<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 March 31, 2000
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 May 15, 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 March 31, 2000
Index
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 31, 2000 and September 30, 1999
Consolidated Statements of Income - Three and Six months ended March 31, 2000
and 1999
Consolidated Statement of Stockholder's Equity - Six months ended March 31,
2000
Consolidated Statements of Cash Flows - Six months ended March 31, 2000 and
1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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 1.
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>
March 31, September 30,
2000 1999
-------------------- --------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 54,216 $ 42,166
Marketable securities 5,552 5,552
Accounts receivable, less allowance for doubtful accounts of
$2,016 at March 31, 2000 and $2,017 at September 30, 1999 44,737 46,369
Parts and supplies 2,334 2,102
Prepaid expenses 4,389 3,362
-------------------- --------------------
Total current assets 111,228 99,551
-------------------- --------------------
Property and equipment:
Land 46,735 46,392
Landfills 28,480 27,300
Buildings and improvements 52,735 51,904
Vehicles and equipment 160,056 150,908
Construction in progress 2,346 8,530
-------------------- --------------------
Total property and equipment 290,352 285,034
Less accumulated depreciation and amortization 124,913 120,024
-------------------- --------------------
Property and equipment, net 165,439 165,010
-------------------- --------------------
Franchises, permits and other intangibles, net 78,276 79,217
Trust accounts 38,196 36,744
Deferred financing costs, net 4,908 5,578
Other assets 5,056 7,709
-------------------- --------------------
Total other assets 126,436 129,248
-------------------- --------------------
Total assets $403,103 $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>
March 31, September 30,
2000 1999
-------------------- --------------------
<S> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Current portion:
Long-term debt $ 317 $ 383
Capital lease obligations 377 582
Accounts payable 5,322 6,064
Accrued expenses 53,986 53,534
Income taxes payable 782 1,311
Deferred revenues 3,696 3,592
Other accrued liabilities 4,015 4,164
-------------------- --------------------
Total current liabilities 68,495 69,630
-------------------- --------------------
Long-term debt 176,249 176,002
Obligations under capital leases 161 285
Deferred income taxes 6,776 6,850
Landfill closure liability 27,293 27,009
Postretirement medical benefits 34,464 34,177
Other liabilities 14,333 14,886
-------------------- --------------------
Total liabilities 327,771 328,839
-------------------- --------------------
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 (69,381) (79,372)
Accumulated other comprehensive income (423) (200)
-------------------- --------------------
97,356 87,588
Less net scheduled contribution to the ESOP (22,024) (22,618)
-------------------- --------------------
Total stockholder's equity 75,332 64,970
-------------------- --------------------
Total liabilities and stockholder's equity $403,103 $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 Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $85,546 $82,791 $169,723 $166,117
---------- --------- ---------- ----------
Cost of operations:
Operating expenses 60,432 59,256 117,666 118,265
Depreciation and amortization 5,691 5,225 11,500 10,307
ESOP compensation expense 968 615 2,083 2,449
General and administrative 9,382 9,727 18,181 18,502
---------- --------- ---------- ----------
Total cost of operations 76,473 74,823 149,430 149,523
---------- --------- ---------- ----------
Operating income 9,073 7,968 20,293 16,594
Interest expense (6,592) (6,487) (13,247) (13,001)
Interest income 1,237 760 2,147 1,650
Other income, net 746 675 1,036 723
---------- --------- ---------- ----------
Income before income taxes 4,464 2,916 10,229 5,966
Income tax expense 108 - 238 -
---------- --------- ---------- ----------
Net income $ 4,356 $ 2,916 $ 9,991 $ 5,966
========== ========= ========== ==========
</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 STATEMENT OF STOCKHOLDER'S EQUITY
For the six months ended March 31, 2000
(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 - - - 9,991 - - 9,991
Other comprehensive income,
net of tax - - - - (223) (223)
Contributions to reduce
ESOP debt - - - - - 594 594
-------- ------ ---------- ----------- ------------- ------------- ----------
Balances, March 31, 2000 24,135 $241 $166,919 $(69,381) $(423) $(22,024) $75,332
======== ====== ========== =========== ============= ============= ==========
</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>
Six Months Ended
March 31,
2000 1999
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,991 $ 5,966
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,500 10,307
ESOP compensation expense 1,677 2,096
Senior notes interest and amortized financing costs 911 881
Other 1,360 (756)
Changes in assets and liabilities, net of effects of acquisitions and dispositions (2,588) 2,486
---------- --------
Net cash provided by operating activities 22,851 20,980
---------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (9,879) (14,787)
Payments for businesses acquired (1,610) (9,863)
Proceeds from dispositions 868 752
Other 300 110
---------- --------
Net cash used in investing activities (10,321) (23,788)
---------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capitalized leases (480) (1,036)
Proceeds from other debt - 149
---------- --------
Net cash used in financing activities (480) (887)
---------- --------
Net increase (decrease) in cash and cash equivalents 12,050 (3,695)
Cash and cash equivalents, beginning balance 42,166 39,752
---------- --------
Cash and cash equivalents, ending balance $ 54,216 $ 36,057
========== ========
Supplemental cash flow information:
Interest $ 12,327 $ 12,338
========== ========
Income taxes $ 1,095 $ 29
========== ========
Schedule of noncash investing and financing activities:
Debt issued and liabilities assumed in acquisitions $ 108 $ 2,945
========== ========
</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 March 31, 2000 and September 30, 1999 is summarized as
follows:
(in thousands)
<TABLE>
<CAPTION>
March 31 September 30
-------- ------------
<S> <C> <C>
Senior Notes due November 15, 2005, interest at 13.5% $171,567 $171,374
Note payable for business acquired, due in monthly installments
through 2016, interest imputed at 8.75% 1,563 1,584
Convertible notes payable for business acquired, due in eight quarterly
installments beginning December 2001, interest imputed at 8.5% 1,859 1,838
Notes payable to former shareholders, due in monthly installments
through 2017, interest at 6% to 8.5% 648 676
Other notes 929 913
-------- --------
Total debt 176,566 176,385
Less current portion 317 383
-------- --------
Long-term debt $176,249 $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 Fleet
Boston Financial, as Agent. The Credit Agreement, as amended, provides for a
revolving credit facility in an amount currently of up to $85.0 million
(depending upon certain financial ratios), up to $25.0 million of which may be
used for letters of credit. At March 31, 2000, 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 $60.0 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:
Six Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(in thousands)
Net income $9,991 $5,966
Other comprehensive income:
Unrealized gains (losses) on
trust accounts, net of tax (223) (171)
------ ------
Total comprehensive income $9,768 $5,795
====== ======
(7) San Bernardino Contract
Included in the footnotes to the financial statements as contained in the
Company's Annual Report for the fiscal year ended September 30, 1999 was
discussion of matters relating to the status and other information concerning
the San Bernardino contract.
In late April and early May, 2000, the Board of Supervisors of San
Bernardino County (the "County") voted to authorize the filing of civil lawsuits
against at least 16 entities and individuals, including the Company, James J.
Hlawek, the immediate former Chief Administrative Officer of the County, Harry
M. Mays, a former consultant of the Company and Mr. Hlawek's predecessor as
Chief Administrative Officer of the County, and Kenneth James Walsh, a former
employee of the Company. Messrs. Hlawek, Mays and Walsh all have pleaded guilty
to federal charges of conspiring to pay and accept bribes to influence or reward
Mr. Hlawek in connection with his official duties. The County's lawsuit against
the Company is expected to be filed within 30 days of April 25, 2000. The
Company does not yet know what claims the County will bring, the facts the
County will allege in support of those claims, all the defendants that will be
named, or what remedy or recovery the complaint will seek against the Company
and other defendants. However, based on discussions with representatives of the
County and press accounts, the Company believes that the complaint is likely to
include allegations that Hlawek was at the center of a bribery scheme in
connection with contracts between the County and a number of companies and
individuals doing business with the County, including the 1995 contract with the
Company pursuant to which the Company operated (through its San Bernardino
subsidiary) all active landfills owned by the County and was primarily
responsible for implementing the County's strategic plan concerning the County's
long-term waste disposal needs (the "1995 Contract"); that Mays and Walsh
conspired to pay bribes to Hlawek to influence his official duties in connection
with the 1995 Contract; and that Hlawek also accepted bribes from a firm that
underwrote bonds issued by the County to help fund the 1995 Contract. The
Company also believes that the County will proceed against the Company under
Section 1090 of the California Government Code, which prohibits governmental
officials from being "financially interested in any contract made by them in
their official capacity, or by any body or board of which they are members," and
Section 1092 of the California Government Code, which provides that contracts
violating Section 1090 "may be avoided." The complaint may assert that these
statutes (the "Statutes") allow the County to recover all payments made to the
Company under the 1995 Contract, without regard to the value of services
performed.
Based on its own internal investigation, 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 believes
that the Statutes do not apply to the circumstances and that an action brought
pursuant to the Statutes would have no merit. However, at this stage, factual
investigation is continuing and no complaint has even been filed. Of course, the
ultimate outcome of legal proceedings cannot be determined with certainty and
should the County prevail against the Company under the Statutes, it could have
a material adverse effect on the Company's business, operating results and
financial condition. If the lawsuit is filed, the Company intends to vigorously
defend itself and is evaluating claims it may have against the County and
others.
Pursuant to the January, 2000 amendment to the 1995 Contract, the
Contract shall end no later than 90 days from the Company's receipt of written
notice of termination by the County after identification of the successful
proposer under the Request for Proposal process for a new contract, and in any
event no later than June 30, 2001. In light of the County Board of Supervisors'
authorization of litigation against the Company, there is some question whether
the Company will be permitted to bid on the new contract.
-8-
<PAGE>
Item 2. 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. These forward looking statements, which reflect
management's beliefs, objectives and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company's senior
management. 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. Readers are cautioned not to
place undue reliance on these forward looking statements, which speak only as of
the date of this quarterly report. 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 any obligation to publicly update or release any
revision to these forward looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
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 $85.0 million, of which up to $25.0 million may be used
for letters of credit. These transactions are collectively referred to as the
"Refinancing Transaction."
The following discussion pertains to the Company's operations for the
three and six months ended March 31, 2000 and 1999 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 469,000
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 Total Revenues
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 80.8% 77.9% 81.8% 78.0%
Third party landfill management services 11.7% 18.0% 11.1% 17.9%
Recycled commodities sales 7.5% 4.1% 7.1% 4.1%
----------- ----------- ----------- -----------
Total revenues 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Cost of operations:
Operating expenses 70.6% 71.6% 69.3% 71.2%
Depreciation and amortization 6.7% 6.3% 6.8% 6.2%
ESOP compensation expense 1.1% 0.7% 1.2% 1.5%
General and administrative 11.0% 11.8% 10.7% 11.1%
----------- ----------- ----------- -----------
Total cost of operations 89.4% 90.4% 88.0% 90.0%
----------- ----------- ----------- -----------
Operating income 10.6% 9.6% 12.0% 10.0%
Interest expense -7.7% -7.8% -7.8% -7.8%
Interest income 1.4% 0.9% 1.2% 1.0%
Other income, net 0.9% 0.8% 0.6% 0.4%
----------- ----------- ----------- -----------
Income before income taxes 5.2% 3.5% 6.0% 3.6%
Income tax expense 0.1% 0.0% 0.1% 0.0%
----------- ----------- ----------- -----------
Net income 5.1% 3.5% 5.9% 3.6%
=========== =========== =========== ===========
</TABLE>
-10-
<PAGE>
The following table sets forth the dollar and percentage changes for the three
month periods ended March 31, 2000 and March 31, 1999 and the dollar and
percentage changes for the six month periods ended March 31, 2000 and March 31,
1999:
NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
Summary Statements of Operations
<TABLE>
<CAPTION>
Comparison of Comparison of
Three Month Periods Six Month Periods
$ % $ %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Collection and disposal operations 4,579 7.1% 9,238 7.1%
Third party landfill management services -4,860 -32.6% -10,838 -36.5%
Recycled commodities sales 3,036 89.0% 5,207 76.9%
----------- ----------- ----------- -----------
Total revenues 2,755 3.3% 3,607 2.2%
----------- ----------- ----------- -----------
Cost of operations:
Operating expenses 1,176 2.0% -599 -0.5%
Depreciation and amortization 466 8.9% 1,193 11.6%
ESOP compensation expense 353 57.4% -366 -14.9%
General and administrative -345 -3.6% -321 -1.7%
----------- ----------- ----------- -----------
Total cost of operations 1,650 2.2% -93 -0.1%
----------- ----------- ----------- -----------
Operating income 1,105 13.9% 3,699 22.3%
Interest expense -105 1.6% -246 1.9%
Interest income 477 62.8% 497 30.1%
Other income, net 71 10.5% 313 43.3%
----------- ----------- ----------- -----------
Income before income taxes 1,548 53.1% 4,263 71.5%
Income tax expense 108 100.0% 238 100.0%
----------- ----------- ----------- -----------
Net income 1,440 49.4% 4,025 67.5%
=========== =========== =========== ===========
</TABLE>
Three months ended March 31, 2000 and 1999
Revenues. Revenues for the three months ended March 31, 2000 increased $2.8
million (3.3%) to $85.6 million from $82.8 million for the three months ended
March 31, 1999. Waste collection and disposal revenues increased $4.6 million,
approximately $3.1 million due to general volume increases, $1.0 million due to
rate increases in several service areas and the remainder due to operations
acquired in Los Angeles. Recycled commodities sales revenues increased $3.0
million due to higher commodity prices. Third party landfill management revenues
decreased $4.9 million due primarily to a $6.3 million decrease in project
related activity in San Bernardino County due to a decrease in both the timing
and scope of projects. The lower project revenues were partially offset by
revenues of $1.1 million from waste tire remediation projects.
Operating Expenses. Operating expenses for the three months ended March 31,
2000 increased $1.2 million (2.0%) to $60.4 million from $59.2 million for the
three months ended March 31, 1999. As a percentage of revenues, operating
expenses decreased to 70.6% for the three months ended March 31, 2000 from 71.6%
for the three months ended March 31, 1999. Payroll costs increased $2.5 million
due to scheduled union wage increases, recycling purchasing costs increased $1.5
million due to higher commodity prices, disposal costs increased $0.8 million
due primarily to increased volumes and fuel costs increased $0.5 million due to
higher prices. These increased costs were partially offset by lower project and
subcontractor related costs of $4.0 million, primarily as a result of decreased
activity in San Bernardino County, described above.
-11-
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased $0.5
million (8.9%) to $5.7 million for the three months ended March 31, 2000 from
$5.2 million for the three months ended March 31, 1999. As a percentage of
revenues, depreciation and amortization increased to 6.7% for the three months
ended March 31, 2000 from 6.3% for the three months ended March 31, 1999. The
primary cause of the increase in depreciation and amortization for the three
months ended March 31, 2000 was higher capital expenditures in the previous
year. As a consequence of increased capital expenditures, the Company
contemplates increased depreciation expense.*
ESOP Compensation Expense. ESOP compensation expense is primarily based on the
cost of shares allocated as determined by the Company's contribution to the
ESOP, along with contributions to fund distributions to retired, terminated and
withdrawing participants. ESOP compensation expense for the three months ended
March 31, 2000 increased $0.4 million (57.4%) to $1.0 million from $0.6 million
for the three months ended March 31, 1999. The increase in expense can be
attributed to the change in contributions expected to be made to the ESOP based
upon a revised payment schedule, as a result of the Company's S Corporation
election, which was adopted in the third quarter of the Company's 1999 fiscal
year.
Operating Income. Operating income increased $1.1 million (13.9%) to $9.1
million for the three months ended March 31, 2000 from $8.0 million for the
three months ended March 31, 1999. As a percentage of revenues, operating income
increased to 10.6% for the three months ended March 31, 2000 from 9.6% for the
three months ended March 31, 1999. The primary causes of the increase in
operating income for the three months ended March 31, 2000 were higher
collection and disposal volumes and recycling revenues, partially offset by
lower earnings from third party landfill management services described above.
Interest Income. Interest income for the three months ended March 31, 2000
increased $0.5 million (62.8%) to $1.2 million from $0.7 million for the three
months ended March 31, 1999. The increase is due to additional interest earned
on higher cash balances in the current period.
Income Tax Expense. The Company experienced an effective rate of 2.0% for the
three months ended March 31, 2000 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 March 31, 1999 as a result of the Company's S Corporation
election, effective October 1, 1998 and anticipated results of operations from
the Company's four subsidiaries which did not elect to become divisions of the S
Corporation.
Net Income. Net income increased $1.4 million to $4.4 million for the three
months ended March 31, 2000 from $2.9 million for the three months ended March
31, 1999. The increase in net income for the three months ended March 31, 2000
was due to higher operating income and interest income described above.
Six months ended March 31, 2000 and 1999
Revenues. Revenues for the six months ended March 31, 2000 increased $3.6
million (2.2%) to $169.7 million from $166.1 million for the six months ended
March 31, 1999. Waste collection and disposal revenues increased $9.2 million,
approximately $6.1 million due to general volume increases, $1.9 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 $5.2 million due to higher commodity prices. Third party
landfill management revenues decreased $10.8 million due to a $12.7 million
decrease in project related activity in San Bernardino County due to a decrease
in both the timing and scope of projects. These lower project revenues were
partially offset by revenues of $2.3 million from waste tire remediation
projects.
Operating Expenses. Operating expenses for the six months ended March 31, 2000
decreased $0.6 million (0.5%) to $117.7 million from $118.3 million for the six
months ended March 31, 1999. As a percentage of revenues, operating expenses
decreased to 69.3% for the six months ended March 31, 2000 from 71.2% for the
six months ended March 31, 1999. Project and subcontractor related costs
decreased $10.3 million as a result of decreased activity in San Bernardino
County, described above. These decreased costs which were partially offset by
higher payroll costs of $4.4 million due to scheduled union wage increases,
increased recycling purchasing costs of $2.4 million due to higher commodity
prices, higher disposal costs of $2.0 million due primarily to increased volumes
and increased fuel costs of $0.9 million due to higher prices.
-12-
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased $1.2
million (11.6%) to $11.5 million for the six months ended March 31, 2000 from
$10.3 million for the six months ended March 31, 1999. As a percentage of
revenues, depreciation and amortization increased to 6.8% for the six months
ended March 31, 2000 from 6.2% for the six months ended March 31, 1999. The
primary causes of the increase in depreciation and amortization for the three
months ended March 31, 2000 was higher capital expenditures in the previous year
and the acceleration of amortization for certain intangible assets in the
current period. As a consequence of increased capital expenditures, the Company
contemplates increased depreciation expense.*
Operating Income. Operating income increased $3.7 million (22.3%) to $20.3
million for the six months ended March 31, 2000 from $16.6 million for the six
months ended March 31, 1999. As a percentage of revenues, operating income
increased to 12.0% for the six months ended March 31, 2000 from 10.0% for the
six months ended March 31, 1999. The primary causes of the increase in operating
income for the six months ended March 31, 2000 were higher collection and
disposal volumes and recycling revenues, partially offset by lower earnings from
third party landfill management services described above.
Interest Income. Interest income for the six months ended March 31, 2000
increased $0.5 million (30.1%) to $2.1 million from $1.6 million for the six
months ended March 31, 1999. The increase is due to additional interest earned
on higher cash balances in the current period.
Income Tax Expense. The Company experienced an effective rate of 2.0% for the
six months ended March 31, 2000 based primarily on the state tax rate of 1.5%
for S Corporations. The Company experienced an effective rate of zero for the
six months ended March 31, 1999 as a result of the Company's S Corporation
election, effective October 1, 1998 and anticipated results of operations from
the Company's four subsidiaries which did not elect to become divisions of the S
Corporation.
Net Income. Net income increased $4.0 million to $10.0 million for the six
months ended March 31, 2000 from $6.0 million for the six months ended March 31,
1999. The increase in net income for the six months ended March 31, 2000 was due
to higher operating income and interest 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 $42.7 million at March 31, 2000
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 $85.0 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 March 31, 2000,
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 $60.0 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.
-13-
<PAGE>
The Senior Notes mature in November 2005. As of March 31, 2000, 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 $22.9 million for the six months ended March 31, 2000 compared to $21.0
million for the same period last year.
Cash Flow from Investing Activities. Cash used in investing activities was
$10.3 million for the six months ended March 31, 2000 compared to cash used of
$23.8 million for the same period last year. During the current period, the
Company used $9.9 million on capital expenditures, primarily vehicles,
containers and other equipment compared to $14.8 million for similar equipment
in the same period last year. In October and November 1998, the Company also
used $9.9 million to purchase the stock of one solid waste collection company
and substantially all of the assets of two other solid waste collection
companies in Southern California.
Cash Flow from Financing Activities. Cash used in financing activities was
$0.5 million for the six months ended March 31, 2000 compared to $0.9 million
for the six months ended March 31, 1999. 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.
-14-
<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.*
-15-
<PAGE>
San Bernardino Contract
In late April and early May, 2000, the Board of Supervisors of San Bernardino
County (the "County") voted to authorize the filing of civil lawsuits against at
least 16 entities and individuals, including the Company, James J. Hlawek, the
immediate former Chief Administrative Officer of the County, Harry M. Mays, a
former consultant of the Company and Mr. Hlawek's predecessor as Chief
Administrative Officer of the County, and Kenneth James Walsh, a former employee
of the Company. Messrs. Hlawek, Mays and Walsh all have pleaded guilty to
federal charges of conspiring to pay and accept bribes to influence or reward
Mr. Hlawek in connection with his official duties. The County's lawsuit against
the Company is expected to be filed within 30 days of April 25, 2000. The
Company does not yet know what claims the County will bring, the facts the
County will allege in support of those claims, all the defendants that will be
named, or what remedy or recovery the complaint will seek against the Company
and other defendants. However, based on discussions with representatives of the
County and press accounts, the Company believes that the complaint is likely to
include allegations that Hlawek was at the center of a bribery scheme in
connection with contracts between the County and a number of companies and
individuals doing business with the County, including the 1995 contract with the
Company pursuant to which the Company operated (through its San Bernardino
subsidiary) all active landfills owned by the County and was primarily
responsible for implementing the County's strategic plan concerning the County's
long-term waste disposal needs (the "1995 Contract"); that Mays and Walsh
conspired to pay bribes to Hlawek to influence his official duties in connection
with the 1995 Contract; and that Hlawek also accepted bribes from a firm that
underwrote bonds issued by the County to help fund the 1995 Contract. The
Company also believes that the County will proceed against the Company under
Section 1090 of the California Government Code, which prohibits governmental
officials from being "financially interested in any contract made by them in
their official capacity, or by any body or board of which they are members," and
Section 1092 of the California Government Code, which provides that contracts
violating Section 1090 "may be avoided." The complaint may assert that these
statutes (the "Statutes") allow the County to recover all payments made to the
Company under the 1995 Contract, without regard to the value of services
performed.
Based on its own internal investigation, 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 believes that the
Statutes do not apply to the circumstances and that an action brought pursuant
to the Statutes would have no merit. However, at this stage, factual
investigation is continuing and no complaint has even been filed. Of course,
the ultimate outcome of legal proceedings cannot be determined with certainty
and should the County prevail against the Company under the Statutes, it could
have a material adverse effect on the Company's business, operating results and
financial condition. If the lawsuit is filed, the Company intends to vigorously
defend itself and is evaluating claims it may have against the County and
others.
Pursuant to the January, 2000 amendment to the 1995 Contract, the Contract
shall end no later than 90 days from the Company's receipt of written notice of
termination by the County after identification of the successful proposer under
the Request for Proposal process for a new contract, and in any event no later
than June 30, 2001. In light of the County Board of Supervisors' authorization
of litigation against the Company, there is some question whether the Company
will be permitted to bid on the new contract.
-16-
<PAGE>
Eureka Landfill and Transfer Station
In November 1999, the Company entered into an agreement with Humboldt Waste
Management Authority ("HWMA") pursuant to which the Company would transfer to
HWMA ownership of the Cummings Road Landfill and the Company's Eureka Transfer
Station. As part of the agreement, the Company would receive certain cash
payments totaling approximately $3.6 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.
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.
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
None
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Litigation Regarding the Former ESOP Notes.
Appellate proceedings are ongoing in (1) the action initiated by certain
holders of prior notes issued by the ESOP ("Noteholders") in which the claims
against the Company and the ESOP were settled in 1995 (the "Settlement") and in
which the remaining defendant, a financial institution, later asserted
unsuccessful indemnity claims against Norcal and the ESOP, and (2) the separate
action brought by that financial institution against the ESOP alone,
unsuccessfully raising the same indemnity issues. The financial institution has
now dismissed its appeal as to Norcal and is appealing only the indemnity
rulings in favor of the ESOP and certain rulings in favor of the Noteholders.
The Noteholders' appeal of the judgment against them alleges, among other
things, that the court lacks subject matter jurisdiction over the action. In the
event that for any reason the judgments or any of the rulings in favor of Norcal
and the ESOP are reversed, vacated or otherwise invalidated on appeal, it
remains unlikely, given the terms of the Settlement, including the indemnity
provided Norcal and the ESOP by the Noteholders, that Norcal's or the ESOP's
financial exposure to the financial institution would materially exceed the
amount of the financial institution's legal fees and expenses.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Certain Reports
(a) Exhibits:
27.0 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
On February 17, 2000, the Company filed a current report relating to the
amendment of the Company's contract with San Bernardino County to expire no
later than June 30, 2001.
SIGNATURES
NORCAL WASTE SYSTEMS, INC.
(Company)
/s/ Mark R. Lomele
------------------
Mark R. Lomele
Senior Vice President and
Chief Financial Officer
Dated: May 18, 2000
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. (IN THOUSANDS EXCEPT PER SHARE DATA.)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 54,216
<SECURITIES> 5,552
<RECEIVABLES> 46,753
<ALLOWANCES> 2,016
<INVENTORY> 2,334
<CURRENT-ASSETS> 111,228
<PP&E> 290,352
<DEPRECIATION> 124,913
<TOTAL-ASSETS> 403,103
<CURRENT-LIABILITIES> 68,495
<BONDS> 176,249
0
0
<COMMON> 241
<OTHER-SE> 75,091
<TOTAL-LIABILITY-AND-EQUITY> 403,103
<SALES> 0
<TOTAL-REVENUES> 169,723
<CGS> 0
<TOTAL-COSTS> 148,953
<OTHER-EXPENSES> (3,183)
<LOSS-PROVISION> 477
<INTEREST-EXPENSE> 13,247
<INCOME-PRETAX> 10,229
<INCOME-TAX> 238
<INCOME-CONTINUING> 9,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,991
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
