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 June 30, 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.)
160 Pacific Avenue, Suite 200
San Francisco, California 94111
- --------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (415) 875-1000
----------------
Former Address: Five Thomas Mellon Circle, Suite 304, San Francisco, CA 94134
Date of Address Change: May 17, 1999
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 August 9, 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>
June 30, September 30,
1999 1998
------------- -------------
Assets
<S> <C> <C>
Current assets:
Cash $28,903 $39,752
Marketable securities 5,552 5,552
Trust accounts, current portion 1,940 1,940
Accounts receivable, less allowance for doubtful
accounts of $2,343 at June 30, 1999 and $2,202
at September 30, 1998 43,736 49,789
Parts and supplies 2,350 2,200
Prepaid expenses 2,715 2,640
--------- ---------
Total current assets 85,196 101,873
--------- ---------
Property and equipment:
Land 46,376 46,103
Landfills 29,749 29,419
Buildings and improvements 50,613 47,422
Vehicles and equipment 149,153 130,190
Construction in progress 8,453 6,291
--------- ---------
Total property and equipment 284,344 259,425
Less accumulated depreciation and amortization 122,413 111,791
--------- ---------
Property and equipment, net 161,931 147,634
--------- ---------
Franchises, permits and other intangibles, net 80,282 73,016
Trust accounts 35,935 34,250
Deferred financing costs, net 5,914 6,920
Other assets 6,740 8,168
--------- ---------
Total other assets 128,871 122,354
--------- ---------
Total assets $375,998 $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>
June 30, September 30,
1999 1998
------------- -------------
Liabilities and Stockholder's Equity
<S> <C> <C>
Current liabilities:
Current portion:
Long-term debt $370 $337
Capital lease obligations 715 1,114
Accounts payable 5,740 7,984
Accrued expenses 50,119 57,873
Income taxes payable 1,371 90
Deferred revenues 3,209 2,703
Other accrued liabilities 3,569 3,731
--------- ---------
Total current liabilities 65,093 73,832
--------- ---------
Long-term debt 175,931 174,080
Obligations under capital leases 452 910
Deferred income taxes 5,127 5,259
Landfill closure liability 26,436 25,938
Postretirement medical benefits 34,097 33,601
Other liabilities 14,280 14,244
--------- ---------
Total liabilities 321,416 327,864
--------- ---------
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 (87,179) (96,928)
Accumulated other comprehensive deficit (2,501) (2,115)
--------- ---------
76,939 67,576
Less net scheduled contribution to the ESOP (22,357) (23,579)
--------- ---------
Total stockholder's equity 54,582 43,997
--------- ---------
Total liabilities and stockholder's equity $375,998 $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 Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $87,173 $80,653 $253,290 $245,992
Cost of operations:
Operating expenses 61,928 55,267 180,120 174,051
Depreciation and amortization 5,508 5,067 15,815 15,002
ESOP compensation expense 442 3,596 2,891 10,885
General and administrative 9,849 8,751 28,424 25,761
--------- --------- --------- ---------
Total cost of operations 77,727 72,681 227,250 225,699
Operating income 9,446 7,972 26,040 20,293
Interest expense (6,453) (6,594) (19,454) (19,665)
Interest income 784 972 2,434 2,658
Other income, net 205 3,346 928 3,999
--------- --------- --------- ---------
Income before income taxes 3,982 5,696 9,948 7,285
Income tax expense (199) - (199) -
--------- --------- --------- ---------
Net income $ 3,783 $ 5,696 $ 9,749 $ 7,285
========= ========= ========= =========
<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 nine months ended June 30, 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 - - - 9,749 - - 9,749
Other comprehensive loss,
net of tax - - - - (386) - (386)
Contributions to reduce
ESOP debt - - - - - 1,222 1,222
-------- ------- --------- ---------- --------- ---------- ---------
Balances, June 30, 1999 24,135 $ 241 $ 166,378 $ (87,179) $ (2,501) $ (22,357) $ 54,582
======== ======= ========= ========== ========= ========== =========
<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>
Nine Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,749 $ 7,285
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 15,815 15,002
ESOP compensation expense 673 10,744
Senior notes interest and amortized financing costs (4,618) (4,543)
Gains on dispositions (573) (3,725)
Other (2,308) 975
Changes in assets and liabilities, net of
effects of acquisitions and dispositions 6,340 (10,423)
--------- ---------
Net cash provided by operating activities 25,078 15,315
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (25,837) (11,738)
Payment for businesses acquired (9,866) -
Proceeds from dispositions 960 7,229
Other 188 142
--------- ---------
Net cash used in investing activities (34,555) (4,367)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt and capitalized leases (1,524) (1,020)
Proceeds from other debt 152 -
--------- ---------
Net cash used in financing activities (1,372) (1,020)
--------- ---------
Net (decrease) increase in cash and cash equivalents (10,849) 9,928
Cash and cash equivalents, beginning balance 39,752 32,330
--------- ---------
Cash and cash equivalents, ending balance $ 28,903 $ 42,258
========= =========
Supplemental cash flow information:
Interest $ 24,443 $ 24,328
========= =========
Income taxes $ 36 $ 1,746
========= =========
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 June 30, 1999 and September 30, 1998 is
summarized as follows:
(in thousands)
<CAPTION>
June 30 September 30
------------ ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest at 13.5% $171,277 $171,004
Note payable for business acquired due in monthly
installments through 2016, interest imputed at 8.75% 1,594 1,622
Convertible notes payable for business acquired, due
in eight quarterly installments beginning
December 2001, interest imputed at 8.5% 1,824 -
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5% 690 734
Other notes 916 1,057
---------- ----------
Total debt 176,301 174,417
Less current portion 370 337
---------- ----------
Long-term debt $175,931 $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
<PAGE>
(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.
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 $92.5 million
(depending upon certain financial ratios), up to $25.0 million of which may
be used for letters of credit. At June 30, 1999, the Company had utilized
$2.2 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 $45.9 million along with $22.8 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.
Representatives of the Company and Local 350 have entered into a Memorandum
of Understanding (the "Memorandum"), which provides that the parties will
suspend the arbitration and that when the Company files its next rate
application with the San Francisco Department of Public Works, which
application may be filed at such time as the Company reasonably determines is
appropriate, such application will include a request for sufficient money to
cover the funding of costs of the pension benefit increases requested by Local
350 (the "Local 350 Amounts"). The Memorandum further provides that, if the
Company's rate applications are granted and become effective, including the
Local 350 Amounts, the arbitration will be terminated with prejudice; but if
such request is denied, in whole or in part, for any reason and the Company
does not put into effect the pension increases requested by Local 350, either
party may reinstate the arbitration. The Company has not determined when it
will submit a rate application.
If either party was to reinstate the arbitration and if Local 350 was to
prevail in the arbitration discussed above or if the Company is successful
in obtaining funding for the Local 350 amounts, 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 the increased pension benefits
are provided, the Company's estimated incremental increase in its annual
accruals for employee benefits would be approximately $2.4 million for
pension and medical costs. The above estimates are based on a discount rate
of 6.75%. The discount rate applied under generally accepted accounting
principles ("GAAP") fluctuates with market conditions. A change in the
discount rate can result in significant adjustments to the ABO.
<PAGE>
The ultimate outcome of this matter cannot be determined at this time and the
results of the rate application or the arbitration proceeding, if reinstated
cannot be predicted with certainty. If the arbitration is reinstated, 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. The
Company has received an unfavorable determination from the hearing officer
and is now working with the Labor Commissioner of the Division of Labor
Standards Enforcement and the International Union of Operating Engineers
Local Union No. 12 ("Local 12") to resolve the matter. The Company and Local
12 have entered into a collective bargaining agreement covering certain of the
Company's landfill employees. Local 12 has agreed to register certain wage and
benefit rates with the State of California for the purpose of establishing
prevailing wage and benefit rates for such landfill employees. If the matter
is not favorably resolved, if Local 12 fails to accomplish the registration of
the wage and hour benefits or if the State of California does not accept and
publish such rates, the collective bargaining agreement will be null and void.
Moreover, if the matter is not favorably resolved, the Company would likely
appeal the decision to the Director of the DIR and/or pursue litigation.
If the Company 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.
(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.
<PAGE>
(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 nine months ended
June 30, 1999. During the three and nine months ended June 30, 1999, the
Company has recorded tax expense based primarily on the state tax rate of
1.5% for S Corporations.
(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 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net income $ 9,749 $ 7,285
Other comprehensive income (loss):
Unrealized gains (losses) on
trust accounts, net of tax (386) 24
------------ -----------
Total comprehensive income $ 9,363 $ 7,309
============ ===========
</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 $92.5 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 nine months ended June 30, 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 13
landfills in California, four of which it owns, nine of which are owned by
local governmental entities. The Company currently serves an estimated
465,000 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 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 Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 77.7% 78.1% 77.9% 75.0%
Third party landfill management services 18.4% 16.9% 18.1% 20.0%
Recycled commodities sales 3.9% 5.0% 4.0% 5.0%
------- ------ ------ -------
Total revenues 100.0% 100.0% 100.0% 100.0%
------- ------ ------ -------
Cost of operations:
Operating expenses 71.0% 68.5% 71.1% 70.8%
Depreciation and amortization 6.3% 6.3% 6.2% 6.1%
ESOP compensation expense 0.5% 4.5% 1.1% 4.4%
General and administrative 11.3% 10.8% 11.3% 10.4%
------- ------ ------ -------
Total cost of operations 89.1% 90.1% 89.7% 91.7%
------- ------ ------ -------
Operating income 10.9% 9.9% 10.3% 8.3%
Interest expense -7.4% -8.2% -7.7% -8.0%
Interest income 0.9% 1.2% 1.0% 1.1%
Other income, net 0.2% 4.2% 0.3% 1.6%
------- ------ ------- -------
Income before income taxes 4.6% 7.1% 3.9% 3.0%
Income tax expense -0.3% 0.0% -0.1% 0.0%
------- ------ ------- -------
Net income 4.3% 7.1% 3.8% 3.0%
======= ====== ======= =======
<PAGE>
<CAPTION>
Period to Period Change
Three Months Ended Nine Months Ended
June 30, June 30,
$ % $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 4,753 7.5% 12,878 7.0%
Third party landfill management services 2,462 18.1% -3,310 -6.7%
Recycled commodities sales -695 -17.1% -2,270 -18.3%
------- ------ ------ -------
Total revenues 6,520 8.1% 7,298 3.0%
------- ------ ------ -------
Cost of operations:
Operating expenses 6,661 12.1% 6,069 3.5%
Depreciation and amortization 441 8.7% 813 5.4%
ESOP compensation expense -3,154 -87.7% -7,994 -73.4%
General and administrative 1,098 12.5% 2,663 10.3%
------- ------ ------- -------
Total cost of operations 5,046 6.9% 1,551 0.7%
------- ------ ------- -------
Operating income 1,474 18.5% 5,747 28.3%
Interest expense 141 -2.1% 211 -1.1%
Interest income -188 -19.3% -224 -8.4%
Other income, net -3,141 -93.9% -3,071 -76.8%
------- ------ ------- -------
Income before income taxes -1,714 -30.1% 2,663 36.6%
Income tax expense -199 -100.0% -199 -100.0%
------- ------ ------- -------
Net income -1,913 -33.6% 2,464 33.8%
======= ======= ======= =======
</TABLE>
Three months ended June 30, 1999 and 1998
Revenues. Revenues for the three months ended June 30, 1999 increased
$6.5 million (8.1%) to $87.2 million from $80.7 million for the three
months ended June 30, 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 $4.8 million; approximately $2.0
million was due to operations acquired in Los Angeles in October and November
1998, approximately $1.8 million was due to general volume increases, and the
remainder was due to rate increases in several service areas. Third party
landfill management services revenues increased $2.5 million due to increased
project management revenues in San Bernardino County of $3.9 million compared
to the prior year, partially offset by reduced landfill operations revenues of
$1.5 million in San Bernardino County due to reduced volumes from the loss of
tonnage from the city of Ontario, which signed a long-term disposal agreement
with a third party landfill effective January 1, 1999. Recycled commodities
sales revenues decreased $0.7 million due to lower commodity prices.
Operating Expenses. Operating expenses for the three months ended June 30,
1999 increased $6.7 million (12.1%) to $61.9 million from $55.2
million for the three months ended June 30, 1998. As a percentage of
revenues, operating expenses increased to 71.0% for the three months
ended June 30, 1999 from 68.5% for the three months ended June 30,
1998. Project and subcontractor related costs increased $3.5 million as a
result of increased landfill and project management activity in San
Bernardino County. Disposal costs increased $1.6 million due primarily to
operations acquired in October and November 1998 and increased volumes
delivered to third party landfills. Payroll and related costs increased
$1.4 million due to scheduled union wage increases and operations acquired
in October and November 1998.
<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 June 30, 1999 decreased $3.2 million
(87.7%) to $0.4 million from $3.6 million for the three months ended
June 30, 1998. The Company has accrued ESOP expense for the current
period based upon a revised 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 June 30, 1999 increased $1.5 million (18.5%) to $9.4
million from $7.9 million for the three months ended June 30, 1998. As a
percentage of revenues, general and administrative expenses increased to
10.9% for the three months ended June 30, 1999 from 9.9% for the three
months ended June 30, 1998. The increased costs were primarily due to
higher professional services for legal matters and wage increases.
Operating Income. Operating income increased $1.5 million (18.5%) to $9.4
million for the three months ended June 30, 1999 from $7.9 million for
the three months ended June 30, 1998. As a percentage of revenues,
operating income increased to 10.9% for the three months ended June 30,
1999 from 9.9% for the three months ended June 30, 1998. The primary
cause of the increase in operating income for the three months ended
June 30, 1999 was the lower ESOP compensation expense described above,
partially offset by higher operating expenses for which corresponding rate
increases have not yet been obtained.
Other Income. Other income decreased $3.1 million (93.9%) to $0.2 million
for the three months ended June 30, 1999 from $3.3 million for the three
months ended June 30, 1998. Other income in 1998 included a $3.2 million
gain from the sale of real estate in San Francisco.
Income tax expense. The Company recorded income tax expense for the three
months ended June 30, 1999 based primarily on the state tax rate of 1.5%
for S Corporations 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 June 30, 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 decreased $1.9 million to $3.8 million for the
three months ended June 30, 1999 from $5.7 million for the three months
ended June 30, 1998. The primary causes of the decrease in net income
for the three months ended June 30, 1999 were the higher operating expenses
and lower other income described above, partially offset by lower ESOP
compensation expense.
Nine months ended June 30, 1999 and 1998
Revenues. Revenues for the nine months ended June 30, 1999 increased $7.3
million (3.0%) to $253.3 million from $246.0 million for the nine months
ended June 30, 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 $12.9 million;
approximately $5.4 million was due to general volume increases,
approximately $5.0 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 $3.3 million; primarily due to discontinued or reduced landfill
operations in San Diego and San Bernardino Counties of $2.6 million and
$2.3 million, respectively, partially offset by increased project management
revenues in San Bernardino County of $1.3 million compared to the prior
year. 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, which signed a
long-term disposal agreement with a third party landfill effective January
1, 1999. Recycled commodities sales revenues decreased $2.3 million due to
lower commodity prices.
<PAGE>
Operating Expenses. Operating expenses for the nine months ended June 30,
1999 increased $6.0 million (3.5%) to $180.1 million from $174.1 million
for the nine months ended June 30, 1998. As a percentage of revenues,
operating expenses increased to 71.1% for the nine months ended June 30,
1999 from 70.8% for the nine months ended June 30, 1998. Disposal costs
increased $3.5 million due primarily to operations acquired in October
and November 1998 and increased volumes delivered to third party landfills.
Payroll and related costs increased $3.2 million due to scheduled union wage
increases and operations acquired in October and November 1998. Worker's
compensation costs increased $1.0 million due to increased claims. Recycling
purchasing costs decreased $1.6 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 nine months ended June 30, 1999 decreased $8.0 million
(73.4%) to $2.9 million from $10.9 million for the nine months ended June
30, 1998. The Company has accrued ESOP expense for the current period
based upon a revised 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
nine months ended June 30, 1999 increased $2.7 million (10.3%) to $28.4
million from $25.7 million for the nine months ended June 30, 1998. As a
percentage of revenues, general and administrative expenses increased to
11.3% for the nine months ended June 30, 1999 from 10.4% for the nine
months ended June 30, 1998. The increased costs were primarily due to
wage increases and settlement costs of legal claims.
Operating Income. Operating income increased $5.7 million (28.3%) to
$26.0 million for the nine months ended June 30, 1999 from $20.3 million
for the nine months ended June 30, 1998. As a percentage of revenues,
operating income increased to 10.3% for the nine months ended June 30,
1999 from 8.3% for the nine months ended June 30, 1998. The primary cause
of the increase in operating income for the nine months ended June 30,
1999 was the lower ESOP compensation expense, partially offset by higher
operating expenses and general and administrative expenses described above.
Other Income. Other income decreased $3.1 million (76.8%) to $0.9 million
for the nine months ended June 30, 1999 from $4.0 million for the nine
months ended June 30, 1998. Other income in 1998 included a $3.2 million
gain from the sale of real estate in San Francisco.
Income tax expense. The Company recorded income tax expense for the nine
months ended June 30, 1999 based primarily on the state tax rate of 1.5%
for S Corporations 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
nine months ended June 30, 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 $2.5 million to $9.8 million for the
nine months ended June 30, 1999 from $7.3 million for the nine months
ended June 30, 1998. The increase in net income for the nine months ended
June 30, 1999 was the result of higher operating income, due to lower ESOP
compensation expense, partially offset by lower other 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 $20.1 million at June
30, 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 nine
months ended June 30, 1999. See "Cash Flow from Investing Activities".
<PAGE>
As part of the Refinancing Transaction the Company entered into the
Credit Agreement that currently provides for up to $92.5 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 June 30, 1999, the Company had utilized $2.2
million of the credit facility provided by the Credit Agreement for
letters of credit and had availability under the Credit Agreement of
approximately $45.9 million for borrowings unrelated to letters of
credit, with an additional $22.8 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 June 30, 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 $25.1 million for the nine months ended June 30, 1999
compared to $15.3 million for the same period last year. The lower cash
provided by operating activities in the period ended June 30, 1998 was
primarily due to accelerated payments of accounts payable at the end of the
calendar year as part of the implementation of a new accounts payable
system, and payments of accrued expenses and taxes.
<PAGE>
Cash Flow from Investing Activities. Cash used in investing activities
was $34.6 million for the nine months ended June 30, 1999 compared to
cash used of $4.4 million for the same period last year. During the nine
months ended June 30, 1999, the Company used $25.8 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 June 30, 1998, the Company used $11.7 million on capital
expenditures for vehicles, containers, other equipment and computer
software and received $5.1 million from the sale of real estate in San
Francisco and $1.5 million from the sale of real estate in Kansas City.
Cash Flow from Financing Activities. Cash used in financing activities
was $1.4 million for the nine months ended June 30, 1998 compared to $1.0
million for the nine months ended June 30, 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).*
<PAGE>
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.*
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.
Representatives of the Company and Local 350 have entered into a Memorandum
of Understanding (the "Memorandum"), which provides that the parties will
suspend the arbitration and that when the Company files its next rate
application with the San Francisco Department of Public Works, which
application may be filed at such time as the Company reasonably determines is
appropriate, such application will include a request for sufficient money to
cover the funding of costs of the pension benefit increases requested by Local
350 (the "Local 350 Amounts"). The Memorandum further provides that, if the
Company's rate applications are granted and become effective, including the
Local 350 Amounts, the arbitration will be terminated with prejudice; but if
such request is denied, in whole or in part, for any reason and the Company
does not put into effect the pension increases requested by Local 350, either
party may reinstate the arbitration. The Company has not determined when it
will submit a rate application.
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 either party was to reinstate the arbitration and
if Local 350 was to prevail in the arbitration discussed above or if the
Company is successful in obtaining funding for the Local 350 amounts, 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 the
<PAGE>
increased pension benefits are provided, the Company's estimated incremental
increase in its annual accruals for employee benefits would be approximately
$2.4 million for pension and medical costs. The above estimates are based on
a discount rate of 6.75%. The discount rate applied under generally accepted
accounting principles ("GAAP") fluctuates with market conditions. A change in
the discount rate can result in significant adjustments to the ABO.
The ultimate outcome of this matter cannot be determined at this time and the
results of the rate application or the arbitration proceeding, if reinstated
cannot be predicted with certainty. If the arbitration is reinstated, 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., has been 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 postclosure 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. City Garbage has entered
into a non-binding letter of intent with the Humboldt County Waste Management
Authority (the "Authority"), pursuant to which City Garbage will transfer to
the Authority the Transfer Station located at Hawthorne Street and the
Cummings Road Landfill, which have been used in connection with City
Garbage's solid waste activities in the County of Humboldt, and grant to the
authority certain related rights for cash consideration of approximately $3.5
million. As part of the transaction, the Authority will assume responsibility
for future corrective actions and closure and postclosure activities thereby
rendering moot the dispute as to $4 million thereof. There will, however,
still remain a dispute between City Garbage and the Authority as to $1 million.
There can be no assurance that the parties will enter into a definitive binding
agreement, that if they do enter into such an agreement that the terms will be
the same as provided in the letter of intent or that the sale will ultimately
be consummated. If the remaining dispute can not be resolved, 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, which 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 cessation of operations at Ontario has had a disproportionately large
negative impact on income derived from the San Bernardino landfill management
activities. This is due to the fact that this was the largest and most
profitable of the landfills operated for the County of San Bernardino by the
Company. There can be no assurance that the Company will be able to mitigate
the loss of revenue from this landfill through increases in tonnage at its
remaining sites, increases in rates and/or reductions in expenses relating
to these operations.* See also Note 4 of Notes to Consolidated Financial
Statements for a description of the dispute pertaining to prevailing wage laws
relating to the Company's San Bernardino landfill employees.
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 financial position, results of operations or cash
flow.*
<PAGE>
Seasonality
The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) due to increased volume at the Company's
transfer stations, waste collection, and landfill operations than during
winter when lower volumes of certain types of waste, such as construction
and demolition debris are generated.* In addition, project management
revenues tend to be higher during spring and summer as a result of favorable
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 Year
2000 code modification and validation testing of it's legacy related systems
and completing the implementation of the renovated systems by September
1, 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 has surveyed
895 entities and received responses regarding Year 2000 compliance from
approximately 44%. In addition, the Company has determined that
approximately 30% of the 895 entities are critical to the Company's
operations. The Company has received responses from nearly all of these
critical entities and determined that 97% of the entities are currently
compliant or have Year 2000 compliance programs in progress.
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 $300,000 in effecting Year
2000 compliance. The Company anticipates that its remaining costs in
effecting such compliance will not exceed $200,000, the majority of which
costs are attributable to the internal costs of employee and management
time.
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.
<PAGE>
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. The California Franchise Tax Board is
conducting audits of the Company's income tax returns for the
fiscal years ended September 30, 1993 through 1997.
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 built-in gains, the Company had no changes to its
total deferred tax liability during the nine month period ended June 30, 1999.
During the nine months ended June 30, 1999, the Company has recorded income
tax expense based primarily on the state tax rate of 1.5% fir S Corporations.
<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 the 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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Certain Reports
(a) Exhibits:
10.37.1 Amendment to Fourth Amended and Restated Loan Agreement, dated as
of June 24, 1999
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: August 13, 1999
AMENDMENT TO
FOURTH AMENDED AND
RESTATED LOAN AGREEMENT
This Agreement is entered into, effective as of October 1, 1998, by and
between NORCAL WASTE SYSTEMS, INC., a California corporation (the "Company"),
and the NORCAL WASTE SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (the
"ESOP").
W I T N E S S E T H:
WHEREAS, the Company and the ESOP entered into a Fourth Amended and Restated
Loan Agreement (the "Loan Agreement"), effective as of October 1, 1995;
WHEREAS, effective as of October 1, 1998, the Company made an election to be
treated as an "S corporation" under Section 1361 of the Internal Revenue Code
of 1986, as amended; and
WHEREAS, it is in the best interests of both the Company and the ESOP
participants to modify the Loan Agreement to provide maximum flexibility in
tax planning;
NOW, THEREFORE, the Company and the ESOP hereby agree that Section 3.1 of the
Loan Agreement is restated, effective as of October 1, 1998, to read as
follows:
3.1 Repayments. As of October 1, 1998, the remaining principal balance under
the Notes is $ 38,891,321 ($ 2,825,857 under Note I, $ 29,263,626 under Note II
and $ 6,801,838 under Note III). It is expected that the ESOP can pay interest
only to the Company so long as the Company continues to be an "S corporation"
under Section 1361 of the Code; provided, however, that the total remaining
balance of principal and interest payable under the Notes shall be due and
payable on September 30, 2008, and that the cumulative payments of principal on
the Notes shall not be less, as of any September 30th, than would have been the
case under the payment schedule in this Section 3.1 as in effect prior to
October 1, 1998. Such payments shall first pay interest accrued on each of the
<PAGE>
Notes and shall then amortize principal first on Note I, until fully repaid,
and then on Note II, until fully repaid, and then on Note III, until fully
repaid.
IN WITNESS WHEREOF, the Company and the ESOP have executed this Amendment
No. 1 to the Loan Agreement this 24th day of June, 1999.
NORCAL WASTE SYSTEMS, INC.
By: /s/ Michael J. Sangiacomo
Michael J. Sangiacomo
President and Chief
Executive Officer
NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP
PLAN AND TRUST
By the Administrative Committee
of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan
By: /s/ Mark R. Lomele
Mark R. Lomele
Chair
<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 JUNE 30, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 28,903
<SECURITIES> 5,552
<RECEIVABLES> 46,079
<ALLOWANCES> 2,343
<INVENTORY> 2,350
<CURRENT-ASSETS> 85,196
<PP&E> 284,344
<DEPRECIATION> 122,413
<TOTAL-ASSETS> 375,998
<CURRENT-LIABILITIES> 65,093
<BONDS> 176,383
0
0
<COMMON> 241
<OTHER-SE> 54,341
<TOTAL-LIABILITY-AND-EQUITY> 375,998
<SALES> 0
<TOTAL-REVENUES> 253,290
<CGS> 0
<TOTAL-COSTS> 226,429
<OTHER-EXPENSES> (3,362)
<LOSS-PROVISION> 821
<INTEREST-EXPENSE> 19,454
<INCOME-PRETAX> 9,948
<INCOME-TAX> 199
<INCOME-CONTINUING> 9,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,749
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
