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THIS ANNUAL REPORT IS FILED BY
NORCAL WASTE SYSTEMS, INC.
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PURSUANT TO CERTAIN CONTRACTUAL REQUIREMENTS AND NOT
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
AND THE RULES AND REGULATIONS THEREUNDER
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 33-80777
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NORCAL WASTE SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2922974
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
</TABLE>
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160 PACIFIC AVENUE, SUITE 200, SAN FRANCISCO, CA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 875-1000
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Norcal Waste Systems, Inc. is currently 100% owned by an employee stock
ownership plan.
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date: On December 27, 1999, there
were 24,134,973 shares of $.01 par value Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING INFORMATION
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described below in "Risk Factors" and elsewhere in this Annual
Report include, but are not limited to: changes in general economic conditions,
inability to maintain rates sufficient to cover costs, inability to obtain
timely rate increases, inability to reduce costs related to the loss of
revenues, loss of material contracts (including the loss of the Company's
contract with San Bernardino County), fluctuations in commodities prices,
changes in environmental regulations or related laws, inability to settle union
labor contract disputes, competition, failure to achieve Year 2000 compliance
and consequences of the Company's S Corporation election. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on its behalf.
HISTORY AND CERTAIN RECENT DEVELOPMENTS
Norcal Waste Systems, Inc. ("Norcal" or the "Company"), a California
corporation, is a vertically integrated waste management company. Norcal
provides services to approximately 408,000 residential and 58,000 commercial and
industrial customers (as of September 30, 1999) throughout the State of
California through 22 operating subsidiaries. The Company's principal activities
include refuse collection, recycling and other waste diversion, transfer station
and hauling operations, and management of both Company-owned and third
party-owned landfills.
The Company traces its roots to the 1920s and, pursuant to a City of San
Francisco Ordinance enacted in 1932 (the "Ordinance"), has provided
substantially all of the residential and commercial refuse collection in San
Francisco since that time. In 1987, the Company's two predecessors merged to
form the Company. The Company currently provides waste management services to 50
cities and counties throughout California. The Company operates 14 landfills in
California, four of which it owns, and operates 12 transfer stations, six of
which it owns, and three material recovery facilities ("MRFs"). Norcal is
currently 100% owned by an employee stock ownership plan (the "ESOP").
On November 21, 1995, Norcal issued 12 1/2% Series A Senior Notes ("Series
A Senior Notes") in an aggregate principal amount of $175.0 million, for which
it received proceeds, after original issue discount, of approximately $170.2
million (the "Offering"). The Company used the proceeds from the Offering (less
certain associated expenses), together with certain cash balances, to retire
approximately $199.1 million of its then outstanding indebtedness and certain of
the ESOP's indebtedness to third parties.
Concurrent with the Offering, the Company entered into a new bank credit
agreement providing for a revolving credit facility with maximum current
availability of $90 million (which maximum amount may be reduced by $2.5 million
per quarter), of which up to $25.0 million may be utilized for letters of credit
(such credit agreement, as amended, is hereafter referred to as the "Credit
Agreement"). The financing provided by the Offering and the Credit Agreement
together with the transactions effected through the application of the initial
proceeds thereof, are collectively referred to herein as the "Refinancing." The
Credit Agreement was amended in November 1996 primarily to provide additional
flexibility under the financial covenants contained therein and increase the
Company's ability to incur certain types of additional debt (including
indebtedness incurred in connection with acquisitions). As of September 30,
1999, the Company had utilized $2.3 million for letters of credit and had
availability under the Credit Agreement of approximately $52.9 million, with an
additional $22.7 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things. In addition, certain covenant measures in the
Credit Agreement become more restrictive over time. Applying the more
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restrictive covenant measures in effect beginning December 31, 1999 to the
Company's estimated results of operations for the twelve month period ending
December 31, 1999 would result in a decrease in availability under the Credit
Agreement of approximately $4.4 million.* The Company's performance relative to
the covenant measures is calculated on a quarterly basis.
In September 1996, the Company exchanged all of the outstanding Series A
Senior Notes for an identical principal amount of 12 1/2% Series B Senior Notes
(the "Senior Notes") registered under the Securities Act of 1933.
The Company currently operates seven landfills, six transfer stations and
six community collection centers in San Bernardino County. Since November 1,
1995, with the concurrence of San Bernardino County's Waste System Division, the
Company has closed ten of the County's landfills, thereby concentrating the
allocation of the County's waste stream among the seven remaining landfills. The
San Bernardino County Board of Supervisors has directed the County's Chief
Administrative Officer to negotiate an amendment to end its agreement with the
Company. For further information see "Item 1. Business -- Landfills -- Operated
Landfills -- San Bernardino County."
The Company employs approximately 1,400 employees under union contracts.
The Company completed the acquisition of the assets of two small medical waste
companies during 1997. In October and November 1998, the Company completed the
acquisition of a waste collection company and the acquisitions of the assets of
two other waste collection companies in the Los Angeles metropolitan area.
COLLECTION OPERATIONS
The Company provides refuse collection services to residential, commercial
and industrial customers in California. Residential customers accounted for
approximately 41% of the Company's refuse collection revenues in fiscal year
1999, and commercial and industrial customers accounted for the remaining 59%.
Services to residential customers are typically provided pursuant to
municipal contracts or franchises that obligate the Company to collect from all
residences in a specified area. At inception, these contracts typically extend
for 5 to 20 years. As of September 30, 1999, the Company had 37 franchise
agreements with municipalities and served many additional customers through
operating contracts.
Commercial services are typically provided under contracts ranging from 1
to 3 years while contracts for the larger "roll-off" container services may
provide for either temporary or longer-term services. Fees are negotiated with
each customer and are determined by such factors as frequency of collection,
type and size of equipment furnished, and the type and volume or weight of the
waste collected.
San Francisco Operations. Since 1932, the Company has provided solid waste
collection and recycling in San Francisco pursuant to the Ordinance, which
provides that, with limited exceptions, only a collector that has been granted a
permit for a specified route may collect or transport solid waste on that route.
The Company's principal operating subsidiaries have held the only permits for
substantially all the routes subject to the Ordinance since 1932, which routes
serve virtually all of San Francisco. San Francisco operations represent the
single largest portion of the Company's business, accounting for approximately
174,000 of its customers and approximately 39% of its total revenues for fiscal
year 1999. The Ordinance permits refuse with "commercial value" (as defined in
the Ordinance and interpreted by the courts) to be collected without a permit.
In addition, debris boxes at construction sites do not require a permit under
the Ordinance. The Company competes for the placement of boxes at construction
sites and the collection of refuse with commercial value. Collection of refuse
from state agencies is also subject to competition.
The Company's San Francisco permits continue until terminated under the
provisions of the Ordinance. Termination, or the award of permits to a
competitor, could occur if, among other things,
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the Company was to provide inadequate service. None of the Company's permits has
been terminated since their initial grant in 1932. A vote to repeal or amend the
Ordinance could also adversely affect the status of the Company's permits. The
Company defeated two initiatives placed on the San Francisco ballot in 1993 and
1994 that, if enacted, would have repealed or amended the Ordinance and opened
residential and commercial refuse collection to competition. See "Risk
Factors -- Changes in Legislation and Political Uncertainty -- Ballot
Initiatives Affecting Ordinance."
If a similar initiative passes in the future, the Company believes that
although a portion of the Company's operations may be immediately affected,
California statutory law would not allow the Company to be completely displaced
by another exclusive waste collection provider for five years unless a buy-out
arrangement were reached between the Company and San Francisco on mutually
satisfactory terms or the permits were terminated pursuant to the existing
provisions of the Ordinance. Furthermore, the Company believes it would be
difficult to create an alternative to its transfer station anywhere in or around
San Francisco because of community resistance, permitting requirements and the
requirements of the California Environmental Quality Act. See "Risk
Factors -- Changes in Legislation and Political Uncertainty -- Potential Flow
Control Legislation."
The Company currently deposits solid waste collected in San Francisco at an
independently owned landfill at favorable rates. These rates are set by an
agreement between San Francisco, the Company and the third party owner of the
landfill, and are subject to annual increases for inflation and regulatory
costs. This agreement is one of several agreements to which the Company is a
party (the "Waste Disposal Agreements") relating to certain operations in San
Francisco that clarify the relationships among the City and County of San
Francisco, the Company and the third-party owner of the landfill at which all
non-hazardous solid waste collected in San Francisco is deposited. The Waste
Disposal Agreements continue until the earlier of the year 2053 or the deposit
of 15 million tons of waste in the landfill. Although estimates are uncertain,
the Company believes, based on historical disposal volumes, the Waste Disposal
Agreements are expected to remain in force until at least 2010.*
Franchise and Other Agreements. Outside of San Francisco, the Company
provides most collection services pursuant to franchise and other agreements
with local governmental entities that obligate the Company to collect from all
residences and, often, commercial establishments within a specified area. Such
agreements typically grant near-exclusivity, although some expressly allow
limited activities by others, such as residential self-hauling and recycling by
charitable or non-profit organizations. Certain agreements allow competition for
specified categories of commercial waste such as construction debris. A local
governmental entity may enter into multiple franchise or other agreements with
different collection companies, each covering a distinct territory within its
jurisdiction. The Company has multiple agreements with certain governmental
entities, in some cases representing the entity's entire jurisdiction and in
other cases representing only part of that entity's jurisdiction. The Company's
collection agreements typically contain general indemnifications by the
applicable operating subsidiary of the Company, as well as, in some cases,
indemnification obligations with respect to costs and damages arising from
hazardous waste.
At inception, the Company's franchise and other agreements relating to its
collection operations typically have terms of between five and 20 years.
Although the Company's franchise and other agreements generally provide for
termination under specified circumstances, such as failure to provide adequate
and continuous service, failure to comply with applicable laws, or insolvency or
bankruptcy, the Company has never had an agreement terminated for such causes.
For fiscal year 1999, approximately 77% of the Company's collection revenues,
excluding San Francisco operations, were generated under franchise and other
agreements with remaining terms of five years or more. In the past ten years,
the Company has been successful in renewing or extending substantially all of
its franchise and other agreements. In light of increasing competitive pressure
in the waste industry, and the risks of competitive bidding, there can be no
assurance that the Company will be able to renew existing franchise and other
agreements, or that such franchise and other agreements will yield levels of
profit consistent with past levels.* See "Risk Factors."
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Changes in state or local laws could also terminate the exclusivity of
these agreements or otherwise subject the Company to greater competition in its
collection activities. Under California law, counties may be required to conduct
competitive bidding upon the expiration of collection franchise agreements,
although under certain conditions counties may extend existing franchise
agreements for one additional term (not to exceed 25 years) without such
bidding. The majority of the Company's franchise agreements are with
municipalities other than counties and are unaffected by this law. However, any
laws enacted in the future requiring competitive bidding could have a material
adverse effect on the Company's financial condition or results of operations.*
In addition, a California Court of Appeal ruled in 1994 that state facilities
such as state universities and other schools, correctional facilities, office
buildings and parks are free to conduct competitive bidding despite exclusive
franchises granted under local ordinances. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Potential Competitive Bidding."
Rates. Refuse collection customers pay a single rate that is designed to
cover not only collection services, but all the services the Company performs as
to the material it collects, including transfer, landfill disposal and
recycling. In most jurisdictions, rate boards, city councils or other local
governmental agencies are authorized to set the rates the Company may charge at
a level that allows the Company to recover projected specified costs and realize
a profit margin. Such specified costs generally include all direct operating
costs, such as direct collection costs (such as personnel and equipment); any
applicable recycling costs; operating costs or tipping fees for transfer
stations, landfills and other facilities; interest charged on leases;
depreciation; trust fund obligations associated with closure and maintenance of
landfills; and other costs. In San Francisco, the Ordinance prescribes an
involved rate-setting procedure under which a rate board determines rates for
residential customers.
The Company generally applies for rate increases every one to three years
in each of its franchise areas to reflect changes in its costs of providing
services. Although rate increases have generally been satisfactory, at times the
Company has not succeeded in fully coordinating the timing and amount of rate
increases with increases in its expenses or capital expenditures or has not
succeeded in obtaining rate increases to cover increased costs, including ESOP
and other corporate-related costs, resulting in reduced margins. Some of the
Company's franchise agreements provide for inflation-based adjustments to a
negotiated rate. The negotiated rates may be adjusted for specific regulatory
and certain other cost increases. See "Risk Factors -- Changes in Legislation
and Political Uncertainty -- Problems in Rate-Setting Process" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Outside of San Francisco, commercial and industrial fees are generally
regulated by local governments and vary from customer to customer depending on
such factors as frequency of collection, volume or weight of waste, type of
equipment furnished by the Company, and distance from the customer site to the
Company's disposal facility. Although rates for commercial and industrial
customers in San Francisco are subject to negotiation and are not directly
regulated, historically the Company's practice has been to raise these rates
consistent with percentage increases in residential rates.
Recycling and Waste Diversion. The Company provides a variety of recycling
services, including material recovery services and other waste diversion
services (collectively, "recycling services"), under arrangements with various
local governments and directly with commercial customers. At times a substantial
portion of the Company's recycling revenues have been derived from the sale of
various grades of recycled paper and paper products. Prices of recyclable
commodities are volatile and cause fluctuations in the Company's recycling
revenues. In addition, the costs associated with mandated recycling efforts and
the resulting increase in supply of, and reduction in sales prices for,
recyclable material place pressure on the Company's operating margins in its
recycling operations. See "Risk Factors -- Fluctuations in Prices for Recyclable
Commodities."
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Transfer Stations. The Company currently operates 12 transfer stations, six
of which it owns. Transfer station ownership allows the Company to exercise
greater control over the waste stream from its collection operations and
promotes greater efficiency in its recycling and waste transportation
activities. As of September 30, 1999, approximately 80% of the waste delivered
to the Company-owned facilities came from the Company's collection operations.
As a result of the Waste Disposal Agreements, substantially all of the refuse
collected in San Francisco (other than waste diverted for recycling) is
deposited in the San Francisco transfer station owned by the Company. Certain
generators of waste (including state agencies) and certain types of waste
(including construction and demolition debris) are not subject to the Waste
Disposal Agreements and as a result waste collected from such generators and
such excluded types of waste may be taken to other transfer stations.
LANDFILLS
The Company operates 14 landfills in California, four of which it owns and
ten of which are owned by local governmental entities. Each of these landfills
generally accepts only non-hazardous waste, with the exception of certain wastes
that may be hazardous due to asbestos content.
Owners or operators of landfills face substantial liabilities, including
environmental impairment liabilities, closure and post-closure maintenance
obligations and corrective action obligations. With respect to all but one of
the third party landfills currently managed by the Company, the Company is a
contractor and is not the operator under the applicable permits. In those
circumstances, the Company is not responsible for closure and post-closure
maintenance obligations, corrective action obligations, or environmental
impairment under operator liability obligations. In addition, in San Bernardino
County, the County has agreed to indemnify the Company for certain other
liabilities. See "Risk Factors -- Environmental Regulation and Potential
Litigation," and "Risk Factors -- Possible Liability for Environmental
Remediation and Damages."
Owned Landfills
The following table sets forth certain information about the four active
landfills owned by the Company:
<TABLE>
<CAPTION>
APPROXIMATE
YEAR LANDFILL PERMITTED LANDFILL
LANDFILL LOCATION BEGAN OPERATIONS ACREAGE(A)
-------- -------- ---------------- ------------------
<S> <C> <C> <C>
B&J............................... Vacaville, CA 1964 260
Cummings Road..................... Eureka, CA 1969 30
Ostrom Road....................... Yuba County, CA 1995 220
Pacheco Pass(b)................... Santa Clara County, CA 1963 60
</TABLE>
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(a) Includes all permitted landfill acres. Total landfill area is approximately
2,500 acres, including contiguous areas. Not all contiguous areas are
permittable.
(b) Permitted acreage includes approximately 35 acres that can only be used for
the disposal of concrete, asphalt and similar inert demolition waste due to
the existence of geologic conditions unsatisfactory for landfill siting.
The Company owns landfills with capacity to service markets the Company
currently serves with collection operations in Northern California. At such time
as a Company-owned landfill no longer has remaining capacity, the Company
intends to either redirect waste being deposited at such landfill to another
Company-owned landfill with substantial remaining capacity or to a third
party-owned landfill. The Company's B&J and Ostrom Road landfills have Class II
permits, which allow these landfills to accept non-hazardous waste that is
capable of degrading water quality if not properly handled, in addition to
municipal solid waste.
In July 1999, the Company and Humboldt Waste Management Authority ("HWMA")
entered into an agreement in principal concerning the Cummings Road Landfill and
the Company's Eureka
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Transfer Station. In November 1999, the Company entered into an agreement with
HWMA, pursuant to which the Company would transfer to HWMA ownership of such
properties as well as certain operating equipment. As part of the agreement, the
Company would receive certain cash payments totaling approximately $4.2 million
from the HWMA and HWMA would assume certain closure/post-closure, corrective
action and operational responsibilities with respect to the Cummings Road
Landfill. The Company would retain liability for its operation of the landfill
prior to the closing of the transaction and for any defect in corrective action
work performed by the Company at the landfill prior to the closing of the
transaction. Under the agreement, the Company would also transfer to HWMA its
interest in the closure/post-closure and corrective action trust funds relating
to the landfill. The consummation of the agreement is subject to several closing
conditions. Provided such conditions are met or waived, the closing is expected
to occur before January 15, 2000.*
Of the waste deposited at Company-owned landfills for fiscal year 1999
approximately 67% was received from the Company's collection, waste diversion
and transfer station operations and 33% was received from independent third
party collectors, hauling companies and self-haulers.
Operated Landfills
The Company currently manages ten third party-owned landfills, nine under
contracts with the permitted operators and one under lease from the landfill
owner. These landfills are permitted for approximately 13,500 tons-per-day total
capacity. Landfill operating agreements with third party owners generally
provide for payment to the Company of a fee based on tonnage received.
San Bernardino County. The Company has a contract with San Bernardino
County, pursuant to which it operates (through its San Bernardino subsidiary)
all active landfills owned by San Bernardino County and is primarily responsible
for implementing the County's strategic plan which addresses the County's
long-term waste disposal needs (the "1995 Contract"). The Company's other
responsibilities include closure and monitoring of non-active landfills and
identification, permitting and construction of landfill expansions. Since
November 1, 1995, with the concurrence of the County's Waste System Division,
the Company has closed 10 of the County's landfills, thereby concentrating the
County's waste stream among the seven remaining landfills. The Company currently
operates seven landfills, six transfer stations and six community collection
centers in San Bernardino County.
The Company's revenues from San Bernardino County are derived from two
categories of services. The core service is the performance of ongoing landfill
operations activities and transfer station operations. Over the term of the
contract the amount of revenues from this core service has varied and will
continue to vary primarily as a result of changes in volume of waste and changes
in the Company's per ton compensation rate. The other component of revenues
represents activities associated with the planning and implementation of the
strategic plan to regionalize landfill operations in San Bernardino County. This
includes planning, engineering and construction management for landfill
expansions, transfer station construction and landfill closures. It is
anticipated that San Bernardino County plans to spend approximately $50 million
through June 30, 2001, and, if the County elects to complete its current
strategic plan, up to an additional $50 million during the subsequent two-to
three-year period, at which time the major work in connection with the strategic
plan is expected to have been completed.* While revenues generated from these
activities are significant, the Company generally earns lower margins than on
its collection and disposal operations due to the fact that there is little
capital investment required to generate the additional revenues and revenues are
provided on a cost plus profit margin basis per the 1995 Contract. In addition,
this business involves substantial subcontractor, consulting and other related
expenses paid to third parties. Moreover, under the terms of the 1995 Contract,
the County and the Company have obligations to negotiate a redetermination of
the per ton compensation rate payable to the County every three years, and if
the parties cannot agree upon such rate they are subject to an agreement to
arbitrate. Additionally, either party may terminate the 1995 Contract if, in
good faith, it does not agree with the redetermined rate arrived at in the
arbitration. The County and the Company are currently in disagreement with
respect to the per ton compensation rate to be paid under the 1995 Contract for
services rendered by the Company on or
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after July 1, 1999, which dispute arose in the fourth calendar quarter of 1999.
Pursuant to the 1995 Contract, the County and Company are currently in
arbitration with respect to such dispute. If the County were to prevail in such
arbitration and obtain a reduction in the current rate, the Company's future
profit margin on the 1995 Contract would be adversely affected, although at this
time the Company cannot accurately predict the financial impact of an adverse
arbitration decision.
The 1995 Contract with the County is scheduled to terminate on June 30,
2001 (the "Expiration Date"). The 1995 Contract provides that the Company, at
its option, may extend the agreement for an additional 15-year period. At the
conclusion of this initial extension period, the Company, at its option, may
extend the agreement for up to an additional 15 years, so long as the waste
stream contractually committed to the landfills meets certain levels. However,
each party may terminate the contract for default, failure to reach an agreement
regarding the reconfiguration of the landfills and other facilities following a
reduction in tonnage, or the bankruptcy or insolvency of the other party. In
addition, San Bernardino County may terminate the contract so long as it uses a
competitive procedure to select a contractor or municipalizes such operations.
The 1995 Contract also contains a clause stating that the County may terminate
the agreement at any time if a Company employee is convicted of bribing public
officials where the conviction relates to actions taken by the employee in
respect to the 1995 Contract.
In October 1999, the United States Attorney for the Central District of
California announced criminal indictments of James J. Hlawek, the immediate
former Chief Administrative Officer for San Bernardino County, Harry M. Mays, a
former consultant of the Company (and Mr. Hlawek's predecessor as Chief
Administrative Officer for San Bernardino County), and Kenneth James Walsh, a
former employee of the Company. All three defendants have pled guilty to federal
charges of conspiring to pay and accept bribes to influence or reward Mr. Hlawek
in connection with his official duties. Although the United States Attorney has
advised the Company that its investigation is ongoing and that the Company is
one of its targets, neither the Company nor any of its affiliates has been
charged. If the Company is charged and held responsible for the conduct of its
employee, it may become subject to penalties and fines.
The Company first learned of this matter when Mr. Walsh reported to the
Company in mid-August 1999 that he was facing possible federal criminal charges
in a matter that Mr. Walsh claimed was totally unrelated to the Company. The
Company immediately made voluntary contact with the United States Attorney's
office to determine the nature and substance of the United States Attorney's
investigation and to offer the Company's full cooperation. The Company also
initiated an internal investigation to determine the nature of Mr. Walsh's acts
and any Company involvement in the matter. After learning of the true nature of
the United States Attorney's investigation and after Mr. Walsh's refusal to
cooperate with the Company's investigation, the Company terminated his
employment on August 27, 1999. The Company terminated its consulting arrangement
with Mr. Mays on September 3, 1999. The Company also informed the County of the
information that had come to its attention concerning this matter and its
actions in terminating Messrs. Walsh and Mays.
Messrs. Walsh and Mays have advised the Company that they were the only
Company personnel and consultants involved in this matter and that no other
Company personnel or consultants were involved in or had knowledge of their
illegal conduct. The Company believes that Messrs. Walsh and Mays were acting
purely for their own personal gain and that none of the Company's other
employees or consultants were aware of or otherwise involved with Messrs.
Walsh's and Mays' illegal conduct. After terminating Mr. Walsh, the Company was
informed by the United States Attorney that Mr. Walsh had been accepting
kickbacks from Mr. Mays and from one of the Company's vendors and had used a
portion of such kickbacks along with a portion of the contract fee paid to Mr.
Mays to fund the payments to Mr. Hlawek. The Company anticipates that the United
States Attorney's office may require additional information in its ongoing
investigation. The Company has cooperated with the United States Attorney's
investigation and intends to continue to cooperate in the future.
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On December 14, 1999, the County Board of Supervisors directed the County's
Chief Administrative Officer to negotiate an amendment with the Company to end
the 1995 Contract as soon as the County can complete a competitive bidding
process through a Request for Proposal, review submitted bids, and negotiate a
replacement contract, but in no event later than June 30, 2001. Although the
County's Chief Administrative Officer has estimated in his report to the
County's Board of Supervisors that the process should take 15 to 18 months, the
County's Board of Supervisors has requested that the process be completed more
quickly, if possible. In response to this request, the County's Chief
Administrative Officer has stated that the process could potentially be
accomplished in 12 to 15 months. The Company is currently unable to estimate how
much time the County will need to complete these procedures. Moreover, the
Company does not know whether it can successfully negotiate such an amendment,
what terms may ultimately be negotiated in such an amendment or whether the
County's Board of Supervisors will approve any such amendment. Assuming the
County is unable to complete the Request for Proposal and enter into a new
contract in the next nine months, the Company does not expect an amendment to
end the 1995 Contract or the termination of the 1995 Contract to have a
significant impact on its cash flows, results of operations or financial
condition for fiscal year 2000.* The County has indicated that the Company will
be permitted to bid on the new contract, but there can be no assurance that the
Company will be awarded the new contract, or if the Company is the successful
bidder, how the terms of the new contract will compare to as those contained in
the 1995 Contract.
During fiscal years 1999, 1998 and 1997, revenues derived from the services
the Company performed for San Bernardino County were approximately $55.1 million
(16% of the Company's total revenue), $65.1 million (19% of the Company's total
revenue) and $55.1 million (17% of the Company's total revenue), respectively.
Revenues less direct expenses including consulting fees (excluding allocable
corporate management fees, lease charges, interest expense and the non-cash
portion of ESOP expense, and depreciation and amortization), related to the
Company's San Bernardino operations for fiscal years 1999, 1998 and 1997 were
approximately $6.6 million, $7.9 million and $7.4 million, respectively. While
the Company's results of operations and cash flows will be adversely impacted if
an amendment to end the 1995 Contract is negotiated or the 1995 Contract is
terminated and the Company and the County do not enter into a new contract
having comparable terms, management believes that such event will not have a
material adverse effect on the Company's financial condition or on its ability
to maintain its operations and service its debt.
San Diego County. On March 1, 1995, the Company began managing activities
of five county-owned landfills in San Diego County. On October 31, 1997, the
County of San Diego sold its waste system (including the four landfills operated
by the Company at that time) to a third party. On March 31, 1998, the Company
ceased operations of the landfills when the new owner assumed operations.
Other Counties. The Company operates two landfills in Kern County,
California under contracts expiring in April 2002 and December 2002,
respectively, and one landfill in Placer County, California under a contract
expiring in August 2001.
Financial Assurance Obligations
Extensive regulation of landfills not only affects their siting and
operations but also imposes long-term obligations on landfill owners or
operators to make substantial efforts to close landfills and maintain them
following closure for at least 30 years. The Company believes that where it
operates landfills owned by local governmental entities, those entities, as the
holders of the relevant permits, are responsible for closure and post-closure
maintenance obligations.
For each landfill it owns, the Company is required to demonstrate financial
assurance for closure and post-closure maintenance costs. The Company makes
periodic deposits to trust funds intended to provide adequate funding at the
time of landfill closure, consistent with the Company's current estimates for
all closure costs and, under current California law, at least 30 years of
post-closure
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maintenance costs. In addition, with respect to one closed landfill, the Company
has posted a performance bond to fund post-closure obligations up to $1.1
million. The Company estimates, that as of September 30, 1999, the aggregate
current cost of its closure and 30-year post-closure requirements is
approximately $52.9 million.* The foregoing estimate of closure and post-closure
liabilities is based on currently available information and current
environmental and regulatory requirements and may change if applicable
regulations or the assumptions relied on or facts and circumstances relating to
the Company's landfills change.
California regulations also require the Company to provide financial
assurance contingency funds for the initiation and completion of corrective
action for certain possible releases of contaminants that may occur from its
landfills into the groundwater, surface water or unsaturated zone, whether such
releases occur before or after closure of the Company-owned landfill. The
Company makes periodic deposits to trust funds intended to provide such
contingency funds. The Company estimates, that as of September 30, 1999, the
aggregate current cost of such remaining corrective action requirements for
Company-owned landfills is approximately $7.7 million and remaining funding
requirements total approximately $5.6 million.* The foregoing estimates are
based on current available information and current environmental and regulatory
requirements and may change if applicable regulations or the assumptions relied
on or facts and circumstances relating to the Company's landfills change.
Regulations amended in 1992 also require California landfill operators to
demonstrate financial assurance to compensate third parties for bodily injury
and property damage arising out of landfill operations. Under the method adopted
by the Company, the regulations require funding of $1.0 million per landfill to
a maximum of $5.0 million Company-wide. To satisfy this requirement for each of
the Company-owned landfills the Company has established trust funds, which are
fully funded, for each landfill. The Company has obtained an insurance policy
for one of its landfills not covered by the method described above.
SPECIAL WASTE AND HAZARDOUS WASTE
The Company provides limited waste management services in connection with
five types of special waste: medical waste, waste water sludge, asbestos,
non-hazardous contaminated soil and ash.
In addition, the Company operates permanent household hazardous waste
collection facilities in four communities and periodically collects household
hazardous waste in other communities as part of special programs designed to
help reduce deposits of hazardous waste in the solid waste stream. The Company
also provides limited hauling and disposal services for asbestos and may also
handle hazardous waste from its load checking and/or ancillary to its medical
waste activities at its facilities. The Company currently has no other plans to
collect or dispose of hazardous or toxic materials.
ENVIRONMENTAL REGULATION
The Company's business activities are subject to extensive and evolving
regulation under various complex, and at times overlapping and conflicting,
federal, state and local laws for the protection of public health and the
environment. These laws, and the numerous regulatory bodies responsible for
interpreting and enforcing them, impose significant restrictions and
requirements on the Company's activities. The Company believes that such
regulation will increase in the future.
To operate landfills, transfer stations and other waste processing
facilities, the Company must possess and maintain various governmental
approvals, operating permits and licenses, and in certain instances, must secure
various land use approvals. Obtaining approvals and permits to acquire, develop
or expand solid waste management facilities is difficult, time-consuming and
expensive and is sometimes vigorously opposed by local citizen groups or other
private parties. Once obtained, operating permits are subject under certain
circumstances to modification or revocation by the issuing agency and may be
altered by changing laws and regulations.
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In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, and time
and frequency of collection.
The Company's operation of solid waste management facilities subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations, as well as financial assurance obligations relating to third party
liability, corrective actions, and closure and post-closure maintenance.
In addition to costly and restrictive regulation, other factors, the
long-term effects of which are unpredictable, may have a significant effect on
the Company's operation of landfills. Increasing public opposition to the siting
and operation of landfills is adding to the length of time required to obtain
necessary permits and approvals for new landfills and the expansion of existing
landfills. Moreover, there is a national trend to attempt to reduce the volume
of solid waste and the dependence on landfill disposal by promoting source
reduction, waste transformation and recycling programs.
During the ordinary course of its operations, the Company may from time to
time receive citations, notices and comments from regulatory authorities that
such operations are not in compliance with applicable environmental regulations.
Upon receipt of such citations, notices or comments, the Company works with the
authorities in an attempt to address the issues identified by such authorities.
In some instances, where the Company operates a landfill or transfer station
pursuant to an agreement with a county or other governmental body,
responsibility for the matters referenced in such citations, notices or comments
lies with such governmental body. Failure to correct the problems to the
satisfaction of the authorities could lead to fines or a curtailment or
cessation of the landfill or transfer station's operations.
Compliance with current or future regulatory requirements may require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. While the Company intends to apply for
rate increases whenever possible to cover such increased costs, there is no
assurance that it will be able to pass all or a portion of these costs on to its
customers.
Federal Regulation
The principal federal statutes affecting the Company's business operations
are:
The Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates
the handling, storage, treatment, transportation and disposal of hazardous and
non-hazardous wastes and requires states to develop programs to insure the safe
disposal of solid waste. Subtitle D of RCRA establishes a framework for federal,
state and local government cooperation in controlling the management of
nonhazardous solid waste, and prohibits the operation of municipal solid waste
landfills that fail to meet minimum federal standards for protecting human
health and the environment. Under these regulations, state and local governments
retain primary responsibility for ensuring enforcement and compliance with state
and federal minimum standards by landfills within their jurisdictions.
The United States Environmental Protection Agency (the "EPA") adopted
regulations under Subtitle D of RCRA that provide minimum standards or criteria
establishing landfill location restrictions, design standards, operating
criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements and corrective action
requirements. These regulations establish stringent requirements for liner
design, leachate (liquid that has leached from the landfill and become
contaminated through contact with solid waste) collection systems, groundwater
testing wells and methane gas control systems. A landfill that fails to meet the
Subtitle D criteria will be deemed to be engaged in "open dumping" in violation
of RCRA. Most of these regulations have been in effect in California for several
years. The EPA has approved California's application to operate California's
permitting program for solid waste landfills under Subtitle D.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund" or "CERCLA"). CERCLA imposes liability for the investigation
and clean up of, or natural resource
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damages from, facilities from which there has been, or is threatened, a release
of a hazardous substance into the environment. Current owners and operators of
the site, parties who were owners or operators at the time the hazardous
substance was disposed of, and all generators or transporters and those who
arrange for disposal of a hazardous substance that is released from a site are
potentially responsible parties. Liability under CERCLA is strict, joint and
several, meaning that it can be imposed upon any potentially responsible party
even if such party complied with all laws and regulations in effect at the time
of the act giving rise to liability or has generated no more than a very small
portion of a facility's contamination. Many of the more than 700 substances
listed by the EPA as "hazardous substances" (including asbestos) can be found in
household waste.
CERCLA investigation and cleanup costs can be very substantial. Many of the
sites addressed under CERCLA are or were municipal solid waste landfills that
ostensibly never received hazardous wastes. Even if the Company's landfills
never received hazardous wastes as such, one or more hazardous substances may
have come to be located at these landfills. The same is true of other industrial
properties owned or operated by the Company. If the Company were to be found to
be a responsible party for a CERCLA cleanup, the enforcing agency could hold the
Company completely responsible for all investigative and remedial costs, even if
others were also liable. The Company's ability to obtain reimbursement from
others for their allocable share of such costs would be limited by the Company's
ability to locate such other responsible parties and to prove the extent of
their responsibility and by the financial resources of such other parties.
Legislation has been introduced in Congress which, if passed would limit the
liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. If such legislation becomes law, the
Company's ability to seek contribution from municipalities for CERCLA cleanup
costs would be limited even if the hazardous substances requiring remediation at
one of the Company's facilities were generated or transported to the facility by
a municipality.
The Federal Water Pollution Control Act (the "Clean Water Act"). The Clean
Water Act regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites, into surface waters of the United States.
The discharge of runoff or leachate from the Company's landfills into waters of
the United States would require the Company to apply for and obtain a discharge
permit, conduct sampling and monitoring and, under certain circumstances, reduce
the quantity of pollutants in the discharge. Also, under new federal storm water
regulations, many landfills, transfer stations and other Company operations are
now required to obtain storm water discharge permits and to develop a storm
water pollution prevention and monitoring program.
The Clean Air Act. The Clean Air Act, as amended, provides for federal,
state and local regulation of emissions of air pollutants into the atmosphere.
The EPA has proposed new source performance standards regulating air emissions
of certain pollutants (methane and non-methane organic compounds) from municipal
solid waste landfills. The EPA may also issue regulations controlling the
emissions of particular regulated air pollutants from municipal solid waste
landfills. In addition, the EPA has issued standards regulating the handling of
asbestos-containing materials.
Occupational Safety and Health Act of 1970 ("OSHA"). OSHA establishes
certain health and safety standards for the workers employed by the Company.
Certain of these standards, including standards for notices of hazards, safety
in evacuation, and the handling of asbestos, may apply to certain of the
Company's operations.
State and Local Regulation
Each state in which the Company now operates or may operate in the future
has laws and regulations for the protection of human health and the environment
that affect various operations of the Company. These laws and regulations
govern, among other things, solid waste disposal, water and air pollution and,
in most cases, the design, operation, maintenance, closure and post-closure
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maintenance of landfills and transfer stations. Among the principal California
statutes affecting the Company's business operations are:
The California Integrated Waste Management Act. The California Integrated
Waste Management Act of 1989 establishes a framework for the regulation of
landfills and other solid waste facilities in California through a system of
solid waste facilities permits administered jointly by the California Integrated
Waste Management Board (the "Waste Board") and the local enforcement agency
(generally a county health or environmental department). Periodic site
inspections and permit reviews are undertaken by the local enforcement agency to
ensure that the landfill operations comply with current health, safety and
environmental regulations. Among those regulations are minimum performance
standards for proper operation, closure, post-closure maintenance and ultimate
re-use of landfill sites to assure that public health and safety and the
environment are protected from pollution due to the disposal of solid waste.
The California Integrated Waste Management Act also requires each local
government to divert 25% of its waste from landfill disposal through source
reduction, recycling and composting. This required level will increase to 50% by
the beginning of calendar year 2000. Attempted compliance with these diversion
goals by local governments could substantially reduce the tonnage of waste
deposited in the Company's landfills.
Closure/Post-Closure. A part of the California Integrated Waste Management
Act known as the Eastin Statute requires landfill owners and operators to (i)
develop closure and post-closure maintenance plans and submit plans to both the
Waste Board and the applicable Regional Water Quality Control Board for
approval, (ii) prepare an estimate of closure and post-closure maintenance
costs, and (iii) establish a mechanism acceptable to the Waste Board to
demonstrate financial responsibility for such estimated costs.
Regulations promulgated under the Eastin Statute (the "Eastin Regulations")
impose closure and post-closure requirements governing the removal of
structures, decommissioning of environmental control systems, construction and
maintenance of final cover, grading, drainage and site face, slope protection
and erosion control (revegetation), leachate control and monitoring systems,
groundwater monitoring facilities and landfill gas monitoring and control
systems. Landfill owners and operators must submit preliminary closure and
post-closure maintenance plans at the time of the application for any existing
solid waste facilities permit review or upon the first application for a permit.
Existing permit reviews generally occur in connection with modifications for the
permit or, if earlier, five years following the most recent permit review. In
addition, final closure and post-closure plans must be submitted two years
before the anticipated date of landfill closure. The EPA has approved
California's application to operate its existing solid waste program under
Subtitle D.
The Eastin Regulations require the owner or operator of each landfill to
(i) estimate the cost associated with closing the landfill in accordance with
the foregoing requirements, including the costs of conducting post-closure
maintenance for a period of at least 30 years after closure, (ii) certify such
cost estimates to the Waste Board and the local enforcement agency, and (iii)
demonstrate that the owner or operator has the financial resources to conduct
closure and post-closure maintenance activities. One of the means by which an
owner or operator can demonstrate financial assurance is to establish a
statutory trust fund whereby the owner or operator is committed to make yearly
contributions over the remaining life of the landfill. This is the primary
mechanism used by the Company for the Company-owned landfills that it has
responsibility for closing. Each year's minimum trust fund deposits are based
upon a regulatory formula using the ratio of the landfill's annual capacity
filled, to the remaining permitted capacity, multiplied by the remaining cost
estimate to be funded. Because these costs can be substantial, the annual trust
fund contributions could have a significant impact on the Company's cash flow if
the Company were unsuccessful in collecting such costs in tipping or collection
fees.
Hazardous Waste Control Law and Carpenter-Presley-Tanner Hazardous
Substance Account Act. The California Environmental Protection Agency's
Department of Toxic Substances Control has broad
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authority under the Hazardous Waste Control Law, similar in many respects to
Subtitle C of RCRA, to regulate generators and transporters of hazardous waste
and facilities that treat, store or dispose of hazardous waste. California also
has enacted the Carpenter-Presley-Tanner Hazardous Substance Account Act, which
is the state's "Superfund" law, with provisions similar to those of the federal
CERCLA.
The Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"). The
Porter-Cologne Act regulates the discharge of waste that may affect waters of
California, whether surface or subsurface, and whether by point or non-point
sources of discharge. This would include the discharge of waste into a landfill.
Each discharger must file a report of waste discharge with the regional water
quality control board (the "regional board") having jurisdiction over the
location of the proposed discharge, and the regional board issues a permit,
known as "waste discharge requirements," that limits the quantity and manner of
the discharge to meet water quality standards and to ensure the protection of
beneficial use of the receiving waters. Pursuant to the Porter-Cologne Act, in
1984, California adopted regulations imposing design, siting, and operational
standards for waste disposal sites to minimize the extent to which landfill
runoff and leachate may pose a threat to surface or groundwater quality. These
standards also apply to new or expanded waste disposal facilities.
The federal Clean Water Act allows states to assume the EPA's
responsibilities over point source discharges of pollutants into surface waters.
California has assumed those responsibilities under the Porter-Cologne Act.
California has also adopted regulations requiring owners and operators of
landfills to provide financial assurance for the initiation and completion of
corrective action for known or reasonably foreseeable releases of contaminants
from landfills into the groundwater, surface water or unsaturated zone.
Other States' Regulation. Although almost all of the Company's business is
currently conducted in California, the Company has historically and in the
future is likely to conduct business in other states with statutes similar to
California's that would regulate the Company's handling, transportation and
disposal of waste, and the design, operation, maintenance, closure and
post-closure care of solid waste disposal facilities and underground storage
tanks ("USTs") regulation. These states may have additional rules with which the
Company would have to comply.
Underground Storage Tank Regulation. USTs in California are regulated by
federal law under RCRA, by a California law that closely parallels the
requirements of the federal law and by local regulation. These regulations
contain extensive requirements relating to monitoring, leak detection and
prevention, permitting, reporting, and other matters, including the required
removal or closure of tanks that are no longer in use. In connection with its
business operations, the Company maintains five double-walled USTs, all of which
are used for the storage of petroleum products, which are hazardous materials.
During 1999, the Company removed the final 10 single-walled USTs previously
used in its operations at three sites. With the exception of two sites, at which
the Company anticipates that up to an additional $0.5 million may be required to
remediate contamination, the Company is not aware of any of the UST sites that
will require significant soil or groundwater remediation.* However, in most
instances the Company has not conducted soil or groundwater testing sufficient
to assess fully the extent and cost of any possible remediation that might be
required. These costs, if any, will not be known until such tests are completed,
although the Company currently estimates that the cost, if any, of remediating
the sites from which the final 10 single-walled USTs were removed may be as much
as $0.9 million.
Owners and operators of USTs containing petroleum also must demonstrate
financial responsibility to pay for corrective action and third party claims
arising from a release from their USTs. The Company has purchased insurance to
make this demonstration.
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Flow Control. Many states and municipalities attempt to direct the flow of
municipal solid waste through a variety of means, including the passage of laws
and ordinances requiring solid waste to be processed or disposed of at a
particular facility. In addition, some municipalities grant franchises and
permits that have the effect of limiting who may collect solid waste and where
such waste may be brought for disposal. In 1994, the United States Supreme
Court, in the case of Carbone v. Town of Clarkstown, held unconstitutional a
local ordinance that required all solid waste generated within or brought into
the locality to be disposed of at a particular transfer station that the town
had guaranteed a certain minimum tonnage of solid waste, in order to help
finance the construction of the transfer station. The Court held that the
ordinance discriminated against interstate commerce by allowing only the favored
facility to process solid waste from the town and effectively "hoarding"
commerce in the service of processing solid waste for the benefit of local
economic interests. The Court found that the primarily economic reasons for
enacting the ordinance could not justify the law's discrimination against
interstate commerce.
Although the Company believes there are many significant differences
between the facts in Carbone and the circumstances relating to the collection
franchises, permits and agreements held by the Company and to government actions
related to such franchises, permits and agreements, it is possible that these
franchises, permits and agreements could be challenged under a similar
rationale. In that event, the municipalities involved would have to show that
their franchises, permits and agreements (i) do not regulate interstate
commerce, (ii) do not discriminate against interstate commerce and do not impose
an excessive burden on interstate trade in relation to the total benefits
conferred; or (iii) are necessary to advance legitimate local interests. There
can be no assurance that such franchises, permits and agreements would be
upheld.
Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress.
At present, it is impossible to know in what form such a bill, if any, will pass
the Congress, but the attempts to pass such a bill have been unsuccessful to
date. Although these bills appear to be intended to limit, rather than broaden,
the scope of Carbone, there can be no assurance that a bill will not be enacted
that will adversely affect the legality of exclusive franchises, agreements or
permits under the interstate commerce clause.
COMPETITION
The solid waste services industry is highly competitive and requires
substantial capital, technical expertise and human resources. The industry is
comprised of three large publicly-traded national waste service companies (Waste
Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc.) and
several smaller, publicly-traded regional companies, as well as numerous
regional and local companies of varying sizes and competitive resources. Many of
the Company's competitors have significantly greater financial and operating
resources and a lower cost of capital than the Company and can take advantage of
less capital intensive environmental regulatory financial assurance obligations
than those with which the Company is required to comply. Additionally, in
smaller markets, the Company may be at a competitive disadvantage with respect
to regional and local companies which may have significantly lower operating
costs. In its landfill activities, the Company also competes with cities and
counties that conduct their own waste disposal services. These municipalities
may have the advantages of access to tax revenues and tax exempt financings as
well as the ability to direct the collection and disposal of waste in their
respective jurisdictions.
Most of the Company's collection operations are conducted pursuant to
franchise agreements, permits and licenses that make the Company the exclusive
provider of most waste services in a specific geographic area. However, each of
these arrangements has a specific duration except in San Francisco, and the
Company may become subject to competition if these arrangements are not extended
prior to maturity. The Company competes for collection services primarily on the
basis of service and price. Transfer station activities are often tied to
collection operations, so the same competitive considerations apply. Competition
among landfills is based upon price, service and the proximity of the landfill
to the waste generator. Competition for operation of landfills under contract is
based on price and
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service. The Company believes that, from time to time, competitors offer
substantially lower prices for their services in an effort to maintain or expand
market share or win a competitively bid municipal contract.
The industry is continuing to undergo significant consolidation,
characterized by the acquisition of smaller regional and local operations by
larger entities, mergers, the privatization of operations that local governments
no longer wish to conduct and the reduced presence of smaller regional and local
operations caused by the ability of larger entities to bid for franchises and
contracts at prices such smaller operations cannot match. Because of the
difficulty in obtaining approvals to operate in communities that already have
established service providers, competition for the acquisition of other
companies and price-related competition upon the renewal of existing contracts
and franchises are increasingly intense. In addition, the Company believes that
a number of its competitors have full-time personnel primarily dedicated to
locating, evaluating and securing business expansion opportunities and
acquisitions -- including environmental and regulatory experts, engineers,
attorneys, lobbyists, financial and accounting personnel and finders. The
Company may be at a competitive disadvantage if it is unable to identify,
adequately evaluate or respond to acquisition opportunities or incurs higher
costs than are borne by its competitors to do so. Accordingly, it may become
uneconomical for the Company to make further acquisitions or the Company may be
unable to locate suitable acquisition candidates, particularly in markets the
Company does not already serve. See "Risk Factors -- Acquisition-Related Risks."
RISK FACTORS
The following is a discussion of certain risks and uncertainties that could
cause results to differ materially from predictions, estimates and expectations
expressed by the Company in this Annual Report.
Concentration of Business
The Company is dependent on a number of franchise contracts and operating
permits for a significant portion of its revenues and operating income.
Approximately 39% of the Company's revenues and substantially more of its
operating income in fiscal year 1999 were derived from services performed in the
City and County of San Francisco. In San Francisco, the Ordinance provides that,
with certain limited exceptions, only a collector that has been granted a permit
for a specified route may collect or transport solid waste on that route in the
City and County of San Francisco. Although the Company holds permits for
substantially all routes covered by the Ordinance, a permit may be revoked or
additional permits granted to third parties if, among other things, the Company
were to provide inadequate service, such as a failure to collect refuse properly
or overcharging. The granting of additional permits due to inadequate service is
required if 20% or more of the customers on a route sign a petition stating that
the Company's service has been inadequate and the Director of the Department of
Public Health finds such statement to be correct. Further, the Ordinance could
be repealed or amended by the vote of the electorate in a way that is
unfavorable to the Company. A change in the Ordinance and the possible loss by
the Company of one or more of its permits could have a material adverse effect
on the Company's business, financial condition and results of operations.
However, the Company believes that California law would not allow it to be
completely displaced by another exclusive waste collection provider for five
years if the Ordinance were repealed, unless the permits were terminated
pursuant to the existing provisions of the Ordinance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Approximately 16% of the Company's revenues in fiscal year 1999 were
derived from services performed for the County of San Bernardino. The Company
and the County are currently in the process of negotiating an amendment to their
agreement pursuant to which the agreement will end as soon as the County can
complete a competitive bidding process through a Request for Proposal, review
submitted bids and negotiate a replacement contract, but in no event later than
June 30, 2001. The County's Chief Administrative Officer has indicated that the
process could potentially be accomplished
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in 12 to 15 months. The County has indicated that the Company will be permitted
to bid on the new contract, but there can be no assurance that the Company will
be awarded the new contract, or if the Company is the successful bidder, how the
terms of the new contract will compare to those contained in the 1995 Contract.
For further information see "Item 1. Business -- Landfills -- Operated
Landfills -- San Bernardino County." The failure of the Company to obtain a new
contract will result in the loss of the Company's San Bernardino County
operations. Such loss will result in a greater concentration of the Company's
revenues and operating income among a limited number of franchises and permitted
operations.
Substantially all of the Company's assets and operations are located in
California. An economic slowdown in California (such as occurred in the early
1990s) or a change in California's environmental or related regulations that
negatively affects the waste management industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
Changes in Legislation and Political Uncertainty
The waste management industry is subject to federal, state and local
statutes, regulations, ballot initiatives and judicial decisions that impose
significant risks and compliance burdens on the Company. The adoption or
promulgation of new, or the amendment of existing, legislation and regulations
could cause the Company to lose franchises, reduce the value of its existing
franchises or require the Company to modify its waste disposal facilities and
methods of operation at substantial cost. In addition, because operations of
waste management companies are the subject of a high level of public concern,
unfavorable publicity may have an adverse effect on the Company.
Ballot Initiatives Affecting Ordinance. In November 1993 and November 1994,
initiatives were placed on the San Francisco general ballot which, if passed,
would have repealed or amended the Ordinance and would have opened refuse
collection in San Francisco to competition. Although these initiatives were
defeated (by votes of 76% to 24% and 65% to 35%, respectively), there can be no
assurance that other attempts will not be made to implement legislation with a
material adverse effect on the Company's operations. The Company incurred costs
in connection with its campaigns to defeat the 1993 and 1994 initiatives and may
incur significant costs in connection with future ballot initiatives, if any.
Future attempts to implement legislation may be financed by persons having
greater resources than the Company and may be successful in modifying or
repealing the Ordinance. There can be no assurance that the Ordinance will not
be modified or repealed in the future.
Potential Competitive Bidding. The Company provides waste collection
services in San Francisco pursuant to permits granted under the terms of the
Ordinance and in other communities generally pursuant to exclusive franchise or
other service agreements. In the event of the amendment or repeal of the
Ordinance or upon the expiration or termination of a franchise or service
agreement in other communities, the award of a franchise or service contract may
be determined by competitive bidding. The waste management industry is intensely
competitive and many of the Company's competitors have greater financial and
other resources than the Company and therefore there can be no assurance that
the Company will succeed in having its bid for such franchise or other service
contract accepted or that such franchise or other service contract, if accepted,
will be on terms and at prices which result in profit margins similar to those
currently earned by the Company.
Problems in Rate-Setting Process. The Company generally seeks to recover
all of its operating costs, including the costs of recycling services, landfill
closure and post-closure obligations and tipping fees in the rate-setting
proceedings that determine many of its collection, transfer station and landfill
rates. However, rate-setting bodies sometimes have been reluctant to allow all
of the Company's operating and related costs, including capital expenditures, to
be reflected in its rates. Political pressure has occasionally inhibited local
governments from allowing large rate increases and caused them instead to
increase rates gradually. Lack of public understanding of new regulatory
requirements which can significantly affect the Company's operating costs,
especially relating to recycling mandates and landfill closure and post-closure
maintenance, has sometimes made it difficult for the Company to
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obtain rate increases to cover such costs. In addition, certain municipalities,
including San Francisco, have not allowed the Company to recover through its
rates some or all ESOP or other corporate-related expenses. Given these
difficulties, there can be no assurance that the Company will succeed in
obtaining timely rate increases sufficient to cover all costs or sufficient to
maintain profit margins at historic levels. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Potential Flow Control Legislation. Many states and municipalities attempt
to direct the flow of municipal solid waste through a variety of means,
including the passage of laws and ordinances requiring solid waste to be
processed or disposed of at a particular facility. In addition, some
municipalities grant franchises and permits that have the effect of limiting who
may collect solid waste and where such waste may be brought for disposal. In
1994, the United States Supreme Court, in the case of Carbone v. Town of
Clarkstown, held unconstitutional a local ordinance that required all solid
waste generated within or brought into the locality to be disposed of at a
particular transfer station for which the town had guaranteed a certain minimum
tonnage of solid waste in order to help finance the construction of the transfer
station. Although there are many significant differences between the facts in
Carbone and the circumstances relating to the collection franchises, permits and
agreements held by the Company and to government actions related to such
franchises, permits and agreements, it is possible that these franchises,
permits and agreements could be challenged under a similar rationale. There can
be no assurance such a challenge would not be successful or would not adversely
affect the enforceability of the Company's exclusive franchises, permits and
agreements. Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress
but the attempts to pass such bills have been unsuccessful to date. At present,
it is impossible to predict the form in which such a bill, if any, will pass.
There can be no assurance that a bill will not be enacted that will adversely
affect the enforceability of exclusive franchise agreements or permits under the
interstate commerce clause of the U.S. Constitution.
Adverse Publicity. Because the Company's business is dependent on approvals
of political bodies, unfavorable publicity affecting public attitudes or
perceptions of the Company could result in political pressure, including
government action, which may have an adverse effect on the Company's business.
For example, the recent guilty pleas by a former employee and a former
consultant of the Company with respect to federal charges of conspiring to pay
and accept bribes to influence or reward a former San Bernardino County official
in connection with such person's official duties have generated significant
unfavorable publicity for the Company in San Bernardino County. Moreover, the
Company has in the past and may from time to time in the future receive
unfavorable publicity relating to litigation, regulatory actions and other
claims, including those involving environmental issues and employment practices.
Also, in the ordinary course of its business, the Company makes political
contributions to various state and local elected officials or candidates for
elective office and pays substantial compensation to consultants, lobbyists and
business opportunity finders, including persons who are former officials or were
formerly employed by officials of municipalities with which the Company does
business or may seek to do business. These activities could become the subject
of unfavorable publicity. There can be no assurance that unfavorable publicity
relating to Norcal or its affiliates will not have an adverse effect on the
Company's business or prospects.
Environmental Regulation and Potential Litigation
The Company's operations are subject to, and substantially affected by,
numerous federal, state and local laws and regulations that govern environmental
protection, zoning, public health and safety and other matters. In recent years,
these regulations have become increasingly stringent (particularly in
California).
These requirements and standards change and, to comply with new
requirements, the Company may from time to time be required to make significant
capital and operating expenditures. These expenditures may be necessary to
modify, replace or supplement equipment and facilities at substantial cost and
without any resulting increase in revenues. In addition, the Company will be
required to
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make substantial expenditures to satisfy statutory obligations concerning
closure and post-closure maintenance of the landfills it owns. The Company may
be unable to pass some or all of these expenditures on to its customers through
rate increases. Even if such expenditures can be passed on, the Company may
experience significant delays in recovering these expenditures. Moreover, the
cost of closure and post-closure monitoring may exceed the amount the Company
has set aside in trust funds and reserves to satisfy its regulatory obligations.
Environmental regulations may also impose restrictions on the Company's
operations. In order to develop and operate a landfill or other solid waste
management facility, for example, the Company usually must obtain, maintain in
effect and periodically renew several permits and often must obtain zoning,
environmental or other land use approvals. These permits and approvals are
difficult and time consuming to obtain or renew and may, under certain
circumstances, be modified or revoked by the issuing agency. Additionally, from
time to time, the Company may be subjected to actions brought by citizens'
groups or other private parties in connection with the grant of permits or
alleging violations of permits or other regulatory requirements. There can be no
assurance that the Company will successfully obtain and maintain in effect the
permits and approvals required for the successful operation and growth of its
business. The Company's failure to obtain or maintain in effect a significant
permit could adversely affect the Company's business and financial condition.
In the normal course of its business, the Company may become subject to
various judicial and administrative proceedings involving federal, state or
local agencies, or private parties. These proceedings may seek to impose fines
on the Company, to revoke or deny renewal of an operating permit or license held
by the Company, or to require the Company to remediate environmental problems.
The Company could incur substantial legal expenses during the course of such
proceedings and the outcome of one or more of these proceedings could have an
adverse impact on the Company's business.
Possible Liability for Environmental Remediation and Damages
With limited exceptions, federal and state laws impose joint, several and
strict liability upon present and former owners, operators and users of
facilities that release certain hazardous substances into the environment and
the generators and transporters of those substances, regardless of the care
exercised by such persons and regardless of when the hazardous substance is
first detected in the environment. All such persons may be liable for the costs
of site investigation, clean up and natural resource damage. Many of such
hazardous substances can be found in household waste. The Company may face
claims for remediation of environmental contamination, personal injury, property
damage or damage to natural resources with respect to facilities it currently or
formerly owned, operated or used. Costs for remediation of, and damages and
penalties for, environmental contamination can be substantial and if incurred by
the Company such liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. There can be no assurance that the
Company will identify all problems or risks in connection with the businesses it
acquires, including environmental problems or risks. As a result, the Company
may have acquired, or may in the future acquire, landfills or other properties
that have unknown environmental problems and related liabilities. The Company
will be subject to similar risks and uncertainties in connection with the
acquisition of facilities that formerly had been operated or owned by businesses
acquired by the Company.
A subsidiary of the Company has indemnification obligations to the City and
County of San Francisco and the owner of the landfill at which such subsidiary
deposits a substantial amount of waste with respect to damages, removal and
remedial costs associated with the deposit of hazardous and certain other types
of waste. Neither the Company nor the subsidiary maintains insurance with
respect to these indemnification obligations, although certain costs resulting
from such obligations may be reimbursed through a reserve fund maintained by the
City and County of San Francisco or through
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rate increases. There can be no assurance that the reserve fund or rate
increases will be adequate to satisfy such indemnification obligations. The
Company's collection agreements typically contain general indemnifications by
the applicable operating subsidiary of the Company, as well as, in some cases,
indemnification obligations with respect to costs and damages arising from
hazardous waste.
Insurance, Bonding and Letters of Credit
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. Liability for environmental damage
significantly in excess of these limits could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to obtain such insurance in the
future.
The Company carries a broad range of insurance coverage that it considers
adequate to protect its assets and operations from "risk of loss." The Company's
commercial general liability, general business automobile liability, and
umbrella and excess liability policies provide an aggregate of $50.0 million
coverage for any single occurrence, subject to a variety of exclusions and a
self-insurance requirement of $0.5 million. Substantially all of the Company's
present workers' compensation liabilities are self-insured and some of its
pre-existing workers' compensation liabilities are self-insured; however, this
liability is capped at a maximum of $0.5 million per claim with workers'
compensation insurance covering liabilities in excess of this amount. In
addition, certain employee and retiree healthcare liabilities are self-insured.
Norcal also provides director and officer and ERISA fiduciary insurance.
The Company is required to post performance bonds in connection with
certain contracts on which it bids. In addition, the Company is usually required
to post a performance bond or a bank letter of credit at the time of execution
of a municipal collection contract. Some of these performance bonds are secured
by letters of credit posted by the Company. At September 30, 1999, the Company
had performance bonds outstanding in the aggregate amount of $25.1 million, and
had provided letters of credit of approximately $0.5 million to secure the
Company's obligations to indemnify the surety companies. If the Company were to
be unable to obtain surety bonds or letters of credit in sufficient amounts or
at reasonable rates, it might be precluded from bidding on certain contracts,
entering into additional municipal collection contracts or obtaining or
retaining landfill operating permits. See "Risk Factors -- Competitive
Industry."
As of September 30, 1999, the Company had a $1.0 million letter of credit
outstanding pertaining to workers' compensation deferred premiums.
Required Payments for ESOP Participant Benefits
To the extent Norcal contributes funds to the ESOP in order for the ESOP to
pay cash benefits due to retired, terminated or withdrawing ESOP participants,
or to the extent Norcal is obligated to repurchase common stock distributed to
participants, Norcal will have less cash available to make payments on its
outstanding indebtedness or for other reasons. The amount Norcal may contribute
to the ESOP to fund such ESOP distribution obligations (or may use to repurchase
common stock distributed by the ESOP) will increase significantly in the future
as the Company's workforce ages and retires, as additional shares of common
stock are allocated to participants, if eligible participants elect to receive
in-service withdrawals or if the value of the common stock increases.
Union Matters
As of September 30, 1999, about 73% of the Company's approximately 2,000
employees were represented by unions. While the Company believes that it
generally has had good relations with its union employees, the Company was the
subject of a work stoppage during 1997. On April 24, 1997,
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employees represented by the Sanitary Truck Drivers and Helpers Union Local 350
International Brotherhood of Teamsters ("Local 350") initiated a strike against
certain San Francisco operations of the Company. The strike was resolved on
April 26, 1997 when Local 350 voted to accept a five-year contract. While this
strike was resolved quickly, there can be no assurances that the Company will
not be subject to future work stoppages or that such stoppages will not continue
for extended periods. In the event that the Company is subjected to an extended
strike or other work stoppage, there could be a material adverse effect on the
Company's business, financial condition and results of operations.
In connection with the resolution of the San Francisco strike, a provision
of the new contract effects an increase in pension benefits. The Company
believes that it was agreed that the increase to certain pension benefits was to
be prospective. Subsequently, Local 350 asserted that it understood the increase
to be retroactive. The Company has served upon Local 350 a demand to arbitrate
this dispute under the terms of the collective bargaining agreement between the
parties. 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. The ultimate outcome of this matter cannot be determined at this
time and the results of the rate application process 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.
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, 1999 would increase
by an additional $8.2 million and reduce stockholder's equity by $1.8 million.
In addition, if the increased pension benefits are provided, the Company's
estimated incremental increase in its annual expense for employee benefits would
be approximately $3.1 million for pension and medical costs. Such incremental
increase in expense would be mostly offset by higher revenue if the Company is
successful in obtaining increased rates to cover the additional funding. The
above estimates are based on a discount rate of 7.5%. The discount rate applied
under generally accepted accounting principles ("GAAP") fluctuates with market
conditions. A change in the discount rate can result in significant adjustments
to the ABO.
Dependence on Senior Management
The Company is highly dependent on the efforts of its senior management
team. The loss of services of any member of senior management may have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company's success may also be dependent on its
ability to hire and retain additional qualified management personnel. There can
be no assurance that the Company will be able to hire and retain such personnel.
The Company does not maintain "key man" life insurance.
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Competitive Industry
The solid waste industry is highly competitive. Operations require
substantial technical, managerial and financial resources. The Company competes
with large publicly-traded national solid waste companies, including Waste
Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc. and
their affiliates, several smaller publicly-traded regional companies and other
regional and local companies, some of which have significantly greater financial
and other resources, lower cost of capital and more established market positions
than the Company. Additionally, in smaller markets, the Company may be at a
competitive disadvantage with respect to regional and local companies, which may
have significantly lower operating costs. The Company's competitors also may not
be subject to restrictions on their ability to incur new indebtedness, obtain
necessary performance bonds or letters of credit, or make capital expenditures,
strategic acquisitions or engage in certain expansions of their businesses such
as those imposed on the Company by the Credit Agreement and the indenture
relating to the Senior Notes (the "Indenture"). As a result, competitors of the
Company may be better able to compete more aggressively for new permits and
franchises (including those held by the Company), pay higher prices for
acquisition candidates, withstand economic downturns and volatility in prices
for recyclable commodities and bear the costs of new regulations.
Acquisition-Related Risks
The Company intends to grow, in part, through the acquisition of additional
franchises, contracts, permits and other businesses. Such growth, if any, may
place significant strain on the Company's management, working capital and
financial control systems. As a result, the Company's future operating results
will depend, in part, on its ability to make acquisitions at appropriate
purchase prices and integrate successfully such acquisitions, including its
ability to recruit, if necessary, qualified management and other personnel to
supervise such operations and improve financial controls. There can be no
assurance that the Company will be able to locate suitable acquisition
candidates, make and manage any such acquisitions successfully or that such
acquisitions will not materially and adversely affect the Company's financial
condition or results of operations. To fund significant expansion, the Company
may require financing for amounts which exceed the amount of its internally
generated cash and borrowing capacity under existing credit facilities. There
can be no assurance that such financing will be available. Moreover, the
Company's lack of a publicly traded equity security and its alternative cost of
financing, which may be higher than that of its competitors, could limit the
amount the Company could prudently pay for acquisition candidates. Also, the
Credit Agreement and the Indenture restrict the Company's ability to make
acquisitions.
Substantial Leverage
As of September 30, 1999, the Company had outstanding long-term debt of
$177.3 million and stockholder's equity of $65.0 million. This level of
indebtedness and the debt service obligations arising therefrom may have one or
more of the following effects on the Company: (i) the Company's ability to
obtain additional financing in the future may be limited; (ii) a significant
portion of the Company's cash provided from operations is and will be dedicated
to servicing the Company's indebtedness, thereby reducing the funds available to
the Company for operations and capital expenditures; and (iii) the Company may
be more vulnerable to economic downturns or other adverse developments than less
leveraged competitors and thus may be limited in its ability to withstand
competitive pressures. Furthermore, the Credit Agreement currently provides for
total maximum borrowing availability of $90 million (subject to certain
limitations imposed by certain financial ratios and such maximum amount may be
reduced by $2.5 million per calendar quarter), $25.0 million of which may be
utilized for letters of credit, all of which indebtedness is scheduled to become
due prior to the time any principal payments may be made on the Senior Notes
(except for certain optional redemptions). As of September 30, 1999, the Company
had availability under the Credit Agreement of approximately $52.9 million, with
an additional $22.7 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things. In
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addition, certain covenant measures in the Credit Agreement become more
restrictive over time. Applying the more restrictive covenant measures in effect
beginning December 31, 1999 to the Company's estimated results of operations for
the twelve month period ending December 31, 1999 would result in a decrease in
availability under the Credit Agreement of approximately $4.4 million.* The
Company's performance relative to the covenant measures is calculated on a
quarterly basis. The Company is also subject to certain limitations on incurring
additional indebtedness in the Indenture.
Possible Inability to Service Debt
The Company's ability to make scheduled payments on its indebtedness,
including interest payments on the Senior Notes, depends on its financial and
operating performance (including its ability to generate sufficient cash flow),
which, in turn, is subject to prevailing economic conditions and to financial,
business and other events, many of which are beyond its control (including
delays in obtaining rate increases, the ability to renew franchises at
historical profit margin levels, and fluctuations in prices for recyclable
commodities). Moreover, the Company may incur additional indebtedness in the
future. There can be no assurances that the Company's cash flow will be
sufficient to repay its debt. The Company's ability to make scheduled payments
also may be affected by its obligations to provide cash to fund ESOP
distributions to retired, terminated or withdrawing participants. For
information relating to the possible loss of the Company's contract with San
Bernardino County and the impact of such loss on the Company's ability to
service its debt, see "Item 1. Business -- Landfills -- Operated
Landfills -- San Bernardino County."
Effect of Holding Company Structure
Norcal has no operations other than those relating to its subsidiaries and
depends on the earnings and cash flows of, and dividends from, such subsidiaries
to pay its obligations, including payments of principal and interest on its
indebtedness. The ability of Norcal's subsidiaries to pay such dividends will be
subject to, among other things, state law and contractual restrictions.
Substantially all of the assets of Norcal's wholly-owned subsidiaries (the
"Subsidiary Guarantors") have been pledged as collateral for their guarantees of
Norcal's obligations under the Credit Agreement and the capital stock of (or
partnership interests in) all the Subsidiary Guarantors has been pledged as
collateral for Norcal's obligations under the Credit Agreement. In the event of
a default under the Credit Agreement, the rights of Norcal with respect to the
liquidation of these assets would be subject to the prior claims of the lenders
under the Credit Agreement. A default under the Senior Notes constitutes an
event of default under the Credit Agreement. Similarly, certain defaults
(including the failure to pay principal or interest or defaults resulting in
acceleration) under other indebtedness in an outstanding principal amount of at
least $5.0 million constitute an event of default under the Indenture.
Seasonality
The Company's revenues tend to be higher during the spring and summer
months (third and fourth fiscal quarters) due to higher volumes of certain types
of waste, such as construction and demolition debris. Such increased volumes
result in higher revenues and earnings from the Company's transfer stations,
waste collection, and landfill operations during such months. In addition,
project management revenues are highest in the fourth quarter as a result of the
favorable construction conditions. Unusual changes in weather patterns can also
affect the operating results on a quarter to quarter basis.
Fluctuations in Prices for Recyclable Commodities
The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities. However, costs
(including significant capital costs) related to recycling do not fluctuate in
accordance with changes in
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prices for recyclables. As a result, the Company may experience increases in
profitability with increases in commodity prices, or reduced profitability (or
losses) at times of low commodity prices. A substantial portion of the Company's
recycling revenues are derived from the sale of various grades of recycled paper
and paper products, the prices for which, in recent years, have suffered
declines from their historical highs.
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.
Projects. The Company has established a corporate level Year 2000 project
team to coordinate the efforts in the Company's operating units and corporate
departments to address the Year 2000 issue in three major areas: information
technology, supply chain and embedded systems. Information technology is the
computer hardware, systems and software used throughout the company's
facilities. Supply chain includes the third parties with which the Company
conducts business. Embedded systems can exist in the automated equipment and
associated software, which are used in the Company's operations. Progress
reports on the Year 2000 project are presented regularly to the Company's senior
management and periodically to the Board of Directors.
The Company has addressed and continues to address Year 2000 compliance in
three overlapping stages: (i) the identification and assessment of all critical
equipment, software systems and business relationships requiring modification or
replacement prior to 2000; (ii) the renovation and testing of modifications to
all significant systems, including embedded systems; and, (iii) the development
of contingency and business continuation plans to mitigate the extent of any
disruption to the Company's operations arising from the Year 2000 problem.
The Company believes that it has replaced all operating equipment and
computer hardware which was not Year 2000 compliant or which could not be
modified to be Year 2000 compliant.
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 of the vendors representation and the Company's internal testing,
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. In
addition, the Company has renovated its remaining legacy systems which include
customer billing and customer service support systems to be Year 2000 compliant.
The Company has investigated 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. The Company continues to monitor this
through periodic discussions with suppliers, customers and other third parties.
The Company has surveyed its mission critical suppliers, customers and third
parties. The Company has received responses from nearly all of these mission
critical entities and believes that most of the entities are currently compliant
or have Year 2000 compliance programs in progress. Based on current information,
the Company believes that it will not experience any significant Year 2000
related problems as a direct consequence of its relationships with such third
parties.
The Company has developed contingency plans which are intended to mitigate
the impact on its operations, if any, of potential failures of mission-critical
systems arising from the Year 2000 issue.
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These plans are designed to protect the company's assets, continue safe
operations, and enable the resumption of any interrupted operations in a timely
and efficient manner. However, contingency planning for Year 2000 issues is
complicated by the possibility of multiple and simultaneous incidents, which
could significantly impede efforts to respond to emergencies and resume normal
business functions. Such incidents may be outside of the Company's control, for
example, if third parties with whom the Company does business and has material
relationships do not successfully address their own material Year 2000 problems.
Costs. To date, the Company has charged to expense under $0.5 million in
effecting Year 2000 compliance. The Company anticipates that its remaining costs
in effecting such compliance will not be material.*
Risks. Factors, many of which are outside the control of the Company, that
could affect the Company's ability to be Year 2000 compliant by the end of 1999
include: the failure of suppliers, contractors, customers, governmental entities
and others to achieve compliance; the continued availability of the internal and
external resources necessary for the Company to complete Year 2000 compliance;
and the inability or failure to identify all critical Year 2000 issues or to
develop appropriate contingency plans for all Year 2000 issues that ultimately
may arise.
The foregoing disclosure is based on the Company's current expectation,
estimates and projections, which could ultimately prove to be inaccurate.
Because of uncertainties, the actual effects of the Year 2000 issues to the
Company may be different from the Company's current assessment. While the
Company believes that its Year 2000 project will adequately address its internal
issues, the failure of the Company's suppliers, customers and other third
parties to adequately address the issue could result in disruption to the
Company's operations and have a material adverse impact on its results of
operations, cash flow and financial condition, the extent of which the Company
cannot yet determine.
EMPLOYEES
The Company employed approximately 2,000 persons as of September 30, 1999.
Seventy-three percent of the Company's employees are covered under union
contracts with varying terms and expiration dates. On April 24, 1997, employees
represented by the Sanitary Truck Drivers and Helpers Union Local 350
International Brotherhood of Teamsters ("Local 350") initiated a strike against
certain of the Company's San Francisco operations. On April 26, 1997, employees
represented by Local 350 voted to accept a five-year contract which provides for
an aggregate 13.4% wage increase and certain amendments to provide early
retirement and increase other benefits. The first-year cost of the contract was
included in the most recent rate increase approved in San Francisco and the
Company intends to seek rate recovery of scheduled future cost increases through
the rate setting process. There can be no assurance that the Company will
succeed in obtaining timely rate increases sufficient to cover all costs or
sufficient to maintain profit margins at historical levels. For a discussion of
outstanding issues related to the union contract, see "Risk Factors -- Union
Matters."
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ITEM 2. PROPERTIES
The principal properties of the Company consist of landfills, transfer
stations, waste recovery, administrative and maintenance facilities and other
land and improvements. The Company owns an aggregate of 302 acres of property on
which its California operations, maintenance, storage, warehousing and
administration facilities are situated. It owns six transfer stations, five of
which are located at the Company's collection sites. The Company also operates
three MRFs. The Company owns four active landfills in California consisting of
approximately 2,500 acres, including contiguous areas.
The Company's headquarters are located in approximately 25,000 square feet
of leased office space in San Francisco, California, pursuant to a lease that
expires April 30, 2009. Under a lease expiring in October 2000, the Company
leases 62,000 square feet of industrial space in the Los Angeles metropolitan
area for its newly acquired Southern California operations. Under a lease
expiring in July 2023, the Company leases 309,000 square feet of industrial
space in San Francisco for recycling operations. Under a lease expiring in 2007,
the Company leases 29,000 square feet of industrial space in Oakland,
California, where the Company's medical waste treatment and disposal subsidiary
conducts business.
The Company owns a 302-acre site situated in San Benito and Santa Clara
Counties in California that formerly was used to spread waste water sludge. The
soil quality suffered from such activities but was returned to normal
agricultural condition in 1993. The Company may use the site again to spread
waste water sludge on a more limited basis and for other waste diversion
activities.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION REGARDING THE ESOP NOTES
In 1995, the Company and the ESOP settled litigation by certain former
holders of the prior notes issued by the ESOP 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 (the
"Settlement"). The litigation was Abraham, et al. v. Norcal Waste Systems, Inc.,
et al., No. C94-3076 CAL, in the United States District Court for the Northern
District of California. Pursuant to the Settlement, the claims against all
defendants, including Norcal and the ESOP, were dismissed with prejudice, with
the exception of certain of plaintiffs' claims against one of the named
financial institutions, as to which the litigation proceeded and judgment
ultimately was entered against the plaintiff and in favor of the financial
institution. 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
the plaintiffs' released claims. That financial institution later made claims
against Norcal and the ESOP related to the Settlement and alleging that Norcal
and the ESOP have post-Settlement indemnity obligations to the institution. The
court rejected those claims, and ultimately entered judgment in favor of Norcal
and the ESOP in connection with the claims of the financial institution. The
financial institution also brought a second lawsuit against the ESOP alone,
raising the same indemnity issues that were at issue in the previously described
action. The Court rejected those claims as well, and entered judgement for the
ESOP. The financial institution is appealing the adverse judgments. The
plaintiffs in the Abraham matter, in turn, are appealing from the judgement
entered against them in favor of that financial institution; however, such
plaintiffs have no remaining claims against Norcal or the ESOP, having settled
those claims in 1995. Norcal and the ESOP believe that the financial
institution's claims against them are without merit and that the Court's rulings
will be affirmed on appeal. However, in the event that these judgments are
overturned on appeal, it is unlikely, given the terms of the Settlement, that
Norcal's and the ESOP's financial exposure to the financial institution would
materially exceed the amount of the financial institution's legal fees and
expenses.
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SAN FRANCISCO UNION ARBITRATION
On April 24, 1997, employees represented by the Sanitary Truck Drivers and
Helpers Union Local 350 International Brotherhood of Teamsters ("Local 350")
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-year
contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. On February 10, 1998, the Company
filed a petition for order compelling arbitration in U.S. District Court for the
Northern District of California entitled Norcal Waste Systems, Inc., Golden Gate
Disposal and Recycling, Inc. and Sunset Scavenger Company v. Sanitary Truck
Drivers and Helpers Union Local 350, IBT. On April 23, 1998 the Company filed a
motion for order compelling such arbitration. On May 29, 1998, the Court ruled
in the Company's favor and directed the parties to proceed with arbitration.
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. The ultimate outcome of this matter cannot be determined at this
time and the results of the rate application process 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. See "Risk
Factors -- Union Matters."
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, 1999 would increase
by an additional $8.2 million and reduce stockholder's equity by $1.8 million.
In addition, if the increased pension benefits are provided, the Company's
estimated incremental increase in its annual expense for employee benefits would
be approximately $3.1 million for pension and medical costs. Such incremental
increase in expense would be mostly offset by higher revenue if the Company is
successful in obtaining increased rates to cover the additional funding. The
above estimates are based on a discount rate of 7.5%. The discount rate applied
under generally accepted accounting principles ("GAAP") fluctuates with market
conditions. A change in the discount rate can result in significant adjustments
to the ABO.
DIR DETERMINATION LETTER
On February 3, 1998, the Company received a determination letter from the
Department of Industrial Relations of the State of California ("DIR") adverse to
the Company. The DIR ruled that the operation of San Bernardino County Landfills
is a public work within the meaning of the labor code and therefore subject to
prevailing wage laws for construction. This determination was in response to a
request by the Company for a determination after the Southern California Labor/
Management Operating Engineers Contract Compliance Committee (the "Compliance
Committee") filed a Complaint (Case No. 4002639001) with the Long Beach office
of the Division of Labor
26
<PAGE> 28
Standards Enforcement. The Complaint alleged that the Company is not paying
prevailing wages and benefits required for a public work by the Labor Code to
those persons employed by the Company to operate the landfills in San Bernardino
County.
The Company filed an appeal of the DIR's ruling with the Director of the
DIR (the "Director") on March 4, 1998. On July 27, 1998, the Director issued a
decision affirming the DIR's initial determination that the operation of the San
Bernardino County landfills is a public work and is therefore subject to
prevailing wage laws. However, the Director rejected the automatic adoption of
general construction industry prevailing 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. On July 25, 1999, the Company and the International Union of Operating
Engineers, Local Union No. 12 ("Local 12") completed a three year collective
bargaining agreement covering substantially all the operating personnel at the
San Bernardino landfills and transfer stations operated by the Company. After
the collective bargaining agreement was entered into, the Compliance Committee
requested that the DIR withdraw the complaint. On September 24, 1999, the DIR
accepted the Compliance Committee's request and issued a notice that the case
had been closed.
HUMBOLDT COUNTY DISPOSAL AGREEMENT
The Company's subsidiary, City Garbage Company of Eureka, Inc., is
currently in discussion with the County of Humboldt over sums due under the
Solid Waste Disposal Agreement which expired on September 28, 1998 (the
"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 $1 million. If the matter cannot be resolved
informally, it will be subject to arbitration pursuant to the agreement between
the parties. Although the outcome of any arbitration is inherently uncertain,
the Company believes that it is likely to recover a substantial portion of the
disputed amount.
ENVIRONMENTAL LIABILITIES
Cummings Road Landfill. In 1987, contamination was confirmed in the
groundwater underlying and in the vicinity of the Company's Cummings Road
Landfill in Humboldt County, California. Investigations indicated that the
landfill was the source of the contamination. In response to civil claims, the
Company made cash payments, restricted use of certain property, exchanged
property and provided an alternative water supply to certain residents and
businesses affected or potentially affected by the impacted groundwater. As part
of a revised corrective action plan submitted to, and in 1994 approved by, the
Regional Water Quality Control Board, various landfill improvements have been
made including a trench to intercept upgradient groundwater to divert it away
from the landfill. In July 1999, the Company and Humboldt Waste Management
Authority ("HWMA") entered into an agreement in principal concerning the
Cummings Road Landfill and the Company's Eureka Transfer Station. In November
1999, the Company entered into an agreement with HWMA, pursuant to which the
Company would transfer to HWMA ownership of such properties as well as certain
operating equipment. As part of the agreement, the Company would receive certain
cash payments totaling approximately $4.2 million from the HWMA and HWMA would
assume certain closure/post-closure, corrective action and operational
responsibilities with respect to the Cummings Road Landfill. The Company would
retain liability for its operation of the landfill prior to the closing of the
transaction and for any defect in corrective action work performed by the
Company at the landfill prior to the closing of the transaction. Under the
agreement, the Company would also transfer to HWMA its interest in the
closure/post-closure and corrective action trust funds relating to the landfill.
The
27
<PAGE> 29
consummation of the agreement is subject to several closing conditions. Provided
such conditions are met or waived, the closing is expected to occur before
January 15, 2000.
In the ordinary course of its business, the Company has incurred
environmental liabilities at some of its other sites including soil and water
contamination. Although the Company believes the environmental liabilities at
these sites will not have a material adverse effect on the Company, there can be
no assurance that such liabilities will not be material or that other material
liabilities will not arise in the future at these or other sites.
OTHER MATTERS
From time to time, in the normal course of its business, the Company may
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. The Company could incur substantial legal
expenses during the course of such proceedings and the outcome of one or more of
these proceedings could have an adverse impact on the Company's business. From
time to time, the Company also may be subjected to actions brought by
individuals or citizens' groups in connection with the grant or permits for its
operations or alleging violations of permits or other regulatory requirements
pursuant to which the Company operates, which, if successful, could have a
material adverse effect on the Company's business. See "Risk
Factors -- Environmental Regulation and Potential Litigation."
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to the
normal course of business are adequately provided for or that resolution of such
matters will not have a material adverse impact on the financial condition of
the Company; however, there can be no assurance that the impact of such matters
on its results of operations or cash flows for any given reporting period will
not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is 100% owned by the ESOP and is not publicly
traded.
The Company has declared no cash dividends on its common stock since 1988.
The Indenture relating to the Senior Notes provides that the Company may not,
and may not permit any of its subsidiaries to, directly or indirectly, declare
or pay any dividend or make any distribution on account of, or any contribution
in respect of, its capital stock, other than dividends or distributions payable
in capital stock (other than stock, or any security convertible into common
stock, with certain mandatory dividend or redemption provisions) of the Company
or dividends or distributions payable from a subsidiary to the Company or any
wholly-owned subsidiary of the Company, if at the time of and after giving
effect to such dividend, distribution or contribution, certain conditions are
not met. This provision does not prohibit certain purchases of capital stock
distributed by the ESOP, certain contributions or dividends paid to the ESOP, or
certain loans to the ESOP.
Pursuant to the Credit Agreement, neither the Company nor any of its
subsidiaries may declare or pay any distributions (including dividends) on or in
respect of any class of capital stock other than (i) distributions payable
solely in its capital stock; (ii) distributions of cash by a subsidiary of the
Company to a Subsidiary Guarantor or to the Company; (iii) certain distributions
made to the ESOP; (iv) distributions made by the Company to repurchase any
capital stock of the Company distributed by the ESOP, to the extent made under
certain circumstances; and (v) other distributions not to exceed $1,000,000 in
the aggregate per fiscal year, subject to certain events of default.
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
29
<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information
regarding the Company for the five years ended September 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Collection and disposal operations.............. $267,813 $249,824 $241,251 $225,328 $221,483
Third party landfill management services........ 59,021 71,519 62,191 45,623 21,516
Recycled commodities sales...................... 16,333 16,514 16,359 17,264 28,502
-------- -------- -------- -------- --------
Total revenues........................... 343,167 337,857 319,801 288,215 271,501
Cost of operations:
Operating expense............................... 242,132 240,761 227,491 202,848 183,865
Depreciation and amortization................... 21,267 20,153 19,732 18,320 19,985
ESOP compensation expense(a).................... 3,209 15,152 13,128 10,291 7,923
General and administrative...................... 37,449 34,181 32,476 30,965 26,446
-------- -------- -------- -------- --------
Total cost of operations................. 304,057 310,247 292,827 262,424 238,219
-------- -------- -------- -------- --------
Operating income.................................. 39,110 27,610 26,974 25,791 33,282
Interest expense.................................. (26,091) (26,165) (25,649) (23,913) (19,909)
Interest income................................... 3,294 3,755 2,463 1,804 1,695
Gain (loss) on dispositions, net.................. 568 3,746 119 (477) 1,279
Settlement of litigation(b)....................... -- -- -- (3,648) --
Other income (expense)............................ 1,006 515 2,619 (693) 748
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and extraordinary item............. 17,887 9,461 6,526 (1,136) 17,095
Income tax expense................................ 331 -- -- -- 6,662
-------- -------- -------- -------- --------
Income (loss) before extraordinary item........... 17,556 9,461 6,526 (1,136) 10,433
Extraordinary gain on early extinguishment of
long-term debt, net of $0 income taxes.......... -- -- -- 31,379 --
-------- -------- -------- -------- --------
Net income............................... $ 17,556 $ 9,461 $ 6,526 $ 30,243 $ 10,433
======== ======== ======== ======== ========
BALANCE SHEET DATA
Property and equipment, net....................... $165,010 $147,634 $142,933 $137,147 $132,431
Total assets...................................... 393,809 371,861 351,169 321,235 299,152
Total long-term debt, including current
portion(c)...................................... 177,252 176,441 177,419 176,740 205,410
Stockholder's equity (deficit).................... 64,970 43,997 23,509 6,117 (43,878)
</TABLE>
- ---------------
(a) Non-cash ESOP compensation expense is calculated under the shares allocated
method based upon repayment on the ESOP's indebtedness to the Company,
funded by contributions from the Company.
(b) Data for 1996 represent non-recurring expenses incurred in connection with
the settlement of litigation involving the ESOP Notes.
(c) Includes indebtedness of the ESOP in fiscal year 1995 as required to be
reflected on the Company's balance sheet by GAAP.
30
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise indicated, references in the discussion below to a
particular year are references to the Company's fiscal year ended September 30.
FORWARD LOOKING INFORMATION
Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described earlier (see "Risk Factors" in Item 1) and elsewhere in
this Annual Report include, but are not limited to: changes in general economic
conditions, inability to maintain rates sufficient to cover costs, inability to
obtain timely rate increases, inability to reduce costs related to the loss of
revenues, loss of material contracts (including the loss of the Company's
contract with San Bernardino County), fluctuations in commodities prices,
changes in environmental regulations or related laws, inability to settle union
labor contract disputes, competition, failure to achieve Year 2000 compliance
and consequences of the Company's S Corporation election. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by it or on its behalf.
GENERAL
The Company's revenues are comprised primarily of fees charged to
residential, commercial and industrial customers for the collection and disposal
of solid waste, disposal fees charged to third parties who dispose at the
Company's transfer stations and landfills, fees charged for landfill operations
and solid waste systems management activities for third party landfill owners,
and revenues generated from the sale of recyclable materials.
Collection and disposal revenues are subject to pressures from a variety of
sources, including increased competition, reductions and diversion of solid
waste and regulatory changes. Revenues are generated through rates charged to
customers. Residential rates are generally covered by formal rate setting
mechanisms as established by rate boards or other local government
jurisdictions, which provide a specified return on allowable costs. Commercial
and industrial rates are generally subject to competitive considerations if not
covered by formal rate setting mechanisms. The rate setting process may result
in the exclusion of certain costs and/or delays in cost recovery. To the extent
that certain operating costs are excluded from the allowable costs to be
recovered, operating margins will be negatively impacted.* The Company believes
the trend of increasing pressure on collection rates, and therefore profit
margins, will continue in the future.*
Approximately 39% of the Company's revenues and substantially more of its
operating income in fiscal year 1999 were derived from services performed in the
City and County of San Francisco.
During 1996, the Company commenced management of the operations in San
Bernardino County under a new contract. In addition to the operations and
engineering activities with respect to all active landfill sites, the contract
includes the opportunity to generate substantial revenues through the
development and implementation of the County's Solid Waste Strategic Plan.
Approximately 16% of the Company's revenues for fiscal year 1999 were derived
from services performed for San Bernardino County. The Company's revenues from
San Bernardino County are derived from two categories of services. The core
service is the performance of ongoing landfill operations activities. Revenues
from this component accounted for approximately 35% of total revenues generated
in San Bernardino County in 1998. Over the term of the contract the amount of
revenues from this core service has varied and will continue to vary primarily
as a result of changes in volume of waste deposited at landfills and changes in
the Company's per ton compensation rate. The other component of revenues
represents activities associated with the planning and implementation of the
strategic plan to regionalize landfill operations in San Bernardino County. This
includes planning, engineering and construction management for landfill
expansions, transfer station construction and landfill closures. It is
anticipated that San
31
<PAGE> 33
Bernardino County plans to spend approximately $50 million through June 30,
2001, and, if the County elects to complete its current strategic plan, up to an
additional $50 million during the subsequent two-to three-year period, at which
time the major work in connection with the strategic plan is expected to be
completed.* See "Item 1. Business -- Landfills -- Operated Landfills -- San
Bernardino County."
As a consequence of a former Company employee's and a former Company
consultant's guilty pleas to federal charges of conspiring to pay and accept
bribes to influence or reward a former San Bernardino County official in
connection with such person's official duties, the County has alleged a default
under the 1995 Contract. On December 14, 1999, the County Board of Supervisors
directed the County's Chief Administrative Officer to negotiate an amendment
with the Company to end the 1995 Contract as soon as the County can complete a
competitive bidding process through a Request for Proposal, review submitted
bids, and negotiate a replacement contract, but in no event later than June 30,
2001. Although the County's Chief Administrative Officer has estimated in his
report to the County's Board of Supervisors that the process should take 15 to
18 months, the County's Board of Supervisors has requested that the process be
completed more quickly, if possible. In response to this request, the County's
Chief Administrative Officer has stated that the process could potentially be
accomplished in 12 to 15 months. The Company is currently unable to estimate how
much time the County will need to complete these procedures. Moreover, the
Company does not know whether it can successfully negotiate such an amendment,
what terms may ultimately be negotiated in such an amendment or whether the
County's Board of Supervisors will approve any such amendment. Assuming the
County is unable to complete the Request for Proposal and enter into a new
contract in the next nine months, the Company does not expect an amendment to
end the 1995 Contract or the termination of the 1995 Contract to have a
significant impact on its cash flows, results of operations or financial
condition for fiscal year 2000. The County has indicated that the Company will
be permitted to bid on the new contract, but there can be no assurance that the
Company will be awarded the new contract, or if the Company is the successful
bidder, how the terms of the new contract will compare to those contained in the
1995 Contract.
During fiscal years 1999, 1998 and 1997, revenues derived from the services
the Company performed for San Bernardino County were approximately $55.1 million
(16% of the Company's total revenue), $65.1 million (19% of the Company's total
revenue) and $55.1 million (17% of the Company's total revenue), respectively.
Revenues less direct expenses including consulting fees (excluding allocable
corporate management fees, lease charges, interest expense and the non-cash
portion of ESOP expense, and depreciation and amortization), related to the
Company's San Bernardino operations for fiscal years 1999, 1998 and 1997 were
approximately $6.6 million, $7.9 million and $7.4 million, respectively. While
the Company's results of operations and cash flows will be adversely impacted if
an amendment to end the 1995 Contract is negotiated or the 1995 Contract is
terminated and the Company and the County do not enter into a new contract
having comparable terms, management believes that such event will not have a
material adverse effect on the Company's financial condition or on its ability
to maintain its operations and service its debt. For further information see
"Item 1. Business -- Landfills -- Operated Landfills -- San Bernardino County."
The revenues derived from the sale of recyclable materials are volatile and
fluctuate in accordance with changes in prices of recyclable commodities which
in turn are, in many cases, dependent on worldwide supply of and demand for such
recyclable commodities. In the aggregate, the costs related to recycling
operations do not fluctuate in accordance with changes in the prices of
recyclable commodities and as a result the Company may experience increases or
decreases in profitability depending on changes in the prices for recyclable
commodities.
Operating expenses include labor, landfill project and subcontractor costs,
disposal fees paid to third parties, fuel, equipment maintenance and rentals,
engineering, consulting and other professional services and other direct costs
of operations. Also included are accruals for landfill closure and corrective
action costs, consistent with regulatory requirements. General and
administrative expenses include management salaries, administrative and clerical
overhead, professional services costs and other fees and expenses.
32
<PAGE> 34
ESOP compensation expense includes amounts contributed by the Company to
the ESOP to allow the ESOP to repay its intercompany loans to the Company along
with amounts to fund distributions to retired, terminated or withdrawing
participants. The total contributions are subject to various limitations imposed
by the Internal Revenue Code of 1986, as amended, and are generally tax
deductible. The debt repayments by the ESOP result in allocation of Company
common stock to ESOP participants' accounts pursuant to an allocation formula.
Distribution payments are made by the ESOP to retired, terminated or withdrawing
participants based on their vested allocated shares of Company common stock. The
Company expects future contributions to the ESOP to fund distributions to
increase significantly as additional employees reach retirement age, as
additional shares are allocated to employee accounts, if eligible participants
elect to receive in-service withdrawals and if the appraised value of the
Company common stock increases.* During 1998, the Company made contributions to
the ESOP that, in addition to funding the distribution obligation and the
scheduled loan repayment, allowed the ESOP to prepay approximately $10.2 million
of inter-company loans. The additional contribution for the prepayment resulted
in substantial tax savings and additional ESOP compensation expense of
approximately $7.4 million related to the additional shares allocated. On June
24, 1999, the Company and the ESOP executed an amendment to the Fourth Amended
and Restated ESOP Loan Agreement related to the Company's S Corporation
election. The amendment allows the ESOP to pay interest only during the period
the Company remains an S Corporation, provided that the entire principal balance
is still repaid by fiscal year 2008 (the final due date of the ESOP Agreement).
As a result of the amendment, the Company's ESOP compensation expense of $1.0
million in 1999 related to the intercompany loans was based on a contribution of
interest only. The Company expects the ESOP to pay interest only as long as the
Company continues to be an S Corporation, however the total remaining balance of
principal and interest payable must be repaid no later than September 30, 2008.*
See "Accounting and Other Matters."
The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
33
<PAGE> 35
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
SUMMARY STATEMENTS OF OPERATIONS
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Collection and disposal operations.......................... 78.0% 73.9% 75.4%
Third party landfill management services.................. 17.2% 21.2% 19.5%
Recycled commodities sales................................ 4.8% 4.9% 5.1%
----- ----- -----
Total revenues.................................... 100.0% 100.0% 100.0%
Cost of operations:
Operating expenses........................................ 70.6% 71.3% 71.1%
Depreciation and amortization............................. 6.2% 6.0% 6.2%
ESOP compensation expense................................. 0.9% 4.5% 4.1%
General and administrative................................ 10.9% 10.1% 10.2%
----- ----- -----
Total cost of operations.......................... 88.6% 91.9% 91.6%
----- ----- -----
Operating income....................................... 11.4% 8.1% 8.4%
Interest expense............................................ (7.6)% (7.7)% (8.0)%
Interest income............................................. 1.0% 1.1% 0.8%
Gain on dispositions, net................................... 0.2% 1.1% 0.0%
Other income................................................ 0.2% 0.2% 0.8%
----- ----- -----
Income from operations before income taxes............. 5.2% 2.8% 2.0%
Income tax expense.......................................... 0.1% 0.0% 0.0%
----- ----- -----
Net income........................................ 5.1% 2.8% 2.0%
===== ===== =====
</TABLE>
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
Revenues. Revenues in 1999 increased $5.3 million (1.6%) to $343.2 million
from $337.9 million in 1998. Waste collection and disposal revenues increased by
$18.0 million; approximately $6.8 million was due to operations acquired in Los
Angeles in October and November 1998, approximately $5.0 million due to general
volume increases and the remainder due to rate increases in several service
areas. Third party landfill management services revenues decreased by $12.5
million due primarily to lower revenues of $9.9 million in San Bernardino County
as a result of lower project management activities in 1999 and reduced landfill
operations revenues 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. Additionally, with respect to its landfill
management operations, the Company experienced a reduction of $2.6 million from
1998 in San Diego as the Company ceased operations of the San Diego County
landfills on March 31, 1998, when the new owner assumed operations.
Operating Expenses. Operating expenses in 1999 increased $1.3 million
(0.6%) to $242.1 million from $240.8 million in 1998. As a percentage of
revenues, operating expenses decreased to 70.6% in 1999 from 71.3% in 1998.
Disposal costs increased $5.2 million due to operations acquired in October and
November 1998, higher volumes and tipping fee increases. Payroll and related
costs increased $3.4 million due primarily to operations acquired in October and
November 1998, as well as scheduled union wage increases. Fuel costs increased
$0.9 million due to higher prices in 1999 and operations acquired in October and
November 1998. Health care costs increased $0.9 million due to higher medical
costs and operations acquired in October and November 1998. These increased
costs were partially offset by lower project and subcontractor related costs of
$7.6 million and lower landfill operating costs of $1.3 million. Both of these
reductions were due primarily to lower project management activities during 1999
and reduced volumes in San Bernardino County compared to 1998.
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<PAGE> 36
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the cost of shares allocated as determined by the Company's contribution to the
ESOP, along with contributions to fund distributions to retired, terminated and
withdrawing participants. ESOP compensation expense in 1999 decreased $12.0
million (78.9%) to $3.2 million from $15.2 million in 1998. The decrease in
expense can be attributed to lower contributions made to the ESOP based upon a
revised payment schedule that does not currently include repayments of principal
related to the Company's S Corporation election.
General and Administrative. General and administrative expenses in 1999
increased $3.2 million (9.4%) to $37.4 million from $34.2 million in 1998. As a
percentage of revenues, general and administrative expenses increased to 10.9%
in 1999 from 10.1% in 1998. The increased costs were primarily due to general
wage increases of $2.0 million and higher professional services of $0.4 million.
Operating Income. Operating income in 1999 increased $11.5 million (41.7%)
to $39.1 million from $27.6 million in 1998. The primary cause of the increase
in operating income was the lower ESOP compensation expense described above.
Interest Income. Interest income in 1999 decreased $0.5 million (12.3%) to
$3.3 million from $3.8 million in 1998. The decrease is due to lower cash
balances during 1999 which resulted from higher capital expenditures and
acquisitions of businesses compared to 1998.
Gain (Loss) on Dispositions. The gain on dispositions in 1999 of $0.6
million represents the net impact of asset disposals and decreased $3.1 million
(83.8%) from 1998. The gain on dispositions in 1998 was primarily from the sale
of real estate in San Francisco and Kansas City.
Other Income (Expense). Other income in 1999 increased $0.5 million
(100.0%) to $1.0 million from $0.5 million in 1998. Other income in 1999
includes royalty income of $0.5 million related to an asset sold in 1995.
Income Tax Expense. Income tax expense of $0.3 million in 1999 was 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
tax rate of zero in 1998 as a result of realizing certain of its deferred tax
assets for which a valuation allowance had previously been established.
Net Income. Net income in 1999 increased $8.1 million to $17.6 million from
$9.5 million in 1998. The increase was primarily attributable to higher
operating income partially offset by lower gains on dispositions discussed
above.
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
Revenues. Revenues in 1998 increased $18.1 million (5.7%) to $337.9 million
from $319.8 million in 1997. Third party landfill management services revenues
increased by $9.3 million due primarily to expanded landfill operations and
solid waste management activities in San Bernardino County as a result of higher
project management revenues of $13.2 million from landfill closure and expansion
project activities, partially offset by a temporary reduction of volumes to the
San Bernardino County landfills during the first half of the 1998 fiscal year
and reduced revenues in San Diego as the Company ceased operations of the San
Diego County landfills on March 31, 1998, when the new owner assumed operations.
Waste collection and disposal revenues increased by $8.6 million, $5.5 million
due to rate increases in several service areas (primarily an 11.0% increase in
San Francisco, effective March 1, 1997), with the remaining increase due to
general volume increases.
Operating Expenses. Operating expenses in 1998 increased $13.3 million
(5.9%) to $240.8 million from $227.5 million in 1997. As a percentage of
revenues, operating expenses increased slightly to 71.3% in 1998 from 71.1% in
1997. Project and subcontractor related costs increased $11.4 million due to
increased landfill closure and expansion project activities in San Bernardino
County. Payroll and
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<PAGE> 37
related costs increased $5.8 million due to scheduled union wage increases
(primarily a 2.0% increase in San Francisco, effective January 1, 1998), higher
employee benefit costs in San Francisco as a result of the April 1997 union
agreement and higher health care costs. Disposal costs increased $1.5 million
due to higher volumes and tipping fee increases. In 1998, the Company accrued
$1.0 million for estimated losses to be incurred on certain contractual
obligations. These increased costs were partially offset by lower landfill
related costs of $3.3 million due to the substantial completion of corrective
action activities at one of the Company's landfills and reductions for estimated
closure costs. Professional services decreased $2.9 million reflecting lower
engineering services for recycling facilities as well as reduced consulting
services.
ESOP Compensation Expense. ESOP compensation expense is primarily based on
the cost of shares allocated as determined by the Company's contribution to the
ESOP, along with contributions to fund distributions to retired, terminated and
withdrawing participants. ESOP compensation expense in 1998 increased $2.1
million (16.0%) to $15.2 million from $13.1 million in 1997. The increase in
expense can be attributed to higher contributions made to the ESOP that allowed
the ESOP to make scheduled loan payments and prepayment of additional principal
along with an increase in contributions related to the funding of distributions
due to a higher share value and an increased number of shares repurchased.
General and Administrative. General and administrative expenses in 1998
increased $1.7 million (5.2%) to $34.2 million from $32.5 million in 1997. As a
percentage of revenues, general and administrative expenses decreased to 10.1%
in 1998 from 10.2% in 1997. The increased costs were primarily due to general
wage increases.
Operating Income. Operating income in 1998 increased $0.6 million (2.2%) to
$27.6 million from $27.0 million in 1997. The primary cause of the increase in
operating income was increased revenues.
Interest Expense. Interest expense in 1998 increased $0.6 million (2.3%) to
$26.2 million from $25.6 million in 1997. The increase is due to a higher
effective interest rate on the Senior Notes in the current period.
Interest Income. Interest income in 1998 increased $1.3 million (52.0%) to
$3.8 million from $2.5 million in 1997. The increase is due to higher cash
balances which earned interest in 1998.
Gain (Loss) on Dispositions. The gain on dispositions in 1998 of $3.7
million represents the net impact of asset disposals, primarily real estate in
San Francisco and Kansas City.
Other Income (Expense). Other income in 1998 decreased $2.1 million (80.3%)
to $0.5 million from $2.6 million in 1997. Other income in 1997 included gains
of $1.4 million from the sale of marketable securities and a $1.0 million
settlement with a third party in connection with a dispute over a landfill
engineering matter at one of its landfills.
Income Tax Expense. There was no income tax expense in 1998 or 1997. The
Company has experienced an effective tax rate of zero in 1998 and 1997 as a
result of realizing certain of its deferred tax assets for which a valuation
allowance had previously been established.
Net Income. Net income in 1998 increased $3.0 million to $9.5 million from
$6.5 million in 1997. The increase was primarily attributable to higher gains on
dispositions and higher interest income partially offset by lower other income
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of working capital
requirements, interest on outstanding indebtedness, capital expenditures and
deposits to trust funds to satisfy certain environmental statutes and
regulations. As of September 30, 1999, the Company had working capital of $29.9
million. As part of the Refinancing the Company entered into the Credit
Agreement which currently provides for up to $90 million of additional
borrowings (which maximum amount may be reduced by $2.5 million per calendar
quarter) and which, subject to certain limitations and covenant
36
<PAGE> 38
restrictions (including financial ratios), can be drawn by the Company to fund
ongoing operations, invest in capital equipment and/or facilities and to finance
acquisitions. The Credit Agreement expires in November 2000. At September 30,
1999, the Company had utilized $2.3 million of the credit facility provided by
the Credit Agreement for letters of credit and had availability under the Credit
Agreement of approximately $52.9 million, with an additional $22.7 million
available for letters of credit. Changes in availability under the Credit
Agreement are a function of changes in operating results, among other things. In
addition, certain covenant measures in the Credit Agreement become more
restrictive over time. Applying the more restrictive covenant measures in effect
beginning December 31, 1999 to the Company's estimated results of operations for
the twelve month period ending December 31, 1999 would result in a decrease in
availability under the Credit Agreement of approximately $4.4 million. The
Company's performance relative to the covenant measures is calculated on a
quarterly basis.
The Indenture governing the Senior Notes contains provisions which, among
other things, (i) limit the Company's and its subsidiaries' ability to declare
or pay dividends or other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal or, in certain cases,
the ESOP), (ii) limit the purchase, redemption or retirement of capital stock
and (iii) limit the incurrence of additional debt.
The Senior Notes mature in November 2005. As of September 30, 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 as 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.
Commencing November 15, 2000, the Senior Notes are redeemable in whole or
in part at Norcal's option, upon not less than 30 nor more than 60 days' notice.
Any such voluntary redemptions by Norcal through November 14, 2003 will include
a redemption premium payment that declines annually over such period. For any
redemptions made by Norcal during the period commencing November 15, 2000
through November 14, 2001, the redemption price, expressed as a percentage of
the principal amount of Senior Notes redeemed, is 106.25%, plus accrued and
unpaid interest to the applicable redemption date.
Cash Flow from Operations. Cash flow from operations in 1999 increased
79.7% to $46.0 million from $25.6 million in 1998. The increase was due to a
smaller reduction in accounts payable in 1999 compared to 1998 of $5.2 million,
a $4.1 million decrease in accounts receivable and a $3.9 million decrease in
tax payments.
Cash Flow from Investing Activities. Cash used by investing activities in
1999 increased 150.0% to $42.0 million from $16.8 million in 1998. The Company
used $33.7 million on capital expenditures during 1999, primarily vehicles,
construction projects, containers and other equipment and $9.9 million to
purchase the stock of solid waste collection company and substantially all of
the assets of two other solid waste collection companies in Los Angeles. In
1998, the Company generated $7.3 million from the sale of miscellaneous assets,
primarily real estate in San Francisco and Kansas City.
Cash Flow from Financing Activities. Cash used by financing activities was
$1.7 million in 1999 and $1.3 million in 1998; consisting primarily of principal
payments on long term debt and capital leases in both years.
OTHER CASH REQUIREMENTS
The Company has material financial obligations related to closure and
post-closure costs with respect to landfills it owns. While the amount of these
future obligations cannot be determined definitively at this time, the Company
estimates the costs in current dollars for final closure of landfills it owns,
as well as related post-closure activities for an estimated period of thirty
years after the closure of each respective landfill, at approximately $52.9
million.* The Company recognizes an expense and
37
<PAGE> 39
liability for such costs based on units of production and makes contributions to
trust funds to satisfy financial assurance requirements and fund the landfill
costs. As of September 30, 1999, the Company had recorded a liability of $25.9
million for such projected costs in accordance with generally accepted
accounting principles ("GAAP") and had on deposit $25.0 million in trust
accounts consistent with regulatory requirements. The Company estimates its 2000
funding requirement at approximately $0.5 million, although the actual
requirements could vary with changes in cost estimates and/or regulatory
requirements.*
The Company also has significant financial obligations with respect to
certain environmental statutes and regulations protecting the groundwater and
surface water in the vicinity of its landfills. The Company estimates the
remaining funding associated with this issue to be approximately $5.6 million
and is satisfying that obligation through deposits made to trust funds.* The
Company estimates its 2000 funding requirement at approximately $0.3 million,
although the actual requirement could vary with changes in cost estimates and/or
regulatory requirements.* The Company also has recorded a liability of $2.6
million for potential costs associated with other environmental matters.
The Company is in discussions with the City of San Francisco regarding
plans for increased diversion of waste from disposal at landfills as well as the
construction and/or relocation of material 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).*
The Company is obligated to provide, subject to certain conditions,
post-retirement health and welfare benefits to certain former
employee-shareholders (as well as their spouses and dependents) of two of its
predecessors. Although the Company's obligation with respect to some of its
former employee-shareholders will terminate upon the earlier of October 1, 2000
or the final resolution of legal claims against third parties reserved pursuant
to the settlement of litigation, most of the Company's obligations extend for
the lifetime of such former employee-shareholders. The accrued post-retirement
medical benefit liability as of September 30, 1999 was $35.5 million and the
Company made cash payments during 1999 totaling approximately $1.3 million.
Payments at rates similar to those made in 1999 or greater, depending on medical
inflation rates and the aging of the persons entitled to benefits, are expected
for a significant number of years.*
The Company anticipates future increases in the ESOP contributions related
to funding the distributions to retired, terminated or withdrawing participants
based on their vested allocated shares of Company common stock.* The Company
expects the contributions to increase as additional employees reach retirement
age, as additional shares are allocated to employee accounts, if eligible
participants elect to receive in-service withdrawals and if the value of the
Company common stock increases. While Norcal may consider a public offering of
its common stock as a potentially desirable way to eliminate the ESOP-related
requirements to either repurchase stock or fund cash distributions for retired,
terminated or withdrawing employees, there can be no assurance that Norcal would
be able to effect such an offering or otherwise create a trading market for its
stock.*
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
38
<PAGE> 40
and operators of non-owned landfills used by the Company. The Company believes
that this regulation will continue in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to the leachate and groundwater management
and remediation. There are many unknown and uncertain factors including
regulatory requirements, incomplete data with respect to projected volumes,
quality and cost of treatment among others. Accordingly, estimates for closure
and post-closure management and remediation of leachate and contaminated
groundwater could be subject to periodic and substantial upward revision as the
Company's knowledge increases concerning these factors.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
Historically, the Company has experienced cost increases due to the effects
of inflation on its operating expenses, particularly the cost of compensation
and benefits, and the replacement of or additions to property and equipment.
Fuel costs which fluctuate with inflation and other market conditions also have
affected operating results. Most of the Company's operations are subject to rate
setting processes which allow for the recovery of certain costs including labor
and fuel. However, inflationary increases in operating costs may cause the
Company to incur lower operating margins, at least until such time as new rates
can be implemented. Rate adjustments, if approved, can take several months.
On April 24, 1997, employees represented by the Sanitary Truck Drivers and
Helpers Union Local 350 International Brotherhood of Teamsters ("Local 350")
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-
year contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. On February 10, 1998, the Company
filed a petition for order compelling arbitration in U.S. District Court for the
Northern District of California entitled Norcal Waste Systems, Inc., Golden Gate
Disposal and Recycling, Inc. and Sunset Scavenger Company v. Sanitary Truck
Drivers and Helpers Union Local 350, IBT. On April 23, 1998 the Company filed a
motion for order compelling such arbitration. On May 29, 1998, the Court ruled
in the Company's favor and directed the parties to proceed with arbitration.
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. The ultimate outcome of this matter cannot be determined at this
time and the results of the rate application process 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
39
<PAGE> 41
could have a material adverse effect on the financial condition or results of
operations of the Company. See "Risk Factors -- Union Matters."
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, 1999 would increase
by an additional $8.2 million and reduce stockholder's equity by $1.8 million.
In addition, if the increased pension benefits are provided, the Company's
estimated incremental increase in its annual expense for employee benefits would
be approximately $3.1 million for pension and medical costs. Such incremental
increase in expense would be mostly offset by higher revenue if the Company is
successful in obtaining increased rates to cover the additional funding. The
above estimates are based on a discount rate of 7.5%. The discount rate applied
under generally accepted accounting principles ("GAAP") fluctuates with market
conditions. A change in the discount rate can result in significant adjustments
to the ABO.
Included in the five-year contract referred to above was an aggregate 13.4%
wage increase. The first year cost of the contract is included in the current
rate in San Francisco and the Company intends to seek rate recovery of cost
increases through the rate setting process.* There can be no assurance that the
Company will succeed in obtaining timely rate increases sufficient to cover all
costs or sufficient to maintain profit levels at historical levels.
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* The
Company is unable to determine the significance a California economic downturn
would have on its operations.
SEASONALITY
The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) due to higher volumes of certain types of waste,
such as construction and demolition debris. Such increased volumes result in
higher revenues and earnings from the Company's transfer stations, waste
collection, and landfill operations during such months. In addition, project
management revenues are highest in the fourth quarter as a result of favorable
construction conditions. Unusual changes in weather patterns can also affect the
operating results on a quarter to quarter basis.
ACCOUNTING AND OTHER MATTERS
The Internal Revenue Service's (the "IRS") audit of the Company's income
tax returns for the fiscal years ended September 30, 1992 through 1994, which
was initiated in 1996, has been completed. The IRS is currently auditing the
Company's tax returns for the fiscal years ended September 30, 1995 through
1997. The California Franchise Tax Board's audit of the Company's state income
tax returns for the fiscal years ended September 30, 1993 through 1997 is
ongoing.
The Company elected to become taxable as an S Corporation effective with
the tax year beginning October 1, 1998. In connection with the 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 (each a
Qualified Subchapter S Subsidiary). Generally, the taxable income (or loss) of
an S Corporation (including its divisions) is not taxable at the corporate
level, but is instead passed through to its shareholders. Because the sole
shareholder of the Company, the Norcal Waste Systems, Inc. Employee Stock
Ownership Plan and Trust, is a tax-exempt employee stock ownership plan, it is
not subject to tax on its allocable share of the Company's taxable income.
Although S Corporations generally are not subject to corporate-level income
taxes, the Company, for so long as it retains its status as an S Corporation,
will be subject to (a) potential income taxes related to the disposition of, or
the realization of income with respect to, certain built-in gain assets (that
is, any asset, such as real estate or securities, with a fair market value
greater than its tax basis as of October 1, 1998 or income reported which
relates to taxable periods prior to the Company becoming an S Corporation,
including, for example, income subsequently reported by reason of a pre-existing
change in accounting method) and
40
<PAGE> 42
(b) state income taxes at a rate of 1.5%. Deferred tax assets and liabilities
are eliminated when a taxable enterprise becomes a non-taxable enterprise and
the effect of recognizing or eliminating deferred tax assets or liabilities is
charged or credited to income tax expense within income from continuing
operations. Corporations that elect S Corporation status generally are subject
to tax under built-in gains provisions as previously discussed and thus would be
required to continue to recognize deferred taxes associated with built-in gains.
Deferred taxes related to built-in gains for the Company include deferred taxes
for anticipated sales of real estate and other assets. In addition, for
subsidiaries of the Company that do not elect to become Qualified Subchapter S
Subsidiaries, deferred taxes must be maintained for existing tax liabilities.
The Company currently maintains deferred taxes related to anticipated built-in
gains and existing tax liabilities for those subsidiaries that did not elect to
become Qualified Subchapter S Subsidiaries.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item. The Company does not engage in financial
transactions for trading or speculative purposes.
41
<PAGE> 43
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Norcal Waste Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Norcal
Waste Systems, Inc. (the Company) and subsidiaries as of September 30, 1999 and
1998, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the years in the three year period ended September
30, 1999. In connection with our audits of the consolidated financial
statements, we have also audited financial statement schedule II. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norcal Waste
Systems, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule II, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
December 17, 1999
42
<PAGE> 44
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 42,166 39,752
Marketable securities..................................... 5,552 5,552
Trust accounts, current portion (note 11)................. -- 1,940
Accounts receivable, less allowance for doubtful accounts
of $2,017 in 1999 and $2,202 in 1998.................... 46,369 49,789
Parts and supplies........................................ 2,102 2,200
Prepaid expenses.......................................... 3,362 2,640
-------- -------
Total current assets............................... 99,551 101,873
-------- -------
Property and equipment (note 7):
Land...................................................... 46,392 46,103
Landfills................................................. 27,300 29,419
Buildings and improvements................................ 51,904 47,422
Vehicles and equipment.................................... 150,908 130,190
Construction in progress.................................. 8,530 6,291
-------- -------
Total property and equipment....................... 285,034 259,425
Less accumulated depreciation and amortization............ 120,024 111,791
-------- -------
Property and equipment, net............................. 165,010 147,634
-------- -------
Other assets:
Franchises, permits and other intangibles, net of
amortization of $47,878 in 1999 and $43,840 in 1998
(notes 3 and 4)......................................... 79,217 73,016
Trust accounts (note 11).................................. 36,744 34,250
Prepaid pension cost (note 10)............................ 3,667 --
Deferred financing costs, net of amortization of $5,201 in
1999 and $3,859 in 1998................................. 5,578 6,920
Other (notes 10 and 11)................................... 4,042 8,168
-------- -------
Total other assets................................. 129,248 122,354
-------- -------
Total assets....................................... $393,809 371,861
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion:
Long-term debt (note 6)................................. $ 383 337
Capital leases (note 7)................................. 582 1,114
Accounts payable.......................................... 6,064 7,984
Accrued payroll and employee benefits..................... 14,171 16,706
Accrued expenses (notes 6, 11 and 12)..................... 42,955 43,870
Income taxes payable (note 8)............................. 1,311 90
Other accrued liabilities................................. 4,164 3,731
-------- -------
Total current liabilities.......................... 69,630 73,832
Long-term debt (note 6)..................................... 176,002 174,080
Obligations under capital leases (note 7)................... 285 910
Deferred income taxes (note 8).............................. 6,850 5,259
Landfill closure liability (note 11)........................ 27,009 25,938
Postretirement medical benefits (note 10)................... 34,177 33,601
Other liabilities........................................... 14,886 14,244
-------- -------
Total liabilities.................................. 328,839 327,864
-------- -------
Commitments and contingencies (notes 7, 8, 9, 10, 11, 12, 13
and 15)
Stockholder's equity (note 9):
Common stock, $.01 par value; 100,000,000 shares
authorized; 24,134,973 shares issued and outstanding.... 241 241
Additional paid-in capital................................ 166,919 166,378
Accumulated deficit....................................... (79,372) (96,928)
Accumulated other comprehensive income.................... (200) (2,115)
-------- -------
87,588 67,576
Less net scheduled contribution to the ESOP (note 9)........ (22,618) (23,579)
-------- -------
Total stockholder's equity......................... 64,970 43,997
-------- -------
Total liabilities and stockholder's equity......... $393,809 371,861
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 45
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $343,167 337,857 319,801
-------- ------- -------
Cost of operations:
Operating expenses........................................ 242,132 240,761 227,491
Depreciation and amortization............................. 21,267 20,153 19,732
ESOP compensation expense (note 9)........................ 3,209 15,152 13,128
General and administrative................................ 37,449 34,181 32,476
-------- ------- -------
Total cost of operations.......................... 304,057 310,247 292,827
-------- ------- -------
Operating income.................................. 39,110 27,610 26,974
Interest expense............................................ (26,091) (26,165) (25,649)
Interest income............................................. 3,294 3,755 2,463
Gain on dispositions, net................................... 568 3,746 119
Other income................................................ 1,006 515 2,619
-------- ------- -------
Income before income taxes........................ 17,887 9,461 6,526
Income tax expense.......................................... 331 -- --
-------- ------- -------
Net income........................................ $ 17,556 9,461 6,526
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 46
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED NET
COMMON STOCK ADDITIONAL OTHER SCHEDULED
--------------- PAID-IN ACCUMULATED COMPREHENSIVE CONTRIBUTION
SHARES AMOUNT CAPITAL DEFICIT INCOME TO THE ESOP TOTAL
------ ------ ---------- ----------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 30, 1996.......... 24,135 $241 166,378 (112,915) 581 (48,168) 6,117
Contributions to reduce ESOP
debt...................... -- -- -- -- -- 11,468 11,468
Net unrealized gains
(losses) on marketable
securities................ -- -- -- -- (602) -- (602)
Net income.................. -- -- -- 6,526 -- -- 6,526
------ ---- ------- -------- ------ ------- ------
Balances,
September 30, 1997........ 24,135 241 166,378 (106,389) (21) (36,700) 23,509
Contributions to reduce ESOP
debt...................... -- -- -- -- -- 13,121 13,121
Pension liability
adjustment................ -- -- -- -- (2,298) -- (2,298)
Net unrealized gains
(losses) on marketable
securities................ -- -- -- -- 204 -- 204
Net income.................. -- -- -- 9,461 -- -- 9,461
------ ---- ------- -------- ------ ------- ------
Balances,
September 30, 1998........ 24,135 241 166,378 (96,928) (2,115) (23,579) 43,997
Contributions to reduce ESOP
debt...................... -- -- -- -- -- 961 961
Pension liability
adjustment................ -- -- -- -- 2,298 -- 2,298
Recognized stock option
compensation expense...... -- -- 541 -- -- -- 541
Net unrealized gains
(losses) on marketable
securities................ -- -- -- -- (383) -- (383)
Net income.................. -- -- -- 17,556 -- -- 17,556
------ ---- ------- -------- ------ ------- ------
Balances, September 30,
1999...................... 24,135 $241 166,919 (79,372) (200) (22,618) 64,970
====== ==== ======= ======== ====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 47
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 17,556 9,461 6,526
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 21,267 20,153 19,732
Landfill trust contributions, withdrawals, interest
income, net of landfill closure and other regulatory
expense............................................... 906 (2,329) (3,775)
Pension, postretirement and insurance, net of amounts
paid.................................................. 1,953 5,142 4,677
ESOP compensation expense in excess of cash payments for
redemptions........................................... 961 13,121 11,468
Accrued interest, amortization of discounts and deferred
financing fees........................................ 1,718 1,834 1,737
Gain on dispositions and other income.................... (1,144) (4,119) (2,263)
Other.................................................... (877) (1,077) (1,108)
Changes in assets and liabilities, net of effects of
acquisitions and dispositions:
Decrease (increase) in accounts receivable............ 4,068 (7,112) (3,557)
(Decrease) increase in accounts payable............... (2,154) (7,395) 3,246
(Decrease) increase in accrued expenses and other
liabilities......................................... (3,462) 6,605 6,938
Increase (decrease) in income taxes................... 2,812 (5,470) (1,885)
Other assets and liabilities.......................... 2,432 (3,250) 642
-------- -------- --------
Net cash provided by operating activities........ 46,036 25,564 42,378
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment.................... (33,733) (24,313) (21,345)
Acquisition of businesses................................ (9,866) -- (3,640)
Proceeds from dispositions............................... 1,387 7,290 447
Proceeds from the sales of marketable securities......... -- -- 1,379
Other.................................................... 247 211 42
-------- -------- --------
Net cash used in investing activities............ (41,965) (16,812) (23,117)
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on long-term debt and capitalized
leases................................................ $ (1,809) (1,330) (1,309)
Other.................................................... 152 -- --
-------- -------- --------
Net cash used in financing activities................. (1,657) (1,330) (1,309)
-------- -------- --------
Net increase in cash....................................... 2,414 7,422 17,952
Cash and cash equivalents, beginning of year............... 39,752 32,330 14,378
-------- -------- --------
Cash and cash equivalents, end of year..................... $ 42,166 39,752 32,330
======== ======== ========
Supplemental schedule of net cash paid for:
Interest................................................. $ 24,796 24,558 24,075
======== ======== ========
Income taxes............................................. $ 106 4,013 815
======== ======== ========
Schedule of noncash investing and financing activities:
Debt issued and liabilities assumed in acquisitions...... $ 2,945 -- 2,000
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 48
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(1) NATURE OF BUSINESS
Through its subsidiaries, Norcal Waste Systems, Inc. (the Company) provides
integrated waste services to residential, commercial, municipal and industrial
customers in California. The Company's services include refuse collection,
recycling and other waste diversion, transfer station and hauling operations,
operation of Company-owned landfills and third party landfill management
services (including engineering and construction management services). The
Company continues to be, with limited exceptions, the sole provider of
commercial and residential refuse collection for the City and County of San
Francisco (note 15).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Norcal Waste
Systems, Inc. and its subsidiaries, all of which are wholly owned. The Company
uses the equity method for its investments in companies which are 50% or less
owned and are not consolidated. All significant intercompany accounts and
transactions have been eliminated.
The Company's outstanding common stock is 100% owned by the Norcal Waste
Systems, Inc. Employee Stock Ownership Plan and Trust (the Norcal ESOP or the
ESOP).
(b) Revenue Recognition
The Company recognizes revenue when services are performed. Revenues billed
in advance are deferred and recorded as income in the period in which the
related services are rendered. A significant amount of the Company's revenue is
subject to rate regulation by local jurisdictions under franchise agreements and
permits.
The Company performs project services on certain managed landfills relating
to landfill closure, landfill expansion and various regulatory compliance tasks.
Revenues are recognized on the percentage-of-completion method. Determination of
the percentage complete is based on estimates of subcontractors of actual job
progress and expenses incurred. Project costs include all direct and indirect
costs related to contract performance including subcontractors, materials and
internal labor. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
(c) Parts and Supplies
The Company's parts and supplies are recorded at cost (first-in,
first-out).
(d) Property and Equipment
Property and equipment, including major renewals and betterments, are
stated at cost. Property and equipment under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. Ordinary
maintenance and repairs are charged directly to operations. The Company
capitalizes interest costs for significant projects under development. The
amount capitalized and netted against interest expense in the consolidated
statements of income was $0.4 million in 1999 and $0.2 million in both 1998 and
1997. Certain properties available for sale have been written down to their
estimated net realizable value.
47
<PAGE> 49
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation is calculated on the straight-line method over the estimated
useful lives of assets as follows: buildings and improvements, 3 to 40 years;
and vehicles and equipment, 6 to 9 years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.
Landfills are carried at cost which includes acquisition, engineering and
permitting costs related to landfills which are currently in operation. These
costs are amortized as the landfill is used, based on engineering estimates of
the available capacity. Engineering, legal and other costs associated with the
development of new landfills and expansion at existing landfills are deferred
pending receipt of all necessary operating permits, at which time they are
capitalized as landfill costs. The Company is required to close, monitor, and
maintain landfill sites for a period of thirty years or more after closure. The
estimated costs and changes thereto in current dollars attributable to future
closure and post-closure costs are accrued in landfill closure liabilities for
each site based upon the capacity used in the current year in relation to the
total remaining capacity as of the beginning of the year.
(e) Intangible Assets
The excess of cost over net assets of acquired businesses is amortized on
the straight-line method over periods not exceeding 40 years. Franchises,
permits and contracts are amortized on the straight-line method over their
estimated lives ranging from 3 to 40 years. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of, the Company's policy
is to review the estimated undiscounted future cash flows for each operation on
an annual basis and to compare it to the remaining net book value to ascertain
if a provision for impairment is necessary.
(f) Income Taxes
The Company utilizes the liability method of accounting for income taxes
prescribed by SFAS No. 109, Accounting for Income Taxes. Under the liability
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred taxes are provided on
financial statement and income tax basis differences relating to business
acquisitions, except that no deferred taxes are provided on amounts related to
operating permit rights and excess of costs over net assets of businesses
acquired. Under SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
This standard requires that the Company recognize income tax benefits for loss
carryforwards and certain temporary differences for which tax benefits have not
previously been recorded. The likelihood of realizing the tax benefits related
to a potential deferred tax asset is evaluated, and a valuation allowance is
recognized to reduce that deferred tax asset to an amount that more likely than
not will be realized. Effective October 1, 1998, the Company elected to change
its tax status to become an S Corporation (note 8).
(g) ESOP Accounting
The Company recognizes ESOP compensation expense using the shares allocated
method whereby the expense is based upon contributions by the Company to the
ESOP relating to ESOP debt service payments, the historical cost of the shares
and the number of shares allocated by reason of such payments. Shares allocable
to participants for a given year are determined based on the ratio of the
current year's debt service payments to the total of the current year's and
estimated remaining debt
48
<PAGE> 50
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
service. Shares to be allocated to individual participants are based upon the
participants' relative compensation.
(h) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a remaining maturity at the time of purchase of three months or
less. Cash and cash equivalents are principally comprised of cash invested in
demand accounts and money market instruments and are stated at cost plus accrued
interest.
(i) Marketable Securities and Trust Accounts
Marketable securities represent primarily investments in fixed income
securities of federal government entities which are considered as available for
sale securities and are recorded at market value using the closing price as
quoted on a national securities exchange. The available for sale securities
mature at various dates from October 1999 to July 2009. Unrealized gains and
losses, which occur when the cost basis differs from the fair value, are
included as a separate component of stockholder's equity, in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
During fiscal 1999, $1.3 million of available for sale securities were sold for
proceeds of $1.3 million. During fiscal 1998, $5.1 million of available for sale
securities were sold for proceeds of $5.2 million. The cost of securities sold
is based on the specific identification method. The gross unrealized holding
gains and gross unrealized holding losses for available for sale securities at
September 30, 1999 were $0.1 million and $0.3 million, respectively, and at
September 30, 1998 were $0.4 million and $0.1 million, respectively.
The Company has established restricted and unrestricted trust accounts
principally in connection with financial assurance for closure and post-closure
liabilities related to landfill operations, financial assurance for the
initiation and completion of corrective action and liabilities to third parties
for bodily injury/property damage. Amounts are principally invested in fixed
income securities of federal government entities with maturities from two to ten
years. The Company considers certain of its trust accounts to be held to
maturity and, consequently, has stated these investments at amortized cost in
accordance with SFAS No. 115. To the extent that the Company expects the
closure/post-closure cash requirements to change, it will periodically modify
the maturity profiles of such investments. The remainder of all trust accounts
are considered available for sale. During fiscal 1999, $0.1 million of held to
maturity securities were sold for proceeds of $0.1 million. During fiscal 1998,
$10.0 million of held to maturity securities were sold for $10.2 million, which
was reinvested in similar fixed income securities with maturities more closely
aligned with current landfill closure projections. The gross unrealized holding
gains and gross unrealized holding losses for held to maturity securities at
September 30, 1999 were $0.1 million and $0.1 million, respectively, and at
September 30, 1998 were $0.2 million and $0.3 million, respectively.
The maturity dates for the Company's investments are as follows (in
millions):
<TABLE>
<CAPTION>
AVAILABLE HELD TO
MATURITY DATE FOR SALE MATURITY COMBINED
------------- --------- -------- --------
<S> <C> <C> <C>
9/30/1999 - Cash equivalents..... $ 0.4 0.3 0.7
10/1/1999 - 9/30/2004............ 14.6 21.8 36.4
10/1/2004 - 9/30/2009............ 4.5 0.7 5.2
----- ---- ----
Total.................. $19.5 22.8 42.3
===== ==== ====
</TABLE>
49
<PAGE> 51
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes
accounting and reporting standards for stock-based compensation plans. This
Statement allows companies to choose between the "fair value based method of
accounting" as defined in this Statement and the "intrinsic value based method
of accounting" as prescribed by Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. The Company has elected to remain
with the accounting requirements under APB 25. The pro forma disclosures of net
income required by SFAS No. 123, as if the fair value based method of accounting
had been applied, are included in note 9.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(l) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(3) BUSINESS ACQUISITIONS
On November 18, 1996, the Company completed the acquisition of
substantially all of the assets of a solid waste business in Butte County.
Results of operations of this entity have been included in the consolidated
financial statements from the acquisition date. The Company paid $2.6 million in
cash and issued a note with a face value of $2.0 million repayable over 20 years
at 6.5% interest. The note was discounted to $1.7 million to yield an imputed
rate of 8.75%. The acquisition was accounted for under the purchase method of
accounting; accordingly, the purchase price was allocated to the assets acquired
(principally operating permits) based on estimates of their relative fair value.
In February and April 1997, the Company acquired certain assets for $1.1
million in cash from businesses operating in the collection and disposal of
medical wastes.
On October 14, 1998, the Company completed the acquisition of a waste
collection company in the Los Angeles metropolitan area. The Company paid $2.2
million in cash, assumed liabilities of $0.2 million and issued two convertible
notes with face values of $1.0 million each repayable over 5 years at 5.5%
interest. The combined notes were discounted to $1.8 million to yield an imputed
interest rate of 8.5%. In November 1998, the Company acquired certain assets of
two waste collection companies in the Los Angeles metropolitan area for $7.6
million, primarily in cash.
(4) FRANCHISES, PERMITS AND OTHER INTANGIBLES
When the Company acquires businesses with definitive franchise or other
agreements with specific terms, a portion of the purchase price is allocated to
the franchise based upon its estimated fair value at the date of acquisition. In
certain instances, permits or other legal documents evidence the Company's right
to do business for an indefinite period and are similar to goodwill. Any amounts
in excess of amounts allocated to franchises and permits are included in excess
of cost over net assets of
50
<PAGE> 52
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
businesses acquired. A summary of intangible assets, net of accumulated
amortization at September 30, is as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Franchises and contracts.................................... $ 8,697 9,705
Operating permit rights..................................... 56,115 58,151
Excess of cost over net assets of businesses acquired....... 14,405 5,160
------- ------
$79,217 73,016
======= ======
</TABLE>
(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The investments in unconsolidated affiliates are included in other assets
in the accompanying consolidated balance sheets. The Company's equity in
earnings of unconsolidated affiliates included in other income in the
consolidated statements of income, was $0.6 million, $0.4 million and $0.2
million for the years ended 1999, 1998 and 1997, respectively.
(6) LONG-TERM DEBT
Long-term debt at September 30, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Series B 12.5% Senior Notes, due 2005....................... $171,374 171,004
Note payable for business acquired, due in monthly
installments through 2016, interest imputed at 8.75%........ 1,584 1,622
Convertible notes payable for business acquired, due in
eight quarterly installments beginning December 2001,
interest imputed at 8.5%.................................. 1,838 --
Notes payable to former shareholders, due in monthly
installments through 2017, interest at 6% to 8.5%......... 676 734
Other notes................................................. 913 1,057
-------- -------
Total debt............................................. 176,385 174,417
Less current portion................................... 383 337
-------- -------
Long-term debt......................................... $176,002 174,080
======== =======
</TABLE>
On November 21, 1995, the Company completed a private debt offering, (the
Refinancing) of $175.0 million in Series A Senior Notes. The Series A Senior
Notes were to mature in November 2005 with interest payable semi-annually. The
Series A Senior Notes were redeemable at the option of the Company, in whole or
in part, at any time during or after November 2000. Prior to this date, the
Series A Senior Notes were partially redeemable in the event of a public
offering, or would have been required to be redeemed in the event of a change in
control of the Company. The Series A Senior Notes were unsecured and ranked pari
passu in right of payment to all existing and future senior indebtedness of the
Company. The Series A Senior Notes were guaranteed on a senior unsecured basis
by the Company's wholly-owned subsidiaries. The Indenture governing the Series A
Senior Notes contained provisions which, among other things, (i) limited 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) limited the purchase, redemption or
retirement of capital stock and (iii) limited the incurrence of additional debt.
In September 1996, the Company completed the exchange of all of its outstanding
Series A Senior Notes for Series B Senior Notes
51
<PAGE> 53
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Senior Notes) with an identical principal balance and terms. The exchange was
completed under the Securities Act of 1933. The interest rate on the Senior
Notes at September 30, 1999 was 13.5%. The interest rate reverts back to 12.5%
if Norcal (in one or more transactions) offers to purchase at 110% (whether or
not any actual purchases are made) or redeems an aggregate of $25.0 million in
principal amount of Senior Notes out of the proceeds of equity sales.
Commencing November 15, 2000, the Senior Notes are redeemable in whole or
in part at the Company's option, upon not less than 30 nor more than 60 days'
notice. Any such voluntary redemptions by the Company through November 14, 2003
will include a redemption premium payment that declines annually over such
period. For any redemptions made by the Company during the period commencing
November 15, 2000 through November 14, 2001, the redemption price, expressed as
a percentage of the principal amount of Senior Notes redeemed, is 106.25%, plus
accrued and unpaid interest to the applicable redemption date.
The Company received net proceeds from the private debt offering of $170.2
million (after original issuance discount of $4.8 million). Deferred financing
costs at September 30, 1999 include commissions and other costs related to the
offering and the new credit agreement (see below) and are being amortized over
the life of the Senior Notes and the new credit agreement. The Company used the
proceeds from the Series A Senior Notes, proceeds from the liquidation of
indemnification trusts and cash balances to repay $94.0 million of long-term
debt, $2.2 million of capital leases, redeem and cancel subordinated notes for
$73.4 million and settle litigation for $3.6 million. The recorded value and
associated accrued interest of the subordinated notes that the Company redeemed
was $103.3 million. The Company recognized an extraordinary gain in 1996 of
$31.4 million in connection with the redemption.
Total debt outstanding at September 30, 1999, matures as follows: 2000,
$0.4 million; 2001, $0.3 million; 2002, $1.6 million; 2003, $1.2 million; 2004,
$0.1 million; and thereafter, $172.8 million, net of unamortized discount of
$3.6 million. Included in accrued expenses at September 30, 1999 and 1998 is
accrued interest amounting to $9.0 million for both years.
Concurrent with the private debt offering, the Company entered into a new
Credit Agreement with a group of lenders and the First National Bank of Boston
as Agent. The agreement, which expires on November 21, 2000, established a
revolving credit facility in an amount currently of up to $90 million, up to $25
million of which can be used for letters of credit. Substantially all of the
assets of the Company and its wholly owned subsidiaries are pledged to secure
the obligations of the Company and such subsidiaries. Subsidiaries of the
Company have guaranteed the debt under the Credit Agreement on a joint and
several basis (note 16). The Credit Agreement provides for certain positive and
negative covenants including restrictions on indebtedness, investments, and
distributions among others, and financial covenants including leverage ratio,
interest coverage ratio, consolidated net worth, and debt service ratio. The
credit facility may be reduced by $2.5 million each quarter beginning with the
quarter ending December 31, 1998 until the maturity date. There are no
compensating balance requirements or any informal arrangements in connection
with any of the loans. The Company must pay to the lenders a commitment fee on
the daily average amount of the unused credit commitment at an annual rate per
annum equal to 0.05%, plus an amount equal to 2.25% of the face amount of each
letter of credit. Except as set forth below, there were no borrowings
outstanding under the Credit Agreement at September 30, 1999.
In the event of a default under the Credit Agreement, the rights of Norcal
with respect to the liquidation of all of the assets of Norcal's wholly owned
subsidiaries and the capital stock of the wholly owned subsidiaries would be
subject to the prior claims of the lenders under the Credit Agreement. A
52
<PAGE> 54
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
default under the Senior Notes constitutes an event of default under the Credit
Agreement. Similarly, certain defaults under other indebtedness in excess of
$5.0 million (including indebtedness under the Credit Agreement) constitute an
event of default under the Indenture.
At September 30, 1999, the Company had utilized $2.3 million of the credit
facility provided by the Credit Agreement for the letters of credit and had
availability under the Credit Agreement of approximately $52.9 million, with an
additional $22.7 million available for letters of credit. Changes in
availability under the Credit Agreement are a function of changes in operating
results, among other things.
(7) LEASES
The Company leases certain land, buildings, vehicles and equipment under
lease agreements. Certain of these leases are accounted for as capital leases.
The Company is responsible for all maintenance costs, taxes and insurance on the
buildings, vehicles and equipment. At September 30, the gross amount of property
and equipment and related accumulated amortization recorded under capital leases
were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Vehicles and equipment................................... $ 6,535 6,535
Less accumulated amortization............................ (5,854) (4,711)
------- -------
$ 681 1,824
======= =======
</TABLE>
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1999 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Year ending September 30:
2000..................................................... $ 660 3,918
2001................................................... 247 3,421
2002................................................... 54 2,880
2003................................................... -- 2,385
2004................................................... -- 2,080
Thereafter............................................. -- 20,433
----- -------
Total minimum lease payments................... 961 35,117
=======
Less amount representing interest...................... (94)
-----
Present value of minimum lease payments................ 867
Less current portion................................... (582)
-----
$ 285
=====
</TABLE>
Rental expense charged to operations under all operating leases was
approximately $4.8 million, $4.6 million and $4.4 million for the years ended
1999, 1998, and 1997, respectively, including amounts under short-term rental
agreements.
53
<PAGE> 55
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) for the fiscal years ended September 30 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ (13) 465 1,635
State............................................ 211 297 665
----- ---- ------
198 762 2,300
----- ---- ------
Deferred:
Federal.......................................... 371 (465) (1,635)
State............................................ (238) (297) (665)
----- ---- ------
133 (762) (2,300)
----- ---- ------
$ 331 -- --
===== ==== ======
</TABLE>
Total income tax expense differed from the amount computed by applying the
federal statutory income tax rate of 35% to income as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate.......................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit................. 2.2 6.0 6.0
S Corporation tax rate benefit...................... (13.0) -- --
Change in valuation allowance....................... (21.4) (55.3) (58.1)
Amortization of nondeductible intangibles........... 0.2 9.6 14.4
Other............................................... (1.1) 4.7 2.7
----- ----- -----
Income tax expense.................................. 1.9% 0.0% 0.0%
===== ===== =====
</TABLE>
The deferred tax liability at September 30, 1999 and 1998 primarily relates
to financial statement carrying amounts in excess of the tax basis in certain
land investments that will not be disposed of in
54
<PAGE> 56
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the foreseeable future. The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax liabilities
at September 30 are summarized below:
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit forward...................... $ 3,257 4,378
Accrued liabilities....................................... 119 1,595
Post retirement benefit obligations....................... 460 12,101
ESOP expense, including accrued interest, in excess of
cash contributions..................................... 221 6,133
Insurance reserves........................................ 4,779 6,747
Net operating loss........................................ 2,226 --
Vacation accrual.......................................... 111 1,507
Pensions.................................................. 77 1,082
Bad debts................................................. 594 865
Other..................................................... 124 831
------- ------
11,968 35,239
Less: Valuation allowance................................... 10,129 13,799
------- ------
Net deferred tax assets........................... $ 1,839 21,440
======= ======
Deferred tax liabilities:
Property and equipment, basis and depreciation
differences............................................ $ 5,632 23,408
Franchises, permits and other intangibles................. 153 1,749
Landfill closure reserves................................. 2,450 1,415
ESOP contributions in excess of accrued expenses,
including interest..................................... 454 --
Marketable securities..................................... -- 127
------- ------
Gross deferred tax liabilities.................... 8,689 26,699
------- ------
Net deferred tax liabilities...................... $ 6,850 5,259
======= ======
</TABLE>
The total valuation allowance decreased for the years ended September 30,
1999 and 1998 by $3.7 million and $5.2 million, respectively.
The Internal Revenue Service (the Service) has completed examinations of
the Company's income tax returns for the fiscal years ended September 30, 1988
through September 30, 1991 and the fiscal years ended September 30, 1992 through
September 30, 1994. The Service has begun an examination of the Company's income
tax returns for the fiscal years ended September 30, 1995 through September 30,
1997. The California Franchise Tax Board is examining the Company's state income
tax returns for the fiscal years ended September 30, 1993 through 1997.
It is the Company's opinion that the matters relating to these examinations
are adequately provided for or that the resolution of such matters will not have
a material adverse impact on the financial condition of the Company; however,
there can be no assurance that the impact of such matters on its results of
operations or cash flows for any given reporting period will not be material.
The Company elected to become an S Corporation effective October 1, 1998
and to treat a number of its subsidiaries as divisions for income tax purposes.
Under S Corporation rules, taxable income and losses are passed through to the
ESOP, the Company's sole shareholder, which is exempt from income tax.
55
<PAGE> 57
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company will still be subject to certain taxes as an S Corporation,
including a minimum state franchise tax of 1.5% and federal and California
built-in gains tax (set at the corporate tax rate) on sales of certain built-in
gain assets (such as real estate and securities). In addition, for subsidiaries
of the Company that did not elect to become Qualified Subchapter S Subsidiaries
and treated as a division of the Company, deferred taxes will continue to be
maintained for existing corporate level tax liabilities.
Deferred tax assets and liabilities are eliminated when a taxable
enterprise becomes a non-taxable enterprise and the effect of recognizing or
eliminating deferred tax assets or liabilities is charged or credited to income
tax expense in income from continuing operations. However, corporations that
elect S Corporation status generally are subject to tax under built-in gains
provisions as previously discussed and thus would be required to continue to
recognize deferred taxes associated with built-in gains and the California 1.5%
franchise tax. At September 30, 1999, the Company provided deferred taxes
associated with anticipated built-in gains.
(9) STOCKHOLDER'S EQUITY
(a) Capital Structure
The Company's Articles of Incorporation allow for the issuance of Preferred
Stock in one or more series, at such designations, rates of dividends,
redemption prices, liquidation payments, voting rights and conversion, exchange
or other special rights to be determined at the time of issuance. None is
presently issued or outstanding.
(b) Stock Options
The Company has four stock option plans that provide for the granting of
Incentive Stock Options and Non-Qualified Stock Options for the purchase of
Common Stock. The options may be granted to officers, employees, directors and
independent contractors of the Company. Participation in the Stock Option Plans
is determined by the Compensation Committee of the Board of Directors, based on
the parameters of each respective plan. The term of an option granted under any
of the option plans cannot exceed ten years and may be further limited by the
specific restrictions as detailed in the individual plans. The options generally
are exercisable pursuant to any vesting requirements imposed by the Compensation
Committee upon the grant of the options.
56
<PAGE> 58
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets out specific details of the respective stock
option plans and status as of September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1996
NON-
1996 1996 EMPLOYEE
EXECUTIVE EMPLOYEE DIRECTOR
1990 STOCK STOCK STOCK STOCK OPTION
SHARES UNDER OPTION OPTION PLAN INCENTIVE PLAN INCENTIVE PLAN PLAN
------------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1997.......... 228,000 990,000 965,000 105,000
========= ========= ========= =======
Granted.................................... -- -- 487,500 --
Canceled.............................. (2,000) -- (46,000) --
--------- --------- --------- -------
Outstanding at September 30, 1998.......... 226,000 990,000 1,406,500 105,000
========= ========= ========= =======
Options available to grant at September 30,
1998..................................... 2,774,000 1,897,500 2,216,250(a) 70,000
========= ========= ========= =======
Granted............................... -- -- 80,000 --
Canceled.............................. (38,000) -- (278,500) --
--------- --------- --------- -------
Outstanding at September 30, 1999.......... 188,000 990,000 1,208,000 105,000
========= ========= ========= =======
Options available to grant at September 30,
1999..................................... 2,812,000 1,897,500 2,414,750(a) 70,000
========= ========= ========= =======
</TABLE>
- ---------------
(a) To the extent shares are granted under the 1990 Stock Option Plan, the 1996
Executive Stock Incentive Plan, the Deferred Compensation and Stock Option
Plan (defined below) or the 1996 Non-Employee Director Stock Option Plan,
the number of shares available under the 1996 Employee Stock Incentive Plan
is reduced by a corresponding amount.
<TABLE>
<CAPTION>
1996
1996 NON-
1996 EMPLOYEE EMPLOYEE
EXECUTIVE STOCK DIRECTOR
1990 STOCK STOCK INCENTIVE STOCK OPTION
SHARES UNDER OPTION OPTION PLAN INCENTIVE PLAN PLAN PLAN
------------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Average option price:
September 30, 1998....................... $ 7.04 5.21 5.22 4.89
September 30, 1999....................... 7.04 5.21 5.24 4.89
Options exercisable:
At September 30, 1997.................... 228,000 202,000 98,500 35,000
At September 30, 1998.................... 226,000 436,000 291,500 70,000
At September 30, 1999.................... 188,000 702,000 511,800 105,000
</TABLE>
In addition to the plans summarized above, the Company has granted a
nonqualified stock option pursuant to a plan (the Deferred Compensation and
Stock Option Plan) to a former officer to purchase up to 300,000 shares of
common stock at an exercise price of $4.89 per share. At September 30, 1999,
300,000 shares were vested.
The Company applies APB 25 in accounting for its Plans. Had the Company
determined compensation cost using the fair value based method of accounting, as
defined by SFAS No. 123, for its
57
<PAGE> 59
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock options, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
As reported..................................... $17,556 9,461 6,526
Pro forma....................................... 16,866 9,387 6,202
</TABLE>
Pro forma net income has been computed using the Black-Scholes option
pricing model and the following assumptions:
<TABLE>
<CAPTION>
EXPECTED
DIVIDEND RISK-FREE VESTING
FAIR VALUE YIELD INTEREST RATE VOLATILITY PERIOD
---------- -------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
1999.................. $6.05 0.0% 6.00% 0.1% 4 years
1998.................. 6.26 0.0% 5.88% 0.1% 4 years
1997.................. 5.59 0.0% 6.18% 0.1% 4 years
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because the estimated compensation cost will be recognized over the
options' vesting periods.
(c) Employee Stock Ownership Plan
In 1986, one of the Company's predecessors (Old Norcal) established an
employee stock ownership plan and trust (the ESOP) which purchased all of the
Company's outstanding stock. Old Norcal borrowed funds from a lender group and
in turn Old Norcal loaned funds to the ESOP which were used together with
certain subordinated notes (the ESOP Notes) for the purpose of purchasing the
stock. In addition, in connection with two other transactions, the Company
borrowed funds from lender groups and in turn loaned funds to the ESOP.
The ESOP will obtain funds to repay the Company loans, including interest,
primarily through the receipt of tax deductible contributions made by the
Company. For financial statement purposes, the Company's future scheduled
contribution to the ESOP, as described below, is reflected as a reduction of
stockholder's equity.
The ESOP covers most of the employees of the Company and is
noncontributory. The benefits are based on the employee's account balance which
is a function of contributions, forfeitures, income and appreciation or
depreciation in the value of assets allocated to the accounts based on years of
service and compensation.
In connection with the Refinancing (note 6) the ESOP's indebtedness
reflects, among other things, Norcal's funding of the ESOP's retirement of the
ESOP Notes, repayment of all amounts owed under the Old Credit Agreement, and
incurrence of new indebtedness by the Company pursuant to the Refinancing. At
September 30, 1999, the outstanding principal balance owed to Norcal was $38.6
million. The ESOP and Norcal entered into a Fourth Amended and Restated ESOP
Loan Agreement, (the ESOP Agreement), effective as of October 1, 1995, whereby
the ESOP will repay such outstanding indebtedness, plus unpaid accrued interest
at the rate of 7.0% per annum, in installments of approximately $9.8 million
each as of September 30 of each year, beginning in 1996. In addition, the ESOP
will prepay such outstanding indebtedness, without penalty, to the extent that
Norcal makes contributions to the ESOP for the purpose of making such
prepayments subject to certain limitations.
58
<PAGE> 60
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company made an additional contribution of $10.2 million in 1998 to the ESOP
which amount has been applied as a prepayment of the loans from the Company to
the ESOP. During 1999, the Company and the ESOP amended the ESOP Agreement to
allow the ESOP to pay interest only during the period the Company remained an S
Corporation, provided that the entire principal balance was still repaid by
fiscal year 2008, the final due date of the ESOP Agreement.
The scheduled contribution to the ESOP presented in the accompanying
balance sheets as a reduction in equity represents the aggregate principal
amounts which the Company has scheduled to contribute to the ESOP in future
years attributable to the original loans and is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Loans from the Company to the ESOP.......................... $ 38,631 38,631
-------- -------
Total scheduled contribution to the ESOP.......... 38,631 38,631
ESOP compensation expense recognized in excess of Company
contributions............................................. (16,013) (15,052)
-------- -------
Net scheduled contribution to the ESOP............ $ 22,618 23,579
======== =======
</TABLE>
Following is a summary of shares as of September 30:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Allocated................................................ 20,373 18,278 16,412
Committed to be released................................. 153 2,095 1,866
Unallocated.............................................. 3,609 3,762 5,857
------ ------ ------
24,135 24,135 24,135
====== ====== ======
</TABLE>
The Company has an obligation to make cash contributions to the ESOP or to
repurchase shares from participants as described below. The cash contributions
made for purposes of funding ESOP benefit payments were $2.2 million, $2.0
million and $1.7 million for the years ended September 30, 1999, 1998, and 1997,
respectively. The amount of the repurchase obligation will increase
significantly in the future as the Company's workforce ages and retires, as
additional shares are allocated to participants, if eligible participants elect
to receive in-service withdrawals and if the value of common stock increases.
The fair value of the shares as established by the ESOP Administrative Committee
based on the valuation of independent appraisers was $6.05 and $6.26 as of
September 30, 1999 and 1998, respectively.
The Company's common stock is not traded on an established market.
Presently, all shares are held by the ESOP, and all benefit distributions from
the ESOP are intended to be made in cash which is received from Norcal or trust
income. A participant who is vested is entitled to begin receiving a
distribution of his or her ESOP accounts at a future date following his or her
termination of employment. Distributions may be made in a lump sum, equal annual
installments over a period generally not to exceed five years or a combination
of the foregoing, generally as determined by the ESOP Administrative Committee
(the Committee). The Committee also generally determines the time and manner of
distributions, subject to the following limitations: (1) in the event of a
participant's retirement, disability or death, distribution must begin prior to
September 30th of the Plan Year following the Plan Year in which employment
terminates; (2) if a participant's employment terminates for any other reason,
distribution must begin prior to September 30th of the sixth Plan Year following
the Plan Year in which employment terminates, although the Committee may (a)
further defer distributions that are attributable to shares of Common Stock
purchased with loan proceeds until after
59
<PAGE> 61
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
such loan has been repaid, and (b) further defer distributions that are not
attributable to post-1986 shares until the participant reaches the age that he
or she would be required to reach in order to qualify for retirement under the
ESOP.
(10) EMPLOYEE BENEFIT PLANS
Effective October 1, 1998, the Company adopted SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. Information for
prior years has been restated to conform to the requirements of this statement.
The Company has two noncontributory funded defined benefit pension plans
covering a portion of their employees. Benefits are based on a formula which
includes years of service and average compensation. Nonparticipating employees
generally are covered under one of several multi-employer union plans to which
the Company contributes.
It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $5.1 million,
$4.0 million and $3.1 million during 1999, 1998 and 1997, respectively.
Certain of the Company's union employees are participants in multi-employer
union defined benefit pension plans. Pension cost charged to expense under these
plans for the years ended September 30, 1999, 1998, and 1997, was $2.0 million,
$1.7 million and $1.5 million, respectively. The Company's portion of the
actuarially computed value of the vested and nonvested benefits of the plans and
the net assets of the pension funds have not been determined.
Assets of the pension plans include marketable equity securities, money
market funds, U.S. government obligations, fixed income securities and other
investments.
In connection with the ESOP's purchase of stock from the former Old Norcal
employee-shareholders, the Company has agreed to provide certain post-retirement
health and welfare benefits to certain settling plaintiffs until the earlier of
the resolution of certain claims against third parties or October 1, 2000. In
connection with the ESOP's purchase of stock from the former Envirocal
employee-shareholders, the Company has agreed to provide certain former
Envirocal employee-shareholders with certain lifetime post-retirement health and
welfare benefits subject to certain conditions.
The Company recognizes postretirement medical benefits in the financial
statements over the term of the affected employee's service with the Company as
required by SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. The postretirement medical benefit plan is unfunded.
60
<PAGE> 62
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status, periodic benefit costs and rate
assumptions associated with the Company's pension and postretirement medical
benefit plans.
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- ------------------
1999 1998 1999 1998
-------- ------- ------- -------
) (IN THOUSANDS
<S> <C> <C> <C> <C>
PENSION AND POSTRETIREMENT BENEFITS
Reconciliation of benefit obligation
Obligation at October 1.......................... $119,596 103,408 28,148 28,070
Service cost..................................... 4,016 3,242 525 626
Interest cost.................................... 7,982 7,513 1,797 1,963
Actuarial (gain) loss............................ (10,443) 10,390 (1,413) (1,168)
Benefit payments................................. (5,211) (4,957) (1,253) (1,343)
-------- ------- ------- -------
Obligation at September 30....................... $115,940 119,596 27,804 28,148
======== ======= ======= =======
Reconciliation of fair value of plan assets
Fair value of plan assets at October 1........... $ 93,949 92,374 -- --
Actual return on plan assets..................... 10,476 2,580 -- --
Employer contributions........................... 5,117 3,952 1,253 1,343
Benefit payments................................. (5,211) (4,957) (1,253) (1,343)
-------- ------- ------- -------
Fair value of plan assets at September 30........ $104,331 93,949 -- --
======== ======= ======= =======
Funded status
Funded status at October 1....................... $(11,609) (25,646) (27,804) (28,148)
Unrecognized (gain) loss......................... 8,578 22,802 (11,744) (10,866)
Unrecognized prior-service cost.................. 3,555 3,829 4,028 4,070
-------- ------- ------- -------
Net amount recognized............................ $ 524 985 (35,520) (34,944)
======== ======= ======= =======
Accumulated benefit obligation................... $ 95,148 97,344 27,804 28,148
STATEMENT OF FINANCIAL POSITION
Prepaid benefit cost............................. $ 3,667 -- -- --
Accrued benefit liability........................ (3,143) (5,616) (35,520) (34,944)
Intangible asset................................. -- 2,734 -- --
Accumulated other comprehensive income, net of
tax benefit.................................... -- 2,298 -- --
Tax benefit...................................... -- 1,569 -- --
-------- ------- ------- -------
Net amount recognized............................ $ 524 985 (35,520) (34,944)
======== ======= ======= =======
</TABLE>
61
<PAGE> 63
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------- ------------------------
1999 1998 1997 1999 1998 1997
------- ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................ $ 4,016 3,242 2,637 525 626 163
Interest cost............................... 7,982 7,513 7,198 1,797 1,963 1,753
Expected return on plan assets.............. (7,932) (6,993) (6,438) -- -- --
Amortization of prior-service cost.......... 284 283 123 42 42 (234)
Amortization of net (gain) loss............. 1,227 864 705 (536) (500) (722)
------- ------ ------ ----- ----- -----
Net periodic benefit cost................... $ 5,577 4,909 4,225 1,828 2,131 960
======= ====== ====== ===== ===== =====
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................... 7.50% 6.75% 7.50% 7.50% 6.75% 7.50%
Expected return on assets................... 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase............... 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
</TABLE>
The Company expects its health care cost trend for postretirement benefits
to decrease from 8.0% in 2000 to 5.5% in 2005, after which the rate is expected
to stabilize. A one percentage point change in the assumed health care cost
trend rate would have the following effects:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Effect of 1% increase in trends:
Effect on service cost plus interest cost......... $ 386
Effect on postretirement benefit obligation....... 4,263
Effect of 1% decrease in trends:
Effect on service cost plus interest cost......... (316)
Effect on postretirement benefit obligation....... (3,558)
</TABLE>
In addition, the Company sponsors an unfunded deferred compensation and
stock option plan for one of its former executives. The accumulated benefit
obligation and projected benefit obligation for this plan were $342,000 and
$301,000 as of September 30, 1999 and 1998, respectively. The unfunded amount
for this plan as of September 30, 1999 is included in accrued payroll and other
benefits in the Consolidated Balance Sheet. The Company recorded an additional
minimum pension liability for this plan of $62,000 as of September 30, 1998.
After recognizing an intangible asset related to the net transition obligation,
the reduction to stockholders' equity at September 30, 1998 totaled $18,000, net
of tax benefit of $13,000.
The Company is currently in a dispute with one of its unions with respect
to an increase in pension benefits. If the union were to prevail the Company
estimates that the accumulated benefit obligation would increase by an
additional $8.2 million as of September 30, 1999 (note 12).
(11)LANDFILL CLOSURE, POST-CLOSURE LIABILITIES, ENVIRONMENTAL LIABILITIES, TRUST
ACCOUNTS, COMMITMENTS AND FUNDING
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.
62
<PAGE> 64
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Compliance with current or future regulatory requirements will require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. It is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts. The Company
has made and may continue to make substantial expenditures relating to
environmental conditions primarily on its landfill properties. In the opinion of
management, compliance with present environmental protection laws will not have
a material adverse effect on the results of operations of the Company provided
costs are substantially covered in the Company's rates on a timely basis. The
Company continues to monitor these matters; however, there is no assurance that
material costs or liabilities related to environmental matters will not be
incurred in the future.
Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to leachate and groundwater management and
remediation. There are many unknown and uncertain factors including regulatory
requirements, incomplete data with respect to projected volumes, quality and
cost of treatment among others. Accordingly, estimates for closure and post-
closure management and remediation of leachate and contaminated groundwater
could be subject to periodic and substantial revision as the Company's knowledge
increases concerning these factors.
At September 30, 1999 and 1998, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $25.9 million
and $25.3 million, respectively, based on the total estimated closure costs and
post-closure maintenance and monitoring at each date, in current dollars, and
the percentage of estimated landfill capacity remaining. The current portion of
landfill closure liability at September 30, 1999 and 1998, amounting to
approximately $0.5 million and $0.9 million, respectively, is included in
accrued expenses and is determined by the amount of required funding of various
trust funds in accordance with various jurisdictional requirements along with
the estimate of closure/post-closure work to be performed in the next year.
Amounts (credited) charged to operating expenses for landfill closure in 1999,
1998 and 1997, net of interest income earned on related trust accounts, were
approximately $(0.4) million, $(0.4) million and $0.2 million, respectively.
Included in each year's expense are amounts that represent the effects of
changes in cost and capacity estimates that are being recognized over the
remaining life of each site. At September 30, 1999 and 1998, the future closure
and post-closure obligation remaining to be recognized over the remaining lives
of the applicable landfills is estimated to be approximately $27.0 million and
$29.3 million, respectively. While the Company believes its estimates of closure
and post-closure costs are reasonable, such amounts are based upon current laws,
technology and information available on the properties. Accordingly, the
Company's estimates may be subject to substantial upward revision.
In accordance with State of California legislation, and other governmental
jurisdictions, the Company has established restricted and unrestricted trust
funds for each owned landfill which are funded annually in amounts designed to
provide the resources to accomplish closure and post-closure maintenance and
monitoring. The estimated funding requirements are $0.5 million for 2000 and
approximately $2.8 million due over the subsequent 5 year period based upon
volume used at the landfill and regulatory requirements. At September 30, 1999
and 1998, $25.0 million and $25.4 million, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. In addition, at
September 30, 1999, the Company had deposited $2.1 million in a trust fund
maintained by Humboldt County which is included in other assets. Withdrawals of
funds from certain restricted trust accounts may require approval of regulatory
agencies. In addition to establishing trust funds, the
63
<PAGE> 65
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company also provides financial assurance for one of its landfills through the
issuance of a bond for $1.1 million.
In addition, in accordance with State of California legislation, the
Company is required to provide financial assurance for the initiation and
completion of corrective action for potential releases of contaminants from its
landfills. The Company has on deposit $2.1 million in trust funds as of
September 30, 1999 and estimates that future contributions to trust funds of
approximately $5.6 million over the remaining lives of the respective landfills
will be required to satisfy these obligations. In the event of a release prior
to full funding, the Company may be required to pay for the corrective action or
to accelerate funding of the trust funds.
The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. The Company also carries an underground
tank policy to satisfy financial assurance requirements mandated under federal
law.
California landfill operators must demonstrate financial assurance to
compensate third parties for bodily injury and property damage arising out of
landfill operations. Under the method adopted by the Company, the regulations
require funding of $1.0 million per landfill to a maximum of $5.0 million
Company-wide. To satisfy this requirement the Company has established financial
assurance mechanisms for each landfill. As of September 30, 1999, the Company
has approximately $3.4 million in three separate trust funds and has secured an
insurance policy for the other landfill.
In July 1999, the Company and Humboldt Waste Management Authority (HWMA)
entered into an agreement in principal concerning the Cummings Road Landfill and
the Company's Eureka Transfer Station. In November 1999, the Company entered
into an agreement with HWMA, pursuant to which the Company would transfer to
HWMA ownership of such properties as well as certain operating equipment. As
part of the agreement, the Company would receive certain cash payments totaling
$4.2 million from the HWMA and HWMA would assume certain closure/post-closure,
corrective action and operational responsibilities with respect to the Cummings
Road Landfill. The Company would retain liability for its operation of the
landfill prior to the closing of the transaction and for any defect in
corrective action work performed by the Company at the landfill prior to the
closing of the transaction. Under the agreement, the Company would also transfer
to HWMA its interest in the closure/post-closure and corrective action trust
funds relating to the landfill. The consummation of the agreement is subject to
several closing conditions. Provided such conditions are met or waived, the
closing is expected to occur before January 15, 2000.
(12) COMMITMENTS AND CONTINGENCIES
The Company has arranged stand-by letters of credit with various expiration
dates totaling $2.3 million and $2.1 million at September 30, 1999 and 1998,
respectively. These letters of credit are provided primarily to secure insurance
and self-insurance obligations and for bond requirements. As of September 30,
1999, the Company has $22.7 million in stand-by letters of credit availability.
The Company is self-insured for various risks of loss related to general
liability, automobile liability, property damage, employee and certain retiree
healthcare, and workers' compensation. The establishment of reserves and claim
payment activity include estimates of the ultimate costs of claims that have
been reported but not settled and of claims that have been incurred but not
reported.
64
<PAGE> 66
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Adjustments to the reserve are charged or credited to expense in the periods in
which they are determined to be necessary. At September 30, 1999 and 1998, the
Company's accrued liability for self-insured claims was approximately $18.0
million and $17.3 million, respectively. The current portion of self-insured
claims at September 30, 1999 and 1998, amounting to approximately $6.9 million
and $8.1 million, respectively, is included in accrued expenses.
At September 30, 1999, the Company and the other unrelated investors were
jointly and severally liable as guarantors of affiliates' (note 5) indebtedness
totaling $0.2 million.
On April 24, 1997, employees represented by the Sanitary Truck Drivers and
Helpers Union Local 350 International Brotherhood of Teamsters (Local 350)
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-year
contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. The Company has served upon Local 350
a demand to arbitrate this dispute under the terms of the collective bargaining
agreement between the parties. Representatives of the Company and Local 350 have
entered into a Memorandum of Understating (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, 1999 would increase by
an additional $8.2 million and reduce stockholder's equity by $1.8 million. In
addition, if the increased pension benefits are provided, the Company's
estimated incremental increase in its annual expense for employee benefits would
be approximately $3.1 million for pension and medical costs. Such incremental
increase in expense would be mostly offset by higher revenue if the Company is
successful in obtaining increased rates to cover the additional funding. The
above estimates are based on a discount rate of 7.5%. The discount rate applied
under generally accepted accounting principles (GAAP) fluctuates with market
conditions. A change in the discount rate can result in significant adjustments
to the ABO.
(13) LITIGATION
The Company and the ESOP were defendants in litigation brought by certain
previous noteholders of the ESOP against them and, among others, certain
financial institutions as to which the Company and/or the ESOP have certain
indemnification obligations. In 1995, the litigation was settled, except for
continuing claims by the noteholders against one of those financial
institutions. That institution has claimed, among other things, that the Company
and the ESOP have continuing indemnity obligations to it in connection with the
litigation. The Court has rejected those claims, and ultimately entered judgment
in favor of Norcal and the ESOP in connection with the claims of the financial
institution.
65
<PAGE> 67
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The financial institution also brought a second lawsuit against the ESOP alone,
raising the same indemnity issues that were at issue in the previously described
action. The Court rejected those claims as well, and entered judgment for the
ESOP. The financial institution is appealing the adverse judgments. The Company
and the ESOP believe that such claims are without merit. In any case, given the
terms of the settlement agreement, the Company believes it is unlikely that
Norcal's and the ESOP's financial exposure to the claims would materially exceed
the amount of the financial institution's legal fees and expenses.
The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that all such matters relating to
litigation are adequately provided for or that resolution of such matters will
not have a material adverse impact on the financial condition of the Company;
however, there can be no assurance that the impact of such matters on its
results of operations or cash flows for any given reporting period will not be
material.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required under Statement of Financial Accounting Standards
(SFAS) No. 107, Fair Value of Financial Instruments, to disclose fair value for
all of its financial instruments. The carrying value of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short maturity of these instruments.
Estimates for the fair value of the Company's other financial instruments at
September 30, are detailed below:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Trust accounts................................. $ 36,744 36,736 36,190 36,137
Marketable securities.......................... 5,552 5,552 5,552 5,552
Liabilities:
Senior notes................................... 171,343 190,750 171,004 198,270
Other long term debt including current
portion..................................... 5,012 5,012 3,413 3,413
</TABLE>
Trust accounts and marketable securities -- The fair value of the trust
accounts and marketable securities has been estimated based on market values
provided by the respective trustees and quoted market prices.
Senior Notes -- The fair value of the senior notes at September 30, 1999
and September 30, 1998 has been estimated using the quoted market price for the
Notes based upon a limited number of transactions.
(15) BUSINESS SEGMENT, GEOGRAPHICAL AND OTHER INFORMATION
The Company operates in one business segment -- solid waste management
services primarily consisting of collection, transfer, disposal and landfill
management to industrial, commercial, residential and municipal customers. The
Company's San Francisco operations represents approximately 39% of revenues for
each of the years 1999, 1998 and 1997; however, the Company does not believe
that it is exposed to credit risk.
The Company has a contract with San Bernardino County, pursuant to which it
operates (through its San Bernardino subsidiary) all active landfills owned by
San Bernardino County and is primarily
66
<PAGE> 68
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
responsible for implementing the County's strategic plan which addresses the
County's long-term waste disposal needs (the 1995 Contract). The Company's other
responsibilities include closure and monitoring of non-active landfills, and
identification, permitting and construction of landfill expansions. The
Company's contract with the County is scheduled to terminate on June 30, 2001
(the Expiration Date). The 1995 Contract provides that the Company, at its
option, may extend the agreement for an additional 15-year period. At the
conclusion of this initial extension period, the Company, at its option, may
extend the agreement for up to an additional 15 years, so long as the waste
stream contractually committed to the landfills meets certain levels. However,
each party may terminate the contract for default, failure to reach an agreement
regarding the reconfiguration of the landfills and other facilities following a
reduction in tonnage, or the bankruptcy or insolvency of the other party. In
addition, San Bernardino County may terminate the contract so long as it uses a
competitive procedure to select a contractor or municipalizes such operations
and either party may terminate the 1995 Contract for failure to reach an
agreement regarding the redetermination of the Company's per ton compensation
rate (which rate must be redetermined every three years, and is currently the
subject of an arbitration between the County and the Company). The contract also
contains a clause stating that the County may terminate the agreement at any
time if a Company employee is convicted of bribing public officials where the
conviction relates to actions taken by the employee in respect to the 1995
Contract.
In October 1999, the United States Attorney for the Central District of
California announced criminal indictments of James J. Hlawek, the immediate
former Chief Administrative Officer for San Bernardino County, Harry M. Mays, a
former consultant of the Company (and Mr. Hlawek's predecessor as Chief
Administrative Officer for San Bernardino County), and Kenneth James Walsh, a
former employee of the Company. All three defendants have pled guilty to federal
charges of conspiring to pay and accept bribes to influence or reward Mr. Hlawek
in connection with his official duties. Although the United States Attorney has
advised the Company that its investigation is ongoing and that the Company is
one of its targets, neither the Company nor any of its affiliates has been
charged. If the Company is charged and held responsible for the conduct of its
employee, it may become subject to penalties and fines.
Messrs. Walsh and Mays have advised the Company that they were the only
Company personnel and consultants involved in this matter and that no other
Company personnel or consultants were involved in or had knowledge of their
illegal conduct. The Company believes that Messrs. Walsh and Mays were acting
purely for their own personal gain and that none of the Company's other
employees or consultants were aware of or otherwise involved with Messrs.
Walsh's and Mays' illegal conduct. The Company terminated Mr. Walsh on August
27, 1999 and its arrangement with Mr. Mays on September 3, 1999. After
terminating Mr. Walsh, the Company was informed by the United States Attorney
that Mr. Walsh had been accepting kickbacks from Mr. Mays and from one of the
Company's vendors and had used a portion of such kickbacks along with a portion
of the contract fee paid to Mr. Mays to fund the payments to Mr. Hlawek. The
Company anticipates that the United States Attorney's office may require
additional information in its ongoing investigation. The Company has cooperated
with the United States Attorney's investigation and intends to continue to
cooperate in the future. The Company has also initiated its own internal
investigation of the matter.
On December 14, 1999, the County Board of Supervisors directed the County's
Chief Administrative Officer to negotiate an amendment with the Company to end
the 1995 Contract as soon as the County can complete a competitive bidding
process through a Request for Proposal, review submitted bids, and negotiate a
replacement contract, but in no event later than June 30, 2001. Although the
County's Chief Administrative Officer has estimated in his report to the
County's Board of Supervisors
67
<PAGE> 69
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that the process should take 15 to 18 months, the County's Board of Supervisors
has requested that the process be completed more quickly, if possible. In
response to this request, the County's Chief Administrative Officer has stated
that the process could potentially be accomplished in 12 to 15 months. The
Company is currently unable to estimate how much time the County will need to
complete these procedures. Moreover, the Company does not know whether it can
successfully negotiate such an amendment, what terms may ultimately be
negotiated in such an amendment or whether the County's Board of Supervisors
will approve any such amendment. Assuming the County is unable to complete the
Request for Proposal and enter into a new contract in the next nine months, the
Company does not expect an amendment to end the 1995 Contract or the termination
of the 1995 Contract to have a significant impact on its cash flows, results of
operations or financial condition for fiscal year 2000. The County has indicated
that the Company will be permitted to bid on the new contract, but there can be
no assurance that the Company will be awarded the new contract, or if the
Company is the successful bidder, how the terms of the new contract will compare
to those contained in the 1995 Contract.
During fiscal years 1999, 1998 and 1997, revenues derived from the services
the Company performed for San Bernardino County were approximately $55.1 million
(16% of the Company's total revenue), $65.1 million (19% of the Company's total
revenue) and $55.1 million (17% of the Company's total revenue), respectively.
Revenues less direct expenses including consulting fees (excluding allocable
corporate management fees, lease charges, interest expense and the non-cash
portion of ESOP expense, and depreciation and amortization), related to the
Company's San Bernardino operations for fiscal years 1999, 1998 and 1997 were
approximately $6.6 million, $7.9 million and $7.4 million, respectively. While
the Company's results of operations and cash flows will be adversely impacted if
an amendment to end the 1995 Contract is negotiated or the 1995 Contract is
terminated and the Company and the County do not enter into a new contract
having comparable terms, management believes that such event will not have a
material adverse effect on the Company's financial condition or on its ability
to maintain its operations and service its debt.
As of September 30, 1999, approximately 73% of the Company's employees were
represented by unions. Of this total, approximately 9% are covered under
contracts that will expire by September 30, 2000.
The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities.
(16) GUARANTEE OF SECURITIES
Norcal is a holding company and has no independent operations other than
those relating to its subsidiaries. The Senior Notes are guaranteed by certain
direct and indirect subsidiaries of Norcal. The guarantor subsidiaries are all
wholly owned subsidiaries and the guarantees of the guarantors are full,
unconditional and joint and several. The direct and indirect nonguarantor
subsidiaries of Norcal are individually and in the aggregate inconsequential.
Separate financial statements of each guarantor have not been presented since
management has determined such separate financial statements are not material to
noteholders.
68
<PAGE> 70
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. Comprehensive income consists of net income and other
gains and losses affecting stockholders' equity, that under generally accepted
accounting principles are excluded from net income. The components of
comprehensive income for the years ended September 30, 1999, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................... $17,556 9,461 6,526
Other comprehensive income:
Minimum pension liability adjustment, net of tax....... 2,298 (2,298) --
Unrealized gains (losses) on trust accounts, net of
tax................................................. (383) 204 (602)
------- ------ -----
Comprehensive income........................... $19,471 7,367 5,924
======= ====== =====
</TABLE>
(18) SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
The following table summarizes the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues............... 1999 $83,326 82,791 87,173 89,877
======= ====== ====== ======
1998 $88,453 76,885 80,653 91,866
======= ====== ====== ======
Income from operations........... 1999 $ 8,626 7,968 9,446 13,070
======= ====== ====== ======
1998 $ 7,754 4,568 7,971 7,317
======= ====== ====== ======
Net income (loss)................ 1999 $ 3,050 2,916 3,783 7,807
======= ====== ====== ======
1998 $ 2,295 (705) 5,696 2,175
======= ====== ====== ======
</TABLE>
69
<PAGE> 71
ITEM 9.CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions and offices with Norcal of the current
executive officers and directors of Norcal are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael J. Sangiacomo........... 50 President, Chief Executive Officer and Director
Archie L. Humphrey.............. 47 Executive Vice President, Chief Operating Officer
Mark R. Lomele.................. 43 Senior Vice President, Chief Financial Officer and
Treasurer
George P. McGrath............... 46 Senior Vice President, Chief Information Officer
Jon D. Braslaw.................. 38 Vice President, Corporate Controller
Bennie J. Anselmo, Jr........... 54 Vice President -- Equipment Procurement and
Maintenance
David A. Cochrane............... 43 Vice President -- Facilities Development and Technical
Services
Denise Delmatier................ 46 Vice President -- Governmental & Regulatory Affairs
Gale R. Kaufman................. 45 Director
John B. Molinari(a)(b).......... 90 Director, Chairman of the Board of Directors
H. Welton Flynn(a)(b)........... 78 Director
</TABLE>
- ---------------
(a) Audit Committee member
(b) Compensation Committee member
MICHAEL J. SANGIACOMO has served as a director of Norcal since November
1990 and as Chief Executive Officer and President since January 1991. From
November 1990 to January 1991, Mr. Sangiacomo served as Acting Chief Executive
Officer and President of Norcal. From August 1988 until November 1990, he served
as Chief Financial Officer of Norcal, and held the additional title of Senior
Vice President from January to November 1990. Mr. Sangiacomo serves as a
director and an executive officer of all of Norcal's subsidiaries. He also
serves as an executive officer of Nortech Waste LLC, a joint venture in which
the Company is a minority investor ("Nortech"). Mr. Sangiacomo holds a B.S. in
Business Administration from the University of San Francisco and practiced as a
certified public accountant from 1971 to 1978.
ARCHIE L. HUMPHREY was appointed Executive Vice President and Chief
Operating Officer of Norcal in August 1999. Mr. Humphrey serves as an executive
officer and director of all of Norcal's subsidiaries, and as an executive
officer and a members' representative of Nortech. Mr. Humphrey also serves as a
director of NorthBay Healthcare Group, a not for profit healthcare organization.
From November 1996 to August 1999, Mr. Humphrey served as Division Manager for
all Northern California operations except San Francisco operations and
Integrated Environmental Systems, Inc., and was a Vice President of 13
subsidiaries of the Company. Mr. Humphrey has also been a member of the
Administrative Committee of the ESOP since 1986 and its Secretary since 1992.
From August 1995 to November 1996, Mr. Humphrey served as Division Manager for
North Coast operations of the Company. Mr. Humphrey served as a Regional Manager
for the Company's Solano County operations from October 1992 until August 1995
and as a director of the Company from November 1991 until February 1996. Mr.
Humphrey holds a B.A. in Sociology from California State University at
Sacramento.
70
<PAGE> 72
MARK R. LOMELE has served as Senior Vice President, Chief Financial Officer
and Treasurer of Norcal since January 1997 and as a Vice President since
November 1990. He also serves as an officer and a members' representative of
Nortech. From September 1988 to July 1996, Mr. Lomele served as Norcal's
Corporate Controller and from July 1996 to January 1997 as Acting Chief
Financial Officer. Mr. Lomele serves as an executive officer of all of Norcal's
subsidiaries. From April 1996 to September 1996 he also served as General
Manager of Nortech. Mr. Lomele has been a member of the ESOP's Administrative
Committee since 1991 and has served as its Chair since February 1, 1995. He
holds a B.S. in Business Administration from the University of San Francisco.
GEORGE P. MCGRATH has served as Senior Vice President, Chief Information
Officer of Norcal since October 1998, responsible for all of the Company's
information systems. From July 1996 to June 1997, Mr. McGrath served as Vice
President and General Manager of Alta Environmental Services, Inc., a subsidiary
that markets certain types of landfill space to third parties. Prior to joining
Norcal in October 1995, Mr. McGrath served as Vice President and Area General
Manager for Chemical Waste Management in the Western Region of the United States
from October 1990 to February 1995. Mr. McGrath holds a B.S. in Psychology from
Western Michigan University.
JON D. BRASLAW has served as Vice President, Corporate Controller since
January 1997. Mr. Braslaw served as Controller from August to December 1996, as
Assistant Controller from April to July 1996, as Manager of Financial Reporting
from January 1995 to March 1996, and as a Financial Analyst from November 1989
to December 1994. He holds a B.A. in Economics from the University of California
at Santa Barbara.
BENNIE J. ANSELMO, JR. has served as Vice President -- Equipment
Procurement and Maintenance and Vice President of Alta Leasing Co., Inc. since
November 1990. Mr. Anselmo served as Director of Equipment Procurement for
Golden Gate Disposal Company from January 1988 until his transfer to Norcal in
November 1990. Mr. Anselmo began his career with Golden Gate Disposal Company in
1962, serving as shop foreman and shop superintendent, among other capacities.
DAVID A. COCHRANE has served since February 1995 as Vice
President -- Facilities Management and Technical Services of Norcal. Prior to
that Mr. Cochrane served Norcal as Director of Technical Services since October
1994, and as Corporate Manager for Landfill Engineering since April 1993. From
November 1996 to April 1998, Mr. Cochrane served as Vice President of Alta
Environmental Services, Inc., a subsidiary that markets certain types of
landfill space to third parties, and as Vice President of B&J Drop Box,
subsidiary that owns a landfill in Vacaville, CA, and Western Placer Recovery,
Inc., a subsidiary that operates a landfill in Roseville, CA. Before joining
Norcal in April 1993, Mr. Cochrane served since April 1990 as an executive
manager for Emcon Associates, an environmental and engineering consulting firm
that provided services to the waste industry, including Norcal and its
subsidiaries. He holds a B.A. in Geology from Humboldt State University.
DENISE DELMATIER has served as Vice President -- Governmental & Regulatory
Affairs since March 1999. Prior to joining Norcal, Ms. Delmatier represented
Norcal in legislative and regulatory matters for the past twelve years with the
lobbying firms of Heron, Burchette, Ruckert & Rothwell and the Gualco Group. Ms.
Delmatier's most recent public employment position was a legislative assistant
for the California State Assemblyman Dan Hauser. She holds a B.A. in English
from California State University, Chico.
GALE R. KAUFMAN became a director of Norcal in July 1996. Since 1987, Ms.
Kaufman has been the president of Kaufman Campaign Consultants, a political
campaign and consulting firm. From 1992 to 1995, she was the Director of the
Speaker's Office of Majority Services of the California State Assembly. Since
May 1993, she has provided certain consulting services to Norcal, including
overall campaign responsibility in connection with Norcal's defeat of certain
City of San Francisco ballot initiatives. Ms. Kaufman has a B.A. in Political
Science from George Washington University.
JOHN B. MOLINARI has served as a director of Norcal and its predecessor
since 1986 and as Chairman of the Board since December 1990. From 1948 to 1953,
Mr. Molinari served as a judge of the
71
<PAGE> 73
San Francisco Municipal Court; from 1953 to 1962, he served as a judge of the
San Francisco Superior Court; and from 1962 to 1977, he served as a Justice on
the California Court of Appeal. He has been an attorney in private practice
since 1977.
H. WELTON FLYNN has served as a director of Norcal since December 1991.
From 1949 until the present, Mr. Flynn has been the sole proprietor of an
accounting firm located in San Francisco. Since January 1996, he has served as a
member of The Public Transportation Commission of the City and County of San
Francisco and currently serves as its President. Mr. Flynn was appointed to the
Public Utilities Commission for the City and County of San Francisco in 1970 and
served as its President for more than five terms before retiring in 1991.
Each executive officer of Norcal is appointed by, and serves at the
pleasure of, the Board of Directors. There are no family relationships among
executive officers or directors of Norcal.
BOARD OF DIRECTORS
Number of Directors and Term of Office. Norcal's Bylaws currently fix the
authorized number of directors of Norcal at five. All directors hold office
until the next annual meeting of shareholders and until their successors have
been elected. The ESOP (as shareholder) has the power to remove directors at any
time. There is currently one vacancy on the Board of Directors.
Committees of the Board. The Compensation Committee recommends to the Board
of Directors the salary, benefit and incentive compensation levels of Norcal's
executive officers as well as the contractual provisions of their employment
contracts, and administers Norcal's 1990 Stock Option Plan (the "1990 Option
Plan"), the 1996 Employee Stock Incentive Plan (the "1996 Employee Plan"), the
Deferred Compensation and Stock Option Plan (the "Deferred Compensation Stock
Option Plan") and the 1996 Executive Stock Incentive Plan (the "1996 Stock
Plan"), including determination of grants of options, prescribing the terms and
provisions of the options, construing and interpreting the 1990 Option Plan, the
1996 Employee Plan and the 1996 Stock Plan and establishing and amending rules
and regulations related thereto. The members of the Compensation Committee are
Messrs. Molinari and Flynn. The Audit Committee recommends the firm of
independent certified public accountants to be appointed to audit Norcal's
financial statements, reviews the scope and results of the audit, reviews with
management Norcal's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of Norcal and
reviews the non-audit services to be performed by the independent accountants.
The members of the Audit Committee are Messrs. Molinari and Flynn.
Compensation of Directors. Directors who are employees of Norcal or its
subsidiaries do not receive additional compensation for their services as
directors of Norcal. For services as a non-employee director during fiscal year
1999, John B. Molinari, H. Welton Flynn and Gale R. Kaufman were each paid
$38,000, $33,000 and $28,000, respectively. Each non-employee director receives
an annual retainer of $18,000 and a payment of $1,000 plus expenses for each
board meeting attended and $1,000 plus expenses for each committee meeting
attended that is held at a different time or place than a board meeting.
Non-employee directors are also eligible to receive option grants under the 1996
Non-Employee Director Stock Option Plan. All directors are eligible to receive
option grants under the 1996 Stock Plan and the 1996 Employee Plan.
Compensation Committee. Interlocks and Insider Participation in
Compensation Decisions. Messrs. Molinari and Flynn were appointed to the
Compensation Committee in May 1992. Neither has ever been an officer or employee
of Norcal or any of its subsidiaries. Mr. Sangiacomo, President and Chief
Executive Officer of Norcal, participates fully with the committee members in
recommending to Norcal's Board of Directors the salaries, benefits and incentive
compensation for Norcal's executive officers, excluding his own.
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<PAGE> 74
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning the compensation paid or accrued during the three fiscal
years ended September 30, 1999 to Norcal's Chief Executive Officer and to each
of the four other most highly compensated executive officers of Norcal who
received compensation in excess of $100,000 during the last completed fiscal
year (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
NAME AND FISCAL OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS(A)($) COMPENSATION($) (NUMBER) COMPENSATION(B)($)
------------------ ------ --------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Sangiacomo..... 1999 407,050 300,000 -- -- 3,686
President and Chief 1998 391,400 300,000 -- -- 60,612
Executive Officer 1997 371,000 175,000 -- -- 45,509
Archie L. Humphrey........ 1999 193,207 90,000 -- -- 1,535
Executive Vice 1998 178,750 70,000 -- 40,000 53,137
President and Chief 1997 167,306 50,000 -- 40,000 39,710
Operating Officer
Mark R. Lomele............ 1999 207,500 130,000 -- -- 2,781
Senior Vice President, 1998 200,000 125,000 -- 40,000 45,309
Chief Financial Officer 1997 186,539 75,000 -- 40,000 34,813
and Treasurer
George P. McGrath......... 1999 175,000 110,000 -- -- 5,836
Senior Vice President, 1998 146,917 45,000 -- 25,000 33,745
Chief Information 1997 138,750 21,000 -- 5,000 28,594
Officer
Jon D. Braslaw............ 1999 127,400 65,000 -- -- 3,886
Vice President, 1998 121,600 60,000 -- 25,000 39,100
Corporate Controller 1997 116,000 45,000 -- 25,000 33,532
Donald M. Moriel.......... 1999 200,000 125,000 52,367 -- 116,016(c)
Former Vice President, 1998 300,000 187,500 -- -- 150,207(c)
Special Projects(d) 1997 293,943 120,000 -- -- 145,491(c)
</TABLE>
- ---------------
(a) Bonuses are indicated for the fiscal year in which they were earned based on
the achievement of certain business plan targets.
(b) Unless otherwise indicated in a note to this table, this amount consists
primarily of increases in the value of the individual's ESOP account as a
result of an allocation of additional shares of Norcal's Common Stock to
such account as well as changes in the estimated fair market value per share
of such stock. This figure also includes premiums paid by Norcal on behalf
of the Named Executive Officers for group life insurance during each of the
years indicated, pro-rated for partial years of service.
(c) Represents amounts earned with respect to a deferred annuity to be paid as
part of the Deferred Compensation Stock Option Plan (as hereinafter
defined), along with compensation relating to the increase in the value of
his ESOP account (see footnote (b)).
(d) Mr. Moriel served as the Company's Executive Vice President and Chief
Operating Officer from June 1994 to October 1998. He served as the Company's
Vice President, Special Projects from October 1998 to May 1999.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. Norcal has employment contracts with various executive officers
and key employees.
In April 1996, Norcal entered into an employment agreement with Mr.
Sangiacomo, its President and Chief Executive Officer. Under the agreement, Mr.
Sangiacomo is entitled to receive a salary of at least $350,000 per year and is
eligible to participate in the Short-Term Incentive Bonus Plan. In addition, Mr.
Sangiacomo receives insurance and other benefits and perquisites generally
available to Norcal's executive employees.
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<PAGE> 75
Mr. Sangiacomo is entitled to certain severance payments (i) if his
employment is terminated constructively or without cause after a change in
control of Norcal or (ii) if he resigns at any time more than 12 months but less
than 13 months after a change in control of Norcal. Such severance benefits
would, under certain circumstances, include payment of an amount equal to twice
his average total annual compensation for the two previous years.
Norcal has granted Mr. Sangiacomo a nonqualified stock option pursuant to
its 1996 Stock Plan (as defined below) to purchase Common Stock consisting of
three series, with each series being for 320,000 shares. The initial exercise
price for all shares was $4.89. The exercise price for the Series B shares was
adjusted to $5.18, the fair value of the stock on October 1, 1996. The exercise
price for the Series C shares was adjusted to $5.59, the fair value of the stock
on October 1, 1997. Each Series generally will vest over four years, with the
first vesting to occur for Series A, B and C options on September 30 of 1996,
1997 and 1998, respectively. This vesting schedule will be partially accelerated
if Norcal achieves certain financial, operational and strategic objectives,
including an initial public offering. Under certain circumstances, the option
will vest completely if there is a change in control (a "Control Event") of
Norcal. Generally, a Control Event will be deemed to have occurred if: (i) a
third party (other than an employee benefit plan or an entity controlled by the
Company) acquires 25% or more of Norcal's voting securities (or 35% or more if
Norcal has not had an initial public offering of Common Stock; (ii) persons who
are directors of Norcal as of the date of adoption of the 1996 Stock Plan (the
"Incumbent Board") cease to constitute a two-thirds majority of Norcal's board
of directors (provided that any director whose nomination or election is
approved by a two-thirds majority of the Incumbent Board shall be considered a
member of the Incumbent Board); (iii) at any time prior to an initial public
offering, the ESOP no longer owns more than 50% of the Company's then
outstanding voting securities; (iv) a merger or like event involving Norcal is
consummated unless, among other things, Norcal shareholders immediately before
such event own immediately following such event at least 75% of the voting
securities of the resulting corporation; (v) Norcal is liquidated or dissolved;
or (vi) substantially all of Norcal's assets are sold.
As long as Mr. Sangiacomo remains employed by Norcal, he may exercise any
option in a Series any time within seven years after the exercise price has been
fixed for that Series with respect to shares that have vested.
In October 1998, Norcal entered into an employment agreement with Mr.
Coyle, then its Chief Operating Officer. Under the agreement, Mr. Coyle was
entitled to receive a salary of at least $240,000 per year, a hiring bonus of
$40,000 and a relocation allowance of $50,000. Mr. Coyle was eligible to
participate in the Short-Term Incentive Bonus Plan. In addition, Mr. Coyle
received insurance and other benefits and perquisites generally available to
Norcal's executive employees. Mr. Coyle was entitled to severance benefits of
$120,000 if his employment is terminated without cause before October 1999 and
$240,000 after October 1999. In July 1999, Mr. Coyle voluntarily terminated his
employment with the Company.
In June 1996, Norcal entered into an employment agreement with Mr. Moriel,
then the Company's Executive Vice President and Chief Operating Officer and most
recently its Vice President, Special Projects. Under the agreement, Mr. Moriel
was entitled to receive a salary of at least $275,000 per year, with $50,000 of
such annual salary deferred pursuant to the Deferred Compensation Stock Option
Plan. Mr. Moriel was eligible to participate in the Short-Term Incentive Bonus
Plan. In addition, Mr. Moriel received insurance and other benefits and
perquisites generally available to Norcal's executive employees.
Pursuant to the agreement, Mr. Moriel retired in 1999 and will receive a
retirement annuity pursuant to the Deferred Compensation Stock Option Plan
which, together with certain pension payments, will result in aggregate payments
of $50,000 per year. In March 1999, Mr. Moriel designated the Donald M. Moriel
and Janet Allad Moriel 1992 Family Revocable Trust (the "Moriel Trust") as the
primary beneficiary of deferred compensation under the aforementioned plan. Mr.
Moriel has agreed to enter into a consulting agreement with Norcal. The terms of
that consulting agreement are under
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<PAGE> 76
negotiation, but it is expected that it shall have a term of five years and a
minimum annual payment of $50,000.
Norcal granted Mr. Moriel a nonqualified stock option under the Deferred
Compensation Stock Option Plan to purchase up to 300,000 shares of Common Stock
at an exercise price of $4.89 per share. As of September 30, 1999, all 300,000
shares were vested. In March 1999, Mr. Moriel and his wife assigned their
interest in this option to the Moriel Trust. Subject to certain provisions of
the Deferred Compensation Stock Option Plan, the Moriel Trust may exercise its
option at any time on or before September 30, 2002.
In April 1996, the Board of Directors adopted a severance pay policy (the
"Severance Policy") which would be triggered by a change in control of Norcal.
The program covers up to ten key employees of the Company (but not Mr.
Sangiacomo). Each employee covered by the Severance Policy will receive an
amount equal to his current base salary if there is a change in control of
Norcal and the employee is constructively terminated or terminated without cause
within 13 months after such change in control. The Company has not designated
any specific employees to be covered by the Severance Policy at this time.
Short-Term Incentive Bonus Plan. In April 1996, the Company adopted a
Short-Term Incentive Bonus Plan, which was amended by the Company on October 29,
1998 (as amended, the "1996 Bonus Plan"), providing variable cash bonuses for up
to approximately 90 of the Company's executive and management employees
(including the Named Executive Officers). Under the 1996 Bonus Plan, cash
bonuses will be based on a percentage of each participant's base salary, with
such percentages varying depending on how closely Norcal (or its regional
operations, as the case may be) achieves specific financial, operational and
strategic objectives. No bonuses will be paid unless the Company's profit before
taxes exceeds the aggregate amount of bonuses due to be paid pursuant to the
1996 Bonus Plan. Depending on the employee, cash bonuses will range from 5% to
30% of base salary if 85% of the target is achieved to between 20% and 120% of
base salary if 120% of the target is achieved. The Company has retained the
discretion to modify such bonuses as it deems appropriate. The Board of
Directors may, from time to time, modify the 1996 Bonus Plan.
1996 Executive Stock Incentive Plan ("1996 Stock Plan"). Pursuant to
Norcal's 1996 Stock Plan, up to 2,887,500 shares of Common Stock have been set
aside to satisfy awards that may be granted to officers, employees or directors
of the Company or its affiliates. Awards may consist of incentive or
nonqualified stock options, restricted stock, stock appreciation rights,
performance awards and dividend equivalent rights. The 1996 Stock Plan will
expire in January 2006. The 1996 Stock Plan is administered by a committee of
non-employee directors (currently, the Compensation Committee), which has the
power to determine when and to whom awards will be granted and the terms of each
award. The terms of any award will be set forth in an award agreement, which may
modify or delete provisions of the 1996 Stock Plan that would otherwise apply to
such award or which may contain other terms and restrictions not set forth in
the 1996 Stock Plan.
With respect to awards of options, the committee has authority to determine
(i) the number of shares of Common Stock that may be purchased pursuant to each
option, (ii) the option's vesting provisions, (iii) the exercise price (provided
in general that the exercise price for shares must be at least 85% of the fair
market value of the shares as of the grant date), (iv) the term of such option
and (v) such other terms as the committee determines.
The 1996 Stock Plan generally provides that, upon a Control Event (as
defined in the Plan), all outstanding options will become immediately and fully
exercisable, and optionholders may surrender any option to the extent not yet
exercised in exchange for a cash payment.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Stock Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination
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<PAGE> 77
of a participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Stock Plan.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition and confidentiality provisions in the 1996 Stock
Plan are subject to certain forfeiture provisions with respect to their options
or shares.
Effective April 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 15,000 shares of Common
Stock under the 1996 Stock Plan at an exercise price of $4.89 per share.
1996 Employee Stock Incentive Plan (the "1996 Employee Plan"). Pursuant to
the 1996 Employee Plan, up to 5,260,500 shares of Common Stock (less any such
shares set forth in awards granted pursuant to the 1996 Stock Plan, the 1990
Option Plan, the Non-Employee Director Plan and the Deferred Compensation Stock
Option Plan) have been set aside to satisfy awards that may be granted to
officers, employees or directors of the Company or its affiliates. Awards may
consist of incentive or nonqualified stock options, restricted stock, stock
appreciation rights, performance awards and dividend equivalent rights. The 1996
Employee Plan will expire in April 2006. The 1996 Employee Plan is administered
by a committee of non-employee directors (currently, the Compensation
Committee), which has the power to determine when and to whom awards will be
granted and the terms of each award. The terms of any award will be set forth in
an award agreement, which may modify or delete provisions of the 1996 Employee
Plan that would otherwise apply to such award or which may contain other terms
and restrictions not set forth in the 1996 Employee Plan.
With respect to the awards of options, the committee has authority to
determine (i) the number of shares of Common Stock that may be purchased
pursuant to each option, (ii) the option's vesting provisions (provided that the
rate of vesting must be at least 20% per year over five years from the date the
option is granted), (iii) the exercise price (provided in general that the
exercise price for shares must be at least 85% of the fair market value of the
shares as of the grant date), (iv) the term of such option (provided that the
term of an option may not be greater than ten years from the date of grant
thereof) and (v) such other terms as the committee determines.
The 1996 Employee Plan generally provides that, in the event of certain
changes in control, the committee, in its sole discretion, may take a variety of
actions (including acceleration of unvested options) with respect to outstanding
awards that it considers to be in the best interests of the Company.
With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Employee Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Employee Plan, which option will terminate upon the consummation of the
Company's first public offering of Common Stock.
Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition, confidentiality and other provisions in the 1996
Employee Plan are subject to certain forfeiture provisions with respect to their
options or shares.
Ms. Delmatier, who is an employee of the Company, was awarded options with
respect to her employment during fiscal year 1999 to purchase up to 30,000
shares of Common Stock under the 1996 Employee Plan. These options were issued
at an exercise price of $6.05 per share. These options have a seven-year term
(commencing on the date of grant) and vest over four years from the date of
grant.
Deferred Compensation Stock Option Plan. Pursuant to Norcal's Deferred
Compensation Stock Option Plan, (i) up to 300,000 shares of Common Stock have
been set aside to satisfy the award of an unqualified stock option to Mr.
Moriel; (ii) Mr. Moriel will defer $50,000 per year of his annual salary (as
described above) (the "Deferred Compensation"); and (iii) Mr. Moriel will be
entitled to receive
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<PAGE> 78
a retirement annuity (the "Retirement Annuity"), payable quarterly until his
death, in the amount of $50,000 per year, less the aggregate amount of benefits
he receives from other retirement plans of Norcal, excluding the ESOP benefit.
In March 1999, Mr. Moriel designated the Moriel Trust as the primary beneficiary
of the Deferred Compensation and assigned the stock option to the Moriel Trust.
The Deferred Compensation Stock Option Plan is currently administered by
the Compensation Committee, which has the power to interpret the plan.
Generally, in the event that (i) there is a merger, consolidation or other
reorganization in which Norcal is not the surviving entity or becomes a
subsidiary of another corporation, (ii) there is a sale of all or substantially
all of Norcal's assets, (iii) there is a sale of more than 50 percent of
Norcal's outstanding stock to one or more persons who are not shareholders of
Norcal or (iv) there is a dissolution or liquidation of Norcal (the transactions
referred to in clauses (i)-(iv) are each referred to herein as a "Corporate
Transaction"), Norcal is obligated to (i) require the successor entity to (A)
assume Mr. Moriel's option now held by the Moriel Trust or (B) substitute a
comparable option of such successor entity (or any of, its affiliated entities),
or (ii) notify the Moriel Trust at least 30 days before a Corporate Transaction
occurs so that he will have an opportunity to purchase all or part of his vested
shares prior to the consummation of such Corporate Transaction, at which time
Mr. Moriel's option will be cancelled. Shares acquired pursuant to the exercise
of the option granted under the Deferred Compensation Stock Option Plan are
subject to certain restrictions on transfers. In addition, with certain
exceptions, transfers of such shares are subject to Norcal's right of first
refusal, which right will terminate upon the consummation of Norcal's first
public offering of Common Stock. Upon the later of Mr. Moriel's termination of
employment and the term of his option, Norcal will have an assignable option to
repurchase shares of Common Stock awarded to Mr. Moriel pursuant to the Deferred
Compensation Stock Option Plan.
The Deferred Compensation Stock Option Plan provides that if Mr. Moriel
violates certain noncompetition and confidentiality provisions in such plan, he
will be subject to forfeiture provisions with respect to his options, shares
purchased thereunder and the Retirement Annuity.
Mr. Moriel's Deferred Compensation will accrue interest at the rate of 8
percent per year, compounded quarterly. Norcal will distribute such Deferred
Compensation to the Moriel Trust at the rate of $30,000 per year beginning with
the first day of the calendar quarter following termination of his employment
with Norcal for any reason.
1996 Non-Employee Director Stock Option Plan. Pursuant to Norcal's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), up
to 175,000 shares of Common Stock have been set aside to satisfy awards to
nonemployee directors of Norcal. Upon becoming a director, each future
participant will be awarded an option to purchase 35,000 shares of Common Stock,
which option will become exercisable in three equal, annual installments,
beginning on the first anniversary of the date of grant. Each such option will
have a term of seven years and an exercise price equal to the Common Stock's
fair market value on the date of grant. Unless otherwise provided in the
applicable award agreement, options granted under the Non-Employee Director Plan
will become immediately exercisable upon a Control Event (as defined therein).
Effective January 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 35,000 shares of Common
Stock under the Non-Employee Director Plan at an exercise price of $4.89 per
share. In July 1996, Ms. Kaufman, a non-employee director, was also granted an
option to purchase up to 35,000 shares of Common Stock under the Non-Employee
Director Plan at an exercise price of $4.89 per share. The Non-Employee Director
Plan is administered by Norcal's Board of Directors.
1990 Stock Option Plan ("1990 Option Plan"). Pursuant to Norcal's 1990
Option Plan, options to purchase a maximum of 1,898,000 shares of Common Stock
may be issued to officers, employees, independent contractors and directors of
Norcal, its subsidiaries and/or its affiliates. Of that amount, options to
purchase a maximum of 600,000 shares of Common Stock may be granted to directors
of Norcal, including directors who are also employees of Norcal. Under the 1990
Option Plan, incentive stock options that meet the requirements of Section 422
of the Code may be granted to the officers and
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<PAGE> 79
employees of Norcal, its subsidiaries and/or certain of its affiliates. The 1990
Option Plan is currently administered by the Compensation Committee of the Board
of Directors, which has the power to determine to whom options will be granted,
the terms of each option and to interpret the plan.
The exercise price of any stock option may not be less than 100% of the
fair market value of the Common Stock on the date the option is granted. If the
Common Stock is not publicly traded on the date of grant of an option, fair
market value may be computed in good faith by the Board of Directors or a
Committee thereof, but shall not be less than the fair market value reflected in
the most recent year-end independent appraiser's valuation report received by
the ESOP Administrative Committee. Unless otherwise provided in the option
grant, shares acquired pursuant to the exercise of options become vested over a
period of five years from the date of grant and are subject to certain
restrictions on transfer, unvested shares may be repurchased by Norcal upon
termination of the optionee's employment or engagement with Norcal (or its
subsidiaries) at the exercise price the optionee originally paid for such shares
and all shares purchased pursuant to the exercise of options are subject to
repurchase by Norcal under certain circumstances. Generally, in the event (i)
there is a merger, consolidation or other reorganization as a result of which
Norcal is not the surviving corporation or becomes a subsidiary of another
corporation and (ii) the surviving corporation does not agree to assume all
options granted under the 1990 Option Plan (or to issue options equivalent
thereto), then such options will become immediately exercisable and shares
purchased pursuant to them will immediately vest.
As of September 30, 1999, options to purchase 188,000 shares of Common
Stock were outstanding under the 1990 Option Plan, at an exercise price of $7.04
per share. No options were granted or exercised under the 1990 Option Plan
during fiscal year 1999. The following table provides certain information with
respect to options outstanding during fiscal year 1999 for the Named Executive
Officers. No stock appreciation rights ("SARs") were outstanding during such
period.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANT
UNDERLYING GRANTED DATE
OPTIONS TO EXERCISE PRESENT
NAME GRANTED(A) EMPLOYEES PRICE EXPIRATION DATE VALUE(B)
---- ---------- ---------- -------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Robert J. Coyle..................... 50,000 62.5% $6.26 September 30, 2006 $55,500
Denise Delmatier.................... 30,000 37.5% $6.05 September 30, 2006 $38,100
</TABLE>
- ---------------
(a) Options granted to Mr. Coyle and Ms. Delmatier were granted pursuant to the
1996 Employee Plan. Each of the options is a non-qualified option and
expires on September 30, 2006. Each option will vest as follows: 20% will
vest on each of September 30, 2000 and 2001, and 30% will vest on each of
September 30, 2002 and 2003. In the event of a change in control, the
Compensation Committee, in its sole discretion, may take a variety of
actions with respect to the options that it considers to be in the best
interests of the Company. The Company will have an assignable option upon
termination of an individual's employment to repurchase any such shares. The
Company's repurchase option with respect to vested shares will terminate
upon an initial public offering. Mr. Coyle's options were canceled when he
voluntarily terminated his employment with the Company in July 1999.
(b) Grant Date Present Value was computed using the Black-Scholes option pricing
model. The calculations utilize certain assumptions, including the
following:
(i) the volatility is assumed to be zero as the Company's Common Stock is
not publicly traded as of the date hereof;
(ii) the risk-free rate of return for each grant is assumed to be the U.S.
Treasury zero-coupon bond rate for bonds with maturities consistent
with the expected time of exercise of each grant;
(iii) the dividend yield is assumed to be zero;
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<PAGE> 80
(iv) the stock price is assumed to be $6.05, which is as of September 30,
1999, the effective date of the most recently completed valuation;
(v) the value of the options is discounted by 5% per year to account for
assumed for forfeitures.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION & SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF OUTSTANDING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
IN VALUE FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Michael J. Sangiacomo...... 0 0 672,000/288,000 $624,960/$171,840
Archie L. Humphrey......... 0 0 76,500/ 78,500 $ 78,500/$ 61,700
Mark R. Lomele............. 0 0 69,500/ 75,500 $ 70,380/$ 58,220
George P. McGrath.......... 0 0 21,000/ 29,000 $ 20,280/$ 18,770
Jon D. Braslaw............. 0 0 29,000/ 41,000 $ 27,240/$ 29,210
Donald M. Moriel........... 0 0 300,000/ 0 $348,000/$ 0
</TABLE>
Pension Plans. The Norcal Waste Systems, Inc. Defined Benefit Pension Plan
(the "Norcal Pension Plan") is a defined benefit pension plan maintained for
certain employees of Norcal and its subsidiaries. Most of the other employees of
Norcal and its subsidiaries are covered by certain collective bargaining
agreements or by the Envirocal, Inc. Retirement Plan (the "Envirocal Retirement
Plan"), the plan covering certain former employees of Envirocal, Inc., one of
Norcal's predecessors, and certain of Envirocal's subsidiaries. The Norcal
Pension Plan is funded as required by ERISA and does not require employee
contributions. Full vesting generally is obtained after five years of vesting
service. The calculation of annual retirement benefits is generally based upon
years of service and average annual compensation for the five consecutive
calendar years that produce the highest such average. Compensation used in
determining retirement benefits generally consists of an employee's total annual
earnings, including overtime pay and bonuses limited to $160,000.
The following table shows the estimated annual retirement benefit payable
on normal retirement at age 62 for unmarried employees (or a married employee
who elects a single life annuity) at specified compensation levels with various
years of service for the Norcal Pension Plan:
NORCAL PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------
REMUNERATION 15 20 25 30 OR MORE
------------ ------ ------ ------ ----------
<S> <C> <C> <C> <C>
$ 50,000..................................... 8,250 11,000 13,750 16,500
$ 65,000..................................... 10,725 14,300 17,875 21,450
$ 75,000..................................... 12,375 16,500 20,625 24,750
$ 85,000..................................... 14,025 18,700 23,375 28,050
$125,000..................................... 20,625 27,500 34,375 41,250
$160,000 and above........................... 26,400 35,200 44,000 52,800
</TABLE>
Covered compensation is total cash compensation but not including any
payment for automobile, moving or living allowances, or employee expense
reimbursements, which corresponds to the amounts listed in the Summary
Compensation Table set forth above under the columns "Salary" and "Bonus" plus
certain payouts by the Company in respect of accrued vacation. Any amounts in
excess of limitations pursuant to Section 401(a)(17) of the Code are excluded.
The annual benefit estimates computed for this table are Single Life Benefits
and are not subject to deductions for Social Security or other offset amounts.
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<PAGE> 81
As of September 30, 1999, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 11.0 years; Mr. Humphrey, 14.0 years; Mr. Lomele, 11.0 years; Mr.
McGrath, 4.0 years; Mr. Braslaw 10.0 years; and Mr. Moriel, 6.0 years.
Mr. Sangiacomo is eligible also to receive a retirement benefit from the
Envirocal Retirement Plan, due to his past employment with Envirocal. The
Envirocal Retirement Plan also is funded as required by ERISA and does not
require employee contributions. The calculation of monthly retirement benefits
is generally based upon years of service and average monthly compensation for
the 60 months (whether or not consecutive) that produce the highest such
average. Compensation used in determining retirement benefits generally consists
of an employee's total earnings, including overtime pay and bonuses. Covered
compensation is total cash compensation but not including any payment for
automobile, moving or living allowances, employee expense reimbursements, or
payment in lieu of unused vacation or sick leave. Any amounts in excess of
limitations pursuant to Section 401(a)(17) of the Code are excluded.
As of September 30, 1999, Mr. Sangiacomo had an estimated 5.17 years of
credited services under the Envirocal Retirement Plan. The estimated annual
retirement benefit to which he will be entitled under the Envirocal Retirement
Plan is $16,383. That estimate is computed as a Single Life Benefit and is not
subject to deduction for Social Security or other offset amounts.
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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Norcal's Common Stock as of December 27, 1999 by (i)
each person known to Norcal to beneficially own 5% or more of Norcal's Common
Stock, (ii) each director of Norcal, (iii) the Named Executive Officers, and
(iv) all directors and executive officers of Norcal as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY OWNED
----------------------------------------------------
STOCK
OPTIONS
EXERCISABLE
IN 60
BENEFICIAL OWNER(A) ESOP ACCOUNT DAYS(B) TOTAL PERCENT
------------------- ------------ ----------- ---------- -------
<S> <C> <C> <C> <C>
Norcal Waste Systems, Inc. ESOP(c)........... 24,134,973 -- 24,134,973 100.0%
Michael J. Sangiacomo........................ 52,053 672,000 724,053 2.8%
Archie L. Humphrey........................... 41,623(d) 76,500 118,123 *
Mark R. Lomele............................... 30,564(d) 69,500 100,064 *
George P. McGrath(e)......................... -- 21,000 21,000 *
Jon D. Braslaw............................... 21,898 29,000 50,898 *
Donald M. Moriel............................. 24,398 300,000 324,398 1.3%
Bennie J. Anselmo, Jr. ...................... 41,497 16,500 57,997 *
David A. Cochrane............................ 18,971 33,000 51,971 *
Denise Delmatier(e).......................... -- -- -- *
Gale R. Kaufman.............................. -- 35,000 35,000 *
John B. Molinari............................. -- 50,000 50,000 *
H. Welton Flynn.............................. -- 50,000 50,000 *
John A. Legnitto............................. 15,138(d) 19,500 34,638 *
All executive officers and directors as a
group (13 persons)......................... 24,134,973(f) 1,372,000 25,753,115(f) 100.0%
</TABLE>
- ---------------
* Less than 1%.
(a) Except as otherwise indicated in the notes to this table, the address of
each beneficial owner of more than 5% of the Common Stock is c/o Norcal
Waste Systems, Inc., 160 Pacific Avenue, Suite 200 San Francisco, California
94111.
(b) As ESOP participants, the individuals named in the table have shared voting
power, but no investment power, over the shares of Common Stock allocated to
such individuals' ESOP account, unless they are members of the ESOP
Administrative Committee. See note (c) below. The ESOP account includes
allocated shares as of September 30, 1999.
(c) The Trustee of the ESOP is Union Bank of California Company (the "ESOP
Trustee"), 475 Sansome Street, 12th Floor, San Francisco, California 94111.
An aggregate of 24,134,973 shares of Common Stock were held by the ESOP
Trustee as of September 30, 1999, of which approximately 20,526,298 had been
allocated to the accounts of individual ESOP participants, including
officers of Norcal. All of the shares held by the ESOP Trustee are currently
voted in most matters as determined by the Administrative Committee of the
ESOP. However, in certain matters the ESOP participants direct the ESOP
Trustee to vote the shares allocated to their respective accounts.
Therefore, the members of the Administrative Committee currently have shared
voting and investment power with respect to all shares held by the ESOP
Trustee. None of the members of the Administrative Committee has sole voting
power over any shares, but as ESOP participants they have shared voting
power over the shares allocated to their individual ESOP accounts. The
members of the Administrative Committee, and the number of shares of Common
Stock that were allocated to their respective ESOP accounts as of September
30, 1999 are as follows: Archie L. Humphrey, 41,623 shares; John A.
Legnitto, 15,138 shares; and Mark R. Lomele, 30,464 shares. In addition,
Messrs. Humphrey and Lomele hold options to purchase 10,000 and 10,000
shares of
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<PAGE> 83
Common Stock, respectively, that are exercisable within 60 days, with an
exercise price of $7.04 per share, which is higher than the fair market
value of Norcal's Common Stock as of September 30, 1999, along with options
to purchase 52,500 and 45,500, respectively, that are exercisable within 60
days at $4.89 per share, options to purchase 16,000 and 16,000,
respectively, that are exercisable within 60 days at $5.18 per share and
options to purchase 8,000 and 8,000, respectively, that are exercisable
within 60 days at $5.59 per share. With respect to each member of the ESOP
Administrative Committee, the number of such shares in the member's
individual ESOP account, together with those subject to stock options
exercisable within 60 days, represent less than 1% of the outstanding shares
of Common Stock as of September 30, 1999.
(d) Excludes all shares of Common Stock held by the ESOP Trustee deemed to be
beneficially owned by Messrs. Lomele, Humphrey and Legnitto as a result of
their membership on the ESOP Administrative Committee which exercises shared
voting and investment power with respect to such shares (see notes (c) above
and (e) below), but includes those shares of Common Stock held by the ESOP
Trustee for the benefit of Messrs. Lomele, Humphrey and Legnitto as ESOP
participants (see note (b) above).
(e) ESOP shares not vested as of September 30, 1999.
(f) Includes all shares of Common Stock held by the ESOP Trustee because Mark R.
Lomele and Archie L. Humphrey are executive officers of Norcal as well as
members of the Administrative Committee of the ESOP with shared voting and
investment power with respect to such shares (see note (c) above).
THE ESOP
The Norcal Waste Systems, Inc. Employee Stock Ownership Plan and Trust (the
"ESOP") owns all of Norcal's outstanding shares of common stock. The ESOP is an
employee stock ownership plan intended to qualify under Sections 401(a) and
4975(e)(7) of the Code. The ESOP was adopted effective as of October 1, 1985 and
acquired the outstanding shares of Norcal in three separate transactions.
TRUSTEE AND ADMINISTRATIVE COMMITTEE; CONTROL OF NORCAL BY THE ESOP
The assets of the ESOP are held in trust under a trust agreement with the
ESOP Trustee. An Administrative Committee (the "Committee") that is appointed by
and serves at the pleasure of the Board of Directors is responsible for the
operation and administration of the ESOP, including the ESOP's activities as
sole shareholder of Norcal. Under ERISA, the Committee members are fiduciaries
and as such must act for the exclusive benefit of the employee participants
under the ESOP. The current members of the Committee are Archie L. Humphrey,
John A. Legnitto and Mark R. Lomele. Mr. Lomele, Chair of the Committee, is an
officer of Norcal. Mr. Humphrey, Secretary of the Committee, is also an officer
of Norcal. All of the Committee members are employees of the Company. Norcal has
agreed to indemnify members of the Committee against any liability arising out
of an alleged breach by a member in the performance of his or her fiduciary
duties, except those resulting from a member's own gross negligence or willful
misconduct. Norcal also carries insurance against costs and liability arising
from a member's breach or alleged breach of fiduciary duty.
The ESOP Trustee has granted the Committee a proxy to vote all shares held
by the ESOP. The Committee elects Norcal's Board of Directors, may remove these
directors, and votes with respect to certain corporate transactions requiring or
presented for shareholder approval. However, with respect to any corporate
matter that requires a shareholder vote and constitutes a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transactions as
may be specified in U.S. Treasury Department regulations, voting instructions
are to be solicited from ESOP participants with respect to shares allocated to
their accounts. The Committee determines the voting of any unallocated shares
and any allocated shares for which ESOP participants do not provide voting
instructions. Because a significant number of shares are
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<PAGE> 84
unallocated (3,608,675 shares or 15.0% of outstanding stock), currently the
Committee may be able to exercise a significant influence over such matters. If
Norcal's capital stock becomes registered under the Exchange Act, each ESOP
participant will be able to direct voting of those shares allocated to his or
her account and the Committee will have responsibility for voting only
unallocated or undirected shares. The sale of any shares of Norcal Common Stock
by the ESOP requires the approval of the Board of Directors.
DISTRIBUTIONS
In-Service Withdrawals. Each participant who has attained age 55 and has
participated in the ESOP for at least ten years is entitled to make in-service
withdrawals with respect to common stock acquired by the ESOP after December 31,
1986, and allocated to his or her ESOP account ("Post-1986 Shares"). An eligible
participant will be entitled to withdraw up to a total of 25% of his or her
Post-1986 Shares during the first five years of the election period and will be
entitled to withdraw up to a total of 50% of his or her Post-1986 Shares during
the sixth year of the election period. It is expected that withdrawals will be
paid in cash. As of the date hereof, the ESOP held 11,654,973 Post-1986 Shares.
Post-Termination Distributions. Except for the in-service withdrawals
described above, a vested participant is not entitled to begin receiving a
distribution of his or her ESOP accounts until after his or her employment has
terminated. The Committee generally determines the time and manner of
distributions, subject to certain limitations. Distributions may be made in a
lump sum or in substantially equal annual installments over a period not
exceeding five years. Norcal expects that the ESOP's distributions will continue
to be paid in cash. Norcal is obligated to repurchase any shares of its common
stock that may be distributed by the ESOP to participants following withdrawal,
retirement or termination.
NORCAL CONTRIBUTIONS AND ALLOCATIONS
Norcal may make contributions to the ESOP in the form of cash, cancellation
of indebtedness (on the various loans that Norcal has made to the ESOP (the
"ESOP Loans"), or newly issued shares of common stock, in such amounts as may be
determined annually by the Board of Directors. The ESOP may use cash
contributions to make payments on the ESOP Loans, to make distributions of
benefits to participants (or beneficiaries) or to invest in investments other
than common stock of Norcal. Contributions to the ESOP are allocated each plan
year to those participants who complete at least 1,000 hours of service during
the plan year and are employed on September 30 (or who retire, become disabled
or die during the plan year). Of 24,134,973 total shares, 3,608,675 shares were
unallocated as of September 30, 1999.
To the extent that the ESOP utilizes cash contributions from Norcal to
repay the ESOP Loans, the contribution will result in no net cash outlay by
Norcal. Moreover, such contributions to the ESOP are generally tax-deductible.
The Credit Agreement and the Indenture relating to the Senior Notes
expressly permit Norcal to pay dividends or make contributions or loans to the
ESOP in order for the ESOP to pay cash benefits due to retired, terminated or
withdrawing ESOP participants and/or to repurchase Norcal common stock
distributed to such participants. To the extent Norcal contributes funds to the
ESOP for this purpose or is obligated to repurchase common stock distributed to
participants, Norcal will have less cash available to make payments on its
outstanding indebtedness. Furthermore, the amount Norcal may contribute to the
ESOP to fund such ESOP distribution obligations (or may use to repurchase common
stock distributed by the ESOP) will increase significantly in the future as the
Company's workforce ages and retires, as additional shares of common stock are
allocated to participants, if eligible participants elect to receive in-service
withdrawals or if the value of the common stock increases. Such an increase in
contributions would reduce the amount of cash available for other purposes,
including to make debt service payments.
83
<PAGE> 85
THE ESOP LOANS
In 1986 and 1987 Norcal's predecessors lent a total of $127.7 million to
their respective employee stock ownership plans in connection with the
acquisition of each of the predecessors by their respective ESOPs and merger of
the two predecessor companies. In 1990, in connection with the Excel
Transaction, Norcal loaned $10.7 million to the Excel ESOP pursuant to a loan
agreement, which amount became indebtedness of the ESOP upon the merger of the
Excel ESOP into the ESOP. At September 30, 1995 the Company reflected on its
balance sheet amounts owed by the ESOP to Norcal of $47.8 million.
In connection with the Refinancing, the ESOP's indebtedness reflects, among
other things, Norcal's funding of the ESOP's retirement of the ESOP Notes,
repayment of all amounts owed under the Old Credit Agreement, and incurrence of
new indebtedness by the Company pursuant to the Refinancing. At September 30,
1999, the outstanding principal balance owed to Norcal was $22.6 million. The
ESOP and Norcal have entered into a Fourth Amended and Restated ESOP Loan
Agreement, effective as of October 1, 1995, whereby the ESOP will repay such
outstanding indebtedness, plus unpaid accrued interest at the rate of seven
percent (7.0%) per annum, in installments of approximately $9.8 million each as
of September 30 of each year, beginning in 1996. In addition, the ESOP will
prepay such outstanding indebtedness, without penalty, to the extent that Norcal
makes contributions to the ESOP for the purpose of making such prepayments. The
ESOP's repayment of principal and interest on such outstanding indebtedness may
not exceed the sum of Norcal's contributions to the ESOP for the purpose of
making such repayments, plus any cash dividends paid on Norcal's common stock
held by the ESOP and earnings on Norcal contributions to the ESOP, less any
repayments made by the ESOP in prior years. On June 24, 1999, the Company and
the ESOP executed an amendment to the Fourth Amended and Restated ESOP Loan
Agreement related to the Company's S Corporation election. The amendment allows
the ESOP to pay interest only during the period the Company remains an S
Corporation, provided that the entire principal balance is still repaid by
fiscal year 2008 (the final due date of the ESOP Agreement). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS WITH KAUFMAN CAMPAIGN CONSULTANTS
Kaufman Campaign Consultants ("KCC"), of which Ms. Kaufman, a director of
Norcal, is President and sole shareholder, is party to a consulting agreement
with the Company, effective May 16, 1996, pursuant to which KCC has agreed to
provide the Company with certain consulting services in the areas of political
affairs, public affairs, media and public relations. The agreement, which had an
original term of one year, has been extended by the Company and KCC through
September 30, 2000. Under the agreement, KCC receives a monthly fee of $9,500.
KCC received an aggregate of $114,000 in fees during fiscal year 1999.
DIRECTORS AND OFFICERS INSURANCE
Norcal carries insurance indemnifying its directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers of Norcal and its affiliates and as ERISA fiduciaries, to
the extent they may so act.
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<PAGE> 86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of KPMG LLP, Independent Auditors
Consolidated balance sheets as of September 30, 1999 and 1998
Consolidated statements of income for each of the three years in the
period ended September 30, 1999
Consolidated statements of stockholder's equity for each of the three
years in the period ended September 30, 1999
Consolidated statements of cash flows for each of the three years in the
period ended September 30, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Included in Part IV of this report:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, or are not
applicable, or the information is included in the consolidated financial
statements or notes to consolidated financial statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Articles of Incorporation of Norcal Waste Systems, Inc.+
3.2 Restated Bylaws of Norcal Waste Systems, Inc.+
4.1 Indenture between Norcal Waste Systems, Inc. and IBJ
Schroder Bank & Trust Company dated as of November 21, 1995+
4.3 Form of the 12 1/2% Series Notes due 2005+
10.1 Norcal Waste Systems, Inc. Employee Stock Ownership Plan, as
amended and restated as of October 1, 1993 (the "ESOP")+
- Amendment No. 1, dated effective October 1, 1993, executed
December 29, 1994+
- Amendment No. 2, dated effective February 1, 1995,
executed April 27, 1995+
- Amendment No. 3, dated effective October 1, 1993, executed
September 28, 1995+
- Amendment No. 4, dated effective November 17, 1995+
10.1.1 Amendment No. 5, dated effective October 1, 1996, executed
January 30, 1997++
10.2 Employee Stock Ownership Trust Agreement between Norcal
Solid Waste Systems, Inc. (now "Norcal Waste Systems, Inc.,"
hereinafter referred to as "Norcal") and Imperial Trust
Company, dated March 15, 1990+*
10.4 Revolving Credit Agreement by and among Norcal, certain of
Norcal's subsidiaries (the "Guarantors"), The First National
Bank of Boston, and the Banks named on Schedule 1 therein,
dated as of November 21, 1995+ -- First Amendment to
Revolving Credit Agreement, dated December 1, 1995+
10.4.1 Second Amendment to Revolving Credit Agreement, dated
November 26, 1996, filed as Exhibit 10.45 to the Company's
Form 10-K for the fiscal year ended September 30, 1996,
filed December 27, 1996, and incorporated herein by this
reference.
10.4.2 Third Amendment to Revolving Credit Agreement, dated May 12,
1997, filed as Exhibit 10.1 to the Company's Quarterly
Report for the quarter ended March 31, 1997, filed May 15,
1997, and incorporated herein by this reference.
</TABLE>
85
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.5 Security Agreement by and among Norcal, the Guarantors and
The First National Bank of Boston, dated as of November 21,
1995+
10.6 Pledge Agreement by and among Norcal, the Guarantors and The
First National Bank of Boston, dated as of November 21,
1995+
10.7 Partnership Pledge Agreement by and among Norcal, the
Guarantors and The First National Bank of Boston, dated as
of November 21, 1995+
10.8 Collateral Assignment of Permits and Contracts by and among
Norcal, Guarantors and The First National Bank of Boston,
dated as of the November 21, 1995+
10.9 Purchase Agreement between Norcal, Bear, Stearns & Co. Inc.
and Montgomery Securities, dated November 15, 1995+
10.10A/B Exchange Registration Rights Agreement by and among Norcal,
the Subsidiary Guarantors named therein, Bear, Stearns & Co.
Inc. and Montgomery Securities, dated as of November 21,
1995+
10.11 Memorandum of Material Settlement Terms between Norcal, the
ESOP, and the Settling Plaintiffs named therein, dated
August 9, 1995+
10.12 Master Finance Lease between Caterpillar Financial Services
Corporation and Alta Equipment Leasing Co., Inc., dated as
of December 21, 1994+
10.13 Master Lease Agreement between Heller Financial Leasing,
Inc. and Norcal, dated June 30, 1994+
10.16 Employment Agreement with Donald M. Moriel, dated as of June
4, 1996+*
10.18 Norcal Amended & Restated 1990 Stock Option Plan, effective
July 23, 1990, as amended August 10, 1990+*
10.18.1 Amendment No. 1 to Norcal Waste Systems, Inc. Amended and
Restated 1990 Stock Option Plan, dated effective June 1,
1997++*
10.20 Form of Indemnity Agreement (separate agreements were
executed by Norcal and each of John B. Molinari, H. Welton
Flynn, Archie L. Humphrey and Michael J. Sangiacomo as of
February 27, 1992)+*
10.21 Agreement to Terminate Indemnification Trust and Modify
Indemnity Agreement between Norcal and M. Sangiacomo, H.
Flynn, J. Molinari, A. Humphrey and W. Graham, dated as of
October 16, 1995+*
10.22 Waste Disposal Agreement between Oakland Scavenger Company
and City and County of San Francisco and Sanitary Fill
Company, dated January 2, 1987+
10.23 Agreement in Facilitation of Waste Disposal Agreement
between City and County of San Francisco and Sanitary Fill
Company, dated January 2, 1987+
10.24 1996 Employee Stock Incentive Plan+*
10.24.1 Amendment No. 1 to 1996 Employee Stock Incentive Plan++*
10.25 1996 Executive Stock Incentive Plan, as amended+*
10.25.1 Amendment No. 1 to 1996 Executive Stock Incentive Plan, as
amended++*
10.26 1996 Non-Employee Director Stock Option Plan+*
10.26.1 Amendment No. 1 to 1996 Non-Employee Director Stock Option
Plan++*
10.29 Amended Short-Term Incentive Bonus Plan*
10.30 Employment Agreement between Norcal and Michael J.
Sangiacomo, dated as of January 22, 1996, as amended+*
10.33 Option Agreement between Norcal and Michael J. Sangiacomo,
dated as of June 24, 1996, as amended+*
10.36 Summary of Material Terms of Severance Policy for Certain
Key Employees+*
10.37 Fourth Amended and Restated Loan Agreement by and between
Norcal and the ESOP, effective as of October 1, 1995+
10.37.1 Amendment to Fourth Amended and Restated Loan Agreement by
and between Norcal and the ESOP, dated June 24, 1999+++++++
10.38 Consulting Agreement between Norcal and Kaufman Campaign
Consultants, dated May 16, 1996+*
10.38.2 Extension No. 2 of Consulting Agreement, dated October 20,
1998+++*
</TABLE>
86
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.38.3 Extension No. 3 of Consulting Agreement, dated August 31,
1999*
10.39 Deferred Compensation and Stock Option Plan+*
10.40 Stock Option Agreement, dated as of April 4, 1996, between
Norcal and John B. Molinari+*
10.41 Stock Option Agreement, dated as of January 12, 1996,
between Norcal and John B. Molinari+*
10.42 Stock Option Agreement, dated as of April 4, 1996, between
Norcal and H. Welton Flynn+*
10.43 Stock Option Agreement, dated as of January 12, 1996,
between Norcal and H. Welton Flynn+*
10.44 Stock Option Agreement, dated as of July 16, 1996, between
Norcal and Gale Kaufman+*
10.45 Indemnification Agreement with Gale R. Kaufman, dated as of
July 24, 1997++++*
10.46 Golden Gateway Commons Building III Office Lease, dated
January 12, 1996+++++
10.47 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated April 8, 1998++++++
10.48 Employment Agreement, between Norcal and Robert J. Coyle,
dated as of October 26, 1998+++*
10.49 Nonqualified Stock Option Agreement, dated as of October 26,
1998 between Norcal and Robert J. Coyle+++*
10.50 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated November 29, 1999.
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Norcal
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
Exhibits available upon request to the Company.
- ---------------
+ Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-4 (File No. 33-80777), as
amended and declared effective on August 16, 1996.
++ Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report for the fiscal year ended September 30, 1997,
filed December 24, 1997.
+++ Incorporated by reference to the Company's Annual Report for the fiscal
year ended September 30, 1998, filed December 21, 1998.
++++ Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report for the quarter ended June 30, 1997, filed August 14, 1997.
+++++ Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report for the quarter ended December 31, 1997, filed February 13,
1998.
++++++ Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report for the quarter ended June 30, 1998, filed August 17, 1998.
+++++++ Incorporated by reference to the identically numbered exhibit to the
Company's Quarterly Report for the quarter ended June 30, 1999, filed
August 13, 1999.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
87
<PAGE> 89
SIGNATURES
Dated: December 28, 1999.
NORCAL WASTE SYSTEMS, INC.
By: /s/ MICHAEL J. SANGIACOMO
------------------------------------
Michael J. Sangiacomo
President, Chief Executive Officer
and Director
88
<PAGE> 90
NORCAL WASTE SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999
Allowance for Doubtful Accounts........... $ 2,202 $ 977 -- $ 1,162 $ 2,017
------- ------- ---- ------- -------
Insurance................................. $17,303 $11,084 -- $10,360 $18,027
Post Retirement Benefit Obligations....... 34,945 1,828 -- 1,253 35,520
Litigation, Claims and Related Matters.... 484 -- -- 484 --
Property and Other Reserves............... 2,212 -- 813 126 2,899
------- ------- ---- ------- -------
Total........................... $54,944 $12,912 813 $12,223 $56,446
======= ======= ==== ======= =======
YEAR ENDED SEPTEMBER 30, 1998
Allowance for Doubtful Accounts........... $ 2,017 $ 940 -- $ 755 $ 2,202
------- ------- ---- ------- -------
Insurance................................. $16,449 $11,259 -- $10,405 $17,303
Post Retirement Benefit Obligations....... 34,156 2,131 -- 1,342 34,945
Litigation, Claims and Related Matters.... 612 -- -- 128 484
Property and Other Reserves............... 2,941 250 -- 979 2,212
------- ------- ---- ------- -------
Total........................... $54,158 $13,640 -- $12,854 $54,944
======= ======= ==== ======= =======
YEAR ENDED SEPTEMBER 30, 1997
Allowance for Doubtful Accounts........... $ 1,611 $ 1,307 -- $ 901 $ 2,017
------- ------- ---- ------- -------
Insurance................................. $12,608 $12,231 -- $ 8,390 $16,449
Post Retirement Benefit Obligations....... 34,395 960 -- 1,199 34,156
Litigation, Claims and Related Matters.... 814 -- -- 202 612
Property and Other Reserves............... 1,783 1,170 -- 12 2,941
------- ------- ---- ------- -------
Total........................... $49,600 $14,361 -- $ 9,803 $54,158
======= ======= ==== ======= =======
</TABLE>
Supporting schedules other than the above have been omitted because they
are not applicable or not required or because the information to be set forth
therein is included in the financial statements or notes thereto herein.
89
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.38.3 Extension No. 3 of Consulting Agreement dated August 31,
1999
10.50 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated November 29, 1999.
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Norcal
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
90
<PAGE> 1
EXHIBIT 10.38.3
EXTENSION NO.3 OF CONSULTING AGREEMENT
August 31, 1999
Ms. Gale Kaufman
Kaufman Campaign Consultants
1510 J Street, Suite 210
Sacramento, CA 95814
Dear Gale:
Kaufman Campaign Consultants has been providing Norcal Waste Systems, Inc.
("Norcal") with consulting services in the areas of political affairs, public
affairs, and media and public relations. The services have been provided
pursuant to an agreement, originally signed May 16, 1996 and extended per a
letter agreements dated December 11, 1997 and October 20, 1998. I would like to
formalize the extension of the agreement under the same terms and conditions as
contained in the original document through September 30, 2000.
As stated in the original agreement, the relationship between you and Norcal
will be that of an independent contractor relationship and that the agreement
will not be construed to constitute you an employee of Norcal or the formation
of a partnership or joint venture between you and Norcal.
Consistent with the original agreement, you will receive aggregate fees covering
all services rendered pursuant to this consulting agreement of $9,500 per month
on or before the 5th day of each and every month.
This letter, along with the original agreement letter dated May 15, 1996 and the
extension letters dated December 11, 1997 and October 20, 1998, constitute the
understanding under which you provide services to Norcal. Please acknowledge by
signing this letter and returning it to me at your earliest convenience.
Very truly yours,
/s/ Michael J. Sangiacomo
--------------------------------------
Michael J. Sangiacomo
President & Chief Executive Officer
Kaufman Campaign Consultants
By: /s/ Gale R. Kaufman
---------------------------
Gale R. Kaufman
-1-
<PAGE> 1
EXHIBIT 10.50
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS (the
"PURCHASE AGREEMENT") is made and entered into as of this 29th day of November,
1999, and constitutes an agreement by and between CITY GARBAGE COMPANY OF
EUREKA, INC., a California corporation ("SELLER"), and HUMBOLDT WASTE MANAGEMENT
AUTHORITY, a California joint powers authority duly organized under California
Government Code Sections 6500 et seq. ("BUYER").
RECITALS AND REPRESENTATIONS
WHEREAS, Seller is the owner of that certain real property, together with
the improvements and fixtures located thereon, located in the City of Eureka,
County of Humboldt, State of California, more particularly described in EXHIBIT
A, attached hereto and incorporated by reference herein (the "TRANSFER STATION
PROPERTY"), on a portion of which Seller currently operates a solid waste
transfer station (the "TRANSFER STATION");
WHEREAS, Seller is the owner of that certain real property, together with
the improvements and fixtures located thereon, located in the County of
Humboldt, State of California, more particularly described in EXHIBIT B attached
hereto and incorporated by reference herein (the "LANDFILL PROPERTY"), on which
Seller currently operates a solid waste landfill known as the Cummings Road
Landfill (the "LANDFILL");
WHEREAS, Buyer is a joint powers authority duly organized under California
Government Code Sections 6500 et seq. and formed by the Cities of Arcata, Blue
Lake, Eureka, Ferndale, and Rio Dell, and the County of Humboldt;
WHEREAS, the Transfer Station and the Landfill have received solid waste
from, among other sources, residents and businesses of those local jurisdictions
which have joined together to form Buyer;
WHEREAS, subject to the terms and conditions hereof: (i) Seller will sell
and transfer to Buyer, and Buyer will purchase and accept from Seller, the
Transfer Station Property, subject to Seller leasing back a portion of such
property; (ii) Seller will transfer to Buyer, and Buyer will accept from Seller,
the Landfill Property, and in connection therewith, Buyer will assume certain
operational, closure and post-closure responsibilities with respect to the
Landfill; (iii) Seller will assign and transfer to Buyer and Buyer will accept
from Seller rights with respect to certain statutorily-mandated trust funds and
related agreements established in connection with the operation of the Landfill;
(iv) Buyer will pay to Seller a termination payment in exchange for which the
Seller and affiliated companies will cease certain refuse disposal activities;
(v) Buyer will cooperate with Seller in its efforts to obtain extensions of
certain collection and recycling contracts Seller has with the City of Eureka
and the County of Humboldt; and (vi) the parties will agree to certain other
matters as specified herein; and
WHEREAS, to facilitate the transactions contemplated herein, this Purchase
Agreement will serve as the joint instructions of Buyer and Seller to
-1-
<PAGE> 2
Humboldt Land Title Company ("ESCROW HOLDER") with regard to the escrow (the
"ESCROW") created pursuant hereto.
AGREEMENT
NOW THEREFORE, in light of the foregoing premises, and for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1.0 Transfer Station Property and Related Agreements.
1.1 Purchase and Sale.
(a) At the Close of Escrow (as defined in Section 6.1 hereof),
Seller shall transfer and convey to Buyer all of Seller's right, title and
interest in and to the Transfer Station Property, and Buyer shall acquire the
same from Seller, upon the terms and conditions herein set forth.
Notwithstanding the foregoing, the Transfer Station Property shall not include
the moveable truck wash container and the truck wash equipment located therein
or the oil/water separator located near the truck wash pad to the extent any of
the same might be deemed an improvement or fixture otherwise within the
definition of the Transfer Station Property, it being understood that Seller
will retain ownership of such property.
(b) At the Close of Escrow, Seller shall assign and transfer to
Buyer to the extent permitted by law all of Seller's right, title and interest
in and to the licenses and permits relating to the use of the Transfer Station
as a solid waste transfer station set forth in EXHIBIT C, attached hereto and
incorporated herein by this reference (collectively, the "TS PERMITS").
(c) Seller has no obligation to transfer to Buyer any license or
permit other than the TS Permits. To the extent the consent of any third party
is required for any such assignment or transfer to Buyer of any TS Permit,
Seller and Buyer will cooperate in good faith to obtain such consent
(collectively, the "TS THIRD PARTY CONSENTS") prior to the Close of Escrow.
Notwithstanding the provisions of Paragraph 1.1(b) hereof, to the extent any
such TS Third Party Consent is not obtainable with respect to any TS Permit, or
if any TS Permit is not transferable, Seller will have no obligation to transfer
or assign such TS Permit to Buyer, but Seller and Buyer will each use its best
efforts to attempt to have issued to Buyer a similar license or permit to such
TS Permit by the relevant governmental agency.
1.2 Consideration. In consideration of the transfer and conveyance to
Buyer of Seller's right, title and interest in and to the Transfer Station
Property, and the assignment and transfer to Buyer of Seller's right, title and
interest in and to the TS Permits, Buyer will, at the Close of Escrow:
(a) Pay to Seller the sum of Two Million Six Hundred Thousand
Dollars ($2,600,000.00) (the "CASH PAYMENT") in immediately available funds,
which amount shall be paid into the Escrow at least one (1) business day prior
to the Close of Escrow; and
(b) Enter into that certain Transfer Station Assignment and
Assumption Agreement in the form attached hereto as EXHIBIT D (the "TS
ASSIGNMENT AGREEMENT").
1.3 Certain Credits. Buyer shall receive a credit against the Cash Payment
at the Close of Escrow in the amount of (i) Twenty-Five Thousand Dollars
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($25,000.00) to compensate Buyer for the cost of updating the
closure/post-closure plan for the Landfill; and (ii) One Hundred Thousand
Dollars ($100,000.00) to compensate Buyer for the cost of certain environmental
mitigation improvements required at the Transfer Station Property, which will
not be the responsibility of Seller after the Close of Escrow.
1.4 Leaseback. Effective on the Close of Escrow, Buyer will lease back to
Seller, pursuant to a lease agreement in the form attached hereto as EXHIBIT E
(the "LEASE"), the waste collection company office, maintenance facility and
parking/truck storage facility located on the Transfer Station Property. The
Lease will provide for a term of ten (10) years, with certain rights to extend
the term, and an initial rental rate of Six Thousand Two Hundred Eighty Three
Dollars ($6, 283.00) per month subject to annual increases based on the Consumer
Price Index.
1.5 Central Drop-off Recycling Site.
(a) Effective on the Close of Escrow, Buyer will assume all of the
obligations of Seller to the City of Eureka pursuant to Section 4.2.5 of that
certain Agreement Between the City of Eureka and City Garbage Company of Eureka,
Inc. For Collection, Transportation and Disposal of Residential, Commercial and
Industrial Solid Waste dated December 19, 1997 (the "EUREKA COLLECTION
AGREEMENT"), for providing a central drop-off recycling site, and all reporting
obligations of Seller under the Eureka Collection Agreement with respect to
recycling materials received at the Transfer Station. From and after the Close
of Escrow, Buyer shall accept recyclable materials delivered to the Transfer
Station by Seller, subject to the same terms and conditions such materials would
be accepted from other customers, such as recyclers, residents, generators of
recyclables, etc. At this time, Buyer anticipates that "traditional"
recyclables, including paper, newspaper, cardboard, glass, tin cans, aluminum
cans, bi-metal cans, #1 PETE plastic, #2 HDPE colored plastic bottles, and #2
HDPE natural bottles will be accepted at no charge. Other material, such as
greenwaste, appliances, tires, metals, and used motor oil, will be accepted at a
cost sufficient to cover the cost of handling and processing. Buyer and Seller
recognize that conditions such as marketability and processing costs can alter
Buyer's terms of acceptance of recyclables. On or before the Close of Escrow,
Seller shall cause the City of Eureka to execute an amendment to the Eureka
Collection Agreement authorizing Buyer to assume the above-referenced recycling
obligations and releasing Seller from said obligations, the form of which
amendment shall be reasonably acceptable to Seller.
2.0 Landfill Property and Related Agreements.
2.1 Transfer and Assignment.
(a) At the Close of Escrow, Seller agrees to transfer and convey to
Buyer all of Seller's right, title and interest in and to the Landfill Property,
and Buyer agrees to acquire the same from Seller, upon the terms and conditions
herein set forth.
(b) At the Close of Escrow, Seller agrees to assign and transfer to
Buyer to the extent permitted by law all of Seller's right, title and interest
in and to the following:
(1) as further described and subject to the limitations set
forth in Paragraph 3.0 hereof, the trust funds and related trust agreements
described under the headings Closure Post-Closure Trust Fund and Article 5
Corrective Action
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Trust Fund in EXHIBIT F attached hereto and incorporated by reference herein
(collectively, the "TRUST FUNDS"); and
(2) all of the licenses and permits relating to the use of the
Landfill as a sanitary landfill as set forth under the heading "Permits" in
EXHIBIT F (collectively, the "LF PERMITS").
(c) Seller has no obligation to transfer to Buyer any license or
permit relating to the use of the Landfill Property as a sanitary landfill other
than the LF Permits. To the extent the consent of any third party is required
for any such assignment and transfer to Buyer of any Trust Funds or LF Permits,
Seller and Buyer agree to cooperate in good faith to obtain such consent
(collectively, the "LF THIRD PARTY CONSENTS") prior to the Close of Escrow.
Notwithstanding the provisions of Paragraph 2.1(b)( 2) above, to the extent any
such LF Third Party Consent is not obtainable with respect to any LF Permit, or
if any LF Permit is not transferable, Seller will have no obligation to transfer
or assign such LF Permit to Buyer, but Seller and Buyer will cooperate with each
other and use diligent efforts to attempt to have issued to Buyer a similar
license or permit to such LF Permit by the relevant governmental agency. In
furtherance of the foregoing, upon execution of this Purchase Agreement, Seller
and Buyer agree to sign and deliver to the California Regional Water Quality
Control Board, North Coast Region a letter in the form attached hereto as
EXHIBIT G, which letter relates to the waste discharge requirements relating to
the Landfill.
2.2 Consideration. In consideration of the transfer and conveyance to
Buyer of Seller's right, title and interest in and to the Landfill Property, the
assignment, transfer and conveyance to Buyer of Seller's right, title and
interest in and to the Trust Funds and LF Permits, Buyer will enter into that
certain Landfill Assignment and Assumption Agreement with Seller, effective as
of the Close of Escrow, in substantially the form attached hereto as EXHIBIT H
(the "LF ASSIGNMENT AGREEMENT").
2.3 Easements. The parties acknowledge that subsequent to the Close of
Escrow, Seller will continue to own approximately 277 acres of additional real
property (the "RETAINED PROPERTY") in the vicinity of the Landfill Property and
will continue to need access to such property over and across the Landfill
Property for logging and other purposes. Accordingly, at the Close of Escrow,
Seller shall reserve from the conveyance of the Landfill Property one or more
ingress/egress easements (the "ACCESS EASEMENT") over and across the Landfill
Property as is reasonably necessary to allow Seller to access the Retained
Property and to harvest efficiently timber from such property , and the language
of such easement shall be acceptable to both parties. The Access Easement shall
be located such that it will not materially interfere with corrective actions
and closure/post-closure activities being performed by Buyer at the Landfill.
Furthermore, at the Close of Escrow, Seller shall grant to Buyer easements over
the Retained Property for purpose of access to and maintenance of the existing
ground water diversion trench sedimentation pond (the "POND EASEMENT") and
access to the existing monitoring wells relating to the Landfill Property (the
"MONITORING WELLS EASEMENT"), the language of which shall be acceptable to both
parties.
2.4 Baseline Assessment. Prior to the Close of Escrow, the parties shall
prepare a baseline environmental assessment of the Landfill (the "ASSESSMENT"),
which Assessment shall consist of a compilation of existing reports, studies and
analyses of the Landfill previously prepared by consultants/engineers of Seller
and the County of Humboldt as set forth in EXHIBIT N. The parties shall bear
equally
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the cost of the Assessment and the cost of taking any necessary aerial
photographs of the Landfill Property.
3.0 Trust Funds and Related Obligations.
3.1 Closure/Post-Closure Trust.
(a) On or before the Close of Escrow, Seller and Buyer shall execute
all documents necessary and obtain all approvals necessary to amend or replace
the Closure/Post-Closure Trust Agreements, as identified on EXHIBIT F, to
transfer all Seller's right, title, interest, and obligation pursuant to the
Trust Agreements to Buyer and to substitute Buyer as grantor under the Trust
Agreements.
(b) The parties understand that prior to the Close of Escrow, Buyer
desires to replace the mechanism for providing financial assurances for
post-closure obligations with respect to the Landfill with a pledge of revenues
mechanism. Accordingly, Seller will cooperate in good faith with Buyer's effort
to obtain all governmental approvals necessary to substitute a pledge of
revenues mechanism and cause the funds contained in the Closure/Post-Closure
Trust Fund to be released into the Escrow prior to the Close of Escrow.
(c) From and after the Close of Escrow, Seller shall be replaced as
grantor under the Closure/Post-Closure Trust Agreement and shall have no further
obligation to make payments into the Closure/Post-Closure Trust Fund, nor to pay
for or participate in any way in future closure/post-closure operations. From
and after the Close of Escrow, Buyer will assume all legal responsibility for
closure/post-closure obligations with respect to the Landfill, including without
limitation, the obligation to provide adequate financial assurances with respect
to such obligations. Seller makes no representations as to the adequacy of the
Closure/Post-Closure Trust Fund and shall have no responsibility or liability to
Buyer or any other party with respect to the failure of such funds to cover
adequately any closure and post-closure costs with respect to the Landfill.
(d) To the extent that this Purchase Agreement between Buyer and
Seller may be inconsistent with paragraph 7 of the 1996 Amendment to the Solid
Waste Disposal Agreement between the County of Humboldt and Seller (the "1996
AMENDMENT"), this Purchase Agreement shall supersede such 1996 Amendment. On or
before the Close of Escrow, Buyer will cause the County of Humboldt to
acknowledge in writing the foregoing, which writing will be reasonably
acceptable to Seller.
3.2 Operator Liability Trust.
(a) On or before the Close of Escrow, Seller and Buyer shall execute
all documents necessary and obtain all approvals necessary to amend or replace
the Operator Liability Trust Agreement, as identified on EXHIBIT F, to transfer
all Seller's right, title, interest, and obligation pursuant to the Trust
Agreement to Buyer, subject to the provisions of Paragraphs 3.2(b)-(f), and to
substitute Buyer as grantor under such Trust Agreement.
(b) On or before the Close of Escrow, (i) Buyer shall cause the
County of Humboldt to release and transfer to Seller all of the County's right,
title and interest pursuant to paragraph 5 of the 1996 Amendment in the funds
held in the Operator Liability Trust Fund, as identified on EXHIBIT F, as of the
date of this Purchase Agreement, together with all interest accrued thereon
until the funds are released from the Trust (the "OPERATOR LIABILITY FUNDS").
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(c) On or before the Close of Escrow, Buyer may substitute a pledge
of revenues or insurance mechanism for the Operator Liability Funds, and shall
cause such funds to be paid into escrow at least one (1) business day prior to
the Close of Escrow.
(d) In consideration of Seller's retention of certain liabilities as
set forth in this Paragraph 3.2(d) hereof, Buyer shall transfer to Seller the
Operator Liability Funds at the Close of Escrow. After the Close of Escrow, the
funds released to Seller from the Operator Liability Trust Fund shall be
available for the exclusive use by Seller to pay liability claims, if any,
arising from its operation of the Landfill prior to the Close of Escrow in
accordance with state law and regulations. Any unused funds in said trust shall
belong to Seller as its sole property.
(e) Seller shall retain any liabilities that are covered by the
Operator Liability Trust Fund that it may otherwise have for its activities at
the Landfill occurring prior to the Close of Escrow.
(f) From and after the Close of Escrow, Seller shall be replaced as
grantor under the Operator Liability Trust Agreement and shall have no further
obligation to make payments into the Operator Liability Trust Fund. Buyer shall
be legally responsible for any replacement funds required to be deposited in the
Operator Liability Trust Fund or other financial assurance mechanism, and such
additional funds shall be available only to meet its own operator liabilities.
3.3 Article 5 Corrective Action Trust Fund.
(a) On or before the Close of Escrow, Seller and Buyer shall execute
all documents necessary and obtain all approvals necessary to amend or replace
the Article 5 Corrective Action Trust Agreement, as identified on EXHIBIT F, to
transfer all Seller's right, title, interest and obligation pursuant to the
Trust Agreement to Buyer and to substitute Buyer as grantor under the Trust
Agreement, subject to the limitations contained in Paragraph 3.3(b).
(b) Both prior to and after the Close of Escrow, the funds in the
Article 5 Corrective Action Trust Fund shall be available to reimburse Seller
for expenses incurred prior to the Close of Escrow to implement any
state-approved Article 5 corrective action. At the Close of Escrow, Buyer shall
also cause the County of Humboldt to pay into the Article 5 Corrective Action
Trust Fund any additional funds required to reimburse Seller for expenses
incurred prior to the Close of Escrow to implement any state approved Article 5
corrective actions (with the exception of additional funds which may be
necessary to reimburse Seller for expenses related to the groundwater diversion
trench and toe-berm repair, construction or design), subject to regulatory
approval of disbursement requests submitted by Seller.
(c) From and after the Close of Escrow, Seller shall be replaced as
grantor under the Article 5 Corrective Action Trust Agreement and shall have no
further obligation to make payments into the Article 5 Corrective Action Trust
Fund, or to pay for or participate in any way in future corrective actions.
(d) Subject to the limitations contained in Paragraph 3.3(e) hereof,
Seller shall retain whatever legal liability it may have for any defect or
deficiency in the work performed by Seller or its contractors or consultants at
the Landfill.
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(e) At such time as Seller and the County of Humboldt resolve by
written agreement the question of the County's obligation, if any, to pay
certain additional Article 5 corrective action costs related to the groundwater
diversion trench and toe-berm repair, construction or design, Buyer shall cause
the County of Humboldt to reimburse Seller for such additional amounts to the
extent required to meet the County's legal obligation, if any, with respect to
such expenses.
4.0 Other Agreements.
4.1 Termination Payment. In recognition that the purchase of the Transfer
Station Property as provided herein will result in the termination of Seller's
existing refuse disposal business involving use of the Landfill and the Transfer
Station, Buyer shall make a termination payment to Seller in the amount of One
Million Dollars ($1,000,000.00) (the "TERMINATION PAYMENT"). The Termination
Payment shall be payable to Seller in immediately available funds at the Close
of Escrow and shall be deposited into the Escrow by Buyer at least one (1)
business day prior to the Close of Escrow.
4.2 Covenant Not to Compete. Seller and its affiliated companies hereby
covenant not to engage in the disposal of solid waste from Humboldt County for a
period of ten (10) years from the Close of Escrow and continuing for the
duration of its current waste collection and recycling contracts in Humboldt
County and any extensions thereof. Nothing contained in this Paragraph 4.2 shall
prevent Seller or its affiliates from engaging in the business of collecting
and/or recycling solid waste in and from Humboldt County.
4.3 Waste Delivery. Beginning at the Close of Escrow, Seller shall deliver
all waste that is collected by Seller in Humboldt County to Buyer's designated
facilities located within Humboldt County for the duration of Seller's current
waste collection and recycling contracts in Humboldt County and any extensions
thereof contemplated herein.
4.4 Collection Contracts. Prior to the Close of Escrow, Buyer shall
cooperate with Seller in its efforts to extend its existing solid waste
collection and recycling contracts with the County of Humboldt and the City of
Eureka such that each contract shall have a term of ten (10) years from the
Close of Escrow.
4.5 Covenant Not to Sue. Seller hereby covenants not to sue or finance the
suit of any other person or entity with respect to any matter which is resolved
pursuant to this Purchase Agreement, provided that Buyer is not in breach of any
of the terms of this Purchase Agreement relating to such resolved matters.
4.6 Rolling Stock and Equipment. At the Close of Escrow, Buyer may
purchase any or all of the rolling stock and equipment used at the Transfer
Station and the Landfill identified on Schedule 4.6 attached hereto. The
purchase price for such rolling stock and equipment shall be as set forth in
such Schedule. Buyer shall identify the items of rolling stock and equipment it
wishes to purchase at least thirty (30) days prior to the Close of Escrow. The
purchase price for such rolling stock and equipment so selected shall be payable
in immediately available funds on the Close of Escrow. All rolling stock and
equipment purchased by Buyer shall be purchased in its "AS IS" condition,
without any representation or warranty as to the condition thereof or fitness
for a particular purpose. At the Close of Escrow, Seller shall deliver to Buyer
a bill of sale with respect to all rolling stock and equipment so purchased and
all necessary certificates of title with respect thereto.
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4.7 Decommissioning of Wells. Prior to the Close of Escrow, or as soon as
reasonable possible thereafter, Seller shall decommission Monitoring Wells
MW-9-H/W and MW-24-W as required by applicable law.
5.0 Indemnification.
5.1 Defined Terms. When used in this Paragraph 5.0, the following terms
shall have the following meanings:
(a) "Indemnify" means indemnify, protect, hold harmless and defend.
(b) "Loss" or "Losses" means any and all claims, demands,
conditions, losses, liabilities, damages (including foreseeable and
unforeseeable consequential damages), liens, obligations, interest, injuries,
penalties, fines, lawsuits and other proceedings, judgments and awards and costs
and expenses (including without limitation reasonable attorneys' fees and costs
and consultants' fees and costs) of whatever kind or nature, known or unknown,
contingent or otherwise, and including those brought, alleged or claimed by
local, state or federal governmental agencies or authorities or by other third
parties.
(c) "CG Related Parties" means all direct or indirect, past or
present, affiliates, parents, subsidiaries, agents, employees, officers,
directors, shareholders, partners, legal representatives, successors and assigns
of Seller, and each of them.
(d) "Authority Related Parties" means all direct or indirect, past
or present constituent members, board and commission members, agents, employees,
legal representatives, successors and assigns of the Buyer, and each of them.
5.2 Seller's Indemnity of Buyer. Subject to the limitations set forth in
Paragraph 5.3 hereof, Seller shall Indemnify Buyer and Authority Related Parties
from and against any and all Losses to the extent arising from:
(a) Seller's operation of the Landfill prior to the Close of Escrow
to the extent Seller is otherwise legally liable therefor;
(b) matters covered by the Operator Liability Trust Fund (as
referenced in EXHIBIT F) that arise from Seller's operation and ownership of the
Landfill prior to the Close of Escrow to the extent Seller is otherwise legally
liable therefor;
(c) any defect or deficiency in the corrective action work performed
by Seller or Seller's contractors or consultants at the Landfill prior to the
Close of Escrow to the extent Seller is otherwise legally liable therefor; and
(d) the presence, if any, of low concentrations of long-chain
hydrocarbons referred to in paragraph 1C of EXHIBIT M.
5.3 Limitations on Indemnity. Notwithstanding anything contained in
Paragraph 5.2 to the contrary, Seller shall have no obligation to Indemnify
Buyer or Authority Related Parties with respect to:
(a) Environmental mitigation costs with respect to the Transfer
Station Property to the extent of $100,000.00, for which Buyer received a credit
pursuant to Paragraph 1.3 hereof; and
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(b) Losses for which Buyer is to Indemnify Seller pursuant to
Paragraphs 5.4(b), (c) or (d) hereof.
5.4 Buyer's Indemnity of Seller. Buyer shall Indemnify Seller and CG
Related Parties from and against any and all Losses to the extent arising from:
(a) Buyer's operation of the Landfill from and after the Close of
Escrow, to the extent the Buyer is otherwise legally liable therefor;
(b) all closure and post-closure activities and obligations existing
or arising with respect to the Landfill, including obligations to close,
maintain and monitor the Landfill and to provide financial assurances with
respect to closure and post-closure obligations;
(c) bodily injury and/or property damage to third parties caused by
operation of the Landfill from and after the Close of Escrow, and the failure to
provide financial assurances with respect to such matters as required by
applicable laws; and
(d) all corrective action activities and obligations existing on or
arising from or after the Close of Escrow with respect to the Landfill,
including obligations to provide financial assurances with respect to such
matters as required by applicable laws, except for the matters for which Seller
is to Indemnify Buyer pursuant to Paragraph 5.2(c) hereof.
5.5 Defense.
(a) Promptly after the assertion by any third party of any claim (a
"THIRD PARTY CLAIM") against any person or entity entitled to indemnification
under this Paragraph 5.0 (the "INDEMNITEE") that results or may result in the
incurrence by such Indemnitee of any Loss for which such Indemnitee would be
entitled to indemnification, in whole or in part, pursuant to this Agreement,
such Indemnitee shall promptly notify the party from whom such indemnification
could be sought (the "INDEMNITOR") of such Third Party Claim.
(b) If the Indemnitee may be entitled to indemnification only in
part with respect to the Third Party Claim:
(1) Indemnitee shall be responsible for conducting the defense
and settlement of the Third Party Claim unless Indemnitor elects at its own
expense, and with the consent of the Indemnitee, to assume the defense of the
entire Third Party Claim;
(2) All claims for reimbursement of defense costs and other
indemnification pursuant to this Paragraph 5 shall be stayed until the
resolution of the Third Party Claim, and shall be resolved thereafter by
compulsory binding arbitration between Indemnitor and Indemnitee. Any statute of
limitations or time limit applicable to the assertion of a claim or defense to
indemnification under this Paragraph 5 shall be tolled during the pendency of
the Third Party Claim; and
(3) The arbitrator shall be selected by mutual agreement of
the parties, and the arbitration shall be conducted in accordance with the terms
of the California Arbitration Act unless otherwise agreed by the parties.
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(c) If the Indemnitee is entitled to indemnification in full with
respect to the Third Party Claim, then the Indemnitor shall have the right to
assume the defense of the Indemnitee against such Third Party Claim (at the
expense of the Indemnitor). If the Indemnitor fails to assume the defense of the
Indemnitee, the Indemnitee may do so with its own counsel at Indemnitor's
expense.
(d) Failure to give prompt notice shall not affect the
indemnification obligations hereunder in the absence of actual prejudice.
Neither party shall, without the prior written consent of the other party: (1)
settle, compromise or offer to settle any such Third Party Claim on a basis
which would result in the imposition of a consent order, injunction or decree
which would restrict the future activity or conduct of the other party or any
affiliate, or (2) settle, compromise or offer to settle on a basis that does not
include an unconditional release of the other party for any liability arising
from the Third Party Claim.
6.0 Escrow.
6.1 Opening and Closing.
(a) For purposes of this Purchase Agreement, the Escrow will be
deemed opened on the date Escrow Holder has received a fully executed original
of this Purchase Agreement or an executed counterpart of this Purchase Agreement
from both Buyer and Seller. Escrow Holder will notify Buyer and Seller, in
writing, of the date Escrow is opened. In addition, Buyer and Seller agree to
execute, deliver, and be bound by any reasonable or customary supplemental
escrow instructions of Escrow Holder or other instruments as may reasonably be
required by Escrow Holder in order to consummate the transactions contemplated
by this Purchase Agreement. Any such supplemental instructions will not conflict
with, amend or supersede any portions of this Purchase Agreement. If there is
any inconsistency between such supplemental instructions and this Purchase
Agreement, this Purchase Agreement will prevail and govern.
(b) For purposes of this Purchase Agreement, the CLOSE OF ESCROW
will be defined as the time and date that the grant deeds (the "GRANT DEEDS")
conveying the Transfer Station Property and the Landfill Property to Buyer are
recorded in the Official Records of Humboldt County, California, the Cash
Payment and Termination Payment are paid and released to Seller, and the funds
in the Operation Liability Trust Fund are released to Seller. The Close of
Escrow will occur on January 15, 2000, or on such other date as is mutually
agreed upon by Buyer and Seller (the "CLOSING DATE"). Either party hereto may
terminate this Purchase Agreement upon written notice to the other party in the
event that the Close of Escrow does not occur by the Closing Date due to the
failure of any condition benefiting such terminating party, which failure was
not the result of any breach of this Agreement or bad faith by such terminating
party.
7.0 Title to Property.
7.1 Conditions of Title. It will be a condition to the Close of Escrow
that title to the Transfer Station Property and the Landfill Property be
conveyed to Buyer by the Grant Deeds, which will be subject only to the
following approved conditions of title (the "APPROVED CONDITIONS OF TITTLE"):
(a) a lien to secure payment of real estate taxes and assessments
not delinquent; and
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(b) the lien of supplemental taxes, if any assessed pursuant to
Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation
Code;
(c) matters created by or with the written consent of Buyer;
(d) matters which do not significantly affect the operation of the
Transfer Station Property and the Landfill Property or involve a significant
surface encroachment or loss of access, as determined by Buyer in its sole
reasonable discretion;
(e) any restrictions affecting the Transfer Station Property and the
Landfill Property as may be set forth in the terms and conditions of any of the
TS Permits or LF Permits;
(f) all matters which would be disclosed by a physical inspection or
an ALTA survey of the Transfer Station Property and the Landfill Property by a
qualified licensed surveyor;
(g) the Access Easement;
(h) all exceptions which are disclosed by the preliminary title
reports in Order Nos. 100011A-001-SG and 100011B-001-SG dated November 12, 1999
(collectively, the "PRELIMINARY REPORTS") issued with respect to the Transfer
Station Property and the Landfill Property by Escrow Holder in its capacity as
title insurer. Seller has provided Buyer with the Preliminary Reports, copies of
which are attached hereto as EXHIBIT I-1 and EXHIBIT I-2, and with copies of the
underlying documents referenced in the Preliminary Reports, and Buyer
acknowledges its receipt and approval of the Preliminary Reports and the
underlying documents.
7.2 Title Policy. Title to the Transfer Station Property and the Landfill
Property will be evidenced by the willingness of the Escrow Holder to issue its
CLTA Form Policies of Title Insurance (collectively, the "TITLE POLICIES") in
the amount of up to $2,475,000.00 with respect to the Transfer Station Property
and up to $100,000.00 with respect to the Landfill Property showing title to the
Transfer Station Property and the Landfill Property vested in Buyer subject only
to the Approved Conditions of Title.
8.0 Additional Conditions to Close of Escrow.
8.1 Conditions to Buyer's Obligations. Buyer's obligation to consummate
the transactions contemplated by this Purchase Agreement is subject to the
occurrence and/or satisfaction of each of the following additional conditions
for Buyer's benefit (or Buyer's waiver thereof, it being agreed that Buyer may
waive any or all of such conditions) on or before the Close of Escrow or on such
other dates as may be designated below for the satisfaction of such conditions:
(a) Seller will have timely performed all of the obligations
required to be performed by Seller under this Purchase Agreement on or before
the dates provided under this Purchase Agreement for the performance of such
obligations.
(b) All representations and warranties made by Seller to Buyer in
this Purchase Agreement will be true and correct in all material respects as of
the Close of Escrow.
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(c) The TS Third Party Consents and LF Third Party Consents shall
have been obtained, or, with respect to TS Permits and LF Permits, Buyer, with
Seller's good faith cooperation, shall have obtained issuance of any necessary
new permits therefor;
(d) The reviews by all lead and responsible agencies required by the
California Environmental Quality Act for the use by Buyer of the Transfer
Station Property and the Landfill Property shall have been successfully
completed.
(e) The Assessment shall have been completed and delivered to the
parties;
(f) All governmental and regulatory approvals shall have been
obtained such that the funds contained in the Closure/Post-Closure Trust Fund
and the Article 5 Corrective Action Trust Fund (less any amounts to be disbursed
to Seller in accordance with Paragraph 3.3 hereof) shall have been released into
the Escrow with Escrow Holder at least two (2) business days prior to the Close
of Escrow; and
(g) Seller will have operated and maintained the Transfer Station
Property and Landfill Property consistent with all regulatory requirements
unless otherwise noted in EXHIBIT M, except where failure to do so would not
have a material adverse effect on the operation or condition of the Transfer
Station Property or Landfill Property.
8.2 Conditions to Seller's Obligations. Seller's obligation to consummate
the transactions contemplated by this Purchase Agreement is subject to the
occurrence and/or satisfaction of each of the following conditions for Seller's
benefit (or Seller's waiver thereof, it being agreed that Seller may waive any
or all of such conditions) on or before the Close of Escrow or on such other the
dates as may be designated below for the satisfaction of such conditions:
(a) Buyer will have timely performed all of the obligations required
to be performed by Buyer under this Purchase Agreement on or before the dates
provided under this Purchase Agreement for the performance of such obligations,
including the Deposit of the Cash Payment and the Termination Payment into the
Escrow;
(b) All representations and warranties made by Buyer to Seller in
this Purchase Agreement will be true and correct in all material respects as of
the Close of Escrow;
(c) Seller shall have entered into extensions of its existing solid
waste collections and recycling contracts with the County of Humboldt and the
City of Eureka which shall provide for a term of not less than ten (10) years
from the Close of Escrow;
(d) The Assessment shall have been completed and delivered to the
parties;
(e) Seller shall have received a writing from the County of Humboldt
acknowledging that paragraph 7 of the 1996 Amendment to Solid Waste Disposal
Agreement between the County and Seller is superseded by this Purchase
Agreement, which writing shall be reasonably acceptable to Seller and County of
Humboldt;
-12-
<PAGE> 13
(f) Seller shall have received all funds held in the Operator
Liability Trust Fund as of the Close of Escrow and the County of Humboldt shall
have released and transferred to Seller all of the County's rights to such funds
in writing in a form reasonably acceptable to Seller;
(g) The County of Humboldt shall have paid into the Article 5
Corrective Action Trust Fund such additional funds as would then be necessary to
reimburse Seller for expenses incurred prior to the Close of Escrow to implement
any state approved Article 5 Corrective Actions (with the exception of
additional funds to cover expenses related to the groundwater diversion trench
and toe-berm repair, construction or design), subject to regulatory approval of
disbursement requests submitted by Seller;
(h) The TS Third Party Consents and LF Third Party Consents shall
have been obtained, or, with respect to TS Permits and LF Permits, Buyer, with
Seller's good faith cooperation, shall have obtained issuance of any necessary
new permits therefor; and
(i) The documents and amendments referenced in Paragraphs 3.1(a),
3.2(a) and 3.3(a) shall have been approved by the necessary governmental
authorities; and
(j) Seller shall have entered into an agreement with the City of
Eureka wherein the City of Eureka will agree to a procedure allowing Seller to
pass through any recycling charges imposed by Buyer as referenced in paragraph
1.5 hereof
(k) Seller shall have entered into an agreement with the City of
Eureka and the County of Humboldt allowing Seller to pass through any increases
in rent under the Lease pursuant to the Eureka Collection Agreement and the
Humboldt County Collection Agreement or shall otherwise be satisfied that any
such rental increases may be passed through under such agreements as the same
are currently written.
9.0 Deposits by Seller. At least two (2) business days prior to the Close of
Escrow, Seller will deposit or cause to be deposited with Escrow Holder a
certified or bank cashier's check made payable to Escrow Holder or a confirmed
wire transfer of funds in the amount of Escrow Holder's estimate of Seller's
share of closing costs, prorations and charges payable pursuant to this Purchase
Agreement. In addition, at least one (1) business day prior to the Close of
Escrow, Seller will deposit or cause to be deposited with Escrow Holder the
following documents and instruments:
(a) Grant Deeds. The Grant Deeds conveying the Transfer Station
Property and the Landfill Property to Buyer duly executed by Seller,
acknowledged and in recordable form;
(b) Assignment Agreements. Two (2) counterpart originals of each of
the TS Assignment Agreement and the LF Assignment Agreement (together, the
Assignments) duly executed by Seller, together with any Third Party Consents
that have been obtained by the parties hereto;
(c) Lease Agreement. Two (2) counterpart originals of the Lease duly
executed by Seller;
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<PAGE> 14
(d) Seller's Certificate. A certificate of non-foreign status (the
"SELLER'S CERTIFICATE"), duly executed by Seller, in the form attached hereto as
EXHIBIT J;
(e) Bill of Sale. A Bill of Sale with respect to any rolling stock
to be purchased by Buyer pursuant to Paragraph 4.6 hereof;
(f) Pond Easement and Monitoring Wells Easement. The Pond and
Monitoring Wells Easements, duly executed by Seller; and
(g) Certificate of Accuracy. A certificate duly executed by an
officer of Seller, in the form attached hereto as EXHIBIT K (the "SELLER
OFFICER'S CERTIFICATE") that the representations and warranties of Seller set
forth in this Purchase Agreement are true and correct in all material respects
on and as of the Close of Escrow as if the same were made on and as of such
time, subject only to those exceptions approved in writing by Buyer.
10.0 Deposits by Buyer. At least one (1) business day prior to the Close of
Escrow, Buyer will deposit with Escrow Holder the following documents and
instruments:
(a) Assignment Agreements. Two (2) counterpart originals of each of
the Assignment Agreements, duly executed by Buyer;
(b) Lease Agreement . Two (2) counterpart originals of the Lease
duly executed by Buyer;
(c) Certificate of Accuracy. A certificate duly executed by an
officer of Buyer in the form attached hereto as EXHIBIT L (the "BUYER OFFICER'S
CERTIFICATE") that the representations and warranties of Buyer set forth in this
Purchase Agreement are true and correct in all material respects on and as of
the Close of Escrow as if the same were made on and as of such time, subject
only to those exceptions approved in writing by Seller; and
d) Access Easement. The Access Easement, duly executed by Buyer.
11.0 Costs and Expenses. The cost and expense of the Title Policies will be paid
by Seller. Seller will pay all documentary transfer taxes payable in connection
with the recordation of the Grant Deeds. Seller and Buyer will each pay one-half
of Escrow Holder's escrow fee charges for document drafting, recording and
miscellaneous charges. All sales taxes will be paid by Buyer.
12.0 Prorations.
12.1 Taxes. Computed as of the Close of Escrow, real and personal property
taxes and assessments on the Property will be prorated on the basis that Seller
is responsible for:
(a) all such taxes for the fiscal year of the applicable taxing
authorities occurring prior to the Current Tax Period (as that term is defined
in Paragraph 12.1(b) hereof); and
(b) that portion of such taxes for the Current Tax Period determined
on the basis of the number of days which have elapsed from the first day of the
Current Tax Period to the Close of Escrow, inclusive, whether or not the same
will
-14-
<PAGE> 15
be payable prior to the Close of Escrow. The phrase "CURRENT TAX PERIOD" refers
to the fiscal year of the applicable taxing authority in which the Close of
Escrow occurs. In the event that as of the Close of Escrow the actual tax bills
for the year or years in question are not available and the amount of taxes to
be prorated as aforesaid cannot be ascertained, then rates and assessed
valuation of the previous year, with known changes, will be used, and when the
actual amount of taxes and assessments for the year or years in question will be
determinable, then such taxes and assessments will be prorated between the
parties to reflect the actual amount of such taxes and assessments.
12.2 Utilities. Utilities will be prorated as of the Close of Escrow.
13.0 Disbursement and Other Actions by Escrow Holder. Upon the Close of Escrow,
Escrow Holder will promptly undertake all of the following in the manner
indicated:
(a) Prorations. Prorate all matters referenced in Paragraph 12.0
hereof.
(b) Dates. Date the Grant Deeds, the Assignment, the Lease and the
Bill of Sale, if any, as of the Close of Escrow.
(c) Recording. Cause the Grant Deeds and any other documents which
the parties hereto may mutually direct, to be recorded in the Official Records
of Humboldt County, California in the order set forth in this subparagraph.
(d) Funds. Disburse from funds deposited by Seller with Escrow
Holder towards payment of all items chargeable to the account of Seller pursuant
hereto in payment of such costs, and disburse the balance of such funds to
Seller.
(e) Documents to Seller. Deliver to Seller the Buyer Officer's
Certificate, and the counterparts of the Assignments and the Lease that were
executed by Buyer.
(f) Documents to Buyer. Deliver to Buyer the Seller's Certificate,
the Seller Officer's Certificate, the counterparts of Assignments and the Lease
that were executed by Seller, all Third Party Consents deposited in Escrow by
Seller or Buyer and, when issued, the Title Policies.
14.0 Seller's Representations and Warranties. Buyer acknowledges and agrees that
except as expressly provided in this Purchase Agreement, Seller has made
absolutely no representations or warranties regarding the Transfer Station
Property and the Landfill Property, including, without limitation, the
condition, the past use, or the suitability for Buyer's intended use thereof,
and that Buyer is purchasing the same on an AS-IS basis, except as otherwise
expressly stated herein. Notwithstanding the foregoing, Seller makes the
following representations to Buyer:
(a) Authorization. This Purchase Agreement has been duly and validly
authorized, executed and delivered by Seller and no other action is requisite to
the execution and delivery of this Purchase Agreement by Seller. The Assignments
and the Lease, when the same are deposited to Escrow and delivered to Buyer,
will have been duly and validly authorized, executed and delivered by Seller and
no other action will be requisite to the execution and delivery of such
-15-
<PAGE> 16
Assignments and Lease by Seller and the performance of Seller's obligations
thereunder.
(b) Legal Actions. To Seller's actual knowledge, there are no
actions, suits or proceedings pending or threatened against or affecting the
Transfer Station Property and the Landfill Property in law or equity, except as
disclosed to Buyer in EXHIBIT M, attached hereto and incorporated by reference
herein.
(c) Compliance with Law. Seller has received no notice from any
governmental agency that either the Transfer Station Property or the Landfill
Property is not in compliance with applicable laws and regulations, except as
disclosed to Buyer in EXHIBIT M.
(d) Condemnation. To Seller's actual knowledge, there are no pending
or threatened condemnation proceedings which would directly affect the Transfer
Station Property or the Landfill Property or any portion thereof.
15.0 Buyer's Representations and Warranties. Buyer makes the following
representations and warranties to Seller:
(a) Formation. Buyer is a California joint powers authority duly
organized and validly existing pursuant to California Government Code Sections
6500 et seq.
(b) Authorization. This Purchase Agreement has been duly and validly
authorized, executed and delivered by Buyer and no other action by Buyer is
requisite to the execution and delivery of this Purchase Agreement. The
Assignments and the Lease, when the same are deposited to Escrow and delivered
to Seller, will have been duly and validly authorized, executed and delivered by
Buyer and no other action will be requisite to the execution and delivery of the
Assignments and the Lease by Buyer and the performance of Buyer's obligations
thereunder.
(c) Inspection of the Property. Except for the express
representations and warranties of Seller contained in Paragraph 14.0 hereof,
Buyer is acquiring the Transfer Station Property and the Landfill Property
(collectively, the "PROPERTY") and the Other Assets AS IS, without any warranty
of Seller, express or implied, as to the nature or condition of or title to the
same or as to their fitness for Buyer's intended use of same. Buyer is, or of
the Close of Escrow will be, familiar with the Property. Buyer is relying solely
upon, and as of the Close of Escrow will have conducted, its own independent
inspection, investigation and analysis of the Transfer Station Property and the
Landfill Property as Buyer deems necessary or appropriate in so acquiring the
same from Seller (including, without limitation, any and all matters concerning
the condition, use, sale, development or suitability for development thereof).
Buyer is not relying in any way upon any representations, statements,
agreements, warranties, studies, plans, reports, descriptions, guidelines or
other information or material furnished by Seller or its representatives,
whether oral or written, express or implied, of any nature whatsoever regarding
any of the foregoing matters.
16.0 Notices. All notices or other communications required or permitted
hereunder will be in writing, and will be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested,
telegraphed, delivered or sent by facsimile transmission and will be deemed
received upon the earlier of:
-16-
<PAGE> 17
(a) if personally delivered, the date of delivery to the address of
the person to receive such notice, or
(b) if mailed, three (3) days after the date of posting by the
United States post office; or
(c) if given by facsimile transmission, when sent. Any notice,
request, demand, direction or other communication sent by facsimile transmission
must be confirmed by the sending party within forty eight (48) hours by letter
mailed or delivered in accordance with the foregoing methods of dispatch other
than facsimile transmission.
To Seller: Attention: Michael Leggins, General Manager
City Garbage Company of Eureka
949 W. Hawthorne
Eureka, California 95501
Fax: (707) 442-7485
Copy to: Alan W. Sparer, Esq.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
Three Embarcadero Center,
Seventh Floor
San Francisco, CA 94111
Fax: (415) 217-5910
To Buyer: Attention: Gerald Kindsfather, General Manager
Humboldt Waste Management Authority
PO Box 5777
Eureka, California 95502
Fax: (707) 822-1361
Copy to: Victor T. Schaub, General Counsel
1740 Panorama Drive
Arcata, California 95521
Fax: (707) 822-5610
To Escrow Holder: Humboldt Land Title Company
Sixth & I Streets
Eureka, CA 95501
Attention: Sue Bosch
Fax: (707) 445-5952
Notice of change of address will be given by written notice in the manner
detailed in this Paragraph 16.0. Rejection or other refusal to accept or the
inability to deliver because of changed address of which no notice was given
will be deemed to constitute receipt of the notice, demand, request or
communication sent.
17.0 No Brokers. Buyer and Seller each represent and warrant to the other that
neither party has retained or used a broker or finder in connection with this
transaction. If any claims arise for brokers or finders fees for the
consummation of this Purchase Agreement, then Buyer hereby agrees to indemnify,
save harmless and defend Seller from and against such claims if they will be
based upon any statement or representation or agreement by Buyer, and Seller
hereby agrees to indemnify, save harmless and defend Buyer if such claims will
be based upon any statement, representation or agreement made by Seller.
-17-
<PAGE> 18
18.0 Legal Fees. In the event of the bringing of any action or suit by a party
hereto against another party hereunder by reason of any breach of any of the
covenants or agreements or any inaccuracies in any of the representations and
warranties on the part of the other party arising out of this Purchase
Agreement, then in that event, the prevailing party in such action or dispute,
whether by final judgment or out of court settlement, will be entitled to have
and recover of and from the other party all costs and expenses of suit,
including, without limitation, reasonable attorneys' fees.
19.0 Assignment. Neither party will assign, transfer or convey its rights and/or
obligations under this Purchase Agreement and/or with respect to the Transfer
Station Property and the Landfill Property without the prior written consent of
the other, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, Buyer may fully assign its rights and obligations under this Purchase
Agreement to any entity which may hereafter assume the waste management
obligations of Buyer; and Seller may assign its rights hereunder to any
affiliated company or any company purchasing Seller or its parent company in an
asset, stock merger, consolidation or similar transaction. Any permitted
assignments will not relieve the assigning party from its liability under this
Purchase Agreement.
20.0 Miscellaneous.
(a) Survival. The representations and warranties of both Buyer and
Seller set forth in this Purchase Agreement will survive the recordation of the
Grant Deeds and the Close of Escrow for a period of one (1) year from such date.
All covenants and indemnities contained in this Purchase Agreement shall survive
the Closing Date to the extent not fully performed by such date.
(b) Required Actions of Buyer and Seller. Buyer and Seller agree to
execute such instruments and documents and to undertake diligently such actions
as may be reasonably required in order to consummate the transactions herein
contemplated and will use their best efforts to accomplish the Close of Escrow
in accordance with the provisions hereof.
(c) Time of Essence. Time is of the essence of each and every term,
condition, obligation and provision hereof.
(d) No Obligations to Third Parties. Except as otherwise expressly
provided herein, the execution and delivery of this Purchase Agreement and any
other agreements related hereto will not be deemed to confer any rights upon,
nor obligate any of the parties thereto, to any person or entity other than the
parties hereto.
(e) Amendments. The terms of this Purchase Agreement may not be
modified or amended except by an instrument in writing executed by each of the
parties hereto.
(f) Waiver. The waiver or failure of either party to enforce any
provision of this Purchase Agreement will not operate as a waiver of any future
breach of any such provision or any other provision hereof.
(g) Applicable Law. This Purchase Agreement will be governed by and
construed in accordance with the laws of the State of California.
(h) Fees and Other Expenses. Except as otherwise provided herein,
each of the parties will pay its own fees and expenses (including, without
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<PAGE> 19
limitation, fees and expenses of the party's own counsel) in connection with
this Purchase Agreement and any other agreements related hereto.
(i) Entire Agreement. This Purchase Agreement, together with all of
the exhibits attached hereto, when duly executed and delivered in substantially
the forms attached as exhibits hereto, supersede any prior agreements,
negotiations and communications, oral or written, and contain the entire
agreement between Buyer and Seller as to the subject matter hereof or thereof.
No subsequent agreement, representation, or promise made by either party hereto,
or by or to an employee, officer, agent or representative of either party will
be of any effect unless it is in writing and executed by the party to be bound
thereby.
(j) Successors and Assigns. This Purchase Agreement will be binding
upon and will inure to the benefit of the successors and permitted assigns of
the parties hereto.
(k) Captions. Any captions to, or headings of, the paragraphs or
subparagraphs of this Purchase Agreement are solely for the convenience of the
parties hereto, are not a part of this Purchase Agreement, and will not be used
for the interpretation or determination of the validity of this Purchase
Agreement or any provision hereof.
(l) Severability. If any provision of this Purchase Agreement, or
any portion thereof, is found by any court of competent jurisdiction to be
unenforceable or invalid for any reason, such provision shall be severable and
shall not in any way impair the enforceability of any other provision of this
Purchase Agreement.
(m) Counterparts. This Purchase Agreement may be executed in
multiple counterparts, each of which will be deemed an original, but all of
which, together, will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Purchase
Agreement as of the day and year first-above written.
<TABLE>
<S> <C>
"BUYER" HUMBOLDT WASTE
MANAGEMENT AUTHORITY
By: /s/ Stan Dixon
-------------------------
Stan Dixon, Chair
Board of Directors of the Buyer
APPROVED AS TO FORM: ATTEST:
By: /s/ Victor T. Schaub By: /s/ Gerald Kindsfather
-------------------------- -------------------------
Victor T. Schaub Gerald Kindsfather
General Counsel to the Buyer Clerk of the Buyer
"SELLER" CITY GARBAGE COMPANY
OF EUREKA
a California corporation
By: /s/ Mark B. Lomele
-------------------------
Its: Chief Financial Officer
</TABLE>
-19-
<PAGE> 20
ACCEPTANCE BY ESCROW HOLDER:
Humboldt Land Title Company hereby acknowledges that it has received a
fully executed counterpart of the foregoing Agreement of Purchase and Sale and
Joint Escrow Instructions and agrees to act as Escrow Holder thereunder and to
be bound by and perform the terms thereof as such terms apply to Escrow Holder.
Dated: ____________________ HUMBOLDT LAND TITLE
COMPANY
By: _______________________
Its:
-20-
<PAGE> 1
EXHIBIT 12.1
NORCAL WASTE SYSTEMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS, EXCEPT RATIO)
FISCAL YEARS ENDING 1995 THROUGH 1999
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (loss) before Income Taxes,
Extraordinary Item and Change in
Accounting Principle $ 17,887 $ 9,461 $ 6,526 $ (1,136) $ 17,096
Interest Expense(a) 26,546 26,400 25,853 24,326 19,909
Capitalized Interest (455) (235) (204) (413) 0
Interest Portion of Rental charge(b) 752 956 882 751 506
Income before Income Taxes,
Extraordinary Item, Interest and
Interest Portion of Rental charge $ 44,730 $ 36,582 $ 33,057 $ 23,528 $ 37,511
Interest Expense $ 26,546 $ 26,400 $ 25,853 $ 24,326 $ 19,909
Interest Portion of Rental Charge 752 956 882 751 506
Interest Expense plus Interest
Portion of Rental Charge $ 27,298 $ 27,356 $ 26,735 $ 25,077 $ 20,415
Ratio of Earnings to Fixed Charges 1.64 1.34 1.24 --(c) 1.84
</TABLE>
- ------------
(a) In addition, the Company guaranteed certain obligations of a less than 50%
owned entity in the amounts of $0.2 million, $0.4 million and $1.2 million
as of September 30, 1999, 1998 and 1997, respectively. The less than 50%
owned entity incurred approximately $0.1 million, $0.1 million and $0.2
million of interest expense on these obligations in the years ended
September 30, 1999, 1998 and 1997, respectively. This amount was not
included in the calculation of the ratio of earnings to fixed charges as
the Company had not been required to honor the guarantees and does not
expect to be required to do so.
(b) Interest portion of rentals is assumed to equal 33% of operating lease and
rental expense for the period.
(c) In 1996, earnings were insufficient to cover fixed charges by $1,549.
-21-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF NORCAL WASTE SYSTEMS, INC.
Alta Environmental Services, Inc.
Alta Equipment Leasing Co., Inc.
Auburn Placer Disposal Service
B&J Drop Box
City Garbage Company of Eureka
Consolidated Environmental Industries, Inc.
Del Norte Disposal, Inc.
Dixon Sanitary Service
Envirocal, Inc.
Foothill Disposal Co., Inc.
Golden Gate Disposal & Recycling Company
Integrated Environmental Systems, Inc.
J.J.V. Disposal, Inc.
Los Altos Garbage Company
Macor, Inc.
Mason Land Reclamation Company, Inc.
Norcal Disposal and Recycling, Inc.
Norcal/San Bernardino, Inc.
Norcal Service Center, Inc.
Norcal Waste Services of Sacramento, Inc.
Norcal Waste Solutions, Inc.
Norcal Waste Systems of Butte County, Inc.
Norcal Waste Systems of Southern California, Inc.
Recycle Central, Inc.
San Bruno Garbage Co., Inc.
Sanitary Fill Company
South Valley Refuse Disposal, Inc.
Sunset Properties, Inc.
Sunset Scavenger Company
Vacaville Sanitary Service
Vallejo Garbage Service, Inc.
West Coast Recycling Co.
Western Placer Recovery Company
Yuba Sutter Disposal, Inc.
- ---------------------
All subsidiaries are California corporations, with the exception of Mason
Land Reclamation Company, Inc. (Missouri corporation).
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 42,166
<SECURITIES> 5,552
<RECEIVABLES> 48,386
<ALLOWANCES> 2,017
<INVENTORY> 2,102
<CURRENT-ASSETS> 99,551
<PP&E> 285,034
<DEPRECIATION> 120,024
<TOTAL-ASSETS> 393,809
<CURRENT-LIABILITIES> 69,630
<BONDS> 176,002
0
0
<COMMON> 241
<OTHER-SE> 64,729
<TOTAL-LIABILITY-AND-EQUITY> 393,809
<SALES> 0
<TOTAL-REVENUES> 343,167
<CGS> 0
<TOTAL-COSTS> 303,080
<OTHER-EXPENSES> (4,868)
<LOSS-PROVISION> 977
<INTEREST-EXPENSE> 26,091
<INCOME-PRETAX> 17,887
<INCOME-TAX> 331
<INCOME-CONTINUING> 17,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,556
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
