<PAGE>
This Quarterly Report is filed by Norcal Waste Systems, Inc.
pursuant to certain contractual requirements and not
pursuant to the Securities Exchange Act of 1934
and the rules and regulations thereunder.
QUARTERLY REPORT
For the Quarterly Period ended December 31, 1999
NORCAL WASTE SYSTEMS, INC.
(Exact Name of Company as specified in its charter)
California 94-2922974
---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
160 Pacific Avenue, Suite 200
San Francisco, CA 94111
-----------------------
(Address of Principal executive offices)
Company's telephone number, including area code: (415) 875-1000
---------------
Norcal Waste Systems, Inc. is currently 100% owned by an employee stock
ownership plan.
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date. On February 7, 2000, there were
24,134,973 shares of $.01 par value Common Stock outstanding.
<PAGE>
NORCAL WASTE SYSTEMS, INC.
Quarterly Report for the period ended December 31, 1999
Index
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and September 30, 1999
Consolidated Statements of Income - Three months ended December 31, 1999 and
1998
Consolidated Statement of Stockholder's Equity - Three months ended December
31, 1999
Consolidated Statements of Cash Flows - Three months ended December 31, 1999
and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Certain Reports
-i-
<PAGE>
PART I - FINANCIAL INFORMATION
Item I.
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
--------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash $ 37,453 $ 42,166
Marketable securities 5,552 5,552
Accounts receivable, less allowance for doubtful accounts of
$2,043 at December 31, 1999 and $2,017 at September 30, 1999 45,665 46,369
Parts and supplies 2,396 2,102
Prepaid expenses 4,875 3,362
--------------- ----------------
Total current assets 95,941 99,551
--------------- ----------------
Property and equipment:
Land 46,965 46,392
Landfills 27,300 27,300
Buildings and improvements 51,974 51,904
Vehicles and equipment 154,122 150,908
Construction in progress 6,504 8,530
--------------- ----------------
Total property and equipment 286,865 285,034
Less accumulated depreciation and amortization 120,930 120,024
--------------- ----------------
Property and equipment, net 165,935 165,010
--------------- ----------------
Franchises, permits and other intangibles, net 78,617 79,217
Trust accounts 37,315 36,744
Deferred financing costs, net 5,243 5,578
Other assets 6,377 7,709
--------------- ----------------
Total other assets 127,552 129,248
--------------- ----------------
Total assets $ 389,428 $ 393,809
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------- -------------
<S> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Current portion:
Long-term debt $ 370 $ 383
Capital lease obligations 482 582
Accounts payable 4,485 6,064
Accrued expenses 45,929 53,534
Income taxes payable 777 1,311
Deferred revenues 3,905 3,592
Other accrued liabilities 4,116 4,164
------------- -------------
Total current liabilities 60,064 69,630
------------- -------------
Long-term debt 176,063 176,002
Obligations under capital leases 214 285
Deferred income taxes 6,776 6,850
Landfill closure liability 27,153 27,009
Postretirement medical benefits 34,320 34,177
Other liabilities 14,168 14,886
------------- -------------
Total liabilities 318,758 328,839
------------- -------------
Commitments and contingencies Stockholder's equity:
Common stock, $.01 par value; 100,000,000 shares authorized;
24,134,973 shares issued and outstanding 241 241
Additional paid-in-capital 166,919 166,919
Accumulated deficit (73,736) (79,372)
Accumulated other comprehensive income (443) (200)
------------- -------------
92,981 87,588
Less net scheduled contribution to the ESOP (22,311) (22,618)
------------- -------------
Total stockholder's equity 70,670 64,970
------------- -------------
Total liabilities and stockholder's equity $ 389,428 $ 393,809
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
--------------- --------------
<S> <C> <C>
Revenues $ 84,178 $ 83,326
--------------- --------------
Cost of operations:
Operating expenses 57,122 59,009
Depreciation and amortization 5,809 5,083
ESOP compensation expense 1,116 1,834
General and administrative 8,911 8,775
--------------- --------------
Total cost of operations 72,958 74,701
--------------- --------------
Operating income 11,220 8,625
Interest expense (6,655) (6,514)
Interest income 910 890
Other income, net 291 49
--------------- --------------
Income before income taxes 5,766 3,050
Income tax expense 130 -
--------------- --------------
Net income $ 5,636 $ 3,050
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three months ended December 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated Net
Additional other scheduled
Common Stock 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, 1999 24,135 $ 241 $ 166,919 $ (79,372) $ (200) $ (22,618) $ 64,970
Net income - - - 5,636 - - 5,636
Other comprehensive income,
net of fax - - - - (243) - (243)
Contributions to reduce
ESOP debt - - - - - 307 307
---------- -------- ---------- ----------- ----------- ----------- ----------
Balances, December 31, 1999 24,135 $ 241 $ 166,919 $ (73,736) $ (443) $ (22,311) $ 70,670
========== ======== ========== =========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,636 $ 3,050
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 5,809 5,083
ESOP compensation expense 1,116 1,834
Senior notes interest and amortized financing costs (5,459) (5,480)
Other 800 (648)
Changes in assets and liabilities, net of effects of acquisitions and dispositions (6,296) (5,775)
------------- -------------
Net cash provided by (used in) operating activities 1,606 (1,936)
------------- -------------
Cash flows from investing activities:
Acquisitions of property and equipment (5,431) (10,218)
Payments for businesses acquired (788) (9,360)
Proceeds from dispositions 34 37
Other 150 50
------------- -------------
Net cash used in investing activities (6,035) (19,491)
------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt and capitalized leases (284) (384)
Proceeds from other debt - 148
------------- -------------
Net cash used in financing activities (284) (236)
------------- -------------
Net decrease in cash and cash equivalents (4,713) (21,663)
Cash and cash equivalents, beginning balance 42,166 39,752
------------- -------------
Cash and cash equivalents, ending balance $ 37,453 $ 18,089
============= =============
Supplemental cash flow information:
Interest $ 12,116 $ 12,088
============= =============
Income taxes $ 991 $ -
============= =============
Schedule of noncash investing and financing activities:
Debt issued and liabilities assumed in acquisitions $ 50 $ 2,578
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements
(1) General
The interim consolidated financial statements presented herein include
Norcal Waste Systems, Inc. ("Norcal") and its subsidiaries (collectively, Norcal
and its subsidiaries are referred to herein as the "Company"). These interim
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto, which include
information as to significant accounting policies, for the year ended September
30, 1999. Such interim consolidated financial statements are unaudited but, in
the opinion of management, reflect all adjustments necessary (consisting of
items of a normal recurring nature) for a fair presentation of the Company's
interim financial position, results of operations, and cash flows. Results of
operations for interim periods are not necessarily indicative of those of a full
year.
(2) Nature of Business
Through its subsidiaries, the Company provides integrated waste services to
residential, commercial, municipal and industrial customers in California. The
Company operates in one business segment - solid waste management services.
These services primarily consist of refuse collection, recycling and other waste
diversion, transfer station and hauling operations, and operation of Company-
owned landfills and third party landfill management services (including
engineering and construction management services). The Company continues to be,
with limited exceptions, the sole provider of commercial and residential refuse
collection for the City and County of San Francisco.
(3) Long-term Debt
Long-term debt at December 31, 1999 and September 30, 1999 is summarized as
follows:
(in thousands)
<TABLE>
<CAPTION>
December 31 September 30
----------- ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest at 13.5% $ 171,470 $ 171,374
Note payable for business acquired, due in monthly installments
through 2016, interest imputed at 8.75% 1,574 1,584
Convertible notes payable for business acquired, due in eight quarterly
installments beginning December 2001, interest imputed at 8.5% 1,848 1,838
Notes payable to former shareholders, due in monthly installments
through 2017, interest at 6% to 8.5% 661 676
Other notes 880 913
------------ -----------
Total debt 176,433 176,385
Less current portion 370 383
------------ -----------
Long-term debt $ 176,063 $ 176,002
============ ===========
</TABLE>
On November 21, 1995, the Company completed a private debt offering of
$175.0 million in Senior Notes (the "Senior Notes"). The Senior Notes mature in
November 2005 with interest payable semi-annually. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time during
or after November 2000. In the event of a change in control of the Company, the
Company would be required to offer to purchase the Senior Notes. The Senior
Notes are unsecured and rank pari passu in right of payment to all existing and
future senior indebtedness of the Company. The Senior Notes are guaranteed, on a
senior unsecured basis, by the Company's wholly-owned subsidiaries. The
Indenture governing the Senior Notes contains provisions which, among other
things, (i) limit the Company's and its subsidiaries' ability to declare or pay
dividends or other distributions (other than dividends or distributions payable
to Norcal or any wholly owned subsidiary of Norcal), (ii) limit the purchase,
redemption or retirement of capital stock and (iii) limit the incurrence of
additional debt. In September 1996, the Company completed the exchange of all of
its outstanding privately-placed Senior Notes for Senior Notes with identical
terms and provisions, which exchange was registered under the Securities Act of
1933. The interest rate on the Senior Notes is currently 13.5%, however, the
interest rate reverts to 12.5% if Norcal (in one or more transactions) offers to
purchase (whether or not any actual purchases are made) or redeems an aggregate
of $25.0 million in principal amount of Senior Notes out of the proceeds of
equity sales.
-6-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements - (Continued)
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.
In conjunction with the private debt offering, the Company entered
into a new Credit Agreement (the "Credit Agreement") with a group of lenders and
BankBoston, N.A., as Agent. The Credit Agreement, as amended, provides for a
revolving credit facility in an amount currently of up to $87.5 million
(depending upon certain financial ratios), up to $25.0 million of which may be
used for letters of credit. At December 31, 1999, the Company had utilized $2.3
million of its credit facility for letters of credit and had availability under
the Credit Agreement (based on limitations imposed by certain financial ratios)
of $55.9 million along with $22.7 million which may be utilized for additional
letters of credit. Changes in availability under the Credit Agreement are a
function of changes in operating results, among other things.
(4) Guarantee of Securities
Norcal is a holding company and has no independent operations other
than those relating to its subsidiaries. The Senior Notes are guaranteed by all
wholly owned subsidiaries of Norcal. The guarantees of the guarantors are full,
unconditional and joint and several. Separate financial statements of each
guarantor have not been presented since management has determined such separate
financial statements are not material to investors.
(5) Income Taxes
The Company elected to become taxable as an S corporation effective
October 1, 1998. In addition, in connection with the Company's S Corporation
election the Company also elected, for income tax purposes only, to treat a
substantial number of its subsidiaries as divisions of the Company. Generally,
the taxable income (or loss) of an S Corporation (including its divisions) is
not taxable at the corporate level, but is instead passed through to its
shareholders. However, because the sole shareholder of the Company, the Norcal
Waste Systems, Inc. Employee Stock Ownership Plan and Trust, is a tax-exempt
employee stock ownership plan, it will not be subject to tax on its allocable
share of the Company's taxable income. 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).
-7-
<PAGE>
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of the Norcal Waste Systems, Inc.
Employee Stock Ownership Plan and Trust)
Notes to Consolidated Financial Statements - (Continued)
(6) Comprehensive Income
Effective October 1, 1998, the Company adopted SFAS No. 130, "
Reporting Comprehensive Income" which establishes standards for the reporting of
comprehensive income and its components in financial statements. Comprehensive
income consists of net income and other gains and losses affecting stockholder's
equity, that under generally accepted accounting principles, are excluded from
net income. The components of comprehensive income for the interim periods
presented is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
(in thousands)
<S> <C> <C>
Net income $5,636 $3,050
Other comprehesive income:
Unrealized gains (losses) on
trust accounts, net of tax (243) (74)
------ ------
Total comprehensive income $5,393 $2,976
====== ======
</TABLE>
-8-
<PAGE>
Item II. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements. Those statements followed by an asterisk
(*) are forward looking statements. Any such statements should be considered in
light of various risks and uncertainties that could cause results to differ
materially from expectations, estimates or forecasts expressed. The various
risks and uncertainties include, but are not limited to: changes in general
economic conditions, inability to maintain rates sufficient to cover costs,
inability to obtain timely rate increases, inability to reduce costs related to
the loss of revenues, loss of material contracts (including the loss of the
Company's contract with the County of San Bernardino), fluctuations in
commodities prices, changes in environmental regulations or related laws,
inability to settle union labor contract disputes, competition 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.
On November 21, 1995, the Company issued 12.5% Series A Senior Notes
in an aggregate principal amount of $175.0 million, for which it received
proceeds, after original issue discount, of approximately $170.2 million. The
Company used the proceeds from this offering (less certain associated expenses),
together with certain cash balances, to retire approximately $199.1 million of
its then outstanding indebtedness and certain of the ESOP's indebtedness to
third parties. Concurrent with this offering, the Company entered into a new
bank credit agreement providing for a revolving credit facility with a maximum
current availability of $87.5 million, of which up to $25.0 million may be used
for letters of credit. These transactions are collectively referred to as the
"Refinancing Transaction."
The following discussion pertains to the Company's operations for the
three months ended December 31, 1999 and 1998 and should be read in conjunction
with the unaudited consolidated financial statements and related notes thereto
included elsewhere herein, and the Company's Annual Report for the fiscal year
ended September 30, 1999.
Introduction
Norcal Waste Systems, Inc. ("Norcal") and its subsidiaries
(collectively referred to herein as the "Company") provide solid waste
management services throughout California, including collection, transfer,
disposal, landfill management, recycling and other waste services. The Company
operates 14 landfills in California, four of which it owns and 10 of which are
owned by local governmental entities. The Company currently serves an estimated
466,000 customers.
The Company's revenues are comprised primarily of fees charged to
residential, commercial, municipal and industrial customers for the collection
and disposal of solid waste, disposal fees (known as "tipping fees") charged to
third party waste collectors who dispose of solid waste at the Company's
transfer stations and landfills, fees charged to third party landfill owners for
landfill operations and solid waste systems management activities and revenues
generated from the sale of recyclable materials.
Operating expenses include labor, landfill project and subcontractor
costs, disposal fees paid to third parties, fuel, equipment maintenance and
rentals, engineering, consulting and other professional services and other
direct costs of operations. Also included are accruals for future landfill
closure and corrective action costs, consistent with regulatory requirements.
General and administrative expenses include management salaries, administrative
and clerical overhead, professional services costs and other fees and expenses.
ESOP compensation expense includes amounts contributed by the Company
to the ESOP to allow the ESOP to repay its intercompany loans to the Company
along with amounts to fund distributions to retired, terminated or withdrawing
participants. The total contributions are subject to various limitations imposed
by the Internal Revenue Code of 1986, as amended, and are generally tax
deductible. The debt repayments by the ESOP result in allocation of Company
common stock to ESOP participants' accounts pursuant to an allocation formula.
-9-
<PAGE>
Results of Operations
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
<TABLE>
<CAPTION>
Relationship to Period to Period
Total Revenues Change
Three Months Ended (in thousands)
December 31, December 31, 1999
1999 1998 $ %
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 83.0% 78.3% 4,659 7.1%
Third party landfill management services 10.5% 17.7% -5,978 -40.4%
Recycled commodities sales 6.5% 4.0% 2,171 64.6%
------------ ------------- ------------- ------------
Total revenues 100.0% 100.0% 852 1.0%
------------ ------------- ------------- ------------
Cost of operations:
Operating expenses 67.9% 70.8% -1,887 -3.2%
Depreciation and amortization 6.9% 6.1% 726 14.3%
ESOP compensation expense 1.3% 2.2% -718 -39.1%
General and administrative 10.6% 10.5% 136 1.5%
------------ ------------- ------------- ------------
Total cost of operations 86.7% 89.6% -1,743 -2.3%
------------ ------------- ------------- ------------
Operating income 13.3% 10.4% 2,595 30.1%
Interest expense -7.9% -7.8% -141 2.2%
Interest income 1.1% 1.1% 20 2.2%
Other income, net 0.3% 0.0% 242 493.9%
------------ ------------- ------------- ------------
Income before income taxes 6.8% 3.7% 2,716 89.0%
Income tax expense 0.2% 0.0% 130 100.0%
------------ ------------- ------------- ------------
Net income 6.7% 3.7% 2,586 84.8%
============ ============= ============= ============
</TABLE>
Three months ended December 31, 1999 and 1998
Revenues. Revenues for the three months ended December 31, 1999 increased
$0.9 million (1.0%) to $84.2 million from $83.3 million for the three months
ended December 31, 1998. Waste collection and disposal revenues increased $4.7
million, approximately $3.0 million due to general volume increases, $0.9
million due to rate increases in several service areas and the remainder due to
operations acquired in Los Angeles in October and November 1998. Recycled
commodities sales revenues increased $2.2 million due to higher commodity
prices. Third party landfill management revenues decreased $6.0 million due to a
$5.2 million decrease in project related activity, primarily in San Bernardino
County and lower landfill operations revenue in San Bernardino County due to
reduced volumes from the loss of tonnage from the city of Ontario, which signed
a long-term disposal agreement with a third party landfill effective January 1,
1999.
Operating Expenses. Operating expenses for the three months ended December
31, 1999 decreased $1.9 million (3.2%) to $57.1 million from $59.0 million for
the three months ended December 31, 1998. As a percentage of revenues, operating
expenses decreased to 67.9% for the three months ended December 31, 1999 from
70.8% for the three months ended December 31, 1998. Project and subcontractor
related costs decreased $4.8 million as a result of decreased activity in San
Bernardino County. These decreased costs which were partially offset by higher
payroll costs of $2.0 million due to scheduled union wage increases and higher
disposal costs of $1.2 million due primarily to increased volumes.
-10-
<PAGE>
ESOP Compensation Expense. ESOP compensation expense is primarily based
on the cost of shares allocated as determined by the Company's contribution to
the ESOP, along with contributions to fund distributions to retired, terminated
and withdrawing participants. ESOP compensation expense for the three months
ended December 31, 1999 decreased $0.7 million (39.1%) to $1.1 million from $1.8
million for the three months ended December 31, 1998. The decrease in expense
can be attributed to lower contributions made to the ESOP based upon a revised
payment schedule, as a result of the Company's S Corporation election, that does
not currently include repayments of principal.
Depreciation and Amortization. Depreciation and amortization increased
$0.7 million (14.3%) to $5.8 million for the three months ended December 31,
1999 from $5.1 million for the three months ended December 31, 1998. As a
percentage of revenues, depreciation and amortization increased to 6.9% for the
three months ended December 31, 1999 from 6.1% for the three months ended
December 31, 1998. The primary causes of the increase in depreciation and
amortization for the three months ended December 31, 1999 was higher capital
expenditures in the previous year and the acceleration of amortization for
certain intangible assets in the current period.
Operating Income. Operating income increased $2.6 million (30.1%) to
$11.2 million for the three months ended December 31, 1999 from $8.6 million for
the three months ended December 31, 1998. As a percentage of revenues, operating
income increased to 13.3% for the three months ended December 31, 1999 from
10.4% for the three months ended December 31, 1998. The primary causes of the
increase in operating income for the three months ended December 31, 1999 were
higher collection and disposal volumes and recycling revenues and the lower ESOP
compensation expense described above.
Income Tax Expense. The Company experienced an effective rate of 2.0%
for the three months ended December 31, 1999 based primarily on the state tax
rate of 1.5% for S Corporations. The Company experienced an effective rate of
zero for the three months ended December 31, 1998 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.
Net Income. Net income increased $2.6 million to $5.6 million for the
three months ended December 31, 1999 from $3.0 million for the three months
ended December 31, 1998. The increase in net income for the three months ended
December 31, 1999 was due to higher operating income described above.
Liquidity and Capital Resources
The Company's cash requirements consist principally of working capital
requirements, interest on outstanding indebtedness, capital expenditures and
deposits to trust funds to satisfy certain environmental statutes and
regulations. The Company had working capital of $35.9 million at December 31,
1999 compared to $29.9 million at September 30, 1999.
As part of the Refinancing Transaction the Company entered into the
Credit Agreement which currently provides for up to $87.5 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 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 December 31,
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 $55.9 million for borrowings unrelated to letters of
credit, 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
become more restrictive over time.
The Indenture governing the Senior Notes contains provisions which,
among other things, (i) limit the Company's and its subsidiaries' ability to
declare or pay dividends or other distributions (other than dividends or
distributions payable to Norcal or any wholly owned subsidiary of Norcal or, in
certain cases, the ESOP), (ii) limit the purchase, redemption or retirement of
capital stock and (iii) limit the incurrence of certain additional debt.
-11-
<PAGE>
The Senior Notes mature in November 2005. As of December 31, 1999,
interest on the Senior Notes accrued at the rate of 13.5% per annum. However,
the interest rate on the Senior Notes is subject to decrease to 12.5% at such
time the Company (in one or more transactions) offers to purchase (whether or
not any actual purchases are made) or redeems an aggregate of $25.0 million in
principal amount of Senior Notes out of the proceeds of equity sales.
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.
Cash Flow from Operating Activities. Cash provided by operating
activities was $1.6 million for the three months ended December 31, 1999
compared to cash used of $1.9 million for the same period last year.
Cash Flow from Investing Activities. Cash used in investing activities
was $6.0 million for the three months ended December 31, 1999 compared to cash
used of $19.5 million for the same period last year. During the current period,
the Company used $5.4 million on capital expenditures, primarily vehicles,
containers and other equipment compared to $10.2 million for similar equipment
in the same period last year. In October and November 1998, the Company also
used $9.4 million to purchase the stock of one solid waste collection company
and substantially all of the assets of two other solid waste collection
companies in Southern California.
Cash Flow from Financing Activities. Cash used in financing activities
was $0.3 million for the three months ended December 31, 1999 compared to $0.2
million for the three months ended December 31, 1998. Activity in both periods
consisted primarily of scheduled note and capital lease payments.
Certain Other Cash Requirements. The Company is in discussions with the
City of San Francisco regarding plans for increased diversion of waste from
disposal at landfills as well as the construction and/or relocation of materials
recovery and other facilities for use in connection with the Company's San
Francisco operations and to facilitate compliance with mandated recycling
requirements. The Company cannot predict the timing or outcome of these
discussions. Over the term of the Senior Notes, the Company may need to invest
substantial capital to acquire or construct waste processing facilities,
household hazardous waste facilities, maintenance and administrative complexes,
and equipment.* The Company intends to seek continued rate recovery for amounts
expended on any projects and may seek to finance such capital expenditures
through additional secured borrowings, including up to $30.0 million of
borrowing for certain "Designated Capital Expenditures" (as defined in the
Indenture).*
Environmental Regulations
The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.*
Various federal and state regulations require owners or operators of
solid waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to the leachate and groundwater management
and remediation. There are many 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.
-12-
<PAGE>
Inflation
Historically, the Company has experienced cost increases due to the
effects of inflation on its operating expenses, particularly the cost of
compensation and benefits, and the replacement of or additions to property and
equipment. Fuel costs which fluctuate with inflation and other market conditions
may also affect operating results. Most of the Company's operations are subject
to rate setting processes which allow for the recovery of certain costs
including labor and fuel. However, inflationary increases in operating costs may
cause the Company to incur lower operating margins, at least until such time as
new rates can be implemented. Rate adjustments, if approved, can take several
months.
Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* A
significant economic downturn in California could have an adverse impact on the
Company's results of operations.*
San Francisco Pension
On April 24, 1997, employees represented by the Sanitary Truck Drivers
and Helpers Union Local 350 International Brotherhood of Teamsters ("Local 350")
initiated a strike against certain San Francisco operations of the Company. The
strike was resolved on April 26, 1997 when Local 350 voted to accept a five-year
contract. A provision of the new contract related to an increase in pension
benefits. The Company believes that it was agreed that the increase to certain
pension benefits was to be prospective. Subsequently, Local 350 asserted that it
understood the increase to be retroactive. On February 10, 1998, the Company
filed a petition for order compelling arbitration in U.S. District Court for the
Northern District of California entitled Norcal Waste Systems, Inc., Golden Gate
Disposal and Recycling Inc. and Sunset Scavenger Company v. Sanitary Truck
Drivers and Helpers Union Local 350, IBT, to arbitrate this dispute under the
terms of the collective bargaining agreement between the parties. On April 23,
1998, the Company filed a motion for 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.
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 accruals for employee benefits
would be approximately $2.4 million for pension and medical costs. Such
incremental increase in expense would most likely be 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-
<PAGE>
San Bernardino Contract
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 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.
-14-
<PAGE>
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.
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 seven 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.
-15-
<PAGE>
Eureka Landfill and Transfer Station
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 consummation of the
agreement is subject to several closing conditions. Provided such conditions are
met or waived, the closing is expected to occur before April 18, 2000.*
Seasonality
The Company's revenues tend to be lower during winter due to decreased
volume at the Company's transfer stations, waste collection, and landfill
operations than during spring and summer (third and fourth fiscal quarters) when
higher volumes of certain types of waste, such as construction and demolition
debris are generated.* In addition, project management revenues tend to be lower
during winter as a result of unfavorable construction conditions. Unusual
changes in weather patterns can also affect the operating results on a quarter
to quarter basis.
Year 2000 Compliance
Many computer systems and software applications were expected to
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. Many parties anticipated
that these systems would be unable to determine whether the digits "00" referred
to the year 1900 or 2000 and that this could result in system failures or
miscalculations. It was also thought that this could potentially cause
disruptions to the Company's various activities and operations.
The Company has not experienced any disruptions to its operations from
the Year 2000 date change. The Company will continue to monitor its systems and
operations until it is reasonably assured that no significant business
interruptions will occur as a result of the Year 2000 date change. The Company
is not aware of any significant Year 2000 related disruptions impacting the
Company's customers, suppliers, contractors, financial institutions and other
third parties with whom the Company does business. To date, the Company charged
to expense as incurred approximately $0.5 million in effecting Year 2000
compliance and expects any remaining costs in effecting such compliance will not
be material.
Accounting and Other Matters
The Internal Revenue Service is auditing the Company's income tax
returns for the fiscal years ended September 30, 1995 through 1997. The
California Franchise Tax Board is auditing the Company's state income tax
returns for the fiscal years ended September 30, 1993 though 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
-16-
<PAGE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On January 21, 2000, the Administrative Committee of the Company's
Employee Stock Ownership Plan (the "ESOP"), acting on behalf of the ESOP as the
Company's sole shareholder, reelected H. Welton Flynn, Gale R. Kaufman, John B.
Molinari and Michael J. Sangiacomo, the current members of the Company's Board
of Directors, and elected Ronald L. Ludwig to the Company's Board of Directors
by written consent. As of January 21, 2000, there were 24,134,973 shares of
common stock outstanding, all of which were the subject of the written consent.
Item 5. Other Information
None
Item 6. Exhibits and Certain Reports
(a) Exhibits:
27.0 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
None
SIGNATURES
NORCAL WASTE SYSTEMS, INC.
(Company)
/s/ Mark R. Lomele
------------------
Mark R. Lomele
Senior Vice President and
Chief Financial Officer
Dated: February 10, 2000
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,453
<SECURITIES> 5,552
<RECEIVABLES> 47,708
<ALLOWANCES> 2,043
<INVENTORY> 2,396
<CURRENT-ASSETS> 95,941
<PP&E> 286,865
<DEPRECIATION> 120,930
<TOTAL-ASSETS> 389,428
<CURRENT-LIABILITIES> 60,064
<BONDS> 176,063
0
0
<COMMON> 241
<OTHER-SE> 70,429
<TOTAL-LIABILITY-AND-EQUITY> 389,428
<SALES> 0
<TOTAL-REVENUES> 84,178
<CGS> 0
<TOTAL-COSTS> 72,695
<OTHER-EXPENSES> (1,201)
<LOSS-PROVISION> 263
<INTEREST-EXPENSE> 6,655
<INCOME-PRETAX> 5,766
<INCOME-TAX> 130
<INCOME-CONTINUING> 5,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,636
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
