.
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date. On June 1, 1998,
there were 24,134,973 shares of $.01 par value Common Stock outstanding.
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<CAPTION>
March 31, September 30,
1998 1997
------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash $38,963 $32,330
Marketable securities 5,552 5,552
Trust accounts, current portion 968 4,362
Accounts receivable, less allowance for doubtful
accounts of $2,022 at March 31, 1998 and $2,017
at September 30, 1997 39,153 42,677
Parts and supplies 2,439 2,436
Prepaid expenses 3,209 2,568
--------- ---------
Total current assets 90,284 89,925
--------- ---------
Property and equipment:
Land 43,701 44,558
Landfills 25,206 25,206
Buildings and improvements 47,488 47,325
Vehicles and equipment 123,977 116,925
Construction in progress 4,889 6,232
--------- ---------
Total property and equipment 245,261 240,246
Less accumulated depreciation and amortization 104,375 97,313
--------- ---------
Property and equipment, net 140,886 142,933
--------- ---------
Franchises, permits and other intangibles, net 74,944 76,829
Trust accounts 33,303 30,647
Prepaid pension costs 895 1,941
Deferred financing costs, net 7,590 8,261
Other assets 993 633
--------- ---------
Total other assets 117,725 118,311
--------- ---------
Total assets $348,895 $351,169
========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands)
(unaudited)
<CAPTION>
March 31, September 30,
1998 1997
------------- -------------
Liabilities and Stockholder's Equity
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt $307 $306
Capital leases 1,098 1,040
Accounts payable 8,669 15,379
Accrued expenses 44,108 48,637
Income taxes payable 584 1,087
Deferred revenues 2,995 2,777
Other accrued liabilities 4,855 4,867
--------- ---------
Total current liabilits 62,616 74,093
--------- ---------
Long-term debt 174,078 174,047
Obligations under capital leases 1,461 2,025
Deferred income taxes 9,772 9,732
Landfill closure liability 24,149 22,823
Postretirement medical benefits 33,336 32,844
Other liabilities 12,106 12,096
--------- ---------
Total liabilities 317,518 327,660
--------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 100,000,000 shares
authorized;
24,134,973 shares issued and outstanding 241 241
Additional paid-in-capital 166,378 166,378
Accumulated deficit (104,799) (106,389)
Unrealized gains (losses) on marketable securities 34 (21)
--------- ---------
61,854 60,209
Less net scheduled contribution to the ESOP (30,477) (36,700)
--------- ---------
Total stockholder's equity 31,377 23,509
--------- ---------
Total liabilities and stockholder's equity $348,895 $351,169
========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $76,885 $75,947 $165,339 $151,068
Cost of operations:
Operating expenses 54,905 53,306 118,866 108,106
Depreciation and amortization 4,953 4,981 9,935 9,612
ESOP compensation expense 3,733 3,510 7,288 6,950
General and administrative 8,726 8,367 16,928 16,151
--------- --------- --------- ---------
Total cost of operations 72,317 70,164 153,017 140,819
Operating income 4,568 5,783 12,322 10,249
Interest expense (6,618) (6,446) (13,070) (12,700)
Interest income 873 452 1,686 821
Gain on dispositions, net 376 97 475 107
Other income 96 970 177 2,333
--------- --------- --------- ---------
Income (loss) before income taxes (705) 856 1,590 810
Income tax expense - - - -
--------- --------- --------- ---------
Net income (loss) ($705) 856 $1,590 $810
========= ========= ========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the six months ended March 31, 1998
(in thousands)
(unaudited)
<CAPTION>
Unrealized
gains Net
Additional (losses) on scheduled
Common Stock paid-in Accumulated marketable contribution
Shares Amount capital deficit securities to the ESOP Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997 $24,135 $241 $166,378 ($106,389) ($21) ($36,700) $23,509
Contributions to reduce
ESOP debt - - - - - 6,223 6,223
Net unrealized gains on
marketable securities - - - - 55 - 55
Net income - - - 1,590 - - 1,590
-------- ------- --------- ---------- -------- --------- --------
Balances, March 31, 1998 $24,135 $241 $166,378 ($104,799) $34 ($30,477) $31,377
======== ======= ========= ========== ======== ========= ========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
March 31
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,590 $810
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,935 9,612
ESOP compensation expense 7,155 6,950
Accrued interest, amortization of discounts and
deferred financing fees 996 787
Other 4,584 (2,144)
Changes in assets and liabilities, net of
effects of acquisitions and dispositions (11,535) (3,548)
--------- ---------
Net cash provided by operating activities 12,725 12,467
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (7,323) (7,879)
Acquisition of businesses - (2,677)
Proceeds from dispositions 1,785 278
Proceeds from the sales of marketable securities - 1,350
Other 92 52
--------- ---------
Net cash used in investing activities (5,446) (8,876)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt and capitalized leases (646) (684)
--------- ---------
Net cash used in financing activities (349) (393)
--------- ---------
Net increase in cash and cash equivalents 6,633 2,907
Cash and cash equivalents, beginning balance 32,330 14,378
--------- ---------
Cash and cash equivalents, ending balance $38,963 $17,285
========= =========
Supplemental schedule of net cash paid for:
Interest $12,182 $12,049
========= =========
Income taxes $500 -
========= =========
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements
(1) General
The interim consolidated financial statements presented herein include Norcal
Waste Systems, Inc. ("Norcal") and its subsidiaries (collectively, Norcal and
its subsidiaries are referred to herein as the "Company"). These interim
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto, which
include information as to significant accounting policies, for the year ended
September 30, 1997. Such interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments necessary
(consisting of items of a normal recurring nature) for a fair presentation of
the Company's interim financial position, results of operations, and cash flows.
Results of operations for interim periods are not necessarily indicative of
those of a full year.
(2) Nature of Business
Through its subsidiaries, the Company provides integrated waste services to
residential, commercial, municipal and industrial customers in California. The
Company's services include refuse collection, recycling and other waste
diversion, transfer station and hauling operations, and operation of Company-
owned landfills and third party landfill management services (including
engineering and construction management services). The Company continues to
be, with limited exceptions, the sole provider of commercial and residential
refuse collection for the City and County of San Francisco.
(3) Long-term Debt
<TABLE>
Long-term debt at March 31, 1998 and September 30, 1997 is
summarized as follows:
(in thousands)
<CAPTION>
March 31 September 30
------------ ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest at 13.5% $170,836 $170,679
Note payable for business acquired due in monthly
installments through 2016, interest imputed at 8.75% 1,640 1,658
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5% 763 792
Other Notes 1,146 1,224
---------- ----------
Total debt 174,385 174,353
Less current portion 307 306
---------- ----------
Long-term debt $174,078 $174,047
========== ==========
</TABLE>
On November 21, 1995, the Company completed a private debt offering of
$175.0 million in Senior Notes (the "Senior Notes"). The Senior Notes mature
in November 2005 with interest payable semi-annually. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time
during or after November 2000. Until November 15, 1998, the Senior Notes
may be partially redeemed in the event of a public offering of the Company's
Common Stock. In the event of a change in control of the Company, the
Company would be required to offer to purchase the Senior Notes. The Senior
Notes are unsecured and rank pari passu in right of payment to all existing and
future senior indebtedness of the Company. The Senior Notes are guaranteed,
on a senior unsecured basis, by the Company's wholly-owned subsidiaries. The
Indenture governing the Senior Notes contains provisions which, among other
things, (i) limit the Company's and its subsidiaries' ability to declare or pay
dividends or other distributions (other than dividends or distributions payable
to Norcal or any wholly owned subsidiary of Norcal), (ii) limit the purchase,
redemption or retirement of capital stock and (iii) limit the incurrence of
additional debt. In September 1996, the Company completed the exchange of
all of its outstanding privately-placed Senior Notes for Senior Notes with
identical terms and provisions, which exchange was registered under the
Securities Act of 1933. The interest rate on the Senior Notes is currently
13.5%,however, the interest rate reverts to 12.5% if Norcal (in one or more
transactions) offers to purchase (whether or not any actual purchases are made)
or redeems an aggregate of $25.0 million in principal amount of Senior Notes
out of the proceeds of equity sales.
<PAGE>
In conjunction with the private debt offering, the Company entered into a new
Credit Agreement (the "Credit Agreement") with a group of lenders and
BankBoston, N.A., as Agent. The Credit Agreement, as amended, provides for
a revolving credit facility in an amount of up to $100.0 million (depending
upon certain financial ratios), up to $25.0 million of which may be used for
letters of credit. At March 31, 1998, the Company had utilized $6.8 million of
its credit facility for letters of credit and had availability under the Credit
Agreement (based on limitations imposed by certain financial ratios) of $65.6
million along with $18.2 million which may be utilized for additional letters of
credit.
(4) 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 are individually and in the aggregate inconsequential. Separate
financial statements of each guarantor have not been presented since
management has determined such separate financial statements are not material
to investors.
(5) Commitments and Contingencies
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. The Company's
motion is set to be heard by the court on May 29, 1998. Arbitration between the
Company and Local 350 could determine that there has been no meeting of the
minds regarding the pension benefits provision in the contract and the provision
could have to be renegotiated. If the matter is not satisfactorily renegotiated,
the Company could be subject to another work stoppage.
If Local 350 were to prevail in the arbitration discussed above, the Company
estimates that the accumulated benefit obligation (ABO) would increase by an
additional $8.4 million, which would result in a charge to the minimum pension
liability of $4.2 million. In addition, if Local 350 were to prevail, the
Company estimates that its annual accruals for employee benefits would increase
by approximately $3.0 million for additional pension and medical costs. The
above estimates are based on a discount rate of 7.5%. The discount rate applied
under generally accepted accounting principles ("GAAP") fluctuates with market
conditions. A change in the discount rate can result in significant adjustments
to the ABO.
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.
<PAGE>
The Company disagrees with the DIR's conclusions and has filed an appeal
with the Director of the DIR.The Company intends to defend any legal attempt
to enforce orders from the DIR. The Company believes that it will be able to
satisfactorily resolve this matter, either through its appeal to the Director
of the DIR or through litigation, but if it is not successful in its legal
efforts, it could have a material adverse impact on the financial condition and
results of operations of the Company.
<PAGE>
Item II. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements. Those statements followed by an asterisk (*)
are forward looking statements. Any such statements should be considered in
light of various risks and uncertainties that could cause results to differ
materially from expectations, estimates or forecasts expressed. These risks
and uncertainties include, but are not limited to: changes in general economic
conditions, inability to obtain timely rate increases sufficient to cover costs,
fluctuations in commodities prices, changes in the amount of ESOP
compensation expense recorded by the Company, uncertainties of legal
proceedings and unfavorable resolutions of such proceedings, changes in
environmental regulations or related laws, the discovery of environmental
matters and competition. The Company does not undertake to update any
forward-looking statement that may be made from time to time by it or on its
behalf.
The following discussion pertains to the Company's operations for the three
and six months ended March 31, 1998 and 1997 and should be read in
conjunction with the unaudited consolidated financial statements and related
notes thereto included elsewhere herein, and the Company's September 30,
1997 audited consolidated financial statements contained in the Company's
Annual Report for the fiscal year ended September 30, 1997. On November
21, 1995, the Company issued 12.5% Series A Senior Notes in an aggregate
principal amount of $175.0 million, for which it received proceeds, after
original issue discount, of approximately $170.2 million (the "Offering"). The
Company used the proceeds from the Offering (less certain associated
expenses), together with certain cash balances, to retire approximately $199.1
million of its then outstanding indebtedness and certain of the ESOP's
indebtedness to third parties. Concurrent with the Offering, the Company
entered into a new bank credit agreement providing for a revolving credit
facility with a maximum availability of $100.0 million, of which up to $25.0
million may be used for letters of credit. These transactions are collectively
referred to as the "Refinancing Transaction."
Introduction
Norcal Waste Systems, Inc. ("Norcal") and its subsidiaries (collectively
referred to herein as the "Company") provide solid waste management
services throughout California, including collection, transfer, disposal,
landfill management, recycling and other waste services. The Company operates
17 landfills in California, four of which it owns and 13 of which are owned by
local governmental entities. The Company currently serves an estimated
450,000 customers.
The Company's revenues are comprised primarily of fees charged to
residential, commercial, municipal and industrial customers for the collection
and disposal of solid waste, disposal fees (known as "tipping fees") charged to
third party waste collectors who dispose of solid waste at the Company's
transfer stations and landfills, fees charged to third party landfill owners for
landfill operations and solid waste systems management activities and
revenues generated from the sale of recyclable materials.
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 operating collection, recycling, transfer station, hauling and landfill
operations. Also included are accruals for future landfill closure, post-closure
and corrective action costs, consistent with regulatory requirements. General
and administrative expenses include management salaries, administrative and
clerical overhead costs, professional services costs and other fees and
expenses. ESOP compensation expense 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.
<PAGE>
Results of Operations
<TABLE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
Operating Comparison
(in thousands)
<CAPTION>
Relationship to Total Revenue
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 77.5% 78.0% 73.5% 77.0%
Third party landfill management services 17.3% 16.9% 21.5% 18.1%
Recycled commodities sales 5.2% 5.1% 5.0% 4.9%
------- ------ ------ -------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses 71.4% 70.2% 71.9% 71.6%
Depreciation and amortization 6.4% 6.6% 6.0% 6.4%
ESOP compensation expense 4.9% 4.6% 4.4% 4.6%
General and administrative 11.3% 11.0% 10.2% 10.6%
------- ------ ------- -------
Total cost of operations 94.0% 92.4% 92.5% 93.2%
------- ------ ------- -------
Operating income 6.0% 7.6% 7.5% 6.8%
Interest expense (8.6)% (8.5)% (7.9)% (8.4)%
Interest income 1.1% 0.6% 1.0% 0.5%
Gain on dispositions, net 0.5% 0.1% 0.3% 0.1%
Other income 0.1% 1.3% 0.1% 1.5%
------- ------ ------- -------
Income (loss) before income taxes (0.9)% 1.1% 1.0% 0.5%
Income tax expense 0.0% 0.0% 0.0% 0.0%
------- ------ ------- -------
Net income (loss) (0.9)% 1.1% 1.0% 0.5%
======= ====== ======= =======
<PAGE>
<CAPTION>
Period to Period Change
Three Months Ended Six Months Ended
March 31, 1998 March 31, 1998
$ % $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 376 0.6% 5,180 4.5%
Third party landfill management services 456 3.6% 8,192 30.0%
Recycled commodities sales 106 2.7% 899 12.1%
------- ------ ------ -------
Total revenues 938 1.2% 13,332 9.4%
Cost of operations:
Operating expenses 1,599 3.0% 10,760 10.0%
Depreciation and amortization (28) (0.6)% 323 3.4%
ESOP compensation expense 223 6.4% 338 4.9%
General and administrative 359 4.3% 777 4.8%
------- ------ ------- -------
Total cost of operations 2,153 3.1% 12,198 8.7%
------- ------ ------- -------
Operating income (1,215) (21.0)% 2,073 20.2%
Interest expense (172) 2.7% (370) 2.9%
Interest income 421 93.1% 865 105.4%
Gain (loss) on dispositions, net 279 287.6% 368 343.9%
Other income (expense) (874) (90.1)% (2,156) (92.4)%
------- ------ ------- -------
Income (loss) before income taxes (1,561) (182.4)% 780 96.3%
Income tax expense - - - -
------- ------ ------- -------
Net income (loss) (1,561) (182.4)% 780 96.3%
======= ======= ======= =======
</TABLE>
Three months ended March 31, 1998 and 1997
Revenues. Revenues for the three months ended March 31, 1998 increased
$1.0 million (1.2%) to $76.9 million from $75.9 million for the three months
ended March 31, 1997. The increase in revenues was due to higher third party
landfill management services revenues and waste collection and disposal
revenues. Third party landfill management revenues increased $0.5 million.
The increase included $0.4 million in San Diego County from higher volumes
and a rate increase, along with $0.3 million from the start of operations of two
landfills in Kern County, effective May 1, 1997 and January 1, 1998. These
increases were partially offset by a decrease of $0.2 million in San Bernardino
County due to a decrease in volume. On March 31, 1998, the Company
ceased operations of the landfills in San Diego County when the new owner
assumed operations. Waste collection and disposal revenues increased $0.4
million from the prior period, resulting from an increase of $1.8 million due
to rate increases from several service areas (primarily an 11.0% increase in
San Francisco, effective March 1, 1997) and volume increases. The prior
period included non-recurring revenues of $1.4 million for unusual flood
related clean-up and disposal activities in the Sacramento Valley of
California.
Operating Expenses. Operating expenses for the three months ended March
31, 1998 increased $1.6 million (3.0%) to $54.9 million from $53.3 million
for the three months ended March 31, 1997. As a percentage of revenues,
operating expenses increased to 71.4% for the three months ended March 31,
1998 from 70.2% for the three months ended March 31, 1997. Payroll and
related costs increased $1.0 million due to 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 personnel associated with the start of operations of two landfills in Kern
County, effective May 1, 1997 and January 1, 1998. Disposal costs increased
$0.4 million due to volume increases and tipping fee increases.
<PAGE>
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 for the three months ended March 31, 1998 increased $0.2 million
(6.4%) to $3.7 million from $3.5 million for the three months ended March
31, 1997. The Company has accrued ESOP expense based upon anticipated
loan payments and prepayments of additional principal.
General and Administrative. General and administrative expenses for the
three months ended March 31, 1998 increased $0.4 million (4.3%) to $8.7
million from $8.3 million for the three months ended March 31, 1997. As a
percentage of revenues, general and administrative expenses increased to
11.3% for the three months ended March 31, 1998 from 11.0% for the three
months ended March 31, 1997. The increased costs were primarily due to
wage increases and additional administrative personnel.
Operating Income. Operating income for the three months ended March 31,
1998 decreased $1.2 million (21.0%) to $4.6 million from $5.8 million for the
three months ended March 31, 1997. As a percentage of revenues, operating
income decreased to 6.0% for the three months ended March 31, 1998 from
7.6% for the three months ended March 31, 1997. The decrease in operating
income was due to lower earnings in Southern California, costs associated
with the Placer Ranch litigation and the absence of flood related earnings in
the Sacramento Valley of California. These decreases were partially offset by
higher earnings from volume and rate increases, primarily in San Francisco.
Interest Income. Interest income for the three months ended March 31, 1998
increased $0.4 million (93.1%) to $0.9 million from $0.5 million for the three
months ended March 31, 1997. The increase is due to additional interest
earned on higher cash balances in the current period.
Gain on Dispositions. The gain on dispositions for the three months ended
March 31, 1998 increased by $0.3 million (287.6%) to $0.4 million from $0.1
million for the three months ended March 31, 1997. The increase is due to the
sale of real estate in Kansas City.
Other Income. Other income for the three months ended March 31, 1998
decreased $0.9 million (90.1%) to $0.1 million from $1.0 million for the three
months ended March 31, 1997. For the three months ended March 31, 1997,
other income included a $1.0 million settlement with a third party in
connection with a dispute over a landfill engineering matter at one of the
Company's landfills.
Income Tax Expense. There was no income tax expense for the three months
ended March 31, 1998 or 1997. The Company experienced an effective tax
rate of zero for the three months ended March 31, 1998 and 1997 as a result
of realizing certain of its deferred tax assets for which a valuation allowance
had been previously established.
Net Income (Loss). Net income for the three months ended March 31, 1998
decreased $1.6 million to a loss of $0.7 million compared to income of $0.9
million for the three months ended March 31, 1997. The primary causes of the
decrease in net income were lower operating income and a reduction in other
income, partially offset by higher interest income and gain on dispositions.
<PAGE>
Six months ended March 31, 1998 and 1997
Revenues. Revenues for the six months ended March 31, 1998 increased
$14.2 million (9.4%) to $165.3 million from $151.1 million for the six
months ended March 31, 1997. The increase in revenues was due to higher
third party landfill management services revenues, waste collection and
disposal revenues and recycled commodities sales. Third party landfill
management revenues increased $8.2 million. The increase included $7.2
million in San Bernardino County from increased landfill closure and
expansion project activities, $0.6 million from the start of operations of two
landfills in Kern County, effective May 1, 1997 and January 1, 1998, and $0.4
million in San Diego County from higher volumes and a rate increase. On
March 31, 1998, the Company ceased operations of the landfills in San Diego
County when the new owner assumed operations. Waste collection and
disposal revenues increased $5.2 million from the prior period, resulting from
an increase of $6.6 million, including $4.0 million from rate increases in
several service areas (primarily an 11.0% increase in San Francisco, effective
March 1, 1997), with the remainder primarily due to volume increases. The
prior period included non-recurring revenues of $1.4 million from unusual
flood clean-up and disposal activities in the Sacramento Valley of California.
Operating Expenses. Operating expenses for the six months ended March 31,
1998 increased $10.8 million (10.0%) to $118.9 million from $108.1 million
for the six months ended March 31, 1997. As a percentage of revenues,
operating expenses increased to 71.9% for the six months ended March 31,
1998 from 71.6% for the six months ended March 31, 1997. Project and
subcontractor related costs increased $6.2 million as a result of increased
activity in San Bernardino County. Payroll and related costs increased $2.2
million due to union wage increases (primarily a 4.7% and 2.0% increase in
San Francisco, effective January 1, 1997 and January 1, 1998, respectively),
higher employee benefit costs in San Francisco as a result of the April 1997
union agreement and personnel associated with the start of operations of two
landfills in Kern County, effective May 1, 1997 and January 1, 1998. Disposal
costs increased $0.8 million due to volume increases, tipping fee increases
and operations acquired in November 1996. Equipment maintenance costs
increased $0.6 million as a result of heavy equipment repairs in Southern
California.
General and Administrative. General and administrative expenses for
the six months ended March 31, 1998 increased $0.8 million (4.8%) to $16.9
million from $16.1 million for the six months ended March 31, 1997. As a
percentage of revenues, general and administrative expenses decreased to
10.2% for the six months ended March 31, 1998 from 10.6% for the six
months ended March 31, 1997. The increased costs were primarily due to
wage increases and additional administrative personnel.
Operating Income. Operating income increased $2.1 million (20.2%) to $12.3
million for the six months ended March 31, 1998 from $10.2 million for the
six months ended March 31, 1997. As a percentage of revenues, operating
income increased to 7.5% for the six months ended March 31, 1998 from
6.8% for the six months ended March 31, 1997. The primary cause of the
increase in operating income for the six months ended March 31, 1998 were
higher revenues from waste collection activities that generated higher margins
during the current period, partially offset by the absence of flood related
earnings in the Sacramento Valley of California.
Interest Income. Interest income for the six months ended March 31, 1998
increased $0.9 million (105.4%) to $1.7 million from $0.8 million for the six
months ended March 31, 1997. The increase is due to additional interest
earned on higher cash balances in the current period.
Other Income. Other income for the six months ended March 31, 1998
decreased by $2.1 million (92.4%) to $0.2 million from $2.3 million for the
six months ended March 31, 1997. For the six months ended March 31, 1997,
other income included gains of $1.3 million on 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 the Company's landfills.
Income Tax Expense. There was no income tax expense for the six months
ended March 31, 1998 or 1997. The Company experienced an effective tax
rate of zero for the six months ended March 31, 1998 and 1997 as a result of
realizing certain of its deferred tax assets for which a valuation allowance had
been previously established.
Net Income (Loss). Net income for the six months ended March 31, 1998
increased $0.8 million to $1.6 million compared to $0.8 million for the six
months ended March 31, 1997. The primary causes of the increase in net
income were higher operating income, interest income and gain on
dispositions, partially offset by a reduction in other income.
<PAGE>
Liquidity and Capital Resources
The Company's cash requirements consist principally of working capital
requirements, interest on outstanding indebtedness, capital expenditures and
deposits to trust funds to satisfy certain environmental statutes and
regulations. The Company had working capital of $27.7 million at March 31,
1998 compared to $15.8 million at September 30, 1997.
As part of the Refinancing Transaction the Company entered into the Credit
Agreement that provides for up to $100.0 million of additional borrowings
which, subject to certain limitations and covenant restrictions (including
financial ratios), can be drawn by the Company to fund ongoing operations,
invest in capital equipment and/or facilities and to finance acquisitions.
Letters of credit under the Credit Agreement are limited to a maximum of
$25.0 million. The Credit Agreement expires in November 2000. At March
31, 1998, the Company had utilized $6.8 million of the credit facility
provided by the Credit Agreement for letters of credit and had availability
under the Credit Agreement of approximately $65.6 million for borrowings
unrelated to letters of credit, with an additional $18.2 million available for
letters of credit. Certain acquisitions could increase availability for
borrowings unrelated to letters of credit under the Credit Agreement, due to
the Company's ability to include certain pro forma financial information of
acquired entities in calculating its financial ratios to determine availability.
Changes in availability under the Credit Agreement are a function of changes
in operating results, among other things. In addition, certain covenant
measures become more restrictive over time, and the maximum availability
will decrease by $2.5 million per quarter beginning December 31, 1998,
unless certain conditions are met.
The Indenture governing the Senior Notes contains provisions which, among
other things, (i) limit the Company's and its subsidiaries' ability to declare
or pay dividends or other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal or, in certain
cases, the ESOP), (ii) limit the purchase, redemption or retirement of capital
stock and (iii) limit the incurrence of certain additional debt.
The Senior Notes mature in November 2005. As of March 31, 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 Operating Activities. Cash provided by operating activities
was $12.7 million for the six months ended March 31, 1998 compared to cash
provided of $12.5 million for the same period last year.
Cash Flow from Investing Activities. Cash used in investing activities was
$5.4 million for the six months ended March 31, 1998 compared to cash used
of $8.9 million for the same period last year. During the current period, the
Company used $7.3 million on capital expenditures, primarily vehicles,
containers and other equipment compared to $7.9 million for building
improvements, containers and other equipment in the same period last year.
During the current period, the Company received $1.5 million from the sale of
real estate in Kansas City. During the period ended March 31, 1997, the
Company also used $2.6 million to purchase substantially all of the assets of a
solid waste collection company in Butte County and generated $1.4 million
from the sale of marketable securities.
Cash Flow from Financing Activities. Cash used in financing activities was
$0.6 million for the six months ended March 31, 1998 compared to $0.7
million for the six months ended March 31, 1997. Activity in both periods
consisted of scheduled note and capital lease payments.
Certain Other Cash Requirements. The Company is in discussions with the
City of San Francisco regarding plans for the construction or modification 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 anticipate
continued review of the nature, scope and financing of this project. The
Company cannot predict the timing of a resolution of these matters and is
therefore unable to project accurately the timing of initiation of any required
construction. Over the term of the Senior Notes, the Company may need to
invest substantial capital to acquire or construct waste processing facilities,
household hazardous waste facilities, maintenance and administrative
complexes, and equipment.* The Company intends to seek continued rate
recovery for amounts expended on any projects and may seek to finance such
capital expenditures through additional secured borrowings, including up to
$30.0 million of borrowing for certain "Designated Capital Expenditures" (as
defined in the Indenture).*
<PAGE>
The Company has substantially completed a major portion of the
implementation of an established third party package of integrated financial
applications to replace most of its existing management information systems.
The implementation is expected to be completed by February 1999. As of March
31, 1998, the Company has spent $2.8 million in external costs and expects
to spend an additional $2.0 million in external costs through the completion
of the project. The new applications are Year 2000 compliant. The Company has
a plan to address the Year 2000 compliance issue for the remaining functions
which are not currently Year 2000 compliant. Although the Company believes it
will not have material Year 2000 Conversion issues, its future operations are
dependent upon the ability of its vendors and suppliers to successfully address
the Year 2000 Conversion issues. There can be no assurance that the computer
systems of other companies upon which the Company's own computer system relies
or upon which its business is dependent, will be timely converted, or that
failure of another company to convert will not adversely affect the Company.
Environmental Regulations
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the
municipalities the Company serves and operators of non-owned landfills used
by the Company. The Company believes that this regulation will continue in
the future.*
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and post-
closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to the leachate and groundwater management
and remediation. There are many unknowns and uncertainties which may
affect the accuracy of the Company's estimates, including potential changes to
and interpretations of regulatory requirements and 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, Prevailing Economic Conditions and Certain Regulatory Issues
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 may also
affect 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 to achieve.*
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 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.*
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 filed a petition for order compelling arbitration and a motion for
order compelling arbitration in U.S. District Court for the Northern District of
California against Local 350 to arbitrate this dispute under the terms of the
collective bargaining agreement between the parties. The Company's motion
is set to be heard by the court on May 29, 1998.
<PAGE>
Under 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 the ABO
would increase by an additional $8.4 million, which would result in a charge
to the minimum pension liability of $4.2 million. In addition, if Local 350
were to prevail, the Company estimates that its annual accruals for employee
benefits would increase by approximately $3.0 million for additional pension
and medical costs. The above estimates are based on a discount rate of 7.5%.
The discount rate applied under GAAP fluctuates with market conditions. A
change in the discount rate can result in significant adjustments to the ABO.
Although the ultimate outcome of such proceeding cannot be determined at
this time and the results of these legal proceedings cannot be predicted with
certainty, the Company, after consultation with outside labor counsel, believes
it should prevail and therefore the resolution of this matter will not have a
material adverse effect on the financial condition or results of operations of
the Company. However, if the Company does not prevail, there could be a
material adverse impact on the financial condition and results of operations of
the Company. Arbitration could conclude that there has been no meeting of
the minds on this provision of the contract and the provision could have to be
renegotiated. If the matter is not satisfactorily renegotiated, the Company
could be subject to another work stoppage.*
The Company's current 5 year contract with Local 350, effective January 1,
1997, provides for an aggregate 13.4% increase over the term of the
agreement. The Company generally intends to seek rate recovery for future
labor cost increases but to date has not yet sought rate recovery other than the
first year's cost which was included in the rate effective March 1, 1997 in San
Francisco. There can be no assurance that the Company will pursue, or
succeed in obtaining, timely rate increases sufficient to cover all costs or
sufficient to maintain profit levels at historical levels.*
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* The
Company is unable to determine the significance a California economic
downturn would have on its operations.
Seasonality
The Company's revenues tend to be lower during winter due to decreased
volume at the Company's transfer stations, waste collection, and landfill
operations than during spring and summer when higher volumes of certain
types of waste, such as yard clippings and construction and demolition debris
are generated.* In addition, project management revenues tend to be lower
during winter as a result of unfavorable weather conditions for construction
activities. 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.
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 new standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
San Francisco Union Arbitration.
See discussion relating to the Company's request for arbitration with Local
350 in San Francisco which appears in note 5 to the Consolidated Financial
Statements in Part 1 hereof and incorporated herein by reference.
DIR Determination Letter.
See discussion relating to the determination letter from the DIR received by
Company which appears in note 5 to the Consolidated Financial Statements in
Part 1 hereof and incorporated herein by reference.
Placer Ranch Litigation.
On April 10, 1998, Placer Ranch Partners, Inc. v. Western Placer
Management Authority, Western Placer Recovery Co. and Norcal Waste
Systems, Inc. was settled as between the plaintiffs and the Company and its
subsidiary, Western Placer Recovery Company ("WPRC"), for a mutual
waiver of costs. The suit was dismissed with prejudice as to the Company and
WPRC.
Also see the Company's Annual Report for the year ended September 30, 1997.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On March 3, 1998, the Administrative Committee of the Company's
Employee Stock Ownership Plan (the "ESOP"), acting on behalf of the ESOP
as the Company's sole shareholder, reelected Michael J. Sangiacomo, John B.
Molinari, H. Welton Flynn and Gale R. Kaufman, the current members of the
Company's Board of Directors, by written consent. As of March 3, 1998,
there were 24,134,973 shares of common stock outstanding, all of which were
the subject of the written consent.
Item 5. Other Information
On March 31, 1998, the Company transfered the operation of the four
landfills it had operated in San Diego County since March 1995 to the new
owner. The Company believes the transfer will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flow.*
Item 6. Exhibits and Certain Reports
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
NORCAL WASTE SYSTEMS, INC.
(Company)
/s/ Mark R. Lomele
Mark R. Lomele
Senior Vice President and
Chief Financial Officer
Dated: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED FINANCIAL STATEMENTS OF NORCAL WASTE SYSTEMS, INC., FOR THE
SIX MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
(IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 38,963
<SECURITIES> 5,552
<RECEIVABLES> 41,175
<ALLOWANCES> 2,022
<INVENTORY> 2,439
<CURRENT-ASSETS> 90,284
<PP&E> 245,261
<DEPRECIATION> 104,375
<TOTAL-ASSETS> 348,895
<CURRENT-LIABILITIES> 62,616
<BONDS> 174,078
0
0
<COMMON> 241
<OTHER-SE> 31,136
<TOTAL-LIABILITY-AND-EQUITY> 348,895
<SALES> 0
<TOTAL-REVENUES> 165,339
<CGS> 0
<TOTAL-COSTS> 152,614
<OTHER-EXPENSES> (2,338)
<LOSS-PROVISION> 403
<INTEREST-EXPENSE> 13,070
<INCOME-PRETAX> 1,590
<INCOME-TAX> 0
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