HomeMy WebLinkAboutRAINBOW DISPOSAL - 1996-09-16 (2) Page 10 -Council/Agency Agenda ,3/17/97 (10)
F. Administrative Items
F-1. (City Council) Approval Of Waste Disposal Agreement With County Of
Orange - Waste Flow Control - Approval Of Franchise Hauler Acknowledgment
With-Rainbow Disposal - Introduction Of Ordinance No. 3349 - Approving
Supplemental Agreement No. 2 To Refuse, Collection And Disposal Franchise
Agreement With Rainbow Disposal (600.45)
Communication from the Assistant City Administrator regarding the following issue:
The cities in Orange County and the county itself are interested in maintaining public
ownership of the landfill disposal system. In order to assure this, the county is working
to contain their costs and establish adequate and predictable revenues to pay their bills.
The cities in the county are working to establish predictable gate fees at the lowest
possible cost for disposing of solid waste coming from their respective cities. The
purpose of this agreement is to attain these objectives. Otherwise the county will
pursue consideration of sale of the landfill system.
Recommended Action: Motion to:
1. Approve and authorize the Mayor and City Clerk to execute the Supplemental
Agreement No. 2 to Refuse Collection And Disposal Service Franchise Agreement
between the County of Orange and the City of Huntington Beach.
AND
2. Approve and authorize the Mayor and City Clerk to execute the Waste Flow
Control/Approval of Franchise Hauler Acknowledgment between the City of
Huntington Beach and Rainbow Disposal and Rainbow Transfer and Recycling
Companies.
AND
3. Approve Introduction of Ordinance No. 3349, after a reading by title by the City
Clerk - "An Ordinance Of The City Of Huntington Beach Amending The Franchise Of
Rainbow Disposal/ /Rainbow Transfer And Recycling Companies
To Collect Refuse:" - (Approves Supplement No. 2 to Refuse Collection and
Disposal Services Franchise Agreement by and between the City of Huntington
Beach and Rainbow Disposal and Rainbow Transfer and Recycling Companies) and
authorize the Mayor and City Clerk to execute same.
[Approved 1, 2, 3 -- 7-0 -- Approved Introduction 7-0 to be presented for
Adoption 4171971
F-2. (City Council Status Report On Bolsa Chica Service Delivery Issues (440.60) -
Communication from the City Administrator, Fire Chief, Library Director, Public Works
Director and Police Chief submitting a status report on the Library, Fire, Police and
Public Works (including water and sewer) service delivery issues, responses to the
water service questions raised at the February 24, 1997 council meeting and a
re-affirmation on the City Council's direction regarding pursuit of the service
agreements.
Recommended Action: Motion to:
1. Direct the City Administrator, or his designee, to continue negotiations with Koll Real
Estate Group and the Orange County Fire Authority on the Fire service agreement;
[Approved -- 5-2 (Harman, Sullivan -- NO)]
AND
n
�. CITY OF HUNTINGTON BEACH
2000 MAIN STREET CALIFORNIA 92648
OFFICE OF THE CITY CLERK
CONNIE BROCKWAY
CITY CLERK
November 12, 1996
Rainbow Disposal Company
Attention: Ron Shenkman
17121 Nichols Street
Huntington Beach, CA 92648
Dear Mr. Shenkman:
Enclosed is a certified copy of the duly executed agreement between the City and Rainbow
Disposal and Rainbow Transfer and Recycling Companies approving the change of effective
control of Rainbow and hypothecation of the companies approved on October 7, 1996.
Also enclosed is a certified copy of the duly executed Reimbursement Agreement between the
City and Rainbow Disposal Company and Rainbow Transfer and Recycling approved on
September 19, 1996.
Please call Scott Fields, Deputy City Attorney(536-5555), if you have any questions.
Sincerely,
Connie Brockway
City Clerk
CB:cjg
cc: Scott Fields, Deputy City Attorney
Enclosures: Certified copy of the duly executed agreement between the City and Rainbow
Disposal and Rainbow Transfer and Recycling Companies approving the change of
effective control of Rainbow and hypothecation of the companies approved on
October 7, 1996
Certified copy of the duly executed Reimbursement Agreement between the City
and Rainbow Disposal Company and Rainbow Transfer and Recycling approved
on September 19, 1996
IT.I-h-- 71d,536.5227)
Council/Agency Meeting Held: /o— 1�-9,
Deferred/Continued to: c�Z�
?,Approved ❑ Conditionally Approved ❑ Denied City Clerk's Signatur
Council Meeting Date: October 7, 1996 Department ID Number: AS 96-054
r;
CITY OF HUNTINGTON BEACH
REQUEST FOR COUNCIL ACTION
SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS
SUBMITTED BY: RAY',SILVER, Assistant City Administrato~
PREPARED BY: DAN T. VILLELLA, Director of Finance
SUBJECT: SOLID WASTE FRANCHISE
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s)
Statement of Issue: Rainbow Disposal has entered into an employee stock ownership
plan (ESOP) to purchase the interest of Mr. Phil Hohnstein in Rainbow, and obtained a
financing package from Chase Manhattan Bank that will fund the ESOP. Therefore, the City
is required to consent any transfer of interest as per Section 19 of the Rainbow Franchise
Agreement.
Funding Source: Rainbow Disposal Franchise Reimbursement Agreement.
Recommended Action: Authorize the Mayor to sign the attached agreement approving the
change of effective control of Rainbow Disposal and Rainbow Transfer and Recycling
Companies.
Alternative Action(s): Do not approve the change of effective control of Rainbow and
hypothecation of the companies.
Analysis: In 1990, the City and Rainbow Disposal Company, Inc., and Rainbow Transfer
and Recycling, Inc., (jointly referred to as "Rainbow"), entered into Franchise agreement to
provide for collection and disposal services of solid waste (the "Franchise"). Subsequently,
in May 1994, a supplement to the Franchise was entered into to provide for operation of a
recycling operation, known as a Materials Recovery Facility ("MFR").
�� B
R1= ACTIN Q UEST FOR COUNCIL ACT
MEETING DATE: October 7, 1996 DEPARTMENT ID NUMBER: AS 96-054
The Franchise grants Rainbow the exclusive right to residential and commercial collection
and recycling within the City. Separate rates are initially specified in the Franchise for each
service. However, pursuant to Sections 11 and 12 of the Franchise, the same method is
used to make annual compensation adjustments. Rate adjustments are made based upon a
weighted formula that takes into account the CPI, the County of Orange landfill tipping fee,
and the price per gallon of diesel fuel. Notwithstanding this formula, either the Director of
Public Works or Rainbow may propose modification of an established rate in order to insure
the "overall fairness of the rate structure."
According to the Supplement to the Franchise, the compensation formula for the MRF is
based upon an initial fee of $3.00 per month per residential unit. Adjustments were then
made in 1995 based upon the actual cost of plant operation and the resale value of materials
collected at the MRF. Finally, beginning July 1, 1996, all subsequent rate changes may not
exceed the CPI. However, this provision is also subject to the option of a negotiated rate
change that can be made annually "to assure the overall fairness of the rate structure."
The Franchise also limits Rainbow's ability to transfer the Franchise. Specifically, Section 19
of the Franchise provides that Rainbow "shall not sell, sign or transfer this agreement or any
interest therein, or permit same to be transferred by operation of the law, without first
obtaining the consent of the City."
The City received a letter September 5, 1996, from Rainbow to comply with Section 19.
Specifically, Rainbow has requested the City's consent to an ESOP to purchase the interest
of Mr. Phil Hohnstein in Rainbow. Hohnstein owns in excess of 50% of Rainbow directly and
through various trusts and family partnerships. The purchase of Mr. Hohnstein's shares
would be financed through a loan from Chase Manhattan Bank. (The ESOP and loan
package will hereinafter be referred to as the "Transaction".)
On September 16, 1996, the City Council authorized the execution of a contract for
Professional Services to Arthur Andersen and Company to conduct a due diligence review of
the transfer of interest in the ownership of Rainbow. The purpose of Arthur Andersen's
review was to satisfy any potential concerns regarding impacts on franchise operations.
These concerns included the effect financing costs (created by the Chase Manhattan loan)
might have on creating pressure to increase revenues or decrease capital or other
expenditures that might adversely effect quality of service.
Similarly, without such changes, what impact might the principal and interest payments have
on the financial viability of Rainbow to remain a solvent, going concern? Also, would the
changes in ownership result in a management team that will remain equally qualified to
manage and operate the franchise?
0021306.01 -2- 10/02/96 11:00 AM
RLQUEST FOR COUNCIL ACTIuN
MEETING DATE: October 7, 1996 DEPARTMENT ID NUMBER: AS 96-054
Arthur Andersen has completed their review of the ESOP transaction, the Chase Manhattan
loan provisions, and other documents and procedures deemed necessary. This report has
been provided to the City Council.
Environmental Status: Not applicable.
Attachment(sl:
Page Number
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1. Arthur Andersen Report
2. Consent Agreement
0021306.01 -3- 10/02/96 11:00 AM
City of Huntington Beach
Agreed-upon Procedures Report
Rainbow Disposal Company, Inc.
September 30, 1996
• l
ARTHUR
ANDERSEN
September 30, 1996 Arthur Andersen LLP
Gail Hutton, Esq. Suite 1100
Office of City Attorney 18500 Von Karman Avenue
y Irvine Ca 92612-0504
City of Huntington Beach 714 757 3100
P.O. Box 190
2000 Main Street
Huntington Beach, California 92648
Dear Ms. Hutton:
We have performed the procedures enumerated below,which were agreed to by the Office of
the City Attorney of Huntington Beach (the City Attorney), with respect to Rainbow Disposal,
Inc. (Disposal) and Rainbow Transfer/Recycling, Inc. (Transfer). Both entities are collectively
referred to herein as Rainbow or the Company. These procedures were solely to assist the City
of Huntington Beach (the City) in assessing the potential impact of the proposed financing of
Rainbow's Employee Stock Ownership Plans (the ESOP). A brief summary of the transaction
based on our understanding is attached as Exhibit C. Specifically, the City has identified the
following concerns:
A) What impact will the financing package of the ESOP, particularly the principal and
interest payments,have on Rainbow solid waste rates,
B) Can Rainbow continue to operate within the current rate structure while meeting the
new principal and interest obligations of the ESOP financing and
C) Are the principals controlling Rainbow under the ESOP qualified to operate
Rainbow.
We have performed the procedures as outlined in Exhibit A to the contract between the City
and Arthur Andersen LLP dated September, 1996 (see attached). The sufficiency of the
procedures therein and enumerated below is solely the responsibility of the specified users of
the report. Consequently, we make no representation regarding the sufficiency of the
procedures described below either for the purpose for which this report has been requested or
for any other purpose.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 2
September 30, 1996
Executive Summary
Our findings have been summarized to address the three concerns provided by the City as
follows:
a) What impact will the financing package of the ESOP, particularly the principal and
interest payments,have on Rainbow solid waste rates?
The ESOP arrangement has no direct impact on rates as per our reading of the HB
Agreement, as defined below, and confirmed by our discussions with City
representatives. Any rate revisions as a result of the ESOP arrangement would need to
be granted by the City, at its discretion. This is primarily a legal and contractual matter
to which we defer to the City Attorney.
b) Can Rainbow continue to operate within the current rate structure while meeting the
new principal and interest obligations of the ESOP financing?
The Rainbow Projections were read by us but were prepared by others, and
accordingly, we cannot and do not form an opinion thereon. The Rainbow Projections
indicate that Rainbow will be able to meet its debt service obligations. Certain key
assumptions implicit in the Rainbow Projections were identified pursuant to the
procedures we performed. We have further attempted to quantify the sensitivity of the
Rainbow Projections to changes in the assumptions. Please refer to Exhibit C and
Section 4 of this letter for this data.
c) Are the principals controlling Rainbow under the ESOP qualified to operate Rainbow?
The key personnel involved in the current operations of Rainbow will retain ownership
and management positions. We understand significant changes are planned. Further,
our background investigation of certain significant shareholders/members of
management disclosed no significant matters.
Our procedures and findings are discussed in greater detail in this report and should be read in
conjunction with this Executive Summary.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 3
September 30, 1996
Procedures and Findings
1. We have obtained and read the following agreements:
A. The Refuse Collection and Disposal Services Franchise Agreement between the
City of Huntington Beach and Disposal and Transfer dated February 5, 1990 (the
HB Agreement)
B. The Agreement for Rubbish Collection and Disposal and Recycling between the
City of Fountain Valley and Disposal dated March 5, 1991 (the FV Agreement).
Rainbow management extracted the pricing from this contract, therefore the
contract was not complete.
C. The Contract Agreement between Transfer and Calsan, Inc. dated February 5,
1996 (the Calsan Agreement). Rainbow management extracted the pricing from
the contract, therefore the contract was not complete.
D. (i) The audited financial statements for the year ended December 31, 1995 and
the reviewed financial statements for the years ended December 31, 1994 and
1993 for Transfer (ii) the reviewed financial statements for Disposal for the years
ended June 30, 1993, 1994 and 1995 and (iii) the unaudited compiled monthly
income statements for the Company for January 1996 through June 1996,
inclusive. The reviewed and audited financial statements referred to above were
audited/reviewed by other auditors. We have not provided any attest services
to Rainbow for any of the periods listed above or for any periods subsequent to
such periods through the date of this letter.
E. The projected combined financial statements for Rainbow for the years ending
June 30, 1997 through 2001, including assumptions (the Rainbow Projections).
F. (i)The ESOP Agreement for Disposal(effective as of July 1, 1995), .(ii) the ESOP
Agreement for Transfer(effective as of January 1, 1996), (iii) the Employee Stock
Ownership Trust(ESOT) agreement for Disposal(effective as of July 1, 1995) and
(iv) the ESOT agreement for Transfer(effective as of January 1, 1996). These
agreements are collectively referred to as the ESOP Documents.
G. The Credit Agreement dated as of September_, 1996 among Rainbow, as
borrowers, the Chase Manhattan Bank, as agent, and other listed lenders (the
Credit Agreement).
H. Form of Seller Pledge Agreement between Philip Hohnstein Family Stock
Limited Partnership ("the Hohnstein Partnership") and Chase Manhattan Bank
(Exhibit K to the Credit Agreement)
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO,SC
Page 4
September 30, 1996
I. Supplemental Agreement No. 1 to the Franchise Agreement between the City of
Huntington Beach and the Rainbow Disposal and Rainbow Transfer and
Recycling Companies. (the HB Supplemental Agreement)
It should be noted that the documents referred to in F,G and H were unsigned, draft
documents which generally excluded exhibits and/or attachments. We have obtained
representation from Rainbow's management that these documents are the most current
versions of such agreements. However, we have no assurance that the final agreements will
not contain revisions which should be considered by the City.
2. We have performed the following procedures regarding the Rainbow Projections:
A. Comparison of Projected Base Year to Historical Financial Statements
Disposal has a June fiscal year end and Transfer has a December fiscal year end.
We combined the revenues and operating expenses included in Disposal's
June 30, 1995 reviewed financial statements with Transfer's December 31, 1995
audited financial statements. We compared this combined historical data with
the combined revenues and operating expenses included in the Rainbow
Projections. Additionally,we read Rainbow's unaudited monthly income
statements from January 1996 to June 1996 to determine any significant changes
in operations since the periods combined above.
B. Adjustments to Base Year
Rainbow made certain adjustments to the base year referred to in 2.A to reflect
certain other transactions that will occur concurrent with the ESOP transaction.
We noted that the significant adjustments in the Rainbow Projections were for(i)
the removal of all rental property that was shown on the historical financial
statements, (ii) the addition of approximately$11.5 million of property
representing Rainbow's corporate headquarters and transfer station, (iii) the
removal of rent expense associated with rent paid for Rainbow's corporate
headquarters and transfer station, (iv) the removal of a note receivable from
Philip Hohnstein totaling approximately$5.3 million and (v) the removal of
salary and expense reimbursement amounts that were historically paid to Philip
Hohnstein.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO,SC
Page 5
September 30, 1996
We discussed the above significant adjustments with Rainbow management and
noted the following:
a. Upon consummation of the ESOP transaction, all of Rainbow's
previously-owned rental property and related debt will be transferred to
an entity owned by Philip Hohnstein and Rainbow will not guarantee
any of the previously recorded debt related to the rental property.
b. Rainbows corporate headquarters and transfer station located at 17121
Nichols Street in Huntington Beach, which Rainbow has historically
rented from Philip Hohnstein, will be purchased by Rainbow. The
purchase will be funded by a term loan provided for in the Credit
Agreement.
C. Philip Hohnstein will no longer provide any paid services to Rainbow.
We confirmed Philip Hohnstein's prior salary level with Rainbow's outside
accountant. We noted no other significant adjustments other than an
intercompany elimination between Disposal and Transfer due to cross charging
of transfer fees as confirmed by Rainbow's outside accountant.
C. Projection Assumptions
We read the Rainbow Projection assumptions and discussed them with Rainbow
management and a representative of the accounting firm that prepared the
Rainbow Projections. We noted the following key items:
a. The expiration date of the HB Supplemental Agreement, the HB Agreement,
the FV Agreement and the Calsan Agreement are consistent with the
Rainbow Projection with the exception of Calsan (see 4F. below).
Additionally,we recalculated residential revenue for Huntington Beach
based on current refuse unit count and growth projections (as supplied by
the City) and compared the result to the Rainbow Projection.
b. We compared the projected operating expenses to historical amounts
obtained in 2.B above. We also discussed labor rates with Rainbow
management and noted that Rainbow is currently in a labor negotiation with
its labor union. We read Rainbow's"Last Best and Final Offer" to the labor
union noting it to be a five year deal and consistent with the Rainbow
Projection. According to management the union is scheduled to vote on the
offer within the next month. We noted that all other significant projected
operating expenses, which include fuel costs and vehicle maintenance, were
consistent with historical amounts and the projected revenue with the
exception of landfill fees and recycling costs (see 4(B)(b) and 4(B)(c)below).
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 6
September 30, 1996
c. We noted that the new financing terms included in the Rainbow Projections
were consistent with the terms of the Credit Agreement.
d. We discussed the corporate income tax impact of the ESOP with Rainbow's
ESOP attorney and assessed the impact to the Rainbow Projection.
3. We performed background checks on Disposal, Transfer, Stanley F. Tkaczyk and
James H. Brownell. Management has advised us that Mssrs. Tkaczyk and Brownell are
the only resulting shareholders with an ownership interest greater than 5 percent.
The background investigation consisted of on-line data base research and included the
following:
A. Verification of Disposal and Transfer's existence as a legal entity
B. Confirmation of the identity and positions of the key members of management
C. Review of local, national and international sources of business information that
include newspapers, trade journals and business magazines
D. Review of governmental/public filings (criminal records, liens,judgements,
lawsuits, bankruptcies,SEC violations, etc.)
There are practical limitations on the effectiveness of on-line data base searches because
public records such as lawsuits, cases,judgements, liens, UCC filings, etc. are available
on-line for only a limited number of states and jurisdictions. In addition, criminal
records are not available on-line on commercial databases with the exception of
California. Historical archives for certain periodicals and public records are limited,
however we are not aware that such data limitations have significantly impacted the
comprehensives of the above search. Based on the above procedures,we found no
sensitive or unusual information to report to you.
4. We performed the following regarding the HB Agreement and the HB Supplemental
Agreement:
A. We considered the impact of the projections (reviewed in 2 above) on provisions
of HB Agreement, particularly rate setting provisions. We also noted that
compensation to Rainbow(both residential and commercial)under the HB
Agreement is adjusted annually based on a formula comprised of the CPI (76%),
Orange County tipping fees (16%) and the price of diesel fuel(8%). The HB
Supplemental Agreement will be adjusted based on the CPI, thus, the ESOP
arrangement will not directly impact pricing under the HB Agreement's or the
HB Supplemental Agreement's pricing index.
B. We have addressed potential areas of impact from the transaction, including
financial wherewithal of Rainbow, and have identified the following items for
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 7
September 30, 1996
your consideration. Exhibit D attached to this letter provides a summary of the
projections read but not prepared by us. We have also quantified the sensitivity
arising from changes in certain assumptions. It should be noted that the
amounts quantified in Exhibit D are presented to provide the reader with the
financial impact of changes in certain assumptions and are not intended to
predict or conclude that such changes will occur.
a. Capital Expenditure Limit
Under the terms of the Credit Agreement, Rainbow cannot make capital
expenditures in excess of $600,000 per year without lender approval. Based on
discussion with management, this will allow Rainbow to purchase
approximately three to four new vehicles per year. In addition, Rainbow can
also utilize a preestablished reserve account totaling$750,000 for capital
expenditures. The Credit Agreement does not limit Rainbow's maintenance
expense.
We obtained a current listing of Rainbow's vehicle fleet (which is summarized in
Exhibit B) and discussed maintenance schedules with Rainbow's maintenance
personnel. Per Rainbow's maintenance personnel, significant maintenance items
include the engine, the transmission and the hydraulics. On the average, the
engine lasts approximately ten years, the transmission lasts five years and the
hydraulics have rarely required a complete overhaul to date. In addition, the
maintenance department informed us that all vehicles that have been purchased
within the last few years now come with a five year factory warranty. Thus, the
risk of higher maintenance costs to be incurred by Rainbow increases as vehicles
approach ten years old.
We discussed Rainbow's fleet with Rainbow's service department noting that
Rainbow has two vehicles greater than ten years old that have yet to have a
complete engine overhaul. Additionally, we read the 1996 service records for
five judgmentally selected vehicles noting numerous routine services but no
major repair expenditures.
Based on the financial statements referred to in 1.D above and discussion with
Rainbow's outside accountant, we noted that Disposal's capital expenditures for
the years ended June 30, 1996, 1995, 1994 and 1993 were approximately
$1,100,000, $521,000 and$6,453,000 and$2,733,000, respectively. Of these
amounts$9,000, $210,000, $5,955,000 and$2,213,000 related to the construction
of the MRF for 1996, 1995, 1994 and 1993, respectively. Transfers capital
expenditures have averaged approximately$91,000 for the last three fiscal years
ended December 31, 1995, 1994 and 1993. Rainbow management has
represented that no significant expenditures for the MRF are expected in the
next several years.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO,SC
Page 8
September 30, 1996
b. Landfill Costs
The Rainbow Projection assumes that landfill fees will remain constant over the
next five years under the premise that an increase in landfill fees will be passed
on to the rate payers via the pricing index. Landfill fees are a component of the
rate index, however, tipping fees comprise of 16% of the rate index in the case of
the HB Agreement but constitute a greater percentage of total operating
expense. It is possible that an increase in landfill expenses might not be totally
recovered via pricing increases. By way of example and, using the Rainbow
Projection figures for 1997, a 25% increase in tipping fees (or$1,900,000 in total
landfill cost) would yield a 4% increase in rates (or$1,000,000 in additional
collection revenue) thus creating a$900,000 shortfall in income.
Additionally, the Company's landfill is owned by the County of Orange, which
is considering selling the landfill. Such a sale could create pricing pressure. Per
local media, it should be noted that under any scenario, this sale would not
occur for several years.
In the event of a landfill fee increase, Rainbow could do a number of things to
mitigate this exposure, such as diverting more products away from the landfill
to the MRF. However, we note that a significant increase in landfill fees could
have an adverse effect on Rainbow's financial condition and its ability to
maintain its vehicles and service level. This issue is not a new business risk for
Rainbow, however the exposure has been magnified given the additional debt
from the ESOP financing.
c. Recycling Revenues and Expenses
The Rainbow Projections assume that recycling revenues and expenses will
remain constant over the entire projection due to the volatility of the recycling
commodities market. Approximately ten percent of Rainbow's total revenue
consists of recycling revenue. A significant change in the recycling commodities
market could have an adverse effect on Rainbow's profitability. Again, this
issue is not a new business risk for Rainbow,however the exposure has
magnified given the additional debt from the ESOP financing.
d. Fluctuations in Interest Rates
Loans under the Credit Agreement bear interest at variable rates. The Credit
Agreement requires Rainbow to enter into an interest rate cap arrangement
providing for interest rate protection covering a notional principal amount of at
least$12 million (which is significantly less than the total amount initially
financed under the Credit Agreement). A significant increase in interest rates,
particularly in the first few years of the Credit Agreement when the Company
will have a significant amount of debt outstanding, could have an adverse effect
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 9
September 30, 1996
on Rainbow's ability to maintain its vehicles and service level. We noted that
the Rainbow Projection assumes a constant interest rate of 9%. This rate is
slightly above the rate currently to be paid based on the rate formulas.
e. Hohnstein Guarantee
In conjunction with the Credit Agreement, the Hohnstein Partnership is to place
certain amounts related to the proceeds of the sale/financing proceeds in an
escrow account. A portion of such escrowed amounts is released annually based
on the prepayment of the loans. It would appear appropriate that the City
request a subordinated position in the collateral to ensure that Rainbow's
performance obligations with the City are met. This provision could be further
strengthened by expanding/refining the performance standards. It should be
noted that no specific matters were identified which would require such
collateral.
f. Other Revenue Services
We noted that the Rainbow projections assume that Rainbow will continue to
provide services under its existing service contract with Calsan, Inc. through
July 1999. Based on our reading of the Calsan Agreement, the arrangement
actually expires in July 1997. Management anticipates that it will be able to
negotiate an extension of this agreement through 1999, however no assurance
can be made that an extension will be achieved. We noted that revenue under
this contract has historically represented less than 3% of Rainbow's total
revenue.
g. Balloon Payment and Mandatory Prepayment Provisions
The Credit Agreement contains a mandatory prepayment provision based on
Rainbow's excess cash flow, as defined. In the event that Rainbow does not
generate any excess cash flow over the term of the loan, the Credit Agreement
contains a$15 million balloon payment which is payable on July 1, 2003. The
Rainbow Projections assume that the loan will be substantially paid off by July 1,
2003 based on expected prepayments, as defined, over the next seven years. To
the extent, if any, that such balances are not prepaid as projected, Rainbow will
incur additional interest expense which will negatively impact Rainbow's
profitability. In addition, to the extent that the loan is not prepaid, Rainbow will
likely be required to obtain alternative financing sources or refinance its debt to
make the required balloon payment.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 10
September 30, 1996
h. Deductibility of ESOP Pants
Section 415 of the Internal Revenue Service Code imposes limitations on the
deductibility of employer contributions to an ESOP. This limitation is based on
a percentage of compensation plus amounts used to pay ESOP loan principal
(less dividends).
The Company will make annual payments of approximately$5 to 6 million stet
per year. The Rainbow projections assume no income tax expense and assume
that the deductions arising the ESOP payments will eliminate taxable income.
The compilation report accompanying the Rainbow projections indicates that the
absence of an income tax provision is a departure generally accepted accounting
principles.
We understand that a fairness opinion on the ESOP transaction will be obtained
prior to completion of the transaction. We have not performed a detailed
analysis of the deductibility of the ESOP contributions. Also we have we not
read the final ESOP transaction documents. However, the highly leveraged
nature of the transaction and the terms thereof create some exposure regarding
the deductibility of the payments. The impact of non-deductibility would be to
increase tax payments and decrease cash flow.
We were not engaged to perform an audit, the objective of which would be the expression of an
opinion on Rainbow's historical or projected financial statements or specified elements,
accounts, or items thereof. Accordingly, we do not express such an opinion. Had we been
engaged to perform additional procedures, other matters might have come to our attention that
would have been reported to you. Furthermore, with respect to Rainbow's projected financial
statements, there will usually be differences between the forecasted and actual results, because
events and circumstances frequently do not occur as expected, and those differences may be
material. We have no responsibility to update this report for events and circumstances
occurring after the date of this report.
We make no representations regarding questions of legal interpretation or provide any
assurance as to Rainbow's solvency, adequacy of capital or ability to pay its debts.
Furthermore, the agreed-upon procedures should not be taken to supplant any possible
additional inquiries and procedures that the City should undertake in its consideration of the
ESOP transaction of Rainbow.
The issuance of this report is predicated on the receipt of a signed contract between the City
and Arthur Andersen LLP, which includes indemnification provisions acceptable to Arthur
Andersen LLP. We understand this contract has been approved by the Office of the City
Attorney. Our report will be recalled if the final approval is not granted by the City Council on
October 7, 1996. In the event the contract is not approved by City Council, our report should
not be quoted, referred to or relied upon by the City or any of the City's representatives.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO SC
Page 11
September 30, 1996
This report is intended solely for the use of the specified users listed above and should not be
used by those who have not agreed to the procedures and taken responsibility for the
sufficiency of the procedures for their purposes.
Very Truly Yours,
ARTHUR ANDERSEN LLP
Exhibit A
CITY OF HUNTINGTON BEACH
RAINBOW FRANCHISE AGREEMENT
TRANSACTION APPROVAL DUE DILIGENCE WORK PROGRAM
1. Obtain and read the following:
A: Franchise agreements entered into by Rainbow with Huntington Beach and
Fountain Valley
B. Unaudited Financial statements for Rainbow for last three years
C. Projections for Rainbow, including assumptions
D. Rainbow's ESOP agreement
E. ESOP loan agreement with Chase Manhattan Bank
2. Perform the following regarding Rainbow's projections:
A. Compare projected revenues to actual revenues included in audited financial
statements and pricing provisions in the franchise agreement(s).
B. Read assumptions for reasonableness and obtain support, as deemed appropriate.
Discuss assumptions with Rainbow management.
C. Ensure terms of new financing have been properly considered.
3. Perform the following regarding the franchise agreement for the City of Huntington
Beach:
A. Assess impact of projected income (reviewed in 2 above) on provisions of
franchise agreement, particularly rate setting provisions and levels of service.
B. Determine other potential areas of impact from the transaction, including financial
withdrawal of franchisee.
4. Perform background checks on Rainbow and new officers of Rainbow. The background
investigation will consist of on-line data base research * and will include the following:
A. Verification of Rainbow's existence as a legal entity
B. Confirmation of the identity and positions of key members of management
C. Review of local, national and international sources of business information that
include newspapers, trade journals and business magazines.
D. Review of govemmental/public filings (criminal records, liens,judgments,
lawsuits, bankruptcies, SEC violations, etc.)
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5. Draft report to City of Huntington Beach, including:
A. Procedures performed
B. Matters arising from procedures performed
C. Address specific questions in the City Attorney's letter dated September 10, 1996.
Said report will set forth the procedures performed and its findings. The report will
acknowledge that (1)the sufficiency of the procedures performed is the sole responsibility
of the City and that Consultant makes no representation regarding the sufficiency of the
procedures for City's purposes, (2)the procedures do not constitute an audit (or
examination in accordance with professional standards) and had Consultant been engaged
to perform additional procedures or an audit (or examination) in accordance with
professional standards, matters might have come to its attention that would have been
reported and(3) it is restricted to the parties named therein and may not be used or
referred to for any other purpose.
In addition, Consultant's report will also state that its procedures and findings do not
constitute a legal determination of the City's compliance with specified requirements.
Consultant's report will further state that it makes no representations regarding questions
of legal interpretation or provide any assurance as to any matters relating to Rainbow's
solvency, adequacy of capital or ability to pay its debts.
Should circumstances arise during the course of Consultant's work that prevents it from
completing the agreed-upon procedures, Consultant will so notify City so that alternative
arrangements can be made. Consultant is not presently aware of such circumstances, and
any that do arise during the course of its work will be discussed with City so that City will
have an opportunity to consider these matters including whether City wishes Consultant to
perform additional procedures in response to the identified conditions.
In connection with Consultant's engagement, it will require a representation letter from
the City concerning matters relating to the completeness and accuracy of the information
Consultant reviews.
7. Assist the City in negotiating any amendments to the Franchise Agreement necessary to
address the areas of impact identified in 3 above.
It is expressly understood that these procedures are sufficient for purposes of the City Attorney.
* There are practical limitations on the effectiveness of on-line data base searches. These include:
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• Public records such as lawsuits, cases,judgments,liens, UCC filings, etc. are
available on-line for only a limited number of states and jurisdictions
• Criminal records are not available on-line on commercial databases with the
exception of California
• Historical archives for certain periodicals and public records are limited. Where
such data limitations significantly impact the comprehensives of a particular search,
we will notify the City Attorney on a timely basis so that extended procedures can
be timely considered.
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Exhibit B
VEHICLES
DATE CRANE FRONT CRANE PETE FRONT ROLL-OFFS
PURCHASED LOADER SHU-PACS LOADER RENT-A-BIN TRACTORS TRAILERS
1975 N/A N/A N/A 4 N/A N/A
1976 N/A N/A N/A N/A N/A N/A
1977 N/A N/A N/A N/A N/A N/A
1978 N/A N/A N/A 1 N/A N/A
1979 N/A N/A N/A N/A N/A N/A
1980 N/A N/A N/A N/A N/A N/A
1981 6 6 N/A 1 N/A N/A
1982 6 N/A N/A N/A N/A N/A
1983 3 3 N/A N/A 10 N/A
1984 N/A N/A N/A N/A 2 N/A
1985 4 2 N/A 5 N/A N/A
1986 N/A N/A N/A N/A 6 N/A
1987 2 5 N/A 1 N/A N/A
1988 N/A N/A 1 N/A N/A N/A
1989 N/A N/A 2 1 N/A 12
1990 2 2 N/A N/A N/A 7
1991 6 6 N/A N/A N/A N/A
1992 N/A N/A N/A N/A N/A N/A
1993 N/A N/A N/A N/A N/A N/A
1994 N/A N/A N/A N/A N/A N/A
1995 N/A N/A N/A 1 N/A N/A
1996 6 N/A N/A 2 N/A N/A
TOTAL 35 24 3 16 18 19
Total of all vehicles 115
Exhibit C
Summary of ESOP Transaction
The purpose of the brief summary below is to provide the reader with a general overview of the ESOP
transaction. The reader should refer to the corresponding specific contracts and agreements for complete
information regarding the transaction in conjunction with this summary.
Our understanding of the ESOP transaction, based on discussion with Rainbow management,
Rainbow's legal counsel and reading the documents referred to in 1. is as follows:
Initial Establishment of Financingl1rusts
• Rainbow will establish two Employee Stock Ownership Plans (one for Transfer and one for
Disposal).
• Rainbow will establish two Employee Stock Ownership Trusts (one for Transfer and one for
Disposal).
• Rainbow will borrow approximately$31.5 million under the Credit Agreement and make
an equal loan of$31.5 million to the Employee Stock Ownership Trusts.
• The Employee Stock Ownership Trusts will purchase the ownership interest of Philip
Hohnstein for$31.5 million in cash and the purchased shares will remain in the Trust.
• Philip Hohnstein will place$15 million of the above proceeds in an escrow account as
partial collateral on amounts payable under the Credit Agreement.
Debt Service and ESOP Contributions
• On a quarterly basis, Rainbow will calculate the necessary debt service on the$31.5 million
and make an equal contribution to the Employee Stock Ownership Trusts.
• The Employee Stock Ownership Trusts will contribute the corresponding number of shares
to the Employee Stock Ownership Plans and make a cash payment back to Rainbow in an
equal amount.
• Rainbow will make its scheduled payment under the Credit Agreement.
Additional Financing
• Rainbow will also enter into an agreement with Philip Hohnstein to purchase the land and
related buildings located at 17121 Nichols Street. In addition, Philip Hohnstein will
purchase all rental property owned by Rainbow and assume certain debt obligations
associated with the rental property. Rainbow will borrow an additional$7.5 million under
the Credit Agreement to finance this transaction.
Exhibit D
Rainbow
I. Summary of Rainbow Projections
(in 000's)
June 30
1997 1998 1999 2000 2001 Total
Revenues $34,600 $35,500 $36,400 $36,900 $37,900 $181,300
Expenses (32,900) 33,200 33,700 33,700 34,300 16( 7,800)
Net Income $1,700 $2,300 $2,700 $3,200 $3,600 $13,500
Tipping fees(included in expenses above) $7,800 $7,800 $7,500 $7,500 $7,500 $38,100
Beginning Cash Balance $1,970 $2,551 $2,900 $3,900 $5,100
Increase in Cash 581 349 1,000 1,200 1,500
Ending Cash Balance $2,551 $2,900 $3,900 $5,100 $6,600
Projected Debt Balance $ 35,700 $ 31,600 $ 26,700 $ 21,200 $ 14,900
Projected Prepayment 1,100 1,300 1,500 1,600 1,700
Assuming No Prepayment $ 36,800 $ 34,000 $ 30,600 $ 26,700 $ 22,100
II. Sensitivity Assumptions:
Increase (decerease) in pre tax income
2 point increase in interest rates with prepayments $ (714) $ (632) $ (534) $ (424) $ (298) $ (2,602)
2 point increase in interest rates without prepayments (736) (680) (612) (534) (442) (3,004)
No prepayments, 9% interest rate (99) (216) (351) (495) (648) (1,809)
10% increase in tipping fees (370) (356) (312) (304) (288) (1,629)
25% increase in tipping fees (926) (890) (779) (759) (719) (4,073)
Loss of Calsan Contract in 1997 (ignoring cost savings) (300) (600) (600) 0 0 (1,500)
Exhibit E
Ownership Structure
Rainbow Management has represented the following details with respect to Rainbow's
percentage ownership:
Disposal: Before ESOP Transaction After ESOP Transaction
James Brownell 6% 12%*
Stanley Tkaczyk 6% 12%*
Philip Hohnstein 88% 0%
ESOP 0% 76%
Transfer.
James Brownell 10% 10%
Stanley Tkaczyk 10% 10%
Richard Timm 5% 5%
Philip Hohnstein 75% 0%
ESOP 0% 75%
* In addition, we were told by management that Mssrs. Brownell and Tkaczyk will be granted
stock options which will vest over a period of five to seven years. Such stock options, if
exercised, will enable Mssrs. Brownell and Tkaczyk to each obtain a 25% total interest in the
combined Rainbow entities.
r
Serving Orange County for 40 Years
Rainbow Disposal Co. Inc.
P.O. BOX 1026 - HUNTINGTON BEACH, CA 92647 - PH: (714) 847-3581 FAX: (714) 841-4660
September 30, 1996
Arthur Andersen LLP
18500 Von Karman Avenue
Suite 1100
Irvine, California 92715
Dear Sirs,
In connection with your engagement to perform certain limited agreed-upon procedures pursuant
to your arrangement with the City of Huntington Beach, which included an examination of the
combined projected financial statements of Rainbow Disposal Company, Inc. and Rainbow
Transfer/Recycling, Inc. for the years ended June 30, 1997 through June 30, 2001, we confirm, to
the best of our knowledge and belief, the following representations made to you during the course
of your work:
1. The financial projection is based on our judgment of the present circumstances of the
conditions we expect to exist and the course of action we expect to take(assuming the
proposed financing of the ESOP Transaction and related purchase of Philip Hohnstein's
financial interest in the Company) and accordingly, presents our assumptions and, to the
best of our knowledge and belief, the expected financial position, results of operations and
cash flows for the period in conformity with generally accepted accounting principles
expected to be used by the Company during the projection period which are consistent
with the principles which the Company uses in preparing its historical financial statements.
2. We have made available to you all significant information that we believe is relevant to
the projection.
3. We believe that the assumptions underlying the projection are reasonable and appropriate.
4. To the best of our knowledge and belief, the documents and records supporting the
assumptions are appropriate and reliable.
5. We believe the projected results are achievable; however, there will usually be differences
between the projected and actual results because events and circumstances frequently do
not occur as expected, and those differences may be material.
6. We are not aware of any material changes in the information or circumstances from
September 13, 1996, the date of the projection, to the present.
PRINTED ON RECYCLED PAPER 0
ARTHUR ANDERSENr LLP KHirvt�IDU71u b e6tW4 fl4-ti41-4bbl� titr 3u ytil�+r�1(;V no .u iu r UO:U`
7. Willi respect to Ute unaudited historical monthly financial aldtaments for
January 31,1996 to Jwie 30,3"6-•
a. We are msponsible fnr the fair presentation of itte financial statements of
the:Company prepared in conformity with (:Pnwrally accaptad accounting
principles applied on a basis consistent with the,principles used in the
preparation of the Decernbor 31, 1996 and June.30, 1995 financial
statpmcnits.
h. tcxcupt as diachvied to you, we hovel uu plaris or intent tars that may
materially 00rt the carrying values or clascifiuntion of gxr:(atg and liabilities.
C. There have been no;
-- Irregularities involving management or employees who have significant
roles in the internal control structure.
-- Irregularities involving other employers that could have a material effect
CM the financial statements.
-- Communications Irani regulatory agencies concerning noncompliancw
with, or dcficiencim in, financial reporting practicm that could have a
material effect on the financial statements.
d. There are no(i)violations yr pus z-o'ble violations of laws or regulations
whose effects should ba considered for disclosure lei atu financial
statements or as a haais rr,r recording a losa contingency or(ff)other
material liabilities or gain or kiss contingenciPs that are required to be
accrued or disclosed by Statement of Financial Accounting Standerdx No.
5.
e. 1wret are no unasaartcd claims or asseaxaments that we are aware of,either
through communications fru,r uur lawyer or otherwise,that are probable
of aacPrhon and thc-rofore rnunt do dioc!losed in acc.ordanse w1Wt Statement
of Financial Accounting Statndarrla No. 5.
f. 7'he accounting recardd underlying the financial Rtatcmenty accurately and
fairly reflect, in reasonable detail,the transactions of the Company.
g. No ewitho have occurred subsequent to December 31, 1995 that would
require adjustment, or dlsclteaury in, die financial statements.
h. We have complied with all ANPPr-ty of contractual acmamonto that would
have a material effect on the financial statments in the Pvent of
noncompliance.
' Page 3
8. We have no intentions or plans to make any major capital expenditures in the foreseeable
future that should be considered in the projections.
9. We have given to your representatives the most recent drafts of all requested contracts
and documents (ie, the ESOP Documents, the Credit Agreement, Franchise Agreements,
etc.)
10. Philip Hohnstein will not provide any paid services to the Company upon consummation
of the ESOP Transaction.
Very Truly Yours
Stanley F. Tkaczyk
Co-President
�- —
J�X H. Brownell
o-President
SFT:JHB:rg9619
AN AGREEMENT BETWEEN THE CITY OF HUNTINGTON BEACH
AND THE RAINBOW DISPOSAL AND
RAINBOW TRANSFER AND RECYCLING COMPANIES
APPROVING THE CHANGE OF EFFECTIVE CONTROL OF RAINBOW
AND HYPOTHECATION OF THE COMPANIES
This Agreement is made and entered into this 7th day of October, 1996,by and between
the City of Huntington Beach, a California municipal corporation, hereinafter referred to as
"City," and the Rainbow Disposal Company, Inc.,joined by Rainbow Transfer and Recycling,
Inc., both California corporations, hereinafter referred to collectively as "Contractor."
WHEREAS, in 1990, the City and Contractor entered into a Franchise Agreement to
provide for collection and disposal services of solid waste. Subsequently, in May 1994, a
Supplement to the Franchise Agreement was entered into to provide for operation of a recycling
operation, known as a"Materials Recovery Facility ("MRF"). (The Franchise Agreement and
the Supplement will hereinafter be referred to as the"Franchise"); and
Contractor has entered into an employee stock-ownership plan("ESOP")to purchase the
interest of Mr. Phil Hohnstein in Contractor. Hohnstein owns in excess of 50%of Contractor
directly and through various trusts and family partnerships. The purchase of Mr. Hohnstein's
shares would be financed through a loan from Chase Manhattan Bank. (The ESOP and the loan
will hereinafter be referred to as the"Transaction"); and
Contractor has applied for City consent to the Transaction; and
City has contracted with Arthur Andersen, LLP,to complete a due diligence review of the
Transaction, and to advise the City regarding the following matters:
(a) What impact will the financing package of the ESOP,particularly the
principal and interest payments, have on Contractor's solid waste rates?
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(b) Can Contractor continue to operate within the current rate structure while
meeting the new principal and interest obligations of the ESOP financing?
and
(c) Are the principals controlling Contractor under the ESOP qualified to
operate Contractor?; and
In support of its application for City consent to the Transaction, Contractor submitted to
Arthur Andersen the following documents which are on file with Arthur Andersen, and are
collectively referred to as the "Transaction Documents":
(a) Letter, dated September 30, 1996, from Rainbow Disposal to Arthur
Andersen;
(b) A redacted version of the Contract between Rainbow Transfer and Calsan,
Inc. dated February 5, 1996.
(c) (i) The audited financial statements for the year ended December 31, 1995,
and the reviewed financial statements for the years ended December 31,
1994, and 1993 for Rainbow Transfer; (ii)the reviewed financial
statements for Rainbow Disposal for the years ended June 30, 1993, 1994
and 1995, and (iii)the unaudited compiled monthly income statements for
Rainbow Transfer and Rainbow Disposal for January 1996 through June
1996, inclusive.
(d) The projected combined financial statements for Rainbow Transfer and
Disposal for the years ending June 30, 1997 through 2001, including
assumptions.
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(e) (i) The ESOP Agreement for Rainbow Disposal (effective as of July 1,
1995); (ii)the ESOP Agreement for Rainbow Transfer(effective as of
January 1, 1996); (iii)the Employee Stock Ownership Trust(ESOT)
Agreement for Rainbow Disposal (effective as of July 1, 1995); and(iv)
the ESOT Agreement for Rainbow Transfer(effective as of January 1,
1996).
(f) The Credit Agreement dated as of September , 1996, among Rainbow
Transfer and Disposal, as borrowers, Chase Manhattan Bank, as agent and
other listed lenders.
(g) Form of Seller Pledge Agreement between Philip Hohnstein Family Stock
Limited Partnership and Chase Manhattan Bank(Exhibit K to the Credit
Agreement).
It should be noted that the documents referred in e, f, and g were unsigned, draft documents
which generally excluded exhibits and/or attachments. Arthur Andersen obtained representations
from Contractor that these documents are the most current versions of such agreements, and will
not materially change in their final version. In addition, Contractor has not submitted to Arthur
Andersen the opinion as to the fairness of the ESOP transaction("Fairness Opinion"); and
Arthur Andersen has been unable to fully evaluate the Transaction because Contractor
was unable to provide: (i) audited financial statements, which made it more difficult to evaluate
the projected combined financial statements for Rainbow Transfer and Disposal for the years
ending June 30, 1997 through 2001, including assumptions; and (ii)the Fairness Opinion; and
3
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The City's limited evaluation of the Transaction is contained in the letter from Arthur
Andersen to Gail Hutton, City Attorney, City of Huntington Beach, dated September 30, 1996.
NOW, THEREFORE, City and Contractor agree as follows:
Section 1. The Huntington Beach City Council finds that, based upon the
representations contained in the Transaction Documents and the limited evaluation of the
Transaction by Arthur Andersen,that after the close of the Transaction, Contractor will have the
legal, financial and technical qualifications to hold and manage the Franchise. Subject to the
conditions of approval contained in Section 2 of this Agreement, the City Council approves and
consents to the Transaction.
Section 2. The approval of the Transaction is subject to the following conditions of
approval:
A. Section 20 of the Franchise Agreement, entitled"Financial Records," is
amended to read as follows:
"Financial Records.
Contractor shall have an independent certified public accountant
audit the annual financial statements in accordance with generally
accepted accounting principals ("GAAP"). Such financial statements shall
reflect combining or consolidating financial statements to reflect all
affiliated entities of Contractor.
At the request of Director, Contractor shall make his complete
financial records available for examination by City or its designated
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agents. Such records shall be kept confidential to the extent permitted by
law."
B. City consent to the Transaction is based upon the representation provided
by Contractor that the Fairness Opinion supports the deductibility of the payments from the
Contractor to the ESOT. Contractor shall submit the Fairness Opinion to the Director of Finance
within ten(10) days of City Council approval of this Agreement. If the Director should
reasonably determine that the Fairness Opinion does not support the deductibility of the
payments from the Contractor to the ESOT,the Contractor shall be deemed to be in violation of
the Franchise. Such violation of the Franchise shall be grounds for termination of the Franchise
pursuant to the terms and conditions of the Franchise Agreement.
C. City consent to the Transaction is further based upon the truth and
accuracy of the representations and information provided by Contractor in the Transaction
Documents. Should any of the representations or information contained in the Transaction
Documents later be determined to be materially false,the Contractor shall be deemed to be in
violation of the Franchise. Such violation of the Franchise shall be grounds for termination of
the Franchise pursuant to the terms and conditions of the Franchise Agreement.
D. Contractor shall notify the City Clerk in writing upon the closing of the
Transaction.
Section 3. By executing this Agreement,the City hereby gives notice to Contractor
and Contractor is hereby notified that pursuant to Revenue and Taxation Code Section 107.6,the
Franchise Agreement may create a possessory interest which, if created, may be subject to
5
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property taxation and that Contractor may be subject to payment of property taxes levied on such
interest.
Section 4. The City Administrator and the City Attorney, or their written designees,
are hereby authorized and empowered to execute any documents necessary, in their discretion,to
implement the approvals contained herein.
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
on the day, month and year first above written in Huntington Beach, California.
CITY OF HUNTINGTON BEACH,
a municipal corporation of the State of
California
f
Mayor
ATTEST: APPROVED AS TO FORM:
r
City Clerk � �-.- City Attorney r z
REVIEWED AND APPROVED: INITI ED I� APPROVED:
City Ad inistrator 0/o?7"Gc, Director of ub c orks
RAINBOW DISP AL COMPANY, INC., RAINBOW TRANSFER AND
a California co o t' n RECYCLING, IN .
a California co on
By: By:
(print na6ie (print name
Its: (circle one)Chairm reside ice President Its: (circle one)Chairm reside ice President
By: By:
041AX azeer //J?094m�-- '41
(prmt name) (print name)
Its: (circle one)Secretary/ ief Financial Officer Its: (circle one)Secretary/CEEEmancial Officer
Asst. Secretary-Treasure Asst.Secretary-Treasurer
SF/s:I'M Agree:Rain925B
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STATEMENT OF ACTION OF THE CITY COUNCIL
Council Chamber, Civic Center
Huntington Beach, California
Monday, October 7, 1996
f
A videotape recording of this meeting
is on file in the Office of the City Clerk.
Mayor Leipzig called the regular meetings of the City Council and the Redevelopment Agency of
the City of Huntington Beach to order at 5:00 p.m.
CITY COUNCIL/REDEVELOPMENT AGENCY ROLL CALL
PRESENT: Harman, Leipzig, Bauer, Sullivan, Dettloff, Green, Garofalo
ABSENT: None
(City Council) Professional Services Agreement Approved Between City And Arthur
Andersen L.L.P. -Consulting Services -Regarding Transfer Of Citv's Franchised Solid
Waste Operator-Through Employee Stock Ownership Plan (600.10)
Communication from the City Attorney informing Council that Rainbow Disposal has entered into
an Employee Stock Ownership Plan (ESOP)to purchase Phil Hohnstein's interest in Rainbow
Disposal and obtain a financing package from Chase Manhattan to fund the ESOP. The City
Council selected Arthur Andersen, L.L.P. to conduct a due diligence review of the transaction as
per Section 19 of the Rainbow Franchise Agreement. Arthur Andersen, L.L.P. has requested
certain modifications to the city's standard Professional Services Contract.
A motion was made by Garofalo, seconded by Green, to approve and authorize the Mayor and
City Clerk to execute a Professional Services Contract with Arthur Andersen, L.L.P. to perform a
"due diligence" review of the ESOP to purchase Phil Hohnstein's interest in Rainbow Disposal
and to review the Chase Manhattan loan package to finance the ESOP. The motion carried by
the following roll call vote:
AYES: Leipzig, Bauer, Sullivan, Dettloff, Green, Garofalo
NOES: None
ABSENT: Harman (out of the room)
«««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««
(City Council) Agreement Between The City Of Huntington Beach And The Rainbow
Disposal And Rainbow Transfer And Recycling Companies Approving The Change Of
Effective Control Of Rainbow And Hypothecation Of The Companies (600.45)
Communication from the Assistant City Administrator recommending that the City Council
approve the transfer of ownership relative to the employee stock ownership plan (ESOP)to
purchase Phil Hohnstein's interest in Rainbow Disposal Company. City consent is required to
any transfer of interest pursuant to Section 19 of the Rainbow Disposal Franchise Agreement.
The Director of Finance reported on the matter and the reason why approval was recommended.
The City Attorney reported on the matter.
A motion was made by Dettloff, seconded by Harman, to approve and authorize the Mayor and
City Clerk to execute the Agreement between the City and the Rainbow Disposal and Rainbow
Transfer and Recycling Companies approving the change of effective control of Rainbow and
Hypothecation of the Companies. The motion carried by the following roll call vote:
AYES: Harman, Leipzig, Bauer, Sullivan, Dettloff, Green, Garofalo
NOES: None
ABSENT: None
«««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««««
Page 2 - Statement of Action
Mayor Sullivan adjourned the regular meetings of the City Council and the Redevelopment
Agency of the City of Huntington Beach at 11:30 p.m. to October 21, 1996 at 5:00 p.m. in
Room B-8, Civic Center, Huntington Beach, California 92648.
/s/ Connie Brockway
City Clerk and ex-officio Clerk of
the City Council of the City of
Huntington Beach, California
ATTEST:
/s/Connie Brockway /s/ Dave Sullivan
City Clerk/Clerk Mayor
STATE OF CALIFORNIA )
County of Orange ) ss:
City of Huntington Beach )
I, Connie Brockway, the duly elected City Clerk of the City of Huntington Beach, California, do
hereby certify that the above and foregoing is a true and correct Statement of Action of the
City Council of said City at their regular meeting held on the 7th day of October, 1996.
Witness my hand and seal of the said City of Huntington Beach this the 30 day of
October, 1996.
/s/ Connie Brockway
City Clerk and ex-officio Clerk of
the City Council of the-City of
Huntington Beach, California
B
Deputy y Clerk
96stact
RECEIVED
a CITY OF HUNTINGTON BEA ,, ' , c
INTER-DEPARTMENT COMMUNICATION !y�(p� /�( !��(¢(�
HUNTINGTON BEACH OCT 9 V 21 N '96
TO: Connie Brockway, City Clerk
FROM: Scott Field, Deputy City Attorney
DATE: October 9, 1996
SUBJECT: Rainbow ESOP Transaction
In connection with the agreement approving the Rainbow ESOP, which was
approved by the City Council at its October 7, 1996, meeting, would you please
include this document from Arthur Andersen, dated October 2, 1996, in the
permanent files of the City.
Attachment: Letter from Mark S. Merriman of Arthur Andersen dated October 2,
1996
G:96-Ltrs:Brock 109
10/9/96-#1
1 .
ARTHUR
ANDERSEN
05
October 2, 1996 Arthur Andersen LLP
E
A
Scott F. Field, Esq. Suite 1100
Deputy City Attorney 18500 Von Karman Avenue
Irvine CA 92715-0527
City of Huntington Beach 714 757 3100
2000 Main Street
P.O. Box 190
Huntington Beach, CA 92648
Dear Scott:
It is our policy to retain for seven years, files prepared, including information obtained, for
work performed. This would include the documents and financial information obtained in our
analysis of the Rainbow ESOP transaction pursuant to which you have retained our services.
Please call me if you have any questions.
Very truly yours,
ARTHUR ANDERSEN LLP
By
Ma k S. Merriman
RED/609014MM
(11) 09/16/96 - Counc.„,%gency Agenda - Page 11
E-17. (City Council) Authorization For HBTV-3 To Televise League Of Women's Voters
Candidates Night As A Public Service - October 10, 1996 (100.10) -Authorize city
staff, as a public service, to proceed with a "live" television production and rebroadcast
of the League of Women Voters sponsored City Council, City Treasurer, and City Clerk
Candidates Night from the City Council Chambers on October 10, 1996. Submitted by
Administration
[Approved 6-1 (Harman--Abstain)]
E-18. (City Council) Professional Services Contract - Reimbursement Agreement - To
Perform Employee Stock Ownership Plan - Entered Into By Rainbow Disposal - To
Purchase Interest Of Phil Hohnstein - Review Of Chase Manhattan Loan Package
(600.10) - Rainbow Disposal has entered into an employee stock ownership plan
("ESOP") to purchase the interest of Phil Hohnstein in Rainbow, and obtain a financing
package from Chase Manhattan that will fund the ESOP. Therefore, the city is required
to conduct a due diligence review of the transaction as per Section 19 of the Rainbow
Franchise Agreement.
4A—APP ,&-&an4ple-P-r essional SewiGes-s� aF&ng4h&4xan&feF-a€
ei€)'s-€r-ans#ised-Solid-Waste-apeFa€ion►-thFoag4-aa•€employee--Stosk-GwneFship-Plan-
And
And
P-Fefessibnai Sep4Ges to the above named GGRsugant and whiGh sha#inGk4e an),other-GGndXpn_5
eatliaed-in the me Administration eFstipol
And
dXgenG9"and Chase Manhattan finan&g paGkage evaluations.
Submitted by the City Attorney's Office and the Assistant City Administrator
[Approve as amended in City Administrator's memorandum dated
9116196 -- 7-0
1. "Award a Professional Services Contract to Arthur Andersen, LLP
to perform a "due diligence" review of the ESOP and to review the
Chase Manhattan loan package to finance the ESOP';
2. "Approve the attached Professional Services Contract, in the
substantial form presented, with Arthur Andersen, LLP and authorize
the Mayor and City Clerk to execute the final contract in the amount of
$20,000 for the base contract and no more than $5,000 available as a
contingency fund for work order changes,"
3. "Approve the Reimbursement Agreement with Rainbow Disposal
Company Inc., to pay for the cost of the Professional Services Contract
of$25,000 and authorize the Mayor and City Clerk to execute the
contact."]
' (11)
Page 12 - Council/Ager,.. , Agenda - 09/16/96 (12)
F. Administrative Items
F-1. (City Council) Public Meeting Announcement Of Proposed New Business License
Requirements - Public Hearing Scheduled For October 7, 1996 (340.20)
Communication from Administration Services Department announcing, pursuant to the
Brown Act, that a public hearing will be held on October 7, 1996 for the purpose of
considering a proposed new business license requirements.
*" Communication dated 09/10/96 from Huntington Beach/Fountain Valley Association of
Realtors opposing a requirement for a business license for single family home rentals
and duplex rentals
Recommended Action: Motion to:
Cancel the public hearing and do not make the public meeting announcement of the
coming public hearing.
[Approve Recommended Action and cancel public hearing -- 7-0]
F-2. (City Council) Presentation Of July Investment Summary Review - Submitted By
City Treasurer (310.20)
Transmittal from City Treasurer Shari Freidenrich of the Monthly Investment Report for
July, 1996, pursuant to Section 17.0 of the Investment Policy of the City of Huntington
Beach.
Recommended Action: Motion to:
Following review of the report, by motion of Council, accept the Monthly Investment
Report for July, 1996 pursuant to Section 17.0 of the Investment Policy of the City of
Huntington Beach.
[Approved-- 7-0]
G. Ordinances
G-1. Ordinance for Adoption
Recommended Action: Motion to:
Adopt, by roll call vote, the following ordinance after City Clerk reads by title.
G-1a. (City Council) Ordinance No. 3334 - Local Coastal Program Amendment No. 1-95 -
Zone Change No. 94-2 And Code Amendment No. 91-10 (640.10) - Adopt
Ordinance No. 3334 - "An Ordinance Of The City Of Huntington Beach Approving
Modifications To The Huntington Beach Zoning And Subdivision Ordinance As
Suggested By The California Coastal Commission (LCPAmendment 1-95)." Approves
Local Coastal Program Amendment No. 1-95, Zone Change No. 94-2, and Code
Amendment No. 91-10 incorporating the suggested modifications recommended by the
California Coastal Commission based upon the findings outlined in Attachment No. 1 to
the Request for Council Action dated September 3, 1996.) (Public hearing and
introduction on September 3, 1996.) Prepared by the Community Development
Department
[Adopted-- 7-0]
(12)
S-e I.v C91V�
Council/Agency Meeting Held: L7
Deferred/Continued to: "Ae,
U-A proved ❑ Conditionally Appro e ❑ Denie t
Clerk's Signature
Council Meeting Date: September 16, 1996 Department ID Number: 96-20
CITY OF HUNTINGTON BEACH
REQUEST FOR COUNCIL ACTION
SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS
SUBMITTED BY: GAIL HUTTON, City Attorney i-12-9.
RAY SILVER, Assistant City Administrator"i
PREPARED BY: GAIL HUTTON, City Attorney
SUBJECT: Solid Waste Franchise
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachment(s) u v
Statement of Issue: Rainbow Disposal has entered into an employee stock ownership
plan ("ESOP") to purchase the interest of Mr. Phil Hohnstein in Rainbow, and obtain a
financing package from Chase Manhattan that will fund the ESOP. Therefore, the City is
required to conduct a due diligence review of the transaction as per Section 19 of the
Rainbow Franchise Agreement.
Funding Source: Reimbursement agreement with Rainbow or the Refuse Fund.
Recommended Action:
1a. Approve sample Professional Services contract to perform a "due diligence" /
review of the ESOP to purchase Mr. Phil Hohnstein's interest in Rainbow and to
review the Chase Manhattan loan package to finance the ESOP.
1 b. Award a Professional Services contract to the consultant recommended in the
memo from Administration provided to the City Clerk under Late Communication.
1c. Authorize the execution of the final contract by the Mayor and City Clerk for
Professional Services to the above named consultant and which shall include
any other conditions outlined in the memo from Administration or stipulated by
the City,Council.
2. Approve the Reimbursement Agreement with Rainbow Disposal Company, Inc.,
to pay for the cost of the Professional Services contract to perform the "due
diligence" and Chase Manhattan financing package evaluations.
Rr-QUEST FOR COUNCIL ACTIUA
MEETING DATE: September 16, 1996 DEPARTMENT ID NUMBER: 96-20
Alternative Action(s):
1. Do not authorize the use of consulting services to perform "due diligence" and
financing package evaluations.
2. That another consultant to provide recommended services.
3. Do not approve,the Reimbursement Agreement with Rainbow Disposal, Inc., to
pay for consulting services and move to "Appropriate the dollar amount, as
recommended by the Administration Late Communication memo, necessary to
pay for consulting services from ER-PW-421 Account (Refuse Fund)".
Analysis:
1. Background:
In 1990, the City and Rainbow Disposal Company, Inc., and Rainbow Transfer and
Recycling, Inc., . (jointly referred to as "Rainbow"), entered into Franchise
Agreement to provide for collection and disposal services of solid waste (the
"Franchise"). Subsequently, in May 1994, a supplement to the.Franchise was
entered into to provide for operation of a recycling operation, known as a
Materials Recovery Facility ("MRF").
The Franchise grants Rainbow the exclusive right to residential and commercial
collection and recycling within the City. Separate rates are initially specified in
the Franchise for each service. However, pursuant to Sections 11 and 12 of the
Franchise, the same method is used to make annual compensation adjustments.
Rate adjustments are made based upon a weighted formula that takes into
account the CPI, the County of Orange landfill tipping fee, and the price per
gallon of diesel fuel. Notwithstanding this formula, either the Director of Public
Works or, Rainbow may propose modification of an established rate in order to
insure the "overall fairness of the rate structure."
According to the Supplement to the Franchise, the compensation formula for the
MRF is based upon an initial fee of $3.00 per month per residential unit.
Adjustments were then made in 1995 based upon the actual cost of plant
operation and the resale value of materials collected at the MRF. Finally,
beginning July.1, 1996, all subsequent rate changes may not exceed the CPI.
However, this provision is also subject-to the option of a negotiated rate change
that can be made annually in order "to assure the overall fairness of the rate
structure."
The Franchise also limits Rainbow's ability to transfer the Franchise.
Specifically, Section 19 of the Franchise provides that Rainbow "shall not sell,
0021068.01 -2- 09/12/96 3:38 PM
RCQUEST FOR COUNCIL ACTS
MEETING DATE: September 16, 1996 DEPARTMENT ID NUMBER: 96-20
sign or transfer this agreement or any interest therein, or permit same to be
transferred by operation of the law, without first obtaining the consent of City."
The City received a letter on September 5, 1996, from Rainbow to comply with
Section 19. Specifically, Rainbow has requested the City's consent to an ESOP
to purchase the interest of Mr. Phil Hohnstein in Rainbow. Hohnstein owns in
excess of 50% of Rainbow directly and through various trusts and family
partnerships. The purchase of Mr. Hohnstein's shares would be `financed
through a loan from Chase Manhattan Bank. (The ESOP and loan package will
hereinafter be referred to as the "Transaction".)
The City is moving as quickly as possible to complete the necessary "due
diligence" review. The RFPs requesting consulting services were distributed on
Tuesday, September 10, with the review of the proposals received to be
conducted on Friday, September 13, 1996. Staff will present the Council, after
the agenda packets have been sent out, with the results of the review of the
consultants' proposals and Staffs recommendation.
2. Does the Transaction require Citv consent pursuant to Section 19 of the
Franchise?
The City is in receipt of two letters from Mitchell, Silberberg and Knupp,
Rainbow's attorneys, contending that the ESOP transaction "is neither a sale,
,assignment or transfer of the contract," and consequently the City's consent is
not required. Underlying this claim is the premise that so long as the two
Rainbow corporations that originally entered into the Franchise continue to hold
the Franchise, then any transfers of stock in the companies can occur without
City approval; only if the Franchise was transferred from the Rainbow
corporations to another corporation would City approval be required.
At issue is what is the purpose of the transfer clause?
The Franchise for solid waste services was awarded to Rainbow based upon the
qualifications of its owners and managers and its financial condition. In fact,
Rainbow's other solid waste franchise with the City of Fountain Valley expressly
references that "this agreement is deemed personal to the parties hereto and
may not be assigned, sold or otherwise transferred to a third person without the
prior written consent of the other." The fact that the Fountain Valley contract
refers to the agreement as personal suggests that the qualifications of the
individual owners of the company are at issue, not merely the corporate
structure. Case law holds that transfers of effective control of personal services
contracts require the consent of the other party to the contract. (Witkin,
Summary of California Law(9th Ed.), Vol. 1, "Contracts," §§ 931-932.)
0021068.01 -3- 09/12/96 3:38 PM
Rr-QUEST FOR COUNCIL ACTIUA
MEETING DATE: September 16, 1996 DEPARTMENT ID NUMBER: 96-20
Moreover, California law holds that whenever'effective control of a contract is
assigned through a stock acquisition or the acquisition of the parent company,
consent of the other party to the contract required. (Trubowitch v. Riverbank
Canning Co., 30 Cal.2d 335, 343-346, 182 P.2d. 182 (1947).) For example,
when control of a cable television franchise was transferred, although the legal
entity holding the franchise remained the same, a court granted a preliminary
injunction to the city seeking to stop the transfer of control. (City of El Segundo
v. Group W Cable, Inc., No. 86-5029 (C.D. Cal. Sept. 29, 1986).)
Most importantly, the Huntington Beach Franchise requires not only consent to
transfer of the Franchise, but also to the transfer of "any interest therein." The
term "interest" is defined broadly to include any right in property that is less
than full title.
Because the Franchise states that any transfer of an "interest" in the Franchise
requires City consent, regardless of whether legal title to the Franchise is
remains held by Rainbow after the ESOP, any transfer of interests in Rainbow
requires City consent. In this particular case, effective control of Rainbow is
being transferred from Mr. Hohnstein and a substantial debt will be incurred, that
could result in another transfer if Chase Manhattan forecloses upon its interests.
Because both these transactions materially effect the City, they require City
approval.
3. The scope of the city's due diligence evaluation of the transaction will be
limited to the impacts that the transaction will have on franchise
operations.
The purpose of the transfer clause is to insure that Rainbow after the ESOP is
equally well qualified to operate the waste hauling system. Obtaining City
consent is not intended to provide the City an opportunity to reopen the
Franchise entirely. Rather, it is intended to insure that :the ESOP and loan
package will not negatively impact the City.
It is the City Attorney's recommendation that a consultant be hired to evaluate
the transaction and conduct a "due diligence" review. The consultant will be in
a better position than this office to determine the scope of that evaluation.
However, preliminarily we would suggest that the chief impact would be on rates.
While there are rate formulas in the Franchise that generally exclude operating
costs from the rate calculation, there are "reopener" clauses allowing either
party to recompute the rates. The principal and interest costs from the Chase
Manhattan loan could create pressure to increase rates. This should be
evaluated as part of the "due diligence" review.
0021068.01 -4- 09/12/96 3:38 PM
RtQUEST FOR COUNCIL ACTIN
MEETING DATE: September 16, 1996 DEPARTMENT ID NUMBER: 96-20
Similarly, the principal and interest payments may have an impact on Rainbow's
ability to continue to be solvent or maintain the existing level of service under the
existing rate structure. Consequently, this potential impact should also be
evaluated through the "due diligence" review.
Finally, it is our understanding at this time that Rainbow will continue to be run
by the same persons (with the exception of Mr. Hohnstein) after the ESOP is
implemented. Consequently, it would appear that they would be as well qualified
as the current management team. However, the principals that will control
Rainbow after the.ESOP should be identified and evaluated to determine if they
are'equally well qualified to manage the company.
Environmental Status: Not applicable.
Attachment(s):
1. Requests for Proposals
2. Letter from Ronald Shenkman requesting approval of transfer
3. Franchise Agreement
4. Sample Contract for Professional Services
5. Reimbursement Agreement
0021068.01 -5- 09/12/96 3:38 PM
Request for Proposal for Consulting Services re Transfer of City's Franchised
Solid Waste Operator through Employee Stock Ownership Plan
Bruce Stump
Partner in Charge of Audit (714) 252-2300
Ernst and Young FAX (714) 252-2379
18400 Von Karman
Irvine, CA 92612
Hank Adamany
Price Waterhouse (714) 435-8600
575 Anton FAX (714) 557-7022
Costa Mesa, CA 92626
Kelly Pittner
Coopers and Lybrand (714) 251-7200
4675 MacArthur Court FAX (714) 251-7362
Newport Beach, CA 92660
Lance Wood
Arthur Anderson (714) 757-3100
18500 Von Karman FAX(714) 261-1362
Irvine, CA 92612
William S. Morgan
Diehl,Evans & Company (714) 757-7700
18401 Von Karman, Suite 200 FAX(714) 757-2707
Irvine, CA 92612-1542
Laith Ezzet
Hilton Farnkoph & Hobson, L.L.C. (714) 251-8628
3990 Westerly Place, Suite 195 FAX (714) 251-9741
Newport Beach, CA 92660-2311
G:SF-96Urs:RFQ:Rainbow:Draft 1
9/11/96
• otaJNrllblp`BF
OFFICE OF
y - -- CITY ATTORNEY
�puITI �`�to. P.O. Box 190
2000 Main Street Telephone
Gail Hutton Huntington Beach, California 92648
City Attorney (714) 536-5555
Fax (714) 374-1590
September 10, 1996 VIA FAX and U. S. MAIL
Bruce Stump
Partner in Charge of Audit
Ernst and Young
18400 Von Karman
Irvine, CA 92612
FAX(714) 252-2379
Re: Request for Proposal for Consulting Services re Transfer of City's Franchised
Solid Waste Operator through Employee Stock Ownership Plan
Dear Mr. Stump:
Background
In 1990, the City and Rainbow Disposal Company, Inc., and Rainbow Transfer and Recycling, Inc.,
(jointly referred to as"Rainbow"), entered into Franchise Agreement to provide for collection and
disposal services of solid waste (the"Franchise"). Subsequently, in May 1994, a supplement to
the Franchise was entered into to provide for operation of a Materials Recovery Facility("MRF").
Rainbow has requested that the City consent to an employee stock-ownership plan ("ESOP")to
purchase the interest of Mr. Phil Hohnstein, for the benefit the company's employees. Hohnstein
owns in excess of 50% of Rainbow either directly or through various trusts and family
partnerships. The purchase of Mr. Hohnstein's shares would be financed through a loan from
Chase Manhattan Bank. (The ESOP and the loan will hereinafter be referred to as the
"Transaction"). Under the City's existing franchise agreement, approval of this Transaction is
required before it may be consumated.
Request For Proposals.
You are hereby quested to submit a proposal to provide a due diligence review of the
Transaction. There should be four (4) components to that review:
a. What impact will the financing package, particularly the principal and interest
payments, have on solid waste rates?
b. Can Rainbow continue to operate within the current rate structure while meeting
its new principal and interest payments?
• Page 2
Request for Proposal
re: Solid Waste Operator/Employee'Stock
C. Are the principals controlling the company under the ESOP qualified to operate
Rainbow?
It is requested that you submit your proposal by no later than 12:00 p.m. (noon) on September
13, 1996. Your proposal should indicate your firm's qualifications to provide the due diligence
review and your proposed pricing. In particular, the City is seeking to have the review completed
within two (2) weeks from the date the contract is awarded. Recognizing this is a very short time
period, the City would also like your price for completing the due diligence review within four(4)
weeks of the date the contract is awarded.
Should you have any questions concerning this request for proposal, please don't hesitate to
contact Scott Field, Deputy City Attorney, at (714) 536-5662.
Sincerely,
Gail Hutton
City Attorney
/sg
c: Mac Chao
2
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09/09/96
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77771
Serving Orange County for Liver 40 Years
Rainbow Disposal Co. Inc.
P.O. BOX 1026 - HUNTINGTON BEACH, CA 92647 PH: (714) 847-3581 FAX: (714) 841-4660
r
-
SEPTEMBER S. 1996
RAY SILVER, ASSISTANT CITY ADMINISTRATOR
CITY OF HUNTINGTON BEACH
2000 MAIN STREET
HUNTINGTON BEACH, CA 92647
DEAR RAY:
THIS LETTER IS A FORMAL REQUEST TO THE CITY OF HUNTINGTON BEACH,
PER SECTION I g OF THE RAINBOW FRANCHISE AGREEMENT, TO CONSENT TO
THE "CHANGE OF CONTROL" OF RAINBOW DISPOSAL AND RAINBOW TRANSFER
RESULTING FROM THE SALE BY PHIL HOHNSTEIN OF ALL THE SHARES OF
CAPITAL STOCK OF RAINBOW OWNED BY HIM TO A NEWLY FORMED EMPLOYEE
STOCK OWNERSHIP PLAN OF RAINBOW.
SINCERELY,
RON SHENKMAN
DIRECTOR OF PUBLIC AFFAIRS
RS:SJT:SJJ96 14
PRINTED ON RECYCLED PAPER 0
PROFESSIONAL SERVICES CONTRACT BETWEEN
THE CITY OF HUNTINGTON BEACH AND
ARTHUR ANDERSEN, L.L.P.,
FOR CONSULTING SERVICES REGARDING THE
TRANSFER OF CITY'S FRANCHISED SOLID WASTE OPERATOR
THROUGH AN EMPLOYEE STOCK OWNERSHIP PLAN
THIS AGREEMENT, made and entered into this day of
1996, by and between the City of Huntington Beach, a municipal
corporation of the State of California, hereinafter referred to as "CITY", and Arthur Andersen,
L.L.P., a California corporation, hereinafter referred to as "CONSULTANT."
WHEREAS, CITY desires to engage the services of a consultant for services regarding
transfer of City's franchised solid waste operator through an Employee Stock Ownership Plan;
and
Pursuant to documentation on file in the office of the City Clerk, the provisions of HBMC
Chapter 3.03 relating to procurement of professional service contracts has been complied with;
and
NOW, THEREFORE, it is agreed by CITY and CONSULTANT as follows:
1. WORK STATEMENT
CONSULTANT shall provide consulting services to evaluate on behalf of the City
the transfer of effective control of City's franchised solid waste operator through an Employee
Stock Ownership Plan and an associated financing package.. Said services are more specifically
described in Exhibit A, attached hereto, and shall hereinafter be referred to as "PROJECT."
CONSULTANT hereby designates Mark Merriman and Tim Keithahn, who shall
represent it and be its sole contact and agent in all consultations with CITY during the
performance of this Agreement.
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2. CITY STAFF ASSISTANCE
CITY shall assign a staff coordinator to work directly with CONSULTANT in the
performance of this Agreement.
:3. TIME OF PERFORMANCE
Time is of the essence of this Agreement. The services of the CONSULTANT are
to commence as soon as practicable after the execution of this Agreement.
4. COMPENSATION
In consideration of the performance of the services described herein, CITY agrees
to pay CONSULTANT a fee of Twenty Thousand Dollars ($20,000.00).
5. EXTRA WORK
In the event CITY requires additional services not included in the PROJECT,
CONSULTANT will undertake such work after receiving written authorization from CITY.
Additional compensation for such extra work shall be allowed only if the prior written approval of
CITY is obtained. Such additional compensation shall not exceed Five Thousand Dollars
($5,000.00).
6. METHOD OF PAYMENT
A. Delivery of work product: A copy of every technical memo and report
prepared by CONSULTANT shall be submitted to the CITY to demonstrate progress toward
completion of tasks. In the event CITY rejects or has comments on any such product, CITY shall
identify specific requirements for satisfactory completion. Any such product which has not been
formally accepted or rejected by CITY shall be deemed accepted.
B. The CONSULTANT shall submit to the CITY an invoice for each progress
payment due. Such invoice shall:
1) Reference this Agreement;
2) Describe the services performed;
3) Show the total amount of the payment due;
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4) . Include a certification by a principal member of the Consultant's
firm that the work has been performed in accordance with the provisions of this
Agreement; and
5) For all payments include an estimate of the percentage of work
completed.
Upon submission of any such invoice, if CITY is satisfied that
CONSULTANT is making satisfactory progress toward completion of tasks in accordance with
this Agreement, CITY shall promptly approve the invoice, in which event payment shall be made
within thirty (30) days of receipt of the invoice by CITY. Such approval shall not be
unreasonably withheld. If the CITY does not approve an invoice, CITY shall notify
CONSULTANT in writing of the reasons for non-approval, within seven (7) calendar days of
receipt of the invoice, and the PROJECT shall be suspended until the parties agree that past
performance by CONSULTANT is in, or has been brought into compliance, or until this
Agreement is terminated as provided herein.
C. Any billings for extra work or additional services authorized by CITY shall
be invoiced separately to the CITY. Such invoice shall contain all of the information required
above, and in*addition shall list the hours expended and hourly rate charged for such time. Such
invoices shall be approved by CITY if the work performed is in accordance with the extra work
or additional services requested, and if CITY is satisfied that the statement of hours worked and
costs incurred is accurate. Such approval shall not be unreasonably withheld. Any dispute
between the parties concerning payment of such an invoice shall be treated as separate and apart
from the ongoing performance of the remainder of this Agreement.
7. INDEMNIFICATION AND HOLD HARMLESS
CONSULTANT hereby agrees to indemnify, defend, and hold and save harmless
CITY, its officers and employees from any and all liability, including any claim of liability and any
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and all losses or costs arising out of the negligent performance of this Agreement by
CONSULTANT, its officers or employees.
8. WORKERS COMPENSATION
CONSULTANT shall comply with all of the provisions of the Workers
Compensation Insurance and Safety Acts of the State of California, the applicable provisions of
the California Labor Code and all amendments thereto; and all similar state or federal acts or laws
applicable; and shall indemnify, defend and hold harmless CITY from and against all claims,
demands, payments, suits, actions, proceedings and judgments of every nature and description,
including attorney fees and costs presented, brought or recovered against CITY, for or on
account of any liability under any of said acts which may be incurred by reason of any work to be
.performed by CONSULTANT under this Agreement.
CONSULTANT shall obtain and furnish evidence to CITY of maintenance of
statutory workers compensation insurance and employers liability in an.amount of not less than
$100,000 bodily injury by accident, each occurrence, $100,000 bodily injury by disease, each
employee, and $250,000 bodily injury by disease, policy limit.
9. INSURANCE
In addition to the workers compensation insurance and CONSULTANT's
covenant to indemnify CITY, CONSULTANT shall obtain and furnish to CITY the following
insurance policies covering the PROJECT:
A. General Liability Insurance
A policy of general public liability insurance, including motor vehicle coverage.
Said policy shall indemnify CONSULTANT, its officers, agents and employees, while acting
within the scope of their duties, against any and all claims of arising out of or in connection with
the PROJECT, and shall provide coverage in not less than the following amount: combined single
limit bodily injury and property damage, including products/completed operations liability and
blanket contractual liability, of$1,000,000 per occurrence. If coverage is provided under a form
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which includes a designated general aggregate limit, the aggregate limit must be no less than
$1,000,000. Said policy shall name CITY, its officers, and employees as Additional Insureds, and
shall specifically provide that any other insurance coverage which may be applicable to the
PROJECT shall be deemed excess coverage and that CONSULTANT's insurance shall be
primary.
Under no circumstances shall said abovementioned insurance contain a self-insured
retention, or a "deductible" or any other similar form of limitation on the required coverage.
B. Professional Liability Insurance.
CONSULTANT shall acquire a professional liability insurance policy covering the
work performed by it hereunder. Said policy shall provide coverage for CONSULTANT's
professional liability in an amount not less than$500,000 per claim. A claims made policy shall be
acceptable.
10. CERTIFICATES OF INSURANCE, ADDITIONAL INSURED
ENDORSEMENTS
Prior to commencing performance of the work hereunder, CONSULTANT shall
furnish to CITY certificates of insurance subject to approval of the City Attorney evidencing the
foregoing insurance coverages as required by this Agreement; said certificates shall:
1. provide the name and policy number of each carrier and policy;
2. shall state that the policy is currently in force;
3. shall promise to provide that such policies will not be canceled or modified
without thirty (30) days prior written notice of CITY;
4. and shall state as follows: "The above detailed coverage is not subject to
any deductible or self-insured retention, or any other form of similar type
limitation."
CONSULTANT shall maintain the foregoing insurance coverages in force until the
work under this Agreement is fully completed and accepted by CITY.
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The requirement for carrying the foregoing insurance coverages shall not derogate
from the provisions for indemnification of CITY by CONSULTANT under the Agreement.
CITY or its representative shall at all times have the right to demand the original or a copy of all
said policies of insurance. CONSULTANT shall pay, in a prompt and timely manner, the
premiums on all insurance hereinabove required.
A separate copy of the additional insured endorsement to each of
CONSULTANT's insurance policies, naming the CITY, its officers and employees as Additional
Insureds shall be provided to the City Attorney for approval prior to any payment hereunder.
11. INDEPENDENT CONTRACTOR
CONSULTANT is, and shall be, acting at all times in the performance of this
Agreement as an independent contractor. CONSULTANT shall secure at its expense, and be
responsible for any and all payment of all taxes, social security, state disability insurance
compensation, unemployment compensation and other payroll deductions for CONSULTANT
and its officers, agents and employees and all business licenses, if any, in connection with the
services to be performed hereunder.
12. TERMINATION OF AGREEMENT
All work required hereunder shall be performed in a good and workmanlike
manner. CITY may terminate CONSULTANT's services hereunder at any time with or without
cause, and whether or not PROJECT is fully complete. Any termination of this Agreement by
CITY shall be made in writing, notice of which shall be delivered to CONSULTANT as provided
herein.
13. ASSIGNMENT AND SUBCONTRACTING
This Agreement is a personal service contract and the supervisory work hereunder
shall not be delegated by CONSULTANT to any other person or entity without the consent of
CITY.
6
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14. CITY EMPLOYEES AND OFFICIALS
CONSULTANT shall employ no CITY official nor any regular CITY employee in
the work performed pursuant to this Agreement. No officer or employee of CITY shall have any
financial interest in this Agreement in violation of the applicable provisions of the California
Government Code.
15. NOTICES
Any notice or special instructions required to be given in writing under this
Agreement shall be given either by personal delivery to CONSULTANT's agent (as designated in
Section 1 hereinabove) or to the City Attorney of as the situation shall warrant, or by enclosing
the same in a sealed envelope, postage prepaid, and depositing the same in the United States
Postal Service, addressed as follows:
TO CITY: TO CONSULTANT:
City of Huntington Beach Mark Merriman
2000 Main Street Tim Keithahn
Huntington Beach;CA 92648 c/o Arthur Andersen, LLP
Attn: City Attorney 18500 Von Karmfin Avenue, Ste 1100
Irvine, CA 92715-0527
16. IMNIIGRATION
CONSULTANT shall be responsible for full compliance with the immigration and
naturalization laws of the United States and shall, in particular, comply with the provisions of the
United States Code regarding employment verification.
17. LEGAL SERVICES SUBCONTRACTING PROHIBITED
CONSULTANT and CITY agree that CITY is not liable for payment of any
subcontractor work involving legal services, and that such legal services are expressly outside the
scope of services contemplated hereunder. CONSULTANT understands that pursuant to
Huntington Beach City Charter Section 309, the City Attorney is the exclusive legal counsel for
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CITY; and CITY shall not be liable for payment of any legal services expenses incurred by
CONSULTANT.
18. ATTORNEY'S FEES
In the event suit is brought by either party to enforce the terms and provisions of
this agreement or to secure the performance hereof, each party shall bear its own attorney's fees.
19. ENTIRETY
The foregoing sets forth the entire Agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by and through their authorized offices the day, month and year first above written.
CONSULTANT:. CITY OF HUNTINGTON BEACH,
a municipal corporation of the
State of California
By:
Mayor
(print name)
Its: (circle one)Chairman/President/Vice President ATTEST:
By: City Clerk
APPROVED AS TO FORM:
(print name)
Its: (circle one)Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer City Attorney
REVIEWED AND APPROVED: INITIATED AND APPROVED:
City Administrator City Attorney
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Exhibit A
CITY OF HUNTINGTON BEACH
RAINBOW.FRANCHISE AGREEMENT
TRANSACTION APPROVAL DUE DILIGENCE WORK PROGRAM
1. Obtain and read the following:
A: Franchise agreements entered into by Rainbow with Huntington Beach and
Fountain Valley
B. Unaudited Financial statements for Rainbow for last three years
C. Projections for Rainbow, including assumptions
D. Rainbow's ESOP agreement
E. ESOP loan agreement with Chase Manhattan Bank
2. Perform the following regarding Rainbow's projections:
A. Compare projected revenues to actual revenues included in audited financial
statements and pricing provisions in the franchise agreement(s).
B. Read assumptions for reasonableness and obtain support, as deemed appropriate.
Discuss assumptions with Rainbow management.
C. Ensure terms of new financing have been properly considered.
3. Perform the following regarding the franchise agreement for the city of Huntington Beach:
:A. Assess impact of projected income (reviewed in 2 above) on provisions of
franchise agreement, particularly rate setting provisions and levels of service,
B. Determine other potential areas of impact from the transaction, including financial
withdrawal of franchisee.
4. Perform background checks on Rainbow and new officers of Rainbow. The background
investigation will consist of on-line data base research * and will include the following:
A. Verification of Rainbow's existence as a legal entity
B. Confirmation of the identity and positions of key members of management
C. Review of local, national and international sources of business information that
include newspapers, trade journals and business magazines.
D. Review of governmental1public filings (criminal records, liens,judgements,
lawsuits, bankruptcies, SEC violations, etc.)
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I
5. Draft report to City of Huntington Beach, including:
A. Procedures performed
B. Matters arising from procedures performed
C. Address specific questions in the City Attorney's letter dated September 10, 1996.
6. Review draft report with City of Huntington Beach prior to finalization.
7. Assist the City in negotiating any amendments to the Franchise Agreement necessary to
address the areas of impact indentified in 3 above.
------------------------------------------------------------------------------------------------------------------
* There are practical limitations on the effectiveness of on-line data base searches. These include:
• Public records such as lawsuits, cases,judgements, liens, UCC filings, etc. are
available on-line for only a limited number of states and jurisdictions
• Criminal records are not available on-line on commercial databases with the
exception of California
• Historical archives for certain periodicals and public records are limited. Where
such data limitations significantly impact the comprehensives of a particular search,
we will notify the City Attorney on a timely basis so that extended procedures can
be timely considered.
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PROFESSIONAL SERVICES CONTRACT BETWEEN
THE CITY OF HUNTINGTON BEACH AND
ARTHUR ANDERSEN, L.L.P.,
FOR CONSULTING SERVICES REGARDING THE
TRANSFER OF CITY'S FRANCHISED SOLID WASTE OPERATOR
THROUGH EMPLOYEE STOCK OWNERSHIP PLAN
Table of Contents
SECTION........................................................................................................... PAGE
1 Work Statement ................................................................................................... 1
2 City Staff Assistance............................................................................................. 2
3 Time of Performance............................................................................................ 2
4 Compensation....................................................................................................... 2
5 Extra Work .......................................................................................................... 2
6 Method of Payment.............................................................................................. 2
7 Indemnification and Hold Harmless.............................:......................................... 3
8 Workers' Compensation........................................................................................ 4
9 Insurance.............................................................................................................. 4
10 Certificates of Insurance ...................................................................................... 5
11 Independent Contractor....................................................................................... 6
12 Termination of Agreement................................................................................... 6
13 Assignment and Subcontracting........................................................................... 7
14 City Employees and Officials ............................................................................... 7
15 Notices................................................................................................................ 7
16 Immigration......................................................................................................... 7
17 Legal Services Subcontracting Prohibited ......................................I..................... 7
19 Attorney Fees...................................................................................................... 8
20 Entirety ............................................................................................................... 8
REIlVIBURSEMENT AGREEMENT
This Reimbursement Agreement 'Agreement')is entered into as of
. 1996,by and between Rainbow Disposal Company,Inc., a
California corporation, and Rainbow Transfer and Recycling,Inc.,a California
corporation (jointly referred to as"Rainbow'), and The City of Huntington Beach, a
municipal corporation and charter city of the State of California("City'5,with reference
to the following facts:
RECITALS
A. In 1990, the City and Rainbow entered into a Franchise
Agreement to provide for collection and disposal services of solid waste (the
"Franchise"). Subsequently,in May 1994, a supplement to the Franchise was
entered into to provide for operation of a Materials Recovery Facility("N[RF").
B. On September 5, 1996,Rainbow applied to the City for consent to
an employee stock-ownership plan("ESOP")to purchase the interest in the
Franchise of Mr. Phil Hohnstein and a loan package to finance the ESOP
(hereinafter referred to as the"Transaction").
C. The City desires to engage the services of a Consultant to evaluate
the Transaction and assist in negotiating any necessary and appropriate conditions to
City consent to the Transaction(hereinafter referred to as the"Consulting Services
AGREEMENT
NOW,THEREFORE,in consideration of the covenants and agreements
contained herein and other valuable consideration,the sufficiency and receipt of which
is hereby acknowledged by the parties hereto,the parties covenant and agree as
follows:
Section 1. Consulting Services. City shall contract with
to provide the Consulting Services.
Section 2. Reimbursement of Costs for Consulting Services. City shall
be entitled to reimbursement of all costs associated with obtaining the Consulting
Services, regardless of whether the City Council approves,conditionally approves or
denies City consent to the Transaction. The reimbursement shall not exceed
$25,000.00, absent a change order.Pursuant to the terms and conditions of the
Consultant's contract with the City, City shall pay all invoices of the Consultant. The
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City will then invoice Rainbow for the amount paid to the Consultant,which amount
Rainbow shall pay the City within 30 days of receipt of the invoice.
Section 3. Change Orders. Rainbow shall pay all invoices in
connection with reasonable change orders. Under no condition shall City approve any
change orders without first consulting with and obtaining the approval of Rainbow.
Section 4. Entire Agreement. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and supersedes all
prior discussions,negotiations,undertaldngs or agreements relating thereto.
Section 5. Authority. Each signatory hereto warrants to the other
party its authority to sign on behalf of the party for whom it purports to sign.
Section 6. No Oral Modification. It is mutually understood and agreed
that no alteration or variation of this Agreement shall be valid or binding unless-made
in writing and signed by the parties hereto.
Section 7. Notices. Any notices shall be in writing and shall be sent
postage prepaid,by a nationally recognized overnight courier service or by first-class or
registered or certified mail,return receipt requested,or by facsimile, addressed as
follows:
To City: City of Huntington Beach
2000 Main Street
P.O.Box 190
Huntington Beach, CA 92648
Attn: Melanie Fallon
To Rainbow: Rainbow Disposal
P.O.Box 1026
Huntington Beach,CA 92647
Attn: Ron Shenlonan
or to such other address as City or Rainbow may from time to time designate by written
notice to the other. Notice shall be deemed given upon delivery or refusal to accept
delivery as indicated by return receipt or,in the case of a nationally recognized
overnight courier service, by such similar document, or in the case of delivery by
facsimile,upon confirmation of receipt by the stated addressee.
Section 8. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,personal
representatives, successors and assigns,including,without limitation, subsequent
owners.
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r �
Section 9. Counterparts. This Agreement may be executed in any
number of counterparts each of which shall be deemed an original and all of which
when executed shall constitute one and the same instrument.
Section 10. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of California.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the date first written above.
"CITY"
CITY OF HUNTINGTON BEACH, a
municipal corporation
Mayor
ATTEST: APPROVED AS TO FORM:
City Clerk y Attorney
REVIEWED AND APPROVED: INITIATE %DAPIPROVED:
City Administrator Director of ubh Works
SIGNATURES CONTINUED ON NEXT PAGE
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"RAINBOW
RAINBOW DISPOSAL COMPANY,INC.,
a California corporation
By:
(print name)
Its: (circle one) Chairman/PresidentlVice President
By:
(print name)
Its: (circle one)Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer
RAINBOW TRANSFER AND RECYCLING, INC.,
a California corporation
By:
(print name)
Its: (circle one) Chairman/President/Vice President
By:
(print name)
Its: (circle one) Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer
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1 ,
i�• �IE�` CITY OF HUNTINCTON BEACH
COUNCIL - ADMINISTRATOR COMMUNICATION
HVN"NGTON BEACH
TO: HONORABLE MAYOR AND CITY COUNCIL
VIA: MICHAEL T. UBERUAGA, CITY ADMINISTRATOR
FROM: RAY SILVER, ASSISTANT CITY ADMINISTRATOR 42,ej
DATE: SEPTEMBER 16,1996
SUBJECT: LATE COMMUNICATION REGARDING E-18, SOLID WASTE
FRANCHISE DUE DILIGENCE
In the Request for Council Action, listed as E-18 for the September 16,1996 Agenda, staff
indicated under Recommended Action lb that the specific firm to be recommended would
be provided to Council as a Late Communication.
On Friday, September 13, 1996,.City staff received and reviewed proposals submitted for
a Professional Services contract to perform a"due diligence" review of the Rainbow
Disposal Inc. ESOP and the Chase Manhattan loan package to fund the ESOP.
.The City received three proposals from: Arthur Andersen L.L.P., Diehl, Evans and
Associates, and Hilton, Farnkoph and Hobson, LLC. Staff recommends that Arthur
Andersen, LLP be hired to perform the needed professional services. Arthur Andersen's
proposal is within a $20,000 range as and can best meet the City's time constraints and
provides the best overall proposal.
The anticipated timetable for City review of Rainbow's request for"Consent to Transfer"
is as follows:
Timeline
Task Item Date
1. City Council approval to hire 9/16/96
2. Firm notification/ start work 9/17/96
3. Rainbow to deliver required data 9/17/96
4. Arthur Andersen performs studies 9/30/96
5. Staff review of draft report 10/02/96
6. Report revisions if applicable) 10/03/96
7. Final report complete and delivered to 10/04/96
Council with Staff recommendation(s)
/ �1
a
8. Council Action 10/07/96
Staff is optimistically and tentatively scheduling consideration of Rainbow's request for
"Consent to Transfer" for the October 7, 1996 City Council meeting. However, the
review may take longer than the proposed two week delivery should additional
information be required of Rainbow. Specifically, Rainbow has indicated that it can only
provide an unaudited financial statement. The time frame for the studies were based on
receiving audited financial information. Additional time may be needed to achieve a
reasonable assurance of the accuracy of the provided information. Further, should the
consultant make any recommendations for adjustments in the Rainbow Franchise, time
needed to review those recommendations may delay this item coming before the City
Council.
Therefore, staff recommends that the City Council move to:
1. "Award a Professional Services Contract to Arthur Andersen, LLP to perform a"due
diligence" review of the ESOP and to review the Chase Manhattan loan package to
finance the ESOP",
2. "Approve the attached Professional Services Contract, in the substantial form
presented, with Arthur Andersen, LLP and authorize the Mayor and City Clerk to execute
the final contract in the amount of$20,000 for the base contract and no more than $5,000
available as a contingency fund for work order changes",
3. "Approve the Reimbursement Agreement with Rainbow Disposal Company Inc., to
pay for the cost of the Professional Services Contract of$25,000 and authorize the Mayor
and City Clerk to execute the contract.
ATTACHMENTS:
1) Revised Professional Services Contract with Arthur Andersen, L.L.P.
2) City Attorney Letter to Stan Tkaczyk of September 11, 1996
3) Arthur Andersen L.L.P. Proposal of September 13, 1996
OFFICE OF
.�-e� CITY ATTORNEY
�QurTr� P.O. Box 190
2000 Main Street Telephone
Gail Hutton Huntington Beach, California 92648 (714) 536-5555
City Attorney Fax (714) 374-1590
September 11, 1996
Stan Tkaczyk
Chief Operating Officer
Rainbow Disposal Company
P.O. Box 1026
Huntington Beach, CA 92647
Re: Transfer of Ownership of Rainbow through ESOP
Dear Stan:
On September 5, 1996, Rainbow Disposal Co., Inc., requested the City of Huntington Beach to
consent to the change of control as per Section 19 of the Rainbow Franchise Agreement. On
September 16, 1996, the City Council will be considering a Request for Council Action to award
a contract for consulting services to review and evaluate the proposed employee stock-ownership
plan("ESOP")to purchase Mr. Phil Hohnstein's interest in Rainbow disposal, and the associated
loan package from Chase Manhattan Bank that will finance the ESOP (hereinafter referred to as
the"Transaction"). The City has requested proposals from several potential consulting firms and
will receive the responses by Friday, September 13, 1996. Based upon the responses, Staff will
make a recommendation as to the preferred consultant.
It is Stars position that Rainbow should be responsible for the costs associated with the City
evaluation of the Transaction, including the cost of the consultant. Enclosed please find a
reimbursement agreement requiring Rainbow to reimburse the City for the cost for the consultant.
Please review the attached agreement and provide me with your comments. Given Rainbow's
short time frame to complete this process, it is important that we receive the fully executed
reimbursement agreement back from Rainbow by no later than the morning of September 16,
1996. Consequently, I would appreciate receiving your comments as quickly as possible.
In order to further expedite the consultant's job, please provide to the chosen consultant, by
September 17, 1996, the following documents and information:
1) ESOP Trust Agreement
2) Bank Loan Agreement(s)
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Stan Tkaczyk
September 11, 1996
Page 2
3) Pre-ESOP Audited Financial Statements(three years)
4) A post-ESOP pro forma financial projection indicating anticipated revenues,
expenses, net income, cash flow, sources and uses of funds, anticipated capital
expenditures, and depreciation.
5) A narrative describing any changes Rainbow intends to make to the operation of
the solid waste collection, recycling and disposal system that do not require a
Franchise amendment.
6) A narrative stating whether an adverse finding has been made or an adverse final
action been taken by any court or administrative body with respect to any officer,
director, person, firm or corporation that will own under the ESOP more than 5%
of Rainbow's voting stock in a civil, criminal or administrative proceeding, brought
under the provisions of any law or regulation related to the following:
(i) any felony;
(ii) revocation, suspension or involuntary transfer of any authorization to
,provide solid waste services;
(iii) antitrust or unfair competition;
(iv) fraudulent statements to another government unit; or
(v) employment discrimination.
7) A narrative describing what effect the proposed ESOP and financing package will
have on the rate structure and operation of the Franchise, and how such
indebtedness incurred in connection with the ESOP will be discharged.
Specifically, can Rainbow assure the City that no aspect of the proposed
Transaction will form the basis of a rate adjustment?
8) A narrative describing any amendments to the existing Franchise Rainbow intends
to request at either the time of the Transaction or during the subsequent five years.
9) Evidence that Rainbow can provide insurance policies in the amounts specified in
the Franchise.
10) Resume of prior business history of the post-ESOP principals of Rainbow,
including experience in the solid waste field. A statement identifying, by place and
date, other solid waste or franchises awarded to the principals or their parents or
subsidiaries.
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Stan Tkaczyk
September 11, 1996
Page 3
Please understand that this is not an exhaustive list. The consultant may request further
documents to complete his task.
Please don't hesitate to call me if you should have any other questions.
Sincerely,
Gail Hutton
City Attorney
Enclosures:' (1) Reimbursement Agreement
c: Ray Silver, Assistant City Administrator
Les Jones, Director of Public Works
Regina Shanney-Saborsky, Mitchell, Silberberg&Knupp
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REIMBURSEMENT AGREEMENT .
This Reimbursement Agreement C'Agreement")is entered into as of
. 1996,by and between Rainbow Disposal Company,Inc., a
California corporation, and Rainbow Transfer and Recycling,Inc.,a California
corporation 6ointly referred to as"Rainbow"), and The City of Huntington Beach, a
municipal corporation and charter city of the State of California("City'),with reference
to the following facts:
RECITALS
A. In 1990, the City and Rainbow entered into a Franchise
Agreement to provide for collection and disposal services of solid waste (the
"Franchise"). Subsequently,in May 1994, a supplement to the Franchise was
entered into to provide for operation of a Materials Recovery Facility(%EU').
B. On September 5, 1996,Rainbow applied to the City-for consent to
an employee stock-ownership plan("ESOP")to purchase the interest in the
Franchise of Mr.Phil Iiohnstein and a loan package to finance the ESOP
(hereinafter referred to as the"Transaction").
C. The City desires to engage the services of a Consultant to evaluate
the Transaction and assist in negotiating any necessary and appropriate conditions to
City consent to the Transaction(hereinafter referred to as the"Consulting Services").
AGREEMENT
NOW,THEREFORE,in consideration of the covenants and agreements
contained herein and other valuable consideration,the sufficiency and receipt of which
is hereby acknowledged by the parties hereto,the parties covenant and agree as
follows:
Section 1. Consulting Services. City shall contract with -
to provide the Consulting Services.
Section 2. Reimbursement of Costs for Consulting Services. City shall
be entitled to reimbursement of all costs associated with obtaining the Consulting
Services,regardless of whether the City Council approves,conditionally approves or
denies City consent to the Transaction. The reimbursement shall not exceed
$25,000.00, absent a change order.Pursuant to the terms and conditions of the
Consultant's contract with the City, City shall pay all invoices of the Consultant. The
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City will then invoice Rainbow for the amount paid to the Consultant,which amount
Rainbow shall pay the City within 30 days of receipt of the invoice.
Section 3. Change Orders. Rainbow shall pay all invoices in
connection with reasonable change orders.Under no condition shall City approve any
change orders without first consulting with and obtaining the approval of Rainbow.
Section 4. Entire Agreement. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and supersedes all
prior discussions,negotiations,undertalangs or agreements relating thereto.
Section 5. Authori . Each signatory hereto warrants to the other
party its authority to sign on behalf of the party for whom it purports to sign.
Section 6. No Oral Modification. It is mutually understood and agreed
that no alteration or variation of this Agreement shall be valid or binding unless made
in writing and signed by the parties hereto.
Section 7. No_ �ce . Any notices shall be in writing and shall be sent
postage prepaid,by a nationally recognized overnight courier service or by first-class or
registered or certified mail,return receipt requested,or by facsimile,addressed as
follows:
To City: City of Huntington Beach
2000 Main Street
P.O.Box 190
Huntington Beach,CA 92648
Attn: Melanie Fallon
To Rainbow-. Rainbow Disposal
P.O.Box 1026
Huntington Beach,CA 92647
Attn: Ron Shenlanan
or to such other address as City or Rainbow may from time to time designate by written
notice to the other. Notice shall be deemed given upon delivery or refusal to accept
delivery as indicated by return receipt or,in the case of a nationally recognized
overnight courier service,by such similar document, or in the case of delivery by
facsimile,upon confirmation of receipt by the stated addressee.
Section 8. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,personal
representatives, successors and assigns,including,without limitation, subsequent
owners.
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Section 9. Counterparts. This Agreement may be executed in any
number of counterparts each of which shall be deemed an original and all of which
when executed shall constitute one and the same instrument.
Section 10. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of California
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the date first written above.
"CITY"
CITY OF HUNTINGTON BEACH, a
municipal corporation
Mayor
ATTEST: APPROVED AS TO FORM:-
City Clerk 14C Attorney
REVIEWED AND APPROVED: INITIATED AND APPROVED:
City Administrator Director of Community Development
SIGNATURES CONTINUED ON NEXT PAGE
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"R.AINB0W
RAINBOW DISPOSAL COMPANY,INC.,
a California corporation
By:
(print name)
Its: (circle one)Chairman/President/Vice President
By:
(print name)
Its: (circle one)Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer
RAINBOW TRANSFER AND RECYCLING,INC.,
a California corporation
By:
(print name)
Its: (circle one)Chairman/President/Vice President
By:
(print name)
Its: (circle one)Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer
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` ARTHUR
ANDERSEN
September 13, 1996 Arthur Andersen LLP
Office of City Attorney Suite 1100
City of Huntington Beach 18500 Von Karman Avenue
Gail Hutton, Es . Irvine CA 92715-0527
�l 714 757 3100
City Attorney
P.O. Box 190
2000 Main Street
Huntington Beach, California 92648
Dear Ms. Hutton:
We are pleased to present our proposal to provide due diligence services to the City of
Huntington Beach (the City) related to a transaction involving the Employee Stock Ownership
Plan (ESOP) of Rainbow Disposal Company, Inc: (Rainbow) and.Rainbow's majority
shareholder.
As you consider our proposal, there are several compelling reasons why Arthur Andersen is
best qualified to provide due diligence procedures to the City. Specifically, we offer you the
following:
CONSULTING EXPERTISE
For the sixth consecutive year, Arthur Andersen has come out on top of Hudson Sawyer's Big
Six evaluations, based on an annual survey of Fortune 1000 financial executives. In addition to
overall highest honors, we received top rankings in the following categories: tax and audit
expertise, responsiveness, strategic thinking, industry expertise, MIS expertise and quality of
business advice for audit, tax, consulting and other services. This evaluation is consistent with
that of college professors and other independent evaluators.
More importantly to you, your engagement team lead by Mark Merriman and Tim Keithahn
have significant experience in evaluating proposed transactions such as outlined above. In
addition, Mark and Tim have at their disposal numerous other specialists who can provide
additional support to this engagement as deemed necessary. This breadth of experience
includes familiarity with the requirements and attributes of ESOP arrangements. We have
attached resumes of your engagement team to this proposal for your review.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO.SC
Page 2
September 13, 1996
INDUSTRY EXPERTISE
In addition to extensive consulting experience, Arthur Andersen also has significant experience
working with disposal service companies. Below represents a partial listing of our firmwide
clients in the disposal industry:
Allied Waste Systems National Sea Corporation
All-Waste Republic Waste
American Ecology TransAmerican Waste
Browning-Ferris Industries Upper Rock Island Landfill
Chemical Waste Management Waste Management, Inc.
Consolidated Waste Management Waste Reduction Systems
National Scavenger
ABOUT ARTHUR ANDERSEN
Though accounting firms may appear at first glance to be very similar, the fact is that Arthur
Andersen is significantly different from other firms in structure, governance and culture.
Those differences can be pivotal in terms of the quality of service the City receives. From the
early days of our firm, we have evolved into a unique organizational culture that today unites
more than 72,000 people of the Arthur Andersen Worldwide Organization.
The Client Comes First
We train our people to put the client at the center of all they do -- not just eight hours a day but
168 hours a week-- nights, weekends or whenever a client needs our help. Nothing is more
important to.us.
Think Straight/Talk Straight
This maxim was passed to our founder from his mother and from him to the generations of
Arthur Andersen people who have followed. Reduced to the basics, it simply means that we
attempt to think every issue through and communicate our views candidly. Our clients always
know where we stand and why.
A Unique Worldwide Organization
No other accounting firm in the world is structured like Arthur Andersen. And, no other firm
can deliver the consistency of service we provide to multinational clients, or effectively control
a worldwide engagement from the client company's headquarters location. Unlike federations
and groups of affiliates, we operate as a single worldwide organization. Our structure, along
with our culture, enables us to serve our clients with a level of quality and consistency that is
superior to our competitors. As a client of our Southern California practice, you will be a client
of every office and have access to all of the resources of Arthur Andersen.
A.RTHUR
ANDERSEN
ARTHUR ANDERSEN&CO.SC
h
Page 3
September 13, 1996
SCOPE OF WORK
As outlined in your letter dated September 10, 1996, it is our understanding that Rainbow has
requested the Citv consent to a proposed transaction whereby Rainbow's ESOP would
purchase the interest of its majority shareholder, Mr. Phil Hohnstein, for the benefit of
Rainbow's employees. Such transaction would be financed through a loan from Chase
Manhattan Bank. Under the City's existing franchise agreement with Rainbow, the City must .
approve this transaction before it can be consummated.
it is our understanding that the issues itemized below are to assist the City Attorney of
Huntington Beach (the City Attorney) in the evaluation of the financial impact of the above
transaction. Specifically you have asked us to evaluate:
a) What impact will the financing package of the ESOP, particularly the principal and
interest payments, have on Rainbow solid waste rates,
b) Can Rainbow continue to operate within the current rate structure while meeting
the new principal and interest obligations of the ESOP financing and
c) Are the principals controlling Rainbow under the ESOP qualified to operate
Rainbow.
To address the above issues, we have summarized the procedures that we would perform in
Exhibit A attached to this letter. The procedures described in Exhibit A are based on our
understanding of the above transaction and could be modified at the request of the City
Attorney. Although such procedures have not yet been agreed to by the City Attorney, upon
acceptance of this proposal, it will be expressly understood that these procedures are sufficient
for purposes of the City Attorney.
Upon completion of or work, we will issue a report that will set forth the procedures
performed and our findings. Our report will acknowledge that (1) the sufficiency of those
procedures is the sole responsibility of the City Attorney and that we make no representation
regarding the sufficiency of those procedures for your purposes, (2) the procedures do not
constitute an audit (or examination in accordance with professional standards) and had we
been engaged to perform additional procedures or an audit (or examination) in accordance
with professional standards, matters might have come to our attention that would have been
reported and (3) it is restricted to the parties named therein and may not be used or referred to
for any other purpose.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO.SC
a
Page 4
September 13, 1996
In addition, our report will also state that our procedures and findings do not constitute a legal
determination of the City's compliance with specified requirements. Our report will further
state that we make no representations regarding questions of legal interpretation or provide
any assurance as to any matters relating to Rainbow's solvency, adequacy of capital or ability
to pay its debts.
Should circumstances arise during the course of our work that prevent us from completing the
agreed-upon procedures, we will so notify you so that alternative arrangements can be made.
We are not presently aware of such circumstances, and any that do arise during the course of
our work will be discussed with you so that you will have an opportunity to consider these
matters including whether you wish us to perform additional procedures in response to the
identified conditions.
In connection with our engagement, we will require a representation letter from the Citv
Attorney concerning matters relating to the completeness and accuracy of the information we
review. Because of the importance of the written representation letter to the discharge of our
responsibilities, the City agrees to release Arthur Andersen, LLP (Andersen) and its personnel
from any liability and costs relating to our services under this letter attributable to any
misrepresentations by the City or management of Rainbow. Andersen's maximum liability to
the City for any reason relating to the services under this letter shall be limited to the fees paid
to Andersen for the services or work products giving rise to liability. In addition, the City will
indemnify and hold harmless Andersen and its personnel from any claims, liabilities, costs and
expenses relating to our services under this letter, except to the extent finally determined to
have resulted from the gross negligence or willful misconduct of Andersen.
VALUE FOR FEES
We estimate that our fees will be$17,000 if the work is to be completed within two weeks from
the date the contract is awarded and $14,500 if the work is to be completed four weeks from the
date the contract is awarded.
This estimate assumes we will receive appropriate assistance from your staff and that of
Rainbow in providing information, responding to inquiries and other matters. Additionally,
such fee contemplates performing'the procedures as outlined in Exhibit A to this proposal. For
example, the absence of projections thoroughly prepared and independently reviewed would
impact both the timing and cost of our work. Additional procedures which are deemed
necessary by the City Attorney and which we agree to perform are subject to a separate
arrangement.
ARTHUR
ANDERSEN
ARTHUR ANDERSEN&CO.SC
Page 5
September 13, 1996
We look forward to working with you and appreciate the opportunity to submit our
qualifications to you. If you have any questions or need additional information, please don't
hesitate to call Mark Merriman at (714) 757-3158 or Tim Keithahn at(714) 757-3105.
Very truly yours,
ARTHUR ANDERSEN, LLP
Exhibit A
City of Huntington Beach
Rainbow Franchise Agreement
Transaction Approval Due Diligence Work Program
1. Obtain and read.the following:
A. Franchise agreements entered into by Rainbow with Huntington Beach
and Fountain Valley
B. Audited financial statements for Rainbow for last three years
C. Projections for Rainbow, including assumptions
D. Rainbow's ESOP agreement
E. ESOP loan agreement with Chase Manhattan Bank
2. Perform the following regarding Rainbow's projections:
A. Compare projected revenues to actual revenues included in audited
financial statements and pricing provisions in the franchise agreement(s).
B. Read assumptions for reasonableness and obtain support, as deemed
appropriate. Discuss assumptions with Rainbow management.
C. Ensure terms of new financing have been properly considered.
3. Perform the following regarding the franchise agreement for the City of
Huntington Beach:
A. Assess impact of projected income (reviewed in 2 above) on provisions of
franchise agreement, particularly rate setting provisions.
B. Determine other potential areas of impact from the transaction, including
financial wherewithal of franchisee.
4. Perform background checks on Rainbow and new officers of Rainbow. The
background investigation will consist of on-line data base research *and will
include the following:
A. Verification of Rainbow's existence as a legal entity
B. Confirmation of the identity and positions of key members of
management
C. Review of local, national and international sources of business
information that include newspapers, trade journals and business
magazines
D. Review of governmental/public filings (criminal records, liens,
judgements, lawsuits, bankruptcies, SEC violations, etc.)
h
5. Draft report to City of Huntington Beach, including:
A. Procedures performed
B. Matters arising from procedures performed
C. Address specific questions in the City's Attorney's letter dated
September 10, 1996.
6. Review draft report with City of Huntington Beach prior to finalization.
---------------------------------------------------------
There are practical limitations on the effectiveness of on-line data base searches. These
include:
• Public records such as lawsuits, cases,judgements, liens, UCC filings, etc.
are available on-line for only a limited number of states and jurisdictions
• Criminal records are not available on-line on commercial databases with the
exception of California
• Historical archives for certain periodicals and public records are limited.
Where such data limitations significantly impact the comprehensiveness of a
particular search, we will notify the City Attorney on a timely basis so that
extended procedures can be timely considered.
Exhibit B
ENGAGEMENT TEAM
MARK S.:MERRIMAN Office: 714/757-3158
Audit and Business Advisory Partner Fax: 714/261-1362
Orange County Home: 714/888-2877
Mark is an audit partner in our Orange County office, specializing in serving our distribution
real estate and technology clients. He recently transferred from our San Jose office, where he
served for four years.
RELEVANT EXPERIENCE
• More than 16 years of experience serving clients in a wide variety of industries, ranging
from small, closely held businesses to publicly held entities.in our California and Hawaii
practices.
• Extensive experience serving public and private companies in handling public offerings,
mergers and acquisitions. This experience includes a wide variety of contractual and
negotiated matters.
• Instructor for various training schools.
REPRESENTATIVE CLIENTS
Orchard Supply Hardware
Hilton Hotels
Dole Foods, Inc.
Calpine Corporation
The Gibson Speno Companies
AFFILIATIONS
Certified Public Accountant, California and Hawaii
Member, American Institute of Certified Public Accountants
Member, International Association of Hospitality Accountants
EDUCATION
Mark holds an M.B.A. from the Anderson School of Management at the University of
California at Los Angeles and a B.B.A. from the University of Notre Dame.
TIM J. KEITHAHN Office: 714/757-3105
Audit and Business.Advisory Manager Fax: 714/261-1362
Orange County Home: 714/962-6961
Tim is an audit manager in our Orange County office and a member of our Enterprise Group,
as well as our High Technology and Manufacturing industry teams.
RELEVANT EXPERIENCE
• More than five years of accounting experience serving clients in various industries,
including manufacturing, healthcare, wholesale and retail distribution, independent power
production and computer software, with extensive experience serving closely held
businesses.
• Significant expertise in SEC filings and reporting, including registration statements, initial
public offerings and year-end reporting.
• Recent client projects include:
Taking a company through an initial public offering.
Providing assistance to a bankruptcy trustee involving the oversight of client facilities
spanning 20 different states.
REPRESENTATIVE CLIENTS
ABT Global Pharmaceutical Corp.
Arbonne International, Inc.
Ashworth, Inc.
Econolite Control Products
Golden West Homes
McGaw, Inc.
Edison
Mission Energy, Inc.
Pacific Business Systems, Inc.
Personal Optics
Turners Outdoorsman
Ultra Wheel Company
White Cap Industries
AFFILIATIONS
Member, American Institute of Certified Public Accountants
EDUCATION
Tian holds a B.A. in business economics from the University of California at Santa
Barbara.
zl SUPPLEMENTAL AGREEMENT NO. 1 TO THE FRANCHISE
AGREEMENT BETWEEN THE CITY OF HUNTINGTON BEACH
AND THE RAINBOW DISPOSAL AND RAINBOW TRANSFER
AND RECYCLING COMPANIES
THIS SUPPLEMENTAL AGREEMENT made and entered into this day of
1994, by and between the CITY OF HUNTINGTON BEACH, a municipal
corporation of the State of California, (hereinafter referred to as "CITY"), and the RAINBOW
DISPOSAL COMPANY, INC.,joined by RAINBOW TRANSFER AND RECYCLING, INC., both
Califomia corporations, hereinafter referred to collectively as "CONTRACTOR.'
RECITALS
WHEREAS, CITY and CONTRACTOR have previously entered into a franchise
agreement dated February 5, 1990, wherein CONTRACTOR was required to provide a solid
waste processing facility; and
CITY and CONTRACTOR agreed the costs of operation of said facility would be borne
by the users of the facility; and
CITY and CONTRACTOR have met in accordance with said agreement and
established charges for the use of this service:
NOW, THEREFORE, CITY and CONTRACTOR do hereby agree as follows:
1. COMPENSATION
A. CITY shall collect and pay to CONTRACTOR, for operation of a solid waste
processing facility, the sum of Three Dollars (S3.00) per month for each Residential Unit of
Service rendered in CITY during the period commencing 30 days prior to the opening of the
facility and extending through June 30, 1995, inclusive.
B. CONTRACTOR may collect a monthly fee for the operation of said facility from
Non-Units of Service in an amount not to exceed a rate schedule approved by CITY. Said
schedule shall be shown as Exhibit A.1 of this Supplemental Agreement and shall become
effective July 1, 1994, and extend through June 30, 1995.
2. ADJUSTMENT
A. CITY and CONTRACTOR agree to meet at least 90 days prior to June 30, 1995,
to review the compensation provisions of this agreement and to make such adjustments as are
deemed necessary. Any adjustment made at this time shall be effective July 1, 1995, and
shall be based upon a consideration of the data, as specified in Section 20 of the Franchise
Agreement, obtained from the first year of facility performance. Said data shall include but not
RAINBOW.DOC6W642?J94
be limited to such factors as the actual cost of plant operation and the resale value of the
materials collected at the facility.
B. Beginning July 1, 1996, and continuing for the life of this agreement, changes in
compensation for each subsequent year shall not exceed the percentage of increase or
decrease in the Los Angeles-Anaheim-Riverside All Urban Consumer Price Index (CPI) or any
relevant successor for the Orange County area from April to April of the preceding twelve (12)
months.
C. No more than one negotiated rate change shall be made in any twelve (12)
month period. However, either CITY or CONTRACTOR may propose modification of an
established rate in order to assure the overall fairness of the rate structure.
D. Should a dispute arise over the setting of a new rate or rate schedule, CITY and
CONTRACTOR agree to continue the compensation plan then in effect until the dispute is
resolved with the provision that the settlement be retroactive to the beginning of the payment
period.
3. REPORTING REQUIREMENTS
A. CONTRACTOR shall as part of this agreement maintain such records on the
composition and disposition of materials collected at the solid waste processing facility as may
be required for reporting purposes by the California Integrated Waste Management Board.
B. CONTRACTOR also agrees to provide CITY with such statistical data on the
operation of the facility and/or the materials processed by same as CITY may deem necessary.
4. OTHER PROVISIONS
A. CONTRACTOR shall be free to establish service rates for refuse processed by
the facility but collected outside the CITY limits so long as those rates are never less than the
rates charged for this same service to service users within CITY.
B. CONTRACTOR shall become owner of all solid waste delivered-to the facility
and shall have the exclusive right to market all recyclable materials reclaimed therein.
C. CONTRACTOR shall at all times be solely liable for any and all expenses
incurred pursuant to the marketing of said materials.
D. CONTRACTOR warranties the ability of the facility to meet the diversion quota
established for same in the CITY's Integrated Waste Management Plan in conjunction with
other diversionary and reduction programs. Should CONTRACTOR fail to meet the quota due
to any fault or failure of CONTRACTOR then CONTRACTOR shall be liable to pay any fine or
penalty levied against CITY by the California Integrated Waste Management Board for failure
to perform.
RAIN BOW.DOCBN04/2?l94
5. REAFFIRMATION
Except as otherwise specifically modified herein, all other items and conditions of the
existing franchise agreement to which this Supplement No. 1 is appended shall remain in full
force and effect
IN WITNESS WHEREOF, the parties hereto have executed this amendment as of the
date first above written.
RAINBOW I POS COMPANY, INC. CITY OF HUNTINGTON BEACH, A
municipal corporation of the State of
California
By*- �� s1�j
print name
ITS: (circle one)ZChaiirn/PresidentA6e Presiders Mayor
By: APPROVED AS TO FORM:
print name
ITS: (circle one)Secreta /Chief Financial c2�
Officer/Ass Secretary-Treasurer , gityAttorney
q G
INITIATE�AND APPROVED:
RAINBWTR. FER AND RECYCLING,INC.
�'� Director of Public Works
By:
Ice �uo�
print name
ITS: (circle one)Chair an/PresidenViice resident
By:
print name
1TS: (circle onel Secretary/Chief Financial
Officer/Asst ecretary-Treasu
ATT3T: d
City Clerk
R EW AND AP'PffOV
City Administra or
RAINBOW.DOC6/k1D4/12/94 .
" r
EXHIBIT A. 1 , SUPPLEMENTAL AGREEMENT NO. 1
SOLID WASTE PROCESSING FACILITY
COMMERCIAL SERVICE RATE SCHEDULE
Size of Number of Monthly Service
Container Pick-ups per Week Rate
--------- ----------------- ---------------
1 Cu. Yard Dumpster 1 $ 3.33
2 6. 67
3 10. 00
4 13. 33
5 16. 67
6 20.00
2 Cu. Yard Dumpster 1 $ 6. 67
2 13.33
3 20. 00
4 26. 67
5 33. 30
6 40.00
3 Cu. Yard Dumpster 1 $10.00
• 2 20. 00
3 30. 00
4 40. 00
5 50. 00
6 60. 00
ATTACHMENT 4
PROFESSIONAL SERVICES CONTRACT BETWEEN
THE CITY OF HUNTINGTON BEACH AND
FOR CONSULTING SERVICES REGARDING THE
TRANSFER OF CITY'S FRANCHISED SOLID WASTE OPERATOR
THROUGH EMPLOYEE STOCK OWNERSHIP PLAN
Table of Contents
SECTION........................................................................................................... PAGE
IWork Statement .................................................................................................... 1
2 City Staff Assistance............................................................................................. 2
3 Time of Performance............................................................................................ 2
4 Compensation....................................................................................................... 2
5 Extra Work .......................................................................................................... 2
6 Method of Payment .............................................................................................. 2
7 Disposition of Plans, Estimates and Other Documents........................................... 3
8 Indemnification and Hold Harmless....................................................................... 4
9 Workers' Compensation........................................................................................ 4
10 Insurance.............................................................................................................. 5
11 Certificates of Insurance ...................................................................................... 6
12 Independent Contractor....................................................................................... 6
13 Termination of Agreement................................................................................... 7
14 Assignment and Subcontracting........................................................................... 7
15 Copyrights/Patents............................................................................................... 7
16 City Employees and Officials ............................................................................... 7
17 Notices................................................................................................................ 7
18 Immigration......................................................................................................... 8
Z.
19 Legal Services Subcontracting Prohibited ............................................................ 8
20 Attorney Fees...................................................................................I.................. 8
21 Entirety ............................................................................................................... 9
e
PROFESSIONAL SERVICES CONTRACT BETWEEN
THE CITY OF HUNTINGTON BEACH AND
FOR CONSULTING SERVICES REGARDING THE
TRANSFER OF CITY'S FRANCHISED SOLID WASTE OPERATOR
THROUGH AN EMPLOYEE STOCK OWNERSHIP PLAN
THIS AGREEMENT, made and entered into this day of
1996, by and between the City of Huntington Beach, a municipal
corporation of the State of California, hereinafter referred to as "CITY", and
, a California corporation, hereinafter referred to as
"CONSULTANT."
WHEREAS, CITY desires to engage the services of a consultant for services regarding
transfer of City's franchised solid waste operator through an Employee Stock Ownership Plan;
and
Pursuant to documentation on file in the office of the City Clerk, the provisions of HBMC
Chapter 3.03 relating to procurement of professional service contracts has been complied with-,
and
NOW, THEREFORE, it is agreed by CITY and CONSULTANT as follows:
1. WORK STATEMENT
CONSULTANT shall provide consulting services to evaluate on behalf of the City
the transfer of effective control of City's franchised solid waste operator through an Employee
Stock Ownership Plan and an associated financing package.. Said services are more specifically
described in Exhibit A, attached hereto, and shall hereinafter be referred to as "PROJECT."
CONSULTANT hereby designates , who shall represent it and be
its sole contact and agent in all consultations with CITY during the performance of this
Agreement.
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2. CITY STAFF ASSISTANCE
CITY shall assign a staff coordinator to work directly with CONSULTANT in the
performance of this Agreement.
3. TIME OF PERFORMANCE
Time is of the essence of this Agreement. The services of the CONSULTANT are
to commence as soon as practicable after the execution of this Agreement.
4. COMPENSATION
In consideration of the performance of the services described herein, CITY agrees
to pay CONSULTANT a fee of$ per hour, plus expenses, not to exceed
Thousand Dollars ($ .00).
5. EXTRA WORK
In the event CITY requires additional services not included in the PROJECT,
CONSULTANT will undertake such work after receiving written authorization from CITY.
Additional compensation for such extra work shall be allowed only if the prior written approval of
CITY is obtained.
6. METHOD OF PAYMENT
A. Delivery*of work product: A copy of every technical memo and report
prepared by CONSULTANT shall be submitted to the CITY to demonstrate progress toward
completion of tasks. In the event CITY rejects or has comments on any such product, CITY shall
identify specific requirements for satisfactory completion. Any such product which has not been
formally accepted or rejected by CITY shall be deemed accepted.
B. The CONSULTANT shall submit to the CITY an invoice for each progress
payment due. Such invoice shall:
1) Reference this Agreement;
2) Describe the services performed-,
3) Show the total amount of the payment due,
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t
4) Include a certification by a principal member of the
CONSULTANT's firm that the work has been performed in accordance with the
provisions of this Agreement; and
5) For all payments include an estimate of the percentage of work
completed.
Upon submission of any such invoice, if CITY is satisfied that
CONSULTANT is making satisfactory progress toward completion of tasks in accordance with
this Agreement, CITY shall promptly approve the invoice, in which event payment shall be made
within thirty (30) days of receipt of the invoice by CITY. Such approval shall not be
unreasonably withheld. If the CITY does not approve an invoice, CITY shall notify
CONSULTANT in writing of the reasons for non-approval, within seven (7) calendar days of
receipt of the invoice, and the PROJECT shall be suspended until the parties agree that past
performance by CONSULTANT is in, or has been brought into compliance, or until this
Agreement is terminated as provided herein.
C. Any billings for extra work or additional services authorized by CITY shall
be invoiced separately to the CITY. Such invoice shall contain all of the information required
above, and in addition shall list the hours expended and hourly rate charged for such time. Such
invoices shall be approved by CITY if the work performed is in accordance with the extra work
or additional services requested, and if CITY is satisfied that the statement of hours worked and
costs incurred is accurate. Such approval shall not be unreasonably withheld. Any dispute
between the parties concerning payment of such an invoice shall be treated as separate and apart
from the ongoing performance of the remainder of this Agreement.
7. DISPOSITION OF PLANS, ESTIMATES AND OTHER DOCUMENTS
. CONSULTANT agrees that all materials prepared hereunder, including all original
drawings, designs, reports, both field and office notices, calculations, maps and other documents,
shall be turned over to CITY upon termination of this Agreement or upon PROJECT completion,
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i
whichever shall occur first. In the event this Agreement is terminated, said materials may be used
by CITY in the completion of PROJECT or as it otherwise sees fit. Title to said materials shall
pass to the CITY upon payment of fees determined to be earned by CONSULTANT to the point
of termination or completion of the PROJECT, whichever is applicable. CONSULTANT shall be
entitled to retain copies of all data prepared hereunder.
8. INDEMNIFICATION AND HOLD HARMLESS
CONSULTANT hereby agrees to indemnify, defend, and hold and save harmless
CITY, its officers and employees from any and all liability, including any claim of liability and any
and all losses or costs arising out of the negligent performance of this Agreement by
CONSULTANT, its officers or employees.
9. WORKERS COMPENSATION
CONSULTANT shall comply with all of the provisions of the Workers
Compensation Insurance and Safety Acts of the State of California, the applicable provisions of
the California Labor Code and all amendments thereto; and all similar state or federal acts or laws
applicable; and shall indemnify, defend and hold harmless CITY from and against all claims,
demands, payments, suits, actions, proceedings and judgments of every nature and description,
including attorney fees and costs presented, brought or recovered against CITY, for or on
account of any liability under any of said acts which may be incurred by reason of any work to be
performed by CONSULTANT under this Agreement.
CONSULTANT shall obtain and furnish evidence to CITY of maintenance of
statutory workers compensation insurance and employers liability in an amount of not less than
$100,000 bodily injury by accident, each occurrence, $100,000 bodily injury by disease, each
employee, and $250,000 bodily injury by disease, policy limit.
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10. INSURANCE
In addition to the workers compensation insurance and CONSULTANT's
covenant to indemnify CITY, CONSULTANT shall obtain and furnish to CITY the following
insurance policies covering the PROJECT:
A. General Liability Insurance
A policy of general public liability insurance, including motor vehicle coverage.
Said policy shall indemnify CONSULTANT, its officers, agents and employees, while acting
within the scope of their duties, against any and all claims of arising out of or in connection with
the PROJECT, and shall provide coverage in not less than the following amount: combined single
limit bodily injury and property damage, including products/completed operations liability and
blanket contractual liability, of$1,000,000 per occurrence. If coverage is provided under a form
which includes a designated general aggregate limit, the aggregate limit must be no less than
$1,000,000. Said policy shall name CITY, its officers, and employees as Additional Insureds, and
shall specifically provide that any other insurance coverage which may be applicable to the
PROJECT shall be deemed excess coverage and that CONSULTANT's insurance shall be
primary.
Under no circumstances shall said abovementioned insurance contain a self-insured
retention, or a"deductible" or any other similar form of limitation on the required coverage.
B. Professional Liability Insurance.
CONSULTANT shall acquire a professional liability insurance policy covering the
work performed by it hereunder. Said policy shall provide coverage for CONSULTANT's
professional liability in an.amount not less than S500,000 per claim. A claims made policy shall be
acceptable.
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11. CERTIFICATES OF INSURANCE; ADDITIONAL INSURED
ENDORSEMENTS
Prior to commencing performance of the work hereunder, CONSULTANT shall
furnish-to CITY certificates of insurance subject to approval of the City Attorney evidencing the
foregoing insurance coverages as required by this Agreement; said certificates shall:
1. provide the name and policy number of each carrier and policy;
2. shall state that the policy is currently in force;
3. shall promise to provide that such policies will not be canceled or modified
without thirty (30) days prior written notice of CITY;
4. and shall state as follows: "The above detailed coverage is not subject to
any deductible or self-insured retention, or any other form of similar type
limitation."
CONSULTANT shall maintain the foregoing insurance coverages in force until the
work under this Agreement is fully completed and accepted by CITY.
The requirement for carrying the foregoing insurance coverages shall not derogate
from the provisions for indemnification of CITY by CONSULTANT under the Agreement.
CITY�or its representative shall at all times have the right to demand the original or a copy of all
said policies of insurance. CONSULTANT shall pay, in a prompt and timely manner, the
premiums on all insurance hereinabove required.
A separate copy of the additional insured endorsement to each of
CONSULTANT's insurance policies, naming the CITY, its officers and employees as Additional
Insureds shall be provided to the City Attorney for approval prior to any payment hereunder.
12. INDEPENDENT CONTRACTOR
CONSULTANT is, and shall be, acting at all times in the performance of this
Agreement as an independent contractor.. CONSULTANT shall secure at its expense, and be
responsible for any and all payment of all taxes, social security, state disability insurance
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compensation, unemployment compensation and other payroll deductions for CONSULTANT
and its officers, agents and employees and,all business licenses, if any, in connection with the
services to be performed hereunder.
13. TERMINATION OF AGREEMENT
All work required hereunder shall be performed in a good and workmanlike
manner. CITY may terminate CONSULTANT's services hereunder at any time with or without
cause, and whether or not PROJECT is fully complete. Any termination of this Agreement by
CITY shall be made in writing, notice of which shall be delivered to CONSULTANT as provided
herein.
14. ASSIGNMENT AND SUBCONTRACTING
This Agreement is a personal service contract and the supervisory work hereunder
shall not be delegated by CONSULTANT to any other person or entity without the consent of
CITY.
15. COPYRIGHTS/PATENTS
CITY shall own all rights to any patent or copyright on any work; item or material
produced as a result of this Agreement.
16. CITY EMPLOYEES AND OFFICIALS
CONSULTANT shall employ no CITY official nor any regular CITY employee in
the work performed pursuant to this Agreement. No officer or employee of CITY shall have any
financial interest in this Agreement in violation of the applicable provisions of the California
Government Code.
17. NOTICES
Any notice or special instructions required to be given in writing under this
Agreement shall be given either by personal delivery to CONSULTANT's agent (as designated in
Section 1 hereinabove) or to the City Attorney of as the situation shall warrant, or by enclosing
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the same in a sealed envelope, postage prepaid, and depositing the same in the United States
Postal Service, addressed as follows:
TO CITY: TO CONSULTANT:
City ofHuntington Beach
2000 Main Street
Huntington Beach, CA 92648
Attn: City Attorney
18. IMMIGRATION
CONSULTANT shall be responsible for full compliance with the immigration and
naturalization laws of the United States and shall, in particular, comply with the provisions of the
United States Code regarding employment verification.
19. LEGAL SERVICES SUBCONTRACTING PROHIBITED
CONSULTANT and CITY agree that CITY is not liable for payment of any
subcontractor work involving legal services, and that such legal services are expressly outside the
scope of servzces contemplated hereunder. CONSULTANT understands that pursuant to
Huntington Beach City Charter Section 309, the City Attorney is the exclusive legal counsel for
CITY; and CITY shall not be liable for payment of any legal services expenses incurred by
CONSULTANT.
20. ATTORNEY'S FEES
In the event suit is brought by either party to enforce the terms and provisions of
this agreement or to secure the performance hereof, each party shall bear its own attorney's fees.
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21. ENTIRETY
The foregoing sets forth the entire Agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by and through their authorized offices the day, month and year first above written.
CONSULTANT:. CITY OF HUNTINGTON BEACH,
a municipal corporation of the
State of California
By:
Mayor
(print name)
Its: (circle one)Chairman/President/Vice President ATTEST:
By: City Clerk
APPROVED AS TO FORM:
(print name)
Its: (circle one)Secretary/Chief Financial Officer/
Asst. Secretary-Treasurer City Attorney
REVIEWED AND APPROVED: INITIATED AND APPROVED:
Cit dministrator City Attorney
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ATTACHMENT 5
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement("Agreement')is entered into as of
i 1996,by and between Rainbow Disposal Company,Inc.,a
California corporation, and Rainbow Transfer and Recycling,Inc., a California
corporation (jointly referred to as"Rainbow'), and The City of Huntington Beach, a
municipal corporation and charter city of the State of California r'City'),with reference
to the following facts:
RECITALS
A. In 1990, the City and Rainbow entered into a Franchise
Agreement to provide for collection and disposal services of solid waste (the
"Franchise'). Subsequently,in May 1994, a supplement to the Franchise was
entered into to provide for operation of a Materials Recovery Facility ("MRF).
B. On September 5, 1996,Rainbow applied to the City for consent to
an employee stock-ownership plan ("ESOP") to purchase the interest in the
Franchise of Mr. Phil Hohnstein and a loan package to finance the ESOP
(hereinafter referred to as the"Transaction').
C. The City desires to engage the services of a Consultant to evaluate
the Transaction and assist in negotiating any necessary and appropriate conditions\to
City consent to the Transaction (hereinafter referred to as the"Consulting Services'.
AGREEMENT
NOW,THEREFORE,in consideration of the covenants and agreements
contained herein and other valuable consideration,the sufficiency and receipt of which
is hereby acknowledged by the parties hereto,the parties covenant and agree as
follows:
Section 1. Consulting Services. City shall contract with
to provide the Consulting Services.
Section 2. Reimbursement of Costs for Consulting Services. City shall
be entitled to reimbursement of all costs associated with obtaining.the Consulting
Services, regardless of whether the City Council approves,conditionally approves or
denies City consent to the Transaction. The reimbursement shall not exceed
$25,000.00, absent a change order.Pursuant to the terms and conditions of the
Consultant's contract with the City, City shall pay all invoices of the Consultant. The
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City will then invoice Rainbow for the amount paid to the Consultant,which amount
Rainbow shall pay the City within 30 days of receipt of the invoice.
Section 3. Change Orders. Rainbow shall pay all invoices in
connection with reasonable change orders. Under no condition shall City approve any
change orders without first consulting with and obtaining the approval of Rainbow.
Section 4. Entire Agreement. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof and supersedes all
prior discussions,negotiations, undertaldngs or agreements relating thereto.
Section 5. Authority. Each signatory hereto warrants to the other
party its authority to sign on behalf of the party for whom it purports to sign.
Section 6. No Oral Modification. It is mutually understood and agreed
that no alteration or variation of this Agreement shall be valid or binding unless made
in writing and signed by the parties hereto.
Section 7. Notices. Any notices shall be in writing and shall be sent
postage prepaid,by a nationally recognized overnight courier service or by first-class or
registered or certified mail,return receipt requested,or by facsimile, addressed as
follows:
To City: City of Huntington Beach
2000 Main Street
P.O.Box 190
Huntington Beach, CA 92648
Attn: Melanie Fallon
To Rainbow-. Rainbow Disposal
P.O.Box 1026
Huntington Beach, CA 92647
Attn: Ron Shenlunan
or to such other address as City or Rainbow may from time to time designate by written
notice to the other. Notice shall be deemed given upon delivery or refusal to accept
delivery as indicated by return receipt or,in the case of a nationally recognized
overnight courier service, by such similar document, or in the case of delivery by
facsimile, upon confirmation of receipt by the stated addressee.
Section 8. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns,including, without limitation, subsequent
owners.
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Section 9. Counterparts. This Agreement may be executed in any
number of counterparts each of which shall be deemed an original and all of which
when executed shall constitute one and the same instrument.
Section 10. Governing;Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of California.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the date first written above.
"CITY"
CITY OF HUNTINGTON BEACH, a
municipal corporation
/A�
Mayor
ATTEST: APPROVED AS TO FORM:
City Clerk y Attorney
RE WED AND APPROVED: 0INITIATE D APPROVED:
City Administrator Director of kubh Works
SIGNATURES CONTINUED ON NEXT PAGE
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"_R_, NB0W9
RAINBOW DISPOSAL COMPANY,INC.,
a California co ation
By:
(print name)
Its: (circle one) Chairm /Presiden ice Presiden
By: Z," I,-x"Z'5
X%;e
(print name
Its: (circle one)Secretary lief Financial Office
Asst. Secretary-Treasurer
RAINBOW FER AND RECYCLING,INC.,
a California or lion
By:
(print name)
Its: (circle one) Chairman/Presiden ice President
By:
(print name)
Its: (circle.one)Secretary hief Financial Officer
Asst. Secretary-Treasurer
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REFUSE COLLECTION AND DISPOSAL SERVICES FRANCHISE AGREEMENT
BY AND BETWEEN THE CITY OF HUNTINGTON BEACH AND
THE RAINBOW DISPOSAL AND RAINBOW TRANSFER
AND RECYCLING COMPANIES
.61
THIS FRANCHISE AGREEMENT is made and entered into this S
day of 1990, by and between the CITY OF HUNTINGTON
BEACH, a California municipal corporation, hereinafter referred to as
"CITY, " and the RAINBOW DISPOSAL COMPANY, INC. , joined by RAINBOW
TRANSFER AND RECYCLING, INC. , both California corporations ,
hereinafter referred to collectively as "CONTRACTOR ."
WHEREAS, CITY and CONTRACTOR have previously entered into a
franchise agreement, dated July 28, 1980, wherein CONTRACTOR was
awarded the right to provide refuse collection and 'disposal services
for CITY; and
CITY and CONTRACTOR are desirous of adopting a new franchise
agreement;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1 . DEFINITIONS
A. "AGREEMENT" shall mean this franchise agreement ,
entered into between CITY and CONTRACTOR .
B. •- "CITY COUNCIL" shall mean the City Council of the
City of Huntington Beach, California .
C. "DIRECTOR" shall mean the Director of Public Works
of CITY or his designated representatives .
D. "REFUSE" means garbage a.nd solid waste .
E. "RESIDENTIAL UNIT OF SERVICE" shall mean each
single-family residence and each dwelling unit within a duplex, a
triplex, or a fourplex receiving noncommercial .refuse collection
service.
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F. "BASIC LEVEL OF SERVICE" shall mean the amount of
refuse generated by an average family within a UNIT OF SERVICE,
G. "COMMERCIAL SERVICE" shall mean collection service
pursuant to an agreement between CONTRACTOR and his CUSTOMER by which
dumpsters or drop-off-bodies are rented to CUSTOMER.
H. "CUSTOMER" shall mean a user of CONTRACTOR ' S \
services .
2 . LEGAL COMPLIANCE
A. This AGREEMENT shall be governed by the laws and
regulations of the State of California, the County of .Orange, and
CITY both as to 'interpretation and performance . Specific reference
is made to Chapter 8 . 20 of the Huntington Beach Iiuni.cipal ,ode as it
now exists . or may be amended.
B . If any provision of this AGREEMENT shall be
declared illegal, void or unenforceable, the other provisions shall
not be affected but shall remain in full force and effect .
3 . TERM; ANNUAL EXTENSION OF TERM
A. The term of this AGREEMENT is fifteen (15) years ,
effective February 1, 1990.
B . Subject to the DIRECTOR' S annual evaluation, as
provided in Section 3 (C) herein, the term of this AGREEMENT shall be
annually extended one ( 1) year, on the 1st of February of each
succeeding year, commencing February 1, 1991 . Such annual extension
may also be terminated by either party in their sole discretion,
without cause, by notification in writing . Such notice will not
terminate the entire AGREEMENT. Such notice will only terminate the
annual one-year extension of this AGREEMENT, and 'the AGREEMENT shall
remain in effect for the balance of the fifteen-year term outstanding .
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C. Sixty days prior to the date for each annual
one-year extension described in paragraph 3 (B) herein, DIRECTOR shall
perform an evaluation of the services provided by CONTRACTOR. Said
evaluation may consider the kind and number of complaints made
against CONTRACTOR by his CUSTOMERS and the condition of CONTRACTOR ' S
facility and equipment . If deficiencies are discovered, DIRECTOR
will provide CONTRACTOR with a written list of same and require
corrective action prior to the effective date of the extension .
Until the deficiencies are corrected to the satisfaction of DIRECTOR,
. an annual extension of this AGREEMENT may be held in abeyance.
D. CITY reserves the right 'to cancel this AGREEMENT
upon thirty (30) days written notice to CONTRACTOR, in the event that
CONTRACTOR shall be in default in any terms , covenants or conditions
set forth in this AGREEMENT, or in the event that CONTRACTOR shall
fail to comply and abide by all of the requirements and provisions of
Chapter 8 . 20 of the Huntington Beach Municipal Code, as the same now
exists, or may hereafter be amended .
E. Any termination of this AGREEMENT for cause, or
because- of expiration of the term, or otherwise, shall constitute a
discontinuation of the right of the CONTRACTOR to provide refuse
disposal services within CITY.
4 . EXCLUSIVENESS OF CONTRACT
A. CONTRACTOR shall have the exclusive duty, right
and privilege to collect, remove and retain all REFUSE; residential , *
commercial , . or industrial , including construction., originating within
CITY limits as they may now or hereinafter exist .
B . This AGREEMENT shall not prohibit collectors of
REFUSE originating outside the city from hauling said refuse over
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city streets, provided such collectors comply with any governing laws.
or ordinances.
5 . SUPERVISION OF AGREEMENT
A. Performance of each of the provisions of this
AGREEMENT shall be under the supervision of DIRECTOR. CONTRACTOR
shall furnish DIRECTOR every reasonable opportunity of ascertaining
whether or not the work herein assigned is performed in accordance
with the requirements of this AGREEMENT.
B. CONTRACTOR shall designate a person to serve as
agent and liaison between CONTRACTOR and CITY, and shall maintain a
toll free telephone for communication with CITY' s staff .
C. DIRECTOR may inspect CONTRACTOR ' S operations and
equipment at any reasonable time . CONTRACTOR shall admit DIRECTOR to
make such inspections at any reasonable time and place.
6 . SERVICE STANDARDS: COLLECTIONS
A. During. the term hereof, CONTRACTOR shall provide
the BASIC LEVEL OF SERVICE to each RESIDENTIAL UNIT OF SERVICE within
CITY. This shall include the normal amount of plant clippings and
trimmings generated by a RESIDENTIAL UNIT OF SERVICE.
B. CONTRACTOR shall be responsible for picking up
plant prunings and trimmings that are securely bundled in lengths not
in excess of four (4) feet and that weigh no more than forty (40) '
pounds .
C. CONTRACTOR agrees that upon removing REFUSE from
receptacles, said receptacles will be replaced, including the lids
alongside thereof ; and that no' REFUSE will be allowed to spill while
handling same, and proper .care will be used in the handling of said
receptacles .
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D. CONTRACTOR shall, at all times during the
term of this AGREEMENT, keep and maintain in good operating
order, and in good appearance, sufficient trucks and other
equipment to properly and adequately provide the services
described herein.
E. CONTRACTOR shall maintain a local telephone
to which all service complaints from CUSTOMERS may be directed .
The telephone shall be staffed from 8 : 00 a .m. until 5 : 00 p .m.
Monday through Friday and from 8 : 00 a .m. until noon Saturday.
F. Each quarter, upon request, CONTRACTOR sizall
provide DIRECTOR a written summary report of all complaints
received and the action taken in response to said complaints .
G. CONTRACTOR shall make at least one (1) weekly
collection at all places of residence and commercial and
industrial establishments qualifying for the minimum can
collection service on a schedule approved by CITY. Extended
commercial and industrial service accounts shall be collected at
a frequency for which they shall contract, provided it is
adequate in the opinion of DIRECTOR to maintain the premises so
served in a healthful and unlittered condition.
H . CONTRACTOR shall supply and unload dumpsters
and drop-off-bodies at CITY owned or operated facilities as
requested by Director, and shall empty the 40-gallon trash cans
in the downtown commercial area at a frequency of six days a
.week in the summer and twice a week at other times , at no cost
to CITY. CONTRACTOR shall pay for the deposit of CITY generated
refuse, including street sweepings , grass clippings and tree
trimmings , at Rainbow Transfer . However, the total dollar value
-5- .
. t
of all such services provided by CONTRACTOR to CITY . shall not exceed
$500, 000 during the first year of this AGREEMENT. This figure shall
be adjusted in subsequent years by an amount equal to the
CONTRACTOR ' S annual rate increase, as shown in sections 11 and 12
herein.
I . Upon the request of a homeowner, CONTRACTOR shall
make two special collections each year of a large household item,
such as a sofa or a water heater, at no cost to the homeowner .
J. The hours of collection shall be 6 : 30 A.M. to 6: 30
P.M. except on. advance specific waiver of DIRECTOR .
K. Should CONTRACTOR fail to collect and dispose of
REFUSE set out or placed for collection as herein provided, or at the
times herein required, CITY may, after notification of CONTRACTOR - and
within a reasonable time not to exceed twenty-four (24} hours,
collect and dispose of said REFUSE at CONTRACTOR ' S sole cost and
expense.
L. Collection of REFUSE shall not be required on
Sundays or on the following legal holidays : New Year ' s Day, Memorial
Day, 'Ind'ependence Day, Labor Day, Thanksgiving Day, and Christmas
Day; excepting in cases of emergency and upon the express direction
of DIRECTOR. Whenever a regular collection day falls on such a
holiday, then collection shall be made on the day following . Should
a holiday fall on a Sunday, then the following Monday shall be
observed as the holiday. Any additional holidays requested by
CONTRACTOR shall be submitted in writing to CITY for approval .
M. All COMMERCIAL SERVICES containers shall be of a
design and size sufficient to contain their contents , at all times ,
in such a manner as to promote the best possible housekeeping
-6-
conditions . All containers supplied by CONTRACTOR shall , at all
times, be maintained in a well-kept appearance. CUSTOMERS shall be
responsible for the cleanliness, sanitation and deodorizing of
rental containers .
N. CONTRACTOR shall not, nor shall it permit any
agent, employee or subcontractor employed by it, to request , solicit,
demand, or accept , either directly or indirectly, any compensation or
gratuity for the collection of REFUSE as herein defined, except such
compensation as may be herein provided to be paid by CITY. It is
further provided, however, that CONTRACTOR may make available special
storage and loading containers, provide additional collections not
required by these specifications, or pick up REFUSE at points other
than as required in these specifications , at the request of the
person or business being served. CONTRACTOR may make a direct charge
in each instance for such additional service under a written
agreement which shall be subject to the approval of DIRECTOR, and at
such rates as are reasonable, just and uniform for all persons or
businesses being served.; All charges for such services shall be
'collected by CONTRACTOR.
7 . RESIDENTIAL TOXIC WASTES
Upon, receipt of all required permits and insurance,
CONTRACTOR agrees to provide a residential toxic waste transfer
station at CONTRACTOR ' S current site. Said station will be a
regional facility and be made available free of charge to the
residents of CITY, unless current funding sources . do not
materialize. In the event these funding sources are not available,
CONTRACTOR may levy user fees to individual users as approved by
CITY. In the event governmental regulations or operational costs
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t.
make it impractical to operate* such a station, CONTRACTOR and CITY
shall have the right to terminate operation of the facility by mutual
agreement .
8 . RECYCLING PROGRAM
CONTRACTOR shall provide a solid waste processing
facility designed .to specifically recycle residential and commercial
waste . Said facility will be operational within thirty (30) months
of the date of AGREEMENT and meet the standards legislated by the
State of California in the Integrated Waste Management Act of 1989
(AB 939) as it now exists or may be hereafter amended . This time
frame may be extended at the request of CONTRACTOR should
construction of said facility be delayed by natural disaster, new
legislation, or other. unforeseen event . Full development of the
system will be phased in over time, and CITY and CONTRACTOR agree
that the costs of operation will be born by the users of the
facility. CITY and CONTRACTOR also agree to meet prior to the
commencement of operations in order to establish a charge for thi--
service .
9 . LABOR RELATIONS
A. - CONTRACTOR shall, at all times during the term of
this AGREEMENT, abide by all laws and regulations of the State of
California regarding the employment of labor .
B . In the event that there occurs any period in which
CONTRACTOR fails to maintain required REFUSE collection and disposal'
services pursuant to this contract by reason of a • strike by
CONTRACTOR ' S employees or similar labor dispute, CITY shall have the
exclusive right of first refusal to rent and operate anv or all
trucks , trailers , tractors , bulldozers , other equipment and
=8-
facilities used by CONTRACTOR in the performance of the work
specified in this AGREEMENT. Such rental shall be upon a reasonable
basis until other arrangements can be made by CITY.•• In determining
the rental amount' to be paid CONTRACTOR, the parties shall take into
consideration the cost, age, and condition of the equipment thus
utilized so as to afford CONTRACTOR fair and just compensation for
such use . All money due CONTRACTOR for such rental may at the option
of CITY be applied to the reduction of any lien or encumbrance on the
rented chattels .
C. Pursuant to California Labor Code Section 1861,
CONTRACTOR acknowledges awareness of Section 3700 et seq. of said
code, which requires every employer to be insured against liability
for workers ' compensation; CONTRACTOR covenants that it will comply
with such provisions during the entire term of this AGREEMENT.
CONTRACTOR shall maintain such Workers ' Compensation
Insurance in an amount of not less than One Hundred Thousand Dollars
($10:0, 000) bodily injury by accident, each occurrence, One Hundred
Thousand Dollars ($100, 000) bodily injury by disease, each employee,
and Two -Hundred Fifty Thousand Dollars $250, 000) bodily injury by
disease, policy limit , at all times incident hereto, in forms and
underwritten by insurance companies satisfactory to CITY.
10 . UNIT OF SERVICE COUNT
A. An annual count of the UNITS OF SERVICE .shall be
performed by a member .of CITY' s staff and a representative of
CONTRACTOR. Said count shall be performed during the first quarter
of each year of the term of this AGREEMENT. Said count shall include
all single family, duplex, triplex, and fourplex residential units
-9-
that are provided noncommercial trash service . Groups of more
than four (4 ) residential units are deemed to be nonresidential
and will be charged in accordance with COMMERCIAL SERVICE
provisions below. This annual residential count shall be the
basis for determining the number of dwelling units for which
CITY shall compensate CONTRACTOR.
B . CONTRACTOR agrees to submit to DIRECTOR, on a
monthly basis, a list of all residential units which have either :
( 1) contracted .for COMMERCIAL SERVICE, or (2) discontinued
COMMERCIAL SERVICE with CONTRACTOR. Such listing shall be kept
confidential by CITY.
C. DIRECTOR shall have added to Ci--L ' s water
file, under the heading "'Trash, " a Code for all single family,
duplex, triplex and fourplex' units that are provided
noncommercial trash service by CONTRACTOR and a Code for those
units that are provided COMMERCIAL SERVICE by CONTRACTOR.
D. DIRECTOR shall multiply the established rate
per UNIT OF SERVICE by the total monthly count of all single
family, -.duplex, triplex and fourplex units that are provided
noncommercial trash service to arrive at the monthly payment to
CONTRACTOR. It is recognized that the total number of UNIT' S OF
SERVICE will vary from month to month. Therefore, the number of
UNITS OF SERVICE in any month shall be determined as above .
E. DIRECTOR is responsible for authorizing the
Finance Department to make monthly payments to. CONTRACTOR based
upon the total monthly count of all single family, duplex,
triplex and fourplex residential units that are provided
noncommercial trash service. CITY shall compensate CONTRACTOR
-10- .
no later than fifteen (15) days after the end of the month in
which service was rendered .
11. COMPENSATION - RESIDENTIAL
A. CITY shall pay to CONTRACTOR for services
provided under the terms of this AGREEMENT, the sum of $8 .45 per
month for each UNIT OF SERVICE rendered in CITY from the period
beginning February 1, 1990, until June 30 , 1990; and the sum of
$9 . 52 per month for same from July 1, 1990, until June 30,
1991 . However, should the landfill tipping fee increase more
than $1. 00 per. tonduring the one. year period after June 30,
1990, then the "tipping fee" portion of the- formula described
below shall be applied to the amount in excess of $1. 00 per ton.
B. Changes in compensation for each subsequent
year will be based on the formula provided below and shall take
effect on July 1st of each succeeding year beginning on July 1,
1991 . A change in compensation will be determined by the three
factors in the following formula :
1 . , The percentage of increase in the Los
Angeles-Anaheim-Riverside All Urban Consumer Price Index (CPI)
or any relevant successor 'for the Orange County area from April
to April of the preceding twelve (12) months . This factor shall
constitute seventy-six percent (76%) of a rate adjustment .
2 . The County of Orange landfill tipping
fees . This factor shall constitute sixteen percent (16%) of a
rate adjustment, and be based upon the tipping fee adopted by
said County for the subsequent fiscal year .
3 . The average per gallon price of diesel
fuel as paid by CONTRACTOR during the April to April time frame
-11-
noted above. This factor shall constitute eight percent (8%) of
a rate adjustment .
Ah example of this formula is provided on the attached
Exhibit B. No more than one negotiated rate change shall be
made -in any twelve (12) month period. However, either DIRECTOR
or CONTRACTOR may propose modification of an established rate in
order to assure the overall fairness of the rate structure to
both CITY and CONTRACTOR.
C. In the event CONTRACTOR becomes obligated in
the performance of this AGREEMENT to pay any fees or charges not
presently required, such as those imposed by toll roads, for the
transit of REFUSE to landfills; or if CONTRACTOR is required 'Co
travel additional distances to an approved landfill site due to
the closing of an existing facility; or if the County of Orange
raises the landfill tipping fee more than once during a year,
then the parties agree to negotiate in good faith for an
adjustment in the existing monthly unit rate prior to the
implementation -of such charges.
-12 : COMPENSATION - COMMERCIAL
A. CONTRACTOR shall establish and -publish a
schedule of rates for all COMMERCIAL SERVICE accounts based on
frequency of collection per week and size of container . Said
schedule shall be shown as Exhibit A of this AGREEMENT and shall
become effective on February 1, 1990 .
B . CONTRACTOR shall be exclusively responsible
for making contracts for COMMERCIAL SERVICE with CUSTOMER ' S
within CITY. All charges will be billed to a.nd collected from
each CUSTOMER by CONTRACTOR.
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C. Beginning July 1; 1990, and continuing for
the life of this AGREEMENT, changes in compensation for
COMMERCIAL SERVICE for each subsequent year will be based on the
formula provided below and shall take effect on July 1st of each
succeeding year. A change in compensation will be determined by
three factors in the following formula :
1 . The percentage of . increase in the Los
Angeles-Anaheim-Riverside All Urban Consumer Price Index(CPI) or
any relevant successor for the Orange County area from April to
April of the preceding twelve (12) months . This factor ' shall
constitute seventy-six percent (76%) of a rate adjustment .
2 . The County of Orange landfill tipping
fees . This factor shall constitute sixteen percent (160) of a
rate adjustment, and be based upon the tipping fee adopted by
said County for the subsequent fiscal year.
3 . The average per gallon price of diesel
fuel as paid by CONTRACTOR during the April to April time frame
noted above . This factor shall constitute eight percent (8%) of
a rate adjustment .
An example of- this formula is provided on the
attached Exhibit B . No more than one negotiated rate change
shall be made in any twelve (12) month period . However, either
DIRECTOR or CONTRACTOR may propose modification of an
established rate in order to assure the overall fairness of the
rate structure - to both CITY and, CONTRACTOR. :
13 . COMMERCIAL SERVICE FRANCHISE FEE
A. Beginning on July 1, 1991, CONTRACTOR shall
pay CITY a franchise fee of one percent (1%) of his paid gross
• -13-
receipts from COMMERCIAL SERVICE . Said fee shall increase to
two percent (2%) of same on July 1, 1992, and to three percent
(3%) on July 1, 1993 . However, in all instances, the fee shall
be added to the rate schedule only after the compensation
formula has been applied .
B. Said payment shall be made on a monthly basis
and be received by CITY no later than fifteen (15) days after
the . end of each calendar month in which CONTRACTOR ' S invoices
were issued. The first payment due under this AGREEMENT, for
receipts of July, 1991, shall be payable on September .l5', -1991 .
Any late payments shall be assessed in accordance with
Chapter 3 .48 of the huntington Beach Municipal Code .
14 . TRANSFER STATION USER FEE
A. Beginning on July 1, 1990, CONTRACTOR shall
pay CITY a transfer station user fee of one and one quarter
percent (1. 25%) of all paid receipts for refuse deposited at the
transfer station,.
B. Said payment shall be made on a monthly basis
and be received by CITY no later than fifteen (15) days after
the end of each calendar month in which CONTRACTOR' S invoices
were issued . The first payment due under this AGREEMENT, for
the paid receipts of July, 1990, shall be payable on September
15, 1990 . Any late payments shall be assessed in accordance
with Chapter 3 . 48 of the Huntington Beach Municipal Code .
. 15 . PERFORMANCE BOND
CONTRACTOR shall , at all times , during the life of
AGREEMENT keep on file with CITY a bond in the sum of Fifty
Thousand and 00/100 Dollars ($50 , 000 . 00) to the effect that
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CONTRACTOR will faithfully perform this AGREEMENT.
16 . INSURANCE
CONTRACTOR shall carry at all times incident
hereto, on all operations to be performed hereunder, general
liability insurance, including coverage for bodily injury and
property damage. Said insurance shall also include automotive
bodily injury and property damage liability insurance . All
insurance shall be underwritten by insurance companies in forms
satisfactory to CITY for all operations and all owned vehicles
and non-owned vehicles . Said insurance shall name the CITY, its
officers, agents and employees and all public agencies as
determined by the CITY as Additional Insureds. CONTRACTOR shall
subscribe for and maintain said insurance policies in full force
and effect, during the life of this AGREEMENT, in an amount of
not less than One Million Dollars ($1, 000, 000) combined single
limit coverage. If coverage is provided under a form which
includes a designated general aggregate limit , such limit shall
be no less than One Million Dollars ($1, 000, 000) . In the event
of aggregate coverage, CONTRACTOR shall immediately notify CITY
of any known depletion of limits . CONTRACTOR shall require its
insurer to waive its subrogation rights against CITY and agrees
to provide certificates evidencing the same .
17 . CERTIFICATES OF INSURANCE ' ADDITIONAL INSURED
ENDORSEMENT
Prior to commencing performance of the work
hereunder, CONTRACTOR shall furnish to CITY certificates of
insurance subject to approval of the City Attorney evidencing
the foregoing insurance coverages as required' by Sections 9 and
-15-
16 herein; said certificates shall provide • the name and policy
number of each carrier and policy, and shall state that the
policy is currently in force and shall promise to provide that
such policies will not be cancelled without thirty (30) days
prior written notice to CITY. CONTRACTOR shall maintain the
foregoing insurance coverages in force during the entire term of
this AGREEMENT.
The requirement for carrying the foregoing insurance shall
not derogate from the provisions for indemnification of CITY by
CONTRACTOR under Section 18 of . this AGREEMENT. CITY or its
representative shall at all times have the 'right to demand the
original or a copy of all said policies of insurance .
CONTRACTOR shall pay, in a prompt and timely manner, the
premiums on all insurance hereinabove required.
A separate copy of the additional insured endorsement to
each of CONTRACTOR' S insurance policies, naming the CITY, its
officers and employees as Additional Insureds shall be provided
to the CITY upon demand.
'18. INDEMNIFICATION, DEFENSE, HOLD HARMLESS
CONTRACTOR hereby agrees to protect, defend,
indemnify and hold and save harmless CITY, its officers , and
employees against any and all liability, claims, judgments ,
costs and demands , however caused, including those resulting
from death or injury to CONTRACTOR' S employees and' damage to
CONTRACTOR ' S property, arising directly or indirectly out of the
performance of this AGREEMENT by CONTRACTOR, including those
arising from the passive concurrent negligence of CITY, but save
and except those which arise out. of the active concurrent
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negligence, sole negligence, or the sole willful misconduct of
CITY. CONTRACTOR will conduct all defense at its sole cost and
expense. CITY shall be reimbursed by CONTRACTOR for all costs
or attorney' s fees incurred by CITY in enforcing this obligation.
19 . TRANSFER
A. CONTRACTOR shall not sell, assign, or
transfer this AGREEMENT or any interest therein, or permit same
to be transferred by operation of law, without first obtaining
the consent of CITY. Any such unauthorized transfer shall allow
CITY, at its option-, to terminate this AGREEMENT.
B . Until the adoption of any ordinance to the
contrary by CITY, CONTRACTOR may sell or otherwise dispose of
refuse materials after the same have. been collected.
20. F- INANCIAL RECORDS
At the request of DIRECTOR, CONTRACTOR shall make
his complete financial records available for examination by CITY
or its designated agents . Such records shall be kept
confidential .
REST OF PAGE NOT USED
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21 . ENTIRETY
The foregoing, and Exhibits "A" and "B" attached
hereto, sets forth the entire AGREEMENT between the parties .
IN WITNESS WHEREOF, the parties hereto have caused this
AGREEMENT to be executed on the day, month and year first above
written at Huntington Beach, California .
RAINBOW DISPOSAL COMPANY,. INC. , CITY OF HUNTINGTON BEACH
a California corporation a California municipal
cor ation
President Mayor
Actary r
RAINBOW TRANSFER AND RECYCLING, INC.
a California corporation
President
Actary
ATTEST: APPROVED AS TO FORM:
City Clerk Attgxney
REVIEWED AND APPROVED: INITIATED A D APPROVED:
City Administrator Directo of ublic Works
2—t- Ota .
sg
-18-
EXHIBIT A
DUMPSTER SERVICE RATE SCHEDULE
Size of Number of Monthly Service
Container Pick-UDs per Week Rate
1 Cu . Yard Dumpster 1 $ 34 . 80
2 54 . 60
3 68 . 40
4 75 . 20
5 88 . 00
6 101. 80
2 Cu. Yard Dumpster 1 $ 56 . 60
2 81.20
3 101. 80
4 119 .40
5 147 . 00
6 168 . 80
3 Cu. Yard Dumpster 1 $ 72 .41
2 109 . 07
3 146 . 98
4 172 . 64
5 221. 05
6 258 .46
Add a $7 . 50 charge per dumpster* per pick-up for push-outs over 30
feet, and a $5 . 00 charge per month per dumpster in an enclosure.
C
S
DROP—OFF—BODY SERVICE RATE SCHEDULE
Container Size Service Time Service Rate
3 Cu . Yard Two (2) Days $40 . 00 per load
3 Cu . Yard Weekend $50 . 00 per load
35/40 Yard Three (3) Days $265 . 00 per load
( 6 tens max)
35/40 Yard Five (5) Days $295 . 00 per load
( 6 tons max)
Any container which exceeds six ( 6) tons in weight is subject to
additional dumping fees at the local transfer station..
10/15 Yard Three (3) Days $335 . 00 per load
(8 tons max)
10/15 Yard Five (5) Days $365 . 00 per load
(8 tons max)
Any container which exceeds eight (8) tons in weight is subject to
additional dumping fees at the local transfer. station.
ADDITIONAL RENTAL DAYS: $15 . 00 per extra day, all sizes .
OVERLOADED OR UNLEVEL CONTAINER: It is the customer ' s
responsibility to reload any container which exceeds nine (9) tons
in weight or is not level full . Contractor cannot remove overweight
containers . Rental charges will stay in effect until container is
reloaded and removed.
EXHIBIT B
Example of Formula
For the purpose of illustration and by way of example only,.
assume that : On May 1, 1991, the CPI increase for the period
April 1, 1990, through April 1, 1991, is determined to be 5 . 0%;
Landfill Tipping fees were increased during said period from $13 . 25
to $16 . 50 per ton (a 24 . 5% increase) ; and the Diesel Fuel Price
increased during said period from $0 . 725 to $0 . 775 per gallon (a
6 . 9% increase) . The following is a statement of the Formula for an
increase in the charges based upon the foregoing illustration:
(76% x 5 . 0%) + (16% x 24 . 5%) + (8% x 6 . 9%)
equals : 3 . 80% + 3 . 92% + 0 . 55% = 08 . 27%
Thus the collection charges would be increased, commencing on
July 1, 1991, by an additional 8 . 27%.