This Quarterly Report is filed by Norcal Waste Systems, Inc.
pursuant to certain contractual requirements and not
pursuant to the Securities Exchange Act of 1934
and the rules and regulations thereunder.
QUARTERLY REPORT
For the quarterly period ended March 31, 1999
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 May 10, 1999,
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,
1999 1998
------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash $36,057 $39,752
Marketable securities 5,552 5,552
Trust accounts, current portion 1,940 1,940
Accounts receivable, less allowance for doubtful
accounts of $2,404 at March 31, 1999 and $2,202
at September 30, 1998 42,336 49,789
Parts and supplies 2,285 2,200
Prepaid expenses 3,338 2,640
--------- ---------
Total current assets 91,508 101,873
--------- ---------
Property and equipment:
Land 46,393 46,103
Landfills 29,757 29,419
Buildings and improvements 50,660 47,422
Vehicles and equipment 143,090 130,190
Construction in progress 4,735 6,291
--------- ---------
Total property and equipment 274,635 259,425
Less accumulated depreciation and amortization 119,059 111,791
--------- ---------
Property and equipment, net 155,576 147,634
--------- ---------
Franchises, permits and other intangibles, net 81,276 73,016
Trust accounts 35,392 34,250
Deferred financing costs, net 6,249 6,920
Other assets 7,001 8,168
--------- ---------
Total other assets 129,918 122,354
--------- ---------
Total assets $377,002 $371,861
========= =========
<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,
1999 1998
------------- -------------
Liabilities and Stockholder's Equity
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt $431 $337
Capital lease obligations 872 1,114
Accounts payable 6,786 7,984
Accrued expenses 53,423 57,873
Income taxes payable 66 90
Deferred revenues 3,300 2,703
Other accrued liabilities 3,575 3,731
--------- ---------
Total current liabilities 68,453 73,832
--------- ---------
Long-term debt 175,949 174,080
Obligations under capital leases 589 910
Deferred income taxes 5,136 5,259
Landfill closure liability 26,140 25,938
Postretirement medical benefits 33,932 33,601
Other liabilities 15,789 14,244
--------- ---------
Total liabilities 325,988 327,864
--------- ---------
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 (90,962) (96,928)
Accumulated other comprehensive deficit (2,286) (2,115)
--------- ---------
73,371 67,576
Less net scheduled contribution to the ESOP (22,357) (23,579)
--------- ---------
Total stockholder's equity 51,014 43,997
--------- ---------
Total liabilities and stockholder's equity $377,002 $371,861
========= =========
<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,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $82,791 $76,885 $166,117 $165,339
Cost of operations:
Operating expenses 59,256 54,745 118,265 118,782
Depreciation and amortization 5,225 4,953 10,307 9,935
ESOP compensation expense 615 3,733 2,449 7,288
General and administrative 9,727 8,886 18,502 17,012
--------- --------- --------- ---------
Total cost of operations 74,823 72,317 149,523 153,017
Operating income 7,968 4,568 16,594 12,322
Interest expense (6,487) (6,618) (13,001) (13,070)
Interest income 760 873 1,650 1,686
Other income, net 675 472 723 652
--------- --------- --------- ---------
Income (loss) before income taxes 2,916 (705) 5,966 1,590
Income tax expense - - - -
--------- --------- --------- ---------
Net income (loss) $2,916 $(705) $5,966 $1,590
========= ========= ========= =========
<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, 1999
(in thousands)
(unaudited)
<CAPTION>
Accumulated Net
Additional other scheduled
Common Stock paid-in Accumulated comprehensive contribution
Shares Amount capital deficit deficit to the ESOP Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1998 24,135 $241 $166,378 ($96,928) ($2,115) ($23,579) $43,997
Net income - - - 5,966 - - 5,966
Other comprehensive loss,
net of tax - - - - (171) - (171)
Contributions to reduce
ESOP debt - - - - - 1,222 1,222
-------- ------- --------- ---------- -------- --------- --------
Balances, March 31, 1999 24,135 $241 $166,378 ($90,962) (2,286) ($22,357) $51,014
======== ======= ========= ========== ======== ========= ========
<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,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $5,966 $1,590
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 10,307 9,935
ESOP compensation expense 2,096 7,155
Senior notes interest and amortized financing costs 881 996
Other (756) 4,584
Changes in assets and liabilities, net of
effects of acquisitions and dispositions 2,486 (11,535)
--------- ---------
Net cash provided by operating activities 20,980 12,725
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (14,787) (7,323)
Payment for businesses acquired (9,863) -
Proceeds from dispositions 752 1,785
Other 110 92
--------- ---------
Net cash used in investing activities (23,788) (5,446)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt and capitalized leases (1,036) (646)
Proceeds from other debt 149 -
--------- ---------
Net cash used in financing activities (887) (646)
--------- ---------
Net (decrease) increase in cash and cash equivalents (3,695) 6,633
Cash and cash equivalents, beginning balance 39,752 32,330
--------- ---------
Cash and cash equivalents, ending balance $36,057 $38,963
========= =========
Supplemental cash flow information:
Interest $12,338 $12,182
========= =========
Income taxes $29 $500
========= =========
Schedule of noncash investing and financing activities:
Debt issued and liabilities assumed in acquisitions $2,945 -
========= =========
<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, 1998. 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, 1999 and September 30, 1998 is
summarized as follows:
(in thousands)
<CAPTION>
March 31 September 30
------------ ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest at 13.5% $171,183 $171,004
Note payable for business acquired due in monthly
installments through 2016, interest imputed at 8.75% 1,608 1,622
Convertible notes payable for business acquired, due
in eight quarterly installments beginning
December 2001, interest imputed at 8.5% 1,814 -
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5% 705 734
Other notes 1,070 1,057
---------- ----------
Total debt 176,380 174,417
Less current portion 431 337
---------- ----------
Long-term debt $175,949 $174,080
========== ==========
</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. 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, currently
provides for a revolving credit facility in an amount of up to $95.0 million
(depending upon certain financial ratios), up to $25.0 million of which may
be used for letters of credit. At March 31, 1999, the Company had utilized
$1.6 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 $61.6 million along with $23.4 million which may be utilized for
additional 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 become more restrictive over time,
and maximum availability decreases by $2.5 million per quarter. The first
reduction occurred December 31, 1998 and reductions continue each quarter
until expiration of the Credit Agreement.
(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 all
wholly owned subsidiaries of Norcal. The guarantees of the guarantors are
full, unconditional and joint and several. Separate financial statements of
each guarantor have not been presented since management has determined
such separate financial statements are not material to investors.
(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.
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 has been rescheduled to begin on December 13, 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 its annual accurals 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.
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
arbitrator could find in favor of the Company or Local 350, or 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.* Such events could have a material adverse effect on the financial
condition or results of operations of the Company.
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 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
therefore subject to prevailing wage laws. However, the Director rejected
the automatic adoption of general construction industry prevailing 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 Commissioner concluded its hearing of the matter in April 1999, subject to
the submission of certain additional evidence. The Company cannot predict the
outcome of this matter by the Commissioner's rate determination process,
although the Company expects an unfavorable decision by the hearing officer.
If the Company is unable to satisfactorily resolve this matter with the
Commissioner, the Company would likely appeal the decision to the Director
and/or pursue litigation. If the Compaany is ultimately unsuccessful in its
efforts to achieve a favorable outcome, it could have a material adverse
impact on the results of operations of the Company depending in part upon the
results of operations in a given period.
(6) Year 2000 Compliance
The Company has underway a project to review and modify, as necessary, its
computer applications, hardware and other equipment to make them Year 2000
compliant. The Company has also initiated formal communications with suppliers,
contractors, financial institutions and other third parties having a substantial
relationship to its business to determine the extent to which the Company may be
vulnerable to such third parties' failures to achieve Year 2000 compliance.
Failure to achieve Year 2000 compliance by the Company, its suppliers,
contractors, financial institutions and other third parties with which
the Company has material relationships could negatively affect the Company's
ability to conduct business for an extended period. There can be no
assurance that all information technology systems and components will be
fully Year 2000 compliant; in addition, other companies on which the
Company's systems and operations rely may or may not be fully compliant on
a timely basis, and any such failure could have a material adverse impact
on the financial condition, cash flow and results of operations of the
Company.
(7) Income Taxes
The Company has elected to become taxable as an S Corporation effective
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 income of an S Corporation (including its divisions) is not
subject to federal income taxation at the corporate level, but, instead,
the income of the S Corporation is passed through and reported directly
on the tax returns of the S Corporation shareholders. However, because the
sole shareholder of the Company, the Norcal Waste Systems, Inc. Employee
Stock Ownership Plan and Trust (the "ESOP"), is a tax-exempt employee
stock ownership plan, it also will not be subject to tax on its allocable
share of the Company's taxable income. As a result of the S Corporation
election and the evaluation of potential built-in gains, the Company had
no changes to its total deferred tax liability during the six months ended
March 31, 1999 and there was no income tax expense for the three and six months
ended March 31, 1999.
<PAGE>
(8) Comprehensive Income
Effective October 1, 1998, the Company has adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting of
comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting stockholder's equity that, under generally accepted accounting
principles, are excluded from net income. The components of comprehensive
income for the interim periods presented is as follows:
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1999 March 31, 1998
----------------- -----------------
<S> <C> <C>
Net Income $5,966 $1,590
Other comprehensive income (loss):
Unrealized gains (losses) on
trust accounts, net of tax (171) 56
---------- --------
Total comprehensive income $5,795 $1,646
========== ========
</TABLE>
(9) Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
<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 maintain rates sufficient to cover costs,
inability to obtain timely rate increases, inability to reduce costs related
to loss of revenues, 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,
consequences of the Company's S Corporation election or changes in laws
affecting the Company's S Corporation status. 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.
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 Company
used the proceeds from this 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 which currently provides for a revolving credit
facility with a maximum availability of $95.0 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."
The following discussion pertains to the Company's operations for the three
months and six months ended March 31, 1999 and 1998 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, 1998
audited consolidated financial statements contained in the Company's Annual
Report for the fiscal year ended September 30, 1998.
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 14
landfills in California, four of which it owns, 10 of which are owned by local
governmental entities. The Company currently serves an estimated 460,000
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 operations. Also included are accruals for future 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. In recognition of the tax benefits
arising from the Company's S Corporation election as more fully described in
"Accounting and Other Matters" below, the Company and the ESOP recently agreed
to change the payment schedule for the intercompany loans, which will result in
lower contributions, and consequently lower ESOP compensation expense.
<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,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 77.9% 77.5% 78.0% 73.5%
Third party landfill management services 18.0% 17.3% 17.9% 21.5%
Recycled commodities sales 4.1% 5.2% 4.1% 5.0%
------- ------ ------ -------
Total revenues 100.0% 100.0% 100.0% 100.0%
------- ------ ------ -------
Cost of operations:
Operating expenses 71.6% 71.2% 71.2% 71.8%
Depreciation and amortization 6.3% 6.4% 6.2% 6.0%
ESOP compensation expense 0.7% 4.9% 1.5% 4.4%
General and administrative 11.8% 11.5% 11.1% 10.3%
------- ------ ------ -------
Total cost of operations 90.4% 94.0% 90.0% 92.5%
------- ------ ------ -------
Operating income 9.6% 6.0% 10.0% 7.5%
Interest expense (7.8)% (8.6)% (7.8)% (7.9)%
Interest income 0.9% 1.1% 1.0% 1.0%
Other income, net 0.8% 0.6% 0.4% 0.4%
------- ------ ------- -------
Income (loss) before income taxes 3.5% (0.9)% 3.6% 1.0%
Income tax expense 0.0% 0.0% 0.0% 0.0%
------- ------ ------- -------
Net income (loss) 3.5% (0.9)% 3.6% 1.0%
======= ====== ======= =======
<PAGE>
<CAPTION>
Period to Period Change
Three Months Ended Six Months Ended
March 31, March 31,
$ % $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 4,862 8.2% 8,125 6.7%
Third party landfill management services 1,615 12.1% (5,773) (16.3)%
Recycled commodities sales (571) (14.3)% (1,574) (18.9)%
------- ------ ------ -------
Total revenues 5,906 7.7% 778 0.5%
------- ------ ------ -------
Cost of operations:
Operating expenses 4,511 8.2% (517) (0.4)%
Depreciation and amortization 272 5.5% 372 3.7%
ESOP compensation expense (3,118) (83.5)% (4,839) (66.4)%
General and administrative 841 9.5% 1,490 8.8%
------- ------ ------- -------
Total cost of operations 2,506 3.5% (3,494) (2.3)%
------- ------ ------- -------
Operating income 3,400 74.4% 4,272 34.7%
Interest expense 131 (2.0)% 69 (0.5)%
Interest income (113) (12.9)% (36) (2.1)%
Other income, net 203 43.0% 71 10.9%
------- ------ ------- -------
Income before income taxes 3,621 513.6% 4,376 275.2%
Income tax expense - - - -
------- ------ ------- -------
Net income 3,621 513.6% 4,376 275.2%
======= ======= ======= =======
</TABLE>
Three months ended March 31, 1999 and 1998
Revenues. Revenues for the three months ended March 31, 1999 increased
$5.9 million (7.7%) to $82.8 million from $76.9 million for the three
months ended March 31, 1998. The increase in revenues was due to higher waste
collection and disposal revenues and third party landfill management services
revenues, partially offset by lower recycled commodity revenues. Waste
collection and disposal revenues increased $4.9 million, approximately $2.0
million was due to general volume increases, approximately $1.8 million was due
to operations acquired in Los Angeles in October and November 1998, and the
remainder was due to rate increases in several service areas. Third party
landfill management services revenues increased $1.6 million due to increased
project management revenues in San Bernardino County of $3.7 million compared
to the prior year, partially offset by reduced landfill operations in San
Diego and San Bernardino Counties of $1.5 million and $0.7 million,
respectively. Revenues were down in San Diego County as the Company ceased
operations of the San Diego County landfills on March 31, 1998, when the new
owner assumed operations and in San Bernardino County due to reduced volumes
from the loss of tonnage from the city of Ontario, who signed a long-term
disposal agreement with a third party landfill effective January 1, 1999.
Recycled commodities sales revenues decreased $0.6 million due to lower
commodity prices.
<PAGE>
Operating Expenses. Operating expenses for the three months ended March
31, 1999 increased $4.5 million (8.2%) to $59.3 million from $54.8
million for the three months ended March 31, 1998. As a percentage of
revenues, operating expenses increased to 71.6% for the three months
ended March 31, 1999 from 71.2% for the three months ended March 31,
1998. Project and subcontractor related costs increased $2.2 million as a
result of increased activity in San Bernardino County. Payroll and
related costs increased $1.7 million due to scheduled union wage
increases and operations acquired in October and November 1998. Disposal
costs increased $1.2 million due primarily to operations acquired in
October and November 1998 and increased volumes delivered to third party
landfills. These increased costs were partially offset by lower recycling
purchasing costs of $0.6 million due to lower commodity prices.
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, 1999 decreased $3.1 million
(83.5%) to $0.6 million from $3.7 million for the three months ended
March 31, 1998. The Company has accrued ESOP expense for the current
period based upon changes to the payment schedule that does not currently
include repayments of principal. In the prior year, ESOP compensation
expense included a scheduled principal payment as well as a prepayment of
additional principal.
General and Administrative. General and administrative expenses for the
three months ended March 31, 1999 increased $0.8 million (9.5%) to $9.7
million from $8.9 million for the three months ended March 31, 1998. As a
percentage of revenues, general and administrative expenses increased to
11.8% for the three months ended March 31, 1999 from 11.5% for the three
months ended March 31, 1998. The increased costs were primarily due to an
accrual for the settlement cost of a legal claim and wage increases.
Operating Income. Operating income increased $3.4 million (74.4%) to $8.0
million for the three months ended March 31, 1999 from $4.6 million for
the three months ended March 31, 1998. As a percentage of revenues,
operating income increased to 9.6% for the three months ended March 31,
1999 from 6.0% for the three months ended March 31, 1998. The primary
cause of the increase in operating income for the three months ended
March 31, 1999 was the lower ESOP compensation expense described above.
Income Tax Expense. There was no income tax expense for the three months
ended March 31, 1999 or 1998. The Company experienced an effective rate
of zero for the three months ended March 31, 1999 as a result of the
Company's S Corporation election, effective October 1, 1998 and
anticipated results of operations from the Company's four subsidiaries
which did not elect to become divisions of the S Corporation. The Company
experienced an effective rate of zero for the three months ended March
31, 1998 as a result of realizing certain of its deferred tax assets for
which a valuation allowance had been previously established.
Net Income. Net income increased $3.6 million to $2.9 million for the
three months ended March 31, 1999 from a loss of $0.7 million for the
three months ended March 31, 1998. Net income for the three months ended
March 31, 1999 was due to higher operating income described above.
<PAGE>
Six months ended March 31, 1999 and 1998
Revenues. Revenues for the six months ended March 31, 1999 increased $0.8
million (0.5%) to $166.1 million from $165.3 million for the six months
ended March 31, 1998. The increase in revenues was due to higher waste
collection and disposal revenues, partially offset by lower third party
landfill management services revenues and recycled commodity revenues.
Waste collection and disposal revenues increased $8.1 million,
approximately $3.6 million was due to general volume increases,
approximately $3.0 million was due to operations acquired in Los Angeles
in October and November 1998, and the remainder was due to rate increases
in several service areas. Third party landfill management services
revenues decreased $5.8 million due to decreased project management
revenues in San Bernardino County of $2.6 million compared to the prior
year, and by reduced landfill operations in San Diego and San Bernardino
Counties of $2.6 million and $0.7 million, respectively. The Company
ceased operations of the San Diego County landfills on March 31, 1998,
when the new owner assumed operations. The Company has experienced
reduced volumes in San Bernardino County compared to the prior year from
the loss of tonnage from the city of Ontario, who signed a long-term
disposal agreement with a third party landfill effective January 1, 1999.
Recycled commodities sales revenues decreased $1.6 million due to lower
commodity prices.
Operating Expenses. Operating expenses for the six months ended March 31,
1999 decreased $0.5 million (0.4%) to $118.3 million from $118.8 million
for the six months ended March 31, 1998. As a percentage of revenues,
operating expenses decreased to 71.2% for the six months ended March 31,
1999 from 71.8% for the six months ended March 31, 1998. Project and
subcontractor related costs decreased $2.2 million as a result of
decreased activity in San Bernardino County. Recycling purchasing costs
decreased $1.0 million due to lower commodity prices. Landfill expenses
decreased $0.9 million primarily due to the completion of corrective
action projects and lower regulatory costs due to reduced volumes at one
of the Company's landfills. Disposal costs increased $1.9 million due
primarily to operations acquired in October and November 1998 and
increased volumes delivered to third party landfills. Payroll and related
costs increased $1.8 million due to scheduled union wage increases and
operations acquired in October and November 1998
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 six months ended March 31, 1999 decreased $4.8 million
(66.4%) to $2.5 million from $7.3 million for the six months ended March
31, 1998. The Company has accrued ESOP expense for the current period
based upon changes to the payment schedule that does not currently
include repayments of principal. In the prior year, ESOP compensation
expense included a scheduled principal payment as well as a prepayment of
additional principal.
General and Administrative. General and administrative expenses for the
six months ended March 31, 1999 increased $1.5 million (8.8%) to $18.5
million from $17.0 million for the six months ended March 31, 1998. As a
percentage of revenues, general and administrative expenses increased to
11.1% for the six months ended March 31, 1999 from 10.3% for the six
months ended March 31, 1998. The increased costs were primarily due to
wage increases and an accrual for the settlement cost of a legal claim.
Operating Income. Operating income increased $4.3 million (34.7%) to
$16.6 million for the six months ended March 31, 1999 from $12.3 million
for the six months ended March 31, 1998. As a percentage of revenues,
operating income increased to 10.0% for the six months ended March 31,
1999 from 7.5% for the six months ended March 31, 1998. The primary cause
of the increase in operating income for the six months ended March 31,
1999 was the lower ESOP compensation expense and operating expenses,
partially offset by higher general and administrative expenses described
above.
<PAGE>
Income Tax Expense. There was no income tax expense for the six months
ended March 31, 1999 or 1998. The Company experienced an effective rate
of zero for the six months ended March 31, 1999 as a result of the
Company's S Corporation election, effective October 1, 1998 and
anticipated results of operations from the Company's four subsidiaries
which did not elect to become divisions of the S Corporation. The Company
experienced an effective rate of zero for the six months ended March 31,
1998 as a result of realizing certain of its deferred tax assets for
which a valuation allowance had been previously established.
Net Income. Net income increased $4.4 million to $6.0 million for the
six months ended March 31, 1999 from $1.6 million for the six months
ended March 31, 1998. Net income for the six months ended March 31, 1999
was due to higher operating income described above.
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 $23.1 million at March
31, 1999 compared to $28.0 million at September 30, 1998. The decrease in
working capital is due to a reduction in cash balances during the six
months ended March 31, 1999. See "Cash Flow from Investing Activities".
As part of the Refinancing Transaction the Company entered into the
Credit Agreement that currently provides for up to $95.0 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, 1999, the Company had utilized $1.6
million of the credit facility provided by the Credit Agreement for
letters of credit and had availability under the Credit Agreement of
approximately $61.6 million for borrowings unrelated to letters of
credit, with an additional $23.4 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 until expiration
of the Credit Agreement. The first reduction occurred December 31, 1998
and reductions continue each quarter until expiration of the Credit
Agreement.
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, 1999, 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 $21.0 million for the six months ended March 31, 1999
compared to $12.7 million for the same period last year. The large
decrease in cash in the prior year was primarily due to an increase in
accounts receivable as a percentage of sales, payments of accrued
expenses and accelerated payments of accounts payable at the end of the
calendar year.
<PAGE>
Cash Flow from Investing Activities. Cash used in investing activities
was $23.8 million for the six months ended March 31, 1999 compared to
cash used of $5.4 million for the same period last year. During the six
months ended March 31, 1999, the Company used $14.8 million on capital
expenditures, primarily vehicles, construction projects, containers and
other equipment and also used $9.9 million to purchase the stock of one
solid waste collection company and substantially all of the assets of two
other solid waste collection companies in Los Angeles. During the period
ended March 31, 1998, the Company used $7.3 million on capital
expenditures for vehicles, containers, other equipment and computer
software and received $1.5 million from the sale of real estate in Kansas
City.
Cash Flow from Financing Activities. Cash used in financing activities
was $0.9 million for the six months ended March 31, 1998 compared to $0.6
million for the six months ended March 31, 1998. Activity in both periods
consisted primarily 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 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 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).*
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 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 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.*
<PAGE>
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 to arbitrate this
dispute under the terms of the collective bargaining agreement between
the parties. On May 29, 1998, the Court ruled in the Company's favor and
directed the parties to proceed with arbitration. Arbitration has been
rescheduled to begin on December 13, 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.
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
arbitrator could find in favor of the Company or Local 350, or 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.* Such events could have a material adverse effect on the financial
condition or results of operations of the Company.
Included in the five-year contract referred to above, is an aggregate
13.4% wage increase. The first year cost of the contract was included in
the rate effective March 1, 1997 in San Francisco. The Company generally
intends to seek rate recovery of scheduled future cost increases through
the rate setting process as appropriate.* 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.
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 take legal action against Humboldt County to enforce its
rights to this sum under the Humboldt Agreement. Although the outcome of
legal action is inherently uncertain, the Company believes that it is
likely to recover a substantial majority of the amounts for which it has
requested reimbursement.
The Company has experienced lower revenue as a result of the loss of
tonnage from the city of Ontario in San Bernardino County, who signed a
long-term disposal agreement with a third party landfill effective
January 1, 1999. This tonnage represented approximately 15% of the total
tonnage received at the San Bernardino sites during the Company's fiscal
year ended September 30, 1998. The impact to operating income will be a
function of the extent to which the revenue reduction can be mitigated
with corresponding decreases in operating costs as well as adjustments to
the compensation rate per ton. There can be no assurance that the Company
will be successful in reducing the impacts of the reduction in volume.*
<PAGE>
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.*
A significant economic downturn in California could have an adverse
impact on the Company's results of 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 (third and fourth fiscal
quarters) when higher volumes of certain types of waste, such as
construction and demolition debris are generated.* In addition, project
management revenues tend to be lower during winter as a result of
unfavorable construction conditions. Unusual changes in weather patterns
can also affect the operating results on a quarter to quarter basis.
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
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.
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. The Company has completed the
necessary code renovation and has begun 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, financial institutions 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 continue 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.
To date, the Company has spent approximately $200,000 in effecting Year
2000 compliance. The Company anticipates that its remaining costs in
effecting such compliance will not exceed $300,000, the majority of which
costs are attributable to the internal costs of employee and management
time.
<PAGE>
Factors, many of which are outside the control of the Company, that could
effect the Company's ability to be Year 2000 compliant by the end of 1999
include: the failure of suppliers, contractors, financial institutions,
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
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.
Accounting and Other Matters
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 the end of fiscal 1999. The
Company is currently evaluating the disclosures required under this new
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 the end of 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 has elected to become taxable as an S corporation effective
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 income of an S Corporation (including its
divisions) is not taxable at the corporate level, but, instead, the
income of the S Corporation is passed through and reported directly on
the tax returns of the S Corporation shareholders. However, because the
sole shareholder of the Company, the Norcal Waste Systems, Inc. Employee
Stock Ownership Plan and Trust (the "ESOP"), is a tax-exempt employee
stock ownership plan, it also 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) which is recognized
within 10 years from the date of the election 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 in 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
estate and other assets. In addition, for subsidiaries of the Company
that have not elected to become Qualified Subchapter S Corporation
Subsidiaries, deferred taxes are maintained for existing tax liabilities.
As a result of the S Corporation election and the evaluation of potential
<PAGE>
built-in gains, the Company had no changes to its total deferred tax
liability during the six month period and there was no income tax expense
for the six months ended March 31, 1999.
However, it should be noted that on February 1, 1999, as part of its
fiscal year 2000 federal budget plan, the Clinton Administration
introduced a proposal which would subject employee stock ownership plans,
such as the ESOP, to current taxation on their allocable share of an S
Corporation's taxable income (subject to the availability of deductions
for certain distributions by the ESOP to ESOP participants). This
proposal, if enacted in its current form, would be effective no sooner
than the fiscal year beginning October 1, 1999 for the Company and the
ESOP. There is no way to predict whether any such proposal will
ultimately be enacted into law, or when such a change in law might be
effective. If the legislation is enacted in its current form, the Company
could be subject to taxation at historical rates.
PART II - OTHER INFORMATION
Item 1. 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 entitled
Abraham, et al. v. Norcal Waste Systems, Inc., et al., No. C94-3076 CAL,
and was filed 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 plaintiffs' claims against
one of those financial institutions, as to which the litigation
proceeded. 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 an
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. In January 1999, the court
granted summary judgment in favor of the financial institution on all
remaining claims of plaintiffs against the financial institution. On March
12, 1999, the financial institution filed a new declaratory relief action
in the same court against the ESOP alleging that the ESOP must indemnify the
financial institution for its litigation expenses in the above referenced
matter following the Settlement. Norcal has not been named a party in this
new action. Norcal and the ESOP believe that this new action and any further
attempts by the financial institution to bring claims against Norcal and/or
the ESOP related to the Settlement or the indemnity (following any appeal
from the court's rulings or otherwise) have no merit. In any case it is
unlikely that any liability on such claims would materially exceed the
amount of the financial institution's legal fees and expenses following the
Settlement; such legal fees and expenses, however, could be substantial.
The ESOP intends to defend vigorously against the claims alleged in the new
matter.
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.
Also see the Company's Annual Report for the year ended September 30,
1998.
<PAGE>
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 25, 1999, 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 H. Welton Flynn, Gale R.
Kaufman, John B. Molinari and Michael J. Sangiacomo, the current members
of the Company's Board of Directors, by written consent. As of February
25, 1999, there were 24,134,973 shares of common stock outstanding, all
of which were the subject of the written consent
Item 5. Other Information
None
Item 6. Exhibits and Certain Reports
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
NORCAL WASTE SYSTEMS, INC.
(Company)
/s/ Mark R. Lomele
Mark R. Lomele
Senior Vice President and
Chief Financial Officer
Dated: May 13, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED FINANCIAL STATEMENTS OF NORCAL WASTE SYSTEMS, INC., FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
(IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 36,057
<SECURITIES> 5,552
<RECEIVABLES> 44,740
<ALLOWANCES> 2,404
<INVENTORY> 2,285
<CURRENT-ASSETS> 91,508
<PP&E> 274,635
<DEPRECIATION> 119,059
<TOTAL-ASSETS> 377,002
<CURRENT-LIABILITIES> 68,453
<BONDS> 176,538
0
0
<COMMON> 241
<OTHER-SE> 50,773
<TOTAL-LIABILITY-AND-EQUITY> 377,002
<SALES> 0
<TOTAL-REVENUES> 166,117
<CGS> 0
<TOTAL-COSTS> 148,988
<OTHER-EXPENSES> (2,373)
<LOSS-PROVISION> 535
<INTEREST-EXPENSE> 13,001
<INCOME-PRETAX> 5,966
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,966
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
