UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16225
EMCON
(Exact name of Registrant as specified in its charter)
California 94-1738964
---------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1200
San Mateo, California
94402
- ------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 375-1522
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
8,514,330 shares of Common Stock Issued and Outstanding as of July 31, 1997.
1
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EMCON
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
Page
Number
FACING SHEET......................................................... 1
TABLE OF CONTENTS.................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996.................... 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 1997 and 1996................................. 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996................ 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9
PART II. OTHER INFORMATION......................................... 12
Signatures........................................................... 13
Index to Exhibits.................................................... 14
2
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1997 1996
(In thousands, except share amounts) (Unaudited) (Audited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................................................... $ 3,120 $ 5,331
Accounts receivable, net of allowance for doubtful accounts of $1,275
and $951 at June 30,1997 and December 31, 1996, respectively ................................ 37,890 32,860
Costs and estimated earnings in excess of billings on uncompleted
contracts ................................................................................... 1,833 904
Prepaid expenses and other current assets ...................................................... 5,914 4,425
Assets held for sale ........................................................................... -- 9,382
------- -------
Total Current Assets ........................................................................ 48,757 52,902
Net property and equipment, at cost ............................................................ 15,429 14,722
Other assets ................................................................................... 8,080 4,800
Deferred tax assets ............................................................................ 4,818 4,818
Goodwill, net of amortization .................................................................. 13,922 12,716
Other intangible assets, net of amortization ................................................... 875 954
------- -------
Total Assets ................................................................................ $91,881 $90,912
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable ............................................................................... $ 6,467 $ 5,483
Accrued payroll and related benefits ........................................................... 3,683 6,020
Other accrued liabilities ...................................................................... 5,242 4,454
Billings in excess of costs and estimated earnings
on uncompleted contracts .................................................................... 3,566 94
Long-term obligations due within one year ...................................................... 1,976 2,250
------- -------
Total Current Liabilities ................................................................... 20,934 18,301
Long-term debt ................................................................................. 11,957 14,667
Other noncurrent obligations ................................................................... 1,970 2,132
Commitments and contingencies .................................................................. -- --
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized; no shares issued
or outstanding .............................................................................. -- --
Common stock, no par value, 15,000,000 shares authorized; 8,533,830
and 8,512,688 shares issued and outstanding at June 30, 1997 and
December 31, 1996, respectively ............................................................. 42,054 42,001
Retained earnings .............................................................................. 14,966 13,811
------- -------
Total Shareholders' Equity .................................................................. 57,020 55,812
------- -------
Total Liabilities and Shareholders' Equity .................................................. $91,881 $90,912
======= =======
See accompanying notes
</TABLE>
3
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------------------- ----------------------
(In thousands, except per share amounts) 1997 1996 1997 1996
- --------------- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenue .............................................. $ 33,114 $ 35,881 $ 64,477 $ 64,445
Outside services, at cost .................................. 8,647 5,339 12,429 9,296
-------- -------- -------- --------
Net revenue ............................................. 24,467 30,542 52,048 55,149
Costs and expenses:
Direct expenses ......................................... 12,206 13,030 24,812 22,719
Indirect expenses ....................................... 11,177 16,722 25,403 31,521
Restructuring ........................................... -- -- (75) --
Loss on disposition of laboratory ....................... -- -- 333 --
Gain on sale of assets .................................. -- -- (826) --
-------- -------- -------- --------
Income from operations ................................ 1,084 790 2,401 909
Interest income (expense), net ............................. (192) (277) (429) (299)
Equity in gain (loss) of affiliates ........................ 16 102 34 80
Minority interest .......................................... (148) (55) (183) (77)
-------- -------- -------- --------
Income before provision for income taxes ................... 760 560 1,823 613
Provision for income taxes ................................. 266 195 638 214
-------- -------- -------- --------
Net income ................................................. $ 494 $ 365 $ 1,185 $ 399
======== ======== ======== ========
Income per share ........................................... $ 0.06 $ 0.05 $ 0.14 $ 0.06
======== ======== ======== ========
</TABLE>
See accompanying notes
4
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended
June 30,
-------------------------------
Increase (decrease) in cash and cash equivalents (in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income ...................................................................................... $ 1,185 $ 399
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization ................................................................. 2,220 3,234
Gain (loss) on sale/disposal of property and equipment ........................................ (15) 39
Loss on disposition of laboratories ........................................................... 333 --
Gain on disposition of assets ................................................................. (826) --
Increase in salary continuation plan .......................................................... 42 53
Changes in operating assets and liabilities:
Accounts receivable ....................................................................... (3,714) (3,074)
Prepaid expenses and other current assets ................................................. (1,940) (950)
Other assets .............................................................................. (418) (1,228)
Accounts payable .......................................................................... 988 (306)
Accrued payroll and related benefits ...................................................... (1,235) 1,094
Other accrued liabilities ................................................................. 3,854 (1,608)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ............................................ 474 (2,347)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment ............................................................. (2,341) (2,095)
Maturities of available for sale securities ..................................................... -- 514
Acquisitions, net of cash acquired ............................................................. (858) (3,827)
Net cash on disposition of laboratory ........................................................... 3,794 --
Net cash from disposition of assets ............................................................. 840 --
Proceeds from sale of property and equipment .................................................... 114 70
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ............................................ 1,549 (5,338)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Dividend payments ............................................................................... (30) --
Proceeds of new debt obligations ................................................................ 69 6,755
Payment of current and noncurrent obligations ................................................... (4,344) (5,572)
Issuance of common stock for cash ............................................................... 71 543
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities ............................................ (4,234) 1,726
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents .............................................................. (2,211) (5,959)
Cash and cash equivalents, beginning of year ....................................................... 5,331 9,451
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period ........................................................... $ 3,120 $ 3,492
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
5
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EMCON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
While the financial information is unaudited, the statements in this report
reflect all adjustments, which are normal and recurring, that are necessary
for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the dates
of the balance sheets. The operating results for the interim periods
presented are not necessarily indicative of performance for the entire
year.
These financial statements and notes should be read in conjunction with the
Company's consolidated financial statements for the fiscal year ended
December 31, 1996.
2. Restructuring Charges
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further
improving the Company's competitiveness and overall profitability. Based on
this review, the Company's Board of Directors approved a strategic
restructuring plan to reposition the Company to fully exploit its core
strengths in engineering, design, construction, operations and maintenance.
The plan included closure or downsizing of underperforming offices,
write-offs of employment contracts for former employees no longer
participating in the Company's affairs and employee severance. During the
six months ended June 30, 1997, $131,000 relating to the restructuring were
incurred and charged against the established reserve. At June 30, 1997,
$907,000 of accrued restructuring costs, net of a $75,000 reduction due to
earlier than anticipated subleasing of abandoned office space, remained and
were included in other accrued liabilities. To-date, $250,000 of
restructuring costs related to these actions have been incurred. All
remaining actions are expected to be substantially completed by the third
quarter of 1997.
In December 1994, as a result of changes in senior management, the
Company's Board of Directors approved a corporate restructuring plan that
included the write off of employment contracts with no current or future
value, termination of personnel, and the elimination or abandonment of
excess and underperforming assets and facilities. During the six months
ended June 30, 1997, $27,000 of cash charges related to the restructuring
were incurred and charged against the established reserve, bringing the
reserve to a zero balance. To date, $1,169,000 of restructuring costs have
been incurred with no additional cost anticipated.
6
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3. Acquisitions
Effective May 1, 1997, Organic Waste Technology, Inc., a wholly owned
subsidiary of EMCON, acquired all of the equity interest in National Earth
Products, Inc. ("NEP"), a Lancaster, Pennsylvania, based company with
significant expertise in civil construction and soils processing around
landfills. NEP was acquired for $933,000 in cash and $800,000 in notes
payable. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,456,000
resulting from this acquisition are included in goodwill and are being
amortized over twenty-five years using the straight line method.
Accumulated amortization as of June 30, 1997, was approximately $10,000.
Additional consideration may be paid for the purchase of NEP subject to
the achievement of certain earnout goals over the next three years. This
acquisition would not have had a material effect on net revenue, net
income, or income per share, had it been effective at January 1, 1997.
On February 29, 1996, EMCON acquired all of the outstanding capital stock
of Organic Waste Technologies, Inc. ("OWT"), a Cleveland based
construction, equipment and operations and maintenance company with
significant expertise in solid waste management. The following summarizes
the unaudited pro forma net revenue, net income, and income per share for
the combined company for the six month period ended June 30, 1997 and 1996
had the acquisition of OWT occurred at the beginning of the period
presented.
(unaudited)
Six months ended
June 30,
------------------------------------------
(in thousands) 1997 1996
-------------------------------------------------------------------------
Net revenue $52,048 $58,048
Net income 1,185 83
Income per share $ 0.14 $ 0.02
-------------------------------------------------------------------------
4. Credit Agreement
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a long term basis with
interest at a variable rate, generally not to exceed the prime rate.
Principal is to be amortized over seven years, but with any unpaid amount
finally due and payable on June 30, 2001. The remaining $10,000,000 under
the credit agreement is available on a line of credit basis for working
capital purposes (with up to $5,000,000 of this amount available for
non-working capital purposes). The line of credit component of the credit
agreement expires on May 31, 1998.
7
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5. Litigation
As a professional services firm engaged in environmental-related matters,
the Company encounters potential liability, including claims for
significant environmental damage in the normal course of business. The
Company is party to lawsuits and is aware of potential exposure related to
certain claims, but in the opinion of management the resolution of these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
6. Income Per Share
Income per share for the three months and six months ended June 30, 1997 is
based on the weighted common and dilutive common equivalent shares
outstanding using the treasury stock method. Common equivalent shares
include shares issuable under the Company's stock option plans. Primary and
fully diluted earnings per share are substantially the same.
Income per share for the three months and six months ended June 30, 1996 is
based on the weighted average number of common and dilutive common
equivalent share outstanding using the modified treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in no change to the primary earnings per share for the
three months and six months ended June 30, 1997 and a $0.01 decrease and a
$0.02 decrease to the primary earnings per share for the three month and
six months ended June 30, 1996, respectively. The impact of Statement 128
on the calculation of the fully diluted earnings per share for these
periods is not expected to be material.
7. Other
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year
which will result in a fifty-two week year in 1997. The Company's year end
falls on the Friday closest to the last day of the calendar year. The
Company also follows a five-four-four week quarterly cycle. For
convenience, the accompanying financial statements have been shown as
ending on the last day of the calendar period.
8
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EMCON
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Current Year-to-Date versus Prior Year-to-Date.
Net Revenue: Net revenue for the first six months of 1997 totaled $52,048,000, a
5.6% decrease from $55,149,000 for the first six months of 1996. The decrease
was due in part to the divestiture of the Company's laboratory subsidiary,
Columbia Analytical Services, Inc. ("CAS"), at the end of the first quarter of
1997 (CAS contributed net revenue of $4,904,000 in the first six months of 1997
and $8,979,000 in the first six months of 1996 ), as well as lower demand for
the Company's professional services in the Company's South and Southwest areas.
The decrease in net revenue was offset in part by the growth of the Company's
Operations and Construction ("EOC") Division from net revenue of $8,174,000 for
the first six months of 1996 (following the acquisition of OWT on February 29,
1996) to $15,086,000 for the first six months of 1997.
Direct Expenses: Direct expenses include compensation for billable hours for
technical and professional staff and other project related expenses. Direct
expenses for the first six months of 1997 totaled $24,812,000, a 9.2% increase
compared to direct expenses of $22,719,000 for the first six months of 1996.
Direct expenses as a percent of net revenue increased to 47.7% in the first six
months of 1997 from 41.2% for the comparable period in 1996. The increase was
due in large part to the shift in business mix resulting from the divestiture of
CAS and the continued expansion of the EOC Division combined with higher
utilization of professional staff.
Indirect Expenses: Indirect expenses include compensation for nonbillable hours
of professional, technical and administrative staff and general administrative
expenses such as rent, bonuses, benefits, insurance, legal, depreciation and
amortization. Indirect expenses for the first six months of 1997 totaled
$25,403,000, a 19.4% decrease compared to indirect expenses of $31,521,000 for
the first six months of 1996. Indirect expenses as a percent of net revenue
decreased to 48.8% in the first six months of 1997 from 57.2% for the comparable
period in 1996. The decrease was due in part to the above-noted shift in
business mix following the divestiture of CAS, the expansion of the EOC Division
and the planned contraction of the Professional Services Division combined with
the positive impact of cost containment and restructuring measures put in place
at the end of 1996.
Adjustment of Restructuring Accrual: During the first quarter of 1997, the
Company reversed an accrual of $75,000 made as part of the restructuring actions
taken in the fourth quarter of 1996. The year end accrual was revised to reflect
lower than anticipated costs associated with the abandonment and subsequent
sublease of certain office space.
9
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Loss on Disposition of Laboratory: During the first quarter of 1997, the Company
completed the sale of CAS to the employees of CAS for $4,000,000 in cash, CAS'
promissory notes for $3,219,000 and a continuing preferred stock interest in CAS
valued at $500,000. The Company paid $206,000 in cash to CAS for retired
employee contracts and for accelerated vesting of stock options and other non
vested stock rights. In anticipation of completing the sale, the Company
recognized impairment in the value of its investment in CAS of $3,327,000 at the
end of 1996. As a result of several pre closing adjustments, the Company
recognized an additional loss on disposition of CAS in the first quarter of 1997
of $333,000.
Gain on Sale of Assets: During the quarter ended March 31, 1997, the Company
completed the sale of one of its landfill gas-to-energy projects, including the
related leasehold production rights and associated machinery and equipment. The
Company recognized a gain on disposition of the project of $826,000.
Income From Operations: Income from operations for the first six months of 1997
totaled $2,401,000, a 164.1% increase compared to $909,000 for the comparable
period in 1996. Income from operations, as a percent of net revenue increased to
4.6% for the first six months of 1997 from 1.6% in the comparable period in
1996.
Interest Income (Expense) Net: The Company recorded interest expense, net of
interest income of $429,000 and $299,000 for the first six months of 1997 and
1996, respectively. The increase was due primarily to the increase in long-term
debt incurred for purposes of financing the acquisition of OWT in February of
1996 and the subsequent expansion of one of OWT's landfill gas-to-energy
projects, as well as the acquisition of NEP which was effective on May 1, 1997.
Quarters Ended June 30, 1997 and 1996.
Net Revenue: For the quarter ended June 30, 1997, net revenue totaled
$24,467,000, a 19.9% decrease from net revenue of $30,542,000 in the second
quarter of 1996. The decrease in net revenue was attributable to the divestiture
of CAS at the end of the first quarter of 1997 (CAS contributed net revenue of
$5,269,000 in the second quarter of 1996), as well as lower demand for the
Company's professional services in all but the Company's North area. The
decrease in net revenue was offset in part by the continued growth of the EOC
Division.
Direct Expenses: Direct expenses for the quarter ended June 30, 1997 totaled
$12,206,000, a 6.3% decrease from direct expenses of $13,030,000 in the
comparable period in 1996. Direct expenses as a percent of net revenue increased
to 49.9% in the second quarter of 1997 from 42.7% in the comparable period in
1996. The increase was due to the shift in business mix resulting from the
divestiture of CAS and the expansion of the EOC Division combined with higher
utilization of professional staff.
Indirect Expenses: Indirect expenses for the quarter ended June 30, 1997 totaled
$11,177,000, a 33.2% decrease from indirect expenses of $16,722,000 in the
comparable period in 1996. Indirect expenses as a percent of net revenue
decreased to 45.7% in the second quarter of 1997 from 54.8% in the comparable
period in 1996. The decrease was largely due to the above-noted change in
business mix following the divestiture of CAS, the expansion of the EOC Division
and the planned contraction of the Professional Services Division combined with
the positive impact of cost containment and restructuring measures put in place
at the end of 1996.
10
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Income from Operations: Income from operations for the quarter ended June 30,
1997 totaled $1,084,000, a 37.2% increase compared to income from operations of
$790,000 in the comparable period in 1996. Income from operations as a percent
of net revenue increased to 4.4% in the second quarter of 1997 from 2.6% in the
comparable period in 1996. Interest Income (Expense) Net: The Company recorded
interest expense net of interest income of $192,000 and $277,000 for the
quarters ended June 30, 1997 and 1996, respectively. The net decrease was
primarily attributable to a decrease in interest expense associated with a net
decrease in the Company's long-term indebtedness and an increase in interest
income earned on the note receivable from the CAS divestiture at the end of the
first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1997 the Company financed its operations
principally from cash on hand, cash generated from the disposition of assets,
and from the return on investment of its cash and cash equivalents. Net cash
provided by operating activities during the first six months of 1997 was
$474,000.
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a term loan basis with interest
at a variable rate, generally not to exceed the prime rate. Principal is to be
amortized over seven years, but with any unpaid amount finally due and payable
on June 30, 2001. In April 1997, following the infusion of cash upon the sale of
CAS, the Company prepaid, on an accelerated basis, $3,000,000 of the then
outstanding principal balance of the term loan. The remaining $10,000,000 under
the credit agreement is available on a line of credit basis for working capital
purposes (with up to $5,000,000 of this amount also being available for
non-working capital purposes). The line of credit component of the credit
agreement expires on May 31, 1998. The credit agreement contains provisions with
respect to the payment of dividends and the level of capital expenditures and
requires the maintenance of specific levels of working capital, tangible net
worth and continued quarterly profitability.
The Company invested $2,341,000 in the first six months of 1997 in additions to
property and equipment; mainly computers, field equipment and the expansion of
its equipment fabrication facilities.
The Company believes that its cash on hand and cash generated from operations,
together with its available bank financing will be sufficient to meet the
Company's capital needs for at least the next twelve months.
11
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EMCON
PART II OTHER INFORMATION
Items 1. - 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
On May 29, 1997, the Annual Meeting of the Shareholders of EMCON was held at the
Syracuse Room of the Holiday Inn Select, 1221 Chess Drive, Foster City,
California. Of the 8,543,012 shares outstanding as of the record date, 7,006,679
shares were present or represented by proxies at the meeting.
Election of Directors. An election of directors was held with the following
individuals being elected to the Board of Directors:
For Withheld
--------- --------
Douglas P. Crane 6,799,943 206,736
Eugene M. Herson 6,813,308 193,371
Donald R. Andres 6,814,966 191,713
Richard A. Peluso 6,836,048 170,631
Jack M. Marzluft 6,700,562 306,117
Donald R. Kerstetter 6,716,698 289,981
Peter Vardy 6,791,513 215,166
Ratification Of Appointment Of Independent Auditors. The shareholders voted to
ratify the appointment of Ernst & Young LLP as EMCON's independent auditors for
the fiscal year ending December 31, 1997. The proposal received 6,865,057 votes
for, 123,678 votes against, and 17,944 abstentions.
Item 5. Not Applicable
Item 6. Exhibits and Reports
(a) Exhibits - See Index to Exhibits on Page 14
(b) Reports on Form 8-K - Not Applicable
12
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EMCON
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 8, 1997 EMCON
R. Michael Momboisse
-------------------------------------
R. MICHAEL MOMBOISSE
Chief Financial Officer,
Vice President - Legal, and Secretary
(Duly authorized and principal
financial and accounting officer)
13
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EMCON
INDEX TO EXHIBITS
2.1 Stock Purchase Agreement dated January 30, 1996, among *
Organic Waste Technologies, Inc. ("OWT"), Registrant and
the selling shareholders and option holders of OWT, incorporated
by reference from Exhibit 2.1 of the Current Report on
Form 8-K dated March 14, 1996, (the "March 1996 8-K").
2.2 Asset Purchase Agreement between Yolo Energy Partners, *
Inc., Yolo Landfill Gas Corporation, EMCON, Yolo Neo
LLC, and Minnesota Methane LLC dated December 31, 1996,
incorporated by reference from Exhibit 10.20 of the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 10-K").
2.3 Acquisition Agreement between EMCON and its wholly *
owned subsidiary, Monterey Landfill Gas Corporation,
and Biomass Energy Partners V, L.P., dated March 6,
1997, incorporated by reference from Exhibit 10.22
of the 1996 10-K.
2.4 Stock Purchase Agreement dated April 4, 1997 among *
Registrant, Columbia Analytical Services, Inc. (`CAS"),
Northwest Trust as trustee of the CAS Employee Stock
Ownership Trust and certain senior management employees
of CAS, incorporated by reference from Exhibit 2.4 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997 (the "March 1997 10-Q").
2.5 Stock Purchase Agreement dated April 30, 1997 among *
Registrant, OWT, National Earth Products, Inc. ("NEP")
and the selling stockholders of NEP, incorporated by
reference from Exhibit 2.5 of the March 1997 10-Q.
3.1 Articles of Incorporation, as amended, incorporated *
by reference from Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1 (File No. 33-16337)
effective September 16, 1987 (the "Form S-1 Registration
Statement").
3.2 Certificate of Amendment of Restated Articles of *
Incorporation as filed on May 24, 1988, incorporated by
reference from Exhibit 3.2 of the Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 (the "1988 10-K").
3.3 Certificate of Amendment of Restated Articles of *
Incorporation as filed on June 4, 1991, incorporate
by reference from Exhibit 4.1 of the Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1991
(the "June 1991 10-Q").
3.4 Bylaws, as amended, incorporated by reference from *
Exhibit 4.2 of the June 1991 10-Q.
14
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Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------- --------------
10.1 EMCON 1986 Incentive Stock Option Plan and Amendment, *(1)
incorporated by reference from Exhibit 10.15 of
the Form S-1 Registration Statement.
10.2 Form of Agreement pursuant to Salary Continuation Plan, *(1)
incorporated by reference from Exhibit 10.17 of the
Form S-1 Registration Statement.
10.3 Schedule identifying Agreements pursuant to Salary *(1)
Continuation Plan between Registrant and certain
employees, incorporated by reference from Exhibit
10.3 of the March 1997 10-Q.
10.4 Form of Indemnity Agreement between the Registrant *
and each of the Registrant's officers and directors,
incorporated by reference from Exhibit 10.20 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1988 (the "1988 10-K").
10.5 EMCON 1988 Stock Option Plan, amended by shareholder *(1)
approval on May 25,1994, including form of Nonqualified
Stock Option Agreement (Outside Directors), incorporated
by reference from Exhibit 10.9 of Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30,
1994 (the "June 30, 1994 10-Q").
10.6 EMCON Employee Stock Purchase Plan incorporated by *(1)
reference from Exhibit 10.10 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1995.
10.7 EMCON Restricted Stock Plan incorporated by reference *(1)
from Exhibit 10.15 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.
10.8 EMCON Deferred Compensation Plan effective January 1, *(1)
1994, incorporated by reference from Exhibit 10.12 of
the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (the "1993 10-K").
10.9 Trust Agreement for the EMCON Deferred Compensation Plan *(1)
and Salary Continuation Plan Trust dated February 19, 1994,
between Registrant and Wells Fargo Bank, N.A. incorporated
by reference from Exhibit 10.13 of the 1993 10-K.
10.10 Agreement between Eugene M. Herson and Registrant dated *(1)
November 30, 1995, incorporated by reference from
Exhibit 10.21 of Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 (the "1995 10-K").
15
<PAGE>
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------- -------------
10.12 Credit Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.2 of
the March 1996 8-K.
10.13 Security Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.3 of the
March 1996 8-K.
10.14 Pledge Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.4 of
the March 1996 8-K.
10.15 Eurodollar Rate Option Agreement between The Bank *
of California, N.A. and Registrant dated February 29,
1996, incorporated by reference from Exhibit 10.5
of the March 1996 8-K.
10.16 Fixed Rate Amortization Option Agreement between *
The Bank of California, N.A. and Registrant dated
February 29, 1996, incorporated by reference from
Exhibit 10.6 of the March 1996 8-K.
10.17 Note Agreement among the Registrant, OWT, and certain *
employees of OWT, incorporated by reference from
Exhibit 10.1 of the March 1996 8-K.
10.18 Rescission and Reformation Agreement dated effective *
November 1, 1996 among EMCON, OWT, and certain employees
of OWT, incorporated by reference from Exhibit 10.18 of
the 1996 10-K.
10.19 New Note Agreement dated effective November 1, 1996 *
among EMCON, OWT and certain employees of OWT, incorporated
by reference from Exhibit 10.19 of the 1996 10-K.
10.20 Second Amendment to Credit Agreement dated effective *
January 27, 1997 among EMCON and Union Bank of
California, N.A. (formerly known as The Bank of
California, N.A.), incorporated by reference from
Exhibit 10.21 of the 1996 10-K.
10.21 Third Amendment to Credit Agreement dated effective *
March 27, 1997 among EMCON and Union Bank of California,
N.A. (formerly known as The Bank of California, N.A.),
incorporated by reference from Exhibit 10.23 of the
1996 10-K.
10.22 Convertible Notes dated April 30, 1997 issued by EMCON *
to Dennis Grimm and Charles Gearhart in the principal
amounts of $400,798.40 and $399,201.60, respectively,
incorporated by reference from Exhibit 10.22 of the
March 1997 10-Q.
16
<PAGE>
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- --------- ------------------
10.23 Lease Agreement dated April 4, 1997, between EMCON *
and Columbia Analytical Services, Inc., incorporated
by reference from Exhibit 10.23 of the March 1997
10-Q.
10.24 Amendment 1997-I to EMCON Deferred Compensation Plan 18
dated effective February 22, 1997.
10.25 Fourth Amendment to Credit Agreement dated effective 21
June 24, 1997 among EMCON and Union Bank of California,
N.A.
11.1 Computation of Income (Loss) Per Share. 24
27 Financial Data Schedule, included herein. 25
* Incorporated by reference
(1) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c)of the instructions
to Form 10-K.
17
EXHIBIT 10.24
AMENDMENT 1997-I
TO
EMCON
DEFERRED COMPENSATION PLAN
EMCON, a California corporation (the "Company"), pursuant to
the power granted to it by Section 11.2 of the EMCON Deferred Compensation Plan
(the "Plan"), hereby amends the Plan, as follows, effective as of February 22,
1997:
1. Section 1.1 is amended in its entirety to read as follows:
""Account Balance" shall mean, with respect to a Participant, a credit
on the records of the Employer equal to the sum of (i) the Deferral
Account balance, and (ii) the vested Company Contribution Account
balance. The Account Balance, and each other specified account balance,
shall be a bookkeeping entry only and shall be utilized solely as a
device for the measurement and determination of the amounts to be paid
to a Participant, or his or her designated Beneficiary, pursuant to
this Plan."
2. A new Section 1.11A is added as follows:
""Company Contribution Account" shall mean (i) the sum of the
Participant's Discretionary Company Contribution Amounts, plus (ii)
interest credited in accordance with all the applicable interest
crediting provisions of this Plan that relate to the Participant's
Company Contribution Account, less (iii) all distributions made to the
Participant of his or her Beneficiary pursuant to this Plan that relate
to the Participant's Company Contribution Account."
3. A new Section 1.15A is added as follows:
""Discretionary Company Contribution Amount" shall mean, for any one
Plan Year, the amount determined in accordance with Section 3.4A."
4. A new Section 1.17A is added as follows:
""Index Rate" shall mean, for each Plan Year, an interest rate, which
may be positive or negative, determined by the Committee, in its sole
discretion, that, unless otherwise indicated by the Committee, shall be
equal to a rate based on an index announced by the Committee prior to
the beginning of the Plan Year."
5. A new Section 3.4A is added as follows:
"Discretionary Company Contribution Amount. For each Plan Year, an
Employer, in its sole discretion, may, but is not required to, credit
any amount it desires to any Participant's Company Contribution Account
18
<PAGE>
under this Plan, which amount shall be for that Participant the
Discretionary Company Contribution Amount for that Plan Year. The
amount so credited to a Participant may be smaller or larger than the
amount credited to any other Participant, and the amount credited to
any Participant for a Plan Year may be zero, even though one or more
other Participants receive an Discretionary Company Contribution
Amount, if any, shall be credited as of the first day of the Plan
Year."
6. Section 3.5 is amended in its entirety to read as follows:
"Interest Crediting Prior to Distribution.
(a) Interest shall be credited and compounded annually
for each Plan Year prior to any distribution of
benefits under Articles 4, 5, 6, 7 or 8 as follows:
(i) on a Participant's Deferral Account, based upon
the Crediting Rate for each Plan Year, and (ii) on
a Participant's Company Contribution Account, based
upon the Crediting Rate for each Plan Year,
except to the extent the Participant otherwise elects
under Section 3.5(b) below. On a Participant's
Deferral Account, nterest shall be credited as
though the Annual Deferral Amount for that Plan Year
was withheld at the beginning of the Plan Year or,
in the case of the first year of Plan
participation, was withheld on the date that the
Participant commenced participation in the Plan.
On a Participant's Company Contribution Account,
interest shall be credited as though the
Discretionary Company Contribution Amount, if
any, was credited at the beginning of the Plan Year
to which it relates. In the event of Retirement,
Disability, death or a Termination of Employment
prior to the end of a Plan Year, the basis for that
year's interest crediting will be a fraction of
the full year's interest, based on the number of
full months that the participant was employed
with the Employer during the Plan Year prior to the
occurrence of such event. If a distribution is
made under this Plan, for purposes of crediting
interest, the Account Balance shall be reduced as of
the first day of the month in which the
distribution is made.
(b) Each Plan Year prior to any distribution of benefits
under Articles 4, 5, 6, 7 or 8, a Participant may
elect, by delivering to the Committee a signed and
completed Election Form to such effect prior to the
beginning of such Plan Year, to have interest
credited and compounded annually on his or her
Company Contribution Account based upon the Index
Rate, rather than the Crediting Rate, for such Plan
Year."
2. Section 3.7 is amended in its entirety as follows:
"FICA and Other Taxes.
(g) Annual Deferral Amounts. For each Plan Year in which
an Annual Deferral Amount is being first withheld
from a Participant, the Participant's Employer(s)
shall withhold from that portion of the Participant's
Base Annual Salary that is not being deferred, in a
manner determined by the Employer(s), the
Participant's share of FICA and other employment
19
<PAGE>
taxes on such Annual Deferral Amount. If necessary,
the Committee may reduce the Annual Deferral Amount
in order to comply with this Section 3.7.
(h) Company Contribution Amounts. When a participant
becomes vested in a portion of his or her Company
Contribution Account, the Participant's Employer(s)
shall withhold from the Participant's Base Annual
Salary that is not deferred, in a manner determined
by the Employer(s), the Participant's share of FICA
and other employment taxes. If necessary, the
Committee may reduce the vested portion of the
Participant's Company Contribution Account in order
to comply with this Section 3.7.
(i) Distributions. The Participant's Employer(s), or the
trustee of the Trust, shall withhold from any
payments made to a Participant under this Plan all
federal, state and local income, employment and other
taxes required to be withhold by the Employer(s), or
the trustee of the Trust, in connection with such
payments, in amounts and in a manner to be determined
in the sole discretion of the Employer(s) and the
trustee of the Trust."
1. A new Section 3.8 is added as follows:
"Vesting.
(h) A Participant shall at all times be one hundred
percent (100%) vested in his or her Deferral
Account.
(i) A Participant shall at all times be zero percent (0%)
vested in his or her Company Contribution Account,
unless fully or partially vested in accordance with
the vesting schedule, if any, provided in his or her
Plan Agreement."
9. Section 7.2 is amended by deleting the words "from the January 1".
The Company has caused this Amendment to be signed by its duly
authorized officer as of the date written below.
EMCON
By: \s\R. Michael Momboisse
---------------------------------
R. Michael Momboisse
Its: CFO and Vice President, Legal
---------------------------------
Date: February 2, 1997
---------------------------------
20
EXHIBIT 10.25
FOURTH AMENDMENT
TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AGREEMENT (this "Fourth Amendment") dated as of
June 24, 1997, is made and entered into by and between EMCON, a California
Corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank"), successor
in interest to the Bank of California, N.A.
RECITALS:
A. Borrower and Bank are parties to that certain Credit Agreement dated
February 29, 1996 as amended from time (the "Agreement"), pursuant to which
Bank agreed to extend credit to Borrower.
B. Borrower is currently indebted to Bank under the Agreement in the
aggregate principal amount of $15,928,571 and Borrower has no defense,
offset or counterclaim against Bank or any other person or entity that
diminishes such indebtedness.
Now, therefore, in consideration of the above recitals and of the mutual
covenants and conditions contained herein, Borrower and Bank agree as follows:
AGREEMENT:
1. Defined Terms. Initially capitalized terms used herein which
are not otherwise defined shall have the meanings assigned thereto
in the Agreement.
2. Amendments to the Agreement.
(a) In ARTICLE 1 - DEFINITIONS, "Termination Date" is amended in its
entirety to read as follows:
""Terminate Date" means the earlier of (a) the date Bank may
terminate making Advances or extending credit pursuant to the
rights of Bank under Article 7; or (b) May 29, 1998 for the Line
of Credit; or (c) June 30, 2001 for the Term Loan."
(b) In ARTICLE 1 - DEFINITIONS, "Permitted Liens" is amended by adding
the following:
"(vii) Deed of Trust on that certain real property the common address
of which is 725 Friendship Drive, New Concord, Ohio".
"(viii) Liens created pursuant to that certain Security Agreement dated
as of April 4, 1996 among Organic Waste Technologies, Inc. ("OWT") and
its subsidiaries and Charter One Bank F.S.B. in support of that certain
$4,850,000 Equipment Term Loan of same date to OWT (the "OWT Equipment
Loan")."
(c) Section 2.1.1 (a) Advances is hereby amended by substituting in line
six the amount "$100,00.00" for the amount "$10,000.00".
21
<PAGE>
(d) Section 5.2 (b) Tangible Net Worth/Debt to Worth is hereby amended by
substituting the amount "Forty-One Million Dollars ($41,000,000)" for
the amount "Thirty Six Million Dollars ($36,000,000)".
(e) Section 5.4 (b) Year-End Financial Statements is hereby amended by
deleting in line four the words "and consolidating".
(f) Section 5.4 (e) Financial Projections is hereby amended in its entirety
to read as follows:
"As soon as available, but no later than December 31 of the prior year,
a complete copy of Borrower's annual, company-prepared projections for
the ensuing fiscal year, which shall include consolidating and
consolidated statements of income."
(g) Section 6.7 Loans/Investments is hereby amended by adding the
following:
"(j) The OWT Equipment Loan"
"(k) A mortgage on that certain real property the common address of
which is 725 Friendship Drive, New Concord, Ohio in a principle
amount not to exceed One Million Two Hundred Thousand Dollars
($1,200,000)."
(h) Section 6.8 Limitation on Capital Expenditures/Leases is amended in
its entirety to read as follows:
"Expend or be committed to expend, on a consolidated basis, Four
Million Dollars ($4,000,000) or more in the aggregate for the
acquisition of gross fixed assets or the lease or rental of gross
fixed assets under capital leases during the term of this
Agreement; provided, however, Borrower may obtain operating lease
lines to be used solely for the purpose of financing leachate
evaporation systems projects in an amount not to exceed an
aggregate of Five Million Dollars ($5,000,000) and so long as the
creation of such lease lines does not cause a violation of any
financial covenants set forth in Section 5.2 of this Agreement."
3. Effectiveness of the Fourth Amendment. This Fourth Amendment shall become
effective as of the date hereof when, and only when, Bank shall have
received all of the following, in form and substance satisfactory to Bank:
(a) The counterpart of this Fourth Amendment, duly executed by Borrower;
(b) The Promissory Note, duly executed by Borrower;
(c) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
(d) A non-refundable fee of Fifteen Thousand Dollars ($15,000) for the
Line of Credit.
4. Ratification. Except as specifically amended hereinabove, the
Agreement shall remain in full force and effect and is hereby ratified
and confirmed.
22
<PAGE>
5. Representations and Warranties. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the Agreement,
as may be amended hereby, is hereby reaffirmed as of the date hereof, each
as if set forth herein;
(b) The execution, delivery and performance of the Fourth Amendment and
any other instruments or documents in connection herewith are within
Borrower's power, have been duly authorized, are legal, valid and binding
obligations of Borrower, and are not in conflict with the terms of any
charter, bylaw, or other organization papers of Borrower or with any law,
indenture, agreement or undertaking to which Borrower is a party or by
which Borrower is bound or affected;
(c) No event has occurred and is continuing or would result from this
Fourth Amendment which constitutes or would constitute an Event of Default
under the Agreement.
6. Governing Law. This Fourth Amendment and all other instruments or
documents in connection herewith shall be governed by and construed
according to the laws of the State of California.
7. Counterparts. This Fourth Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. EMCON
By: /s/William C. Hinch By: \s\Eugene M. Herson
------------------------- ------------------------------
Title: Vice President Title: CEO and President
------------------------- ------------------------------
By: \s\R. Michael Momboisse
------------------------------
Title: CFO and Vice President, Legal
------------------------------
23
EXHIBIT 11.1
EMCON
COMPUTATION OF INCOME PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ......................................................... $ 494 $ 365 $1,185 $ 399
Proforma interest income related to modified
treasury stock method ........................................... N/A 57 N/A 116
------ ------ ------ ------
Adjusted net income ................................................ $ 494 $ 422 $1,185 $ 515
====== ====== ====== ======
Weighted average number of common shares
outstanding during the period ................................... 8,534 8,481 8,534 8,463
Common and common equivalent shares
outstanding for the purpose of calculating
primary net income per share .................................... 8,519 N/A 8,496 N/A
Common equivalent share from outstanding
stock options using the modified treasury
stock method .................................................... N/A 716 N/A 779
Incremental shares to reflect full dilution (1) .................... 75 0 37 0
------ ------ ------ ------
Total shares for purposes of calculating diluted
income per share (1) ............................................ 8,594 9,197 8,533 9,242
====== ====== ====== ======
Primary income per share ........................................... $ 0.06 $ 0.05 $ 0.14 $ 0.06
====== ====== ====== ======
Fully diluted income per share ..................................... $ 0.06 $ 0.05 $ 0.14 $ 0.06
====== ====== ====== ======
</TABLE>
- ------------------
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 to APB
Opinion No. 15, because it results in dilution of less than 3%.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of income and consolidated
statements of cash flows included in the Company's Form 10-Q for the six month
period ended June 30, 1996, and is qualified in its entirety by reference to
such financial statements and the notes thereto.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,120,000
<SECURITIES> 0
<RECEIVABLES> 39,165,000
<ALLOWANCES> 1,275,000
<INVENTORY> 0
<CURRENT-ASSETS> 48,757,000
<PP&E> 32,450,000
<DEPRECIATION> 17,021,000
<TOTAL-ASSETS> 91,881,000
<CURRENT-LIABILITIES> 20,934,000
<BONDS> 0
<COMMON> 42,054,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 91,881,000
<SALES> 52,048,000
<TOTAL-REVENUES> 52,048,000
<CGS> 24,812,000
<TOTAL-COSTS> 24,812,000
<OTHER-EXPENSES> 24,266,000
<LOSS-PROVISION> 499,000
<INTEREST-EXPENSE> 648,000
<INCOME-PRETAX> 1,823,000
<INCOME-TAX> 638,000
<INCOME-CONTINUING> 1,185,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,185,000
<EPS-PRIMARY> $0.14
<EPS-DILUTED> $0.14
