<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
 
                            WASHINGTON, D. C. 20549
 
                                   FORM 10-K
(MARK ONE)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
     THE SECURITIES EXCHANGE ACT OF 1934
 
     FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.
                                       OR
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
     THE SECURITIES EXCHANGE ACT OF 1934.
 
     FOR THE TRANSITION PERIOD  _________ TO  _________ .
     COMMISSION FILE NUMBER 33-80777
 
                           NORCAL WASTE SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                  CALIFORNIA                                    94-2922974
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
</TABLE>
 
               FIVE THOMAS MELLON CIRCLE, SAN FRANCISCO, CA 94134
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 330-1000
 
          SECURITIES REGISTERED PURSUANT TO SECTION 15(D) OF THE ACT:
                     12 1/2% SERIES B SENIOR NOTES DUE 2005
                                (TITLE OF CLASS)
 
     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  X   NO  __
 
     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.  [X]
 
     NORCAL WASTE SYSTEMS, INC., IS CURRENTLY 100% OWNED BY AN EMPLOYEE STOCK
OWNERSHIP PLAN.
 
     INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK, AS
OF THE LATEST PRACTICABLE DATE: ON DECEMBER 15, 1996, THERE WERE 24,134,973
SHARES OF COMMON STOCK OUTSTANDING.
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
Forward Looking Information
 
     Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described below in "Risk Factors" and elsewhere in this Form 10-K
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, fluctuations in commodities prices, changes in
environmental regulations or related laws and competition. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on its behalf.
 
History and Certain Recent Developments
 
     Norcal Waste Systems, Inc. ("Norcal" or the "Company"), a California
corporation, is a vertically integrated waste management company. Norcal
provides services to approximately 377,000 residential and 44,000 commercial and
industrial customers (as of September 30, 1996) throughout the State of
California through 24 operating subsidiaries. The Company's principal activities
include refuse collection, recycling and other waste diversion, transfer station
and hauling operations, and management of both Company-owned and third
party-owned landfills.
 
     The Company traces its roots to the 1920s and, pursuant to a City of San
Francisco Ordinance enacted in 1932 (the "Ordinance"), has provided
substantially all of the residential and commercial refuse collection in San
Francisco since that time. The Company currently provides waste management
services to 38 cities and counties throughout California. The Company operates
28 landfills in California, five of which it owns, and owns and operates six
transfer stations and three materials recovery facilities ("MRFs"). Norcal is
currently 100% owned by an employee stock ownership plan (the "ESOP").
 
     In 1987, the Company's two predecessors merged to form the Company.
Beginning in late 1990, the Company experienced severe constraints on its
liquidity, due in large part to a severe recession in California, regulatory
changes that required pre-funding for landfill closure and post-closure
obligations, significant indebtedness outstanding after the merger, and
additional indebtedness incurred to finance certain acquisitions and to fund
capital expenditures, including those in connection with mandated increased
recycling. In early 1991, the Company was unable to pay required amounts on
certain of its outstanding indebtedness and did not make contributions to the
ESOP to enable the ESOP to service its indebtedness. As a result, the Company
and the ESOP defaulted on substantially all of their outstanding debt.
 
     In December 1994, Norcal effected a settlement with the holders of certain
subordinated notes (the "Old Subordinated Notes") issued by one of the Company's
predecessors in 1987 to former shareholders. Pursuant to the settlement, Norcal
paid approximately $5.5 million in cash to settle certain claims, and issued
$51.0 million aggregate principal amount of new subordinated notes (the "Class A
and B Notes") in exchange for all of the Old Subordinated Notes which, together
with accrued interest, aggregated $59.5 million. Norcal subsequently redeemed
the Class A and B Notes for approximately $39.3 million with a portion of the
proceeds from the Refinancing (as defined herein). In August 1995, Norcal and
the ESOP reached a settlement with certain holders of other subordinated notes
(the "ESOP Notes") issued by the ESOP in 1986 to former shareholders of the
Company's other predecessor. As of November 21, 1995, the outstanding aggregate
balance of the ESOP Notes was $53.5 million, including accrued but unpaid
interest. Norcal utilized approximately $37.8 million of proceeds from the
Refinancing to effect the settlement and provide for the retirement of the ESOP
Notes.
 
     On November 21, 1995, Norcal issued 12 1/2% Series A Senior Notes ("Series
A Senior Notes") in an aggregate principal amount of $175.0 million, for which
it received proceeds, after original issue discount, of approximately $170.2
million (the "Offering"). The Company used the proceeds from the Offering (less
 
                                        1
<PAGE>   3
 
certain associated expenses), together with certain cash balances, to retire
approximately $199.1 million of its then outstanding indebtedness and certain of
the ESOP's indebtedness to third parties.
 
     Concurrent with the Offering, the Company entered into a new bank credit
agreement providing for a revolving credit facility with maximum availability of
$100.0 million, of which up to $25.0 million may be utilized for letters of
credit (such credit agreement, as amended, is hereafter referred to as the
"Credit Agreement"). As of September 30, 1996, the Company had utilized $9.4
million for letters of credit and had availability under the Credit Agreement of
approximately $25.0 million, with an additional $15.6 million available for
letters of credit and additional amounts potentially available to fund
acquisitions based on certain pro-forma ratios. The financing provided by the
Offering and the Credit Agreement together with the transactions effected
through the application of the initial proceeds thereof, are collectively
referred to herein as the "Refinancing." The Credit Agreement was recently
amended primarily to provide additional flexibility under the financial
covenants contained therein and increase the Company's ability to incur certain
types of additional debt (including indebtedness incurred in connection with
acquisitions).
 
     In September 1996, the Company exchanged all of the outstanding Series A
Senior Notes for an identical principal amount of 12 1/2% Series B Senior Notes
(the "Senior Notes") registered under the Securities Act of 1933.
 
     On November 1, 1995, the Company commenced operation of nine additional
active landfills in San Bernardino County, bringing the total number of
landfills operated by the Company in San Bernardino County to 17. Furthermore,
as of the same date, the Company assumed primary responsibility for designing
and implementing a strategic plan to identify and address the County's long-term
waste disposal needs, and assumed specific responsibilities including closure
and monitoring of non-active landfills and identification, permitting and
construction of new landfills and landfill expansions.
 
     The Company employs approximately 1,300 employees under union contracts. Of
this total, approximately 59% are covered under contracts that have expired or
will expire by December 31, 1996. The Company is currently in the process of
negotiation with representatives of the various unions.
 
     The Company reached agreement in October 1996 with Humboldt County on the
funding of certain landfill liabilities related to the Cummings Road Landfill
upon the expiration of the current waste disposal agreement in September 1998.
The County has agreed, among other things, to provide funding for any
outstanding liability funding requirements with respect to closure/post-closure
and/or corrective action activities at the landfill.
 
     The Company completed the acquisition of the assets of a company in Butte
County for approximately $4.5 million in November 1996. This was the Company's
first acquisition since the completion of the Refinancing.
 
     In September 1996, the Company applied for an increase to its collection
and disposal rates in the City of San Francisco. The application requested an
increase of 14.9%, to be effective March 1, 1997, to fund several new recycling
programs requested by the City, along with increases to recover current and
projected increases in operating costs. In accordance with the rate procedures
dictated by the Ordinance, the Director of Public Works (the "Director") held
hearings and filed two recommended rate orders (the "Recommended Rate Orders")
in mid-December 1996. The Recommended Rate Orders provide for a 9.5% increase,
which was lower than requested, primarily due to the disallowance of ESOP
expense which historically was allowed in the rates. The Company objects to the
positions taken by the Director and intends to vigorously pursue its rights
under the Ordinance, including filing an appeal with the Refuse Collection and
Disposal Rate Board (the "Rate Board"), which has the authority to make the
final rate determination. See "Risk Factors -- Changes in Legislation and
Political Uncertainty -- Problems in Rate-Setting Process" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
                                        2
<PAGE>   4
 
Collection Operations
 
     The Company provides refuse collection services to residential, commercial
and industrial customers in California. Residential customers accounted for
approximately 43% of the Company's refuse collection revenues in fiscal year
1996, and commercial and industrial customers accounted for the remaining 57%.
 
     Services to residential customers are typically provided pursuant to
municipal contracts or franchises that obligate the Company to collect from all
residences in a specified area. At inception, these contracts typically extend
for 5 to 20 years. As of September 30, 1996, the Company had 37 franchise
agreements with municipalities and served many additional customers through
operating contracts.
 
     Commercial services are typically provided under contracts ranging from 1
to 3 years while contracts for the larger "roll-off" container services may
provide for either temporary or longer-term services. Fees are negotiated with
each customer and are determined by such factors as frequency of collection,
type and size of equipment furnished, and the type and volume or weight of the
waste collected.
 
     San Francisco Operations.  Since 1932, the Company has provided solid waste
collection and recycling in San Francisco pursuant to the Ordinance, which
provides that, with limited exceptions, only a collector that has been granted a
permit for a specified route may collect or transport solid waste on that route.
The Company's principal operating subsidiaries have held the only permits for
substantially all the routes subject to the Ordinance since 1932, which routes
serve virtually all of San Francisco. San Francisco operations represent the
single largest portion of the Company's business, accounting for approximately
170,000 of its customers and approximately 40% of its total revenues for fiscal
year 1996. The Ordinance permits refuse with "commercial value" (as defined in
the Ordinance and interpreted by the courts) to be collected without a permit.
In addition, debris boxes at construction sites do not require a permit under
the Ordinance. The Company competes for the placement of boxes at construction
sites and the collection of refuse with commercial value.
 
     The Company's San Francisco permits continue until terminated under the
provisions of the Ordinance. Termination, or the award of permits to a
competitor, could occur if, among other things, the Company were to provide
inadequate service. None of the Company's permits has been terminated since
their initial grant in 1932. A vote to repeal or amend the Ordinance could also
adversely affect the status of the Company's permits. The Company defeated two
initiatives placed on the San Francisco ballot in 1993 and 1994 that, if
enacted, would have repealed or amended the Ordinance and opened residential and
commercial refuse collection to competition. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Ballot Initiatives Affecting
Ordinance."
 
     If a similar initiative passes in the future, the Company believes that
although a portion of the Company's operations may be immediately affected,
California statutory law would not allow the Company to be completely displaced
by another exclusive waste collection provider for five years unless a buy-out
arrangement were reached between the Company and San Francisco on mutually
satisfactory terms or the permits were terminated pursuant to the existing
provisions of the Ordinance. Furthermore, the Company believes it would be
difficult to create an alternative to its transfer station anywhere in or around
San Francisco because of community resistance, permitting requirements and the
requirements of the California Environmental Quality Act.* See "Risk
Factors -- Changes in Legislation and Political Uncertainty -- Potential Flow
Control Legislation."
 
     The Company currently deposits solid waste collected in San Francisco at an
independently owned landfill at favorable rates. These rates are set by an
agreement between San Francisco, the Company and the third party-owner of the
landfill, and are subject to annual increases for inflation and regulatory
costs. This agreement is one of several agreements to which the Company is a
party (the "Waste Disposal Agreements") relating to certain operations in San
Francisco that clarify the relationships among the City and County of San
Francisco, the Company and the third-party owner of the landfill at which all
non-hazardous solid waste collected in San Francisco is deposited. The Waste
Disposal Agreements continue until the earlier of the year 2053 or the deposit
of 15 million tons of waste in the landfill. Although estimates are uncertain,
the Company believes, based on historical disposal volumes, the Waste Disposal
Agreements will remain in force until at least 2012.*
 
                                        3
<PAGE>   5
 
     Franchise and Other Agreements.  Outside of San Francisco, the Company
provides most collection services pursuant to franchise and other agreements
with local governmental entities that obligate the Company to collect from all
residences and, often, commercial establishments within a specified area. Such
agreements typically grant near-exclusivity, although some expressly allow
limited activities by others, such as residential self-hauling and recycling by
charitable or non-profit organizations. Certain agreements allow competition for
specified categories of commercial waste such as construction debris. A local
governmental entity may enter into multiple franchise or other agreements with
different collection companies, each covering a distinct territory within its
jurisdiction. The Company has multiple agreements with certain governmental
entities, in some cases representing the entity's entire jurisdiction and in
other cases representing only part of that entity's jurisdiction.
 
     At inception, the Company's franchise and other agreements relating to its
collection operations typically have terms of between five and 20 years.
Although the Company's franchise and other agreements generally provide for
termination under specified circumstances, such as failure to provide adequate
and continuous service, failure to comply with applicable laws, or insolvency or
bankruptcy, the Company has never had an agreement terminated for such cause.
For fiscal year 1996, 74% of the Company's collection revenues, excluding San
Francisco operations, were generated under franchise and other agreements with
remaining terms of five years or more. In the past ten years, the Company has
been successful in renewing or extending substantially all of its franchise and
other agreements. In light of increasing competitive pressure in the waste
industry, and the risks of competitive bidding, there can be no assurance that
the Company will be able to renew existing franchise and other agreements, or
that such franchise and other agreements will yield levels of profit consistent
with past levels.* See "Risk Factors."
 
     Changes in state or local laws could also terminate the exclusivity of
these agreements or otherwise subject the Company to greater competition in its
collection activities. Under California law, counties may be required to conduct
competitive bidding upon the expiration of collection franchise agreements,
although under certain conditions counties may extend existing franchise
agreements for one additional term (not to exceed 25 years) without such
bidding. The majority of the Company's franchise agreements are with
municipalities other than counties and are unaffected by this law. However, any
laws enacted in the future requiring competitive bidding could have a material
adverse effect on the Company's financial condition or results of operations.*
In addition, a California Court of Appeal ruled in 1994 that state facilities
such as state universities and other schools, correctional facilities, office
buildings, and parks are free to conduct competitive bidding despite exclusive
franchises granted under local ordinances. See "Risk Factors -- Changes in
Legislation and Political Uncertainty -- Potential Competitive Bidding."
 
     Rates.  Refuse collection customers pay a single rate that is designed to
cover not only collection services, but all the services the Company performs as
to the materials it collects, including transfer, landfill disposal and
recycling. In most jurisdictions, rate boards, city councils or other local
governmental agencies are authorized to set the rates the Company may charge at
a level that allows the Company to recover projected specified costs and realize
a profit margin. Such specified costs generally include all direct operating
costs, such as direct collection costs (such as personnel and equipment); any
applicable recycling costs; operating costs or tipping fees for transfer
stations, landfills and other facilities; interest charged on leases;
depreciation; trust fund obligations associated with closure and maintenance of
landfills; and other costs. In San Francisco the Ordinance prescribes an
involved ratesetting procedure under which a rate board determines rates for
residential customers on a similar basis.
 
     The Company generally applies for rate increases every one to three years
in each of its franchise areas to reflect changes in its costs of providing
services. Although rate increases have generally been satisfactory, at times the
Company has not succeeded in fully coordinating the timing and amount of rate
increases with increases in its expenses or capital expenditures, including ESOP
and other corporate-related costs, or has not succeeded in obtaining rate
increases to cover capital expenditures or increased costs, resulting in reduced
margins. Some of the Company's franchise agreements provide for inflation-based
adjustments to a negotiated rate. The negotiated rates may be adjusted for
specific regulatory and certain other cost increases. In September 1996 the
Company applied for an increase to its collection and disposal rates in the City
of San Francisco. The application requested an increase of 14.9%, to be
effective March 1, 1997, to fund several new
 
                                        4
<PAGE>   6
 
recycling programs requested by the City, along with increases to recover
current and projected increases in operating costs. In accordance with the rate
procedures dictated by the Ordinance, the Director held hearings and filed the
Recommended Rate Orders in mid-December 1996. The Recommended Rate Orders
provide for a 9.5% increase, which was lower than requested, primarily due to
the disallowance of ESOP expense which historically was allowed in the rates.
The Company objects to the positions taken by the Director and intends to
vigorously pursue its rights under the Ordinance, including filing an appeal
with the Rate Board, which has the authority to make the final rate
determination. See "Risk Factors -- Changes in Legislation and Political
Uncertainty -- Problems in Rate-Setting Process" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
 
     Outside of San Francisco, commercial and industrial fees are generally
regulated by local governments and vary from customer to customer depending on
such factors as frequency of collection, volume or weight of waste, type of
equipment furnished by the Company, and distance from the customer site to the
Company's disposal facility. Although rates for commercial and industrial
customers in San Francisco are subject to negotiation and are not directly
regulated, historically the Company's practice has been to raise these rates
consistent with percentage increases in residential rates.
 
     Recycling and Waste Diversion.  The Company provides a variety of recycling
services, including material recovery services and other waste diversion
services (collectively, "recycling services"), under arrangements with various
local governments and directly with commercial customers. At times a substantial
portion of the Company's recycling revenues have been derived from the sale of
various grades of recycled paper and paper products. Prices of recyclable
commodities are volatile and cause fluctuations in the Company's recycling
revenues. In addition, the costs associated with mandated recycling efforts and
the resulting increase in supply of, and reduction in sales prices for,
recyclable materials place pressure on the Company's operating margins in its
recycling operations. See "Risk Factors -- Fluctuations in Prices for Recyclable
Commodities."
 
     The Company owns and operates six transfer stations. Transfer station
ownership allows the Company to exercise greater control over the waste stream
from its collection operations and promotes greater efficiency in its recycling
and waste transportation activities. As of September 30, 1996, over 80% of the
waste delivered to these facilities came from the Company's collection
operations. The City and County of San Francisco requires that all refuse
collected in San Francisco by refuse collectors be deposited at a transfer
station owned by the Company.
 
Landfills
 
     The Company operates 28 landfills in California, five of which it owns and
23 of which are owned by local governmental entities. Each of these landfills
generally accepts only non-hazardous waste, with the exception of certain wastes
that may be hazardous due to asbestos content.
 
     Owners or operators of landfills face substantial liabilities, including
environmental impairment liabilities, closure and post-closure maintenance
obligations and corrective action obligations. With respect to all but one of
the third party landfills currently managed by the Company, the Company is a
contractor and is not the operator under the applicable permits. In those
circumstances, the Company is not responsible for closure and post-closure
maintenance obligation payments. In addition, in San Bernardino County, the
County has agreed to indemnify the Company for certain other liabilities.
 
                                        5
<PAGE>   7
 
     Owned Landfills.  The following table sets forth certain information about
the five landfills owned by the Company:
 
<TABLE>
<CAPTION>
                                                                        YEAR        APPROXIMATE
                                                                      LANDFILL       PERMITTED
                                                                       BEGAN         LANDFILL
                  LANDFILL                       LOCATION            OPERATIONS     ACREAGE(A)
    ------------------------------------  -----------------------    ----------     -----------
    <S>                                   <C>                        <C>            <C>
    B & J...............................  Vacaville, CA                 1964            260
    Cummings Road(b)....................  Eureka, CA                    1969             30
    Ostrom Road(c)......................  Yuba County, CA               1995            220
    Pacheco Pass(d).....................  Santa Clara County, CA        1963             60
    Yuba-Sutter(e)......................  Marysville, CA                1967            100
</TABLE>
 
---------------
(a) Includes all permitted landfill acres. Total landfill area is approximately
    2,500 acres, including contiguous acres. Not all contiguous acres are
    permittable.
 
(b) The Company has entered into an agreement that may result in the closure of
    this landfill and the diversion of waste currently deposited there to an
    alternative site.
 
(c) The permit for this landfill was obtained in December 1993. The Company
    commenced construction and preparation of this site in the third calendar
    quarter of 1994. Site utilization began in the second calendar quarter of
    1995.
 
(d) Permitted acreage includes approximately 35 acres that can only be used for
    the disposal of concrete, asphalt and similar inert demolition waste due to
    the existence of geologic conditions unsatisfactory for landfill siting.
 
(e) This landfill substantially reached its capacity in November 1996. The waste
    stream associated with this landfill is being transferred to the Ostrom Road
    Landfill located 14 miles away.
 
     Based on its estimates, the Company believes it owns landfills with
sufficient capacity to service each of the markets currently served for a
minimum of six years.* Although certain of the Company-owned landfills have
limited remaining capacity, the Company believes it will be able either to
redirect waste being deposited at these landfills under existing contracts to
Company owned landfills with substantial remaining capacity or extend the life
of the landfill by permitting additional acreage or redesigning the site.*
During fiscal year 1996, the Company's B & J and Ostrom Road landfills obtained
Class II permits, which allow these landfills to accept non-hazardous waste that
is capable of degrading water quality if not properly handled, in addition to
municipal solid waste. The Company's estimates of remaining landfill capacity
are updated annually and are based, among other things, on the terms of existing
permits, remaining permitted capacity and anticipated incoming waste volumes
taking into account projected community growth rates.
 
     Of the waste deposited at Company-owned landfills for fiscal year 1996
approximately 88% was received from the Company's collection, waste diversion
and transfer station operations and 12% was received from independent third
party collectors, hauling companies and self-haulers.
 
     Operated Landfills.  The Company currently manages 23 third party-owned
landfills, 22 under contracts with the permitted operators and one under lease
from the landfill owner. These landfills have approximately 2,150 permitted
acres. Landfill operating agreements with third party owners generally provide
for payment to the Company of a fee based on tonnage received. In 1989, the
Company commenced operation of four landfills in San Bernardino County, and in
1991 commenced operation of an additional four landfills. In 1995, the Company
entered into a contract with San Bernardino County, pursuant to which the
Company on November 1, 1995, commenced operation with respect to all active
landfills in San Bernardino County (bringing the total number of landfills
operated by the Company in San Bernardino County to 17), and, the Company
assumed primary responsibility for designing and implementing a strategic plan
to identify and address San Bernardino County's long-term waste disposal needs.
The Company also assumed specific landfill management responsibilities including
closure and monitoring of non-active landfills and identification, permitting
and construction of landfill expansions.
 
                                        6
<PAGE>   8
 
     Approximately 14% of the Company's revenues for fiscal year 1996 were
derived from services performed for San Bernardino County. The Company's
revenues from San Bernardino County are derived from two categories of services.
The core service is the performance of ongoing landfill operations activities.
Over the term of the contract the amount of revenues from this core service will
vary primarily as a result of changes in volume of waste deposited at landfills
and changes in the Company's per ton compensation rate. The other component of
revenues represents activities associated with the planning and implementation
of the strategic plan to regionalize landfill operations in San Bernardino
County. This includes planning, engineering and construction management for
landfill expansions, transfer station construction and landfill closures. It is
anticipated that the majority of these activities will be completed over the
next 7 years, during which time San Bernardino County plans to spend over $200
million. 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 agreement. In addition, this business involves substantial
subcontractor, consulting and other related expenses paid to third parties. The
Company's agreement with San Bernardino County terminates on June 30, 2001. The
Company, at its option, may extend the agreement for up to an additional thirty
years, so long as the projected waste stream 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, beginning July 1, 1999, San Bernardino County may
terminate the contract so long as it municipalizes such operations or uses a
competitive procedure to select a contractor, and either party may terminate the
contract for failure to reach an agreement regarding the redetermination of the
Company's per ton compensation rate (which rate must be redetermined every three
or four years, at the option of San Bernardino County).
 
     On March 1, 1995, the Company commenced daily management activities of five
landfills covering approximately 700 permitted acres in San Diego County
pursuant to a contract that expires in 2000. The Company's other landfill
operation covering approximately 300 permitted acres is in Placer County,
California and expires in 2001.
 
     Landfill Development.  The Company regularly reviews the status of its
owned landfills for opportunities to expand the operating capacity of such
landfills. During fiscal year 1996 the Company obtained permits to expand the B
& J landfill from 141 to 256 permitted acres. Because the process of developing
new landfills or expanding existing landfills is lengthy, complex and expensive
there can be no assurance that the Company will be successful in its future
attempts to expand its landfills or develop new ones. See "Risk Factors --
Changes in Legislation and Political Uncertainty -- Difficulty of Obtaining
Landfill Permits."
 
     Financial Assurance Obligations.  Extensive regulation of landfills not
only affects their siting and operations but also imposes long-term obligations
on landfill owners or operators to make substantial efforts to close landfills
and maintain them following closure for at least 30 years. The Company believes
that where it operates landfills owned by local governmental entities, those
entities, as the holders of the relevant permits, are responsible for closure
and post-closure maintenance obligations.
 
     For each landfill it owns, the Company is required to demonstrate financial
assurance for closure and post-closure maintenance costs. The Company makes
periodic deposits to trust funds so that at the time of landfill closure there
will be sufficient amounts to fund the Company's current estimates for all
closure costs and, under current California law, at least 15 years of
post-closure maintenance costs. Beginning in April 1997, California law will
require financial assurance for 30 years of post-closure maintenance. The
Company estimates, that as of September 30, 1996, the aggregate cost of its
closure and 30-year post-closure requirements is approximately $60.4 million.*
The foregoing estimates of closure and post-closure liabilities are based on
currently available information and current environmental and regulatory
requirements and may change if applicable regulations or the assumptions relied
on or facts and circumstances relating to the Company's landfills change.
 
     California regulations also require the Company to provide financial
assurance contingency funds for the initiation and completion of corrective
action for certain possible releases of contaminants that may occur
 
                                        7
<PAGE>   9
 
from its landfills into the groundwater, surface water or unsaturated zone,
whether such releases occur before or after closure of the landfill.
 
     Regulations amended in 1992 also require California landfill operators to
demonstrate financial assurance to compensate third parties for bodily injury
and property damage arising out of landfill operations. Under the method adopted
by the Company, the regulations require funding of $1.0 million per landfill to
a maximum of $5.0 million Company-wide. To satisfy this requirement the Company
has established financial assurance mechanisms for each landfill. The Company
has obtained an insurance policy for one of its landfills not covered by the
method described above.
 
Special Waste and Hazardous Waste
 
     The Company provides limited waste management services in connection with
five types of special waste: medical waste, waste water sludge, asbestos,
non-hazardous contaminated soil and ash.
 
     In addition, the Company operates permanent household hazardous waste
collection facilities in four communities and periodically collects household
hazardous waste in other communities as part of special programs designed to
help reduce deposits of hazardous waste in the solid waste stream. The Company
also provides limited hauling and disposal services for asbestos and may also
handle hazardous waste from its load checking activities at its facilities. The
Company currently has no other plans to collect or dispose of hazardous or toxic
materials.
 
Environmental Regulation
 
     The Company's business activities are subject to extensive and evolving
regulation under various complex, and at times overlapping and conflicting,
federal, state and local laws for the protection of public health and the
environment. These laws, and the numerous regulatory bodies responsible for
interpreting and enforcing them, impose significant restrictions and
requirements on the Company's activities. The Company believes that such
regulation will increase in the future.
 
     To operate landfills, transfer stations and other waste processing
facilities, the Company must possess and maintain various governmental
approvals, operating permits and licenses, and in certain instances, must secure
various land use approvals. Obtaining approvals and permits to acquire, develop
or expand solid waste management facilities is difficult, time-consuming and
expensive and is sometimes opposed by local citizen groups or other private
parties. Once obtained, operating permits are subject under certain
circumstances to modification or revocation by the issuing agency and may be
altered by changing laws and regulations.
 
     In the collection segment of the industry, regulation takes such forms as
licensing collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, and time
and frequency of collection.
 
     The Company's operation of solid waste management facilities subjects it to
certain operational, monitoring, site maintenance, closure and post-closure
obligations, as well as financial assurance obligations relating to third party
liability, corrective actions, and closure and post-closure maintenance.
 
     In addition to costly and restrictive regulation, other factors, the
long-term effects of which are unpredictable, may have a significant effect on
the Company's operation of landfills. Increasing public opposition to the siting
and operation of landfills is adding to the length of time required to obtain
necessary permits and approvals for new landfills and the expansion of existing
landfills. Moreover, there is a national trend to attempt to reduce the volume
of solid waste and the dependence on landfill disposal by promoting source
reduction, waste transformation and recycling programs.
 
     During the ordinary course of its operations, the Company may from time to
time receive citations, notices and comments from regulatory authorities that
such operations are not in compliance with applicable environmental regulations.
Upon receipt of such citations, notices or comments, the Company works with the
authorities in an attempt to address the issue. In some instances, where the
Company operates a landfill or transfer station pursuant to an agreement with a
county or other governmental body, responsibility for the
 
                                        8
<PAGE>   10
 
matters referenced in such citations, notices or comments lies with such
governmental body. Failure to correct the problems to the satisfaction of the
authorities could lead to fines or a curtailment or cessation of the landfill or
transfer station's operations.
 
     Compliance with current or future regulatory requirements may require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. While the Company intends to apply for
rate increases whenever possible to cover such increased costs, there is no
assurance that it will be able to pass all or a portion of these costs on to its
customers.
 
  Federal Regulation
 
     The principal federal statutes affecting the Company's business operations
are:
 
     The Resource Conservation and Recovery Act of 1976 ("RCRA").  RCRA
regulates the handling, storage, treatment, transportation and disposal of
hazardous and non-hazardous wastes and requires states to develop programs to
insure the safe disposal of solid waste. Subtitle D of RCRA establishes a
framework for federal, state and local government cooperation in controlling the
management of nonhazardous solid waste, and prohibits the operation of municipal
solid waste landfills that fail to meet minimum federal standards for protecting
human health and the environment. Under these regulations, state and local
governments retain primary responsibility for ensuring enforcement and
compliance with state and federal minimum standards by landfills within their
jurisdictions.
 
     The United States Environmental Protection Agency (the "EPA") adopted
regulations under Subtitle D of RCRA that provide minimum standards or criteria
establishing landfill location restrictions, design standards, operating
criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements and corrective action
requirements. These regulations establish stringent requirements for liner
design, leachate (liquid that has leached from the landfill and become
contaminated through contact with solid waste) collection systems, groundwater
testing wells and methane gas control systems. A landfill that fails to meet the
Subtitle D criteria will be deemed to be engaged in "open dumping" in violation
of RCRA. Most of these regulations have been in effect in California for several
years. The EPA has approved California's application to operate California's
permitting program for solid waste landfills under Subtitle D.
 
     The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund" or "CERCLA").  CERCLA imposes liability for the investigation
and clean up of, or natural resource damages from, facilities from which there
has been, or is threatened, a release of a hazardous substance into the
environment. Current owners or operators of the site, parties who were owners or
operators at the time the hazardous substance was disposed of, and all
generators of transporters of a hazardous substance that is released from a site
are potentially responsible parties. Liability under CERCLA is strict, joint and
several, meaning that it can be imposed upon any potentially responsible party
even if such party complied with all laws and regulations in effect at the time
of the act giving rise to liability or has generated no more than a very small
portion of a facility's contamination. Many of the more than 700 substances
listed by the EPA as "hazardous substances" (including asbestos) can be found in
household waste.
 
     CERCLA investigation and cleanup costs can by very substantial. Many of the
sites addressed under CERCLA are or were municipal solid waste landfills that
ostensibly never received hazardous wastes. Even if the Company's landfills
never received hazardous wastes as such, one or more hazardous substances may
have come to be located at these landfills. The same is true of other industrial
properties owned or operated by the Company. If the Company were to be found to
be a responsible party for a CERCLA cleanup, the enforcing agency could hold the
Company completely responsible for all investigative and remedial costs, even if
others were also liable. The Company's ability to obtain reimbursement from
others for their allocable share of such costs would be limited by the Company's
ability to locate such other responsible parties and to prove the extent of
their responsibility and by the financial resources of such other parties.
Legislation has been introduced in Congress which, if passed would limit the
liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. If such legislation becomes law, the
Company's ability to seek contribution from municipalities for CERCLA cleanup
costs would be limited even if the hazardous
 
                                        9
<PAGE>   11
 
substances requiring remediation at one of the Company's facilities were
generated or transported to the facility by a municipality.
 
     The Federal Water Pollution Control Act (the "Clean Water Act").  The Clean
Water Act regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites, into surface waters of the United States.
The discharge of runoff or leachate from the Company's landfills into waters of
the United States would require the Company to apply for and obtain a discharge
permit, conduct sampling and monitoring and under certain circumstances, reduce
the quantity of pollutants in the discharge. Also, under new federal storm water
regulations, many landfills, transfer stations and other Company operations are
now required to obtain storm water discharge permits and to develop a storm
water pollution prevention and monitoring program.
 
     The Clean Air Act.  The Clean Air Act, as amended, provides for federal,
state and local regulation of emissions of air pollutants into the atmosphere.
The EPA has proposed new source performance standards regulating air emissions
of certain pollutants (methane and non-methane organic compounds) from municipal
solid waste landfills. The EPA may also issue regulations controlling the
emissions of particular regulated air pollutants from municipal solid waste
landfills. In addition, the EPA has issued standards regulating the handling of
asbestos-containing materials.
 
     Occupational Safety and Health Act of 1970 ("OSHA").  OSHA establishes
certain health and safety standards for the workers employed by the Company.
Certain of these standards, including standards for notices of hazards, safety
in evacuation, and the handling of asbestos, may apply to certain of the
Company's operations.
 
  State and Local Regulation
 
     Each state in which the Company now operates or may operate in the future
has laws and regulations for the protection of human health and the environment
that affect various operations of the Company. These laws and regulations
govern, among other things, solid waste disposal, water and air pollution and,
in most cases, the design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. Among the principal California
statutes affecting the Company's business operations are:
 
     The California Integrated Waste Management Act.  The California Integrated
Waste Management Act of 1989 establishes a framework for the regulation of
landfills and other solid waste facilities in California through a system of
solid waste facilities permits administered jointly by the California Integrated
Waste Management Board (the "Waste Board") and the local enforcement agency
(generally a county health or environmental department). Periodic site
inspections and permit reviews are undertaken by the local enforcement agency to
ensure that the landfill operations comply with current health, safety and
environmental regulations. Among those regulations are minimum performance
standards for proper operation, closure, post-closure maintenance and ultimate
re-use of landfill sites to assure that public health and safety and the
environment are protected from pollution due to the disposal of solid waste.
 
     The California Integrated Waste Management Act also requires each local
government to divert 25% of its waste from landfill disposal through source
reduction, recycling and composting. This required level will increase to 50% by
the beginning of calendar year 2000. Compliance with these diversion goals could
substantially reduce the tonnage of waste deposited in the Company's landfills.
 
     Closure/Post-Closure.  A part of the California Integrated Waste Management
Act known as the Eastin Statute requires landfill owners and operators to (i)
develop closure and post-closure maintenance plans and submit plans to both the
Waste Board and the applicable Regional Water Quality Control Board for
approval, (ii) prepare an estimate of closure and post-closure maintenance
costs, and (iii) establish a mechanism acceptable to the Waste Board to
demonstrate financial responsibility for such estimated costs.
 
     Regulations promulgated under the Eastin Statute (the "Eastin Regulations")
impose closure and post-closure requirements governing the removal of
structures, decommissioning of environmental control systems, construction and
maintenance of final cover, grading, drainage and site face, slope protection
and erosion control (revegetation), leachate control and monitoring systems,
groundwater monitoring facilities and landfill
 
                                       10
<PAGE>   12
 
gas monitoring and control systems. Landfill owners and operators must submit
preliminary closure and post-closure maintenance plans at the time of the
application for any existing solid waste facilities permit review or upon the
first application for a permit. Existing permit reviews generally occur in
connection with modifications for the permit or, if earlier, five years
following the most recent permit review. In addition, final closure and
post-closure plans must be submitted two years before the anticipated date of
landfill closure. The EPA has approved California's application to operate its
existing solid waste program under Subtitle D.
 
     The Eastin Regulations require the owner or operator of each landfill to
(i) estimate the cost associated with closing the landfill in accordance with
the foregoing requirements, including the costs of conducting post-closure
maintenance for a period of at least 30 years after closure, (ii) certify such
cost estimates to the Waste Board and the local enforcement agency, and (iii)
demonstrate that the owner or operator has the financial resources to conduct
closure and post-closure maintenance activities. One of the means by which an
owner or operator can demonstrate financial assurance is to establish a
statutory trust fund whereby the owner or operator is committed to make yearly
contributions over the remaining life of the landfill. This is the primary
mechanism used by the Company for the landfills that it has responsibility for
closing. Each year's minimum trust fund deposits are based upon a regulatory
formula using the ratio of the landfill's annual capacity filled, to the
remaining permitted capacity, multiplied by the remaining cost estimate to be
funded. Because these costs can be substantial, the annual trust fund
contributions could have a significant impact on the Company's cash flow if the
Company were unsuccessful in collecting such costs in tipping or collection
fees.
 
     Hazardous Waste Control Law and Carpenter-Presley-Tanner Hazardous
Substance Account Act.  The California Environmental Protection Agency's
Department of Toxic Substances Control has broad authority under the Hazardous
Waste Control Law, similar in may respects to Subtitle D of RCRA, to regulate
generators and transporters of hazardous waste and facilities that treat, store
or dispose of hazardous waste. California also has enacted the
Carpenter-Presley-Tanner Hazardous Substance Account Act, which is the state's
"Superfund" law, with provisions similar to those of the federal CERCLA.
 
     The Porter-Cologne Water Quality Control Act ("Porter-Cologne Act").  The
Porter-Cologne Act regulates the discharge of waste that may affect waters of
California, whether surface or subsurface, and whether by point or non-point
sources of discharge. This would include the discharge of waste into a landfill.
Each discharge must file a report of waste discharge with the regional board
having jurisdiction over the location of the proposed discharge, and the
regional board issues a permit, known as "waste discharge requirements," that
limits the quantity and manner of the discharge to meet water quality standards
and to ensure the protection of beneficial used of the receiving waters.
Pursuant to the Porter-Cologne Act, in 1984, California adopted regulations
imposing design, siting, and operational standards for waste disposal sites to
minimize the extent to which landfill runoff and leachate may pose a threat to
surface or groundwater quality. These standards also apply to new or expanded
waste disposal facilities.
 
     The federal Clean Water Act allows states to assume the EPA's
responsibilities over point source discharges of pollutants into surface waters.
California has assumed those responsibilities under the Porter-Cologne Act.
 
     California has also adopted regulations requiring owners and operators of
landfills to provide financial assurance for the initiation and completion of
corrective action for known or reasonably foreseeable releases of contaminants
from landfills into the groundwater, surface water or unsaturated zone.
 
     Other States' Regulation.  Although almost all of the Company's business is
currently conducted in California, the Company has historically and in the
future is likely to conduct business in other states with statutes similar to
California's that would regulate the Company's handling, transportation and
disposal of waste, and the design, operation, maintenance, closure and
post-closure care of solid waste disposal facilities and underground storage
tanks ("USTs") regulation. These states may have additional rules with which the
Company would have to comply.
 
     Underground Storage Tank Regulation.  USTs in California are regulated by
federal law under RCRA, by a California law that closely parallels the
requirements of the federal law and by local regulation. These regulations
contain extensive requirements relating to monitoring, leak detection and
prevention, permitting,
 
                                       11
<PAGE>   13
 
reporting, and other matters, including the required removal or closure in place
of tanks that are no longer in use. In connection with its business operations,
the Company maintains numerous USTs, all of which are used for the storage of
petroleum products, a hazardous substance.
 
     The Company has 14 USTs that it is required to remove by 1998 (including
the remediation of any associated contaminated soil). Removing USTs can be
costly because of the possibility of discovering contaminated soil and
groundwater, and the need to remove or remediate such contamination. Based upon
its experience in its UST removal program, the Company expects that removal of
its 14 USTs will cost approximately $0.6 million over two years, exclusive of
any material remediation that is subsequently determined to be necessary.* With
the exception of two sites at which the Company anticipates that up to an
additional $0.5 million may be required to remediate contamination, the Company
is not aware of any USTs that will require significant soil or groundwater
remediation.* However, in most instances the Company has not conducted soil or
groundwater testing sufficient to assess fully the extent and cost of required
remediation. These costs will not be known until such tests are completed or the
USTs are removed.
 
     Owners and operators of USTs containing petroleum also must demonstrate
financial responsibility to pay for corrective action and third party claims
arising from a release from their USTs. The Company has purchased insurance to
make this demonstration.
 
     Flow Control.  Many states and municipalities attempt to direct the flow of
municipal solid waste through a variety of means, including the passage of laws
and ordinances requiring solid waste to be processed or disposed of at a
particular facility. In addition, some municipalities grant franchises and
permits that have the effect of limiting who may collect solid waste and where
such waste may be brought for disposal. In 1994, the United States Supreme
Court, in the case of Carbone v. Town of Clarkstown, held unconstitutional a
local ordinance that required all solid waste generated within or brought into
the locality to be disposed of at a particular transfer station that the town
had guaranteed a certain minimum tonnage of solid waste, in order to help
finance the construction of the transfer station. The Court held that the
ordinance discriminated against interstate commerce by allowing only the favored
facility to process solid waste from the town and effectively "hoarding"
commerce in the service of processing solid waste for the benefit of local
economic interests. The Court found that the primarily economic reasons for
enacting the ordinance could not justify the law's discrimination against
interstate commerce.
 
     Although the Company believes there are many significant differences
between the facts in Carbone and the circumstances relating to the collection
franchises, permits and agreements held by the Company and to government actions
related to such franchises, permits and agreements, it is possible that these
franchises, permits and agreements could be challenged under a similar
rationale. In that event, the municipalities involved would have to show that
their franchises, permits and agreements (i) do not regulate interstate
commerce, (ii) do not discriminate against interstate commerce and do not impose
an excessive burden on interstate trade in relation to the total benefits
conferred; or (iii) are necessary to advance legitimate local interests. There
can be no assurance that such franchises, permits and agreements would be
upheld.
 
     Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress.
At present, it is impossible to know in what form such a bill, if any, will pass
the Congress, but the attempts to pass such a bill have been unsuccessful to
date. Although these bills appear to be intended to limit, rather than broaden,
the scope of Carbone, there can be no assurance that a bill will not be enacted
that will adversely affect the legality of exclusive franchises, agreements or
permits under the interstate commerce clause.
 
Competition
 
     The solid waste services industry is highly competitive and requires
substantial capital, technical expertise and human resources. The industry is
comprised of four large national waste service companies (WMX Technologies,
Inc., Browning-Ferris Industries, Inc., USA Waste Services, Inc. and Allied
Waste Industries, Inc. -- Laidlaw Waste Systems, Inc.) and several smaller
national companies, as well as numerous regional and local companies of varying
sizes and competitive resources. Many of the Company's competitors have
significantly greater financial and operating resources and a lower cost of
capital than the Company and can
 
                                       12
<PAGE>   14
 
take advantage of less capital intensive environmental regulatory financial
assurance obligations than those with which the Company is required to comply.
Additionally, in smaller markets, the Company may be at a competitive
disadvantage with respect to regional and local companies which may have
significantly lower operating costs. In its landfill activities, the Company
also competes with cities and counties that conduct their own waste disposal
services. These municipalities may have the advantages of access to tax revenues
and tax exempt financings as well as the ability to direct the collection and
disposal of waste in their respective jurisdictions.
 
     Most of the Company's collection operations are conducted pursuant to
franchise agreements, permits and licenses that make the Company the exclusive
provider of most waste services in a specific geographic area. However, each of
these arrangements has a specific duration except in San Francisco, and the
Company may become subject to competition if these arrangements are not extended
prior to maturity. The Company competes for collection services primarily on the
basis of service and price. Transfer station activities are often tied to
collection operations so the same competitive considerations apply. Competition
among landfills is based upon price, service and the proximity of the landfill
to the waste generator. Competition for operation of landfills under contract is
based on price and service. The Company believes that from time to time,
competitors offer substantially lower prices for their services in an effort to
maintain or expand market share or win a competitively bid municipal contract.
 
     The industry is undergoing significant consolidation, characterized by the
acquisition of smaller regional and local operations by larger entities,
mergers, the privatization of operations that local governments no longer wish
to conduct and the reduced presence of smaller regional and local operations
caused by the ability of larger entities to bid for franchises and contracts at
prices such smaller operations cannot match. Because of the difficulty in
obtaining approvals to operate in communities that already have established
service providers, competition for the acquisition of other companies and
price-related competition upon the renewal of existing contracts and franchises
are increasingly intense. In addition, the Company believes that a number of its
competitors have full-time personnel primarily dedicated to locating, evaluating
and securing business expansion opportunities and acquisitions -- including
environmental and regulatory experts, engineers, attorneys, lobbyists, financial
and accounting personnel and finders. The Company does not have employees solely
dedicated to acquisition or business expansion activity and may be at a
competitive disadvantage if it is unable to identify, adequately evaluate or
respond to business opportunities or incurs higher costs than are borne by its
competitors. Accordingly, it may become uneconomical for the Company to make
further acquisitions, or the Company may be unable to locate suitable
acquisition candidates, particularly in markets the Company does not already
serve.
 
Risk Factors
 
     The following is a discussion of certain risks and uncertainties that could
cause results to differ materially from predictions, estimates and expectations
expressed by the Company in this Form 10-K.
 
  Geographic Concentration of Business
 
     The Company is dependent on a number of franchise contracts and operating
permits for a significant portion of its revenues. Approximately 40% and 14% of
the Company's revenues for fiscal year 1996 were derived from services performed
in the City and County of San Francisco and for the County of San Bernardino,
respectively. In San Francisco, the Ordinance provides that, with certain
limited exceptions, only a collector that has been granted a permit for a
specified route may collect or transport solid waste on that route in the City
and County of San Francisco. Although the Company holds permits for
substantially all routes covered by the Ordinance, a permit may be revoked or
additional permits granted to third parties if, among other things, the Company
were to provide inadequate service, such as a failure to collect refuse properly
or overcharging. The granting of additional permits due to inadequate service is
required if 20% or more of the customers on a route sign a petition stating that
the Company's service has been inadequate and the Director of the Department of
Public Health finds such statement to be correct. Further, the Ordinance could
be repealed or amended by the vote of the electorate in a way that is
unfavorable to the Company. A change in the Ordinance and the possible loss by
the Company of one or more of its permits could have a
 
                                       13
<PAGE>   15
 
material adverse effect on the Company's business, financial condition and
results of operations. However, the Company believes that California law would
not allow it to be completely displaced by another exclusive waste collection
provider for five years if the Ordinance were repealed, unless the permits were
terminated pursuant to the existing provisions of the Ordinance. The Company's
agreement with San Bernardino County terminates on June 30, 2001. 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, beginning July 1, 1999, San Bernardino County may terminate the
contract so long as it municipalizes such operations or uses a competitive
procedure to select a contractor, and either party may terminate the contract
for failure to reach an agreement regarding the redetermination of the Company's
per ton compensation rate (which rate must be redetermined every three or four
years, at the option of San Bernardino County).
 
     Substantially all of the Company's assets and operations are located in
California. An economic slowdown in California (such as occurred in the early
1990s) or a change in California's environmental or related regulations that
negatively affects the waste management industry could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
  Changes in Legislation and Political Uncertainty
 
     The waste management industry is subject to federal, state and local
statutes, regulations, ballot initiatives and judicial decisions that impose
significant risks and compliance burdens on the Company. The adoption or
promulgation of new, or the amendment of existing, legislation and regulations
could cause the Company to lose franchises, reduce the value of its existing
franchises or require the Company to modify its waste disposal facilities and
methods of operation at substantial cost. In addition, because operations of
waste management companies are the subject of a high level of public concern,
unfavorable publicity may have an adverse effect on the Company.
 
     Ballot Initiatives Affecting Ordinance.  In November 1993 and November
1994, initiatives were placed on the San Francisco general ballot which, if
passed, would have repealed or amended the Ordinance and would have opened
refuse collection in San Francisco to competition. Although these initiatives
were defeated (by votes of 76% to 24% and 65% to 35%, respectively), there can
be no assurance that other attempts will not be made to implement legislation
with a material adverse effect on the Company's operations. The Company incurred
costs in connection with its campaigns to defeat the 1993 and 1994 initiatives
and may incur significant costs in connection with future ballot initiatives, if
any. Future attempts to implement legislation may be financed by persons having
greater resources than the Company and may be successful in modifying or
repealing the Ordinance. There can be no assurance that the Ordinance will not
be modified or repealed in the future.
 
     Potential Competitive Bidding.  The Company provides waste collection
services in San Francisco pursuant to permits granted under the terms of the
Ordinance and in other communities generally pursuant to exclusive franchise or
other service agreements. In the event of the amendment or repeal of the
Ordinance or upon the expiration or termination of a franchise or service
agreement in other communities, the award of a franchise or service contract may
be determined by competitive bidding. The waste management industry is intensely
competitive and many of the Company's competitors have greater financial and
other resources than the Company and therefore there can be no assurance that
the Company will succeed in having its bid for such franchise or other service
contract accepted or that such franchise or other service contract, if accepted,
will be on terms and at prices which result in profit margins similar to those
currently earned by the Company.
 
     Problems in Rate-Setting Process.  The Company generally seeks to recover
all of its operating costs, including the costs of recycling services, landfill
closure and post-closure obligations and tipping fees in the rate-setting
proceedings that determine many of its collection, transfer station and landfill
rates. However, rate-setting bodies sometimes have been reluctant to allow all
of the Company's operating and related costs, including capital expenditures, to
be reflected in its rates. Political pressure has occasionally inhibited local
governments from allowing large rate increases and caused them instead to
increase rates gradually. Lack of public understanding of new regulatory
requirements which can significantly affect the Company's operating
 
                                       14
<PAGE>   16
 
costs, especially relating to recycling mandates and landfill closure and
post-closure maintenance, has sometimes made it difficult for the Company to
obtain rate increases to cover such costs. In addition, certain municipalities,
including San Francisco, have not allowed the Company to recover through its
rates some or all ESOP or other corporate-related expenses. In September 1996,
the Company applied for an increase to its collection and disposal rates in the
City of San Francisco. The application requested an increase of 14.9%, to be
effective March 1, 1997, to fund several new recycling programs requested by San
Francisco, along with increases to recover current and projected increases in
operating costs. In accordance with the rate procedures dictated by the
Ordinance, the Director held hearings and filed the Recommended Rate Orders in
mid-December 1996. The Recommended Rate Orders provide for a 9.5% increase,
which was lower than requested, primarily due to the disallowance of ESOP
expense which historically was allowed in the rates. The Company objects to the
positions taken by the Director and intends to vigorously pursue its rights
under the Ordinance, including filing an appeal with the Rate Board, which has
the authority to make the final rate determination. If the Company is
unsuccessful in its attempt to modify the Recommended Rate Orders in San
Francisco, its future annual operating results and cash flow could be adversely
impacted by as much as $4.0 million (the amount of ESOP expense recovery denied
reimbursement).* In addition, if the Company is unsuccessful in its appeal, the
Company expects that by the end of fiscal year 1997 potential availability under
the Credit Agreement will be reduced by up to approximately $12 million and the
Company's ability to incur certain other future debt financing could be
significantly curtailed or eliminated.* Given these difficulties, there can be
no assurance that the Company will succeed in obtaining timely rate increases
sufficient to cover all costs or sufficient to maintain profit margins at
historic levels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
     Potential Flow Control Legislation.  Many states and municipalities attempt
to direct the flow of municipal solid waste through a variety of means,
including the passage of laws and ordinances requiring solid waste to be
processed or disposed of at a particular facility. In addition, some
municipalities grant franchises and permits that have the effect of limiting who
may collect solid waste and where such waste may be brought for disposal. In
1994, the United States Supreme Court, in the case of Carbone v. Town of
Clarkstown, held unconstitutional a local ordinance that required all solid
waste generated within or brought into the locality to be disposed of at a
particular transfer station for which the town had guaranteed a certain minimum
tonnage of solid waste in order to help finance the construction of the transfer
station. Although there are many significant differences between the facts in
Carbone and the circumstances relating to the collection franchises, permits and
agreements held by the Company and to government actions related to such
franchises, permits and agreements, it is possible that these franchises,
permits and agreements could be challenged under a similar rationale. There can
be no assurance such a challenge would not be successful or would not adversely
affect the enforceability of the Company's exclusive franchises, permits and
agreements. Bills that would exempt certain ordinances and facilities from the
potential impact of Carbone have been presented to the United States Congress
but the attempts to pass such bills have been unsuccessful to date. At present,
it is impossible to predict the form in which such a bill, if any, will pass.
There can be no assurance that a bill will not be enacted that will adversely
affect the enforceability of exclusive franchise agreements or permits under the
interstate commerce clause of the U.S. Constitution.
 
     Adverse Publicity.  Because the Company's business is dependent on
approvals of political bodies, unfavorable publicity affecting public attitudes
or perceptions of the Company could result in political pressure, including
government action, which may have an adverse effect on the Company's business.
The Company has in the past and may from time to time in the future receive
unfavorable publicity relating to litigation, regulatory actions and other
claims, including those involving environmental issues and employment practices.
Also, in the ordinary course of its business, the Company makes political
contributions to various state and local elected officials or candidates for
elective office and pays substantial compensation to consultants, lobbyists and
business opportunity finders, including persons who are former officials or were
formerly employed by officials of municipalities with which the Company does
business or may seek to do business. These activities could become the subject
of unfavorable publicity. There can be no assurance that unfavorable publicity
relating to Norcal or its affiliates will not have an adverse effect on the
Company's business or prospects.
 
                                       15
<PAGE>   17
 
  Environmental Regulation and Potential Litigation
 
     The Company's operations are subject to, and substantially affected by,
numerous federal, state and local laws and regulations that govern environmental
protection, zoning, public health and safety and other matters. In recent years,
these regulations have become increasingly stringent (particularly in
California).
 
     These requirements and standards change and, to comply with new
requirements, the Company may from time to time be required to make significant
capital and operating expenditures. These expenditures may be necessary to
modify, replace or supplement equipment and facilities at substantial cost and
without any resulting increase in revenues. In addition, the Company will be
required to make substantial expenditures to satisfy statutory obligations
concerning closure and post-closure maintenance of the landfills it owns. The
Company may be unable to pass some or all of these expenditures on to its
customers through rate increases. Even if such expenditures can be passed on,
the Company may experience significant delays in recovering these expenditures.
Moreover, the cost of closure and post-closure monitoring may exceed the amount
the Company has set aside in trust funds and reserves to satisfy its regulatory
obligations.
 
     Environmental regulations may also impose restrictions on the Company's
operations. In order to develop and operate a landfill or other solid waste
management facility, for example, the Company usually must obtain, maintain in
effect and periodically renew several permits and often must obtain zoning,
environmental or other land use approvals. These permits and approvals are
difficult and time consuming to obtain or renew and may, under certain
circumstances, be modified or revoked by the issuing agency. Additionally, from
time to time, the Company may be subjected to actions brought by citizens'
groups or other private parties in connection with the grant of permits or
alleging violations of permits or other regulatory requirements. There can be no
assurance that the Company will successfully obtain and maintain in effect the
permits and approvals required for the successful operation and growth of its
business. The Company's failure to obtain or maintain in effect a significant
permit could adversely affect the Company's business and financial condition.
 
     In the normal course of its business, the Company may become subject to
various judicial and administrative proceedings involving federal, state or
local agencies, or private parties. These proceedings may seek to impose fines
on the Company, to revoke or deny renewal of an operating permit or license held
by the Company, or to require the Company to remediate environmental problems.
The Company could incur substantial legal expenses during the course of such
proceedings and the outcome of one or more of these proceedings could have an
adverse impact on the Company's business.
 
     Difficulty of Obtaining Landfill Permits.  Obtaining the zoning approvals
and permits required to develop new landfills or expand existing landfills is a
lengthy, complex and expensive process. Permit applications are generally
subject to extensive governmental scrutiny, as well as comment and opposition by
local citizens. Several years may be required to obtain all necessary operating
permits, during which time the Company may become the target of litigation
opposing the project. There can be no assurance that the Company will be able to
complete its current landfill development projects, expand other existing
landfills or develop new landfills. The failure to achieve these objectives
could have a material adverse effect on the Company and its results of
operations.
 
  Possible Liability for Environmental Remediation and Damages
 
     With limited exceptions, federal and state laws impose joint, several and
strict liability upon present and former owners, operators and users of
facilities that release certain hazardous substances into the environment and
the generators and transporters of those substances, regardless of the care
exercised by such persons and regardless of when the hazardous substance is
first detected in the environment. All such persons may be liable for the costs
of site investigation, clean up and natural resource damage. Many of such
hazardous substances can be found in household waste. The Company may face
claims for remediation of environmental contamination, personal injury, property
damage or damage to natural resources with respect to facilities it currently or
formerly owned, operated or used. Costs for remediation of, and damages and
penalties for, environmental contamination can be substantial and if incurred by
the Company such liability could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
                                       16
<PAGE>   18
 
     The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. There can be no assurance that the
Company will identify all problems or risks in connection with the businesses it
acquires, including environmental problems or risks. As a result, the Company
may have acquired, or may in the future acquire, landfills or other properties
that have unknown environmental problems and related liabilities. The Company
will be subject to similar risks and uncertainties in connection with the
acquisition of facilities that formerly had been operated or owned by businesses
acquired by the Company.
 
     A subsidiary of the Company has indemnification obligations with respect to
damages, removal and remedial costs associated with the deposit of hazardous and
certain other types of waste to the City and County of San Francisco and the
owner of the landfill at which such subsidiary deposits a substantial amount of
waste. Neither the Company nor the subsidiary maintains insurance with respect
to these indemnification obligations, although certain costs resulting from such
obligations may be reimbursed through a reserve fund maintained by the City and
County of San Francisco or through rate increases. There can be no assurance
that the reserve fund or rate increases will be adequate to satisfy such
indemnification obligations.
 
  Insurance, Bonding and Letters of Credit
 
     The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. Liability for environmental damage
significantly in excess of these limits could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to obtain such insurance in the
future. The Company also has underground storage tank liability insurance to
satisfy financial assurance requirements mandated under state and federal law.
The current policy has a limit of $1.0 million per loss with an annual aggregate
limit for all losses of $1.0 million, covering pollution conditions emanating
from the Company's locations which result in bodily injury or property damage
beyond the boundaries of these locations.
 
     The Company carries a broad range of insurance coverage that it considers
adequate to protect its assets and operations from "risk of loss." The Company's
commercial general liability, general business automobile liability, and
umbrella and excess liability policies provide an aggregate of $50.0 million
coverage for any single occurrence, subject to a variety of exclusions and a
self-insurance requirement of $500,000. Substantially all of the Company's
present workers compensation liabilities are self-insured and some of its
pre-existing workers' compensation liabilities are self-insured; however, this
liability is capped at a maximum of $350,000 per claim with workers'
compensation insurance covering liabilities in excess of this amount. In
addition, employee and certain retiree healthcare liabilities are self-insured.
Norcal also provides director and officer and ERISA fiduciary insurance.
 
     The Company is required to post performance bonds in connection with
certain contracts on which it bids. In addition, the Company is usually required
to post a performance bond or a bank letter of credit at the time of execution
of a municipal collection contract. Some of these performance bonds are secured
by letters of credit posted by the Company. At September 30, 1996, the Company
had available performance bonds outstanding in the aggregate amount of $23.7
million, and had provided its surety companies with letters of credit of
approximately $5.8 million to secure the Company's obligations to indemnify the
surety companies. If the Company were to be unable to obtain surety bonds or
letters of credit in sufficient amounts or at reasonable rates, it might be
precluded from bidding on certain contracts, entering into additional municipal
collection contracts or obtaining or retaining landfill operating permits. See
"Risk Factors -- Competitive Industry."
 
     As of September 30, 1996, the Company had $3.6 million of additional
letters of credit outstanding, most of which relate to workers' compensation
deferred premiums and landfill operation contract matters.
 
                                       17
<PAGE>   19
 
  Required Payments for ESOP Participant Benefits
 
     To the extent Norcal contributes funds to the ESOP, in order for the ESOP
to pay cash benefits due to retired, terminated or withdrawing ESOP
participants, or to the extent Norcal is obligated to repurchase common stock
distributed to participants, Norcal will have less cash available to make
payments on its outstanding indebtedness or for other reasons. The amount Norcal
may contribute to the ESOP to fund such ESOP distribution obligations (or may
use to repurchase common stock distributed by the ESOP) will increase
significantly in the future as the Company's workforce ages and retires, as
additional shares of common stock are allocated to participants, or if the value
of the common stock increases.
 
  Dependence on Senior Management
 
     The Company is highly dependent on the efforts of its senior management
team. The loss of services of any member of senior management may have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company's success may also be dependent on its
ability to hire and retain additional qualified management personnel. There can
be no assurance that the Company will be able to hire and retain such personnel.
The Company does not maintain "key man" life insurance.
 
  Competitive Industry
 
     The solid waste industry is highly competitive. Operations require
substantial technical, managerial and financial resources. The Company competes
with large national solid waste companies, including WMX Technologies, Inc.,
Browning-Ferris Industries, Inc., USA Waste Services, Inc. and Allied Waste
Industries, Inc. -- Laidlaw Waste Systems, Inc. and their affiliates, several
small national companies and with regional and local companies, some of which
have significantly greater financial and other resources, lower cost of capital
and more established market positions than the Company. Additionally, in smaller
markets, the Company may be at a competitive disadvantage with respect to
regional and local companies, which may have significantly lower operating
costs. The Company's competitors also may not be subject to restrictions on
their ability to incur new indebtedness, obtain necessary performance bonds or
letters of credit, or make capital expenditures, strategic acquisitions or
engage in certain expansions of their businesses such as those imposed on the
Company by the Credit Agreement and the indenture relating to the Senior Notes
(the "Indenture"). As a result, competitors of the Company may be better able to
compete more aggressively for new permits and franchises (including those held
by the Company), pay higher prices for acquisition candidates, withstand
economic downturns and volatility in prices for recyclable commodities and bear
the costs of new regulations.
 
  Acquisition-Related Risks
 
     The Company intends to grow, in part, through the acquisition of additional
franchises, contracts, permits and other companies. Such growth, if any, may
place significant strain on the Company's management, working capital and
financial control systems. As a result, the Company's future operating results
will depend, in part, on its ability to make acquisitions at appropriate
purchase prices and integrate successfully such acquisitions, including its
ability to recruit, if necessary, qualified management and other personnel to
supervise such operations and improve financial controls. There can be no
assurance that the Company will be able to make and manage such acquisitions
successfully or that such acquisitions will not materially and adversely affect
the Company's results. To fund significant expansion, the Company may require
financing for amounts which exceed the amount of its internally generated cash
and borrowing capacity under existing credit facilities. There can be no
assurance that such financing will be available. Moreover, the Company's lack of
a publicly traded equity security and its alternative cost of financing, which
may be higher than that of its competitors, could limit the amount the Company
could prudently pay for acquisition candidates. Also, the Credit Agreement
restricts the Company's ability to make acquisitions. For the remainder of
fiscal 1997, without significant improvements in cash flow and operating
results, the Company will likely be restricted under the Indenture from certain
borrowings for material acquisitions (other than under the Credit Agreement) to
support the growth of its business.*
 
                                       18
<PAGE>   20
 
  Substantial Leverage
 
     As of September 30, 1996, the Company had outstanding long-term debt of
$176.7 million and stockholder's equity of $6.1 million. This level of
indebtedness and the debt service obligations arising therefrom may have one or
more of the following effects on the Company: (i) the Company's ability to
obtain additional financing in the future may be limited; (ii) a significant
portion of the Company's cash provided from operations is and will be dedicated
to servicing the Company's indebtedness, thereby reducing the funds available to
the Company for operations and capital expenditures; and (iii) the Company may
be more vulnerable to economic downturns or other adverse developments than less
leveraged competitors and thus may be limited in its ability to withstand
competitive pressures. Furthermore, the Credit Agreement provides for total
maximum borrowing availability of $100.0 million (subject to certain limitations
imposed by certain financial ratios), $25.0 million of which may be utilized for
letters of credit, all of which indebtedness is scheduled to become due prior to
the time any principal payments may be made on the Senior Notes (except for
certain optional redemptions). As of September 30, 1996, the Company had
availability under the Credit Agreement of approximately $25.0 million (with
additional amounts potentially available to fund acquisitions based on certain
pro forma ratios), along with $15.6 million which may be utilized for additional
letters of credit. Changes in availability under the Credit Agreement are a
function of, among other things, changes in operating results. The Company
expects that by the end of fiscal year 1997 potential availability under the
Credit Agreement will be reduced by up to approximately $12 million if the
Recommended Rate Orders are put into effect without modification by the Rate
Board.* As of September 30, 1996, under the incurrence covenant in the
Indenture, the Company would have been able to incur approximately $4 million of
additional debt (in addition to that which would have been available under the
Credit Agreement and was otherwise permitted under the Indenture). The Company
currently anticipates that the incurrence covenant of the Indenture will
preclude it from incurring such additional debt during the remainder of fiscal
year 1997.*
 
  Possible Inability to Service Debt
 
     The Company's ability to make scheduled payments on its indebtedness,
including payments on the Senior Notes, depends on its financial and operating
performance (including its ability to generate EBITDA), which, in turn, is
subject to prevailing economic conditions and to financial, business and other
events, many of which are beyond its control (including delays in obtaining rate
increases, the ability to renew franchises at historical profit margin levels,
and fluctuations in prices for recyclable commodities). Moreover, the Company
may incur additional indebtedness in the future. There can be no assurances that
the Company's cash flow will be sufficient to repay its debt. The Company's
ability to make scheduled payments also may be affected by its obligations to
provide cash to fund ESOP distributions to retired, terminated or withdrawing
participants.
 
  Effect of Holding Company Structure
 
     Norcal has no operations other than those relating to its subsidiaries and
depends on the earnings and cash flows of, and dividends from, such subsidiaries
to pay its obligations, including payments of principal and interest on its
indebtedness. The ability of Norcal's subsidiaries to pay such dividends will be
subject to, among other things, state law and contractual restrictions.
Substantially all of the assets of Norcal's wholly-owned subsidiaries (the
"Subsidiary Guarantors") have been pledged as collateral for their guarantees of
Norcal's obligations under the Credit Agreement and the capital stock of (or
partnership interests in) all the Subsidiary Guarantors has been pledged as
collateral for Norcal's obligations under the Credit Agreement. In the event of
a default under the Credit Agreement, the rights of Norcal with respect to the
liquidation of these assets would be subject to the prior claims of the lenders
under the Credit Agreement. A default under the Senior Notes constitutes an
event of default under the Credit Agreement. Similarly, certain defaults under
other indebtedness in excess of $5.0 million (including indebtedness under the
Credit Agreement) constitute an event of default under the Indenture.
 
  Seasonality
 
     The Company's revenues tend to be lower during the fall and winter months
due to lower volumes of certain types of waste, such as yard clippings and
construction and demolition debris. Such reduced volumes result in lower
revenues and earnings from the Company's transfer stations, waste collection,
and landfill operations during such months.
 
                                       19
<PAGE>   21
 
  Fluctuations in Prices for Recyclable Commodities
 
     The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities. However, costs
(including significant capital costs) related to recycling do not fluctuate in
accordance with changes in prices for recyclables. As a result, the Company may
experience increases in profitability with increases in commodity prices, or
reduced profitability (or losses) at times (such as the current period) of low
commodity prices. In 1995, a substantial portion of the Company's recycling
revenues were derived from the sale of various grades of recycled paper and
paper products, the prices for which have suffered substantial declines since
such time.
 
Employees
 
     The Company employs approximately 1,900 persons as of September 30, 1996.
Sixty-six percent of the Company's employees are covered under union contracts
with varying terms and expiration dates. Approximately 59% of these union
employees are covered under contracts that have expired or will expire by
December 31, 1996. While historically the Company has continued to operate after
the expiration of union contracts without any impact on operations, there can be
no assurance that the Company will be able to reach agreement with the employees
or that expiration of these contracts will not have a material adverse impact on
operations.
 
                                       20
<PAGE>   22
 
ITEM 2. PROPERTIES
 
     The principal properties of the Company consist of landfills, transfer
stations, waste recovery, administrative and maintenance facilities and other
land and improvements. The Company owns an aggregate of 309 acres of property on
which its California operations, maintenance, storage, warehousing and
administration facilities are situated. It owns six transfer stations, five of
which are located at the Company's collection sites. The Company also operates
three MRFs. The Company owns five landfills in California and approximately
2,800 acres on eight sites primarily in California that are used as a source of
landfill cover, as potential expansion sites for Company operations or for other
purposes.
 
     The Company owns a 496-acre quarry in Kansas City, Missouri that was
originally purchased for development as a landfill. In 1991, the Company failed
to secure approval for a landfill site from the Kansas City Council. In August
1996, a contract that the Company had entered into in August 1995 to sell the
property expired as a result of certain closing conditions not being satisfied.
The Company has arranged government assistance in financing certain property
remediation and is currently marketing the site to potential buyers.
 
     In November 1996 the Company entered into an agreement to sell property
currently utilized for recycling operations of the Company's West Coast
Recycling subsidiary. The agreement includes a leaseback agreement that allows
the Company to continue operations on the site for a one year period after the
sale. The Company is currently studying various options regarding the relocation
of West Coast Recycling's operations.
 
     The Company's headquarters are located in approximately 22,000 square feet
of leased office space in San Francisco, California, pursuant to a lease that
expires in 1999. Under a lease expiring in 2007, the Company leases 29,000
square feet of industrial space in Oakland, California, where the Company's
medical waste treatment and disposal subsidiary conducts business. The Company
also leases several small parcels of real property in California, generally
under short-term leases. The Company acquired 5 unimproved acres in Santa Clara,
California, in August 1996 and is constructing a 22,000 square foot facility to
house the operations of three of its subsidiaries and the administration of its
South Bay region.
 
     The Company owns a 302-acre site situated in San Benito and Santa Clara
Counties in California that formerly was used to spread waste water sludge. The
soil quality suffered from such activities but was returned to normal
agricultural condition in 1993. The Company may use the site again to spread
waste water sludge on a more limited basis and for other waste diversion
activities.
 
                                       21
<PAGE>   23
 
ITEM 3.  LEGAL PROCEEDINGS
 
Litigation Regarding the ESOP Notes.
 
     On July 29, 1994, two lawsuits entitled Abraham, et al. v. Norcal Waste
Systems, Inc., et al., Case Nos. C94-3076 CAL and C94-2730 CAL, in the United
States District Court for the Northern District of California (the "Abraham
Actions") were filed against Norcal, the ESOP, and various parties to which
Norcal has certain indemnification obligations, including past and present
directors and officers of Norcal, members of the ESOP Administrative Committee,
and banks that acted as financial advisers, trustees or lenders to Norcal. The
suits were filed by certain holders ("Plaintiffs") of notes issued by the ESOP
("ESOP Notes") under the indenture dated as of December 19, 1986 between the
ESOP and Security Pacific National Bank as Indenture Trustee ("1986 Indenture").
The complaints alleged a variety of claims in connection with the 1986
transaction in which the ESOP purchased Plaintiffs' stock in one of Norcal's
predecessors in exchange for cash and the ESOP Notes, and certain later
transactions involving Norcal or its predecessors.
 
     On August 9, 1995, Norcal and the ESOP reached a settlement (the "Abraham
Settlement") with Plaintiffs and certain other noteholders ("Settling
Plaintiffs"). In connection with the Abraham Settlement, the Settling
Plaintiffs' ESOP Notes were satisfied in full and cancelled, and Settling
Plaintiffs released all claims arising out of any of the events alleged in the
Abraham Actions, based on the ESOP Notes or the 1986 Indenture, or relating to
Settling Plaintiffs' capacities as noteholders or former shareholders of Norcal,
against all defendants, including Norcal and the ESOP, and related entities such
as their past and present officers, directors, employees, agents, attorneys,
subsidiaries, affiliates, and everyone else involved in the events alleged in
the Abraham Actions (the "Released Parties"), with one exception. Settling
Plaintiffs did not release and are permitted to proceed upon claims (the
"Excluded Claims") against certain banks (and counsel to one of them) based upon
their roles as former trustees under the 1986 Indenture, but only insofar as
those claims are not indemnifiable under a provision of the 1986 Indenture that
requires indemnification by the ESOP for loss, liability or expense incurred by
the trustee without the trustee's negligence or bad faith. Those banks are
Security Pacific National Bank ("Security Pacific") (and Bank of America solely
as successor to Security Pacific) and U.S. Trust Company of New York (and its
counsel) (collectively, Security Pacific (and Bank of America, as successor),
U.S. Trust and its counsel are referred to as the "Indenture Trustee Parties").
In Action No. C94-3076 CAL, Plaintiffs dismissed with prejudice all claims
against all defendants except the Excluded Claims against Bank of America and
Security Pacific. Action No. C94-2730 CAL was dismissed with prejudice in its
entirety.
 
     The Abraham Settlement provides that Settling Plaintiffs shall indemnify
Norcal, the ESOP and certain related persons, including Norcal's and the ESOP's
current counsel and financial advisers and past and present officers, directors,
affiliates and subsidiaries (collectively, the "Indemnified Norcal Parties"),
against claims brought against any of the Indemnified Norcal Parties by the
Indenture Trustee Parties or any of the Released Parties caused by, arising out
of or related to the Excluded Claims (the "Indemnified Claims"), including
claims against Norcal for indemnification by Released Parties who are sued by
the Indenture Trustee Parties as a result of Settling Plaintiffs' pursuit of the
Excluded Claims. Settling Plaintiffs' indemnification extends to reasonable
attorneys' fees and costs incurred in connection with such Indemnified Claims,
with the exception of Norcal's and the ESOP's own defense costs. The indemnity
is to be paid from certain funds to be placed in escrow (the "Escrow Account")
and not disbursed to Settling Plaintiffs until the later of the resolution of
all Indemnified Claims or, if no Indemnified Claims are brought, then nine
months after deposit. No Settling Plaintiff is personally liable on the
indemnity beyond his, her or its interest in or distribution from the Escrow
Account. The funds to be placed in the Escrow Account consist of (i) any amounts
Settling Plaintiffs recover from the Indenture Trustee Parties (the "Escrowed
Recovery"); and (ii) a deferred settlement payment by Norcal, to be paid on the
earlier of the fifth anniversary of the effective date of the Abraham Settlement
and final resolution of Settling Plaintiffs' claims against the Indenture
Trustee Parties, in the amount of $500,000 reduced by the amount of reasonable
attorneys' fees and costs as to which Norcal or the ESOP is contractually
obligated to provide indemnification and/or reimbursement incurred by
Indemnified Norcal Parties (exclusive of Norcal and the ESOP) after September
30, 1995 in defense of claims arising out of Settling Plaintiffs' pursuit of the
Excluded Claims (the "Deferred Settlement Payment").
 
                                       22
<PAGE>   24
 
     On September 29, 1995, the court entered an order in Action No. C94-3076
CAL (the "Good Faith Determination") finding that the Abraham Settlement was
fair and made in good faith under all applicable legal standards, including
California Code of Civil Procedure sections 877 and 877.6. The court barred, and
enjoined the prosecution of, any claim against the Released Parties, including
Norcal and the ESOP, by any other joint tortfeasor (including Bank of America
and Security Pacific) for full or partial equitable comparative contribution or
full, partial or comparative equitable indemnity, based on comparative
negligence or comparative fault, however captioned or styled, that is based
upon, arises out of, or in any way relates to the released claims. The United
States Court of Appeals for the Ninth Circuit denied Bank of America's petition
for writ of mandamus seeking, among other things, the vacating of the Good Faith
Determination. If, as a result of an appeal from a judgment, or otherwise, the
Good Faith Determination were reversed, vacated or modified in such a way that
the Indenture Trustee Parties were not prohibited from proceeding against some
or all of the Released Parties on such claims for implied equitable indemnity
and contribution, the Settling Plaintiffs' indemnification of Norcal and related
parties would still extend to such claims.
 
     On August 20, 1996, Norcal and the ESOP, pursuant to an order allowing them
to intervene in Action No. C94-3076 CAL, filed a declaratory relief action (the
"Declaratory Relief Action") in that Action against Bank of America entitled
Norcal Waste Systems, Inc., et al. v. Bank of America, N.T. & S.A., seeking a
declaration that they have no obligation to indemnify the Bank or reimburse the
Bank's costs or litigation expenses following the Abraham Settlement under the
indemnity provisions of certain agreements between Bank of America or Security
Pacific, on the one hand, and Norcal or the ESOP, on the other (the "Indemnity
Agreements"), in connection with Settling Plaintiffs' pursuit of the Excluded
Claims. By order dated December 17, 1996, the court granted summary judgment to
Norcal and the ESOP in the Declaratory Relief Action.
 
     On September 10, 1996, Bank of America, in its own capacity and as
successor to Security Pacific, served a cross-complaint (the "Cross-Complaint")
in Action No. C94-3076 CAL entitled Security Pacific National Bank, et al. v.
Norcal Waste Systems, Inc., et al., alleging a variety of claims against, among
others, Norcal and the ESOP relating to the Abraham Settlement or the Indemnity
Agreements. The Cross-Complaint included claims for fraud, breach of contract,
and tortious breach of the implied covenant of good faith and fair dealing in
entering into the Abraham Settlement, and claims for declaratory relief and
breach of contract in connection with the Indemnity Agreements. In addition to
punitive damages, the Cross-Complaint sought compensatory damages subject to
proof at trial, alleged to include possibly in excess of $13.0 million in
damages. By order dated December 17, 1996, the court dismissed all claims in the
Cross-Complaint with prejudice, except that the claim against the ESOP for
tortious breach of the implied covenant was dismissed with prejudice insofar as
it attempted to state a tort claim and was otherwise dismissed without
prejudice.
 
     Any claims in the Cross-Complaint are "caused by or related to the Excluded
Claims" and, as such, are Indemnified Claims covered by Settling Plaintiffs'
indemnity. Accordingly, any liability incurred by Norcal (other than its own or
the ESOP's defense costs) in connection with the Cross-Complaint would be
payable from the Escrowed Recovery, if any, and potentially the Deferred
Settlement Payment. Norcal believes that it is unlikely that it would be liable
to pay an amount in damages on the Cross-Complaint that is materially greater
than any recovery by Settling Plaintiffs from Bank of America (aside from any
liability for damages in the amount of Bank of America's litigation expenses),
and thus any award of damages (aside from such expenses) on the Cross-Complaint
is not likely to exceed the Escrowed Recovery (before reduction for indemnified
defense costs).
 
IRS Dispute.
 
     The Internal Revenue Service (the "Service") has almost completed an audit
of the Company's income tax returns for the fiscal years ending September 30,
1988 through 1991. During the course of that audit, the Service also examined
certain transactions involving employee benefit plans sponsored by the Company.
 
     With respect to this audit, the Service has proposed a number of
adjustments (some of which have been agreed to by the Company). In particular,
the Service has stated that it does not (i) believe the Company should be
permitted to deduct post-retirement health and welfare benefits paid to former
employee-
 
                                       23
<PAGE>   25
 
shareholders of Norcal's predecessors on the grounds that such benefits should
be treated as additional purchase price consideration for the stock acquired
from such shareholders and therefore must be capitalized, or (ii) agree with the
manner in which the Company has calculated certain deductions related to its
landfill closure and post-closure costs. The Company has advised the Service
that it intends to challenge vigorously the Service's proposed treatment of the
post-retirement health and welfare benefits. The Service and the Company have
tentatively agreed on an alternative treatment of landfill closure and
post-closure costs that is acceptable to the Company.
 
     The Company does not believe that the income tax adjustments proposed by
the Service will have a material adverse effect on the financial condition of
the Company. However, certain income tax deductions that would otherwise be
available to the Company in future periods (in particular, deductions related to
the provision of post-retirement health and welfare benefits to former
employee-shareholders) may be substantially reduced or deferred.
 
     The Service also asserted that the role played by a subsidiary of Norcal in
connection with the investment by certain of the Company's pension plans,
through Bank of America, the trustee of such plans, in Techno-Therm, Inc., a
Colorado corporation in which Mr. Sangiacomo and certain former executive
officers of Norcal also invested, constituted a "prohibited transaction" for
which the Company is liable for penalties under the Code. The Company disagrees
with the Service's assertion, but has nevertheless reached a compromise
agreement with the Service regarding the transaction that will permit the
Company to resolve this matter in a way that will not have a material adverse
effect on the Company's financial condition or cash flow.
 
     The Service also investigated the transactions pursuant to which the ESOP
acquired and subsequently disposed of Excel Environmental, Inc. ("Excel") (the
"Excel Transaction"), and in accordance with that investigation, the Service
sought technical advice from its national office as to how the Excel Transaction
and related events should be treated for tax purposes. The Service's auditors
requested specific guidance, among other things, as to: (i) whether the ESOP
acquired impermissible assets upon the merger of the Excel employee stock
ownership plan (the "Excel ESOP") into the ESOP or otherwise should be subject
to sanctions (including possible revocation of its qualified status) by reason
of its participation in the acquisition and subsequent disposition of Excel,
(ii) whether the Company should be subject to so-called "prohibited transaction"
taxes by reason of its role in the acquisition and disposition of Excel by the
ESOP, and (iii) what the resulting income tax consequences of the Excel
Transaction should be to the Company, the former Excel shareholders, the Excel
ESOP and the ESOP in light of the resolution of the foregoing issues. In
conjunction with the Service's request for technical advice, the Company
provided a detailed position paper setting forth why the Company believes there
should be no adverse tax consequences to the Company or the ESOP as a result of
the Excel Transaction. The National Office of the Service has issued a favorable
technical advice memorandum to the Company that concurs with the views espoused
by the Company as to how the Excel Transaction should be treated for tax
purposes on all but one immaterial issue. Accordingly, this matter will be
resolved in a manner that will not have a material adverse effect on the
Company's financial condition or cash flow.
 
     The Service has also initiated an audit of the Company's income tax returns
for the periods ended September 30, 1992, through September 30, 1994.
 
Environmental Liabilities.
 
     Cummings Road Landfill.  In 1987, contamination was confirmed in the
groundwater underlying and in the vicinity of the Company's Cummings Road
Landfill in Humboldt County, California. Investigations indicated that the
landfill was the source of the contamination. In response to civil claims, the
Company made cash payments, restricted use of certain property, exchanged
property and provided an alternative water supply to certain residents and
businesses affected or potentially affected by the impacted groundwater. As part
of a revised corrective action plan submitted to and in 1994 approved by the
Regional Water Quality Control Board various landfill improvements have been
made or are under construction including a trench to intercept upgradient
groundwater to divert it away from the landfill. The Company currently estimates
its remaining expenditures to be incurred to be $1.9 million and has established
a mechanism with the County of Humboldt to secure reimbursement of such
remediation costs at the landfill by the end of the current disposal agreement
 
                                       24
<PAGE>   26
 
on September 30, 1998. In addition, the Company has extended a municipal water
line to certain residents downgradient of the landfill. The Company estimates
that there are $0.6 million in additional expenditures to be incurred in
connection with completion of this water line project. The Company plans to seek
reimbursement from third parties for a portion of the total project cost of the
water line.
 
     On December 3, 1996, The Pacific Lumber Company ("Pacific Lumber") filed a
lawsuit against a subsidiary of the Company entitled The Pacific Lumber Company
v. City Garbage Company of Eureka et al. in the Superior Court of the State of
California, County of Humboldt. The lawsuit alleges that a parcel of real
property owned by Pacific Lumber has been affected by contamination emanating
from the Cummings Road Landfill and seeks unspecified damages based upon strict
liability, negligence, nuisance, trespass, waste and equitable indemnity. The
lawsuit also seeks declaratory relief that the defendants are responsible for
cleaning up and removing any contamination on Pacific Lumber's property and for
any other remedial measures which might be required. The Company has already
taken remedial action at the Cummings Road Landfill with respect to the source
of the contamination, which action was approved by the applicable regulatory
authority. The Company believes that there has been no significant economic
damage to Pacific Lumber's property and therefore that even if this matter is
resolved in a manner adverse to the Company, it is not likely to have a material
adverse effect on the Company's financial condition or cash flow.
 
     Sierra Point Landfill.  On March 25, 1996, the California Regional Water
Quality Control Board (the "Regional Board") issued a formal request for
information pursuant to the California Waste Code to Sunset Scavenger Company
("Sunset"), a subsidiary of Norcal, regarding Sunset's ownership, prior to 1980,
of the now closed Sierra Point landfill in the City of Brisbane. Preliminary
research indicates that landfilling ceased at the site prior to 1972 and closure
work was completed by 1982. The Regional Board issued the information request in
connection with its review of the existing Waste Discharge Requirement ("WDRs")
order for the landfill. On April 17, 1996, the Regional Board adopted updated
WDRs naming seven parties, but not Sunset or Norcal, as responsible for
performing specified post-closure landfill monitoring, maintenance and,
potentially, corrective action or work at the landfill if monitoring indicates
that is necessary. Although neither Sunset nor Norcal were named in the WDRs,
the Regional Board staff stated at the April 17, 1996 hearing that they may
propose to add Sunset or Norcal as parties to the WDRs or to a site cleanup
requirements ("SCRs") order in the future. Sunset is preparing its response to
the information request, but it is not possible at this stage of the
administrative proceeding to determine what, if any, Sunset or Norcal's
liabilities may be at the landfill. If Sunset or Norcal ultimately is named in
the WDRs or SCRs order, either or both may be required to fund or perform a
share of the post-closure work. Such work could include pumping and treatment of
landfill leachate, if monitoring demonstrates that such work is necessary.
Sunset and Norcal currently are not able to estimate the costs that may be
associated with such work.
 
     In the ordinary course of its business, the Company has incurred
environmental liabilities at some of its other sites including soil and water
contamination. Although the Company believes the environmental liabilities at
these sites will not have a material adverse effect on the Company, there can be
no assurance that such liabilities will not be material or that other material
liabilities will not arise in the future at these or other sites.
 
Other Matters
 
     From time to time, in the normal course of its business, the Company may
become subject to various judicial and administrative proceedings involving
federal, state or local agencies. The Company could incur substantial legal
expenses during the course of such proceedings and the outcome of one or more of
these proceedings could have an adverse impact on the Company's business. From
time to time, the Company also may be subjected to actions brought by
individuals or citizens' groups in connection with the grant or permits for its
operations or alleging violations of permits or other regulatory requirements
pursuant to which the Company operates, which, if successful, could have a
material adverse effect on the Company's business. See "Risk
Factors -- Environmental Regulation and Potential Litigation."
 
     The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to ordinary
litigation are adequately provided for or that resolution of such matters will
not have a material adverse impact on the financial condition of the Company;
however, there can be no assurance that the impact of such matters on its
results of operations or cash flows for any given reporting period will not be
material.
 
                                       25
<PAGE>   27
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     On July 22, 1996, the ESOP, as the sole shareholder of the Company,
approved consulting and related agreements with each of Messrs. Pacini and
Corbolotti, former officers of the Company.
 
     On July 25, 1996, the ESOP, as the sole shareholder of the Company,
approved an amendment to the Company's Bylaws, which such amendment set the
number of directors of the Company at five.
 
     On July 30, 1996, the ESOP, as the sole shareholder of the Company,
approved (i) the 1996 Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan"); (ii) grants of options to each of Messrs. Molinari and Flynn
and Ms. Kaufman pursuant to the Non-Employee Director Plan, each such grant
being for 35,000 shares of common stock; (iii) grants of options to each of
Messrs. Molinari and Flynn pursuant to the 1996 Executive Stock Incentive Plan
(the "1996 Stock Plan"), each such grant being for 15,000 shares of common
stock; and (iv) the Employment Agreement and the Stock Option Agreement (which
such agreement provided for, among other things, a grant of an option for
960,000 shares of common stock under the 1996 Stock Plan) with Mr. Sangiacomo.
 
                                       26
<PAGE>   28
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's common stock is 100% owned by the ESOP and is not publicly
traded. As of December 15, 1996, there were 1,708 employees who were
participants in the ESOP.
 
     During the two most recent fiscal years, the Company has declared no cash
dividends on its common stock. The Indenture relating to the Senior Notes
provides that the Company may not, and may not permit any of its subsidiaries
to, directly or indirectly, declare or pay any dividend or make any distribution
on account of, or any contribution in respect of, its capital stock, other than
dividends or distributions payable in capital stock (other than stock, or any
security convertible into common stock, with certain mandatory dividend or
redemption provisions) of the Company or dividends or distributions payable from
a subsidiary to the Company or any wholly-owned subsidiary of the Company, if at
the time of and after giving effect to such dividend, distribution or
contribution, certain conditions are not met. This provision does not prohibit
certain purchases of capital stock distributed by the ESOP, certain
contributions or dividends paid to the ESOP, or certain loans to the ESOP.
 
     Pursuant to the Credit Agreement, neither the Company nor any of its
subsidiaries may declare or pay any distributions (including dividends) on or in
respect of any class of capital stock other than (i) distributions payable
solely in its capital stock; (ii) distributions of cash by a subsidiary of the
Company to a Subsidiary Guarantor or to the Company; (iii) certain distributions
made to the ESOP; (iv) distributions made by the Company to repurchase any
capital stock of the Company distributed by the ESOP, to the extent made under
certain circumstances; and (v) other distributions not to exceed $1,000,000 in
the aggregate per fiscal year, subject to certain events of default.
 
     The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractural and legal
restrictions and other factors deemed relevant by the Board of Directors.
 
                                       27
<PAGE>   29
 
ITEM 6. SELECTED FINANCIAL DATA
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
 
                            SELECTED FINANCIAL DATA
 
     The following is a summary of certain consolidated financial information
regarding the Company for the five years ended September 30, 1996.
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------
                                                    1996      1995      1994      1993      1992
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
INCOME STATEMENT DATA
  Revenues.......................................  288,215   271,501   247,176   255,149   253,925
                                                   -------   -------   -------   -------   -------
  Cost of operations:
     Operating expenses..........................  202,848   183,865   167,740   173,515   174,123
     Depreciation and amortization...............   18,320    19,985    20,141    22,704    26,233
     ESOP compensation expense(a)................   10,291     7,923     7,319     6,920     3,519
     General and administrative..................   30,965    26,446    24,849    26,286    24,752
     Restructuring expenses(b)...................       --        --        --        --    36,533
                                                   -------   -------   -------   -------   -------
          Total cost of operations...............  262,424   238,219   220,049   229,425   265,160
                                                   -------   -------   -------   -------   -------
               Operating income (loss)...........   25,791    33,282    27,127    25,724   (11,235)
  Interest expense...............................   23,913    19,909    20,920    23,900    28,958
  Gain (loss) on dispositions, net...............     (477)    1,279     6,744    11,477        --
  Settlement of litigation(c)....................    3,648        --     5,480        --        --
  Other income (expense).........................    1,111     2,443     1,389     6,287       795
                                                   -------   -------   -------   -------   -------
               Income (loss) before income taxes,
                 extraordinary item and
                 cumulative effect of change in
                 accounting principle............   (1,136)   17,095     8,860    19,588   (39,398)
  Income tax expense (benefit)...................       --     6,662     2,500     1,447      (317)
                                                   -------   -------   -------   -------   -------
               Income (loss) before extraordinary
                 item and cumulative effect of
                 change in accounting
                 principle.......................   (1,136)   10,433     6,360    18,141   (39,081)
  Extraordinary gain on early extinguishment of
     long-term debt, net of $0 income taxes......   31,379        --        --        --        --
  Cumulative effect on prior years of change in
     accounting for income taxes.................       --        --     2,500        --        --
                                                   -------   -------   -------   -------   -------
               Net income (loss).................   30,243    10,433     8,860    18,141   (39,081)
                                                   =======   =======   =======   =======   =======
BALANCE SHEET DATA
  Property and equipment, net....................  137,147   132,431   129,566   143,706   160,242
  Total assets...................................  321,235   299,152   292,299   305,655   322,763
  Total long-term debt, including current
     portion(d)..................................  176,740   205,410   226,013   258,186   271,860
  Stockholder's equity (deficit).................    6,117   (43,878)  (65,935)  (81,864)  (99,162)
</TABLE>
 
---------------
(a) Non-cash ESOP compensation expense is calculated under the shares allocated
    method based upon principal repayment on the ESOP's indebtedness to the
    Company, funded by contributions from the Company.
 
(b) Restructuring expense in 1992 includes losses incurred in connection with
    the disposal of certain operations, asset abandonments, and writedowns,
    reserves for litigation expenses and settlements, and professional and other
    fees.
 
(c) Data for 1996 and 1994 represent non-recurring expenses incurred in
    connection with the settlement of litigation involving the ESOP Notes and
    the Old Subordinated Notes, respectively.
 
(d) Includes indebtedness of the ESOP in fiscal years 1992 to 1995 as required
    to be reflected on the Company's balance sheet by GAAP.
 
                                       28
<PAGE>   30
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     Unless otherwise indicated, references in the discussion below to a
particular year are references to the Company's fiscal year ended September 30.
 
FORWARD LOOKING INFORMATION
 
     Those statements followed by an asterisk (*) may be perceived to be forward
looking statements. Any such statements should be considered in light of various
risks and uncertainties that could cause results to differ materially from
expectations, estimates or forecasts expressed. The various risks and
uncertainties described earlier (see "Risk Factors" in Item 1) and elsewhere in
this Form 10-K 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, fluctuations in commodities prices, changes in
environmental regulations or related laws and competition. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by it or on its behalf.
 
GENERAL
 
     The Company's revenues are comprised primarily of fees charged to
residential, commercial and industrial customers for the collection and disposal
of solid waste, disposal fees charged to third parties who dispose at the
Company's transfer stations and landfills, fees charged for landfill operations
and solid waste systems management activities for third party landfill owners,
and revenues generated from the sale of recyclable materials.
 
     Collection and disposal revenues are subject to pressures from a variety of
sources, including increased competition, reductions and diversion of solid
waste and regulatory changes. Revenues are generated through rates charged to
customers. Residential rates are generally covered by formal rate setting
mechanisms as established by rate boards or other local government
jurisdictions, which provide a specified return on allowable costs. Commercial
and industrial rates are generally subject to competitive considerations if not
covered by formal rate setting mechanisms. The rate setting process may result
in the exclusion of certain costs and/or delays in cost recovery. The recent
Recommended Rate Orders in San Francisco disallowed from future rate recovery
certain ESOP-related expenses. See discussion below in "Liquidity and Capital
Resources." To the extent that certain operating costs are excluded from the
allowable costs to be recovered, operating margins will be negatively impacted.*
The Company believes the trend of increasing pressure on collection rates, and
therefore profit margins, will continue in the future.*
 
     During 1996, the Company commenced management of the operations under the
new contract in San Bernardino County. In addition to the operations and
engineering activities with respect to all active landfill sites, the new
contract includes the potential to generate substantial revenues through the
development and implementation of the County's Solid Waste Strategic Plan.*
Approximately 14% of the Company's revenues for fiscal year 1996 were derived
from services performed for San Bernardino County. The Company's revenues from
San Bernardino County are derived from two categories of services. The core
service is the performance of ongoing landfill operations activities. The
Company estimates that revenues from this component will account for 35-50% of
total revenues generated in San Bernardino County in 1997.* Over the term of the
contract the amount of revenues from this core service will vary primarily as a
result of changes in volume of waste deposited at landfills and changes in the
Company's per ton compensation rate. The other component of revenues represents
activities associated with the planning and implementation of the strategic plan
to regionalize landfill operations in San Bernardino County. This includes
planning, engineering and construction management for landfill expansions,
transfer station construction and landfill closures. It is anticipated that the
majority of these activities will be completed over the next 7 years, during
which time San Bernardino County plans to spend over $200 million.* The
Company's agreement with San Bernardino County terminates on June 30, 2001. The
Company believes the regionalization of the landfill disposal system will create
efficiencies for the County and can be used by the Company as a model to pursue
other opportunities of this nature, although there can be no assurance that the
Company will be successful in pursuing this strategy.*
 
                                       29
<PAGE>   31
 
     Although the Company will generate significant revenues from its services
for San Bernardino County, 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 profit margins are
limited by the contract.* The additional revenues are anticipated to generate
additional earnings but will tend to reduce the overall profit margin as
compared to historical levels.* This business involves substantial
sub-contractor, consulting and other related expenses paid to third parties. The
Company believes the dilutive impact on margin percentages may increase as
additional revenues and profits are generated by the San Bernardino County
contract and other similar activities.*
 
     The revenues derived from the sale of recyclable materials are volatile and
fluctuate in accordance with changes in prices of recyclable commodities which
in turn are, in many cases, dependent on worldwide supply of and demand for such
recyclable commodities. In the aggregate, the costs related to recycling
operations do not fluctuate in accordance with changes in the prices of
recyclable commodities and as a result the Company may experience increases or
decreases in profitability depending on changes in the prices for recyclable
commodities. The Company derives substantial revenues from the sale of paper and
paper products, which have suffered substantial declines since 1995.
 
     Operating expenses include labor, disposal fees paid to third parties,
fuel, equipment maintenance and rentals, engineering, consulting and other
professional services and other direct costs of operations. Also included are
accruals for landfill closure and corrective action costs, consistent with
regulatory requirements. General and administrative expenses include management
salaries, administrative and clerical overhead, professional services costs and
other fees and expenses.
 
     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 Service and are generally tax deductible. The debt
repayments by the ESOP result in allocation of Company common stock to ESOP
participants' accounts pursuant to an allocation formula. Distribution payments
are made by the ESOP to retired, terminated or withdrawing participants based on
their vested allocated shares of Company common stock.* The Company expects
future contributions to the ESOP to fund distributions to increase significantly
as additional employees reach retirement age, as additional shares are allocated
to employee accounts and if the appraised value of the Company common stock
increases.* During 1996, the Company made contributions to the ESOP that, in
addition to funding the distribution obligation and the scheduled loan payment,
allowed the ESOP to prepay approximately $9.0 million of intercompany loans.
This additional contribution resulted in substantial tax savings and additional
ESOP compensation expense relative to the additional shares allocated.* The
Company may make similar additional contributions to the ESOP in excess of the
scheduled contribution in future periods corresponding to tax advantages
afforded by the accelerated contributions.*
 
     The Company has no present intention to pay a dividend. Any future
determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, tax benefits and applicable contractual and legal
restrictions and other factors deemed relevant by the Board of Directors.
 
                                       30
<PAGE>   32
 
RESULTS OF OPERATIONS
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
 
                        SUMMARY STATEMENTS OF OPERATIONS
                    PERCENTAGE RELATIONSHIP TO TOTAL REVENUE
 
<TABLE>
<CAPTION>
                                                                1996         1995         1994
                                                               ------       ------       ------
<S>                                                            <C>          <C>          <C>
Revenues:
  Collection and disposal operations.........................    78.2%        81.6%        84.6%
  Third party landfill management services...................    15.8%         7.9%         7.6%
  Recycled commodities sales.................................     6.0%        10.5%         7.8%
                                                                -----        -----        -----
          Total revenues.....................................   100.0%       100.0%       100.0%
Cost of operations:
  Operating expenses.........................................    70.4%        67.7%        67.9%
  Depreciation and amortization..............................     6.4%         7.4%         8.1%
  ESOP compensation expense..................................     3.6%         2.9%         3.0%
  General and administrative.................................    10.7%         9.7%        10.0%
                                                                -----        -----        -----
          Total cost of operations...........................    91.1%        87.7%        89.0%
                                                                -----        -----        -----
                    Operating income.........................     8.9%        12.3%        11.0%
Interest expense.............................................    (8.3)%       (7.3)%       (8.5)%
Gain (loss) on dispositions, net.............................    (0.2)%        0.4%         2.7%
Settlement of litigation.....................................    (1.2)%        0.0%        (2.2)%
Other income (expense).......................................     0.4%         0.9%         0.6%
                                                                -----        -----        -----
                    Income (loss) from operations before
                      income taxes and extraordinary item....    (0.4)%        6.3%         3.6%
                                                                -----        -----        -----
Income tax expense...........................................     0.0%         2.5%         1.0%
                                                                -----        -----        -----
                    Income (loss) before extraordinary
                      item...................................    (0.4)%        3.8%         2.6%
                                                                -----        -----        -----
Extraordinary item -- gain on early retirement of debt,
  net........................................................    10.9%         0.0%         0.0%
Cumulative effect on prior years of change in accounting for
  income taxes...............................................     0.0%         0.0%         1.0%
                                                                -----        -----        -----
                    Net income...............................    10.5%         3.8%         3.6%
                                                                =====        =====        =====
</TABLE>
 
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
 
     Revenues.  Revenues for 1996 increased $16.7 million (6.2%) to $288.2
million from $271.5 million for 1995. The increase in revenues was primarily due
to higher third-party landfill management services revenues and waste collection
and disposal revenues partially offset by lower recycled commodities sales
revenues. Third-party landfill management services revenues were higher due to
new and expanded landfill operations and solid waste management activities in
San Bernardino and San Diego Counties. Waste collection and disposal revenues
were higher primarily as a result of rate increases in several service areas.
Recycled commodities sales revenues were down due to lower prices received from
the sale of recyclable commodities, primarily paper and cardboard.
 
     Operating Expenses.  Operating expenses for 1996 increased $18.9 million
(10.3%) to $202.8 million from $183.9 million for 1995. As a percentage of
revenues, operating expenses increased to 70.4% in 1996 from 67.7% in 1995. The
increased costs were due to higher project and subcontractor related costs,
payroll and related costs and fuel costs. The increase in project management and
subcontractor costs was associated with new and expanded third-party landfill
management services activities in San Bernardino and San Diego
 
                                       31
<PAGE>   33
 
Counties. Payroll and related costs were higher as a result of additional hires
and scheduled union wage increases. Fuel costs were higher, reflecting a general
increase in fuel prices. These increased operating costs were partially offset
by lower recycling purchases due to lower costs for recyclable commodities and
lower landfill costs resulting from increased capacity and changes to estimated
closure costs at the Company-owned landfills.
 
     Depreciation and Amortization.  Depreciation and amortization decreased
$1.7 million (8.3%) in 1996 to $18.3 million from $20.0 million in 1995. The
decrease is attributable to a reduction in landfill depletion expense based on
increased capacity at the Company's landfills along with a reduction in
depreciation expense from a number of assets that became fully depreciated at
September 30, 1995 along with the buyouts of expiring capital leases during
fiscal year 1995.
 
     ESOP Compensation Expense.  ESOP compensation expense is primarily based on
the Company's contribution to the ESOP. The Company contributes to the ESOP to
allow for repayment of intercompany loans and to fund distributions to retired,
terminated or withdrawing participants. ESOP expense for 1996 increased $2.4
million to $10.3 million from $7.9 million for 1995. The increase in expense can
be attributed to higher contributions made to the ESOP that allowed the ESOP to
make scheduled loan payments and prepayment of additional principal along with
increases in contributions related to the funding of distributions.
 
     General and Administrative.  General and administrative expenses for 1996
increased $4.6 million (17.4%) to $31.0 million from $26.4 million in 1995. As a
percentage of revenues, general and administrative expenses increased to 10.7%
for 1996 from 9.7% for 1995. The increased costs were due to higher payroll and
related costs and other expenses. The increase in payroll and related costs
resulted from general wage increases and additional management personnel. Other
administrative costs increased as a result of the new and expanded third-party
landfill management services in San Bernardino and San Diego Counties.
 
     Operating Income.  Operating income decreased $7.5 million (22.5%) to $25.8
million in 1996 from $33.3 million in 1995. As a percentage of revenues,
operating income decreased to 8.9% for 1996 from 12.3% for 1995. The primary
causes of the decrease in operating income for 1996 were the significant drop in
recycling revenues due to lower commodity prices coupled with higher operating,
ESOP compensation and general and administrative expenses.
 
     Interest Expense.  Interest expense increased by $4.0 million (20.1%) to
$23.9 million for 1996 from $19.9 million in 1995. The increase is due to a
higher effective interest rate associated with the Company's Senior Notes issued
as part of the refinancing transaction in November 1995.
 
     Settlement of Litigation.  Settlement of litigation for 1996 reflects the
payment of $3.6 million made to the holders of ESOP Notes as part of the ESOP
noteholder litigation settlement agreement.
 
     Gain (Loss) on Dispositions.  The loss on dispositions of $0.5 million for
1996 represents the net impact of asset disposals, primarily real estate. The
gain on dispositions of $1.3 million for 1995 primarily represented the gain on
the sale of the Company's 50% ownership interest in an affiliated company.
 
     Other Income (Expense).  Other income decreased $1.3 million (54.5%) to
$1.1 million for 1996 from $2.4 million for 1995. The decrease in other income
was due to non-operating expenses incurred during 1996, including equity in
losses of an affiliate, certain expenses associated with the Refinancing, losses
incurred from the sales of investments held in trust accounts, lower interest
earned on trust fund balances and the absence of equity in earnings of another
affiliate which was sold in July 1995.
 
     Income Tax Expense (Benefit).  There was no income tax expense for 1996
compared to income tax expense of $6.7 million in 1995. The Company experienced
an effective rate for fiscal 1996 of zero as a result of realizing certain of
its deferred tax assets for which a valuation allowance had previously been
established.
 
     Extraordinary Gain.  The Company recorded an extraordinary gain of $31.4
million as a result of the early extinguishment of subordinated notes pursuant
to the refinancing transaction.
 
     Net income.  The Company recorded net income of $30.2 million for 1996
compared to net income of $10.4 million for 1995. The net income for 1996 is
attributable to the Extraordinary Gain, offset by those
 
                                       32
<PAGE>   34
 
factors discussed in Operating Income as well as higher interest expense,
settlement of litigation and lower other income.
 
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
 
     The results of operations of the Company during 1995 were impacted by the
performance of services under a contract to operate five landfills for San Diego
County in March 1995 and the expiration of a contract to operate a landfill for
a third party in August 1995. The results of operations of the Company during
1994 were impacted by the sale of the stock of two subsidiaries, and
substantially all of the assets of a third subsidiary, during the first quarter
of that year.
 
     Revenues.  Revenues for 1995 increased $24.3 million (9.8%) to $271.5
million from $247.2 million for 1994. Net of the effect of disposed operations,
which comprised revenues of $2.0 million for 1995 and $6.4 million for 1994,
revenues from continuing operations increased by $28.7 million or 11.9%. The
increase in revenues was due to higher waste collection and disposal, recycled
commodities and third-party landfill management services revenues. Waste
collection revenues increased due to rate increases received in several service
areas, including San Francisco. Recycled commodities sales revenues increased
due to higher prices received from the sale of commodities, primarily paper and
cardboard. Third-party landfill management services revenues increased primarily
due to the new San Diego contract.
 
     Operating Expenses.  Operating expenses for 1995 increased $16.2 million
(9.6%) to $183.9 million from $167.7 million for 1994. As a percentage of
revenues, operating expenses decreased to 67.7% in 1995 from 67.9% in 1994. Net
of the effect of disposed operations, which had operating expenses of $1.5
million for 1994, operating expenses from continuing operations increased by
$19.1 million or 11.7%. The increase was due to higher disposal costs, recycling
purchases, payroll and related costs, landfill costs, repairs and maintenance
and other expenses. The increase in disposal cost was a result of paying higher
disposal fees at several operating subsidiaries, including the San Francisco
operations. The increase in recycling purchases was due to higher prices paid
for recyclable commodities. The increase in payroll and related costs was due to
scheduled wage increases. The increase in landfill costs was due to the
increased scope of activities at several landfills. The increase in repairs and
maintenance was due to inflationary increases. The increase in other expenses
included increases in contract services and franchise fees.
 
     ESOP Compensation Expense.  ESOP compensation expense is primarily based on
the Company's contribution to the ESOP and increased $0.6 million to $7.9
million for 1995 from $7.3 million for 1994. ESOP compensation expense increased
due to increased share allocations and increased contribution for share
repurchases related to a higher share price.
 
     General and Administrative.  General and administrative expenses for 1995
increased $1.6 million (6.5%) to $26.4 million from $24.8 million for 1994. As a
percentage of revenues, general and administrative expenses decreased to 9.7% in
1995 from 10.0% in 1994. Net of the effect of disposed operations, which had
general and administrative expenses of $0.2 million for 1995 and $0.9 million
for 1994, general and administrative expenses for continuing operations
increased by $2.7 million or 11.3%. The increase was due to an increase in fees
for professional services, along with higher outside data processing, travel and
outside equipment rental costs.
 
     Operating Income.  Operating income increased $6.2 million (22.7%) to $33.3
million in 1995 from $27.1 million in 1994. As a percentage of revenues,
operating income increased to 12.3% for 1996 from 11.0% for 1995. The primary
cause of the increase in operating income for 1995 was the significant increase
in recycling revenues due to higher commodity prices.
 
     Interest Expense.  Interest expense for 1995 decreased $1.0 million (4.8%)
to $19.9 million from $20.9 million for 1994. The decrease was due to payments
made pursuant to debt obligations, and the resultant lower balances outstanding,
during 1994 and 1995 and a reduction in interest accrued on the Class A and B
Notes as compared to the Old Subordinated Notes.
 
     Gains on Dispositions.  The gain on dispositions of $1.3 million for 1995
primarily represented the gain on the sale of the Company's 50% ownership
interest in an affiliated company. The gain on dispositions of $6.7
 
                                       33
<PAGE>   35
 
million in 1994 primarily resulted from the sale of the stock of one subsidiary
and substantially all of the assets of another, along with the sale of certain
real property.
 
     Settlement of Litigation.  Settlement of litigation for 1994 reflects the
payment of $5.5 million made to the holders of Old Subordinated Notes as part of
the Old Subordinated Notes noteholder litigation settlement agreement.
 
     Other Income (Expense).  Other income for 1995 increased $1.0 million
(75.9%) to $2.4 million from $1.4 million for 1994. The increase in other income
was due to an increase in the interest income earned on trust funds and cash
balances in certain restricted cash accounts established by the Company in
connection with the Third Amended and Restated Credit Agreement dated as of
September 30, 1992, as amended, among Norcal and its lenders (the "Old Credit
Agreement"). In connection with the Refinancing in November 1995, the Old Credit
Agreement was terminated.
 
     Income Tax Expense (Benefit).  The income tax expense provision for 1995
increased to $6.7 million from $2.5 million for 1994. The effective income tax
rate for 1995 was 39%, which is lower than the federal and state statutory rates
due to utilization of deferred deductions upon which no benefit was previously
recognized. The increase in income tax expense for 1995 was due to higher income
before taxes and a higher effective income tax rate.
 
     Effect of Accounting Change.  Effective October 1, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" which allows, among other things, the recognition of a deferred
tax asset associated with net operating losses available to offset future
taxable income. The Company recognized a cumulative adjustment related to
available net operating losses which increased income by $2.5 million in 1994.
 
     Net Income.  The Company recorded net income of $10.4 million for 1995
compared to net income of $8.9 million for 1994. The increase in net income for
1995 is attributable to those factors discussed in Operating Income, lower
interest expense and higher other income partially offset by higher income
taxes.
 
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. Prior to September 30, 1996, the Company had operated with working
capital deficits for several years, primarily due to the current portions of
debt obligations and other accrued liabilities. Throughout this period, the
Company financed its operations primarily through operating cash flow and the
proceeds from divestiture of certain operations and other assets. The Company
was able to take advantage of access to limited capital lease financing during
1994 and 1995. With the completion of the Refinancing in November 1995 and the
impact of operations for the year ended September 30, 1996, the Company has
improved its working capital position by $40.4 million to a working capital
surplus of $4.9 million from a deficit of $35.5 million at September 30, 1995.
In addition to the improvements in working capital, as part of the Refinancing
the Company entered into the Credit Agreement which provides for up to $100
million of additional borrowings 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 has a five-year term. At September
30, 1996, the Company had utilized $9.4 million of the credit facility provided
by the Credit Agreement for letters of credit and had availability under the
Credit Agreement of approximately $25.0 million (with additional amounts
potentially available to fund acquisitions based on certain pro-forma ratios)
along with $15.6 million which may be utilized for additional letters of credit.
Changes in availability under the Credit Agreement are a function of, among
other things, changes in operating results. The Credit Agreement was recently
amended primarily to provide additional flexibility under the financial
covenants contained therein and increase the Company's ability to incur certain
types of additional debt (including indebtedness incurred in connection with
acquisitions). The Company expects that by the end of fiscal year 1997 potential
availability under the Credit Agreement will be reduced by up to approximately
$12 million if the Recommended Rate Orders are put into effect without
modification by the Rate Board.* In addition, in November 1996 the Company
signed a letter
 
                                       34
<PAGE>   36
 
of intent for the provision of operating lease financing for certain capital
expenditures. The agreement, subject to final credit approval by the lessor,
would provide up to approximately $13.5 million of available financing.
 
     The Indenture governing the Senior Notes contains provisions which, among
other things, (i) limit the Company's and its subsidiaries' ability to declare
or pay dividends or other distributions (other than dividends or distributions
payable to Norcal or any wholly owned subsidiary of Norcal or, in certain cases,
the ESOP), (ii) limit the purchase, redemption or retirement of capital stock
and (iii) limit the incurrence of additional debt. As of September 30, 1996,
under the incurrence covenant in the Indenture, the Company would have been able
to incur approximately $4.0 million of additional debt (in addition to that
which would have been available under the Credit Agreement and was otherwise
permitted under the Indenture). The Company currently anticipates that the
incurrence covenant of the Indenture will preclude it from incurring such
additional debt for the remainder of fiscal year 1997.*
 
     The Senior Notes mature in November 2005. Interest on the Senior Notes
currently accrues at the rate of 13.0% per annum, which rate will increase by an
additional 0.25% per annum on each of May 16, 1997, and November 16, 1997, to a
maximum of 13.5% per annum. However, the interest rate on the Senior Notes will
revert to 12.5% at such time as the Company (in one or more transactions) will
have offered to purchase (whether or not any actual purchases are made) or
redeemed an aggregate of $25.0 million in principal amount of Senior Notes out
of the proceeds of equity sales.
 
     Cash Flow from Operations.  Cash flow from operations decreased 44.8% to
$20.4 million for 1996 from $36.9 million for 1995. The decrease was due to the
loss before extraordinary item of $1.1 million for 1996 compared to income of
$10.4 million for the same period a year ago. If the Company is unsuccessful in
its attempt to modify the Recommended Rate Orders in San Francisco, its future
annual operating results and cash flow could be adversely impacted by as much as
$4.0 million (the amount of ESOP expense recovery denied reimbursement).*
Changes in availability under the Credit Agreement are a function of, among
other things, changes in operating results. In addition, the Company expects
that by the end of fiscal year 1997 potential availability under the Credit
Agreement will be reduced by up to approximately $12 million, and the Company's
ability to incur certain other future debt financing could be significantly
curtailed or eliminated.*
 
     While the Company expects future cash flow generated from operating
activities and available financing to be adequate to support existing operations
of the Company, without significant improvements in cash flow and operating
results, the Company will likely be restricted under the Indenture from certain
borrowings for material capital expenditures or acquisitions to support the
growth of its business.*
 
     Cash flow from operations decreased 5.2% to $36.9 million for 1995 from
$38.9 million for 1994. The decrease in 1995 from 1994 included the payment of
$5.5 million in connection with the 1994 settlement of litigation related to the
Old Subordinated Notes.
 
     Cash Flow from Investing Activities.  Cash used by investing activities was
$7.2 million for 1996 compared to $9.6 million in 1995. The Company generated
$6.8 million from the liquidation of trust funds that were released upon
termination of an indemnification trust by current and former directors of the
Company. In addition, $2.7 million was received from restricted cash accounts
which were released upon completion of the Refinancing and applied to the then
outstanding debt balance. The Company also generated $4.5 million from the sale
of miscellaneous assets and used $20.8 million on capital expenditures during
1996, primarily vehicles, containers and other equipment. During 1995, the
Company withdrew $10.2 million from restricted cash accounts, received $6.1
million from the sale of miscellaneous assets, used $19.6 million for capital
expenditures, invested $5.6 million in marketable securities and deposited $0.6
million to trust funds.
 
     In 1994, the Company generated $3.1 million from investing activities as a
result of asset and subsidiary sales of $21.6 million and withdrawal of $11.3
million and $3.5 million from restricted cash accounts and trust funds,
respectively, partially offset by capital expenditures of $14.6 million and
deposits of $17.5 million and $0.7 million to restricted cash accounts and trust
funds, respectively.
 
     Cash Flow from Financing Activities.  Cash used by financing activities was
$7.2 million for 1996 compared to $24.9 million for 1995. As discussed above,
the Company completed the Refinancing on November 21, 1995 which included the
receipt of $170.2 million (after original issue discount) from the issuance of
Senior Notes and utilized the funds for the payment of then outstanding bank
debt, certain
 
                                       35
<PAGE>   37
 
capitalized lease obligations and redemption of subordinated notes. In addition,
the Company incurred approximately $10.8 million in fees and expenses related to
the transaction. The Company also received $3.5 million from the ESOP as payment
on loans to the ESOP paid from the insurance proceeds received in conjunction
with a litigation settlement. During 1995, the Company made principal payments
on long term debt and capital leases of $32.2 million, partially offset by
proceeds from capitalized leases and additional debt of $4.2 million and the
receipt of $3.1 million from the ESOP as payment on loans to the ESOP paid from
the proceeds of a litigation settlement with the former owners of a subsidiary.
Financing activities during 1994 consisted of principal payments on long term
debt and capital leases of $45.5 million, partially offset by proceeds from
capitalized leases of $2.2 million.
 
OTHER CASH REQUIREMENTS
 
     The Company has material financial obligations related to closure and
postclosure costs with respect to landfills it owns. While the amount of these
future obligations cannot be determined definitively at this time, the Company
estimates the costs in current dollars for final closure of landfills it owns,
as well as related post-closure activities for an estimated period of thirty
years after the closure of each respective landfill, at approximately $60.4
million.* The Company recognizes an expense and liability for such costs based
on units of production and makes contributions to trust funds to satisfy
financial assurance requirements and fund the landfill costs. As of September
30, 1996, the Company had a recorded liability of $25.3 million for such
projected costs in accordance with generally accepted accounting principles
("GAAP") and had on deposit $20.4 million in trust accounts consistent with
regulatory requirements. The Company estimates its 1997 funding requirement at
approximately $3.2 million, although the actual requirements could vary with
changes in cost estimates and/or regulatory requirements.*
 
     The Company also has significant financial obligations with respect to
certain environmental statutes and regulations protecting the groundwater and
surface water in the vicinity of its landfills. The Company estimates the
remaining expenditures associated with this issue to be approximately $4.4
million and is satisfying that obligation through deposits made to trust funds.*
The Company estimates its 1997 funding requirement at approximately $0.4
million, although the actual requirement could vary with changes in cost
estimates and/or regulatory requirements.* The Company also has recorded a
liability of $1.2 million for potential costs associated with other
environmental matters.
 
     The Company is in discussions with the City of San Francisco regarding
plans for the construction 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. If the Company and the City
reach agreement on the nature and scope of the project, the Company believes
construction of the facilities could begin in 12 to 18 months from that time.*
Over the term of the Senior Notes, the Company estimates that it will need to
invest substantial capital to acquire waste processing facilities and household
hazardous waste facilities, maintenance and administrative complexes and
equipment.* These projects, including the San Francisco facilities, will require
significant capital investments. The Company intends to seek continued rate
recovery for amounts expended on these projects and may seek to finance such
costs through additional secured borrowings, including $30.0 million of
borrowing for certain "Designated Capital Expenditures" (as defined in the
Indenture).*
 
     The Company is obligated to provide, subject to certain conditions,
post-retirement health and welfare benefits to certain former
employee-shareholders (as well as their spouses and dependents) of two of its
predecessors. Although the Company's obligation with respect to some of its
former employee-shareholders will terminate upon the earlier of October 1, 2000
or the final resolution of legal claims against third parties reserved pursuant
to the settlement of litigation, most of the Company's obligations extend for
the lifetime of such former employee-shareholders. The accrued post-retirement
medical benefit liability as of September 30, 1996 was $34.4 million and the
Company made cash payments during 1996 totalling approximately $1.1 million.
Payments at rates similar to those made in 1996 or greater, depending on medical
inflation rates and the aging of the persons entitled to benefits, are expected
for a significant number of years.
 
     The Company anticipates future increases of approximately $1.0 million to
$3.0 million annually in the ESOP contributions related to funding the
distributions to retired, terminated or withdrawing participants based on their
vested allocated shares of Company common stock.* The Company expects the
contributions
 
                                       36
<PAGE>   38
 
to increase as additional employees reach retirement age, as additional shares
are allocated to employee accounts and if the value of the Company common stock
increases. In addition, accelerated contributions made to realize tax benefits
will increase the ESOP compensation expense and will have a negative impact on
earnings.* While Norcal may consider a public offering of its common stock as a
potentially desirable way to eliminate the ESOP-related requirements to either
repurchase stock or fund cash distributions for retired, terminated or
withdrawing employees, there can be no assurance that Norcal would be able to
effect such an offering or otherwise create a trading market for its stock.*
 
     The Company is currently reviewing the adequacy and operational
capabilities of its management information systems. The cost of modifications to
the Company's information systems could impact the results of operations or
require substantial capital investment during 1997 and/or subsequent years.*
 
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 postclosure management and remediation of leachate and contaminated
groundwater could be subject to periodic and substantial upward revision as the
Company's knowledge increases concerning these factors.
 
INFLATION AND PREVAILING ECONOMIC CONDITIONS
 
     Historically, the Company has experienced cost increases due to the effects
of inflation on its operating expenses, particularly the cost of compensation
and benefits, and the replacement of or additions to property and equipment.
Fuel costs which fluctuate with inflation and other market conditions also have
affected operating results. Most of the Company's operations are subject to rate
setting processes which allow for the recovery of certain costs including labor
and fuel. However, inflationary increases in operating costs may cause the
Company to incur lower operating margins, at least until such time as new rates
can be implemented. Rate adjustments, if approved, can take several months. The
rise in fuel costs during 1996 has had a negative impact on Company results
which is expected to continue until such time as the Company may be able to
attain the necessary rate increases to compensate it for higher fuel costs or
fuel cost prices subside to previous levels.*
 
     Due to the Company's concentration in California, cyclical economic
conditions in California will have an impact on the Company's results.* The
Company is unable to determine the significance a California economic downturn
would have on its operations.
 
SEASONALITY
 
     The Company's revenues tend to be higher during spring and summer (third
and fourth fiscal quarters) than fall and winter when lower volumes of certain
types of waste, such as yard clippings and construction and demolition debris,
are generated. This typically results in decreased volume at the Company's
transfer stations, waste collection, and landfill operations during these
months.
 
ACCOUNTING AND OTHER MATTERS
 
     In October 1995, Statement of Financial Accounting Standard No. 123
"Accounting for Stock Based Compensation" (SFAS 123) was issued. This Statement
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
 
                                       37
<PAGE>   39
 
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25
(APB 25) "Accounting for Stock Issued to Employees." The Company has concluded
it will continue to utilize the method of accounting prescribed by APB 25 at
this time.
 
     The Company is considering a "quasi reorganization" for financial reporting
purposes, which would enable the Company to revalue assets and liabilities to
fair value and eliminate accumulated deficit against additional paid in capital.
This procedure, if effectuated, will not have any material effect on the
Company's operations or its ability to service its obligations.* There can be no
assurance that the Company will be able to effect such a quasi reorganization.*
 
                                       38
<PAGE>   40
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Norcal Waste Systems, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Norcal
Waste Systems, Inc. (the Company) and subsidiaries as of September 30, 1996 and
1995, and the related consolidated statements of income, stockholder's equity
(deficit) and cash flows for each of the years in the three year period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norcal Waste
Systems, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1996 in conformity with generally accepted
accounting principles.
 
     As discussed in note 2 to the consolidated financial statements, effective
October 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
 
                                                   KPMG Peat Marwick LLP
 
San Francisco, California
December 23, 1996
 
                                       39
<PAGE>   41
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                       CONSOLIDATED STATEMENTS OF INCOME
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Revenues...................................................  $288,215     $271,501     $247,176
                                                             --------     --------     --------
Cost of operations:
  Operating expenses.......................................   202,848      183,865      167,740
  Depreciation and amortization............................    18,320       19,985       20,141
  ESOP compensation expense (note 9).......................    10,291        7,923        7,319
  General and administrative...............................    30,965       26,446       24,849
                                                             --------     --------     --------
     Total cost of operations..............................   262,424      238,219      220,049
                                                             --------     --------     --------
          Operating income.................................    25,791       33,282       27,127
Interest expense...........................................   (23,913)     (19,909)     (20,920)
Gain (loss) on dispositions, net...........................      (477)       1,279        6,744
Settlement of litigation (note 14).........................    (3,648)          --       (5,480)
Other income...............................................     1,111        2,443        1,389
                                                             --------     --------     --------
          Income (loss) before income taxes, extraordinary
            item and cumulative effect of change in
            accounting principle...........................    (1,136)      17,095        8,860
Income tax expense (note 8)................................        --        6,662        2,500
                                                             --------     --------     --------
          Income (loss) before extraordinary item and
            cumulative effect of change in accounting
            principle......................................    (1,136)      10,433        6,360
Extraordinary gain on early extinguishment
  of long-term debt net of $0 income taxes (note 5)........    31,379           --           --
Cumulative effect on prior years of change in accounting
  for income taxes (note 8)................................        --           --       (2,500)
                                                             --------     --------     --------
          Net income.......................................  $ 30,243     $ 10,433     $  8,860
                                                             ========     ========     ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       40
<PAGE>   42
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,
                                                                       -----------------------
                                                                         1996          1995
                                                                       ---------     ---------
<S>                                                                    <C>           <C>
Current assets:
  Cash...............................................................  $  14,378     $   8,416
  Restricted cash....................................................         --         2,721
  Marketable securities..............................................      6,889         5,645
  Trust accounts, current portion (note 12)..........................      4,066            --
  Accounts receivable, less allowance for doubtful accounts of $1,611
     in 1996 and $1,277 in 1995......................................     39,120        31,055
  Parts and supplies.................................................      2,434         2,411
  Prepaid expenses...................................................      3,836         4,710
                                                                       ---------     ---------
          Total current assets.......................................     70,723        54,958
                                                                       ---------     ---------
Property and equipment:
  Land...............................................................     42,691        45,187
  Landfills..........................................................     24,481        19,720
  Buildings and improvements.........................................     43,189        42,490
  Vehicles and equipment.............................................    107,822       100,357
  Construction in progress...........................................      4,412         5,639
                                                                       ---------     ---------
          Total property and equipment...............................    222,595       213,393
  Less accumulated depreciation and amortization.....................     85,448        80,962
                                                                       ---------     ---------
          Property and equipment, net................................    137,147       132,431
                                                                       ---------     ---------
Other assets:
  Franchises, permits and other intangibles, net of amortization of
     $35,952 in 1996 and $32,227 in 1995 (note 3)....................     76,166        79,956
  Trust accounts (note 12)...........................................     24,209        31,289
  Prepaid pension cost (note 10).....................................      3,090            --
  Deferred financing costs, net of amortization of $1,177 in 1996....      9,636           252
  Other..............................................................        264           266
                                                                       ---------     ---------
          Total other assets.........................................    113,365       111,763
                                                                       ---------     ---------
                                                                       $ 321,235     $ 299,152
                                                                       =========     =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       41
<PAGE>   43
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                     CONSOLIDATED BALANCE SHEETS, CONTINUED
                                 (IN THOUSANDS)
 
                 LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,
                                                                       -----------------------
                                                                         1996          1995
                                                                       ---------     ---------
<S>                                                                    <C>           <C>
Current liabilities:
  Current portion:
     Long-term debt (note 5).........................................  $     354     $  28,277
     Capital leases (note 7).........................................        935         3,419
  Accounts payable...................................................     12,133         9,941
  Accrued expenses (notes 5 and 12)..................................     44,632        33,203
  Income taxes payable (note 8)......................................         --         3,884
  Deferred revenues..................................................      2,722         2,838
  Other accrued liabilities..........................................      5,091         8,885
                                                                       ---------     ---------
          Total current liabilities..................................     65,867        90,447
Long-term debt (note 5)..............................................    172,386        67,602
Obligations under capital leases (note 7)............................      3,065         4,071
Deferred income taxes (note 8).......................................     12,503        13,039
Landfill closure liability (note 12).................................     18,668        21,456
Postretirement medical benefits (note 11)............................     33,318        33,905
Other liabilities....................................................      9,311        10,469
Subordinated notes payable (note 6)..................................         --       102,041
                                                                       ---------     ---------
          Total liabilities..........................................    315,118       343,030
                                                                       ---------     ---------
Commitments and contingencies (notes 7, 8, 9, 10, 11, 12, 13 and 14)
Stockholder's equity (deficit) (note 9):
  Common stock, $.01 par value; 100,000,000 shares authorized;
     24,134,973 shares issued and outstanding........................        241           241
  Additional paid-in capital.........................................    166,378       166,378
  Accumulated deficit................................................   (112,915)     (143,158)
  Pension liability adjustment (note 10).............................         --        (8,581)
  Unrealized gains on marketable securities..........................        581            --
                                                                       ---------     ---------
                                                                          54,285        14,880
Less net scheduled contribution to the ESOP (note 9).................    (48,168)      (58,758)
                                                                       ---------     ---------
          Total stockholder's equity (deficit).......................      6,117       (43,878)
                                                                       ---------     ---------
                                                                       $ 321,235     $ 299,152
                                                                       =========     =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       42
<PAGE>   44
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
 
                 YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                            NET       UNREALIZED
                               COMMON STOCK     ADDITIONAL                  PENSION      SCHEDULED     GAINS ON
                              ---------------    PAID-IN     ACCUMULATED   LIABILITY    CONTRIBUTION  MARKETABLE
                              SHARES   AMOUNT    CAPITAL       DEFICIT     ADJUSTMENT   TO THE ESOP   SECURITIES    TOTAL
                              ------   ------   ----------   -----------   ----------   -----------   ----------   --------
<S>                           <C>      <C>      <C>          <C>           <C>          <C>           <C>          <C>
Balances,
  September 30, 1993........  24,135    $241     $166,378     $(162,451)    $(12,052)    $ (73,980)      $ --      $(81,864)
Contributions to reduce ESOP
  debt......................     --       --           --            --           --         5,924         --         5,924
Pension liability
  adjustment................     --       --           --            --        1,145            --         --         1,145
Net income..................     --       --           --         8,860           --            --         --         8,860
                              ------    ----     --------     ---------     --------      --------       ----      --------
Balances,
  September 30, 1994........  24,135     241      166,378      (153,591)     (10,907)      (68,056)        --       (65,935)
Contributions to reduce ESOP
  debt......................     --       --           --            --           --         9,298         --         9,298
Pension liability
  adjustment................     --       --           --            --        2,326            --         --         2,326
Net income..................     --       --           --        10,433           --            --         --        10,433
                              ------    ----     --------     ---------     --------      --------       ----      --------
Balances,
  September 30, 1995........  24,135     241      166,378      (143,158)      (8,581)      (58,758)        --       (43,878)
Contributions and adjustment
  to ESOP debt..............     --       --           --            --           --        10,590         --        10,590
Pension liability
  adjustment................     --       --           --            --        8,581            --         --         8,581
Unrealized gains on
  marketable securities.....     --       --           --            --           --            --        581           581
Net income..................     --       --           --        30,243           --            --         --        30,243
                              ------    ----     --------     ---------     --------      --------       ----      --------
Balances,
  September 30, 1996........  24,135    $241     $166,378     $(112,915)    $     --     $ (48,168)      $581      $  6,117
                              ======    ====     ========     =========     ========      ========       ====      ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       43
<PAGE>   45
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Cash flows from operating activities:
  Net income...............................................  $ 30,243     $ 10,433     $  8,860
  Extraordinary gain on early extinguishment of long term
     debt..................................................   (31,379)          --           --
                                                              -------       ------       ------
     Income (loss) before extraordinary gain...............    (1,136)      10,433        8,860
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization.........................    18,320       19,985       20,141
     Landfill trust contributions, withdrawals, interest
       income, net of landfill closure and other regulatory
       expense.............................................    (2,053)      (2,805)          14
     Pension, postretirement and insurance, net of amounts
       paid................................................     1,845        1,949          (41)
     ESOP compensation expense in excess of cash payments
       for redemptions.....................................     8,768        7,528        7,031
     Accrued interest, amortization of discounts and
       deferred financing fees.............................    10,664        6,031        9,648
     (Settlement of) accrual for litigation................        --       (5,480)       5,480
     (Gain) loss on dispositions and other income..........      (709)      (2,380)      (7,243)
     Other.................................................       619         (613)        (601)
     Changes in assets and liabilities, net of effects of
       dispositions:
       (Increase) in accounts receivable...................    (8,399)      (4,356)      (1,319)
       Increase in accounts payable........................     2,192        1,376        2,005
       (Decrease) in accrued expenses and other
          liabilities......................................    (3,275)      (1,677)      (4,642)
       Increase (decrease) in income taxes.................    (4,817)       5,915       (2,641)
       Other assets and liabilities........................    (1,667)       1,006        2,242
                                                              -------       ------       ------
          Net cash provided by operating activities........    20,352       36,912       38,934
                                                              -------       ------       ------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       44
<PAGE>   46
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Cash flows from investing activities:
  Acquisition of property and equipment....................  $(20,842)    $(19,603)    $(14,622)
  Proceeds from dispositions, net..........................     4,498        6,057       21,579
  (Deposits to) and withdrawals from trust accounts, net...     6,795         (595)       2,849
  Investment in marketable securities......................        --       (5,608)          --
  (Deposits to) and withdrawals from restricted cash,
     net...................................................     2,735       10,203       (6,240)
  Other....................................................      (383)         (20)        (435)
                                                              -------       ------       ------
          Net cash (used in) provided by investing
            activities.....................................    (7,197)      (9,566)       3,131
                                                              -------       ------       ------
Cash flows from financing activities:
  Proceeds from long-term debt and capitalized leases......   170,848        4,212        2,170
  Principal payments on long-term debt and capitalized
     leases................................................   (97,698)     (32,156)     (45,494)
  Principal payments on subordinated debt..................   (73,061)          --           --
  Payments of loans by ESOP................................     3,531        3,081           --
  Deferred financing costs.................................   (10,813)          --           --
                                                              -------       ------       ------
          Net cash used in financing activities............    (7,193)     (24,863)     (43,324)
                                                              -------       ------       ------
Net increase (decrease) in cash............................     5,962        2,483       (1,259)
Cash, beginning of year....................................     8,416        5,933        7,192
                                                              -------       ------       ------
Cash, end of year..........................................  $ 14,378     $  8,416     $  5,933
                                                              =======       ======       ======
Supplemental schedule of net cash paid for:
  Interest.................................................  $ 13,883     $ 13,912     $ 11,328
                                                              =======       ======       ======
  Income taxes.............................................  $  5,221     $    747     $  1,274
                                                              =======       ======       ======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       45
<PAGE>   47
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                        NOTES TO CONSOLIDATED STATEMENTS
 
                          SEPTEMBER 30, 1996 AND 1995
 
(1) NATURE OF BUSINESS
 
     Through its subsidiaries, Norcal Waste Systems, Inc. (the Company) provides
integrated waste services to residential, commercial, municipal and industrial
customers in California. The Company's services include refuse collection,
recycling and other waste diversion, transfer station and hauling operations,
operation of Company-owned landfills and third party landfill management
services (including engineering and construction management services). The
Company continues to be, with limited exceptions, the sole provider of
commercial and residential refuse collection for the City and County of San
Francisco.
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  (a) Principles of Consolidation
 
     The consolidated financial statements include the accounts of Norcal Waste
Systems, Inc. and its subsidiaries, all of which are wholly owned. The Company
uses the equity method for its investments in unconsolidated subsidiaries.
Investments in companies which are 50% or less owned are not consolidated and
are accounted for under the equity method. All significant intercompany accounts
and transactions have been eliminated.
 
     The Company's outstanding common stock is 100% owned by the Norcal Waste
Systems, Inc. Employee Stock Ownership Plan and Trust (the Norcal ESOP or the
ESOP).
 
  (b) Revenue Recognition
 
     The Company recognizes revenue when services are performed. Revenues billed
in advance are deferred and recorded as income in the period in which the
related services are rendered. A significant amount of the Company's revenue is
subject to rate regulation by local jurisdictions under franchise agreements and
permits.
 
     The Company performs project services on managed landfills relating to
landfill closure, landfill expansion and various regulatory compliance tasks.
Revenues are recognized on the percentage-of-completion method. Determination of
the percentage complete is based on estimates of subcontractors of actual job
progress and expenses incurred. Project costs include all direct and indirect
costs related to contract performance including subcontractors, materials and
internal labor. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
 
  (c) Parts and Supplies
 
     The Company's parts and supplies are recorded at cost (first-in,
first-out).
 
  (d) Property and Equipment
 
     Property and equipment, including major renewals and betterments, are
stated at cost. Property and equipment under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. Ordinary
maintenance and repairs are charged directly to operations. The Company
capitalizes interest costs for significant projects under development in
accordance with Statement of Financial Accounting Standards (SFAS) No. 34,
"Capitalization of Interest Cost". The amount capitalized and netted against
interest expense in the consolidated statements of income was $0.4 million in
1996 and $0 for both 1995 and 1994. Certain properties available for sale have
been written down to their estimated net realizable value.
 
                                       46
<PAGE>   48
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     Depreciation is calculated on the straight-line method over the estimated
useful lives of assets as follows: buildings and improvements, 3 to 40 years;
and vehicles and equipment, 6 to 9 years. Property and equipment held under
capital leases and leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.
 
     Landfills are carried at cost which includes acquisition, engineering and
permitting costs related to landfills which are currently in operation. These
costs are amortized as the landfill is used, based on engineering estimates of
the available capacity. Engineering, legal and other costs associated with the
development of new landfills and expansion at existing landfills are deferred
pending receipt of all necessary operating permits, at which time they are
capitalized as landfill costs. The Company is required to close, monitor, and
maintain landfill sites for a period of thirty years or more after closure. The
estimated costs and changes thereto in current dollars attributable to future
closure and post-closure costs are accrued in landfill closure liability for
each site based upon the capacity used in the current year in relation to the
total remaining capacity as of the beginning of the year.
 
  (e) Intangible Assets
 
     The excess of cost over net assets of acquired businesses is amortized on
the straight-line method over periods not exceeding 40 years. Franchises,
permits and contracts are amortized on the straight-line method over their
estimated lives ranging from 3 to 40 years. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed Of" during the year
ended September 30, 1995. It is the Company's policy to review the estimated
undiscounted future cash flows for each operation on an annual basis and to
compare it to the remaining net book value to ascertain if a provision for
impairment is necessary. Adoption of SFAS No. 121 did not result in the
recognition of any impairment loss.
 
  (f) Income Taxes
 
     The Company adopted the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," effective October 1, 1993 and has reported the
cumulative effect of the change in method in the 1994 consolidated statement of
income. Under the liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Deferred
taxes are provided on financial statement and income tax basis differences
relating to business acquisitions, except that no deferred taxes are provided on
amounts related to operating permit rights and excess of costs over net assets
of businesses acquired. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. This standard requires that the Company recognize income tax
benefits for loss carryforwards and certain temporary differences for which tax
benefits have not previously been recorded. The likelihood of realizing the tax
benefits related to a potential deferred tax asset is evaluated, and a valuation
allowance is recognized to reduce that deferred tax asset to an amount that more
likely than not will be realized.
 
  (g) ESOP Accounting
 
     The Company recognizes ESOP compensation expense using the shares allocated
method whereby the expense is based upon expected contributions by the Company
to the ESOP relating to ESOP debt service payments, the historical cost of the
shares and the number of shares allocated by reason of such payments. Shares
allocable to participants for a given year are determined based on the ratio of
the current year's debt
 
                                       47
<PAGE>   49
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
service payments to the total of the current year's and estimated remaining debt
service. Shares to be allocated to individual participants are based upon the
participants' relative compensation.
 
  (h) Cash and Cash Equivalents
 
     Cash and cash equivalents include all cash balances and highly liquid
investments with a remaining maturity at the time of purchase of three months or
less. Cash and cash equivalents are principally comprised of cash invested in
demand accounts and money market instruments and are stated at cost plus accrued
interest.
 
  (i) Restricted Cash
 
     The restricted cash account, which was liquidated as part of the
refinancing transaction, was established in accordance with the Third Amended
and Restated Credit Agreement (the Old Credit Agreement)(Note 5). Withdrawals
from this account were restricted to certain expenditures requiring written
notice from the Company to the collateral agent and were limited as specified in
the agreement.
 
  (j) Marketable Securities and Trust Accounts
 
     Marketable securities represent primarily investments in fixed income
securities of federal government entities which are considered as available for
sale securities and are recorded at market value using the closing price as
quoted on a national securities exchange. The available for sale securities
mature at various dates from May 1998 to September 2010. Unrealized gains and
losses, which occur when the cost basis differs from the fair value, are
included as a separate component of stockholder's equity, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." During fiscal 1996, $10.4
million of available for sale securities were sold for proceeds of $10.1
million. There were no sales of available for sale securities during fiscal
1995. The gross unrealized holding gains and gross unrealized holding losses (in
thousands) for available for sale securities at September 30, 1996 were $1,327
and $151, respectively.
 
     The Company has established restricted and unrestricted trust accounts
principally in connection with landfill operations with respect to closure and
post-closure liabilities, financial assurance for the initiation and completion
of corrective action and liabilities to third parties for bodily injury/property
damage. Amounts are principally invested in fixed income securities of federal
government entities with maturities from two to ten years. The Company considers
certain of its trust accounts to be held to maturity and, consequently, has
stated these investments at amortized cost in accordance with SFAS No. 115. The
gross unrealized holding gains and gross unrealized holding losses (in
thousands) for held to maturity securities at September 30, 1996 were $86 and
$224, respectively, and at September 30, 1995 were $445 and $233, respectively.
 
     Pursuant to guidance contained in the Special Report, "A Guide to
Implementation of Statement 115 Accounting for Certain Investments in Debt and
Equity Securities" issued by the Financial Accounting Standards Board (FASB), at
December 31, 1995 the Company re-evaluated its classification of certain
investments held in trust accounts as "held to maturity." Based on the Company's
intent and ability, it reclassified certain investments as "available for sale."
The aggregate fair value and amortized cost of the investments reclassified was
$13.1 million and $12.9 million, respectively, and the related unrealized gain
was $0.2 million.
 
                                       48
<PAGE>   50
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
  (k) Stock Options
 
     The Company has applied Accounting Principles Board (APB) Opinion No. 25
and the related interpretations in accounting for its various stock option
plans. Accordingly, no compensation expense has been recognized for its fixed
price stock option plans.
 
  (l) Use of Estimates
 
     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
 
(3) FRANCHISES, PERMITS AND OTHER INTANGIBLES
 
     When the Company acquires businesses with definitive franchise or other
agreements with specific terms, a portion of the purchase price is allocated to
the franchise based upon its estimated fair value at the date of acquisition. In
certain instances, permits or other legal documents evidence the Company's right
to do business for an indefinite period and are similar to goodwill. Any amounts
in excess of amounts allocated to franchises and permits are included in excess
of cost over net assets of businesses acquired. A summary of intangible assets,
net of accumulated amortization at September 30, is as follows:
 
<TABLE>
<CAPTION>
                                                                        1996        1995
                                                                       -------     -------
                                                                       (IN THOUSANDS)
    <S>                                                                <C>         <C>
    Franchises and contracts.........................................  $ 8,168     $ 9,123
    Operating permit rights..........................................   62,224      64,260
    Excess of cost over net assets of businesses acquired............    5,774       6,573
                                                                       -------     -------
                                                                       $76,166     $79,956
                                                                       =======     =======
</TABLE>
 
(4) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 
     On July 28, 1995, the Company sold its 50% ownership interest in an
affiliated company and other related entities, which were engaged in the waste
collection and disposal business for $5 million in cash. The gain on disposal of
$1.2 million is included in gain on dispositions in the consolidated statements
of income.
 
     The investments in unconsolidated affiliates are included in other assets
in the accompanying consolidated balance sheets. The Company's equity in
earnings/(losses) of unconsolidated affiliates included in other income in the
consolidated statements of income (in thousands), was $(284), $517 and $532 for
the years ended 1996, 1995 and 1994, respectively.
 
                                       49
<PAGE>   51
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
(5) LONG-TERM DEBT
 
     Long-term debt at September 30, 1996 and 1995 is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                        1996        1995
                                                                      --------     -------
                                                                      (IN THOUSANDS)
    <S>                                                               <C>          <C>
    Series B 12.5% Senior Notes, due 2005...........................  $170,392     $    --
    Bank loans:
      Facility A and B loans, six-year term loan dated September 30,
         1992, original principal balance of $149,733,818, interest
         at 9.63%...................................................        --      93,951
    Notes payable to former shareholders, due in monthly
      installments through 2017, interest at 6% to 8 1/2%...........       850         914
    Other notes.....................................................     1,498       1,014
                                                                      --------     -------
         Total debt.................................................   172,740      95,879
         Less current portion.......................................       354      28,277
                                                                      --------     -------
              Long-term debt........................................  $172,386     $67,602
                                                                      ========     =======
</TABLE>
 
     On November 21, 1995, the Company completed a private debt offering, (the
Refinancing) of $175.0 million in Series A Senior Notes. The Series A Senior
Notes matured in November 2005 with interest payable semi-annually. The Series A
Senior Notes were redeemable at the option of the Company, in whole or in part,
at any time during or after November 2000. Prior to this date, the Series A
Senior Notes were partially redeemable in the event of a public offering, or
would have been required to be redeemed in the event of a change in control of
the Company. The Series A Senior Notes were unsecured and ranked pari passu in
right of payment to all existing and future senior indebtedness of the Company.
The Series A Senior Notes were guaranteed on a senior unsecured basis by the
Company's wholly-owned subsidiaries. The Indenture governing the Series A Senior
Notes 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. As of September
30, 1996, under the incurrence covenant in the Indenture, the Company would have
been able to incur approximately $4 million of additional debt (in addition to
that which would have been available under the Credit Agreement and was
otherwise permitted under the Indenture). The Company currently anticipates that
the incurrence covenant of the Indenture will preclude it from incurring such
additional debt during the remainder of fiscal year 1997. In September 1996, the
Company completed the exchange of all of its outstanding Series A Senior notes
for Series B Senior Notes (Senior Notes) with an identical principal balance and
terms. The exchange was completed under the Securities Act of 1933. The interest
rate on the Senior Notes is currently 12.75% and increases .25% per annum on
each of November 16, 1996, May 16, 1997 and November 16, 1997 to a maximum of
13.5%. The interest rate reverts back 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.
 
     The Company received net proceeds from the private debt offering of $170.2
million (after original issuance discount of $4.8 million). Deferred financing
costs at September 30, 1996 include commissions and other costs related to the
offering and the new credit agreement (see below) and are being amortized over
the life of the Senior Notes and the new credit agreement. The Company used the
proceeds from the Series A Senior Notes, proceeds from the liquidation of
indemnification trusts and cash balances to repay $94.0 million long-term debt,
$2.2 million of capital leases, redeem subordinated notes for $73.4 million and
settle litigation for $3.6 million.
 
                                       50
<PAGE>   52
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The debt outstanding at September 30, 1996, matures as follows (in
thousands): 1997, $354; 1998, $236; 1999, $251; 2000, $255; 2001, $226; and
thereafter, $176,026, less unamortized discount of $4,608. Included in accrued
expenses at September 30, 1996 and 1995 is accrued interest amounting to $8,791
and $446, respectively.
 
     Concurrent with the private debt offering, the Company entered into a new
Credit Agreement with a group of lenders and the First National Bank of Boston
as Agent. The agreement established a revolving credit facility in an amount of
up to $100 million, up to $25 million of which can be used for letters of
credit. Substantially, all of the assets of the Company and its wholly owned
subsidiaries are pledged to secure the obligations of the Company and such
subsidiaries. Subsidiaries of the Company have guaranteed the debt under the
Credit Agreement on a joint and several basis. The Credit Agreement provides for
certain positive and negative covenants including restrictions on indebtedness,
investments, and distributions among others, and financial covenants including
leverage ratio, interest coverage ratio, consolidated net worth, and debt
service ratio. There are no compensating balance requirements or any informal
arrangements in connection with any of the loans. The Company must pay to the
lenders a commitment fee on the daily average amount of the unused credit
commitment at an annual rate per annum equal to 0.05%, plus an amount equal to
2.25% of the face amount of each letter of credit. Except as set forth below,
there were no borrowings outstanding under the Credit Agreement at September 30,
1996.
 
     In the event of a default under the Credit Agreement, the rights of Norcal
with respect to the liquidation of all of the assets of Norcal's wholly owned
subsidiaries and the capital stock of the wholly owned subsidiaries would be
subject to the prior claims of the lenders under the Credit Agreement. A default
under the Senior Notes constitutes an event of default under the Credit
Agreement. Similarly, certain defaults under other indebtedness in excess of
$5.0 million (including indebtedness under the Credit Agreement) constitute an
event of default under the Indenture.
 
     As of September 30, 1996, the Company had availability under the Credit
Agreement of approximately $25.0 million (with additional amounts potentially
available to fund acquisitions based on certain pro forma ratios), along with
$15.6 million which may be utilized for additional letters of credit. The
Company expects that by the end of fiscal year 1997 potential availability under
the Credit Agreement will be reduced by up to approximately $12 million if the
Recommended Rate Orders (as hereinafter defined) are put into effect without
modification. See Note 16.
 
(6) SUBORDINATED NOTES PAYABLE
 
     As part of the refinancing (Note 5), the Company redeemed the subordinated
notes on November 21, 1995. The recorded value and associated accrued interest
of the subordinated notes that the Company redeemed was $103.3 million. The
Company recognized an extraordinary gain of $31.4 million.
 
  Norcal ESOP Notes (ESOP Notes)
 
     Subordinated notes payable by the ESOP to former shareholders of Norcal
Solid Waste Systems Inc. (Old Norcal) (ESOP Notes) were issued by the ESOP in
the original amount of $36.6 million. The discounted present value of the ESOP
Notes as of September 30, 1995 was $32.4 million. The ESOP Notes were recorded
net of a discount of $4.2 million to reflect a market rate of interest at the
date of issuance. The ESOP Notes bore interest at a fixed rate of 8% per annum
and were discounted to yield 13.3%. The discount was amortized over the life of
the notes. At September 30, 1995 there was $16.4 million of interest in arrears.
Although the Company was not an obligor or guarantor on the ESOP Notes, they
were recorded as a liability on the Company's consolidated balance sheets in
accordance with generally accepted accounting principles (GAAP) with a
corresponding decrease to stockholder's equity (Note 9).
 
                                       51
<PAGE>   53
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The ESOP Notes and related interest were in default at September 30, 1995
and could not be paid according to the terms of the Old Credit Agreement and the
Indenture governing the Class A and B Notes until certain restructuring
conditions were met. Interest payments due under the ESOP Notes had not been
paid since 1991 and scheduled principal payments had not been made in 1995 and
1994. Accordingly, the discounted present value of the ESOP Notes together with
accrued interest aggregating $48.8 million were included as long-term
liabilities in 1995 financial statements. A settlement of claims by holders of
ESOP Notes against Norcal, the ESOP and others was reached in August 1995 as
more fully described in Note 14. The ESOP Notes were repaid in November 1995 in
connection with the Refinancing.
 
  Envirocal Notes Payable (Class A and B Notes)
 
     In December 1994, under the terms of a settlement agreement (as further
described in Note 14), the Company issued new notes (the Class A and B Notes) in
exchange for the subordinated notes payable by the Company to former Envirocal
shareholders (Old Subordinated Notes). The Class A and B Notes consisted of
Class A Notes in the amount of $41.8 million and Class B Notes in the amount of
$9.3 million.
 
     The Class A and Class B Notes were issued in exchange for the Old
Subordinated Notes, which were payable by the Company to former Envirocal
shareholders and were issued in 1987 by Envirocal, Inc. in the original amount
of $41.8 million.
 
     No gain or loss was recognized on the conversion of the debt instruments on
the Old Subordinated Notes. Accordingly, the difference between the carrying
amount of Old Subordinated Notes and accrued interest in the amount of $52.7
million, at the settlement date and the future payments required by the Class A
and B Notes would have been recognized as interest expense over the life of the
Class A and B Notes at an imputed interest rate which approximated 5.8%. At
September 30, 1995, the total recorded obligation was $53.2 million.
 
     The Company was obligated to and did redeem the Class A and Class B notes
(based upon a stipulated amount) in connection with the settlement of claims by
holders of ESOP Notes in November 1995.
 
(7) LEASES
 
     The Company leases certain land, buildings, vehicles and equipment under
lease agreements. Certain of these leases are accounted for as capital leases.
The Company is responsible for all maintenance costs, taxes and insurance on the
equipment. At September 30, the gross amount of property and equipment and
related accumulated amortization recorded under capital leases were as follows:
 
<TABLE>
<CAPTION>
                                                                        1996        1995
                                                                       -------     -------
                                                                         (IN THOUSANDS)
    <S>                                                                <C>         <C>
    Vehicles and equipment...........................................  $ 6,534     $17,092
    Less accumulated amortization....................................   (2,232)     (8,426)
                                                                        ------       -----
                                                                       $ 4,302       8,666
                                                                        ======       =====
</TABLE>
 
                                       52
<PAGE>   54
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments at September 30, 1996 are
as follows:
 
<TABLE>
<CAPTION>
                                                                       CAPITAL     OPERATING
                                                                       LEASES       LEASES
                                                                       -------     ---------
                                                                          (IN THOUSANDS)
    <S>                                                                <C>         <C>
    Year ending September 30:
      1997...........................................................  $ 1,310       2,041
      1998...........................................................    1,310       1,492
      1999...........................................................    1,288       1,194
      2000...........................................................      658         813
      2001...........................................................      248         363
      Thereafter.....................................................       54       1,798
                                                                        ------       -----
              Total minimum lease payments...........................    4,868       7,701
                                                                                     =====
    Less amount representing interest................................      868
                                                                        ------
    Present value of minimum lease payments..........................    4,000
    Less current portion.............................................      935
                                                                        ------
                                                                       $ 3,065
                                                                        ======
</TABLE>
 
     Rental expense charged to operations under all operating leases was
approximately $3.9 million, $2.8 million and $2.8 million for the years ended
1996, 1995, and 1994, respectively, including amounts under short-term rental
agreements.
 
(8) INCOME TAXES
 
     As discussed in Note 2, the Company adopted SFAS No. 109 as of October 1,
1993. The cumulative effect of the change in accounting for income taxes of $2.5
million was determined as of October 1, 1993 and is reported separately in the
consolidated statement of income for the year ended September 30, 1994.
 
     Income tax expense (benefit) for the fiscal years ended September 30, 1996,
1995, and 1994 is as follows:
 
<TABLE>
<CAPTION>
                                                                1996       1995       1994
                                                                -----     ------     ------
                                                                      (IN THOUSANDS)
    <S>                                                         <C>       <C>        <C>
    Current:
      Federal...............................................    $ 639     $4,562     $2,188
      State.................................................      301      1,600         87
                                                                -----     ------     ------
                                                                  940      6,162      2,275
                                                                -----     ------     ------
    Deferred:
      Federal...............................................     (639)       425        225
      State.................................................     (301)        75         --
                                                                -----     ------     ------
                                                                 (940)       500        225
                                                                -----     ------     ------
                                                                $  --     $6,662     $2,500
                                                                =====     ======     ======
</TABLE>
 
                                       53
<PAGE>   55
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     Total income tax expense differed from the amount computed by applying the
federal statutory income tax rate of 35% to income as a result of the following:
 
<TABLE>
<CAPTION>
                                                                  1996      1995      1994
                                                                  -----     -----     -----
    <S>                                                           <C>       <C>       <C>
    Federal statutory tax rate................................     35.0%     35.0%     35.0%
    State taxes, net of federal benefit.......................      6.0       6.0       6.0
    Change in valuation allowance.............................    (36.5)    (14.6)    (43.3)
    Amortization of nondeductible intangibles.................      3.1       5.1       9.2
    Permanent differences related to debt extinguishment......    (12.4)       --        --
    Permanent differences on affiliate sold...................       --       6.5        --
    Current utilization of previously deferred deductions and
      state net operating loss................................       --        --      22.3
    Other.....................................................      4.8       1.0      (1.0)
                                                                  -----     -----     -----
    Income tax expense........................................      0.0%     39.0%     28.2%
                                                                  =====     =====     =====
</TABLE>
 
     The deferred tax liability at September 30, 1996 and 1995 primarily relates
to financial statement carrying amounts in excess of the tax basis in certain
land investments that will not be disposed of in the foreseeable future. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at September 30 are summarized
below:
 
<TABLE>
<CAPTION>
                                                                       1996         1995
                                                                     --------     --------
                                                                        (IN THOUSANDS)
    <S>                                                              <C>          <C>
    Deferred tax assets:
      Alternative minimum tax credit carryforward..................  $  3,862     $  3,183
      Accrued liabilities..........................................     2,298        4,785
      Post retirement benefit obligations..........................    14,117       13,967
      ESOP expense, including accrued interest, in excess of cash
         contributions.............................................     8,344       14,979
      Pension expense in excess of contributions...................        --        3,550
      Insurance reserves...........................................     5,175        4,787
      Landfill closure reserves....................................     2,414        1,175
      Vacation accrual.............................................     1,400        1,071
      Bad debts....................................................       661          465
      Other........................................................       706        1,702
      Old Subordinated Notes, interest recapture...................        --        2,320
                                                                     --------     --------
                                                                       38,977       51,984
    Less: Valuation allowance......................................    24,716       35,745
                                                                     --------     --------
              Net deferred tax assets..............................    14,261       16,239
                                                                     --------     --------
    Deferred tax liabilities:
      Property and equipment, basis and depreciation differences...    22,080       25,616
      Franchises, permits and other intangibles....................     3,011        3,662
      Pension contributions in excess of expense...................     1,269           --
      Marketable securities........................................       404           --
                                                                     --------     --------
              Gross deferred tax liabilities.......................    26,764       29,278
                                                                     --------     --------
              Net deferred tax liabilities.........................  $(12,503)    $(13,039)
                                                                     ========     ========
</TABLE>
 
     The total valuation allowance decreased for the years ended September 30,
1996 and 1995 by $11.0 million and $2.5 million, respectively.
 
                                       54
<PAGE>   56
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     At September 30, 1996, 1995, and 1994, the Company concluded it was unable
to implement tax planning strategies which would have enabled the Company to
reduce deferred tax liabilities. Consequently, the Company has provided a
valuation allowance for deferred tax assets attributable to substantial expenses
and losses recognized for financial statement purposes which represent future
deductible amounts.
 
     The Internal Revenue Service (the "Service") is completing an audit of the
Company's income tax returns for the fiscal years ended September 30, 1988
through September 30, 1991. During the course of that audit, the Service also
examined certain transactions involving employee benefit plans sponsored by the
Company. With regard to this tax audit, the Service has proposed a number of
adjustments (some of which have been agreed to by the Company). In particular,
the Service has stated that it does not (i) believe the Company should be
permitted to deduct post-retirement health and welfare benefits paid to Old
Norcal and Envirocal employee-shareholders on the grounds that such benefits
should be treated as additional purchase price consideration for the stock
acquired from such shareholders and therefore must be capitalized or (ii) agree
with the manner in which the Company has calculated certain deductions related
to its landfill closure and post-closure costs. The Company has advised the
Service that it intends to vigorously challenge the Service's proposed treatment
of the post-retirement health and welfare benefits. The Service and the Company
have tentatively agreed on an alternative treatment of landfill closure and
post-closure costs which is acceptable to the Company.
 
     The Company does not believe that the income tax adjustments proposed by
the Service will have a material adverse effect on the financial condition of
the Company. However, income tax deductions otherwise available to the Company
to reduce income subject to tax in future periods (in particular, deductions
related to the provision of post-retirement health and welfare benefits to
former employee-shareholders) may be substantially reduced or deferred as a
result of the income tax audit.
 
     The Service has also initiated an audit of the Company's income tax returns
for the fiscal years ended September 30, 1992 through September 30, 1994.
 
     It is the Company's opinion that these matters relating to the IRS
examinations are adequately provided for or that the resolution of such matters
will not have a material adverse impact on the financial condition of the
Company; however, there can be no assurance that the impact of such matters on
its results of operations or cash flows for any given reporting period will not
be material.
 
(9) STOCKHOLDER'S EQUITY (DEFICIT)
 
  Capital Structure
 
     The Company's Articles of Incorporation allow for the issuance of Preferred
Stock in one or more series, at such designations, rates of dividends,
redemption prices, liquidation payments, voting rights and conversion, exchange
or other special rights to be determined at the time of issuance. None is
presently issued or outstanding.
 
  Stock Options
 
     The Company has four stock option plans that provide for the granting of
Incentive Stock Options and Non-Qualified Stock Options for the purchase of
Common Stock. The options may be granted to officers, employees, directors and
independent contractors of the Company. Participation in the Stock Option Plans
is determined by the Compensation Committee of the Board of Directors, based on
the parameters of each respective plan. The term of an option granted under any
of the option plans cannot exceed ten years and may be further limited by the
specific restrictions as detailed in the individual plans. The options generally
are
 
                                       55
<PAGE>   57
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
exercisable pursuant to any vesting requirements imposed by the Compensation
Committee upon the grant of the options.
 
     The following table sets out specific details of the respective stock
option plans and status as of September 30, 1996, 1995 and 1994:
 
<TABLE>
<CAPTION>
                                                                                                1996
                                         1990                                               NON-EMPLOYEE
                                        STOCK             1996                1996            DIRECTOR
                                        OPTION       EXECUTIVE STOCK     EMPLOYEE STOCK        STOCK
          SHARES UNDER OPTION            PLAN        INCENTIVE PLAN      INCENTIVE PLAN     OPTION PLAN
    --------------------------------  ----------     ---------------     --------------     ------------
    <S>                               <C>            <C>                 <C>                <C>
    Outstanding at September 30,
      1994..........................     266,100                --                 --               --
    Canceled........................      (5,600)               --                 --               --
                                      ----------        ----------           --------
    Outstanding at September 30,
      1995..........................     260,500                --                 --               --
    Granted.........................          --         1,390,000            527,500          105,000
    Canceled........................     (17,750)         (400,000)                --               --
                                      ----------        ----------           --------
    Outstanding at September 30,
      1996..........................     242,750           990,000            527,500          105,000
                                      ==========        ==========           ========
    Options available to grant......   2,757,250         1,897,500          3,095,250(c)        70,000
                                      ==========        ==========           ========
    Average option price:
      September 30, 1995 and 1994...  $     7.04       $        --         $       --         $     --
      September 30, 1996............  $     7.04       $      4.89(a)      $     4.89(b)      $   4.89
    Options exercisable:
      At September 30, 1994.........     266,100                --                 --               --
      At September 30, 1995.........     260,500                --                 --               --
      At September 30, 1996.........     242,750            64,000                 --               --
</TABLE>
 
---------------
(a) $4.89 to estimated fair value at September 30, 1998.
 
(b) Price subject to adjustment to at least 85% of value at date of grant.
 
(c) To the extent shares are granted under the 1990 Stock Option Plan, the 1996
    Executive Stock Incentive Plan, the Deferred Compensation and Stock Option
    Plan (defined below) or the 1996 Non-Employee Director Stock Option Plan,
    the number of shares available under the 1996 Employee Stock Incentive Plan
    is reduced by a corresponding amount.
 
     In addition to the plans summarized above the Company has granted a
nonqualified stock option pursuant to a plan (the "Deferred Compensation and
Stock Option Plan") to an officer to purchase up to 300,000 shares of common
stock at an exercise price of $4.89 per share. The options will vest 90,000
shares on each of September 30, 1996, 1997, 1998, and 30,000 on May 1999.
 
  Employee Stock Ownership Plan
 
     In 1986, Old Norcal established an employee stock ownership plan and trust
(the ESOP) which purchased all of the Company's outstanding stock. Old Norcal
borrowed funds from a lender group and in turn Old Norcal loaned funds to the
ESOP which were used together with the ESOP Notes described in Note 6 for the
purpose of purchasing the stock. In addition, in connection with two other
transactions, the Company borrowed funds from lender groups and in turn loaned
funds to the ESOP.
 
     The ESOP will obtain funds to repay the Company loans primarily through the
receipt of tax deductible contributions made by the Company. For financial
statement purposes, the Company's future scheduled contribution to the ESOP, as
described below, is reflected as a reduction of stockholder's equity.
 
                                       56
<PAGE>   58
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The ESOP covers most of the employees of the Company and is
noncontributory. The benefits are based on the employee's account balance which
is a function of contributions, forfeitures, income and appreciation or
depreciation in the value of assets allocated to the accounts based on years of
service and compensation.
 
     During 1996 the ESOP received $3.5 million in insurance proceeds related to
settlement of litigation (Note 14). During 1995 the ESOP received a $3.1 million
litigation settlement. These proceeds were applied against Company loans to the
ESOP.
 
     In connection with the Refinancing (Note 5) the ESOP's indebtedness
reflects, among other things, Norcal's funding of the ESOP's retirement of the
ESOP Notes, repayment of all amounts owed under the Old Credit Agreement, and
incurrence of new indebtedness by the Company pursuant to the Refinancing. At
September 30, 1996, the outstanding principal balance owed to Norcal was $68.8
million. The ESOP and Norcal have entered into a Fourth Amended and Restated
ESOP Loan Agreement, effective as of October 1, 1995, whereby the ESOP will
repay such outstanding indebtedness, plus unpaid accrued interest at the rate of
seven percent (7.0%) per annum, in thirteen equal installments of approximately
$9.8 million each as of September 30 of each year, beginning in 1996 and ending
in 2008. In addition, the ESOP will prepay such outstanding indebtedness,
without penalty, to the extent that Norcal makes contributions to the ESOP for
the purpose of making such prepayments subject to certain limitations. The
Company made an additional contribution of $9.0 million to the ESOP with respect
to September 30, 1996 which has been applied as a prepayment of the loans from
the Company to the ESOP.
 
     The scheduled contribution to the ESOP presented in the accompanying
balance sheets as a reduction in equity represents the aggregate principal
amounts which the Company has scheduled to contribute to the ESOP in future
years attributable to the original loans and is summarized as follows:
 
<TABLE>
<CAPTION>
                                                               1996                 1995
                                                             --------             --------
                                                              (IN THOUSANDS, EXCEPT SHARE
                                                                       AMOUNTS)
    <S>                                                      <C>                  <C>
    Loans from the Company to the ESOP...................    $ 68,798             $ 47,750
    ESOP notes...........................................          --               32,398
                                                             --------             --------
              Total scheduled contribution to the ESOP...      68,798               80,148
    ESOP compensation expense recognized in excess of
      Company contributions..............................     (20,630)             (21,390)
                                                             --------             --------
      Net scheduled contribution to the ESOP.............    $ 48,168             $ 58,758
                                                             ========             ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                           1996          1995         1994
                                                          -------       ------       ------
    <S>                                                   <C>           <C>          <C>
    Information concerning the ESOP is as follows:
      ESOP compensation expense.......................    $10,291       $7,923       $7,319
                                                          =======       ======       ======
      Interest expense related to ESOP debt...........    $ 5,633       $9,224       $8,373
                                                          =======       ======       ======
</TABLE>
 
     Following is a summary of shares as of September 30:
 
<TABLE>
<CAPTION>
                                                            1996         1995         1994
                                                           -------      ------       -------
                                                                    (IN THOUSANDS)
    <S>                                                    <C>          <C>          <C>
    Allocated..........................................     14,842      13,777        12,794
    Committed to be released...........................      1,570       1,066           983
    Unallocated........................................      7,723       9,292        10,358
                                                           -------      ------       -------
                                                            24,135      24,135        24,135
                                                            ======      ======        ======
</TABLE>
 
                                       57
<PAGE>   59
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The Company has an obligation to make cash contributions to the ESOP or to
repurchase shares from participants as described below. The cash contributions
made for purposes of funding ESOP benefit payments were $1.2 million, $0.4
million and $0.3 million for the years ended 1996, 1995, and 1994, respectively.
The amount of the repurchase obligation will increase significantly in the
future as the Company's workforce ages and retires as additional shares are
allocated to participants, and as the value in common stock increases. The fair
value of the shares as established by independent appraisers was $4.89 and $2.61
as of September 30, 1995 and 1994, respectively. The fair value has not yet been
determined as of September 30, 1996.
 
     The Company's common stock is not traded on an established market.
Presently, all shares are held by the ESOP, and all distributions from the ESOP
are intended to be made in cash which is received from Norcal or trust income. A
participant who is vested is entitled to begin receiving a distribution of his
or her ESOP accounts at a future date following his or her termination of
employment. Distributions may be made in a lump sum, equal annual installments
over a period generally not to exceed five years or a combination of the
foregoing, generally as determined by the ESOP Administrative Committee (the
Committee). The Committee also generally determines the time and manner of
distributions, subject to the following limitations: (1) in the event of a
participant's retirement, disability or death, distribution must begin no later
than September 30th of the Plan Year following the Plan Year in which employment
terminates; (2) if a participant's employment terminates for any other reason,
distribution must begin no later than September 30th of the sixth Plan Year
following the Plan Year in which employment terminates, although the Committee
may (a) further defer distributions that are attributable to shares of Common
Stock purchased with loan proceeds until after such loan has been repaid, and
(b) further defer distributions that are not attributable to post-1986 shares
until the participant reaches the age that he or she would be required to reach
in order to qualify for retirement under the ESOP.
 
     As discussed in Note 6 to the financial statements, during 1995 and 1994
certain debt payments were not made by the Company and corresponding
contributions to the ESOP were not made. Consequently, the ESOP was unable to
make its loan payments to the Company. As of October 1, 1995 the Company and the
ESOP entered into an Amended and Restated ESOP Loan Agreement and the ESOP is in
compliance with the terms of that agreement.
 
(10) PENSION PLANS
 
     The Company has two noncontributory funded defined benefit pension plans
covering a portion of their employees. Benefits are based on a formula which
includes years of service and average compensation. Nonparticipating employees
generally are covered under one of several multi-employer union plans to which
the Company contributes.
 
     Net periodic pension cost for the years ended September 30, 1996, 1995, and
1994 included the following components:
 
<TABLE>
<CAPTION>
                                                             1996        1995        1994
                                                           --------     -------     -------
                                                                    (IN THOUSANDS)
    <S>                                                    <C>          <C>         <C>
    Service cost -- benefits earned during the period....  $  2,499     $ 2,279     $ 2,373
    Interest cost on projected benefit obligations.......     6,624       6,325       5,989
    Actual return on plan assets.........................   (10,579)     (9,269)     (1,139)
    Net amortization and (deferral)......................     5,480       4,192      (3,429)
                                                           --------     -------     -------
              Net periodic cost..........................  $  4,024     $ 3,527     $ 3,794
                                                           ========     =======     =======
</TABLE>
 
     Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
 
                                       58
<PAGE>   60
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at September 30, 1996
and 1995:
 
<TABLE>
<CAPTION>
                                                                  1996                    1995
                                                           -------------------     -------------------
                                                               PLANS WITH              PLANS WITH
                                                            ASSETS IN EXCESS        ASSETS LESS THAN
                                                             OF ACCUMULATED            ACCUMULATED
                                                           BENEFIT OBLIGATIONS     BENEFIT OBLIGATIONS
                                                           -------------------     -------------------
                                                                         (IN THOUSANDS)
    <S>                                                    <C>                     <C>
    Actuarial present value of benefit obligations:
      Accumulated benefit obligation, including vested
         benefits of $70,987 in 1996 and $69,828 in
         1995............................................       $ (73,323)               (71,982)
                                                                  =======                =======
    Projected benefit obligation.........................         (89,179)               (88,028)
    Plan assets at fair value, primarily marketable
      equity securities, fixed income securities, U.S.
      government obligations, money market funds and
      other investments..................................          77,669                 66,968
                                                                  -------                -------
    Projected benefit obligation in excess of plan
      assets.............................................         (11,510)               (21,060)
    Unrecognized net loss from past experience different
      from that assumed and effects of changes in
      assumptions........................................          14,094                 24,237
    Prior service cost not yet recognized................             506                    390
    Reduction of stockholder's equity to recognize
      minimum liability..................................              --                 (8,581)
                                                                  -------                -------
              Net pension asset/(liability) recognized in
                the consolidated balance sheets..........           3,090                 (5,014)
                                                                  -------                -------
    Prepaid pension/(accrued) pension cost included in:
      Accrued expenses -- current........................              --                 (3,284)
      Prepaid pension cost...............................           3,090                     --
      Long-term pension liability........................              --                 (1,730)
                                                                  -------                -------
              Net pension asset/(liability) recognized in
                the consolidated balance sheets..........       $   3,090                $(5,014)
                                                                  =======                =======
</TABLE>
 
     The Company has unrecognized losses from past experience different from
that assumed and effects of changes in assumptions amounting to $14.1 million
and $24.2 million at September 30, 1996 and 1995, respectively. At September 30,
1995, $8.6 million had been charged to stockholder's equity representing the
excess of the accumulated benefit obligation of $5.0 million over plan assets
and the excess of cumulative contributions of $3.6 million over net periodic
pension cost. Since the accumulated benefit obligation exceeded the fair value
of plan assets at September 30, 1995, the Company recognized a liability equal
to the unfunded accumulated benefit obligation. At September 30, 1996, the
excess cumulative contributions over net period pension costs of $3.1 million
has been reflected as a prepaid pension cost on the balance sheet.
 
     It is the Company's current policy to contribute at least the minimum
statutory amounts. Actual contributions to the pension plans were $3.5 million,
$3.3 million and $4.3 million during 1996, 1995 and 1994, respectively.
 
     The weighted average discount rate was 8.0%, 7.75%, and 8.0% respectively,
for 1996, 1995, and 1994. The expected long-term rate of return on assets and
rate of increase in future compensation levels used in determining the benefit
obligations for all three years was 9.0% and 5.0%, respectively. The actual
annual rate of return on investments may be lower than projected, which could
result in a reduction of the prepaid pension asset or a return to the unfunded
status of the plans.
 
                                       59
<PAGE>   61
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     Certain of the Company's union employees are participants in multi-employer
union defined benefit pension plans. Pension cost charged to expense under these
plans for the years ended September 30, 1996, 1995, and 1994, was $1.5 million,
$1.6 million and $1.5 million, respectively. The Company's portion of the
actuarially computed value of the vested and nonvested benefits of the plans and
the net assets of the pension funds have not been determined.
 
(11) POSTRETIREMENT MEDICAL BENEFITS
 
     The Company recognizes postretirement medical benefits in the financial
statements over the term of an employee's service with the Company as required
by Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
 
     The postretirement medical benefit plans are unfunded. The following table
sets forth the status of the postretirement medical benefits plans at September
30, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                        1996        1995
                                                                       -------     -------
                                                                         (IN THOUSANDS)
    <S>                                                                <C>         <C>
    Accumulated postretirement medical benefit obligation:
      Retirees.......................................................  $12,176     $12,515
      Fully eligible active plan participants........................    9,744      10,737
                                                                       -------     -------
    Accumulated postretirement medical benefit obligation............   21,920      23,252
    Unrecognized net gain from past experience different from that
      assumed and from changes in assumptions........................    8,810       7,598
    Unamortized prior service credit not yet recognized in net
      periodic postretirement benefit cost primarily resulting from
      plan changes...................................................    3,665       4,068
                                                                       -------     -------
    Accrued postretirement medical benefit liability.................  $34,395     $34,918
                                                                       =======     =======
</TABLE>
 
     Net periodic cost for the post retirement medical benefit plans for the
years ended September 30, 1996, 1995 and 1994 included the following components:
 
<TABLE>
<CAPTION>
                                                                1996       1995       1994
                                                               ------     ------     ------
                                                                      (IN THOUSANDS)
    <S>                                                        <C>        <C>        <C>
    Interest cost on accumulated postretirement benefit
      obligation.............................................  $1,625     $1,758     $2,070
    Amortization of prior service cost.......................    (403)      (403)      (403)
    Amortization of gain.....................................    (667)      (524)        (9)
                                                               ------     ------     ------
              Net periodic cost..............................  $  555     $  831     $1,658
                                                               ======     ======     ======
</TABLE>
 
     For measurement purposes, 11.50%, 11.75%, and 12% medical cost trend rate
was assumed for the calculation of accumulated postretirement benefit obligation
at September 30, 1996, 1995, and 1994, respectively. This rate was assumed to
decrease incrementally to 7%, 6.75% and 7% after 9 years, 10 years and 10 years,
respectively, and remain at that level thereafter. The medical cost trend rate
has a significant effect on the amounts reported. The weighted average discount
rates of 8.0%, 7.75%, and 8.0% were assumed as of September 30, 1996, 1995, and
1994, respectively. By increasing the assumed medical cost trend rate by 1
percentage point in each year, the interest cost component for the years ended
September 30, 1996, 1995, and
 
                                       60
<PAGE>   62
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
1994, and the accumulated postretirement benefit obligation at September 30,
1996, 1995, and 1994 would increase approximately as follows:
 
<TABLE>
<CAPTION>
                                                                1996       1995       1994
                                                               ------     ------     ------
                                                                      (IN THOUSANDS)
    <S>                                                        <C>        <C>        <C>
    Interest component.......................................  $  220     $  248     $  324
                                                               ======     ======     ======
    Accumulated postretirement medical benefit obligation....  $3,058     $3,384     $3,098
                                                               ======     ======     ======
</TABLE>
 
     In connection with the ESOP's purchase of stock from the former Old Norcal
employee-shareholders, the Company has agreed to provide certain post-retirement
health and welfare benefits to certain settling plaintiffs until the earlier of
the resolution of certain claims against third parties or October 1, 2000. In
connection with the ESOP's purchase of stock from the former Envirocal
employee-shareholders, the Company has agreed to provide the former Envirocal
employee-shareholders with lifetime post-retirement health and welfare benefits
subject to certain conditions.
 
(12) LANDFILL CLOSURE, POST-CLOSURE LIABILITIES, ENVIRONMENTAL LIABILITIES,
COMMITMENTS AND FUNDING
 
     The Company's business activities are subject to extensive and evolving
regulation under complex federal, state and local laws for the protection of
public health and the environment. These laws, and the numerous regulatory
bodies responsible for interpreting and enforcing them, impose significant
restrictions and requirements on the Company and also impact the municipalities
the Company serves and operators of non-owned landfills used by the Company. The
Company believes that this regulation will continue in the future.
 
     Compliance with current or future regulatory requirements will require the
Company to make capital and operating expenditures to maintain current
operations or to initiate new operations. It is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts. The Company
has made and may continue to make substantial expenditures relating to
environmental conditions primarily on its landfill properties. In the opinion of
management, compliance with present environmental protection laws will not have
a material adverse effect on the results of operations of the Company provided
costs are substantially covered in the Company's rates on a timely basis. The
Company continues to monitor these matters; however, there is no assurance that
material costs or liabilities related to environmental matters will not be
incurred in the future.
 
     Various federal and state regulations require owners or operators of solid
waste landfill sites to provide financial assurances for the closure and
post-closure monitoring and maintenance of these sites. The Company uses
independent engineers to assist it in assessing the estimates of future costs of
complying with such regulations. A significant portion of the landfill closure
and post-closure liability relates to leachate and groundwater management and
remediation. There are many unknown and uncertain factors including regulatory
requirements, incomplete data with respect to projected volumes, quality and
cost of treatment among others. Accordingly, estimates for closure and
post-closure management and remediation of leachate and contaminated groundwater
could be subject to periodic and substantial revision as the Company's knowledge
increases concerning these factors.
 
     At September 30, 1996 and 1995, the Company has recorded closure and
post-closure liabilities on its owned landfills of approximately $25.4 million
and $24.4 million, respectively, based on the total estimated closure costs and
post-closure maintenance and monitoring at each date, in current dollars, and
the percentage of estimated landfill capacity remaining. The current portion of
landfill closure liability at September 30, 1996 and 1995, amounting to
approximately $7.2 million and $3.2 million, respectively, is included in
accrued expenses and is determined by the amount of required funding of various
trust funds in accordance with
 
                                       61
<PAGE>   63
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
various jurisdictional requirements along with the estimate of
closure/post-closure work to be performed in the next year. Amounts charged to
operating expenses for landfill closure in 1996, 1995 and 1994, net of interest
income earned on related trust accounts, were approximately $0.2 million, $2.0
million and $2.9 million, respectively. Included in each year's expense are
amounts that represent the effects of changes in cost and capacity estimates
that are being recognized over the remaining life of each site. At September 30,
1996 and 1995, the future closure and post-closure obligation remaining to be
recognized over the remaining lives of the applicable landfills is estimated to
be approximately $35.0 million and $30.5 million, respectively. While the
Company believes its estimates of closure and post-closure costs are reasonable,
such amounts are based upon current laws, technology and information available
on the properties. Accordingly, the Company's estimates may be subject to
substantial upward revision.
 
     In accordance with State of California legislation, and other governmental
jurisdictions, the Company has established restricted and unrestricted trust
funds for each owned landfill which will be funded annually in amounts designed
to provide the resources to accomplish closure and post-closure maintenance and
monitoring. The estimated funding requirements are $3.2 million for 1997 and
approximately $11.0 million due over the subsequent 5 year period based upon
volume used at the landfill and regulatory requirements. At September 30, 1996
and 1995, $20.2 million and $17.3 million, respectively, have been deposited in
restricted and unrestricted trust accounts for this purpose. Withdrawals of
funds from certain restricted trust accounts may require approval of regulatory
agencies. In addition to establishing trust funds, the Company also provides
financial assurance for one of its landfills through the issuance of a bond for
$3.9 million.
 
     In addition, in accordance with State of California legislation, the
Company is required to provide financial assurance for the initiation and
completion of corrective action for potential releases of contaminants from its
landfills. The Company has on deposit $0.9 million in trust funds as of
September 30, 1996 and estimates that future contributions to trust funds of
approximately $6.9 million over the remaining lives of the respective landfills
will be required to satisfy these obligations. In the event of a release prior
to full funding, the Company may be required to pay for the corrective action or
to accelerate funding of the trust funds.
 
     The Company has environmental impairment liability insurance, which covers
the sudden or gradual onset of environmental damage to third parties, on all
owned and operated facilities. The current policy has a limit of $15.0 million
per loss with an annual aggregate limit for all losses of $15.0 million,
covering pollution conditions that result in bodily injury or property damage to
third parties, including clean-up costs. The Company also carries an underground
tank policy to satisfy financial assurance requirements mandated under federal
law.
 
     California landfill operators must demonstrate financial assurance to
compensate third parties for bodily injury and property damage arising out of
landfill operations. Under the method adopted by the Company, the regulations
require funding of $1.0 million per landfill to a maximum of $5.0 million
Company-wide. To satisfy this requirement the Company has established financial
assurance mechanisms for each landfill. The Company has approximately $1.0
million in each of the four separate trust funds at September 30, 1996 and has
secured an insurance policy for the other landfill.
 
(13) COMMITMENTS AND CONTINGENCIES
 
     The Company has arranged stand-by letters of credit with various expiration
dates totaling $9.4 million and $16.7 million at September 30, 1996 and 1995,
respectively. These letters of credit are provided primarily to secure insurance
and self-insurance obligations and for bond requirements. As of September 30,
1996, the Company has $15.6 million in standby letters of credit availability.
 
                                       62
<PAGE>   64
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     The Company is self-insured for various risks of loss related to general
liability, automobile liability, property damage, employee and certain retiree
healthcare, and workers' compensation. The establishment of reserves and claim
payment activity include estimates of the ultimate costs of claims that have
been reported but not settled and of claims that have been incurred but not
reported. Adjustments to the reserve are charged or credited to expense in the
periods in which they are determined to be necessary. At September 30, 1996 and
1995, the Company's accrued liability for self-insured claims was approximately
$12.6 million and $10.3 million, respectively.
 
     At September 30, 1996, the Company and the other unrelated investors were
jointly and severally liable as guarantors of affiliates' (Note 4) indebtedness
totaling $2.0 million.
 
(14) LITIGATION
 
     In December 1994, the Company effected the settlement of litigation
originally commenced in 1991 by certain holders of the Old Subordinated Notes.
The aggregate amount of settlement payments of $5.5 million for personal injury
claims was included in other accrued liabilities at September 30, 1994. Norcal
issued $51.1 million aggregate principal amount of new notes ("Class A and B
Notes") in exchange for all of the Old Subordinated Notes (Note 6). In
connection with a settlement in August 1995 (the "ESOP Note Settlement") with
holders of all but four of the ESOP Notes (the "Settling Plaintiffs") of
litigation commenced in 1994 entitled Abraham et. al. v. Norcal Waste Systems
Inc. et al., discussed below, the Company was required to redeem the Class A and
B Notes. The ESOP Note Settlement was successfully consummated in November 1995,
and the redemption of the Class A and B Notes occurred resulting in the
recognition of a gain of $14.4 million since there was no gain recognized for
financial statement purposes on the conversion of the debt instruments in 1994.
 
     Pursuant to the ESOP Note Settlement, Norcal paid $3.6 million in
settlement of personal injury claims and provided funds to the ESOP in the
amount of $33.2 million to satisfy those ESOP Notes in full and provide for
their extinguishment. Although the Company was not an obligor or a guarantor on
the ESOP Notes, they were recorded on the Company's consolidated balance sheet
in accordance with GAAP. Settlement of the ESOP Notes for less than the carrying
amount of the Notes resulted in a gain of $17.0 million to the Company. The
Company also agreed to continue to provide certain post-retirement health and
welfare benefits to certain Settling Plaintiffs until the earlier of the
resolution of remaining claims and October 1, 2000. The ESOP subsequently paid
the holders of the four remaining ESOP Notes approximately $0.9 million funded
by Norcal, in exchange for cancellation of their ESOP Notes, which represented
outstanding principal and accrued interest totaling approximately $1.4 million
as of September 30, 1995 and as of the redemption date and releases equivalent
to those provided by the Settling Plaintiffs.
 
     The Settling Plaintiffs did not release and were permitted to proceed upon
claims (the "Excluded Claims") against certain banks (and counsel to one of
them) based upon their roles as former trustees under the ESOP Notes Indenture
(the "Trustee Parties"), but only insofar as those claims are not indemnifiable
under a provision of the ESOP Notes Indenture that requires indemnification of
the trustee by the ESOP for liability incurred without the trustee's negligence
or bad faith. The ESOP Note Settlement provides that the Settling Plaintiffs
shall indemnify the Company, the ESOP and certain related parties against claims
brought by the Trustee Parties or the released parties arising out of the
Excluded Claims (the "Indemnified Claims"). The indemnity is to be paid from
certain funds to be placed in escrow (the "Escrow Account") and not disbursed to
Settling Plaintiffs until the later of the resolution of all Indemnified Claims
or, if no Indemnified Claims are brought, then nine months after deposit. No
Settling Plaintiff is personally liable on the indemnity beyond his, her or its
interest in or distribution from the Escrow Account. The funds to be placed in
the Escrow Account consist of (i) any amounts Settling Plaintiffs recover from
the Trustee Parties (the
 
                                       63
<PAGE>   65
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
"Escrowed Recovery"); and (ii) a deferred settlement payment by Norcal, to be
paid on the earlier of the fifth anniversary of the effective date of the ESOP
Note Settlement and final resolution of Settling Plaintiffs' claims against the
Trustee Parties, in the amount of $500,000 reduced by the amount of certain
attorneys' fees and costs as to which Norcal or the ESOP is contractually
obligated to provide indemnification and/or reimbursement (the "Deferred
Settlement Payment").
 
     On August 20, 1996, Norcal and the ESOP filed a declaratory relief action
(the "Declaratory Relief Action") in the Abraham Action against Bank of America
entitled Norcal Waste Systems, Inc., et al. v. Bank of America, N.T. & S.A.,
seeking a declaration that they have no obligation to indemnify the Bank
following the ESOP Note Settlement under the indemnity provisions of certain
agreements between Bank of America or Security Pacific, on the one hand, and
Norcal or the ESOP, on the other (the "Indemnity Agreements"), in connection
with Settling Plaintiffs' pursuit of the Excluded Claims. By order dated
December 17, 1996 the court granted summary judgment to Norcal and the ESOP in
the Declaratory Relief Action.
 
     On September 10, 1996, Bank of America, in its own capacity and as
successor to Security Pacific, served a cross-complaint (the "Cross-Complaint")
alleging a variety of claims against, among others, Norcal and the ESOP relating
to the ESOP Note Settlement or the Indemnity Agreements. The Cross-Complaint
included claims for fraud, breach of contract, and tortious breach of the
implied covenant of good faith and fair dealing in entering into the ESOP Note
Settlement, and claims for declaratory relief and breach of contract in
connection with the Indemnity Agreements. In addition to punitive damages, the
Cross-Complaint sought compensatory damages subject to proof at trial, alleged
to include possibly in excess of $13.0 million in damages. By order dated
December 17, 1996 the court dismissed all claims in the Cross-Complaint with
prejudice, except that the claim against the ESOP for tortious breach of the
implied covenant was dismissed with prejudice insofar as it attempted to state a
tort claim and was otherwise dismissed without prejudice.
 
     Any claims in the Cross-Complaint are "caused by or related to the Excluded
Claims" and, as such, are Indemnified Claims covered by Settling Plaintiffs'
indemnity. Accordingly, any liability incurred by Norcal (other than its own or
the ESOP's defense costs) in connection with the Cross-Complaint would be
payable from the Escrowed Recovery, if any, and potentially the Deferred
Settlement Payment. Norcal believes that it is unlikely that it would be liable
to pay an amount in damages on the Cross-Complaint that is materially greater
than any recovery by Settling Plaintiffs from Bank of America (aside from any
liability for damages in the amount of Bank of America's litigation expenses),
and thus any award of damages (aside from such expenses) on the Cross-Complaint
is not likely to exceed the Escrowed Recovery (before reduction for indemnified
defense costs).
 
     On October 19, 1995, Norcal and the Secretary of the United States
Department of Labor (the "Secretary") settled matters arising out of the
Secretary's investigation of certain employee-benefit plans sponsored by Norcal
or its predecessors, as well as a transaction (the "Plan Investment") involving
an investment by certain of the Company's pension plans (the "Plans") through
Bank of America (the "Bank"), the trustee on the Plans. Pursuant to the
settlement (the "Norcal-Secretary Settlement"), a $3.5 million payment, which
was fully funded by insurance proceeds, was allocated in amounts determined by
the Secretary and the Internal Revenue Service to be sufficient to correct in
full any "prohibited transactions" with respect to the Plan Investment, with
$45,000 deposited in one of the Plans and the remainder of the settlement
payment deposited in the ESOP, which used the proceeds to pay a portion of its
debt to Norcal.
 
     The Secretary released claims against Norcal, the Plans and certain related
persons, including officers, directors, agents, fiduciaries, advisers and
attorneys; the Secretary did not release claims (the "DOL Excluded Claims")
arising out of the Plan Investment against the Bank as trustee for the Plans,
except insofar as the Bank was entitled to indemnity from Norcal on such claims.
 
     On February 14, 1996, the Secretary filed an action against the Bank on the
DOL Excluded Claims alleging ERISA violations, entitled Reich v. Bank of
America, N.T.&S.A., in the United States District Court
 
                                       64
<PAGE>   66
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
for the Northern District of California (the "Bank Action"). Norcal intervened
in the Bank Action to bring a declaratory relief action asserting that Norcal
had no indemnity obligations to the Bank in connection with the Bank Action.
 
     On March 29, 1996, the Bank and the Secretary entered into a settlement of
the Bank Action (the "Bank-Secretary Settlement"), which was conditioned on
Norcal and the Plans issuing releases of the Bank. The Bank paid to the Plans
the aggregate amount of $4.0 million; and the Bank released Norcal, the Plans
and certain related persons, including officers, directors, agents, fiduciaries,
advisers and attorneys, from all claims, including indemnification claims,
relating to the Plan Investment, the Bank-Secretary Settlement and the
Norcal-Secretary Settlement. The Bank Action and Norcal's declaratory relief
action were dismissed with prejudice.
 
     The Company is involved in various other legal actions in the normal course
of business. It is the Company's opinion that these matters relating to ordinary
litigation are adequately provided for or that resolution of such matters will
not have a material adverse impact on the financial condition of the Company;
however, there can be no assurance that the impact of such matters on its
results of operations or cash flows for any given reporting period will not be
material.
 
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company is required under Statement of Financial Accounting Standards
(SFAS) No. 107 "Fair Value of Financial Instruments" to disclose fair value for
all of its financial instruments. The carrying value of cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short maturity of these instruments.
Estimates for the fair value of the Company's other financial instruments at
September 30, are detailed below:
 
<TABLE>
<CAPTION>
                                                       1996                      1995
                                               ---------------------     --------------------
                                               CARRYING       FAIR       CARRYING      FAIR
                                                AMOUNT       VALUE        AMOUNT       VALUE
                                               --------     --------     --------     -------
                                                               (IN THOUSANDS)
     <S>                                       <C>          <C>          <C>          <C>
     Assets:
       Trust accounts........................  $ 28,150     $ 28,187     $ 31,289     $31,222
       Marketable securities.................     6,889        6,889        5,645       5,645
     Liabilities:
       Senior Notes..........................   170,392      170,392           --          --
       Other long term debt including
          current portion....................     2,348        2,348       95,879      95,879
     Subordinated notes payable:
       Class A and B Notes...................        --           --       53,249      38,489
       ESOP Notes............................        --           --       32,398      34,016
</TABLE>
 
     Trust accounts and marketable securities -- The fair value of the trust
accounts and marketable securities has been estimated based on market values
provided by the respective trustees and quoted market prices.
 
     Senior Notes -- The fair value of the senior notes has been estimated to be
the carrying amount of the notes because of the proximity of the exchange to
September 30, 1996 and the lack of an established market.
 
     Class A and B Notes -- The fair value of the Class A and B Notes has been
estimated based on the calculated redemption price of the notes under the terms
of the settlement agreement as of September 30, 1995. The notes were redeemed on
November 21, 1995, as part of the refinancing (Note 6).
 
                                       65
<PAGE>   67
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
     ESOP Notes -- The fair value of the ESOP Notes has been estimated based on
amounts paid in connection with the Settlement. The notes were redeemed on
November 21, 1995 as part of the refinancing (Note 6).
 
(16) BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
 
     The Company operates in one business segment -- solid waste management
services primarily consisting of collection, transfer and disposal to
industrial, commercial, residential and municipal customers. In 1996, one
customer accounted for 14% of consolidated revenue and 27% of consolidated
accounts receivable at September 30, 1996, during 1995 and 1994, no single
customer accounted for as much as 10% of consolidated revenue or accounts
receivable.
 
     The Company operates primarily in seven different geographical areas within
the State of California. The San Francisco geographical region represents
approximately 40%, 45% and 44% of revenues for the years 1996, 1995 and 1994,
respectively. In September 1996, the Company applied for an increase to its
collection and disposal rates in the City of San Francisco. The application
requested an increase, to be effective March 1, 1997, to fund several new
recycling programs requested by San Francisco, along with increases to recover
current and projected increases in operating costs. In accordance with certain
rate procedures two recommended rate orders (the "Recommended Rate Orders")
recommended smaller increases than requested, primarily due to the disallowance
of certain ESOP expenses which historically were allowed in the rates. The
Company objects to the positions taken by the Director of Public Works and
intends to vigorously pursue its rights under the Ordinance, including filing an
appeal with the Refuse Collection and Disposal Rate Board, which has the
authority to make the final rate determination. If the Company is unsuccessful
in its attempt to modify the Recommended Rate Orders in San Francisco, its
future annual operating results and cash flow could be adversely impacted in
that certain operating costs may not be recovered.
 
     The Company has collective bargaining agreements in this region which
represent 35% of the Company's total labor force and such agreements expire
within one year.
 
     The Company's operating results are affected by variations in its recycling
revenues from the sale of recyclable commodities. The Company's recycling
revenues are volatile and fluctuate in accordance with changes in prices of
recyclable commodities which in turn are, in many cases, dependent on changes in
worldwide supply of, and demand for, such recyclable commodities.
 
(17) GUARANTEE OF SECURITIES
 
     Norcal is a holding company and has no independent operations other than
those relating to its subsidiaries. The Senior Notes are guaranteed by certain
direct and indirect subsidiaries of Norcal. The guarantor subsidiaries are all
wholly owned subsidiaries and the guarantees of the guarantors are full,
unconditional and joint and several. The direct and indirect nonguarantor
subsidiaries of Norcal are individually and in the aggregate inconsequential.
Separate financial statements of each guarantor have not been presented since
management has determined such separate financial statements are not material to
investors.
 
                                       66
<PAGE>   68
 
                  NORCAL WASTE SYSTEMS, INC. AND SUBSIDIARIES
                (WHOLLY OWNED BY THE NORCAL WASTE SYSTEMS, INC.
                    EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST)
 
                  NOTES TO CONSOLIDATED STATEMENTS, CONTINUED
 
(18) SELECTED QUARTERLY FINANCIAL DATA, UNAUDITED
 
     The Company became subject to SEC reporting requirements in the third
quarter of 1996. The following table summarizes the unaudited quarterly results
of operations (in thousands):
 
<TABLE>
<CAPTION>
                                   FIRST QUARTER     SECOND QUARTER     THIRD QUARTER     FOURTH QUARTER
                                   -------------     --------------     -------------     --------------
     <S>                           <C>               <C>                <C>               <C>
     Operating revenues...........    $67,602           $ 69,802           $71,228           $ 79,583
                                       ======             ======
     Income from operations.......    $ 7,678           $  5,349           $ 9,784           $  2,980
                                       ======             ======
     Net income (loss)............    $29,971           $ (1,246)          $ 3,747           $ (2,229)
                                       ======             ======
</TABLE>
 
     The fourth quarter operating results were adversely impacted by the
Company's decision to increase the contributions to the ESOP by $9.0 million,
having the effect of reducing current taxes payable, and resulting in an
increased ESOP compensation expense relative to the additional shares allocated.
The contribution was applied as a prepayment of the loans from the Company to
the ESOP.
 
                                       67
<PAGE>   69
 
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
     None.
 
                                       68
<PAGE>   70
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The names, ages and positions and offices with Norcal of the current
executive officers and directors of Norcal are set forth below.
 
<TABLE>
<CAPTION>
            NAME                 AGE                          POSITION
-----------------------------    ---     --------------------------------------------------
<S>                              <C>     <C>
Michael J. Sangiacomo........    47      President, Chief Executive Officer and Director
Donald M. Moriel.............    62      Executive Vice President and Chief Operating
                                         Officer
Mark R. Lomele...............    40      Acting Chief Financial Officer, Treasurer and Vice
                                         President
Bennie J. Anselmo, Jr........    51      Vice President -- Equipment Procurement and
                                         Maintenance
David A. Cochrane............    40      Vice President -- Facilities Development and
                                         Technical Services
Jon D. Braslaw...............    35      Controller
Kenneth James Walsh..........    49      Division Manager of Southern California
Archie L. Humphrey...........    44      Division Manager of Northern California
Gale R. Kaufman..............    42      Director
John B. Molinari(a)(b).......    87      Director, Chairman of the Board of Directors
H. Welton Flynn(a)(b)........    74      Director
</TABLE>
 
---------------
(a) Audit Committee member
 
(b) Compensation Committee member
 
     Michael J. Sangiacomo has served as a director of Norcal since November
1990 and as Chief Executive Officer and President since January 1991. From
November 1990 to January 1991, Mr. Sangiacomo served as Acting Chief Executive
Officer and President of Norcal. From August 1988 until November 1990, he served
as Chief Financial Officer of Norcal, and held the additional title of Senior
Vice President from January to November 1990. Mr. Sangiacomo serves as a
director and an executive officer of all of Norcal's subsidiaries. From January
1988 until August 1988, he served as General Manager of Norcal subsidiary Sunset
Scavenger. From October 1983 through December 1987, Mr. Sangiacomo served as
Chief Financial Officer of Envirocal, Inc., a Norcal predecessor. Mr. Sangiacomo
holds a B.S. in Business Administration from the University of San Francisco and
practiced as a certified public accountant from 1971 to 1978.
 
     Donald M. Moriel has served as Executive Vice President and Chief Operating
Officer of Norcal since June 1992. Mr. Moriel also serves as an executive
officer and since June 1994 as a director of all of Norcal's subsidiaries. Since
March 1992 and prior to his current positions, Mr. Moriel, through a wholly
owned consulting company unaffiliated with Norcal, Pentagon Equities Corporation
located in Davis, California, served as a consultant to three Norcal
subsidiaries located in Solano County, California and was the General Manager of
these operations between March 1980 and March 1982. Mr. Moriel has been
President and Chief Executive Officer of Pentagon Equities Corporation since it
formation. Mr. Moriel's son-in-law is the Vice President and General Manager of
Norcal's Vacaville Sanitary Service subsidiary and Group Manager of five
additional subsidiaries.
 
     Mark R. Lomele has served as a Vice President of Norcal since November 1990
and as its Acting Chief Financial Officer and Treasurer since July 1996. From
September 1988 to July 1996, Mr. Lomele served as Norcal's Controller. From
April 1996 to September 1996 he also served as General Manager of Nortech Waste
LLC, a joint venture in which the Company is a minority investor. Prior to 1988,
Mr. Lomele was a financial manager for National Semiconductor Corporation. Mr.
Lomele has been a member of the ESOP's
 
                                       69
<PAGE>   71
 
Administrative Committee since 1991 and has served as its Chair since February
1, 1995. He holds a B.S. in Business Administration from the University of San
Francisco.
 
     Bennie J. Anselmo, Jr. has served as Vice President -- Equipment
Procurement and Maintenance and Vice President of Alta Equipment, Inc. since
November 1990. Mr. Anselmo served as Director of Equipment Procurement for
Golden Gate Disposal Company from January 1988 until his transfer to Norcal in
November 1990. Mr. Anselmo began his career with Golden Gate Disposal Company in
1963, serving as shop foreman and shop superintendent, among other capacities.
 
     David A. Cochrane has served since February 1996 as Vice President of
Norcal, with responsibility for landfill operations in Northern California,
facilities development and technical services. Prior to that Mr. Cochrane served
Norcal as Director of Technical Services since October 1994, and as Corporate
Manager for Landfill Engineering since April 1993. Since November 1996, Mr.
Cochrane as served as Vice President of Alta Environmental Services, Inc., a
subsidiary that markets certain types of landfill space to third parties, and as
Vice President of B&J Drop Box, subsidiary that owns a landfill in Vacaville,
CA, and Western Placer Recovery, Inc., a subisdiary that operates a landfill in
Roseville, CA. Before joining Norcal in April 1993, Mr. Cochrane served since
April 1990 as an executive manager for Emcon Associates, an environmental and
engineering consulting firm that has provided services to the waste industry,
including Norcal and its subsidiaries. He holds a B.A. in Geology from Humboldt
State University.
 
     Jon D. Braslaw has served as Controller since July 1996. Prior to that
time, Mr. Braslaw served as Assistant Controller from April to July 1996, and as
Manager of Financial Reporting since January 1995. Before joining Norcal in
November 1989, Mr. Braslaw was Controller of the Santa Barbara Metropolitan
Transit District. He holds a B.A. in Economics from the University of California
at Santa Barbara.
 
     Kenneth James Walsh has been an employee of Norcal since 1965. During this
period, Mr. Walsh has performed extensive operations functions. Mr. Walsh has
worked at seven Norcal subsidiary companies, and has been the Division Manager
of Southern California since 1990. He is responsible for overall management of
the contracts with San Bernardino and San Diego Counties. Mr. Walsh is currently
Vice President and District Manager of Norcal/San Bernardino, Inc., the
subsidiary that administers the Company's San Bernardino County operations, and
Norcal/San Diego, Inc., the subsidiary that administers the Company's San Diego
County operations, and Vice President and General Manager of Norcal Waste
Solutions, Inc.
 
     Archie L. Humphrey has served as Division Manager for all Northern
California operations except San Francisco operations, Integrated Environmental
Systems, a subsidiary that owns and operates a medical waste incinerator, and
Northern California landfills since November 1996 and is a Vice President of 14
subsidiaries of the Company. Mr. Humphrey has also been a member of the
Administrative Committee of the ESOP since 1986 and its Secretary since 1992.
From August 1995 to November 1996, Mr. Humphrey served as Division Manager for
North Coast operations of the Company. Mr. Humphrey served as a Regional Manager
for the Company's Solano County operations from October 1992 until August 1995
and as a director of the Company from November 1991 until February 1996. He
began his career with Vacaville Sanitary in 1982. Mr. Humphrey holds a B.A. in
Sociology from California State University at Sacramento.
 
     Gale R. Kaufman became a director of Norcal in July 1996. Since 1987, Ms.
Kaufman has been the president of Kaufman Campaign Consultants, a political
campaign and consulting firm. From 1992 to 1995, she was the Director of the
Speaker's Office of Majority Services of the California State Assembly. Since
May 1993, she has provided certain consulting services to Norcal, including
overall campaign responsibility in connection with Norcal's defeat of certain
City of San Francisco ballot initiatives. Ms. Kaufman has a B.A. in Political
Science from George Washington University.
 
     John B. Molinari has served as a director of Norcal and its predecessor
since 1986 and as Chairman of the Board since December 1990. From 1948 to 1953,
Mr. Molinari served as a judge of the San Francisco Municipal Court; from 1953
to 1962, he served as a judge of the San Francisco Superior Court; and from 1962
to 1977, he served as a Justice on the California Court of Appeal. He has been
an attorney in private practice since 1977. He serves on the board of directors
of Redwood Bank and is a member of its compensation committee.
 
                                       70
<PAGE>   72
 
     H. Welton Flynn has served as a director of Norcal since December 1991.
From 1949 until the present, Mr. Flynn has been the sole proprietor of an
accounting firm located in San Francisco. Since January 1996, he has served as a
member of The Public Transportation Commission of the City and County of San
Francisco. Mr. Flynn was appointed to the Public Utilities Commission for the
City and County of San Francisco in 1970 and served as its President for more
than five terms before retiring in 1991.
 
     Each executive officer of Norcal is appointed by, and serves at the
pleasure of, the Board of Directors. There are no family relationships among
executive officers or directors of Norcal.
 
Board of Directors
 
     Number of Directors and Term of Office.  Norcal's Bylaws currently fix the
authorized number of directors of Norcal at five. All directors hold office
until the next annual meeting of shareholders and until their successors have
been elected. The ESOP (as shareholder) has the power to remove directors at any
time. There is currently one vacancy on the Board of Directors.
 
     Committees of the Board.  The Compensation Committee recommends to the
Board of Directors the salary, benefit and incentive compensation levels of
Norcal's executive officers as well as the contractual provisions of their
employment contracts, and administers Norcal's 1990 Stock Option Plan (the "1990
Option Plan"), the 1996 Employee Stock Incentive Plan (the "1996 Employee Plan")
and the 1996 Executive Stock Incentive Plan (the "1996 Stock Plan"), including
determination of grants of options, prescribing the terms and provisions of the
options, construing and interpreting the 1990 Option Plan, the 1996 Employee
Plan and the 1996 Stock Plan and establishing and amending rules and regulations
related thereto. The members of the Compensation Committee are Messrs. Molinari
and Flynn. The Audit Committee recommends the firm of independent certified
public accountants to be appointed to audit Norcal's financial statements,
reviews the scope and results of the audit, reviews with management Norcal's
interim and year-end operating results, considers the adequacy of the internal
accounting controls and audit procedures of Norcal and reviews the non-audit
services to be performed by the independent accountants. The members of the
Audit Committee are Messrs. Flynn and Molinari.
 
     Compensation of Directors.  Directors who are employees of Norcal or its
subsidiaries do not receive additional compensation for their services as
directors of Norcal. For services as a non-employee director during fiscal year
1996, John B. Molinari, H. Welton Flynn and Gale R. Kaufman were each paid
$19,750, $18,000 and $3,500, respectively. Each non-employee director receives
an annual retainer of $18,000 and a payment of $1,000 plus expenses for each
board meeting attended and $1,000 plus expenses for each committee meeting
attended that is held at a different time or place than a board meeting.
Non-employee directors are also eligible to receive option grants under the 1996
Non-Employee Director Stock Option Plan. All directors are eligible to receive
option grants under the 1996 Stock Plan and the 1996 Employee Plan.
 
     Compensation Committee Interlocks and Insider Participation in Compensation
Decisions. Messrs. Molinari and Flynn were appointed to the Compensation
Committee in May 1992. Neither has ever been an officer or employee of Norcal or
any of its subsidiaries. Mr. Sangiacomo, President and Chief Executive Officer
of Norcal participates fully with the committee members in recommending to
Norcal's Board of Directors the salaries, benefits and incentive compensation
for Norcal's executive officers, excluding his own.
 
                                       71
<PAGE>   73
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Summary Compensation Table.  The following table provides certain summary
information concerning the compensation paid or accrued during the three fiscal
years ended September 30, 1996 to Norcal's Chief Executive Officer and to each
of the four other most highly compensated executive officers of Norcal who
received compensation in excess of $100,000 during the last completed fiscal
year (the "Named Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                    OTHER       SECURITIES         ALL
                                                                    ANNUAL      UNDERLYING        OTHER
                                   FISCAL    SALARY   BONUS(A)   COMPENSATION    OPTIONS     COMPENSATION(C)
   NAME AND PRINCIPAL POSITION      YEAR      ($)       ($)          ($)         (NUMBER)          ($)
---------------------------------- ------   --------  --------   ------------   ----------   ---------------
<S>                                <C>      <C>       <C>        <C>            <C>          <C>
Michael J. Sangiacomo.............  1996     350,000  147,500        --           960,000             --(d)
  President and Chief               1995     333,846  175,000        --            --             94,582
  Executive Officer                 1994     279,230  150,000        --            --             42,277
Donald M. Moriel..................  1996     275,578  100,000      68,615         300,000         35,856(e)
  Executive Vice President and      1995     261,539  110,000        --            --             31,247
  Chief Operating Officer           1994     214,230  100,000        --            --             14,286
Mark R. Lomele....................  1996     128,233   50,000        --            65,000(b)          --(d)
  Acting Chief Financial Officer,   1995     117,066   42,000        --            --             44,288
  Treasurer and Vice President      1994     109,078   40,000        --            --             18,344
Kenneth James Walsh...............  1996     154,617   40,000        25,502        35,000(b)          --(d)
  Division Manager --               1995     120,990   38,000        --            --             20,160
  Southern California               1994     113,708   80,000        --            --             29,530
Archie L. Humphrey................  1996     135,013   30,500        --            75,000(b)          --(d)
  Division Manager --               1995     105,926   32,000        --            --             69,336
  Northern California               1994     100,041   25,000        --            --             29,257
</TABLE>
 
---------------
(a) Bonuses are indicated for the fiscal year in which they were earned based on
    the achievement of certain business plan targets.
 
(b) Options set forth below for fiscal year 1996 include certain options that
    were granted during fiscal year 1997 with respect to employment during
    fiscal year 1996.
 
(c) Unless otherwise indicated in a note to this table, this amount consists
    primarily of increases in the value of the individual's ESOP account as a
    result of an allocation of additional shares of Norcal's Common Stock to
    such account as well as an increase in the estimated fair market value per
    share of such stock. This figure also includes premiums paid by Norcal on
    behalf of the Named Executive Officers for group life insurance during each
    of the years indicated, pro-rated for partial years of service.
 
(d) Amounts representing increases in the value of the individual's ESOP account
    are not presently calculable. See footnote (c).
 
(e) Represents amounts earned with respect to a deferred annuity to be paid as
    part of the Deferred Compensation and Stock Option Plan (as hereinafter
    defined). Mr. Moriel will also receive compensation relating to the increase
    in the value of his ESOP account (see footnote (c)). This amount is not
    presently calculable.
 
     Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. Norcal has employment contracts with various executive officers
and key employees.
 
     In April 1996, Norcal entered into a new employment agreement with Mr.
Sangiacomo, its President and Chief Executive Officer. Under the agreement, Mr.
Sangiacomo will initially receive a salary of $350,000 per year and be eligible
to participate in the Short-Term Incentive Bonus Plan. In addition, Mr.
Sangiacomo will receive insurance and other benefits and perquisites generally
available to Norcal's executive employees.
 
     Mr. Sangiacomo will be entitled to certain severance payments (i) if his
employment is terminated constructively or without cause after a change in
control of Norcal or (ii) if he resigns at any time more than
 
                                       72
<PAGE>   74
 
12 months but less than 13 months after a change in control of Norcal. Such
severance benefits would, under certain circumstances, include payment of an
amount equal to twice his average total annual compensation for the two previous
years.
 
     Norcal has granted Mr. Sangiacomo a nonqualified stock option pursuant to
its 1996 Stock Plan to purchase Common Stock consisting of three series, with
each series being for 320,000 shares. The initial exercise price for all shares
is $4.89. The exercise price for the Series B and C shares will be subject to
adjustment on October 1, 1996, and, with respect to the Series C shares only, on
October 1, 1997, to the fair market value of the stock on such date (but in no
event less than the initial exercise price of $4.89 per share). Each Series
generally will vest over four years, with the first vesting to occur for Series
A, B and C options on September 30 of 1996, 1997 and 1998, respectively. This
vesting schedule will be partially accelerated if Norcal achieves certain
financial, operational and strategic objectives, including an initial public
offering. Under certain circumstances, the option will vest completely if there
is a change in control (a "Control Event") of Norcal. Generally, a Control Event
will be deemed to have occurred if: (i) a third party (other than an employee
benefit plan or an entity controlled by the Company) acquires 25% or more of
Norcal's voting securities (or 35% or more if Norcal has not had an initial
public offering of Common Stock and the ESOP owns more than 50% of Norcal's
voting securities); (ii) persons who are directors of Norcal as of the date of
this prospectus (the "Incumbent Board") cease to constitute a two-thirds
majority of Norcal's board of directors (provided that any director whose
nomination or election is approved by a two-thirds majority of the Incumbent
Board shall be considered a member of the Incumbent Board); (iii) a merger or
like event involving Norcal is consummated unless, among other things, Norcal
shareholders immediately before such event own immediately following such event
at least 75% of the voting securities of the resulting corporation; (iv) Norcal
is liquidated or dissolved; or (v) substantially all of Norcal's assets are
sold.
 
     As long as Mr. Sangiacomo remains employed by Norcal, he may exercise any
option in a Series any time within seven years after the exercise price has been
fixed for that Series with respect to shares that have vested.
 
     In June 1996, Norcal entered into a new employment agreement with Mr.
Moriel, its Chief Operating Officer. Under the agreement, Mr. Moriel will
initially receive a salary of $275,000 per year, with $50,000 of such annual
salary deferred pursuant to the Deferred Compensation and Stock Option Plan
(defined below). Mr. Moriel will be eligible to participate in the Short-Term
Incentive Bonus Plan. In addition, Mr. Moriel will receive insurance and other
benefits and perquisites generally available to Norcal's executive employees.
 
     Pursuant to the agreement, Mr. Moriel will retire in 1999 and will receive
a retirement annuity pursuant to the Deferred Compensation and Stock Option Plan
which, together with certain pension payments, will result in aggregate payments
to Mr. Moriel of $50,000 per year. Upon his retirement, Mr. Moriel has agreed to
enter into a consulting agreement with Norcal, with a term of five years and
with a minimum annual payment of $50,000. Mr. Moriel will also receive certain
other post-retirement benefits, including health insurance for himself and his
dependents.
 
     Mr. Moriel will be entitled to certain severance benefits if (i) his
employment is terminated without cause and (ii) he signs a release relating to
certain claims. Such severance benefits would include, until the earlier of 18
months after his employment termination or May 1999, payment of an amount equal
to his average annual compensation (salary plus bonus) for the two previous
years.
 
     Norcal granted Mr. Moriel a nonqualified stock option under the Deferred
Compensation and Stock Option Plan to purchase up to 300,000 shares of Common
Stock at an exercise price of $4.89 per share. The option will vest as follows:
with respect to 90,000 shares, on each of September 30, 1996, 1997, and 1998,
and with respect to 30,000 shares, on May 27, 1999. The option will vest
completely upon Mr. Moriel's termination as a result of disability or death.
Subject to certain provisions of the Deferred Compensation and Stock Option
Plan, Mr. Moriel may exercise his option with respect to the shares that have
vested at any time on or before September 30, 2002.
 
     In April 1996, the Board of Directors adopted a severance pay policy (the
"Severance Policy") which would be triggered by a change in control of Norcal.
The program covers up to ten key employees of the Company (but not Messrs.
Sangiacomo and Moriel). Each employee covered by the Severance Policy will
receive an amount equal to his current base salary if there is a change in
control of Norcal and the employee is
 
                                       73
<PAGE>   75
 
constructively terminated or terminated without cause within 13 months after
such change in control. The Company has not designated any specific employees to
be covered by the Severance Policy at this time.
 
     Short-Term Incentive Bonus Plan.  In April 1996, the Company adopted a
Short-Term Incentive Bonus Plan (the "1996 Bonus Plan") providing variable cash
bonuses for up to approximately 70 of the Company's executive and management
employees (including the Named Executive Officers). Under the 1996 Bonus Plan,
cash bonuses will be based on a percentage of each participant's base salary,
with such percentages varying depending on how closely Norcal (or its regional
operations, as the case may be) achieves specific financial, operational and
strategic objectives. No bonuses will be paid unless the Company's profit before
taxes exceeds the aggregate amount of bonuses due to be paid pursuant to the
1996 Bonus Plan. Depending on the employee, cash bonuses will range from 5% to
30% of base salary if 85% of the target is achieved to between 20% and 120% of
base salary if 120% of the target is achieved. With respect to fiscal year 1996,
the Company has retained the discretion to reduce such bonuses by up to 50%. The
Board of Directors may, from time to time, modify the 1996 Bonus Plan for any
period after September 30, 1996.
 
     1996 Executive Stock Incentive Plan ("1996 Stock Plan").  Pursuant to
Norcal's 1996 Stock Plan, up to 2,887,500 shares of Common Stock have been set
aside to satisfy awards that may be granted to officers, employees or directors
of the Company or its affiliates. Awards may consist of incentive or
nonqualified stock options, restricted stock, stock appreciation rights,
performance awards and dividend equivalent rights. The 1996 Stock Plan will
expire in January 2006.
 
     The 1996 Stock Plan is administered by a committee of non-employee
directors (currently, the Compensation Committee), which has the power to
determine when and to whom awards will be granted and the terms of each award.
The terms of any award will be set forth in an award agreement, which may modify
or delete provisions of the 1996 Stock Plan that would otherwise apply to such
award or which may contain other terms and restrictions not set forth in the
1996 Stock Plan.
 
     With respect to awards of options, the committee has authority to determine
(i) the number of shares of Common Stock that may be purchased pursuant to each
option, (ii) the option's vesting provisions, (iii) the exercise price (provided
in general that the exercise price for shares must be at least 85% of the fair
market value of the shares as of the grant date), (iv) the term of such option
and (v) such other terms as the committee determines.
 
     The 1996 Stock Plan generally provides that, upon a Control Event, all
outstanding options will become immediately and fully exercisable, and
optionholders may surrender any option to the extent not yet exercised in
exchange for a cash payment.
 
     With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Stock Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Stock Plan.
 
     Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition and confidentiality provisions in the 1996 Stock
Plan are subject to certain forfeiture provisions with respect to their options
or shares.
 
     Effective April 1996, Messrs. Molinari and Flynn, who are non-employee
directors, were each awarded an option to purchase up to 15,000 shares of Common
Stock under the 1996 Stock Plan at an exercise price of $4.89 per share.
 
     1996 Employee Stock Incentive Plan (the "1996 Employee Plan").  Pursuant to
the 1996 Employee Plan, up to 5,260,500 shares of Common Stock (less any such
shares set forth in awards granted pursuant to the 1996 Stock Plan, the 1990
Option Plan, the Non-Employee Director Plan and the Deferred Compensation and
Stock Option Plan) have been set aside to satisfy awards that may be granted to
officers, employees or directors of the Company or its affiliates. Awards may
consist of incentive or nonqualified stock options, restricted stock, stock
appreciation rights, performance awards and dividend equivalent rights. The 1996
Employee Plan will expire in December 2006.
 
                                       74
<PAGE>   76
 
     The 1996 Employee Plan is administered by a committee of non-employee
directors (currently, the Compensation Committee), which has the power to
determine when and to whom awards will be granted and the terms of each award.
The terms of any award will be set forth in an award agreement, which may modify
or delete provisions of the 1996 Employee Plan that would otherwise apply to
such award or which may contain other terms and restrictions not set forth in
the 1996 Employee Plan.
 
     With respect to the awards of options, the committee has authority to
determine (i) the number of shares of Common Stock that may be purchased
pursuant to each option, (ii) the option's vesting provisions (provided that the
rate of vesting must be at least 20% per year over five years from the date the
option is granted), (iii) the exercise price (provided in general that the
exercise price for shares must be at least 85% of the fair market value of the
shares as of the grant date), (iv) the term of such option (provided that the
term of an option may not be greater than ten years from the date of grant
thereof) and (v) such other terms as the committee determines.
 
     The 1996 Employee Plan generally provides that, in the event of certain
changes in control, the committee, in its sole discretion, may take a variety of
actions (including acceleration of unvested options) with respect to outstanding
awards that it considers to be in the best interests of the Company.
 
     With limited exceptions, transfers of shares of Common Stock acquired
pursuant to the 1996 Employee Plan are subject to the Company's right of first
refusal, which right will terminate upon the consummation of the Company's first
public offering of Common Stock. In addition, upon termination of a
participant's employment, the Company will have an assignable option to
repurchase any shares of Common Stock awarded to a participant pursuant to the
1996 Employee Plan, which option will terminate upon the consummation of the
Company's first public offering of Common Stock.
 
     Unless a particular award agreement provides otherwise, participants who
violate certain noncompetition, confidentiality and other provisions in the 1996
Employee Plan are subject to certain forfeiture provisions with respect to their
options or shares.
 
     Messrs. Lomele, Humphrey, Walsh, Braslaw, Cochrane and Anselmo, who are
employees of the Company and/or certain subsidiaries, were each awarded an
option with respect to their employment during fiscal year 1996, to purchase up
to 65,000, 75,000, 35,000, 20,000, 30,000 and 15,000 shares of Common Stock,
respectively, under the 1996 Employee Plan at an exercise price equal to the
greater of (i) $4.89 per share or (ii) 85% of the fair market value of the
shares of Common Stock as of the date of grant (as such value is determined by
the Compensation Committee). These options have a seven-year term (commencing
September 30, 1996) and vest over four years.
 
     Deferred Compensation Stock Option Plan.  Pursuant to Norcal's Deferred
Compensation and Stock Option Plan (the "Deferred Compensation and Stock Option
Plan"), (i) up to 300,000 shares of Common Stock have been set aside to satisfy
the award of an unqualified stock option to Mr. Moriel; (ii) Mr. Moriel will
defer $50,000 per year of his annual salary (as described above) (the "Deferred
Compensation"); and (iii) Mr. Moriel will be entitled to receive a retirement
annuity (the "Retirement Annuity"), payable quarterly until his death, in the
amount of $50,000 per year, less the aggregate amount of benefits he receives
from other retirement plans of Norcal, excluding the ESOP benefit.
 
     The Deferred Compensation and Stock Option Plan is currently administered
by the Compensation Committee, which has the power to interpret the plan.
 
     Generally, in the event that (i) there is a merger, consolidation or other
reorganization in which Norcal is not the surviving entity or becomes a
subsidiary of another corporation, (ii) there is a sale of all or substantially
all of Norcal's assets, (iii) there is a sale of more than 50 percent of
Norcal's outstanding stock to one or more persons who are not shareholders of
Norcal or (iv) there is a dissolution or liquidation of Norcal (the transactions
referred to in clauses (i)-(iv) are each referred to herein as a "Corporate
Transaction"), Norcal is obligated to (i) require the successor entity to (A)
assume Mr. Moriel's option or (B) substitute a comparable option of such
successor entity (or any of, its affiliated entities), or (ii) notify Mr. Moriel
at least 30 days before a Corporate Transaction occurs so that he will have an
opportunity to purchase all or part of his vested shares prior to the
consummation of such Corporate Transaction, at which time Mr. Moriel's option
will be cancelled.
 
                                       75
<PAGE>   77
 
     Shares acquired pursuant to the exercise of the option granted under the
Deferred Compensation and Stock Option Plan are subject to certain restrictions
on transfers. In addition, with certain exceptions, transfers of such shares are
subject to Norcal's right of first refusal, which right will terminate upon the
consummation of Norcal's first public offering of Common Stock. Upon the later
of Mr. Moriel's termination of employment and the term of his option, Norcal
will have an assignable option to repurchase shares of Common Stock awarded to
Mr. Moriel pursuant to the Deferred Compensation Stock Option Plan.
 
     The Deferred Compensation and Stock Option Plan provides that if Mr. Moriel
violates certain noncompetition and confidentiality provisions in such plan, he
will be subject to forfeiture provisions with respect to his options, shares
purchased thereunder and the Retirement Annuity.
 
     Mr. Moriel's Deferred Compensation will accrue interest at the rate of 8
percent per year, compounded quarterly. Norcal will distribute such Deferred
Compensation to Mr. Moriel at the rate of $30,000 per year beginning with the
first day of the calendar quarter following termination of his employment with
Norcal for any reason.
 
     1996 Non-Employee Director Stock Option Plan.  Pursuant to Norcal's 1996
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"), up
to 175,000 shares of Common Stock have been set aside to satisfy awards to
non-employee directors of Norcal. Upon becoming a director, each future
participant will be awarded an option to purchase 35,000 shares of Common Stock,
which option will become exercisable in three equal, annual installments,
beginning on the first anniversary of the date of grant. Each such option will
have a term of seven years and an exercise price equal to the Common Stock's
fair market value on the date of grant. Unless otherwise provided in the
applicable award agreement, options granted under the Non-Employee Director Plan
will become immediately exercisable upon a Control Event. Effective January
1996, Messrs. Molinari and Flynn, who are non-employee directors, were each
awarded an option to purchase up to 35,000 shares of Common Stock under the
Non-Employee Director Plan at an exercise price of $4.89 per share. In July
1996, Ms. Kaufman, a non-employee director, was also granted an option to
purchase up to 35,000 shares of Common Stock under the Non-Employee Director
Plan at an exercise price of $4.89 per share. The Non-Employee Director Plan is
administered by Norcal's Board of Directors.
 
     1990 Stock Option Plan ("1990 Option Plan").  Pursuant to Norcal's 1990
Option Plan, options to purchase a maximum of 1,898,000 shares of Common Stock
may be issued to officers, employees, independent contractors and directors of
Norcal, its subsidiaries and/or its affiliates. Of that amount, options to
purchase a maximum of 600,000 shares of Common Stock may be granted to directors
of Norcal, including directors who are also employees of Norcal. Under the 1990
Option Plan, incentive stock options that meet the requirements of Section 422
of the Code may be granted to the officers and employees of Norcal, its
subsidiaries and/or certain of its affiliates. The 1990 Option Plan is currently
administered by the Compensation Committee of the Board of Directors, which has
the power to determine to whom options will be granted, the terms of each option
and to interpret the plan.
 
     The exercise price of any stock option may not be less than 100% of the
fair market value of the Common Stock on the date the option is granted. If the
Common Stock is not publicly traded on the date of grant of an option, fair
market value may be computed in good faith by the Board of Directors or a
Committee thereof, but shall not be less than the fair market value reflected in
the most recent year-end independent appraiser's valuation report received by
the ESOP Administrative Committee. Unless otherwise provided in the option
grant, shares acquired pursuant to the exercise of options become vested over a
period of five years from the date of grant and are subject to certain
restrictions on transfer, unvested shares may be repurchased by Norcal upon
termination of the optionee's employment or engagement with Norcal (or its
subsidiaries) at the exercise price the optionee originally paid for such shares
and all shares purchased pursuant to the exercise of options are subject to
repurchase by Norcal under certain circumstances. Generally, in the event (i)
there is a merger, consolidation or other reorganization as a result of which
Norcal is not the surviving corporation or becomes a subsidiary of another
corporation and (ii) the surviving corporation does not agree to assume all
options granted under the 1990 Option Plan (or to issue options equivalent
thereto), then such options will become immediately exercisable and shares
purchased pursuant to them will immediately vest.
 
                                       76
<PAGE>   78
 
     As of September 30, 1996, options to purchase 242,750 shares of Common
Stock were outstanding under the 1990 Option Plan, at an exercise price of $7.04
per share. No options were granted or exercised under the 1990 Option Plan
during the 1996 fiscal year. The following table provides certain information
with respect to options outstanding during fiscal year 1996, for the Named
Executive Officers. No stock appreciation rights ("SARs") were outstanding
during such period.
 
                          OPTION GRANTS IN FISCAL 1996
 
<TABLE>
<CAPTION>
                                        NUMBER OF     % OF TOTAL
                                        SECURITIES      OPTIONS
                                        UNDERLYING    GRANTED TO
                                         OPTIONS     EMPLOYEES IN    EXERCISE                  GRANT DATE
                                         GRANTED        FISCAL        PRICE       EXPIRATION  PRESENT VALUE
                 NAME                    (NUMBER)       YEAR(D)       ($/SH)        DATE         ($)(F)
--------------------------------------  ----------   -------------   --------     ---------   -------------
<S>                                     <C>          <C>             <C>          <C>         <C>
Michael J. Sangiacomo(a)..............   320,000          14.6%       $ 4.89      September     320,000
                                                                                   30, 2002
                                         320,000          14.6%       $ 4.89(a)   September     370,000
                                                                                   30, 2003
                                         320,000          14.6%       $ 4.89(a)   September     410,000
                                                                                   30, 2004
Donald M. Moriel(b)...................   300,000          13.7%       $ 4.89      September     300,000
                                                                                   30, 2002
Mark R. Lomele(c).....................    65,000           3.0%       $ 4.89(e)   September      80,000
                                                                                   30, 2003
Kenneth James Walsh(c)................    35,000           1.7%       $ 4.89(e)   September      40,000
                                                                                   30, 2003
Archie L. Humphrey(c).................    75,000           3.4%       $ 4.89(e)   September      90,000
                                                                                   30, 2003
</TABLE>
 
---------------
(a) Mr. Sangiacomo's lump-sum multi-year option was granted pursuant to the 1996
    Executive Stock Incentive Plan. The option is a non-qualified stock option.
    The option consists of three series, each for 320,000 shares. The exercise
    price for the Series A shares will remain at $4.89. The exercise price for
    the Series B shares is subject to adjustment as of October 1, 1996, and the
    exercise price for the Series C shares is subject to adjustment as of
    October 1, 1997, to the fair market value of the stock on any such date (but
    in no event less than the initial exercise price of $4.89). Each series
    generally will vest over four years, with the first vesting to occur for
    Series A, B and C options on September 30 of 1996, 1997 and 1998,
    respectively. Vesting may be partially accelerated based upon achievement of
    particular financial, operational and strategic objectives, including an
    initial public offering. Under certain circumstances, the option will vest
    completely if there is a change of control of Norcal. With certain
    exceptions, additional vesting ceases upon termination of employment. Each
    series terminates seven years after the exercise price has been fixed for
    that series. Mr. Sangiacomo may purchase all or any portion of the shares in
    each series, whether vested or unvested, on or after the respective initial
    vesting date for each such series. Upon a termination of Mr. Sangiacomo's
    employment, the Company will have an assignable option to repurchase any
    such shares. The Company's repurchase option with respect to vested shares
    will terminate upon an initial public offering.
 
(b) Mr. Moriel's lump-sum multi-year option was granted pursuant to the Deferred
    Compensation and Stock Option Plan. Pursuant to an employment agreement, Mr.
    Moriel will retire in 1999. The option is a non-qualified stock option. The
    option expires on September 30, 2002. The option will vest as follows: 30%
    will vest on each of September 30, 1996, 1997 and 1998, and 10% will vest on
    May 27, 1999. Vesting of the option (1) accelerates upon termination of Mr.
    Moriel's employment due to death or disability and (2) with certain
    exceptions, ceases upon termination of employment for any other reason. Upon
    the later of Mr. Moriel's termination of employment and the term of the
    option, the Company will have an assignable option to repurchase all or any
    portion of the shares acquired by Mr. Moriel pursuant to exercise of the
    option.
 
                                       77
<PAGE>   79
 
(c) Options granted to Messrs. Lomele, Walsh and Humphrey were granted pursuant
    to the 1996 Employee Plan. Each of the options is a non-qualified option and
    expires on September 30, 2003. Each option will vest as follows: 20% will
    vest on each of September 30, 1997, and 1998, and 30% will vest on each of
    September 30, 1999, and 2000. Exercise price for each option is the greater
    of (i) $4.89 per share or (ii) 85% of the fair market value of the shares of
    Common Stock of the date of grant. In the event of a change in control, the
    Compensation Committee, in its sole discretion, may take a variety of
    actions with respect to the options that it considers to be in the best
    interests of the Company. The Company will have an assignable option upon
    termination of an individual's employment to repurchase any such shares. The
    Company's repurchase option with respect to vested shares will terminate
    upon an initial public offering.
 
(d) Calculations below include certain options granted to two former executive
    officers of the Company during fiscal year 1996 in respect of 400,000 shares
    of Common Stock in the aggregate, which options were terminated.
 
(e) Exercise price for these options is equal to the greater of (i) $4.89 per
    share or (ii) 85% of the fair market value of the shares of Common Stock as
    of the date of grant (as such value is determined by the Compensation
    Committee).
 
(f) Grant Date Present Value was computed using the Black-Scholes option pricing
    model. The calculations utilize certain assumptions, including the
    following:
 
           (i) the volatility is assumed to be zero as the Company's Common
               Stock is not publicly traded as of the date hereof;
 
           (ii) the risk-free rate of return for each grant is assumed to be the
                U.S. Treasury zero-coupon bond rate for bonds with maturities
                consistent with the expected time of exercise of each grant;
 
          (iii) the dividend yield is assumed to be zero;
 
           (iv) the stock price is assumed to be $4.89, which is as of September
                30, 1995, the date of the most recently completed valuation;
 
           (v) the time of exercise for each option grant listed above is
               assumed to be the last vesting date of each such grant plus one
               year, except that the time of exercise with respect to each
               series of options is assumed to be the last vesting date plus one
               year for each series. The additional year is used in the option
               pricing model to compensate for the stock price used in the model
               which is as of September 30, 1995, the date of the most recently
               completed valuation; and
 
           (vi) the value of the options was discounted by 3% per year to
                account for assumed forfeitures.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                    AND FISCAL YEAR END OPTION & SAR VALUES
 
<TABLE>
<CAPTION>
                                                                                       $ VALUE OF UNEXERCISED
                                                            NUMBER OF OUTSTANDING                IN-
                                                 VALUE     UNEXERCISED OPTIONS/SARS   THE-MONEY OPTIONS/SARS AT
                              SHARES ACQUIRED   REALIZED      AT FISCAL YEAR-END         FISCAL YEAR-END(A)
            NAME                IN EXERCISE       ($)      EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
----------------------------  ---------------   --------   ------------------------   -------------------------
<S>                           <C>               <C>        <C>                        <C>
Michael J. Sangiacomo.......         0              0           139,000/896,000                  0/0
Donald M. Moriel............         0              0            95,000/210,000                  0/0
Mark R. Lomele..............         0              0            10,000/65,000                   0/0
Kenneth James Walsh.........         0              0             3,000/35,000                   0/0
Archie L. Humphrey..........         0              0            10,000/75,000                   0/0
</TABLE>
 
---------------
(a) These values are not presently calculable.
 
     Pension Plans.  The Norcal Waste Systems, Inc. Defined Benefit Pension Plan
(the "Norcal Pension Plan") is a defined benefit pension plan maintained for
certain employees of Norcal and its subsidiaries. Most of the other employees of
Norcal and its subsidiaries are covered by certain collective bargaining
agreements or by the Envirocal, Inc. Retirement Plan (the "Envirocal Retirement
Plan"), the plan covering certain
 
                                       78
<PAGE>   80
 
former employees of Envirocal, Inc., one of Norcal's predecessors, and certain
of Envirocal's subsidiaries. The Norcal Pension Plan is funded as required by
ERISA and does not require employee contributions. Full vesting generally is
obtained after five years of vesting service. The calculation of annual
retirement benefits is generally based upon years of service and average annual
compensation for the five consecutive calendar years that produce the highest
such average. Compensation used in determining retirement benefits generally
consists of an employee's total annual earnings, including overtime pay and
bonuses.
 
     The following table shows the estimated annual retirement benefit payable
on normal retirement at age 62 for unmarried employees (or a married employee
who elects a single life annuity) at specified compensation levels with various
years of service for the Norcal Pension Plan:
 
                           NORCAL PENSION PLAN TABLE
 
<TABLE>
<CAPTION>
                                      YEARS OF SERVICE
                       ----------------------------------------------
   REMUNERATION          15          20          25        30 OR MORE
-------------------    -------     -------     -------     ----------
<S>                    <C>         <C>         <C>         <C>
$ 50,000               $ 8,250     $11,000     $13,750      $ 16,500
$ 65,000                10,725      14,300      17,875        21,450
$ 75,000                12,375      16,500      20,625        24,750
$ 85,000                14,025      18,700      23,375        28,050
$125,000                20,625      27,500      34,375        41,250
$150,000 and above      24,750      33,000      41,250        49,500
</TABLE>
 
     Covered compensation is total cash compensation but not including any
payment for automobile, moving or living allowances, or employee expense
reimbursements, which corresponds to the amounts listed in the Summary
Compensation Table set forth above under the columns "Salary" and "Bonus" plus
certain payouts by the Company in respect of accrued vacation. Any amounts in
excess of limitations pursuant to Section 401(a)(17) of the Code are excluded.
The annual benefit estimates computed for this table are Single Life Benefits
and are not subject to deductions for Social Security or other offset amounts.
 
     As of September 30, 1996, the Named Executive Officers had the following
estimated credited years of service under the Norcal Pension Plan: Mr.
Sangiacomo, 7.75 years; Mr. Moriel, 4.33 years; Mr. Lomele, 8.00 years; Mr.
Walsh, 8.00 years; and Mr. Humphrey, 10.00 years.
 
     Mr. Sangiacomo is eligible also to receive a retirement benefit from the
Envirocal Retirement Plan, due to his past employment with Envirocal. The
Envirocal Retirement Plan also is funded as required by ERISA and does not
require employee contributions. The calculation of monthly retirement benefits
is generally based upon years of service and average monthly compensation for
the 60 months (whether or not consecutive) that produce the highest such
average. Compensation used in determining retirement benefits generally consists
of an employee's total earnings, including overtime pay and bonuses. Covered
compensation is total cash compensation but not including any payment for
automobile, moving or living allowances, employee expense reimbursements, or
payment in lieu of unused vacation or sick leave. Any amounts in excess of
limitations pursuant to Section 401(a)(17) of the Code are excluded.
 
     As of September 30, 1996, Mr. Sangiacomo had an estimated 5.17 years of
credited services under the Envirocal Retirement Plan. The estimated annual
retirement benefit to which he will be entitled under the Envirocal Retirement
Plan is $16,383. That estimate is computed as a Single Life Benefit and is not
subject to deduction for Social Security or other offset amounts.
 
                                       79
<PAGE>   81
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information with respect to the
beneficial ownership of Norcal's Common Stock as of December 15, 1996 by (i)
each person known to Norcal to beneficially own 5% or more of Norcal's Common
Stock, (ii) each director of Norcal, (iii) the Named Executive Officers, and
(iv) all directors and executive officers of Norcal as a group.
 
<TABLE>
<CAPTION>
                                                    SHARE BENEFICIALLY OWNED NUMBER
                                              -------------------------------------------
                                                             STOCK OPTIONS
                                                 ESOP         EXERCISABLE
            BENEFICIAL OWNER(A)               ACCOUNT(B)      IN 60 DAYS         TOTAL        PERCENT
--------------------------------------------  ----------     -------------     ----------     -------
<S>                                           <C>            <C>               <C>            <C>
Norcal Waste Systems, Inc. ESOP(c)..........  24,134,973              0        24,134,973      100.0%
Michael J. Sangiacomo.......................      37,251        139,000           176,251        *
Donald M. Moriel............................       9,601          5,000            14,601        *
Mark R. Lomele..............................      15,666(d)      10,000            25,666(d)     *
Kenneth James Walsh.........................      20,966          3,000            29,966        *
Archie L. Humphrey..........................      26,823         10,000            36,823        *
John B. Molinari............................           0         12,500            12,500        *
H. Welton Flynn.............................           0              0                 0        *
Gale R. Kaufman.............................           0              0                 0        *
All executive officers and directors as a
  group (11 persons)........................  24,134,973(e)     217,500        24,337,473(e)   100.0%
</TABLE>
 
---------------
 
 *  Less than 1%.
 
(a) Except as otherwise indicated in the notes to this table, the address of
    each beneficial owner of more than 5% of the Common Stock is c/o Norcal
    Waste Systems, Inc., Five Thomas Mellon Circle, San Francisco, California
    94134.
 
(b) As ESOP participants, the individuals named in the table have shared voting
    power, but no investment power, over the shares of Common Stock allocated to
    such individuals' ESOP account, unless they are members of the ESOP
    Administrative Committee. See note (c) below. The ESOP account includes
    allocated shares as of September 30, 1996.
 
(c) The Trustee of the ESOP is Imperial Trust Company (the "ESOP Trustee"), 456
    Montgomery Street, Suite 600, San Francisco, California 94104. An aggregate
    of 24,134,973 shares of Common Stock were held by the ESOP Trustee as of
    September 30, 1996, of which approximately 16,411,881 had been allocated to
    the accounts of individual ESOP participants, including officers of Norcal.
    All of the shares held by the ESOP Trustee are currently voted in most
    matters as determined by the Administrative Committee of the ESOP. However,
    in certain matters the ESOP participants direct the ESOP Trustee to vote the
    shares allocated to their respective accounts. Therefore, the members of the
    Administrative Committee currently have shared voting and investment power
    with respect to all shares held by the ESOP Trustee. None of the members of
    the Administrative Committee has sole voting power over any shares, but as
    ESOP participants they have shared voting power over the shares allocated to
    their individual ESOP accounts. The members of the Administrative Committee,
    and the number of shares of Common Stock that were allocated to their
    respective ESOP accounts as of September 30, 1995 are as follows: Archie L.
    Humphrey, 26,823 shares; John A. Legnitto, 2,001 shares; and Mark R. Lomele,
    15,666 shares. In addition, Messrs. Humphrey and Lomele hold options to
    purchase 10,000 and 10,000 shares of Common Stock, respectively, that are
    currently exercisable, with an exercise price of $7.04 per share,
    substantially higher than the fair market value of Norcal's Common Stock as
    of September 30, 1996. With respect to each member of the ESOP
    Administrative Committee, the number of such shares in the member's
    individual ESOP account, together with those subject to stock options
    currently exercisable, represent less than 1% of the outstanding shares of
    Common Stock as of September 30, 1996.
 
(d) Excludes all shares of Common Stock held by the ESOP Trustee deemed to be
    beneficially owned by Mr. Lomele as a result of his membership on the ESOP
    Administrative Committee which exercises shared voting and investment power
    with respect to such shares (see notes (c) above and (e) below), but
 
                                       80
<PAGE>   82
 
    includes those shares of Common Stock held by the ESOP Trustee for the
    benefit of Mr. Lomele as ESOP participant (see note (b) above).
 
(e) Includes all shares of Common Stock held by the ESOP Trustee because Mark R.
    Lomele is an executive officer of Norcal as well as a member of the
    Administrative Committee of the ESOP with shared voting and investment power
    with respect to such shares (see note (c) above).
 
The ESOP
 
     The Norcal Waste Systems, Inc. Employee Stock Ownership Plan and Trust (the
"ESOP") owns all of Norcal's outstanding shares of common stock. The ESOP is an
employee stock ownership plan intended to qualify under Sections 401(a) and
4975(e)(7) of the Code. The ESOP was adopted effective as of October 1, 1985 and
acquired the outstanding shares of Norcal in three separate transactions.
 
  Trustee and Administrative Committee; Control of Norcal by the ESOP
 
     The assets of the ESOP are held in trust under a trust agreement with the
ESOP Trustee. An Administrative Committee (the "Committee") that is appointed by
and serves at the pleasure of the Board of Directors is responsible for the
operation and administration of the ESOP, including the ESOP's activities as
sole shareholder of Norcal. Under ERISA, the Committee members are fiduciaries
and as such must act for the exclusive benefit of the employee participants
under the ESOP. The current members of the Committee are Archie L. Humphrey,
John A. Legnitto and Mark R. Lomele. Mr. Lomele, Chair of the Committee, is an
officer of Norcal. Mr. Humphrey is Secretary of the Committee. All of the
Committee members are employees of the Company. Norcal has agreed to indemnify
members of the Committee against any liability arising out of an alleged breach
by a member in the performance of his or her fiduciary duties, except those
resulting from a member's own gross negligence or willful misconduct. Norcal
also carries insurance against costs and liability arising from a member's
breach or alleged breach of fiduciary duty.
 
     The ESOP Trustee has granted the Committee a proxy to vote all shares held
by the ESOP. The Committee elects Norcal's Board of Directors, may remove these
directors, and votes with respect to certain corporate transactions requiring or
presented for shareholder approval. However, with respect to any corporate
matter that requires a shareholder vote and constitutes a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all assets of a trade or business or such similar transactions as
may be specified in U.S. Treasury Department regulations, voting instructions
are to be solicited from ESOP participants with respect to shares allocated to
their accounts. The Committee determines the voting of any unallocated shares
and any allocated shares for which ESOP participants do not provide voting
instructions. Because a significant number of shares are unallocated (7,723,092
shares or 32.0% of outstanding stock), currently the Committee may be able to
exercise a significant influence over such matters. If Norcal's capital stock
becomes registered under the Exchange Act, each ESOP participant will be able to
direct voting of those shares allocated to his or her account and the Committee
will have responsibility for voting only unallocated or undirected shares. The
sale of any shares of Norcal Common Stock by the ESOP requires the approval of
the Board of Directors.
 
  Distributions
 
     In-Service Withdrawals.  Each participant who has attained age 55 and has
participated in the ESOP for at least ten years is entitled to make in-service
withdrawals with respect to common stock acquired by the ESOP after December 31,
1986, and allocated to his or her ESOP account ("Post-1986 Shares"). An eligible
participant will be entitled to withdraw up to a total of 25% of his or her
Post-1986 Shares during the first five years of the election period and will be
entitled to withdraw up to a total of 50% of his or her Post-1986 Shares during
the sixth year of the election period. It is expected that withdrawals will be
paid in cash. As of the date hereof, the ESOP held 11,654,973 Post-1986 Shares.
 
     Post-Termination Distributions.  Except for the in-service withdrawals
described above, a vested participant is not entitled to begin receiving a
distribution of his or her ESOP accounts until after his or her employment has
terminated. The Committee generally determines the time and manner of
distributions, subject to certain limitations. Distributions may be made in a
lump sum or in substantially equal annual installments over a period not
exceeding five years. Norcal expects that the ESOP's distributions will continue
 
                                       81
<PAGE>   83
 
to be paid in cash. Norcal is obligated to repurchase any shares of its common
stock that may be distributed by the ESOP to participants following withdrawal,
retirement or termination.
 
  Norcal Contributions and Allocations
 
     Norcal may make contributions to the ESOP in the form of cash, cancellation
of indebtedness (on the various loans that Norcal has made to the ESOP (the
"ESOP Loans") or newly issued shares of common stock, in such amounts as may be
determined annually by the Board of Directors. The ESOP may use cash
contributions to make payments on the ESOP Loans, to make distributions of
benefits to participants (or beneficiaries) or to invest in investments other
than common stock of Norcal. Contributions to the ESOP are allocated each plan
year to those participants who complete at least 1,000 hours of service during
the plan year and are employed on September 30 (or who retire, become disabled
or die during the plan year). Of 24,134,973 total shares, 7,723,092 shares were
unallocated as of September 30, 1996.
 
     To the extent that the ESOP utilizes cash contributions from Norcal to
repay the ESOP Loans, the contribution will result in no net cash outlay by
Norcal. Moreover, such contributions to the ESOP are generally tax-deductible.
 
     The Credit Agreement and the Indenture relating to the Senior Notes
expressly permit Norcal to make contributions to the ESOP in order for the ESOP
to pay cash benefits due to retired, terminated or withdrawing ESOP participants
and/or to repurchase Norcal common stock distributed to such participants. To
the extent Norcal contributes funds to the ESOP for this purpose or is obligated
to repurchase common stock distributed to participants, Norcal will have less
cash available to make payments on its outstanding indebtedness. Furthermore,
the amount Norcal may contribute to the ESOP to fund such ESOP distribution
obligations (or may use to repurchase common stock distributed by the ESOP) will
increase significantly in the future as the Company's workforce ages and
retires, as additional shares of common stock are allocated to participants, or
if the value of the common stock increases. Such an increase in contributions
would reduce the amount of cash available for other purposes, including to make
debt service payments.
 
  The ESOP Loans
 
     In 1986 and 1987 Norcal's predecessors lent a total of $127.7 million to
their respective employee stock ownership plans in connection with the
acquisition of each of the predecessors by their respective ESOPs and merger of
the two predecessor companies. The ESOP's indebtedness to Norcal was amended and
restated pursuant to a Third Amended and Restated Loan Agreement dated as of
September 30, 1992 by and between Norcal and the ESOP (the "Old ESOP Loan
Agreement"). In 1990, in connection with the Excel Transaction, Norcal loaned
$10.7 million to the Excel ESOP pursuant to a loan agreement (as amended, the
"Excel ESOP Loan Agreement"), which amount became indebtedness of the ESOP upon
the merger of the Excel ESOP into the ESOP. At September 30, 1995 the Company
reflected on its balance sheet amounts owed by the ESOP to Norcal of $47.8
million pursuant to the Old ESOP Loan Agreement and the Excel ESOP Loan
Agreement.
 
     In connection with the Refinancing, the ESOP's indebtedness reflects, among
other things, Norcal's funding of the ESOP's retirement of the ESOP Notes,
repayment of all amounts owed under the Old Credit Agreement, and incurrence of
new indebtedness by the Company pursuant to the Refinancing. At September 30,
1996, the outstanding principal balance owed to Norcal was $68.8 million. The
ESOP and Norcal have entered into a Fourth Amended and Restated ESOP Loan
Agreement, effective as of October 1, 1995, whereby the ESOP will repay such
outstanding indebtedness, plus unpaid accrued interest at the rate of seven
percent (7.0%) per annum, in thirteen equal installments of approximately $9.8
million each as of September 30 of each year, beginning in 1996 and ending in
2008. In addition, the ESOP will prepay such outstanding indebtedness, without
penalty, to the extent that Norcal makes contributions to the ESOP for the
purpose of making such prepayments. The ESOP's repayment of principal and
interest on such outstanding indebtedness may not exceed the sum of Norcal's
contributions to the ESOP for the purpose of making such repayments, plus any
cash dividends paid on Norcal's common stock held by the ESOP and earnings on
Norcal contributions to the ESOP, less any repayments made by the ESOP in prior
years.
 
                                       82
<PAGE>   84
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Consulting Arrangements with Kaufman Campaign Consultants
 
     Kaufman Campaign Consultants ("KCC"), of which Ms. Kaufman, a director of
Norcal, is President and sole shareholder, is party to a consulting agreement
with the Company, effective May 1, 1996, pursuant to which KCC has agreed to
provide the Company with certain consulting services in the areas of political
matters, public affairs, media and public relations. The agreement has a term of
one year and provides for a monthly fee of $9,500. Pursuant to previous
arrangements and the current consulting agreement with the Company, KCC received
$69,288 and $78,800 in fees during Norcal's fiscal years ended September 30,
1996 and 1995, respectively, for consulting services provided to the Company
during such periods.
 
Agreements with Certain Former Officers
 
     Norcal and Mr. Broderson, a former officer of Norcal, have entered into a
Separation Agreement and Release of Claims (the "Separation Agreement"),
effective as of March 15, 1996, relating to Mr. Broderson's resignation, as of
January 19, 1996, as an officer of Norcal and member of the Pension Investment
and Administration Committee. Pursuant to the provisions of the Separation
Agreement, Mr. Broderson is entitled to receive, among other things,
approximately $237,000 from Norcal as severance compensation, over the 15-month
period commencing March 15, 1996. The Separation Agreement also contains
provisions requiring Norcal to use its best efforts to provide, to the same
extent that any other former officer is provided such coverage, insurance
coverage for Mr. Broderson as a named insured and named fiduciary under Norcal's
Director and Officer liability and fiduciary liability insurance policies.
 
     On July 15, 1996, David J. Pacini resigned as Director and Executive Vice
President Corporate of the Company, and Robert J. Corbolotti resigned as Senior
Vice President, Chief Financial Officer and Treasurer of the Company and Chief
Financial Officer of those subsidiaries for which Mr. Corbolotti served as an
officer. Mr. Pacini and Mr. Corbolotti have entered into consulting agreements
with the Company pursuant to which each of them is required to provide certain
transition and consulting services to the Company for a period of two years. Mr.
Pacini's consulting agreement provides for a consulting fee of $200,000 for the
first year of such agreement and $50,000 during the second. Mr. Corbolotti's
consulting agreement provides for a consulting fee of $150,000 for the first
year of such agreement and $50,000 during the second. Both consulting agreements
also contain, among other terms, noncompetition and confidentiality provisions.
The consulting agreements replace employment and stock option agreements
pursuant to which Messrs. Pacini and Corbolotti would have received annual base
compensation and a grant of stock options of $277,500 and 200,000 shares and
$202,500 and 200,000 shares, respectively.
 
Directors and Officers Insurance
 
     Norcal carries insurance indemnifying its directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers of Norcal and its affiliates and as ERISA fiduciaries, to
the extent they may so act.
 
                                       83
<PAGE>   85
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
 
(a) 1.   Financial Statements
 
        Report of KPMG Peat Marwick LLP, Independent Auditors
 
        Consolidated statements of income for each of the three years in the
        period ended September 30, 1996
 
        Consolidated balance sheets as of September 30, 1996 and 1995
 
        Consolidated statements of stockholder's equity (deficit) for each of
        the three years in the period ended September 30, 1996
 
        Consolidated statements of cash flows for each of the three years in the
        period ended September 30, 1996
 
        Notes to Consolidated Financial Statements
 
     2.   Financial Statement Schedules
 
        Included in Part IV of this report:
 
        Schedule II Valuation and Qualifying Accounts and Reserves
 
             All other schedules are omitted because they are not required, or
        are not applicable, or the information is included in the consolidated
        financial statements or notes to consolidated financial statements.
 
     3.   Exhibits
 
<TABLE>
<CAPTION>
        EXHIBIT                                     DESCRIPTION
        -------     ---------------------------------------------------------------------------
        <C>         <S>
          3.1       Articles of Incorporation of Norcal Waste Systems, Inc.+
          3.2       Restated Bylaws of Norcal Waste Systems, Inc.+
          4.1       Indenture between Norcal Waste Systems, Inc. and IBJ Schroder Bank & Trust
                    Company dated as of November 21, 1995+
          4.3       Form of the 12 1/2% Series B Notes due 2005+
         10.1       Norcal Waste Systems, Inc. Employee Stock Ownership Plan, as amended and
                    restated as of October 1, 1993 (the "ESOP")+
                    - Amendment No. 1, dated effective October 1, 1993, executed December 29,
                    1994+
                    - Amendment No. 2, dated effective February 1, 1995, executed April 27,
                    1995+
                    - Amendment No. 3, dated effective October 1, 1993, executed September 28,
                    1995+
                    - Amendment No. 4, dated effective November 17, 1995+
         10.2       Employee Stock Ownership Trust Agreement between Norcal Solid Waste
                    Systems, Inc. (now "Norcal Waste Systems, Inc.," hereinafter referred to as
                    "Norcal") and Imperial Trust Company, dated March 15, 1990+*
         10.4       Revolving Credit Agreement by and among Norcal, certain of Norcal's
                    subsidiaries (the "Guarantors"), The First National Bank of Boston, and the
                    Banks named on Schedule 1 therein, dated as of November 21, 1995+
                    - First Amendment to Revolving Credit Agreement, dated December 1, 1995+
         10.5       Security Agreement by and among Norcal, the Guarantors and The First
                    National Bank of Boston, dated as of November 21, 1995+
         10.6       Pledge Agreement by and among Norcal, the Guarantors and The First National
                    Bank of Boston, dated as of November 21, 1995+
         10.7       Partnership Pledge Agreement by and among Norcal, the Guarantors and The
                    First National Bank of Boston, dated as of November 21, 1995+
</TABLE>
 
                                       84
<PAGE>   86
 
<TABLE>
<CAPTION>
        EXHIBIT                                     DESCRIPTION
        -------     ---------------------------------------------------------------------------
        <C>         <S>
         10.8       Collateral Assignment of Permits and Contracts by and among Norcal, the
                    Guarantors and the First National Bank of Boston, dated as of November 21,
                    1995+
         10.9       Purchase Agreement between Norcal, Bear, Stearns & Co. Inc. and Montgomery
                    Securities, dated November 15, 1995+
         10.10      A/B Exchange Registration Rights Agreement by and among Norcal, the
                    Subsidiary Guarantors named therein, Bears, Stearns & Co. Inc. and
                    Montgomery Securities, dated as of November 21, 1995+
         10.11      Memorandum of Material Settlement Terms between Norcal, the ESOP, and the
                    Settling Plaintiffs named therein, dated August 9, 1995+
         10.12      Master Finance Lease between Caterpillar Financial Services Corporation and
                    Alta Equipment Leasing Co., Inc., dated as of December 21, 1994+
         10.13      Master Lease Agreement between Heller Financial Leasing, Inc. and Norcal,
                    dated June 30, 1994+
         10.14      Lease Agreement between OB-1 Associates, as landlord, and Norcal, as
                    tenant, for premises located at 5 Thomas Mellon Circle, San Francisco, CA,
                    dated April 4, 1989+
                    - Amendment to Lease, dated effective January 15, 1990+
                    - Amendment to Lease, dated effective April 1, 1990+
                    - Third Amendment to Lease, dated effective January 15, 1991+
         10.16      Employment Agreement with Donald M. Moriel dated as of June 4, 1996+*
         10.17      Separation Agreement between Norcal and Richard C. Broderson effective as
                    of March 15, 1996+*
         10.18      Norcal Amended & Restated 1990 Stock Option Plan, effective July 23, 1990,
                    as amended August 10, 1990+*
         10.20      Form of Indemnity Agreement (separate agreements were executed by Norcal
                    and each of John B. Molinari, H. Welton Flynn, Archie L. Humphrey and
                    Michael J. Sangiacomo as of February 27, 1992)+*
         10.21      Agreement to Terminate Indemnification Trust and Modify Indemnity Agreement
                    between Norcal and M. Sangiacomo, H. Flynn, J. Molinari, A. Humphrey and W.
                    Graham, dated as of October 16, 1995+*
         10.22      Waste Disposal Agreement between Oakland Scavenger Company and City and
                    County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
         10.23      Agreement in Facilitation of Waste Disposal Agreement between City and
                    County of San Francisco and Sanitary Fill Company, dated January 2, 1987+
         10.24      1996 Employee Stock Incentive Plan*
         10.25      1996 Executive Stock Incentive Plan, as amended*
         10.26      1996 Non-Employee Director Stock Option Plan+*
         10.27      Restated Consulting Agreement between Norcal and Robert Corbolotti dated
                    July 19, 1996+*
         10.28      Restated Consulting Agreement between Norcal and David Pacini dated July
                    19, 1996+*
         10.29      Short-Term Incentive Bonus Plan+*
         10.30      Employment Agreement between Norcal and Michael J. Sangiacomo, dated as of
                    January 22, 1996, as amended+*
         10.31      Employment Agreement between Norcal and Robert Corbolotti, dated as of June
                    24, 1996, effective as of January 22, 1996, as amended+*
         10.32      Employment Agreement between Norcal and David Pacini, dated as of June 24,
                    1996, effective as of January 22, 1996, as amended+*
         10.33      Option Agreement between Norcal and Michael J. Sangiacomo dated as of June
                    24, 1996, as amended+*
         10.34      Option Agreement between Norcal and David Pacini, dated as of June 24,
                    1996, effective as of January 22, 1996, as amended+*
         10.35      Option Agreement between Norcal and Robert Corbolotti, dated as of June 24,
                    1996, effective as of January 22, 1996, as amended+*
</TABLE>
 
                                       85
<PAGE>   87
 
<TABLE>
<CAPTION>
        EXHIBIT                                     DESCRIPTION
        -------     ---------------------------------------------------------------------------
        <C>         <S>
         10.36      Summary of Material Terms of Severance Policy for Certain Key Employees+*
         10.37      Fourth Amended and Restated Loan Agreement by and between Norcal and the
                    ESOP, effective as of October 1, 1995+
         10.38      Consulting Agreement between Norcal and Kaufman Campaign Consultants dated
                    May 16, 1996+*
         10.39      Deferred Compensation and Stock Option Plan+*
         10.40      Stock Option Agreement dated as of April 4, 1996, between Norcal and John
                    B. Molinari+*
         10.41      Stock Option Agreement dated as of January 12, 1996, between Norcal and
                    John B. Molinari*
         10.42      Stock Option Agreement dated as of April 4, 1996, between Norcal and H.
                    Welton Flynn+*
         10.43      Stock Option Agreement dated as of January 12, 1996, between Norcal and H.
                    Welton Flynn*
         10.44      Stock Option Agreement dated as of July 16, 1996, between Norcal and Gale
                    Kaufman*
         10.45      Second Amendment to Revolving Credit Agreement (Exhibit 10.4 above), dated
                    November 26, 1996
         10.46      Form of Option Agreement in respect of 1996 Employee Stock Incentive Plan*
         12.1       Calculation of Ratio of Earnings to Fixed Charges
         21.1       Subsidiaries of Norcal
         24.1       Powers of Attorney
         27.1       Financial Data Schedule
</TABLE>
 
---------------
+   Identically numbered exhibit to the Company's Registration Statement on From
     S-4 (File No. 33-80777); incorporated herein by reference.
 
*   Management contract or compensatory plan or arrangement.
 
Exhibits available upon request to the Company.
 
(b) Reports on Form 8-K.
 
    None.
 
                                       86
<PAGE>   88
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
Dated: December 27, 1996
                                          NORCAL WASTE SYSTEMS, INC.
 
                                          By: /s/  MICHAEL J. SANGIACOMO
 
                                            ------------------------------------
                                            Michael J. Sangiacomo
                                            President, Chief Executive Officer
                                              and
                                            Director
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
 
<TABLE>
<S>                                         <C>                             <C>
 /s/  MICHAEL J. SANGIACOMO                 President, Chief Executive       December 27, 1996
 -----------------------------------------  Officer and Director
 MICHAEL J. SANGIACOMO
 /s/  MARK R. LOMELE                        Acting Chief Financial           December 27, 1996
 -----------------------------------------  Officer, Treasurer and Vice
 MARK R. LOMELE                             President
 /s/  JON D. BRASLAW                        Controller                       December 27, 1996
 -----------------------------------------
 JON D. BRASLAW
 /s/  GALE R. KAUFMAN                       Director                         December 27, 1996
 -----------------------------------------
 GALE R. KAUFMAN
 /s/  JOHN B. MOLINARI                      Director                         December 27, 1996
 -----------------------------------------
 JOHN B. MOLINARI
 /s/  H. WELTON FLYNN                       Director                         December 27, 1996
 -----------------------------------------
 H. WELTON FLYNN
</TABLE>
 
                                       87
<PAGE>   89
 
                           NORCAL WASTE SYSTEMS, INC.
 
           SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
<TABLE>
<CAPTION>
                                                       BALANCE AT
                                                       BEGINNING    CHARGES TO                BALANCE AT
                                                        OF YEAR      EXPENSE     DEDUCTIONS   END OF YEAR
                                                       ----------   ----------   ----------   -----------
<S>                                                    <C>          <C>          <C>          <C>
YEAR ENDED SEPTEMBER 30, 1996
  Allowance for Doubtful Accounts....................   $  1,277     $  1,275     $    941      $ 1,611
                                                         =======       ======      =======      =======
  Insurance..........................................   $ 10,269     $ 10,236     $  7,897      $12,608
  Post Retirement Benefit Obligations................     34,917          554        1,076       34,395
  Litigation, Claims and Related Matters.............      2,995           --        2,181          814
  Property and Other Reserves........................      2,940           --        1,157        1,783
                                                         -------       ------      -------      -------
  Total..............................................   $ 51,121     $ 10,790     $ 12,311      $49,600
                                                         =======       ======      =======      =======
YEAR ENDED SEPTEMBER 30, 1995
  Allowance for Doubtful Accounts....................   $  1,472     $    879     $  1,074      $ 1,277
                                                         =======       ======      =======      =======
  Insurance..........................................   $  6,585     $  5,880     $  2,196      $10,269
  Post Retirement Benefit Obligation.................     35,094          830        1,007       34,917
  Litigation, Claims and Related Matters.............      5,141           --        2,146        2,995
  Property and Other Reserves........................      8,610           --        5,670        2,940
                                                         -------       ------      -------      -------
  Total..............................................   $ 55,430     $  6,710     $ 11,019      $51,121
                                                         =======       ======      =======      =======
YEAR ENDED SEPTEMBER 30, 1994
  Allowance for Doubtful Accounts....................   $  1,743     $    819     $  1,090      $ 1,472
                                                         =======       ======      =======      =======
  Insurance..........................................   $  6,797     $  3,808     $  4,020      $ 6,585
  Post Retirement Benefit Obligation.................     34,438        1,658        1,002       35,094
  Litigation, Claims and Related Matters.............      9,964           --        4,823        5,141
  Property and Other Reserves........................      8,741           --          131        8,610
                                                         -------       ------      -------      -------
  Total..............................................   $ 59,940     $  5,466     $  9,976      $55,430
                                                         =======       ======      =======      =======
</TABLE>
 
     Supporting schedules other than the above have been omitted because they
are not applicable or not required or because the information to be set forth
therein is included in the financial statements or notes thereto herein.
 
                                       88
<PAGE>   90
 
                               INDEX OF EXHIBITS
 
<TABLE>
<CAPTION>
NUMBER                                         DESCRIPTION
------       --------------------------------------------------------------------------------
<S>          <C>
10.24        1996 Employee Stock Incentive Plan
10.25        1996 Executive Stock Incentive Plan, as amended
10.41        Stock Option Agreement dated as of January 12, 1996, between Norcal and John B.
             Molinari
10.43        Stock Option Agreement dated as of January 12, 1996, between Norcal and H.
             Welton Flynn
10.44        Stock Option Agreement dated as of July 16, 1996, between Norcal and Gale
             Kaufman
10.45        Second Amendment to Revolving Credit Agreement, dated November 26, 1996
10.46        Form of Option Agreement in respect of 1996 Employee Stock Incentive Plan
12.1         Calculation of Ratio of Earnings to Fixed Charges
21.1         Subsidiaries
24.1         Powers of Attorney
27.1         Financial Data Schedule (EDGAR only)
</TABLE>
 
                                       89