UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 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 of 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant, based on the closing price of the Registrant's
Common Stock as quoted by the National Association of Securities Dealers'
Automated Quotation System on February 28, 1998, was $24,794,995 Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of February
28, 1998, was 8,574,839.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's definitive proxy statement to be filed with the
Commission within 120 days of the end of Registrant's fiscal year ended December
31, 1997 are incorporated by reference in Part III of this Form 10-K.
The Index to Exhibits appears on Page 44 of this Report. This Report, including
all exhibits and attachments, contains 91 pages.
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TABLE OF CONTENTS
PART I PAGE
Item 1: Business ............................................... 4
Item 2: Properties............................................... 9
Item 3: Legal Proceedings........................................ 10
Item 4: Submission of Matters to a Vote of Security Holders...... 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters.................................... 11
Item 6: Selected Financial Data.................................. 12
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 13
Item 8: Financial Statements and Supplementary Data.............. 18
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 40
PART III
Item 10: Directors and Executive Officers of the Registrant....... 40
Item 11: Executive Compensation................................... 40
Item 12: Security Ownership of Certain Beneficial Owners and
Management............................................. 40
Item 13: Certain Relationships and Related Transactions........... 40
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 41
Signatures............................................... 42
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PART I
Item 1. Business
EMCON (referred to herein as "EMCON" and the "Company") provides comprehensive
environmental engineering, design, construction, operations and maintenance, and
equipment fabrication services to a variety of public and private industrial and
solid waste clients. The Company is comprised of two divisions -- the Operation
and Construction Division (EOC) and the Professional Services Division (PSD) --
and services three key service lines: Solid Waste, Site Restoration and Facility
Services.
EMCON is a leader in the design, construction and remediation of solid and
hazardous waste facilities, having participated in the design, construction and
remediation of several hundred transfer, storage and disposal facilities in the
United States, as well as Argentina, Canada, Hong Kong, India, Indonesia,
Israel, Kuwait, Malaysia, Russia, Saudi Arabia, Mexico, Peru and Venezuela.
EMCON's waste facility services include site selection and evaluation, facility
design, development of preprocessing and operating plants, assistance in
regulatory compliance and permitting, final closure, end-use planning and
design, construction, and operations and maintenance. The Company's services
also include the development of programs dealing with environmental assessments
and remediation of contaminated sites, as well as services related to applied
sciences such as fuel spill damage assessment, marine fate-and-effect studies
and natural resource damage assessment. The Company's professional staff
includes chemical, civil, geotechnical, mechanical, electrical and environmental
engineers; marine and terrestrial biologists; oceanographers; plant ecologists;
chemists; geologists; hydrogeologists; hydrologists and toxicologists.
References to the Company and EMCON in this report include the Company's
subsidiaries, unless the context indicates otherwise.
During the first quarter of 1997, the Company completed the sale of its
laboratory subsidiary, Columbia Analytical Services, Inc. ("CAS"), to the
employees of CAS for $4,000,000 in cash, CAS' promissory notes for $3,219,000
(the "CAS Notes") and a continuing preferred stock interest in CAS valued at
$500,000. The Company paid to CAS $206,000 in cash for retired employee
contracts and for accelerated vesting of stock options and other non vested
stock rights. The principal balance of the CAS Notes are potentially subject to
adjustment based upon the Company's ability to continue to provide analytical
laboratory work to CAS.
Effective May 1, 1997, Organic Waste Technology, Inc. (OWT), a wholly-owned
subsidiary of EMCON, acquired all of the outstanding equity interest in National
Earth Products, Inc. (NEP), a Lancaster, Pennsylvania-based company with
significant expertise in landfill civil construction and related soils
processing. NEP was acquired for $933,000 in cash and the issuance of EMCON's
convertible promissory notes in the aggregate principal amount of $800,000.
Approximately 50% of the convertible notes are due on May 1, 2000, with the
balance due on May 1, 2002. The indebtedness bears interest at the rate of 8%
per annum and is convertible into EMCON Common Stock at a conversion price of
$6.50 per share. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,476,000
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 December 31, 1997 was approximately $39,000. Additional consideration may
be paid for the purchase of NEP subject to the achievement of certain earn out
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.
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On March 6, 1997, the Company completed the sale of its Marina landfill
gas-to-energy project for a net up front cash payment of $944,000. The Company
earned an additional $200,000 at year end as a result of the satisfaction of
certain post-closing contingencies.
Services
The Company is comprised of two operating divisions: the Professional Services
Division (PSD); and the Operations and Construction Division (EOC). These two
divisions work in concert to address the needs of the Company's clients in three
key service lines: Solid Waste, Site Restoration and Facility Services. Solid
Waste Services
The Company's Professional Services Division and Operations and Construction
Division offer a full range of services to operators of solid and hazardous
waste transfer, storage, recycling, and disposal facilities; from the design,
permitting and construction of the facility, to the fabrication of necessary
equipment and components, to post-closure, operations and maintenance services
and end-use planning. Customers may utilize the full range or a portion of the
Company's services.
Through its extensive experience in the solid waste industry, the Company has
developed expertise in several critical areas of waste disposal technology -
landfill cells and related infrastructure, liner systems, leachate treatment,
and gas control/recovery systems. To protect surrounding soil and water, natural
and synthetic liners are used to collect and contain potentially hazardous
liquids percolating through the waste that have been deposited at the site
("leachate"). Leachate is then collected on the surface of the liner, withdrawn
from the landfill and treated using physical, chemical, evaporative and/or
biological methods. Gas control and recovery systems, which may be installed on
active or closed landfills, are used to control the methane gas produced by
decomposing organic refuse. Where economical, recovery systems are designed to
extract methane to generate heat and/or electricity, or in some cases to
evaporate leachate using the Company's patented leachate evaporation technology.
Federal regulation now requires that all new land disposal facilities utilize
liners and methane control systems, and that these systems be required to meet
increasingly stringent design standards.
EMCON's services to its solid waste clients often begin with the evaluation of
potential disposal facility sites. The hydrogeological and geotechnical staff of
the Professional Services Division evaluate soils, groundwater occurrence and
quality, seismic stability and potential flooding at possible locations, while
other professionals analyze operational considerations, such as proximity of a
site to water sources, visibility to the public and estimated operating
expenses. Once desirable sites are identified, the Company assists in obtaining
regulatory approvals by drafting environmental impact reports and permit
applications, appearing at hearings and negotiating with government agencies.
EMCON performs detailed cost/benefit analyses of design alternatives, using, if
possible, natural features of the site to reduce cost. EMCON engineers design
the waste disposal facility, considering such factors as the volume and types of
material to be disposed at the site, land use and public policy, physical
characteristics of the site and regulatory requirements. EMCON identifies the
type of natural or synthetic liners which are appropriate or required for the
site and designs the monitoring systems, landfill gas control systems and
leachate recovery and treatment systems. EMCON also monitors statutory and
regulatory developments, and assists operators in implementing required design
or operating changes and preparing additional permit applications and
environmental reports.
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Throughout the construction process, the Professional Services Division performs
services such as preparing detailed construction documents, assisting in
contractor selection, scheduling and monitoring work in progress, performing
construction quality assurance review, review of contractor requests for payment
and assisting with regulatory compliance and permitting. The Company also trains
disposal facility personnel, performs environmental monitoring services, and
designs site maintenance programs and operating plans.
Where appropriate, the Operations and Construction Division can perform a broad
range of related services, including construction of landfill cells, landfill
remediation and collection systems, landfill gas flares and control systems, and
leachate evaporation systems, as well as the capping, closure, development of
landfill gas recovery projects, and long-term operation and maintenance of old
landfills. The Company is also seeing more opportunities to provide fully
integrated design -- build projects, utilizing the combined solid waste
expertise of PSD and EOC.
The Operations and Construction Division is complimented by ET Environmental
Corporation ("ET"), a 50/50 joint venture between EMCON and The Turner
Construction Company ("Turner"). ET's charter is to provide primarily
above-ground environmental, remedial and construction services on a national
basis, utilizing the regional resources of EMCON and Turner. ET is a leader in
the development and construction of solid waste transfer stations and materials
recovery facilities on a design build basis.
Site Restoration Services
EMCON's environmental expertise incorporates analytical and risk-assessment
capabilities enabling remediation specialists to design site-specific solutions
to environmental compliance and contamination problems. The Company is often
called upon to design and monitor remediation plans when corrective action is
required at solid or hazardous waste storage or disposal facilities and at
commercial or industrial plant sites. Problems which may require remediation
include leaching of hazardous chemicals or wastes into groundwater, ground
instability or erosion, flooding and migration of landfill gas. Work generally
entails site reconnaissance, drilling exploratory borings, and soil and
groundwater sampling as part of the assessment program. Using data collected in
the assessment phase of a project, the Company then defines the nature and
extent of the problem, develops a remediation program and monitors its
implementation.
The Company generally approaches site restoration projects by consulting with
the client on the nature and scope of the problem. Historical information about
the site, if available, is reviewed to determine the most likely sources and
locations of contamination. Information about the local geology and hydrogeology
is also reviewed to determine potential migration pathways. A detailed work plan
is then prepared that describes the field investigation program to be conducted,
including the number and location of samples to be collected and the specific
chemical analyses to be performed. Trained personnel then conduct the field
investigation program, which may include drilling soil borings, installing
groundwater monitoring wells, and collecting samples of soil, groundwater,
surface water and/or industrial discharges.
Following laboratory analysis of the various samples collected, the results are
evaluated by Company engineers and scientists to determine the nature and extent
of contamination at the site. Depending on the complexity of the site, this may
require more than one round of sampling. Site cleanup levels are then determined
based on the media that have been impacted, the contaminants of concern, the
intended use of the property, and state and federal regulations. In consultation
with the client, various remediation alternatives are then identified and
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evaluated for implementability, effectiveness, permanence and cost. Remedial
alternatives at a site may include the excavation and removal of the sources of
contamination and contaminated soil, the removal and treatment of groundwater
using physical and chemical treatment systems, or the installation of surface
caps and vertical hydraulic barriers. EMCON also applies in-situ technologies,
such as vapor extraction or bioremediation as appropriate, to remediate
contaminated soils and groundwater as a means to reduce cost and minimize
disturbance. To assure continued compliance during and after remediation, EMCON
designs and provides operations and maintenance programs for affected
facilities.
Through its ET joint venture with Turner, the Company is also able to provide a
complete turnkey package to clients, combining planning and implementation of
facility/plant decommissioning; remediation of soil and groundwater
contamination, and lead based paint and asbestos abatement.
Facility Services
In the last several years the market has seen a significant trend among many of
the larger industrial clients to outsourcing many of their environmental,
regulatory, and health and safety compliance requirements. EMCON offers
responsive assistance to the regulated community in a broad range of areas
including air quality regulatory compliance through provision of air quality
assessment and engineering services. Company personnel have direct experience in
air quality permitting under the New Source Review (NSR), Prevention of
Significant Deterioration (PSD) and added requirements under the Clean Air Act
Amendments of 1990, preparing emission inventories (for criteria and toxic air
pollutants), performing risk assessment to evaluate potential human and
ecological risk, evaluating emission control technologies (BACT/RACT/LAER/MACT),
dispersion modeling, ambient air quality and meteorological measurements,
pollution prevention and waste minimization, indoor air, litigation support and
expert testimony, and compliance audits. EMCON's air quality staff are fully
integrated with staff in other environmental disciplines to provide cost
effective evaluations and compliance solutions to situations which involve
multiple media contamination.
Clients and Marketing
EMCON's principal clients are industrial concerns, predominantly in the solid
waste, petroleum, wood products, aerospace, power generation, chemicals and
manufacturing industries. The Company also provides services to utilities,
non-regulatory government entities, and financial institutions. The Company
often enters into master service agreements with major clients, which set forth
the general terms and conditions under which EMCON will perform services and
which facilitate repeated use of the Company's services.
EMCON focuses significant efforts on providing high quality services in a timely
manner and developing long-term relationships with its clients. EMCON assigns an
experienced project manager to each project to coordinate work undertaken by the
numerous professionals from different disciplines within the Company. This
approach reduces the time and cost required to complete a project and relieves
the client of the responsibility of coordinating the efforts of independent
consultants. Because the Company provides a broad range of services, work
performed for a client in one technical area often leads to work in other
technical areas.
In the last several years, an increasing amount of work has been done on a
competitive bid basis in response to client requests for proposals. This has
required the dedication of significantly greater resources to proposal writing
and general business development, and the implementation of a more formal
marketing program to share leads and coordinate resources nationwide.
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To further promote its services, the Company takes an active role in industry
trade associations to enhance its national reputation for technical expertise.
Similarly, EMCON provides services to a wide variety of local, state and federal
government agencies and contractors. Participation in such contracts allows
EMCON to remain on the leading edge of new technological developments and to
publicize its expertise.
Regulation
Public concern over health, safety and preservation of the environment has
resulted in the enactment of a broad range of environmental laws and regulations
by local, state and federal lawmakers and agencies. These laws and the
implementing regulations affect nearly every industry, as well as the agencies
of federal, state and local governments charged with their enforcement.
Recently, the level of enforcement has waned given governmental budget
constraints and a number of environmental laws set for renewal have been allowed
to lapse. Nonetheless, those laws and regulations still in force will continue
to stimulate demand for the kinds of services offered by EMCON. They also
subject the Company to stringent regulation in the conduct of its operations.
Potential Liability and Insurance
The Company's work involves assisting clients in handling, storing and disposing
of hazardous materials, toxic wastes and other pollutants, as well as the
remediation of existing contamination. The Company therefore is exposed to a
significant risk of professional liability for environmental damage and personal
injury.
EMCON maintains health and safety and quality assurance/quality control programs
to reduce the risk of potential damage to persons and property and the
associated potential liability. In addition, EMCON currently maintains
professional liability insurance (covering damages resulting from negligent
acts, errors, mistakes or omissions in rendering or failing to render its
professional services) as well as commercial general liability insurance
(covering bodily injury and property damage).
EMCON endeavors contractually to limit its potential liability to the amount and
terms of its insurance policies, and to be indemnified by its clients from
potential liability to third parties. However, the Company is not always able to
obtain such limitations on liability or indemnification, and such provisions,
when obtained, may not adequately shelter the Company from liability.
Consequently, a partially or completely uninsured claim, if successful and of
sufficient magnitude, could have a material adverse effect on the Company and
its financial condition and results of operations.
Although the liabilities arising out of environmental laws are more directly
applicable to the Company's clients, such laws could, under certain factual
circumstances, apply to some of the activities pursued by the Company in the
course of business, including failure to properly design a cleanup, removal or
remedial action plan or failure to achieve required cleanup standards in
compliance with such laws and standards. Such liabilities can be joint and
several where other parties are involved. Because much of the Company's business
is generated either directly or indirectly as a result of federal and state
governmental programs and regulations, changes in governmental policies
affecting such programs, or regulations or administrative actions affecting the
funding or sponsorship of such programs, could have a material adverse effect on
the Company's business. See Item 3 - Legal Proceedings.
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Competition
EMCON competes directly with a wide variety of national and local engineering,
consulting, construction, equipment, and operations and maintenance companies
which offer services similar to those provided by the Company. However, many of
these competitors are only engaged in certain segments of the applicable
industry and do not provide the broad range of services provided by the Company.
In addition, the Company competes indirectly with remediation companies which
offer environmental consulting and engineering services, as well as
transportation, storage or disposal capabilities generally not provided by
EMCON. The Company believes that the principal competitive factors in its
industry are price, reputation, technical proficiency, management experience and
breadth of services offered. The industry has also experienced a significant
amount of consolidation activity. Management anticipates that these trends will
continue for the foreseeable future.
Employees
As of December 31, 1997, the Company had a total of 972 employees, including:
520 professionals; 144 technical personnel; and 308 administrative and support
personnel. The Company's professional staff includes chemical, civil,
geotechnical, mechanical, electrical and environmental engineers; marine and
terrestrial biologists; oceanographers; plant ecologists; chemists; geologists;
hydrogeologists; hydrologists and toxicologists. The Company's ability to
attract and retain qualified engineers, scientists and other professionals is an
important factor in determining its future success. EMCON's employees have never
been represented by a union, and the Company believes its relations with its
employees are good.
Seasonality
EMCON's business has experienced an increase in seasonality in recent years, due
in part to the increase in on-site investigation, construction and other field
work. Consequently, the financial results in its second and third quarters
(ending June 30 and September 30, respectively) tend to be stronger than such
results in its first and fourth quarters.
Backlog
The Company estimates that at December 31, 1997, the backlog of future net
revenue from contracts in existence and orders believed to be firm was in excess
of $75 million, all of which is expected to be received within the next twelve
months, compared to $80 million backlog (including CAS) at December 31, 1996.
However, there can be no assurance that this work will not be postponed or
canceled. Furthermore, a substantial portion of the Company's work is performed
pursuant to agreements by which the Company is compensated for time and expenses
devoted to projects with indefinite lives.
Item 2. Properties
The Company's corporate office, located in San Mateo, California, occupies
approximately 3,000 square feet and is leased through July, 2001. The Company's
accounting center, located in Sacramento, California, occupies approximately
4,000 square feet and is leased through December 31, 2000.
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The Company owns 4.4 acres of real property in Kelso, Washington, including
37,000 square feet of office and analytical lab space. The facilities are
currently leased to CAS under a long term lease expiring April 3, 2007. The
Company owns a 4.9 acre piece of property in New Concord, Ohio, including 25,000
square feet of office and equipment fabrication facilities.
The Company leases office and warehouse space in a total of 50 facilities
located in Alaska, Arizona, California, Connecticut, Florida, Georgia, Illinois,
Maine, Massachusetts, Michigan, New Jersey, New York, Ohio, Oregon,
Pennsylvania, Puerto Rico, Texas, Vermont, Virginia and Washington under leases
expiring at various times through December 2002. These facilities have a
combined area of approximately 337,000 square feet.
Item 3. Legal Proceedings
As a 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. In the opinion of management the
resolution of all known lawsuits/claims at amounts in excess of established
reserves will not have a material adverse affect on the Company's financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the NASDAQ National Market System under
the symbol MCON. The following table sets forth the quarterly range of high and
low bid quotations per quarter for 1997 and 1996:
- -------------------------------------------------------------------------------
High Low
- -------------------------------------------------------------------------------
January 1 - March 31, 1996 $4.88 $4.00
April 1 - June 30, 1996 5.13 4.13
July 1 - September 30, 1996 4.13 3.19
October 1 - December 31, 1996 4.25 3.50
January 1 - March 31, 1997 3.75 3.00
April 1 - June 30, 1997 4.06 2.88
July 1 - September 30, 1997 5.50 3.13
October 1 - December 31, 1997 6.88 4.63
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On February 28, 1998, there were 509 shareholders of record of the Company's
common stock.
Although the Company does make annual distributions to a minority shareholder of
one of OWT's subsidiaries, the Company did not pay cash dividends to EMCON
shareholders in 1997 or 1996 and does not plan to pay cash dividends to its
shareholders in the near future. Furthermore, the payment of cash dividends is
restricted by the Company's bank line of credit arrangement. The Company
presently intends to retain earnings for further development of its business.
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Item 6. Selected Financial Data
Five Year Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations Statement Data (a)
Gross revenue $139,343 $137,626 $122,542 $115,638 $ 98,612
Net revenue 109,502 117,705 103,409 95,926 83,062
Direct expenses 56,134 52,608 39,473 37,307 32,201
Indirect expenses 49,782 65,844 61,498 59,302 47,528
Restructuring/other charges (1,612) 8,197 (17) 1,958 --
Loss on disposition of laboratory 333 3,327 -- -- --
Income (loss) from operations 4,865 (12,271) 2,455 (2,641) 3,333
Interest income 516 317 369 348 313
Interest expense 1,251 1,112 181 66 57
Equity in income/(loss) of affiliates (2) 227 (74) (58) --
Minority interest expense 810 188 -- -- --
Income (loss) before provision (benefit) for
income taxes 3,318 (13,027) 2,569 (2,417) 3,589
Provision (benefit) for income taxes 1,161 (2,936) 783 (500) 1,165
Net income (loss) 2,157 (10,091) 1,786 (1,917) 2,424
- -----------------------------------------------------------------------------------------------------------------
Per Share Data (a)
Basic earnings (loss) per share $ 0.25 $ (1.19) $ 0.22 $ (0.24) $ 0.33
Diluted earnings (loss) per share $ 0.25 -- $ 0.21 -- $ 0.33
Shares used in computing basic earnings (loss)
per share 8,549 8,485 8,274 7,919 7,296
Shares used in computing diluted earnings
(loss) per share 8,693 -- 8,338 -- 7,455
- -----------------------------------------------------------------------------------------------------------------
Balance Sheet Data (a)
Total assets $93,075 $ 90,912 $ 78,636 $ 80,989 $ 68,852
Working capital 32,583 34,601 36,313 32,582 36,200
Noncurrent obligations and deferred income
taxes 14,177 16,799 1,700 1,348 882
Shareholders' equity 58,100 55,812 65,306 63,059 58,997
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Company was involved in several acquisitions, mergers, and
divestitures during the five year period presented. See Notes 4 and 6
to the Company's consolidated financial statements.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth (i) certain items in the Company's Consolidated
Statements of Operations as a percentage of net revenue and (ii) the percentage
increase (decrease) in the dollar amount of those items for the period
indicated. Net revenue is determined by subtracting the costs of outside
subcontractor services, largely drilling contractors and specialized consultant
services, from gross revenue. Since EMCON's use of subcontractors can vary from
period to period and the costs of these services are passed directly to the
Company's clients, the Company believes that net revenue is a more accurate
measure of the value of its services.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Percentage of Percentage
Net Revenue Increase (Decrease)
--------------------------------- ---------------------------
1997 1996
vs. vs.
Years Ended December 31, 1997 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% (7.0%) 13.8%
Direct expenses 51.3% 44.7% 38.2% 6.7% 33.3%
Indirect expenses 45.5% 55.9% 59.4% (24.4%) 7.1%
Restructuring/other charges (0.5%) 7.0% -- (107.1%) --
Loss on disposition of laboratory 0.3% 2.8% -- (90.0%) --
Gain on disposition of assets (1.0%) -- -- -- --
Income (loss) from operations 4.4% (10.4%) 2.4% 139.6% (599.8%)
Interest income (expense), net (0.7%) (0.7%) 0.2% 7.5% (522.9%)
Equity in income/(loss) of affiliates -- 0.2% (0.1%) (100.9%) --
Minority interest expense (0.7%) (0.2%) -- (330.9%) --
Income (loss) before provision (benefit) for
income taxes 3.0% (11.1%) 2.5% 125.5% (607.1%)
Provision (benefit) for income
taxes 1.0% (2.5%) 0.8% 139.5% 475.0%
Net income (loss) 2.0% (8.6%) 1.7% 121.4% (665.0%)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Revenue:
Net revenue for 1997 totaled $109,502,000, a 7.0% decrease from $117,705,000 in
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 1997 and
$20,505,000 in 1996), as well as lower demand for the Company's services within
the Company's Professional Services Division (PSD). 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 $22,167,000 in 1996 (following the
acquisition of OWT on February 29, 1996) to $41,386,000 in 1997.
Net revenue for 1996 increased by 13.8% over net revenue of $103,409,000 in
1995. Excluding net revenue of $20,596,000 contributed by Organic Waste
Technologies, Inc. (OWT), following its acquisition on February 29, 1996, net
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revenue in 1996 totaled $97,109,000, a 6.1% decrease from 1995. The decrease was
primarily attributable to significant underperformance of the Company's
Professional Services Division combined with a general decrease in revenue
following reductions in work force throughout the Professional Services Division
during the year. The decrease was, to a lesser extent, also attributable to
particularly difficult weather conditions in the Northeast and Northwest areas
during the first quarter of 1996.
Direct Expenses:
Direct expenses include all project related expenses, including compensation for
billable hours for technical and professional staff and other project related
expenses, as well as direct labor and materials for in-house testing and
construction activities. Direct expenses for 1997 totaled $56,134,000, a 6.7%
increase compared to direct expenses of $52,608,000 for 1996. Direct expenses as
a percent of net revenue increased to 51.3% in 1997 from 44.7% in 1996. The
increase was due in large part to a 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 within the Professional Services
Division.
Direct expenses in 1996 increased 33.3% over direct expenses in 1995 of
$39,473,000. Excluding the direct expenses incurred by OWT in 1996 of
$14,744,000, direct expenses in 1996 totaled $37,864,000, a 4.1% decrease from
1995. Excluding the effects of OWT, direct expenses, as a percent of net revenue
in 1996, increased to 39.0% from 38.2% in 1995; due largely to relative
increases in the cost of labor and materials within the laboratory division.
Indirect Expenses:
Indirect expenses include compensation for non-billable hours of professional,
technical and administrative staff, and general administrative expenses such as
rent, bonuses, benefits, insurance, marketing, legal fees, depreciation and
amortization. Indirect expenses for 1997 totaled $49,782,000, a 24.4% decrease
compared to indirect expenses of $65,844,000 for 1996. Indirect expenses as a
percent of net revenue decreased to 45.5% in 1997 from 55.9% for 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 short-term
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.
Indirect expenses in 1996 increased 7.1% over 1995 indirect expenses of
$61,498,000. Excluding indirect expenses of $3,173,000 incurred by OWT, indirect
expenses in 1996 totaled $62,671,000, a 1.9% increase over 1995. Excluding the
impact of OWT, indirect expenses as a percent of net revenue in 1996 increased
to 64.5% from 59.4% in 1995; due in part to the above-noted decrease in net
revenue, combined with the effect of significant severance costs and expenses
related to the closing of several small offices during 1996. In addition, during
the fourth quarter of 1996, the Company increased reserves relating to pending
litigation matters by an additional $1,553,000.
Restructuring/Other 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,
14
<PAGE>
the Company's Board of Directors approved a strategic restructuring plan in
December, 1996 to reposition the Company to fully exploit its core strengths in
engineering, design, construction, operations and maintenance. As a result of
these actions in 1996, the Company recognized pre-tax restructuring and other
charges of $1,237,000 and $6,960,000, respectively. Included in the
restructuring charge were $604,000 relating to the closure or downsizing of
several underperforming offices, $628,000 related to employee severance and the
write-off of employment contracts for former employees no longer actively
participating in the Company's affairs, and a $5,000 adjustment to the 1994
restructuring plan. Included in other charges were $4,768,000 related to the
write-down in the carrying value of goodwill associated with the Company's
continuing operating units in accordance with the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", $1,529,000 related to the
write-off of idle or disposed of assets, $368,000 related to the write-down of
the Company's landfill gas production rights and related fixed assets, and
$156,000 related to the buyout and cancellation of outstanding stock options to
purchase approximately 743,000 shares of the Company's common stock held by
employees of the Company. Also, included in other charges were $139,000 for
various other operational costs.
As of December 31, 1997, $328,000 of the 1996 restructuring charges have been
incurred and $318,000 remains in other accrued liabilities. A net reduction of
$586,000 to the reserve was recorded to reflect lower than anticipated costs
associated with the abandonment and subsequent sublease of certain office space
and lower than anticipated severance costs due to retaining certain previously
identified personnel.
In October, 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 future value, termination of
personnel, and the elimination or abandonment of excess and under performing
assets and facilities. During the twelve months ended December 31, 1997, $27,000
of cash charges related to the 1994 restructuring were incurred and charged
against the established reserve, bringing the 1994 reserve to a zero balance. To
date, $1,169,000 of restructuring costs have been incurred with no additional
cost anticipated.
Loss on Disposition of Laboratory:
In December 1996, the Company executed a letter of intent to sell its laboratory
division, Columbia Analytical Services, Inc. (CAS), to the employees of CAS by
the first quarter of 1997. In anticipation of the sale, the Company recognized
an impairment in its investment in CAS of $3,327,000; including a write-down in
the carrying value of goodwill associated with previous laboratory acquisitions
of $1,426,000. For the year ended December 31, 1996, CAS had a loss before taxes
of $142,000.
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
("CAS Notes") 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. As a result of several closing adjustments, the Company recognized
an additional loss on disposition of CAS in the first quarter of 1997 of
$333,000. CAS and the Company also entered into a Master Service Agreement
relating to the continued provision of laboratory services to the Company (the
"MSA"). The CAS Notes are subject to offset, in certain circumstances, based
upon the levels of future revenues to CAS accruing under the MSA. The Company
currently does not anticipate that any material offset will occur under the
terms of the MSA.
15
<PAGE>
Gain on Sale of Assets:
During the first quarter of 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 $1,026,000.
Interest Income:
The Company recorded interest income of $516,000 in 1997 compared to $317,000 in
1996 and $369,000 in 1995. The increase in interest income in 1997 compared to
1996 and 1995 was primarily due to the recognition of interest income on the CAS
Notes.
Interest Expense:
The Company incurred interest expense of $1,251,000 in 1997 compared to
$1,112,000 in 1996. The increase in interest expense was a due primarily to an
increase in debt by OWT in connection with (i) the acquisition of National Earth
Products, Inc. and (ii) the acquisition and expansion of its equipment
fabrication facility. This was offset by the $3,000,000 prepayment on the OWT
secured term loan.
The increase in interest expense in 1996, compared to 1995, was due primarily to
increases in long-term debt of $11,747,000 incurred for purposes of financing
the acquisition of OWT in February of 1996 and $5,000,000 for purposes of
financing the subsequent expansion of OWT's 5.3 megawatt landfill gas-to-energy
project.
Income Taxes Provision (Benefit):
The provision (benefit) for income taxes in 1997 was $1,161,000 compared to
($2,936,000) in 1996 and $783,000 in 1995. The effective tax rate for 1997 was
35.0% versus (22.5%) in 1996 and 30.5% for 1995. The 1996 tax benefit is
primarily due to the alternative minimum tax credits generated from the
Company's landfill gas-to-energy project and from temporary timing differences
consisting of the restructuring charges, impairment of assets held for sale and
the increase in the legal reserve.
Included in the Company's consolidated balance sheet at December 31, 1997, are
total current and long-term net deferred tax assets of $5,263,000. The full
utilization of such assets is dependent upon a number of factors including the
Company's ability to generate future profits, the successful implementation of
the Company's restructuring plan and the anticipated reduction in the level of
new tax credits generated from the Company's existing landfill gas-to-energy
project. Based on these factors, the Company believes that it is more likely
than not that the full benefit of the net deferred tax assets will be realized
by the Company in due course.
Liquidity and Capital Resources
Working Capital:
Cash provided by operating activities for fiscal 1997, 1996 and 1995 was
$6,189,000, $1,583,000 and $5,232,000, respectively. The changes in cash
provided by operating activities in 1997, 1996 and 1995 were primarily
attributed to changes in the Company's net income (loss), accounts receivable,
16
<PAGE>
accounts payable, depreciation and amortization, bad debt expense, gain on
disposition of assets, prepaid expense and other current tax assets and other
accrued liabilities. During 1997, the Company's uses of cash for non-operating
activities primarily consisted of repayment of debt in the amount of $5,731,000,
and additions to property and equipment in the amount of $5,325,000; comprised
of computers, field equipment and the expansion of its equipment fabrication
facilities. This was partially offset by net cash provided by operating
activities during 1997 of $6,189,000 and from net cash due to the disposition of
CAS. Cash and cash equivalents increased to $6,106,000 in 1997 from $5,331,000
in 1996.
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 an
interest at a managed rate 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 for working capital purposes (with up to $5,000,000 also being
available for non-working capital purposes). The line of credit component of the
Credit Agreement expires on May 31, 1998. The Company expects to renew the line
of credit component of the Credit Agreement following its expiration. 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. In
April 1997, following the infusion of cash upon the divestiture of CAS, the
Company prepaid, on an accelerated basis, $3,000,000 of the then outstanding
principal balance of the secured loan.
Capital Expenditures:
The Company invested $5,325,000 in 1997 in additions to property and equipment,
mainly computers, field equipment and the expansion of its equipment fabrication
facilities. The Company is currently exploring several sources of financing to
fund the anticipated expansion of its leachate evaporation system (LES) business
which is currently being offered on the equivalent of a design, build, operate
and finance basis. That notwithstanding, 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.
Year 2000:
The Company continues to review and modify its information technology to
recognize the Year 2000, for its critical data processing systems, both
internally and externally. We currently expect the project to be substantially
complete by early 1999, with minimal costs. We do not expect this project to
have a significant effect on operations.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------
Consolidated Statements of Operations for each of the
three years ended December 31, 1997, 1996, and 1995........... 19
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 20
Consolidated Statements of Shareholders' Equity for each of
the three years ended December 31, 1997, 1996, and 1995....... 21
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1997, 1996, and 1995................. 22
Notes to Consolidated Financial Statements....................... 23
Report of Ernst & Young LLP, Independent Auditors................ 39
18
<PAGE>
EMCON
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------- ------------------------------------------------
Years Ended December 31,
------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995
---------------------------------------------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
Gross revenue $139,343 $137,626 $122,542
Outside services at cost 29,841 19,921 19,133
-------- -------- --------
Net revenue 109,502 117,705 103,409
Costs and expenses:
Direct expenses 56,134 52,608 39,473
Indirect expenses 49,782 65,844 61,498
Restructuring/other charges (586) 8,197 (17)
Loss on disposition of laboratory 333 3,327 --
Gain on sale of assets (1,026) -- --
--------- -------- --------
Income (loss) from operations 4,865 (12,271) 2,455
Interest income 516 317 369
Interest expense (1,251) (1,112) (181)
Equity in income (loss) of affiliates (2) 227 (74)
Minority interest expense (810) (188) --
---------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes 3,318 (13,027) 2,569
Provision (benefit) for income taxes 1,161 (2,936) 783
--------- ----------- ----------
Net income (loss) $ 2,157 $(10,091) $ 1,786
========= ========= =========
Basic earnings (loss) per share $ 0.25 $ (1.19) $ 0.22
========= ========= =========
Diluted earnings (loss) per share $ 0.25 -- $ 0.21
========= ========= =========
Shares used in computing basic earnings (loss) per share 8,549 8,485 8,274
========== ========= =========
Shares used in computing diluted earnings per share 8,693 -- 8,338
========== ========== =========
</TABLE>
See accompanying notes.
19
<PAGE>
<TABLE>
<CAPTION>
EMCON
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------- --------------------------
December 31,
------------- ------------
(In thousands, except share amounts) 1997 1996
-------------------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,106 $ 5,331
Accounts Receivable:
Billed accounts receivable, net of allowance for doubtful accounts
of $634 and $515 at December 31, 1997 and 1996, respectively 31,413 24,697
Unbilled accounts receivable, net of allowance for doubtful accounts
of $295 and $436 at December 31, 1997 and 1996, respectively 5,310 8,163
Costs and estimated earnings in excess of billings on
uncompleted contracts 678 904
Prepaid expenses and other current assets 3,401 1,908
Inventory 2,238 879
Deferred taxes, current portion 4,235 1,638
Assets held for sale -- 9,382
---------- --------
Total Current Assets 53,381 52,902
Net property and equipment, at cost 16,182 14,722
Notes receivable 2,811 600
Cash surrender value of insurance policies 2,346 1,707
Other assets 2,597 2,493
Deferred tax assets 1,028 4,818
Goodwill, net of amortization 13,916 12,716
Other intangible assets, net of amortization 814 954
--------- ---------
Total Assets $93,075 $90,912
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,391 $ 5,483
Accrued payroll and related benefits 4,356 6,020
Other accrued liabilities 2,969 4,454
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,732 94
Long-term obligations due within one year 2,350 2,250
-------- --------
Total Current Liabilities 20,798 18,301
Long-term debt 11,441 14,667
Other noncurrent obligations 2,736 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;
8,571,764 and 8,512,688 shares issued and outstanding at
December 31, 1997 and 1996, respectively 42,184 42,001
Retained earnings 15,916 13,811
------- -------
Total Shareholders' Equity 58,100 55,812
------- -------
Total Liabilities and Shareholders' Equity $93,075 $90,912
======= =======
</TABLE>
See accompanying notes.
20
<PAGE>
<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Total
Common Stock Retained Marketable Shareholders'
(In thousands) Shares Amount Earnings Securities Equity
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 8,186 $40,958 $22,132 $ (31) $63,059
Issuance of common stock upon exercise of
options, net of redemptions 30 35 -- 35
Income tax benefits of employee stock option
exercises -- 50 -- 50
Issuance of common stock under the Employee Stock
Purchase Plan 114 369 -- 369
Issuance of restricted stock, net of cancellation (1) (11) -- (11)
Net change in unrealized losses on marketable
securities -- -- -- 18 18
Net income -- -- 1,786 1,786
----------------------------------------------------------------------
Balance at December 31, 1995 8,329 41,401 23,918 (13) 65,306
Issuance of common stock upon exercise of
options, net of redemptions 5 15 -- 15
Issuance of common stock under the Employee Stock
Purchase Plan 88 258 -- 258
Issuance of restricted stock, net of cancellation 91 327 -- 327
Net change in unrealized losses on marketable
securities -- -- -- 13 13
Dividends paid -- -- (16) (16)
Net loss -- -- (10,091) (10,091)
-----------------------------------------------------------------------
Balance at December 31, 1996 8,513 42,001 13,811 0 55,812
Issuance of common stock upon exercise of
options, net of redemptions 42 151 -- 151
Issuance of common stock under the Employee Stock
Purchase Plan 36 99 -- 99
Cancellation of restricted stock (19) (67) -- (67)
Dividends paid -- -- (52) (52)
Net income -- -- 2,157 2,157
-----------------------------------------------------------------------
Balance at December 31, 1997 8,572 $42,184 $15,916 $ 0 $58,100
-----------------------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE>
<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------- ------------------------------------------
Years Ended December 31,
Increase (decrease) in cash and cash equivalents (in thousands) 1997 1996 1995
------------------------------------------------------------------------------ ------------- --------------- -------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $2,157 $(10,091) $ 1,786
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,808 7,330 4,487
Amortization 652 1,034 613
Bad debt expense 1,424 717 1,022
Loss on sale/disposal of property and equipment 227 474 129
Loss on disposition of laboratory 333 -- --
Gain on disposition of assets (1,026) -- --
Write-down of gas production rights -- 247 --
Impairment of goodwill -- 6,194 --
Increase in salary continuation plan 102 133 62
Changes in operating assets and liabilities:
Accounts receivable (3,971) 509 2,376
Costs in excess of billings 226 (421) --
Inventory (1,359) (102) --
Prepaid expenses and other assets (1,015) (782) 302
Notes receivable (2,211) (257) (206)
Cash surrender value, insurance policies (639) (381) (531)
Other assets 2,425 (1,238) (49)
Deferred tax assets 1,193 (3,616) 267
Accounts payable 2,912 (351) (4,672)
Accrued payroll and related benefits (562) 661 (605)
Billings in excess of costs 2,638 (217) --
Other accrued liabilities (1,125) 1,740 251
------------------------------------------------------------------------------- ------------- --------------- ------------
Net cash provided by operating activities 6,189 1,583 5,232
------------------------------------------------------------------------------- ------------- --------------- ------------
Cash flow from investing activities:
Additions to property and equipment (5,325) (2,484) (4,082)
Maturities of available for sale securities -- 514 1,953
Net cash on disposition of laboratory 3,794 -- --
Net cash from dispositions of assets 1,040 -- --
Cash portion of assets held for sale -- (593) --
Acquisitions, net of cash acquired (858) (13,827) --
Proceeds from sale of property and equipment 203 508 327
------------------------------------------------------------------------------- ------------- --------------- ------------
Net cash used for investing activities (1,146) (15,882) (1,802)
------------------------------------------------------------------------------- ------------- --------------- ------------
Cash flow from financing activities:
Proceeds of new debt obligation 1,314 17,526 476
Payments of current and noncurrent obligations (5,731) (7,931) --
Issuance of common stock for cash, net of cancellations 201 600 393
Dividend payments (52) (16) --
------------------------------------------------------------------------------- ------------- --------------- ------------
Net cash provided by (used for) financing activities (4,268) 10,179 869
------------------------------------------------------------------------------- ------------- --------------- ------------
Increase (decrease) in cash and cash equivalents 775 (4,120) 4,299
Cash and cash equivalents, beginning of year 5,331 9,451 5,152
------------------------------------------------------------------------------- ------------ --------------- -------------
Cash and cash equivalents, end of year $6,106 $ 5,331 $ 9,451
------------------------------------------------------------------------------- ------------ --------------- -------------
</TABLE>
See accompanying notes.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
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. Certain amounts in the 1996 and 1995
financial statements have been reclassified to conform to the 1997 presentation.
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year,
resulting in a fifty-two week year in 1997 and a fifty-three week year in 1996.
The Company's year end falls on the Friday closest to the last day of the
calendar quarter. The Company also follows a five-four-four week quarterly
cycle. While the actual period ends for the fiscal years 1997 and 1996 were
January 2, 1998 and January 3, 1997, respectively, for convenience, the date
shown on accompanying consolidated financial statements is December 31, the last
day of the calendar periods.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition and Expenses:
Revenue from engineering service contracts is recognized as services are
provided and revenue from construction projects is recognized on a percentage of
completion basis. The Company routinely subcontracts for outside services, such
as drilling and specialized laboratory services. These costs are generally
passed through to the Company's customers. The Company believes net revenue is a
more accurate measure of the value of its services than gross revenue. Direct
costs include compensation for billable hours for professional and technical
staff and other project expenses reimbursed by clients. Indirect costs include
compensation for non-billable professional and technical staff hours, all
employee fringe benefits, marketing, and general and administrative expenses
such as rent, insurance, depreciation and amortization.
Cash and Cash Equivalents and Marketable Securities:
The Company considers all investment instruments and marketable securities with
an original maturity date of 90 days or less at the date of purchase to be cash
equivalents. Management determines the appropriate classifications of debt
securities held as investments as either held to maturity or available for sale
at the time of purchase and reevaluates such designation as of each balance
sheet date. Investments consisting primarily of high grade U.S. government and
corporate marketable debt securities are classified as available-for-sale, and
are carried at fair value, based on quoted market prices, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, which is included in interest income.
Realized gains and losses and declines in value judged to be
23
<PAGE>
other-than-temporary, as well as any interest on these securities, are included
in interest income. The cost of securities sold is based on the specific
identification method. There were no debt securities held as investment
as of December 31, 1997.
Supplemental Cash Flow Information:
Cash paid for income taxes was approximately $1,673,000, $659,000 and $58,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Cash paid
for interest was approximately $1,210,000, $951,000 and $181,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
In 1995, the Company sold certain land and buildings in exchange for $1,100,000
in marketable trade credits which will be used to reduce cash payments of future
recurring corporate expenses. No significant gain or loss was incurred on the
transaction. The trade credits expire in eight years, and the Company expects to
utilize such credits prior to expiration. To date, $280,000 of the trade credits
have been applied to payments. The Company has agreements for the utilization of
an additional $400,000 of the trade credits. $225,000 and $175,000 of these
credits are included on the December 31, 1997 consolidated balance sheet in
other current assets and other assets, respectively. The remaining balance of
$420,000 is included on the December 31, 1997 consolidated balance sheet in
other assets.
Inventories:
Inventories are recorded at the lower of cost using the first-in, first-out
method, or market.
Property and Equipment:
Property and equipment, net of assets held for sale, consists of (in thousands):
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Land and buildings $ 4,683 $ 2,808
Machinery and equipment 19,895 18,886
Furniture and fixtures 3,685 4,130
Vehicles 2,362 2,871
Leasehold improvements 1,074 1,328
- --------------------------------------------------------------------------------
Total 31,699 30,023
Less accumulated depreciation and amortization 15,517 15,301
- --------------------------------------------------------------------------------
Net property and equipment $16,182 $14,722
- --------------------------------------------------------------------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line basis over the lesser of the estimated useful
lives of the assets or the term of the lease (lives range from 3-31 years).
Amortization of property and equipment acquired under capital leases is included
with depreciation expense.
Approximately $3,963,000 and $7,058,000 of fixed assets net of accumulated
depreciation of $3,533,000 and $6,236,000 were sold or disposed of in 1997 and
1996, respectively.
24
<PAGE>
Basic and Diluted Net Income (Loss) per Share:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to fully diluted earnings per share as previously computed
under APB 15. Income (loss) per share amounts for all periods have been
presented, and where appropriate, the presentation has been restated to conform
to the requirements under Statement 128.
Business Segment and Concentration of Credit Risk:
The Company operates within one business segment, which provides comprehensive
environmental engineering, consulting, construction facilities operations and
maintenance, and services to industrial, private and governmental concerns,
predominantly in the waste disposal, petroleum, wood products, chemical and
manufacturing industries; as well as to utilities, non-regulatory government
entities, financial institutions and real estate developers. There are no
significant operations or revenues generated from non United States locations.
Ongoing credit evaluations of its customers' financial condition are performed
by the Company, generally requiring no collateral.
In 1997, one customer accounted for approximately 10% of gross revenue; however,
excluding subcontractor fees, this customer represented approximately one
percent of net revenue. In 1996 and 1995, no customer accounted for more than
10% of gross revenue.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") and Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income is comprised of
net income (loss), changes in the value of available-for-sale securities and
foreign currency translation adjustments, and other such items disclosed in the
statement of stockholders' equity. SFAS 131 revises the manner in which public
companies report segment information in annual financial statements. The Company
will adopt SFAS 130 and SFAS 131 in the first quarter of 1998, and based on
current circumstances, does not believe the effect of adoption will be
significant.
2. Contracts in Progress
Information related to contracts in progress (in thousands):
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $12,995 $4,181
Estimated earnings on uncompleted contracts 2,187 940
-------- -------
15,182 5,121
Less billings to date on uncompleted contracts 17,236 4,311
- --------------------------------------------------------------------------------
Total $ (2,054) $ 810
- --------------------------------------------------------------------------------
25
<PAGE>
Included in the accompanying consolidated balance sheets on an individual
contract basis are (in thousands):
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Costs and estimated earnings in excess of billings
on uncompleted contracts. $ 678 $ 904
Billings in excess of costs and estimated earnings
on uncompleted contracts (2,732) (94)
- --------------------------------------------------------------------------------
Total $(2,054) $ 810
- --------------------------------------------------------------------------------
3. Restructuring/Other 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 in
December, 1996 to reposition the Company to fully exploit its core strengths in
engineering, design, construction, operations and maintenance. As a result of
these actions, the Company recognized pre-tax restructuring and other charges of
$1,237,000 and $6,960,000, respectively. Included in the restructuring charge
were $604,000 related to the closure or downsizing of several underperforming
offices, $628,000 related to employee severance and the write-off of employment
contracts for former employees no longer actively participating in the Company's
affairs, and a $5,000 adjustment to the 1994 restructuring plan. Included in
other charges were $4,768,000 related to the write-down in the carrying value of
goodwill associated with the Company's continuing operating units in accordance
with the Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", $1,529,000 related to the write-off of idle or disposed of assets, $368,000
related to the write-down of the Company's landfill gas production rights and
related fixed assets, and $156,000 related to the buyout and cancellation of
outstanding stock options to purchase approximately 743,000 shares of the
Company's common stock held by employees of the Company. Also, included in other
charges were $139,000 for various other operational costs. Fair value of the
goodwill associated with the Company's continuing operating units was based on
each operating unit's expected future discounted cash flows.
As of December 31, 1997, $328,000 of the 1996 restructuring charges have been
incurred and $318,000 remains in other accrued liabilities. A net reduction of
$586,000 to the reserve was recorded to reflect lower than anticipated costs
associated with the abandonment and subsequent sublease of certain office space
and lower than anticipated severance costs due to retaining certain previously
identified personnel.
In October, 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 future value, termination of
personnel, and the elimination or abandonment of excess and under performing
assets and facilities. During the twelve months ended December 31, 1997, $27,000
of cash charges related to the 1994 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.
26
<PAGE>
4. Impairment of Assets Held for Sale/Loss on Disposition of Laboratory
In December 1996, the Company executed a letter of intent to sell its laboratory
division, Columbia Analytical Services, Inc. ("CAS"), to the employees of CAS by
the first quarter of 1997. In anticipation of the sale, the Company recognized
an impairment in its investment in CAS of $3,327,000; including a write-down in
the carrying value of goodwill associated with previous laboratory acquisitions
of $1,426,000. For the year ended December 31, 1996, CAS had a loss before taxes
of $142,000.
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
("CAS Notes") 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. As a result of several closing adjustments, the Company recognized
an additional loss on disposition of CAS in the first quarter of 1997 of
$333,000. CAS and the Company also entered into a Master Service Agreement
relating to the continued provision of laboratory services to the Company (the
"MSA"). The CAS Notes are subject to offset, in certain circumstances, based
upon the levels of future revenues to CAS accruing under the MSA. The Company
currently does not anticipate that any material offset will occur under the
terms of the MSA.
5. Other Dispositions
During the first quarter of 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 $1,026,000.
6. Acquisitions
Goodwill
Effective May 1, 1997, Organic Waste Technology, Inc. (OWT), a wholly-owned
subsidiary of EMCON, acquired all of the outstanding equity interest in National
Earth Products, Inc. (NEP), a Lancaster, Pennsylvania-based company with
significant expertise in landfill civil construction and related soils
processing. NEP was acquired for $933,000 in cash and the issuance of EMCON's
convertible promissory notes in the aggregate principal amount of $800,000.
Approximately 50% of the convertible notes are due on May 1, 2000, with the
balance due on May 1, 2002. The indebtedness bears interest at the rate of 8%
per annum and is convertible into EMCON Common Stock at a conversion price of
$6.50 per share. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,476,000
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 December 31, 1997 was approximately $39,000. Additional consideration may
be paid for the purchase of NEP subject to the achievement of certain earn out
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 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 Company purchased OWT for $13,859,000 in cash plus
27
<PAGE>
the issuance of convertible notes and other contractual indebtedness held by
certain senior OWT management in the principal amount of $1,747,000. The
transaction was accounted for as a purchase. The indebtedness bears interest at
the rate of 8% per annum with all principal due and payable in full on March 1,
2001. The indebtedness may be converted into shares of OWT common stock upon an
underwritten public offering of OWT's common stock in an amount in excess of
$10,000,000. In the event the indebtedness has not been converted into OWT
shares, it may instead be converted into shares of EMCON common stock for a
period of ninety days after November 30, 2001 at a conversion price of $6.50 per
share. Goodwill of approximately $11,382,000, which included a $253,000 increase
resulting from the establishment of a deferred tax asset related to this
acquisition, is being amortized over thirty years using the straight line
method. Related accumulated amortization at December 31, 1997, was approximately
$689,000.
The following summarizes the unaudited pro forma net revenue, net income
(loss), and income (loss) per share of the combined company for the unaudited
twelve months ended December 31, 1996 compared to the audited twelve months
ended December 31, 1997 (in thousands):
- --------------------------------------------------------------------------------
Pro Forma
1997 1996
Twelve months ended December 31, (audited) (unaudited)
- -------------------------------------------------------------- -----------------
Net revenue $109,502 $120,738
Net income (loss) 2,157 (10,407)
Income (loss) per share $0.25 ($1.23)
- --------------------------------------------------------------------------------
The above pro forma results of operations do not purport to reflect the actual
results of operations had the Company actually acquired OWT as of the beginning
of 1996.
Effective April 1, 1994, the Company acquired all of the capital stock of Wehran
Envirotech, Inc. ("Wehran"), an environmental consulting company headquartered
in Middletown, New York, in exchange for 410,000 shares of the Company's common
stock valued at $2,818,000 and $439,000 in direct acquisition costs. The
transaction was accounted for as a purchase. An additional 80,000 shares, valued
at $290,000, were issued to Wehran shareholders in December, 1994 as a result of
their attaining certain predetermined operating performance goals. Goodwill of
approximately $1,896,000 resulting from this acquisition is being amortized over
twenty years using the straight line method. Accumulated amortization as of
December 31, 1997, was approximately $348,000. Subsequent to the purchase of
Wehran, the Company issued an additional 425,000 shares of its common stock to
retire approximately $5,000,000 of Wehran's convertible subordinated notes. In
addition, the Company also paid approximately $6,100,000 in cash to satisfy
amounts borrowed against Wehran's revolving credit line ($5,000,000) and
obligations due to settlement of certain litigation ($1,100,000).
Acquisitions made by the Company from 1992 through 1993 have resulted in
goodwill of approximately $1,216,000 which is included with intangible assets
and is being amortized over a period of 20 years using the straight-line method.
Related accumulated amortization was approximately $979,000 at December 31,
1997.
Other Intangible Assets:
Intangible assets included $879,000 at December 31, 1996, representing gross
costs incurred to obtain landfill gas production rights. The related accumulated
amortization was approximately $798,000 at December 31, 1996. In December, 1996,
the Company reduced the value of these landfill gas production rights by
28
<PAGE>
$247,000 to their estimated fair value, and, at December 31, 1997, they were
fully amortized.
Other intangible assets at December 31, 1997, also include $888,000,
representing the gross cost to reacquire certain patent rights associated with
the Company's proprietary leachate evaporation system technology. Accumulated
amortization at December 31, 1997, was approximately $74,000 and the patent is
being amortized over the 15 year life of the patent.
7. Other Noncurrent Obligations
Certain employees participate in a salary continuation plan which will provide
the employees with a 10-year benefit from the Company. Monthly benefits range
from $600 to $4,500, and the employees vest in varying amounts from the fifth to
the tenth anniversary date of their contracts. Such amounts will be paid in
addition to those payments due specifically as consideration for the employees
meeting the non-competition provisions of their contracts.
Included in other noncurrent obligations are the Company's liabilities under
salary continuation agreements. Liabilities under salary continuation agreements
were $1,088,000 and $939,000 at December 31, 1997 and 1996, respectively. These
liabilities have been funded through insurance policies.
Capital lease obligations are included in property and equipment with a cost and
accumulated depreciation of $87,000 and $44,000, respectively, at December 31,
1997, and $324,000 and $80,000, respectively, at December 31, 1996.
8. Retirement Plan
The Company sponsors a qualified retirement plan, generally available to all
employees, which is based on Section 401(k) of the Internal Revenue. Employees
may elect to contribute up to 20% of their annual compensation to the plan up to
the Internal Revenue Service annual contribution limit of $9,500 for 1997. Prior
to 1997, the Company voluntarily matched the employee's contribution to a
maximum of 3% of annual compensation. In 1997, the Company elected to suspend
the Company match. The Company's contributions to the retirement plan were
$1,146,000, and $1,177,000 for the years ended December 31, 1996 and 1995,
respectively.
29
<PAGE>
9. Commitments
The Company leases its office facilities, as well as office equipment, under
operating leases in various locations. Until 1995, certain office facilities
were leased from partnerships in which certain officers and shareholders of the
Company had controlling interests. Lease arrangements with the partnerships were
terminated in 1995. The annual rents under leases from partnerships was
approximately $473,000 for 1995. The Company's minimum annual lease commitments
under all operating leases are approximately (in thousands):
- --------------------------------------------------------------------------------
Years Ending December 31,
- --------------------------------------------------------------------------------
1998 $4,808
1999 3,921
2000 2,748
2001 1,623
2002 961
- --------------------------------------------------------------------------------
Rent expense was approximately $5,523,000, $5,263,000 and $4,429,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Certain employees have signed non-competition agreements which will provide them
with monthly payments from $400 to $3,000 for a period of up to ten years,
commencing on the tenth anniversary date of the agreements. (See note 7.)
10. Litigation
As a 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. In the fourth quarter of 1996, the
Company agreed to settlement terms on a number of outstanding legal matters. At
the same time, the Company assessed the potential exposure relative to all other
known pending matters. Based on the foregoing, the Company increased its legal
reserve by an additional $1,553,000 at December 31, 1996. No increases to legal
reserves occurred in 1997. In the opinion of management, the resolution of all
known lawsuits/claims at amounts in excess of established reserves will not have
a material adverse affect on the Company's consolidated financial position,
results of operations or cash flows.
30
<PAGE>
11. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands):
- ---------------------------------------------------------------------------------------- --------------- -------------
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Variable-rate note payable to bank
(effective rate at 12/31/97 was 7.46%). Payable in quarterly installments of $4,857 $ 9,286
$357 with a final payment of $3,214 in 2001. Collateralized by the assets of
EMCON.
8.00% unsecured notes payable to certain former OWT shareholders. Payable on 1,747 1,747
termination date in 2001. This debt may be converted into common stock
at $6.50 per share. Conversion of debt, if it occurs, would be within ninety days
after November 30, 2001.
7.99% note payable to bank in monthly installments through 2006. Cross-collateralized 4,285 4,661
by the assets of OWT with a net book value of $7,823.
8.49% note payable to bank in monthly installments through 2001. Collateralized by 284 374
equipment of OWT with a net book value of $337.
8.99% note payable to bank in monthly installments through 2000. Cross-collateralized 206 296
by the assets of OWT with a net book value of $7,823.
7.89% note payable to bank in monthly installments through 2012. Cross-collateralized 1,158 --
by the assets of OWT with a net book value of $7,823.
8.00% unsecured notes payable to former NEP shareholders. Approximately 800 --
50% of the convertible notes are due on May 1, 2000 with the balance due on May
1, 2002. This debt may be converted into common stock at $6.50 per
share. Conversion of debt, if it occurs, would be 50% on May 1, 2000, and 50% on
May 1, 2002.
9.07% note payable to finance company in monthly installments through 2001. 142 --
Collateralized by equipment of NEP with a net book value of $88.
Other indebtedness, interest rates vary from 5.3% to 15.9% payable in installments 312 553
through 2000. (Primarily lease obligations)
--------------- -------------
Total Long-term Debt $13,791 $16,917
Less current portion $ 2,350 $ 2,250
- ---------------------------------------------------------------------------------------- --------------- -------------
Long-term Debt, net of current portion $11,441 $14,667
- ---------------------------------------------------------------------------------------- --------------- -------------
</TABLE>
Interest paid on all outstanding debt amounted to $1,135,000 in 1997 and
$951,000 in 1996.
Aggregate principal payments for the next five years for years ending December
31,
- --------------------------------------------------------------------------------
1998 $ 2,350
1999 2,173
2000 2,937
2001 2,899
2002 and thereafter 3,432
- --------------------------------------------------------------------------------
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured Credit Agreement with its existing commercial bank,
31
<PAGE>
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 managed rate 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 for
working capital purposes (with up to $5,000,000 also being available for
non-working capital purposes). The line of credit component of the Credit
Agreement expires on May 31, 1998. The Company expects to renew the line of
credit component of the Credit Agreement following its expiration. 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. As of
December 31, 1997, the Company was in compliance with all debt covenants.
12. Shareholders' Equity
Preferred Stock:
The Board of Directors of the Company has the authority to determine the rights,
preferences, privileges and restrictions of the authorized preferred stock.
Stock Option and Restricted Stock Plans:
The Company has issued options to purchase shares of common stock pursuant to
its 1986 and 1988 Incentive Stock Option Plans (both expired in 1997). These
options were granted with option exercise prices which are equal to 100%, 105%
or 110% of fair market value on the date of grant, and expire over terms ranging
from five to ten years. Options generally vest ratably over a two year or four
year period.
The Company's Restricted Stock Plan was approved by its shareholders in May,
1991. A total of 225,000 shares of the Company's Common Stock were reserved for
issuance under the Restricted Stock Plan. Shares granted to employees under the
Restricted Stock Plan generally vest in equal annual installments over periods
ranging from three to four years. At December 31, 1997, 118,361 shares were
available for issuance.
32
<PAGE>
<TABLE>
<CAPTION>
A summary of activity of the Plans follows:
--------------------------------------------------------- --------------------------------------------------------
Options Outstanding
-------------- ---------------------- ------------------
Available Number Price Aggregate
for Grant of Shares Per Share Value
------------------------------------ -------------------- -------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 838,284 2,226,337 $1.15 - $11.25 $17,446,023
Options granted (386,650) 386,650 $3.50 - $ 4.88 1,545,537
Options canceled 72,629 (72,629) $3.33 - $10.00 (591,701)
Options exercised -- (30,000) $1.15 (34,666)
- ------------------------------------- -------------------- -------------- ---------------------- ------------------
Balance at December 31, 1995 524,263 2,510,358 $3.33 - $11.25 $18,365,193
Options granted (192,448) 192,448 $3.25 - $ 4.88 728,144
Options canceled 1,518,674 (1,518,674) $3.33 - $ 11.25 (12,357,381)
Options exercised -- (4,700) $3.33 - $ 3.50 (15,698)
- ------------------------------------- -------------------- -------------- ---------------------- ------------------
Balance at December 31, 1996 1,850,489 1,179,432 $3.25 - $11.25 $ 6,720,258
Options granted (1,261,500) 1,261,500 $3.13 - $ 5.00 5,250,375
Options canceled 534,043 (534,043) $3.25 - $11.25 (3,030,431)
Options exercised -- (42,374) $3.33 - $ 3.75 (150,621)
Options expired (1,004,671) -- -- --
--
- ------------------------------------- -------------------- -------------- ---------------------- ------------------
Balance at December 31, 1997 118,361 1,864,515 $3.13 - $10.00 $ 8,789,581
- ------------------------------------- -------------------- -------------- ---------------------- ------------------
</TABLE>
Employee Stock Purchase Plan:
The EMCON Employee Stock Purchase Plan (ESPP) provided that substantially all
employees could purchase the Company's common stock at a price equal to 85% of
its fair value on certain specified dates via a payroll deduction plan. At
December 31, 1996, 248,338 shares were available for issuance. The Company
discontinued the ESPP effective February 1, 1997.
Stock-Based Compensation:
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) in accounting for stock-based awards to employees. Under APB 25, the Company
generally recognizes no compensation expense with respect to such awards.
Pro Forma information regarding net income (loss) and earnings (loss) per share
is required by FASB 123 for awards granted after December 31, 1994, as if the
Company had accounted for its stock-based awards to employees under the fair
value method of FASB 123. For these purposes, the fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
valuation model. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions.
33
<PAGE>
- --------------------------------------------------------------------------------
Options ESPP
------- ----
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------
Expected life (years) 4.5 6.6 7.0 -- 0.5 0.5
Expected volatility .66 .49 .49 -- .32 .42
Risk-free interest rate 6.1% 6.1% 6.3% -- 5.5% 6.1%
- --------------------------------------------------------------------------------
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period (for options)
and the six-month purchase period (for stock purchases under the ESPP). The
Company's pro forma information follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------- ------------ -------------- -----------------
In thousands except for earnings (loss) per share information 1997 1996 1995
- ----------------------------------------------------------------------- ------------ -------------- -----------------
<S> <C> <C> <C>
Net income (loss)
As reported $2,157 $(10,091) $1,786
Pro forma $1,710 $(10,393) $1,688
Basic (loss) earnings per share
As reported $ 0.25 $ (1.19) $ 0.22
Pro forma $ 0.20 $ (1.27) $ 0.20
- ----------------------------------------------------------------------- ------------ -------------- -----------------
</TABLE>
Because FASB 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until approximately 1999.
The weighted average fair value of options granted during 1997, 1996 and 1995
was $2.11, $2.14 and $2.30 per share, respectively.
The following summarizes information about fixed stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------- ---------------------------------
Options Outstanding Options Exercisable
Weighted Weighted
Number Weighted Average Average Average
Range of Exercise Outstanding at Remaining Contractual Exercise Price Number Exercisable Exercise
Prices 12/31/97 Life Price
- ------------------------ ---------------- ------------------------ ---------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$9.25 - $10.00 172,750 4.6 $9.31 172,750 $9.31
$6.50 - $ 8.83 72,950 5.6 $6.98 62,700 $6.98
$5.00 - $ 6.00 669,125 5.0 $5.01 12,750 $5.28
$3.13 - $ 4.88 949,690 5.3 $3.50 166,953 $3.93
- ------------------------ ---------------- ------------------------ ---------------- ------------------- -------------
$3.13 - $10.00 1,864,515 5.2 $4.71 415,153 $6.67
- ------------------------ ---------------- ------------------------ ---------------- ------------------- -------------
</TABLE>
December 31, 1996, 673,400 shares were exercisable at an average exercise price
of $6.93 per share.
In December, 1996 employees (other than officers and directors) with options
having exercise prices of $5.00 per share or greater were given the right to
either sell back their options to the Company, to exchange their options for new
options, to retain their original options or elect a combination of the three.
The rates at which the outstanding options could be exchanged or sold back to
the Company varied depending on the original option exercise price. Participants
could exchange their outstanding stock options for newly granted options at
rates ranging from one new share for every three old option shares to one new
share for every five old option shares. Alternatively, participants could sell
back their options at prices ranging from $0.10 to $0.40 per option share. This
resulted in options of 743,319 shares being canceled for a cash settlement of
34
<PAGE>
approximately $156,000, and an additional 203,727 shares canceled in exchange
for the grant of new options covering 47,247 shares with an option exercise
price of $3.68 per share.
13. Earnings Per Share
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ----------------------------------------------
Years Ended December 31,
(In thousands, except for earnings per share) 1997 1996 1995
- ------------------------------------------------------------------- ----------------- --------------- --------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 2,157 $(10,091) $ 1,786
------- --------- -------
Numerator for basic earnings per share -
income (loss) available to common stockholders $ 2,157 $(10,091) $ 1,786
Effect of dilutive securities:
8% convertible debentures N/A(1) -- N/A
-------- ---------- -------
Numerator for diluted earnings per share -
income (loss) available to common stockholders
after assumed conversions $ 2,157 $(10,091) $ 1,786
------- --------- -------
Denominator:
Denominator for basic earnings (loss) per share -
weighted-average shares 8,549 8,485 8,274
Effect of dilutive securities:
Employee stock options 144 -- 64
8% convertible debentures N/A(1) -- N/A
------- --------- --------
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 8,693 -- 8,338
========= ========== =========
Basic earnings (loss) per share $ 0.25 $ (1.19) $ 0.22
========= ========== =========
Diluted earnings per share $ 0.25 -- $ 0.21
========= ========== =========
------------------------------------------------------------------- ---------------- ----------------- -------------
</TABLE>
(1)Excluded from the above reconciliations were approximately 269,000 shares of
common stock that may be issued at $6.50 per share to convert $1,747,000 of
indebtedness to certain senior management of OWT because they were antidilutive
at December 31, 1997. Conversion of debt, if it occurs, would be within ninety
days after November 30, 2001.
Also excluded from the above reconciliations were approximately 123,000 shares
of common stock that may be issued at $6.50 per share to convert $800,000 of
indebtedness to certain senior management of NEP because they were antidilutive
at December 31, 1997. Conversion of debt, if it occurs, would be 50% at May 1,
2000, and 50% at May 1, 2002.
35
<PAGE>
14. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- ------------ ------------- --------------
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Federal:
Current $ 43 $ 607 $438
Deferred 832 (3,358) 61
- ------------------------------------------------------------------------- ------------ ------------- --------------
Total Federal 875 (2,751) 499
- ------------------------------------------------------------------------- ------------ ------------- --------------
State:
Current 179 73 78
Deferred 107 (258) 206
- ------------------------------------------------------------------------- ------------ ------------- --------------
Total State 286 (185) 284
- ------------------------------------------------------------------------- ------------ ------------- --------------
Total Federal and State $1,161 $(2,936) $783
- ------------------------------------------------------------------------- ------------ ------------- --------------
</TABLE>
A reconciliation between the Company's effective tax rate of 35.0% in 1997,
(22.5%) in 1996 and 30.5% in 1995 and the U.S. statutory rate is as follows (in
thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- ------------ -------------- --------------
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $1,128 $(4,559) $899
State taxes, net of federal benefit 189 (280) 149
Fuel tax credits (416) (454) (515)
Goodwill amortization 180 2,306 150
Meals and entertainment 90 94 105
Other individually immaterial items (10) (43) (5)
- ------------------------------------------------------------------------- ------------ -------------- --------------
Total Federal and State $1,161 $(2,936) $783
- ------------------------------------------------------------------------- ------------ -------------- --------------
</TABLE>
As of December 31, 1997, the Company has federal alternative minimum tax credit
carryforwards of approximately $1,980,000 which have no expiration date.
36
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at
(in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------- ---------- ------------
Years Ended December 31, 1997 1996
- -------------------------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforwards $1,980 $2,327
Deferred compensation 342 340
Allowance for doubtful accounts 318 403
Vacation accruals 582 636
Restructuring accruals 2,330 3,145
Other individually immaterial items 221 424
- -------------------------------------------------------------------------------------------- ---------- ------------
Total deferred tax assets $5,773 $7,275
- -------------------------------------------------------------------------------------------- ---------- ------------
Deferred tax liabilities:
Tax over book depreciation $ 436 $ 532
Tax accounting method changes 72 70
Payment liabilities deducted 2 108
Supplies -- 110
- -------------------------------------------------------------------------------------------- ---------- ------------
Total deferred tax liabilities $ 510 $ 820
- -------------------------------------------------------------------------------------------- ---------- ------------
Total net deferred tax assets $5,263 $6,455
- -------------------------------------------------------------------------------------------- ---------- ------------
</TABLE>
15. Related Party Transactions
The Company's Chief Financial Officer, currently serves as a member of the Board
of Directors of Columbia Analytical Services, Inc. (CAS), an analytical
laboratory company in which the Company retains a minority interest. CAS remains
a significant outside vendor of laboratory services to the Company.
37
<PAGE>
<TABLE>
<CAPTION>
16. Quarterly Data (unaudited)
-----------------------------------------------------------------------------------------------------------------
(In thousands First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Gross revenue $28,564 $35,881 $36,416 $36,765
Net revenue 24,607 30,542 31,560 30,996
Income (loss) from operations 119 790 582 (13,762)
Net income (loss) 34 365 259 (10,749)
Basic earnings (loss) per share $ 0.00 $ 0.04 $ 0.03 $ (1.26)
Diluted earnings per share $ 0.00 $ 0.04 $ 0.03 --
-----------------------------------------------------------------------------------------------------------------
1997
Gross revenue $31,363 $33,114 $40,764 $34,102
Net revenue 27,581 24,467 29,899 27,555
Income from operations 1,317 1,084 1,789 675
Net income 691 494 943 29
Basic earnings per share $ 0.08 $ 0.06 $ 0.11 $ 0.00
Diluted earnings per share $ 0.08 $ 0.06 $ 0.11 $ 0.00
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Historically, the Company's net revenue is adversely affected in the first and
fourth quarters of each year, primarily as a result of restricted field work due
to weather conditions.
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EMCON
We have audited the accompanying consolidated balance sheets of EMCON as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EMCON
at December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
February 18, 1998
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1997.
Item 11. Executive Compensation
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1997.
40
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K Page
(a)(1) Financial Statements 18
(a)(2) Schedule II - Valuation and Qualifying Accounts 43
(b) Reports on Form 8-K --
No reports on Form 8-K were filed during the
quarter ended December 31, 1997.
(c) Index to Exhibits 44
Exhibits filed herewith and attached hereto under
separate cover or incorporated by reference herein
will be furnished to security holders of the
Registrant upon written request and payment of a
fee of $.30 per page which fee covers only the
Registrant's reasonable expenses in furnishing such
exhibits.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMCON
Dated: 3/27/97 By /s/ Eugene M. Herson
----------- --------------------
Eugene M. Herson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Douglas P. Crane Chairman of the Board and Director March 27, 1998
- --------------------
Douglas P. Crane
/s/ Eugene M. Herson President, Chief Executive Officer March 27, 1998
- -------------------- and Director (Principal Executive
Eugene M. Herson Officer)
/s/ R. Michael Momboisse Chief Financial Officer,
- ------------------------ Vice President - Legal and March 27, 1998
R. Michael Momboisse Secretary (Principal Financial
and Accounting Officer)
/s/ Donald R. Andres Vice President and Director March 27, 1998
- --------------------
Donald R. Andres
/s/ Richard A. Peluso Vice President and Director March 27, 1998
- ---------------------
Richard A. Peluso
/s/ Donald R. Kerstetter Director March 27, 1998
- ------------------------
Donald R. Kerstetter
/s/ Jack M. Marzluft Director March 27, 1998
- --------------------
Jack M. Marzluft
/s/ Peter Vardy Director March 27, 1998
- ---------------
Peter Vardy
42
<PAGE>
SCHEDULE II
EMCON
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
at Beginning Costs and at End
of Period Expenses Write-Offs of Period
Allowance for
Doubtful Accounts:
<S> <C> <C> <C> <C>
Year Ended
December 31, 1995 $ 975 $ 765 $ (688) $1,052
Year Ended
December 31, 1996 $1,052 $1,985 $(2,086) $ 951
Year Ended
December 31, 1997 $ 951 $1,295 $(1,317) $ 929
</TABLE>
43
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
- -------------- ------------
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, incorporated
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.
44
<PAGE>
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- ------------
10.1 EMCON 1986 Incentive Stock Option Plan *(1)
and Amendment, incorporated by reference
from Exhibit 10.15 of the Form S-1 Registration
Statement.
10.2 Form of Agreement pursuant to Salary *(1)
Continuation Plan, incorporated by reference
from Exhibit 10.17 of the Form S-1
Registration Statement.
10.3 Schedule identifying Agreements pursuant to Salary 48*(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 *(1)
Plan 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 *(1)
dated 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").
45
<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.
46
<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 *(1)
dated effective February 22, 1997, incorporated by
reference from Exhibit 10.24 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997 (the "June 30, 1997 10-Q").
10.25 Fourth Amendment to Credit Agreement dated effective *
June 24, 1997 among EMCON and Union Bank of California,
N.A., incorporated by reference from Exhibit 10.25
of the June 30, 1997 10-Q.
10.26 Amended and Restated Agreement between Eugene M. 49*
Herson and Registrant dated November 3, 1997.
10.27 Amended and Restated Agreement between R. 56*
Michael Momboisse and Registrant dated
November 3, 1997.
10.28 Deferred Compensation Plan, Amended and Restated 63*
effective January 1, 1998.
27 Financial Data Schedule, included herein. 91
* 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.
47
EXHIBIT 10.3
EMCON
SALARY CONTINUATION PLAN PARTICIPANTS
Monthly Payments
------------------------------
Salary Date Payments
Participant Continuation Non-compete Commence
- --------------------------------------------------------------------------------
Thorley D. Briggs $1,800 $1,200 January 1993
$1,200 $ 800 July 1993
John G. Pacey -0- $1,080 January 1993
Donald R. Andres $1,800 $1,200 January 1993
Richard J. Leach -0- $ 819 January 1993
Fred W. Cope $ 600 $ 400 January 1994
Robert E. Van Heuit -0- $ 400 January 1994
H. Randolph Sweet $1,350 $ 900 April 1997
Eugene M. Herson $1,800 $1,200 November 2000
$2,700 $1,800 November 2004
R. Michael Momboisse $ 600 $ 400 January 2003
$1,200 $ 800 November 2004
$ 600 $ 400 November 2006
$ 600 $ 400 July 2007
Gary O. McEntee $ 600 $ 400 November 2004
48
EXHIBIT 10.26
AMENDED AND RESTATED
AGREEMENT
THIS AGREEMENT ("Agreement") is made as of November 3, 1997, between
EMCON, A California corporation, (the "Company"), and Eugene M. Herson, (the
"Employee"). Unless otherwise indicated, certain of the capitalized terms used
herein are defined in Exhibit A and shall have the meaning as assigned.
RECITALS
A. The Company recognizes that the possibility of a Change of Control
Event exists and that the Employee possesses an intimate knowledge of the
Company. The Board of Directors of the Company (the "Board") believes that it is
necessary that the Company be able to call on the Employee for advice upon the
occurrence of a Change of Control Event. The Board also believes that the
existence of this Agreement will enhance the Company's ability to call on and
rely upon such Employee.
B. The Company and the Employee desire to enter into this Agreement in
order to provide additional compensation and benefits to the Employee in
recognition of past services and to encourage Employee to continue employment
with the Employer.
C. It is intended by the parties that the provisions of paragraphs 2
and 3 of this Agreement shall be effective during the eighteen (18) month period
following a Change of Control Event.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, the Company and Employee agree as follows:
1. Term: Operation of Agreement. Except as provided in paragraph 1(a)
below, this Agreement shall be effective immediately, and, except as provided in
paragraph 1(b) below, shall terminate on the eighteenth (18) month anniversary
following any Change of Control Event.
(a) The provisions of paragraphs (2) and (3) of this Agreement
shall not become effective unless (i) there is a Change of Control Event and
(ii) the Employee is employed by the Company immediately prior to the Change of
Control Event. Notwithstanding the foregoing, if the Employee's employment with
the Company is terminated within the ninety (90) day period immediately
preceding a Change of Control Event and such termination would have constituted
a Termination as defined in Exhibit A if termination had occurred after the
Change of Control Event, the termination will be deemed to have occurred the day
after the Change of Control Event, such that paragraphs 2 and 3 shall be
effective as to such termination.
(b) This Agreement shall terminate on the first to occur of
the following:
49
<PAGE>
(i) The termination of the Employee's employment with
the Company prior to a Change of Control Event unless such termination is deemed
to occur the day after such Change of Control Event as provided in paragraph
1(a) above.
(ii) Subject to the provisions of paragraph 3(f) below,
the termination of the Employee's employment following a Change of Control Event
is due to any of the following: (a) termination by the Company with Cause, (b)
death of the Employee, (c) Permanent Disability of the Employee or (d) voluntary
termination of employment by the Employee without Good Reasons.
2. Service. Once a Change of Control Event occurs, the Employee shall
not voluntarily terminate his employment with the Company until ninety (90) days
after such Event has occurred. Following a Change of Control Event, the Company
shall not terminate the Employee's employment with the Company, except in
accordance with this Agreement and the Company shall provide not less than
ninety (90) days prior written notice of such Termination to the Employee.
3. Payments and Benefits Upon Termination. The Employee shall be entitled
to the following payments and benefits following Termination:
(a) Termination Payment. The Company shall pay the Employee
within ten (10) days of the date of Termination an amount equal to the sum of
twenty-four (24) months cash salary and a prorated cash bonus, if earned and
otherwise due.
(b) Welfare Plan Benefits. The Employee shall be entitled to
continuation of medical insurance coverage under the Company's Continuation of
Benefits Program for Former Senior Executives (originally implemented by the
Company on January 1, 1993). The Company shall pay the cost of medical insurance
coverage for a period equal to the lesser of (i) twenty-four months following
the date of Termination or (ii) until the Employee is provided by another
employer with medical insurance benefits. The Employee shall notify the Company
within ten (10) days of any employment by the Employee during the period the
Company is paying for medical insurance coverage pursuant to this paragraph
3(b).
(c) Vesting of Benefits. Employee shall become immediately
vested in full in any and all employment benefits, including, without
limitation:
(i) Employee's interest in the EMCON Shared Savings
and Profit Sharing Plan, including the Company match portion; provided that if
such action is found to be a violation of ERISA, the Company shall have the
option of instead paying the Employee an amount which after taking account for
applicable withholding, equals the unvested balance of the Company match portion
of the Employees account.
(ii) all amounts payable as salary continuation and
noncompetition payments under the salary continuation agreements between the
Employee and the Company dated November 1990, November 1994 and November 9,
1996, as well as any similar agreements that have been or may hereafter be
entered into between Employee and the Company; provided that (A) the portion of
such payments representing salary continuation payments shall be immediately due
and payable upon full vesting and (B) the portion of such payments representing
noncompetition payments shall be paid to Employee in equal monthly installments
over a three-year period commencing from the date of departure from the Company
50
<PAGE>
and for so long during the subsequent three-year period as the Employee is not
employed by a competitor or potential competitor of the Company. For purposes of
the foregoing, a competitor or potential competitor of the Company shall be
defined as an environmental engineering, consulting or construction company not
affiliated with the Company.
(iii) all incentive and non-qualified stock options
to purchase the Company's (or its successor's) capital stock, and
(iv) all restricted stock agreements.
(d) Continued Right to Exercise Options. Employee shall retain
the right to exercise all of the incentive and nonqualified stock options held
by Employee and referred to in paragraph 3(c)(iii) above for a period of up to
three years after Employee's departure from the Company or, if earlier, until
expiration of the original term of the respective option agreements, and for
these purposes Employee shall be considered a continuing employee of EMCON.
(e) No Mitigation. All payments and benefits to which the
Employee is entitled under this Agreement shall be made and provided without
offset, deduction or mitigation on account of income the Employee may receive
from other employment or otherwise, except as provided in paragraph 3(b) above.
(f) Death of the Employee. In the event of the Employee's
death subsequent to Termination, all payments and benefits required by this
Agreement shall be paid to the Employee's designated beneficiary or
beneficiaries or, if he has not designated a beneficiary or beneficiaries, to
his estate.
4. Arbitration. Any claim, dispute or controversy arising out of or in
any way relating to the parties' employment relationship (including, but not
limited to, any claims of wrongful termination or age, sex or other
discrimination), this Agreement, the interpretation of this Agreement or the
alleged breach thereof shall be submitted by the parties to binding arbitration
by the American Arbitration Association in San Mateo County, California;
provided, however, that this arbitration provision shall not apply to any
disputes or claims relating to or arising out of the misuse or misappropriation
of the Company's trade secrets or confidential and proprietary information.
5. Conflict in Benefits. This Agreement amends and restates that
certain Agreement between the Employee and the Company dated November 30, 1995
and shall supersede all other prior arrangements, whether written or oral, and
understandings regarding the subject matter of this Agreement; provided,
however, that this Agreement is not intended to and shall not affect, limit or
terminate (i) any plans, programs, or arrangements of the company that are
either in writing or regularly made available to a significant number of
employees of the Company, (ii) any agreement or arrangement with the Employee
that has been reduced to writing, or (iii) any agreements or arrangements
hereafter entered into by the parties in writing.
51
<PAGE>
6. Miscellaneous.
(a) Notices. Any notice or other communication provided for in
this Agreement or contemplated hereby shall be sufficiently given if given in
writing and personally delivered or delivered by certified mail, return receipt
requested, and addressed, in the case of the Company, to the Company at:
EMCON
400 S. El Camino Real, Suite 1200
San Mateo, CA 94402
Attn: Chairman of the Board
and, in the case of the Employee, to the Employee at:
Eugene M. Herson
501 El Camino Del Mar
San Francisco, CA 94121
Either party may designate a different address by giving written notice of
change of address in the manner provided above.
(b) Waiver. No waiver or modification in whole or in part of
this Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver of any breach of any provision hereof or any right or power by any party
on one occasion shall not be construed as a waiver of, or a bar to, the exercise
of such right or power on any other occasion or as a waiver of any subsequent
breach.
(c) Binding Effect; Successors. This Agreement shall be
binding upon, inure to the benefit of, and be enforceable by, the Company and
the Employee and their respective heirs, legal representatives, successors and
assigns. For purposes of the foregoing, the successors to the Company shall
include, without limitation, successors (whether direct or indirect, by
purchase, merger, consolidation, or otherwise) to all or substantially all of
the business or assets of the Company (a "Company Successor"). If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The provisions of this
paragraph 6(c) shall continue to apply to each subsequent employer of the
Employee hereunder in the event of any subsequent merger, consolidation or
transfer or assets of such subsequent employer.
(d) Separability. Any provision of this Agreement which is
unenforceable or invalid in any jurisdiction shall be ineffective in such
jurisdiction to the extent that it is unenforceable or invalid without affecting
the remaining provisions hereof, which shall continue in full force and effect.
The unenforceability or invalidity of a provision of this Agreement in one
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(e) Controlling Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed therein.
52
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
COMPANY:
EMCON, a California Corporation
By: /s/ Douglas P. Crane
---------------------------------------
Douglas P. Crane, Chairman of the Board
EMPLOYEE:
By: /s/ Eugene M. Herson
Eugene M. Herson
53
<PAGE>
EXHIBIT A
DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms mean:
(i) "Cause" means (a) theft, dishonesty or falsification of any
employment or Company records; (b) improper disclosure of the Company's
confidential or proprietary information; (c) any intentional act by Employee
which has a material detrimental effect on the Company's reputation or business;
or (d) failure to perform any reasonable assigned duties, which failure is not
cured within thirty (30) days following written notice of such failure from the
Company.
(ii) "Change of Control Event" means an Ownership Change of which the
shareholders of the Company before such Ownership Change do not retain, directly
or indirectly, at least seventy percent (70%) of the beneficiary interest in the
voting stock of the Company after such transaction or in which the Company is
not the surviving corporation.
(iii) An "Ownership Change" shall be deemed to have occurred in the
event any of the following events occurs with respect to the Company;
A. the direct or indirect sale or exchange by the shareholders
of the Company of all or substantially all of the stock of the Company;
B. a merger or consolidation in which the Company is a party;
C. the sale, exchange, or transfer of all or substantially all
of the assets of the Company; or
D. a liquidation or dissolution of the Company.
(iv) A voluntary termination of employment by the Employee for "Good
Reasons" means a termination of employment following: (a) a Deemed Demotion
which results without the Employee's express written consent and which
continues, for a period of twenty (20) days after written notice thereof to the
Company from the Employee with a "Deemed Demotion" being defined as (i) the
assignment to the Employee of any duties, or any limitation of the Employee's
responsibilities, inconsistent with the Employee's positions, duties,
responsibilities and status with the Company immediately prior to the date of
the Change of Control Event, or (ii) a removal of the Employee from the
Employee's position with the Company held by the Employee in contemplation of a
Change of Control Event, except in connection with the termination of the
employment of the Employee by the Company for Cause or as a result of the death
or Permanent Disability of the Employee; (b) any failure by the Company to pay,
or any reduction by the Company of, the Employee's base annual salary or bonus
compensation in effect immediately prior to the date of the Change of Control
Event; (c) any failure by the Company to (i) continue to provide the Employee
with the opportunity to participate, on terms no less favorable than those in
effect immediately prior to the date of the Change of Control Event, in any
benefit plans and programs, including, but not limited to, the Company's life,
disability, health, dental, medical, bonus savings and retirement plans in which
54
<PAGE>
the Employee was participating immediately prior to the date of the Change of
Control Event, or their equivalent, or (ii) provide the Employee with all other
fringe benefits (or their equivalent) from time to time in effect for the
benefit of any executive, management or administrative group which customarily
includes a person holding the employment position with the Company then held by
the Employee; (d) without the Employee's express written consent, the relocation
of the principal place of the Employee's employment to a location that is more
than 20 miles further from the Employee's principal residence than such
principal place of employment immediately prior to the date of the Change of
Control Event, or the imposition of travel requirements on the Employee not
substantially consistent with normal day-to-day travel requirements existing
immediately prior to the date of the Change of Control Event and/or (e) a good
faith determination by the Employee, in his sole judgment, that the continuation
of the Employee's employment with the company is no longer in the best interests
of the Company.
(iv) "Permanent Disability" means, as applied to the Employee, that (a)
he has been totally incapacitated by bodily injury or disease so as to be
prevented thereby from engaging in any occupation or employment for remuneration
or profit, (b) such total incapacity shall have continued for a period of six
consecutive months and (c) such total incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Employee's life.
(v) "Termination" means any termination of the employment of the
Employee following the occurrence of any Change of Control Event, by the Company
without Cause or by the Employee for Good Reason; provided, however, that
"Termination" shall not include any termination of the employment of the
Employee (a) by the Company as a result of the Permanent Disability of the
Employee or (b) as a result of the death of the Employee.
55
EXHIBIT 10.27
AMENDED AND RESTATED
AGREEMENT
THIS AGREEMENT ("Agreement") is made as of November 3, 1997, between
EMCON, A California corporation, (the "Company"), and R. Michael Momboisse, (the
"Employee"). Unless otherwise indicated, certain of the capitalized terms used
herein are defined in Exhibit A and shall have the meaning as assigned.
RECITALS
A. The Company recognizes that the possibility of a Change of Control
Event exists and that the Employee possesses an intimate knowledge of the
Company. The Board of Directors of the Company (the "Board") believes that it is
necessary that the Company be able to call on the Employee for advice upon the
occurrence of a Change of Control Event. The Board also believes that the
existence of this Agreement will enhance the Company's ability to call on and
rely upon such Employee.
B. The Company and the Employee desire to enter into this Agreement in
order to provide additional compensation and benefits to the Employee in
recognition of past services and to encourage Employee to continue employment
with the Employer.
C. It is intended by the parties that the provisions of paragraphs 2
and 3 of this Agreement shall be effective during the eighteen (18) month period
following a Change of Control Event.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, the Company and Employee agree as follows:
1. Term: Operation of Agreement. Except as provided in paragraph 1(a)
below, this Agreement shall be effective immediately, and, except as provided in
paragraph 1(b) below, shall terminate on the eighteenth (18) month anniversary
following any Change of Control Event.
(a) The provisions of paragraphs (2) and (3) of this Agreement
shall not become effective unless (i) there is a Change of Control Event and
(ii) the Employee is employed by the Company immediately prior to the Change of
Control Event. Notwithstanding the foregoing, if the Employee's employment with
the Company is terminated within the ninety (90) day period immediately
preceding a Change of Control Event and such termination would have constituted
a Termination as defined in Exhibit A if termination had occurred after the
Change of Control Event, the termination will be deemed to have occurred the day
after the Change of Control Event, such that paragraphs 2 and 3 shall be
effective as to such termination.
(b) This Agreement shall terminate on the first to occur
of the following:
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(i) The termination of the Employee's employment
with the Company prior to a Change of Control Event unless such termination is
deemed to occur the day after such Change of Control Event as provided in
paragraph 1(a) above.
(ii) Subject to the provisions of paragraph 3(f)
below, the termination of the Employee's employment following a Change of
Control Event is due to any of the following: (a) termination by the Company
with Cause, (b) death of the Employee, (c) Permanent Disability of the Employee
or (d) voluntary termination of employment by the Employee without Good Reasons.
2. Service. Once a Change of Control Event occurs, the Employee shall
not voluntarily terminate his employment with the Company until ninety (90) days
after such Event has occurred. Following a Change of Control Event, the Company
shall not terminate the Employee's employment with the Company, except in
accordance with this Agreement and the Company shall provide not less than
ninety (90) days prior written notice of such Termination to the Employee.
3. Payments and Benefits Upon Termination. The Employee shall be
entitled to the following payments and benefits following Termination:
(a) Termination Payment. The Company shall pay the Employee
within ten (10) days of the date of Termination an amount equal to the sum of
twenty-four (24) months cash salary and a prorated cash bonus, if earned and
otherwise due.
(b) Welfare Plan Benefits. The Employee shall be entitled to
continuation of medical insurance coverage under the Company's Continuation of
Benefits Program for Former Senior Executives (originally implemented by the
Company on January 1, 1993). The Company shall pay the cost of medical insurance
coverage for a period equal to the lesser of (i) twenty-four months following
the date of Termination or (ii) until the Employee is provided by another
employer with medical insurance benefits. The Employee shall notify the Company
within ten (10) days of any employment by the Employee during the period the
Company is paying for medical insurance coverage pursuant to this paragraph
3(b).
(c) Vesting of Benefits. Employee shall become immediately
vested in full in any and all employment benefits, including, without
limitation:
(i) Employee's interest in the EMCON Shared Savings
and Profit Sharing Plan, including the Company match portion; provided that if
such action is found to be a violation of ERISA, the Company shall have the
option of instead paying the Employee an amount which after taking account for
applicable withholding, equals the unvested balance of the Company match portion
of the Employees account.
(ii) all amounts payable as salary continuation and
noncompetition payments under the salary continuation agreements between the
Employee and the Company dated January 1993, November 1994; and November
9, 1996, as well as any similar agreements that have been or may hereafter be
entered into between Employee and the Company; provided that (A) the portion
of such payments representing salary continuation payments shall be immediately
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due and payable upon full vesting and (B) the portion of such payments
representing noncompetition payments shall be paid to Employee in equal monthly
installments over a three-year period commencing from the date of departure from
the Company and for so long during the subsequent three-year period as the
Employee is not employed by a competitor or potential competitor of the Company.
For purposes of the foregoing, a competitor or potential competitor of the
Company shall be defined as an environmental engineering, consulting or
construction company not affiliated with the Company. (iii) all incentive and
non-qualified stock options to purchase the Company's (or its successor's)
capital stock, and
(iv) all restricted stock agreements.
(d) Continued Right to Exercise Options. Employee shall retain
the right to exercise all of the incentive and nonqualified stock options held
by Employee and referred to in paragraph 3(c)(iii) above for a period of up to
three years after Employee's departure from the Company or, if earlier, until
expiration of the original term of the respective option agreements, and for
these purposes Employee shall be considered a continuing employee of EMCON.
(e) No Mitigation. All payments and benefits to which the
Employee is entitled under this Agreement shall be made and provided without
offset, deduction or mitigation on account of income the Employee may receive
from other employment or otherwise, except as provided in paragraph 3(b) above.
(f) Death of the Employee. In the event of the Employee's
death subsequent to Termination, all payments and benefits required by this
Agreement shall be paid to the Employee's designated beneficiary or
beneficiaries or, if he has not designated a beneficiary or beneficiaries, to
his estate.
4. Arbitration. Any claim, dispute or controversy arising out of or in
any way relating to the parties' employment relationship (including, but not
limited to, any claims of wrongful termination or age, sex or other
discrimination), this Agreement, the interpretation of this Agreement or the
alleged breach thereof shall be submitted by the parties to binding arbitration
by the American Arbitration Association in San Mateo County, California;
provided, however, that this arbitration provision shall not apply to any
disputes or claims relating to or arising out of the misuse or misappropriation
of the Company's trade secrets or confidential and proprietary information.
5. Conflict in Benefits. This Agreement amends and restates that
certain Agreement between the Employee and the Company dated November 30, 1995
and shall supersede all other prior arrangements, whether written or oral, and
understandings regarding the subject matter of this Agreement; provided,
however, that this Agreement is not intended to and shall not affect, limit or
terminate (i) any plans, programs, or arrangements of the company that are
either in writing or regularly made available to a significant number of
employees of the Company, (ii) any agreement or arrangement with the Employee
that has been reduced to writing, or (iii) any agreements or arrangements
hereafter entered into by the parties in writing.
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6. Miscellaneous.
(a) Notices. Any notice or other communication provided for in
this Agreement or contemplated hereby shall be sufficiently given if given in
writing and personally delivered or delivered by certified mail, return receipt
requested, and addressed, in the case of the Company, to the Company at:
EMCON
400 S. El Camino Real, Suite 1200
San Mateo, CA 94402
Attn: Chairman of the Board
and, in the case of the Employee, to the Employee at:
R. Michael Momboisse
1920 Polk Court
Mountain View, CA 94040
Either party may designate a different address by giving written notice of
change of address in the manner provided above.
(b) Waiver. No waiver or modification in whole or in part of
this Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver of any breach of any provision hereof or any right or power by any party
on one occasion shall not be construed as a waiver of, or a bar to, the exercise
of such right or power on any other occasion or as a waiver of any subsequent
breach.
(c) Binding Effect; Successors. This Agreement shall be
binding upon, inure to the benefit of, and be enforceable by, the Company and
the Employee and their respective heirs, legal representatives, successors and
assigns. For purposes of the foregoing, the successors to the Company shall
include, without limitation, successors (whether direct or indirect, by
purchase, merger, consolidation, or otherwise) to all or substantially all of
the business or assets of the Company (a "Company Successor"). If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The provisions of this
paragraph 6(c) shall continue to apply to each subsequent employer of the
Employee hereunder in the event of any subsequent merger, consolidation or
transfer or assets of such subsequent employer.
(d) Separability. Any provision of this Agreement which is
unenforceable or invalid in any jurisdiction shall be ineffective in such
jurisdiction to the extent that it is unenforceable or invalid without affecting
the remaining provisions hereof, which shall continue in full force and effect.
The unenforceability or invalidity of a provision of this Agreement in one
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(e) Controlling Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed therein.
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IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.
COMPANY:
EMCON, a California Corporation
By: /s/ Douglas P. Crane
---------------------------------------
Douglas P. Crane, Chairman of the Board
EMPLOYEE:
By: /s/ R. Michael Momboisse
------------------------
R. Michael Momboisse
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EXHIBIT A
DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms mean:
(i) "Cause" means (a) theft, dishonesty or falsification of any
employment or Company records; (b) improper disclosure of the Company's
confidential or proprietary information; (c) any intentional act by Employee
which has a material detrimental effect on the Company's reputation or business;
or (d) failure to perform any reasonable assigned duties, which failure is not
cured within thirty (30) days following written notice of such failure from the
Company.
(ii) "Change of Control Event" means an Ownership Change of which the
shareholders of the Company before such Ownership Change do not retain, directly
or indirectly, at least seventy percent (70%) of the beneficiary interest in the
voting stock of the Company after such transaction or in which the Company is
not the surviving corporation.
(iii) An "Ownership Change" shall be deemed to have occurred in the
event any of the following events occurs with respect to the Company;
A. the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the stock of the
Company;
B. a merger or consolidation in which the Company is a
party;
C. the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
D. a liquidation or dissolution of the Company.
(iv) A voluntary termination of employment by the Employee for "Good
Reasons" means a termination of employment following: (a) a Deemed Demotion
which results without the Employee's express written consent and which
continues, for a period of twenty (20) days after written notice thereof to the
Company from the Employee with a "Deemed Demotion" being defined as (i) the
assignment to the Employee of any duties, or any limitation of the Employee's
responsibilities, inconsistent with the Employee's positions, duties,
responsibilities and status with the Company immediately prior to the date of
the Change of Control Event, or (ii) a removal of the Employee from the
Employee's position with the Company held by the Employee in contemplation of a
Change of Control Event, except in connection with the termination of the
employment of the Employee by the Company for Cause or as a result of the death
or Permanent Disability of the Employee; (b) any failure by the Company to pay,
or any reduction by the Company of, the Employee's base annual salary or bonus
compensation in effect immediately prior to the date of the Change of Control
Event; (c) any failure by the Company to (i) continue to provide the Employee
with the opportunity to participate, on terms no less favorable than those in
effect immediately prior to the date of the Change of Control Event, in any
benefit plans and programs, including, but not limited to, the Company's life,
disability, health, dental, medical, bonus savings and retirement plans in which
the Employee was participating immediately prior to the date of the Change of
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Control Event, or their equivalent, or (ii) provide the Employee with all other
fringe benefits (or their equivalent) from time to time in effect for the
benefit of any executive, management or administrative group which customarily
includes a person holding the employment position with the Company then held by
the Employee; (d) without the Employee's express written consent, the relocation
of the principal place of the Employee's employment to a location that is more
than 20 miles further from the Employee's principal residence than such
principal place of employment immediately prior to the date of the Change of
Control Event, or the imposition of travel requirements on the Employee not
substantially consistent with normal day-to-day travel requirements existing
immediately prior to the date of the Change of Control Event and/or (e) a good
faith determination by the Employee, in his sole judgment, that the continuation
of the Employees employment with the company is no longer in the best interests
of the Company.
(iv) "Permanent Disability" means, as applied to the Employee, that (a)
he has been totally incapacitated by bodily injury or disease so as to be
prevented thereby from engaging in any occupation or employment for remuneration
or profit, (b) such total incapacity shall have continued for a period of six
consecutive months and (c) such total incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Employee's life.
(v) "Termination" means any termination of the employment of the
Employee following the occurrence of any Change of Control Event, by the Company
without Cause or by the Employee for Good Reason; provided, however, that
"Termination" shall not include any termination of the employment of the
Employee (a) by the Company as a result of the Permanent Disability of the
Employee or (b) as a result of the death of the Employee.
62
EXHIBIT 10.28
Amended and Restated in its entirety.
Effective January 1, 1998
Copyright (C) 1997
By Compensation Resource Group, Inc.
All Rights Reserved
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TABLE OF CONTENTS
Page
Purpose 67
ARTICLE 1 Definitions 67
ARTICLE 2 Selection, Enrollment, Eligibility 72
2.1 Selection by Committee 72
2.2 Enrollment Requirements 72
2.3 Eligibility; Commencement of Participation 72
2.4 Termination of Participation and/or Deferrals 72
ARTICLE 3 Deferral Commitments/Company Matching/Crediting Taxes 73
3.1 Minimum Deferrals 73
3.2 Maximum Deferral 73
3.3 Election to Defer; Effect of Election Form 74
3.4 Withholding of Annual Deferral Amounts 74
3.5 Discretionary Company Contribution Amount 74
3.6 Investment of Trust Assets 74
3.7 Vesting 74
3.8 Crediting/Debiting of Account Balances 75
3.9 FICA and Other Taxes 76
3.10 Distributions 76
4.1 Short-Term Payout 76
4.2 Other Benefits Take Precedence Over Short-Term 77
4.3 Withdrawal Payout/Suspensions for Unforeseeable
Financial Emergencies 77
4.4 Withdrawal Election 77
ARTICLE 5 Retirement Benefit 77
5.1 Retirement Benefit 77
5.2 Payment of Retirement Benefit 77
5.3 Death Prior to Completion of Retirement
Benefit 78
ARTICLE 6 Pre-Retirement Survivor Benefit 78
6.1 Pre-Retirement Survivor Benefit 78
6.2 Payment of Pre-Retirement Survivor Benefit 78
ARTICLE 7 Termination Benefit 78
7.1 Termination Benefit 78
7.2 Payment of Termination Benefit 79
ARTICLE 8 Disability Waiver and Benefit 79
8.1 Disability Waiver 79
8.2 Continued Eligibility; Disability Benefit 70
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ARTICLE 9 Beneficiary Designation 80
9.1 Beneficiary 80
9.2 Beneficiary Designation; Change; Spousal Consent 80
9.3 Acknowledgement 80
9.4 No Beneficiary Designation 80
9.5 Doubt as to Beneficiary 80
9.6 Discharge of Obligations 80
ARTICLE 10 Leave of Absence 81
10.1 Paid Leave of Absence 81
10.2 Unpaid Leave of Absence 81
ARTICLE 11 Termination, Amendment or Modification 81
11.1 Termination 81
11.2 Amendment 82
11.3 Plan Agreement 82
11.4 Effect of Payment 82
ARTICLE 12 Administration 82
12.1 Committee Duties 82
12.2 Agents 82
12.3 Binding Effect of Decisions 82
12.4 Indemnity of Committee 83
12.5 Employer Information 83
ARTICLE 13 Other Benefits and Agreements 83
13.1 Coordination with Other Benefits 83
ARTICLE 14 Claims Procedures 83
14.1 Presentation of Claim 83
14.2 Notification of Decision 83
14.3 Review of a Denied Claim 84
14.4 Decision on Review 84
14.5 Legal Action 84
ARTICLE 15 Trust 84
15.1 Establishment of the Trust 84
15.2 Interrelationship of the Plan and the Trust 85
15.3 Distributions From the Trust 85
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ARTICLE 16 Miscellaneous 85
16.1 Status of Plan 85
16.2 Unsecured General Creditor 85
16.3 Employer's Liability 85
16.4 Nonassignability 85
16.5 Not a Contract of Employment 85
16.6 Furnishing Information 86
16.7 Terms 86
16.8 Captions 86
16.9 Governing Law 86
16.10 Notice 86
16.11 Successors 86
16.12 Spouse's Interest 86
16.13 Validity 87
16.14 Incompetent 87
16.15 Court Order 87
16.16 Distribution in the Event of Taxation 87
16.17 Insurance 87
16.18 Legal Fees To Enforce Rights After Change in Control 88
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EMCON
DEFERRED COMPENSATION PLAN
Effective January 1, 1998
Purpose
The purpose of this Plan is to provide specified benefits to a select
group of management and highly compensated Employees who contribute materially
to the continued growth, development and future business success of Emcon, a
California corporation, and its subsidiaries, if any, that sponsor this Plan.
This Plan shall be unfunded for tax purposes and for purposes of Title I of
ERISA.
ARTICLE 1
Definitions
For purposes of this Plan, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "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 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.
1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual
Salary relating to services performed during any calendar year, whether
or not paid in such calendar year or included on the Federal Income Tax
Form W-2 for such calendar year, payable to a Participant as an
Employee under any Employer's annual bonus and cash incentive plans,
excluding stock options.
1.3 "Annual Deferral Amount" shall mean that portion of a Participant's
Base Annual Salary and Annual Bonus that a Participant elects to have,
and is deferred, in accordance with Article 3, for any one Plan Year.
In the event of a Participant's Retirement, Disability (if deferrals
cease in accordance with Section 8.1), death or a Termination of
Employment prior to the end of a Plan Year, such year's Annual Deferral
Amount shall be the actual amount withheld prior to such event.
1.4 "Base Annual Salary" shall mean the annual cash compensation relating
to services performed during any calendar year, whether or not paid in
such calendar year or included on the Federal Income Tax Form W-2 for
such calendar year, excluding bonuses, commissions, overtime, fringe
benefits, stock options, relocation expenses, incentive payments,
non-monetary awards, and other fees, automobile and other allowances
paid to a Participant for employment services rendered (whether or not
such allowances are included in the Employee's gross income). Base
Annual Salary shall be calculated before reduction for compensation
voluntarily deferred or contributed by the Participant pursuant to all
qualified or non-qualified plans of any Employer and shall be
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calculated to include amounts not otherwise included in the
Participant's gross income under Code Sections 125, 402(e)(3), 402(h),
or 403(b) pursuant to plans established by any Employer; provided,
however, that all such amounts will be included in compensation only to
the extent that, had there been no such plan, the amount would have
been payable in cash to the Employee.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled to
receive benefits under this Plan upon the death of a Participant.
1.6 "Beneficiary Designation Form" shall mean the form established from
time to time by the Committee that a Participant completes signs and
returns to the Committee to designate one or more Beneficiaries.
1.7 "Board" shall mean the board of directors of the Company.
1.8 "Change in Control" shall mean the first to occur of any of the
following events:
(a) Any "person" (as that term is used in Section 13 and 14(d)(2)
of the Securities Exchange Act of 1934 ("Exchange Act"))
becomes the beneficial owner (as that term is used in Section
13(d) of the Exchange Act), directly or indirectly, of 50% or
more of the Company's capital stock entitled to vote in the
election of directors;
(b) During any period of not more than two consecutive years, not
including any period prior to the adoption of this Plan,
individuals who at the beginning of such period constitute the
board of directors of the Company, and any new director (other
than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described
in clause (a), (c), (d) or (e) of this Section 1.8) whose
election by the board of directors or nomination for election
by the Company's stockholders was approved by a vote of at
least three-fourths (3/4ths) of the directors then still in
office who either were directors at the beginning of the
period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at
least a majority thereof;
(c) The shareholders of the Company approve any consolidation or
merger of the Company, other than a consolidation or merger of
the Company in which the holders of the common stock of the
Company immediately prior to the consolidation or merger hold
more than 50% of the common stock of the surviving corporation
immediately after the consolidation or merger;
(d) The shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(e) The shareholders of the Company approve the sale or transfer
of all or substantially all of the assets of the Company to
parties that are not within a "controlled group of
corporations" (as defined in Code Section 1563) in which the
Company is a member.
1.9 "Claimant" shall have the meaning set forth in Section 14.1.
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1.10 "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
1.11 "Committee" shall mean the committee described in Article 12.
1.12 "Company" shall mean EMCON Inc., a California corporation, and any
successor to all or substantially all of the Company's assets or
business.
1.13 "Company Contribution Account" shall mean (i) the sum of the
Participant's Annual Company Contribution Amounts, plus (ii) amounts
credited in accordance with all the applicable crediting provisions of
this Plan that relate to the Participant's Company Contribution
Account, less (iii) all distributions made to the Participant or his or
her Beneficiary pursuant to this Plan that relate to the Participant's
Company Contribution Account.
1.14 "Deduction Limitation" shall mean the following described limitation on
a benefit that may otherwise be distributable pursuant to the
provisions of this Plan. Except as otherwise provided, this limitation
shall be applied to all distributions that are "subject to the
Deduction Limitation" under this Plan. If an Employer determines in
good faith prior to a Change in Control that there is a reasonable
likelihood that any compensation paid to a Participant for a taxable
year of the Employer would not be deductible by the Employer solely by
reason of the limitation under Code Section 162(m), then to the extent
deemed necessary by the Employer to ensure that the entire amount of
any distribution to the Participant pursuant to this Plan prior to the
Change in Control is deductible, the Employer may defer all or any
portion of a distribution under this Plan. Any amounts deferred
pursuant to this limitation shall continue to be credited/debited with
additional amounts in accordance with Section 3.9 below, even if such
amount is being paid out in installments. The amounts so deferred and
amounts credited thereon shall be distributed to the Participant or his
or her Beneficiary (in the event of the Participant's death) at the
earliest possible date, as determined by the Employer in good faith, on
which the deductibility of compensation paid or payable to the
Participant for the taxable year of the Employer during which the
distribution is made will not be limited by Section 162(m), or if
earlier, the effective date of a Change in Control. Notwithstanding
anything to the contrary in this Plan, the Deduction Limitation shall
not apply to any distributions made after a Change in Control.
1.15 "Deferral Account" shall mean (i) the sum of all of a Participant's
Annual Deferral Amounts, plus (ii) amounts credited in accordance with
all the applicable crediting provisions of this Plan that relate to the
Participant's Deferral Account, less (iii) all distributions made to
the Participant or his or her Beneficiary pursuant to this Plan that
relate to his or her Deferral Account.
1.16 "Director" shall mean any member of the board of directors of any
Employer.
1.17 "Disability" shall mean a period of disability during which a
Participant qualifies for permanent disability benefits under the
Participant's Employer's long-term disability plan, or, if a
Participant does not participate in such a plan, a period of disability
during which the Participant would have qualified for permanent
disability benefits under such a plan had the Participant been a
participant in such a plan, as determined in the sole discretion of the
Committee. If the Participant's Employer does not sponsor such a plan,
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or discontinues to sponsor such a plan, Disability shall be determined
by the Committee in its sole discretion.
1.18 "Disability Benefit" shall mean the benefit set forth in Article 8.
1.19 "Discretionary Company Contribution Amount" shall mean, for any one
Plan Year, the amount determined in accordance with Section 3.5.
1.20 "Election Form" shall mean the form established from time to time by
the Committee that a Participant completes, signs and returns to the
Committee to make an election under the Plan.
1.22 "Employee" shall mean a person who is an employee of any Employer.
1.23 "Employer(s)" shall mean the Company and/or any of its subsidiaries
(now in existence or hereafter formed or acquired) that have been
selected by the Board to participate in the Plan and have adopted the
Plan as a sponsor.
1.24 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as it may be amended from time to time."
1.25 "First Plan Year" shall mean the period beginning January 1, 1994 and
ending December 31, 1994.
1.26 "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."
1.27 "Monthly Installment Method" shall be a monthly installment payment
over the number of months selected by the Participant in accordance
with this Plan, calculated as follows: The Account Balance of the
Participant shall be calculated as of the close of business three
business days prior to the last business day of the month. The monthly
installment shall be calculated by multiplying this balance by a
fraction, the numerator of which is one, and the denominator of which
is the remaining number of monthly payments due the Participant. By way
of example, if the Participant elects a 120-month Monthly Installment
Method, the first payment shall be 1/120 of the Account Balance,
calculated as described in this definition. The following month, the
payment shall be 1/119 of the Account Balance, calculated as described
in this definition. Each monthly installment shall be paid on or as
soon as practicable after the last business day of the applicable
month.
1.28 "Participant" shall mean any Employee (i) who is selected to
participate in the Plan, (ii) who elects to participate in the Plan,
(iii) who signs a Plan Agreement, an Election Form and a Beneficiary
Designation Form, (iv) whose signed Plan Agreement, Election Form and
Beneficiary Designation Form are accepted by the Committee, (v) who
commences participation in the Plan, and (vi) whose Plan Agreement has
not terminated. A spouse or former spouse of a Participant shall not be
treated as a Participant in the Plan or have an account balance under
the Plan, even if he or she has an interest in the Participant's
benefits under the Plan as a result of applicable law or property
settlements resulting from legal separation or divorce.
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1.29 "Plan" shall mean the Company's Deferred Compensation Plan, which shall
be evidenced by this instrument and by each Plan Agreement, as they may
be amended from time to time.
1.30 "Plan Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between an Employer and a
Participant. Each Plan Agreement executed by a Participant and the
Participant's Employer shall provide for the entire benefit to which
such Participant is entitled under the Plan; should there be more than
one Plan Agreement, the Plan Agreement bearing the latest date of
acceptance by the Employer shall supersede all previous Plan Agreements
in their entirety and shall govern such entitlement. The terms of any
Plan Agreement may be different for any Participant, and any Plan
Agreement may provide additional benefits not set forth in the Plan or
limit the benefits otherwise provided under the Plan; provided,
however, that any such additional benefits or benefit limitations must
be agreed to by both the Employer and the Participant.
1.31 "Plan Year" shall mean a period beginning on January 1 of each calendar
year and continuing through December 31 of such calendar year.
1.32 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth
in Article 6.
1.33 "Retirement", "Retire(s)" or "Retired" shall mean, severance from
employment with all Employers for any reason other than a leave of
absence, death or disability, and/or at a time when such Participant
would be considered Retired under the Company's qualified 401(k) Plan.
1.34 "Retirement Benefit" shall mean the benefit set forth in Article 5.
1.35 "Short-Term Payout" shall mean the payout set forth in Section 4.1.
1.36 "Termination Benefit" shall mean the benefit set forth in Article 7.
1.37 "Termination of Employment" shall mean the severing of employment with
all Employers, voluntarily or involuntarily, for any reason other than
Retirement, Disability, death or an authorized leave of absence.
1.38 "Trust" shall mean one or more trusts established pursuant to that
certain Master Trust Agreement, dated as of February 28, 1994 between
the Company and the trustee named therein, as amended from time to
time.
1.39 "Unforeseeable Financial Emergency" shall mean an unanticipated
emergency that is caused by an event beyond the control of the
Participant that would result in severe financial hardship to the
Participant resulting from (i) a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant, (ii) a
loss of the Participant's property due to casualty, or (iii) such other
extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant, all as determined in the
sole discretion of the Committee.
1.40 "Years of Plan Participation" shall mean the total number of full Plan
Years a Participant has been a Participant in the Plan prior to his or
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her Termination of Employment (determined without regard to whether
deferral elections have been made by the Participant for any Plan
Year). Any partial year shall not be counted. Notwithstanding the
previous sentence, a Participant's first Plan Year of participation
shall be treated as a full Plan Year for purposes of this definition,
even if it is only a partial Plan Year of participation.
1.41 "Years of Service" shall mean the total number of full years in which a
Participant has been employed by one or more Employers. For purposes of
this definition, a year of employment shall be a 365 day period (or 366
day period in the case of a leap year) that, for the first year of
employment, commences on the Employee's date of hiring and that, for
any subsequent year, commences on an anniversary of that hiring date.
Any partial year of employment shall not be counted.
ARTICLE 2
Selection, Enrollment, Eligibility
2.1 Selection by Committee. Participation in the Plan shall be limited to a
select group of management and highly compensated Employees of the
Employers, as determined by the Committee in its sole discretion. From
that group, the Committee shall select, in its sole discretion,
Employees to participate in the Plan.
2.2 Enrollment Requirements. As a condition to participation, each selected
Employee shall complete, execute and return to the Committee a Plan
Agreement, an Election Form and a Beneficiary Designation Form, all
within 30 days after he or she is selected to participate in the Plan.
In addition, the Committee shall establish from time to time such other
enrollment requirements as it determines in its sole discretion are
necessary.
2.3 Eligibility; Commencement of Participation. Provided an Employee
selected to participate in the Plan has met all enrollment requirements
set forth in this Plan and required by the Committee, including
returning all required documents to the Committee within the specified
time period, that Employee shall commence participation in the Plan on
the first day of the month following the month in which the Employee
completes all enrollment requirements. If an Employee fails to meet all
such requirements within the period required, in accordance with
Section 2.2, that Employee shall not be eligible to participate in the
Plan until the first day of the Plan Year following the delivery to and
acceptance by the Committee of the required documents.
2.4 Termination of Participation and/or Deferrals. If the Committee
determines in good faith that a Participant no longer qualifies as a
member of a select group of management or highly compensated employees,
as membership in such group is determined in accordance with Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the
right, in its sole discretion, to (i) terminate any deferral election
the Participant has made for the remainder of the Plan Year in which
the Participant's membership status changes, (ii) prevent the
Participant from making future deferral elections and/or (iii)
immediately distribute the Participant's then Account Balance as a
Termination Benefit and terminate the Participant's participation in
the Plan.
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ARTICLE 3
Deferral Commitments/Company Matching/Crediting/Taxes
3.1 Minimum Deferrals:
(a) Base Annual Salary, Annual Bonus. For each Plan Year, a
Participant may elect to defer, as his or her Annual Deferral
Amount, Base Annual Salary and/or Annual Bonus in the
following minimum amounts for each deferral elected:
--------------------------------------------------------------
Deferral Minimum Amount
Base Annual Salary $2,000
Annual Bonus $2,000
--------------------------------------------------------------
If an election is made for less than stated minimum amounts,
or if no election is made, the amount deferred shall be zero.
(b) Short Plan Year. Notwithstanding the foregoing, if a
Participant first becomes a Participant after the first day of
a Plan Year, or in the case of the first Plan Year of the Plan
itself, the minimum Base Annual Salary deferral shall be an
amount equal to the minimum set forth above, multiplied by a
fraction, the numerator of which is the number of complete
months remaining in the Plan Year and the denominator of which
is 12.
3.2 Maximum Deferral:
(a) Base Annual Salary, Annual Bonus. For each Plan Year, a
Participant may elect to defer, as his or her Annual Deferral
Amount, Base Annual Salary and/or Annual Bonus up to the
following maximum percentages for each deferral elected:
--------------------------------------------------------------
Deferral Maximum Amount
Base Annual Salary 50%
Annual Bonus 100%
--------------------------------------------------------------
(b) Notwithstanding the foregoing, if a Participant first becomes
a Participant after the first day of a Plan Year, or in the
case of the first Plan Year of the Plan itself, the maximum
Annual Deferral Amount, with respect to Base Annual Salary,
Annual Bonus shall be limited to the amount of compensation
not yet earned by the Participant as of the date the
Participant submits a Plan Agreement and Election Form to the
Committee for acceptance.
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3.3 Election to Defer; Effect of Election Form:
(a) First Plan Year. In connection with a Participant's
commencement of participation in the Plan, the Participant
shall make an irrevocable deferral election for the Plan Year
in which the Participant commences participation in the Plan,
along with such other elections as the Committee deems
necessary or desirable under the Plan. For these elections to
be valid, the Election Form must be completed and signed by
the Participant, timely delivered to the Committee (in
accordance with Section 2.2 above) and accepted by the
Committee.
(b) Subsequent Plan Years. For each succeeding Plan Year, an
irrevocable deferral election for that Plan Year, and such
other elections as the Committee deems necessary or desirable
under the Plan, shall be made by timely delivering to the
Committee, in accordance with its rules and procedures, before
the end of the Plan Year preceding the Plan Year for which the
election is made, a new Election Form. If no such Election
Form is timely delivered for a Plan Year, the Annual Deferral
Amount shall be zero for that Plan Year.
3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the Base
Annual Salary portion of the Annual Deferral Amount shall be withheld
from each regularly scheduled Base Annual Salary payroll in equal
amounts, as adjusted from time to time for increases and decreases in
Base Annual Salary. The Annual Bonus or portion of the Annual Deferral
Amount shall be withheld at the time the Annual Bonus are or otherwise
would be paid to the Participant, whether or not this occurs during the
Plan Year itself.
3.5 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
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 a Discretionary Company Contribution Amount
for that Plan Year. The Discretionary Company Contribution Amount, if
any, shall be credited as of the first day of the Plan Year.
3.6 Investment of Trust Assets. The Trustee of the Trust shall be
authorized, upon written instructions received from the Committee or
investment manager appointed by the Committee, to invest and reinvest
the assets of the Trust in accordance with the applicable Trust
Agreement, including the disposition of stock and reinvestment of the
proceeds in one or more investment vehicles designated by the
Committee.
3.7 Vesting:
(a) A Participant shall at all times be 100% vested in his or her
Deferral Account.
(b) 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.
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3.8 Crediting/Debiting of Account Balances. In accordance with, and subject
to, the rules and procedures that are established from time to time by
the Committee, in its sole discretion, amounts shall be credited or
debited to a Participant's Account Balance in accordance with the
following rules:
(a) Election of Measurement Funds. A Participant, in connection
with his or her initial deferral election in accordance with
Section 3.3(a) above, shall elect, on the Election Form, one
or more Measurement Fund(s) (as described in Section 3.8(c)
below) to be used to determine the additional amounts to be
credited to his or her Account Balance for the Plan Year.
(b) Proportionate Allocation. In making any election described in
Section 3.8(a) above, the Participant shall specify on the
Election Form, in increments of five percentage points (5%),
the percentage of his or her Account Balance to be allocated
to a Measurement Fund (as if the Participant was making an
investment in that Measurement Fund with that portion of his
or her Account Balance).
(c) Measurement Funds. The Participant may elect one or more of
the following measurement funds, for the purpose of crediting
additional amounts to his or her Account Balance:
(1) Moody's Rate. Based on the Moody's Seasoned Corporate
Bond Rate.
(2) S&P Index Rate.
As necessary, the Committee may, in its sole discretion,
discontinue, substitute or add a Measurement Fund. Each such
action will take effect as of the first day of the Plan Year
that follows by thirty (30) days the day on which the
Committee gives Participants advance written notice of such
change.
(d) Crediting or Debiting Method. The performance of each elected
Measurement Fund (either positive or negative) will be
determined by the Committee, in its sole discretion, based on
the performance of the Measurement Funds themselves. A
Participant's Account Balance shall be credited or debited on
a daily basis based on the performance of each Measurement
Fund selected by the Participant, as determined by the
Committee in its sole discretion, as though (i) a
Participant's Account Balance were invested in the Measurement
Fund(s) selected by the Participant, in the percentages
applicable to such Plan Year, as of the close of business on
the first business day of such Plan Year, at the closing price
on such date; (ii) and any distribution made to a Participant
that decreases such Participant's Account Balance ceased being
invested in the Measurement Fund(s), in the percentages
applicable to such Plan Year, no earlier than three business
days prior to the distribution, at the closing price on such
date.
(e) No Actual Investment. Notwithstanding any other provision of
this Plan that may be interpreted to the contrary, the
Measurement Funds are to be used for measurement purposes
only, and a Participant's election of any such Measurement
Fund, the allocation to his or her Account Balance thereto,
the calculation of additional
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amounts and the crediting or debiting of such amounts to a
Participant's Account Balance shall not be considered or
construed in any manner as an actual investment of his or her
Account Balance in any such Measurement Fund. In the event
that the Company or the Trustee (as that term is defined in
the Trust), in its own discretion, decides to invest funds in
any or all of the Measurement Funds, no Participant shall have
any rights in or to such investments themselves. Without
limiting the foregoing, a Participant's Account Balance shall
at all times be a bookkeeping entry only and shall not
represent any investment made on his or her behalf by the
Company or the Trust; the Participant shall at all times
remain an unsecured creditor of the Company.
3.9 FICA and Other Taxes:
(a) Annual Deferral Amounts. For each Plan Year in which an Annual
Deferral Amount is being withheld from a Participant, the
Participant's Employer(s) shall withhold from that portion of
the Participant's Base Annual Salary and Bonus that is not
being deferred, in a manner determined by the Employer(s), the
Participant's share of FICA and other employment taxes on such
Annual Deferral Amount. If necessary, the Committee may reduce
the Annual Deferral Amount in order to comply with this
Section 3.9.
(b) 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 and/or Bonus 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 3.9.
3.10 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 withheld 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.
ARTICLE 4
Short-Term Payout; Unforeseeable Financial Emergencies;
Withdrawal Election
4.1 Short-Term Payout. In connection with each election to defer an Annual
Deferral Amount, a Participant may irrevocably elect to receive a
future "Short-Term Payout" from the Plan with respect to such Annual
Deferral Amount. Subject to the Deduction Limitation, the Short-Term
Payout shall be a lump sum payment in an amount that is equal to the
Annual Deferral Amount plus amounts credited or debited in the manner
provided in Section 3.9 above on that amount, determined at the time
that the Short-Term Payout becomes payable (rather than the date of a
Termination of Employment). Subject to the Deduction Limitation and the
other terms and conditions of this Plan, each Short-Term Payout elected
shall be paid out during a period beginning 1 day and ending 60 days
after the last day of any Plan Year designated by the Participant that
is at least five Plan Years after the Plan Year in which the Annual
Deferral Amount is actually deferred. By way of example, if a five year
Short-Term Payout is elected for Annual Deferral Amounts that are
deferred in the Plan Year commencing January 1, 1998, the five year
Short-Term Payout would become payable during a 60 day period
commencing January 1, 2003.
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4.2 Other Benefits Take Precedence Over Short-Term. Should an event occur
that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral
Amount, plus amounts credited or debited thereon, that is subject to a
Short-Term Payout election under Section 4.1 shall not be paid in
accordance with Section 4.1 but shall be paid in accordance with the
other applicable Article. Moreover, any Short-Term Payout shall be
adjusted to take into account any contribution under Section 4.5 below.
4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.
If the Participant experiences an Unforeseeable Financial Emergency,
the Participant may petition the Committee to (i) suspend any deferrals
required to be made by a Participant and/or (ii) receive a partial or
full payout from the Plan. The payout shall not exceed the lesser of
the Participant's vested Account Balance, calculated as if such
Participant were receiving a Termination Benefit, or the amount
reasonably needed to satisfy the Unforeseeable Financial Emergency. If,
subject to the sole discretion of the Committee, the petition for a
suspension and/or payout is approved, suspension shall take effect upon
the date of approval and any payout shall be made within 60 days of the
date of approval. The payment of any amount under this Section 4.3
shall not be subject to the Deduction Limitation.
4.4 Withdrawal. A Participant (or, after a Participant's death, his or her
Beneficiary) may elect, at any time, to withdraw all of his or her
vested Account Balance, calculated as if there had occurred a
Termination of Employment as of the day of the election, less a
withdrawal penalty equal to 10% of such amount (the net amount shall be
referred to as the "Withdrawal Amount"). This election can be made at
any time, before or after Retirement, Disability, death or Termination
of Employment, and whether or not the Participant (or Beneficiary) is
in the process of being paid pursuant to an installment payment
schedule. If made before Retirement, Disability or death, a
Participant's Withdrawal Amount shall be his or her Account Balance
calculated as if there had occurred a Termination of Employment as of
the day of the election. No partial withdrawals of the Withdrawal
Amount shall be allowed. The Participant (or his or her Beneficiary)
shall make this election by giving the Committee advance written notice
of the election in a form determined from time to time by the
Committee. The Participant (or his or her Beneficiary) shall be paid
the Withdrawal Amount within 60 days of his or her election. Once the
Withdrawal Amount is paid, the Participant's participation in the Plan
shall terminate and the Participant shall not be eligible to
participate in the Plan in the future. The payment of this Withdrawal
Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
Retirement Benefit
5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant
who Retires shall receive, as a Retirement Benefit, his or her vested
Account Balance.
5.2 Payment of Retirement Benefit. A Participant, in connection with his or
her commencement of participation in the Plan, shall elect on an
Election Form to receive the Retirement Benefit in a lump sum or
pursuant to a Annual Installment Method of 5 years. The Participant may
annually change his or her election to an allowable alternative payout
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period by submitting a new Election Form to the Committee, provided
that any such Election Form is submitted at least 18 months prior to
the Participant's Retirement and is accepted by the Committee in its
sole discretion. The Election Form most recently accepted by the
Committee shall govern the payout of the Retirement Benefit. If a
Participant does not make any election with respect to the payment of
the Retirement Benefit, then such benefit shall be payable in a lump
sum. The lump sum payment shall be made, or installment payments shall
commence, no later than 60 days after the date the Participant Retires.
Any payment made shall be subject to the Deduction Limitation.
5.3 Death Prior to Completion of Retirement Benefit. If a Participant dies
after Retirement but before the Retirement Benefit is paid in full, the
Participant's unpaid Retirement Benefit payments shall continue and
shall be paid to the Participant's Beneficiary (a) over the remaining
number of years and in the same amounts as that benefit would have been
paid to the Participant had the Participant survived, or (b) in a lump
sum, if requested by the Beneficiary and allowed in the sole discretion
of the Committee, that is equal to the Participant's unpaid remaining
Account Balance.
ARTICLE 6
Pre-Retirement Survivor Benefit
6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation,
the Participant's Beneficiary shall receive a Pre-Retirement Survivor
Benefit equal to the Participant's vested Account Balance if the
Participant dies before he or she Retires, experiences a Termination of
Employment or suffers a Disability.
6.2 Payment of Pre-Retirement Survivor Benefit. A Participant, in
connection with his or her commencement of participation in the Plan,
shall elect on an Election Form whether the Pre-Retirement Survivor
Benefit shall be received by his or her Beneficiary in a lump sum or
pursuant to a Annual Installment Method of 5 years. The Participant may
annually change this election to an allowable alternative payout period
by submitting a new Election Form to the Committee, which form must be
accepted by the Committee in its sole discretion. The Election Form
most recently accepted by the Committee prior to the Participant's
death shall govern the payout of the Participant's Pre-Retirement
Survivor Benefit. If a Participant does not make any election with
respect to the payment of the Pre-Retirement Survivor Benefit, then
such benefit shall be paid in a lump sum. Despite the foregoing, if the
Participant's Account Balance at the time of his or her death is less
than $25,000, payment of the Pre-Retirement Survivor Benefit may be
made, in the sole discretion of the Committee, in a lump sum or
pursuant to a Annual Installment Method of not more than 60 months. The
lump sum payment shall be made, or installment payments shall commence,
no later than 5 years after the date the Committee is provided with
proof that is satisfactory to the Committee of the Participant's death.
Any payment made shall be subject to the Deduction Limitation.
ARTICLE 7
Termination Benefit
7.1 Termination Benefit. Subject to the Deduction Limitation, the
Participant shall receive a Termination Benefit, which shall be equal
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to the Participant's vested Account Balance if a Participant
experiences a Termination of Employment prior to his or her Retirement,
death or Disability.
7.2 Payment of Termination Benefit. If the Participant's Account Balance at
the time of his or her Termination of Employment is less than $25,000,
payment of his or her Termination Benefit shall be paid in a lump sum.
If his or her Account Balance at such time is equal to or greater than
that amount, the Committee, in its sole discretion, may cause the
Termination Benefit to be paid in a lump sum or in substantially equal
annual installment payments over a period of time that does not exceed
five years in duration. The lump sum payment shall be made, or
installment payments shall commence, no later than 60 days after the
date the date of the Participant's Termination of Employment. Any
payment made shall be subject to the Deduction Limitation.
ARTICLE 8
Disability Waiver and Benefit
8.1 Disability Waiver:
(a) Waiver of Deferral. A Participant who is determined by the
Committee to be suffering from a Disability shall be excused
from fulfilling that portion of the Annual Deferral Amount
commitment that would otherwise have been withheld from a
Participant's Base Annual Salary and/or Annual Bonus for the
Plan Year during which the Participant first suffers a
Disability. During the period of Disability, the Participant
shall not be allowed to make any additional deferral
elections, but will continue to be considered a Participant
for all other purposes of this Plan.
(b) Return to Work. If a Participant returns to employment, with
an Employer, after a Disability ceases, the Participant may
elect to defer an Annual Deferral Amount for the Plan Year
following his or her return to employment or service and for
every Plan Year thereafter while a Participant in the Plan;
provided such deferral elections are otherwise allowed and an
Election Form is delivered to and accepted by the Committee
for each such election in accordance with Section 3.3 above.
8.2 Continued Eligibility; Disability Benefit. A Participant suffering a
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed, or in the service of an Employer and shall
be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in
accordance with the provisions of those Articles. Notwithstanding the
above, the Committee shall have the right to, in its sole and absolute
discretion and for purposes of this Plan only, and must in the case of
a Participant who is otherwise eligible to Retire, deem the Participant
to have experienced a Termination of Employment, or in the case of a
Participant who is eligible to Retire, to have Retired, at any time (or
in the case of a Participant who is eligible to Retire, as soon as
practicable) after such Participant is determined to be suffering a
Disability, in which case the Participant shall receive a Disability
Benefit equal to his or her Account Balance at the time of the
Committee's determination; provided, however, that should the
Participant otherwise have been eligible to Retire, he or she shall be
paid in accordance with Article 5. The Disability Benefit shall be paid
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in a lump sum within 60 days of the Committee's exercise of such right.
Any payment made shall be subject to the Deduction Limitation.
ARTICLE 9
Beneficiary Designation
9.1 Beneficiary. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(is) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary designated
under this Plan may be the same as or different from the Beneficiary
designation under any other plan of an Employer in which the
Participant participates.
9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall
designate his or her Beneficiary by completing and signing the
Beneficiary Designation Form, and returning it to the Committee or its
designated agent. A Participant shall have the right to change a
Beneficiary by completing, signing and otherwise complying with the
terms of the Beneficiary Designation Form and the Committee's rules and
procedures, as in effect from time to time. If the Participant names
someone other than his or her spouse as a Beneficiary, a spousal
consent, in the form designated by the Committee, must be signed by
that Participant's spouse and returned to the Committee. Upon the
acceptance by the Committee of a new Beneficiary Designation Form, all
Beneficiary designations previously filed shall be canceled. The
Committee shall be entitled to rely on the last Beneficiary Designation
Form filed by the Participant and accepted by the Committee prior to
his or her death.
9.3 Acknowledgment. No designation or change in designation of a
Beneficiary shall be effective until received and acknowledged in
writing by the Committee or its designated agent.
9.4 No Beneficiary Designation. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be his or her
surviving spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary shall be
payable to the executor or personal representative of the Participant's
estate.
9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the
proper Beneficiary to receive payments pursuant to this Plan, the
Committee shall have the right, exercisable in its discretion, to cause
the Participant's Employer to withhold such payments until this matter
is resolved to the Committee's satisfaction.
9.6 Discharge of Obligations. The payment of benefits under the Plan to a
Beneficiary shall fully and completely discharge all Employers and the
Committee from all further obligations under this Plan with respect to
the Participant, and that Participant's Plan Agreement shall terminate
upon such full payment of benefits.
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ARTICLE 10
Leave of Absence
10.1 Paid Leave of Absence. If a Participant is authorized by the
Participant's Employer for any reason to take a paid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Annual Deferral Amount
shall continue to be withheld during such paid leave of absence in
accordance with Section 3.3.
10.2 Unpaid Leave of Absence. If a Participant is authorized by the
Participant's Employer for any reason to take an unpaid leave of
absence from the employment of the Employer, the Participant shall
continue to be considered employed by the Employer and the Participant
shall be excused from making deferrals until the earlier of the date
the leave of absence expires or the Participant returns to a paid
employment status. Upon such expiration or return, deferrals shall
resume for the remaining portion of the Plan Year in which the
expiration or return occurs, based on the deferral election, if any,
made for that Plan Year. If no election was made for that Plan Year, no
deferral shall be withheld.
ARTICLE 11
Termination, Amendment or Modification
11.1 Termination. Although each Employer anticipates that it will continue
the Plan for an indefinite period of time, there is no guarantee that
any Employer will continue the Plan or will not terminate the Plan at
any time in the future. Accordingly, each Employer reserves the right
to discontinue its sponsorship of the Plan and/or to terminate the Plan
at any time with respect to any or all of its participating Employees,
by action of its board of directors. Upon the termination of the Plan
with respect to any Employer, the Plan Agreements of the affected
Participants who are employed by that Employer, or in the service of
that Employer, shall terminate and their vested Account Balances,
determined as if they had experienced a Termination of Employment on
the date of Plan termination or, if Plan termination occurs after the
date upon which a Participant was eligible to Retire, then with respect
to that Participant as if he or she had Retired on the date of Plan
termination, shall be paid to the Participants as follows: Prior to a
Change in Control, if the Plan is terminated with respect to all of its
Participants, an Employer shall have the right, in its sole discretion,
and notwithstanding any elections made by the Participant, to pay such
benefits in a lump sum or pursuant to a Monthly Installment Method of
up to 15 years, with amounts credited and debited during the
installment period as provided herein. If the Plan is terminated with
respect to less than all of its Participants, an Employer shall be
required to pay such benefits in a lump sum. After a Change in Control,
the Employer shall be required to pay such benefits in a lump sum. The
termination of the Plan shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of any benefits
under the Plan as of the date of termination; provided however, that
the Employer shall have the right to accelerate installment payments
without a premium or prepayment penalty by paying the vested Account
Balance in a lump sum or pursuant to a Monthly Installment Method using
fewer months (provided that the present value of all payments that will
have been received by a Participant at any given point of time under
the different payment schedule shall equal or exceed the present value
of all payments that would have been received at that point in time
under the original payment schedule).
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11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in
whole or in part with respect to that Employer by the action of its
board of directors; provided, however, that no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's vested Account Balance in existence at the time the
amendment or modification is made, calculated as if the Participant had
experienced a Termination of Employment as of the effective date of the
amendment or modification or, if the amendment or modification occurs
after the date upon which the Participant was eligible to Retire, the
Participant had Retired as of the effective date of the amendment or
modification. The amendment or modification of the Plan shall not
affect any Participant or Beneficiary who has become entitled to the
payment of benefits under the Plan as of the date of the amendment or
modification; provided, however, that the Employer shall have the right
to accelerate installment payments by paying the vested Account Balance
in a lump sum or pursuant to a Monthly Installment Method using fewer
months (provided that the present value of all payments that will have
been received by a Participant at any given point of time under the
different payment schedule shall equal or exceed the present value of
all payments that would have been received at that point in time under
the original payment schedule).
11.3 Plan Agreement. Despite the provisions of Sections 11.1 and 11.2 above,
if a Participant's Plan Agreement contains benefits or limitations that
are not in this Plan document, the Employer may only amend or terminate
such provisions with the consent of the Participant.
11.4 Effect of Payment. The full payment of the applicable benefit under
Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all
obligations to a Participant and his or her designated Beneficiaries
under this Plan and the Participant's Plan Agreement shall terminate.
ARTICLE 12
Administration
12.1 Committee Duties. This Plan shall be administered by a Committee, which
shall consist of the Board, or such committee as the Board shall
appoint. Members of the Committee may be Participants under this Plan.
The Committee shall also have the discretion and authority to (i) make,
amend, interpret, and enforce all appropriate rules and regulations for
the administration of this Plan and (ii) decide or resolve any and all
questions including interpretations of this Plan, as may arise in
connection with the Plan. Any individual serving on the Committee who
is a Participant shall not vote or act on any matter relating solely to
himself or herself. When making a determination or calculation, the
Committee shall be entitled to rely on information furnished by a
Participant or the Company.
12.2 Agents. In the administration of this Plan, the Committee may, from
time to time, employ agents and delegate to them such administrative
duties as it sees fit (including acting through a duly appointed
representative) and may from time to time consult with counsel who may
be counsel to any Employer.
12.3 Binding Effect of Decisions. The decision or action of the Committee
with respect to any question arising out of or in connection with the
82
<PAGE>
administration, interpretation and application of the Plan and the
rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the
Plan.
12.4 Indemnity of Committee. All Employers shall indemnify and hold harmless
the members of the Committee, and any Employee to whom the duties of
the Committee may be delegated, against any and all claims, losses,
damages, expenses or liabilities arising from any action or failure to
act with respect to this Plan, except in the case of willful misconduct
by the Committee or any of its members or any such Employee.
12.5 Employer Information. To enable the Committee to perform its functions,
each Employer shall supply full and timely information to the Committee
on all matters relating to the compensation of its Participants, the
date and circumstances of the Retirement, Disability, death or
Termination of Employment of its Participants, and such other pertinent
information as the Committee may reasonably require.
ARTICLE 13
Other Benefits and Agreements
13.1 Coordination with Other Benefits. The benefits provided for a
Participant and Participant's Beneficiary under the Plan are in
addition to any other benefits available to such Participant under any
other plan or program for employees of the Participant's Employer. The
Plan shall supplement and shall not supersede, modify or amend any
other such plan or program except as may otherwise be expressly
provided.
ARTICLE 14
Claims Procedures
14.1 Presentation of Claim. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below as
a "Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such
Claimant from the Plan. If such a claim relates to the contents of a
notice received by the Claimant, the claim must be made within 60 days
after such notice was received by the Claimant. All other claims must
be made within 180 days of the date on which the event that caused the
claim to arise occurred. The claim must state with particularity the
determination desired by the Claimant.
14.2 Notification of Decision. The Committee shall consider a Claimant's
claim within a reasonable time, and shall notify the Claimant in
writing:
(a) that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole
or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be
understood by the Claimant:
(1) the specific reason(s) for the denial of the claim, or any
part of it;
83
<PAGE>
(2) specific reference(s) to pertinent provisions of the Plan
upon which such denial was based;
(3) a description of any additional material or information
necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is
necessary; and
(4) an explanation of the claim review procedure set forth in
Section 14.3 below.
14.3 Review of a Denied Claim. Within 60 days after receiving a notice from
the Committee that a claim has been denied, in whole or in part, a
Claimant (or the Claimant's duly authorized representative) may file
with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than 30 days after the review
procedure began, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
14.4 Decision on Review. The Committee shall render its decision on review
promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other
special circumstances require additional time, in which case the
Committee's decision must be rendered within 120 days after such date.
Such decision must be written in a manner calculated to be understood
by the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 Legal Action. A Claimant's compliance with the foregoing provisions of
this Article 14 is a mandatory prerequisite to a Claimant's right to
commence any legal action with respect to any claim for benefits under
this Plan.
ARTICLE 15
Trust
15.1 Establishment of the Trust. The Company shall establish the Trust, and
each Employer shall at least annually transfer over to the Trust such
assets as the Employer determines, in its sole discretion, are
necessary to provide, on a present value basis, for its respective
future liabilities created with respect to the Annual Deferral Amounts,
Annual Company Contribution Amounts, and Company Matching Amounts for
such Employer's Participants for all periods prior to the transfer, as
well as any debits and credits to the Participants' Account Balances
84
<PAGE>
for all periods prior to the transfer, taking into consideration the
value of the assets in the trust at the time of the transfer.
15.2 Interrelationship of the Plan and the Trust. The provisions of the Plan
and the Plan Agreement shall govern the rights of a Participant to
receive distributions pursuant to the Plan. The provisions of the Trust
shall govern the rights of the Employers, Participants and the
creditors of the Employers to the assets transferred to the Trust. Each
Employer shall at all times remain liable to carry out its obligations
under the Plan.
15.3 Distributions From the Trust. Each Employer's obligations under the
Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the
Employer's obligations under this Plan.
ARTICLE 16
Miscellaneous
16.1 Status of Plan. The Plan is intended to be a plan that is not qualified
within the meaning of Code Section 401(a) and that "is unfunded and is
maintained by an employer primarily for the purpose of providing
deferred compensation for a select group of management or highly
compensated employee" within the meaning of ERISA Sections 201(2),
301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted
to the extent possible in a manner consistent with that intent.
16.2 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of an Employer. For
purposes of the payment of benefits under this Plan, any and all of an
Employer's assets shall be, and remain, the general, unpledged
unrestricted assets of the Employer. An Employer's obligation under the
Plan shall be merely that of an unfunded and unsecured promise to pay
money in the future.
16.3 Employer's Liability. An Employer's liability for the payment of
benefits shall be defined only by the Plan and the Plan Agreement, as
entered into between the Employer and a Participant. An Employer shall
have no obligation to a Participant under the Plan except as expressly
provided in the Plan and his or her Plan Agreement.
16.4 Nonassignability. Neither a Participant nor any other person shall have
any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate, alienate or
convey in advance of actual receipt, the amounts, if any, payable
hereunder, or any part thereof, which are, and all rights to which are
expressly declared to be, unassignable and non-transferable. No part of
the amounts payable shall, prior to actual payment, be subject to
seizure, attachment, garnishment or sequestration for the payment of
any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, be transferable by operation of law in
the event of a Participant's or any other person's bankruptcy or
insolvency or be transferable to a spouse as a result of a property
settlement or otherwise.
16.5 Not a Contract of Employment. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between any
Employer and the Participant. Such employment is hereby acknowledged to
85
<PAGE>
be an "at will" employment relationship that can be terminated at any
time for any reason, or no reason, with or without cause, and with or
without notice, unless expressly provided in a written employment
agreement. Nothing in this Plan shall be deemed to give a Participant
the right to be retained in the service of any Employer, to interfere
with the right of any Employer to discipline or discharge the
Participant at any time.
16.6 Furnishing Information. A Participant or his or her Beneficiary will
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be
requested in order to facilitate the administration of the Plan and the
payments of benefits hereunder, including but not limited to taking
such physical examinations as the Committee may deem necessary.
16.7 Terms. Whenever any words are used herein in the masculine, they shall
be construed as though they were in the feminine in all cases where
they would so apply; and whenever any words are used herein in the
singular or in the plural, they shall be construed as though they were
used in the plural or the singular, as the case may be, in all cases
where they would so apply.
16.8 Captions. The captions of the articles, sections and paragraphs of this
Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
16.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be
construed and interpreted according to the internal laws of the State
of California without regard to its conflicts of law principles.
16.10 Notice. Any notice or filing required or permitted to be given to the
Committee under this Plan shall be sufficient if in writing and
hand-delivered, or sent by registered or certified mail, to the address
below:
Deferred Compensation Plan Committee
EMCON
400 South El Camino Real, Suite 1200
San Mateo, California 94402
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand-delivered,
or sent by mail, to the last known address of the Participant.
16.11 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Participant's Employer and its successors and assigns
and the Participant and the Participant's designated Beneficiaries.
16.12 Spouse's Interest. The interest in the benefits hereunder of a spouse
of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be transferable by
such spouse in any manner, including but not limited to such spouse's
will, nor shall such interest pass under the laws of intestate
succession.
86
<PAGE>
16.13 Validity. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not affect
the remaining parts hereof, but this Plan shall be construed and
enforced as if such illegal or invalid provision had never been
inserted herein.
16.14 Incompetent. If the Committee determines in its discretion that a
benefit under this Plan is to be paid to a minor, a person declared
incompetent or to a person incapable of handling the disposition of
that person's property, the Committee may direct payment of such
benefit to the guardian, legal representative or person having the care
and custody of such minor, incompetent or incapable person. The
Committee may require proof of minority, incompetence, incapacity or
guardianship, as it may deem appropriate prior to distribution of the
benefit. Any payment of a benefit shall be a payment for the account of
the Participant and the Participant's Beneficiary, as the case may be,
and shall be a complete discharge of any liability under the Plan for
such payment amount.
16.15 Court Order. The Committee is authorized to make any payments directed
by court order in any action in which the Plan or the Committee has
been named as a party. In addition, if a court determines that a spouse
or former spouse of a Participant has an interest in the Participant's
benefits under the Plan in connection with a property settlement or
otherwise, the Committee, in its sole discretion, shall have the right,
notwithstanding any election made by a Participant, to immediately
distribute the spouse's or former spouse's interest in the
Participant's benefits under the Plan to that spouse or former spouse.
16.16 Distribution in the Event of Taxation:
(a) In General. If, for any reason, all or any portion of a
Participant's benefits under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee before a Change in Control, or the trustee of the
Trust after a Change in Control, for a distribution of that
portion of his or her benefit that has become taxable. Upon
the grant of such a petition, which grant shall not be
unreasonably withheld (and, after a Change in Control, shall
be granted), a Participant's Employer shall distribute to the
Participant immediately available funds in an amount equal to
the taxable portion of his or her benefit (which amount shall
not exceed a Participant's unpaid vested Account Balance under
the Plan). If the petition is granted, the tax liability
distribution shall be made within 90 days of the date when the
Participant's petition is granted. Such a distribution shall
affect and reduce the benefits to be paid under this Plan.
(b) Trust. If the Trust terminates in accordance with Section
3.6(e) of the Trust and benefits are distributed from the
Trust to a Participant in accordance with that Section, the
Participant's benefits under this Plan shall be reduced to the
extent of such distributions.
16.17 Insurance. The Employers, on their own behalf or on behalf of the
trustee of the Trust, and, in their sole discretion, may apply for and
procure insurance on the life of the Participant, in such amounts and
in such forms as the Trust may choose. The Employers or the trustee of
the Trust, as the case may be, shall be the sole owner and beneficiary
87
<PAGE>
of any such insurance. The Participant shall have no interest
whatsoever in any such policy or policies, and at the request of the
Employers shall submit to medical examinations and supply such
information and execute such documents as may be required by the
insurance company or companies to whom the Employers have applied for
insurance.
16.18 Legal Fees To Enforce Rights After Change in Control. The Company and
each Employer is aware that upon the occurrence of a Change in Control,
the Board or the board of directors of a Participant's Employer (which
might then be composed of new members) or a shareholder of the Company
or the Participant's Employer, or of any successor corporation might
then cause or attempt to cause the Company, the Participant's Employer
or such successor to refuse to comply with its obligations under the
Plan and might cause or attempt to cause the Company or the
Participant's Employer to institute, or may institute, litigation
seeking to deny Participants the benefits intended under the Plan. In
these circumstances, the purpose of the Plan could be frustrated.
Accordingly, if, following a Change in Control, it should appear to any
Participant that the Company, the Participant's Employer or any
successor corporation has failed to comply with any of its obligations
under the Plan or any agreement thereunder or, if the Company, such
Employer or any other person takes any action to declare the Plan void
or unenforceable or institutes any litigation or other legal action
designed to deny, diminish or to recover from any Participant the
benefits intended to be provided, then the Company and the
Participant's Employer irrevocably authorize such Participant to retain
counsel of his or her choice at the expense of the Company and the
Participant's Employer (who shall be jointly and severally liable) to
represent such Participant in connection with the initiation or defense
of any litigation or other legal action, whether by or against the
Company, the Participant's Employer or any , officer, shareholder or
other person affiliated with the Company, the Participant's Employer or
any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as of
__________, 199_.
"Company"
EMCON
a California corporation
By:
Title:
88
EXHIBIT 21.1
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
PLACE OF
NAME ORGANIZATION
Columbia Analytical Services, Inc. Washington
EMCON Alaska, Inc. Alaska
ET Environmental Corporation (50/50 Joint Venture
with The Turner Construction Company) Delaware
Organic Waste Technologies, Inc. Delaware
National Earth Products, Inc. Pennsylvania
89
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-83060, 33-61369 and 33-42186) pertaining to the EMCON 1986
Incentive Stock Option and 1988 Stock Option Plans, the EMCON Employee Stock
Purchase Plan and the EMCON Restricted Stock Plan of our report dated February
18, 1998, with respect to the consolidated financial statements and schedule of
EMCON included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
ERNST & YOUNG, LLP
San Francisco, California
March 26, 1998
90
<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-K for the twelve
month period ended December 31, 1997, 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> 12-MOS
<FISCAL-YEAR-END> JAN-2-1998
<PERIOD-START> DEC-31-1996
<PERIOD-END> JAN-2-1998
<EXCHANGE-RATE> 1
<CASH> 6,106,000
<SECURITIES> 0
<RECEIVABLES> 37,652,000
<ALLOWANCES> 929,000
<INVENTORY> 2,238,000
<CURRENT-ASSETS> 53,381,000
<PP&E> 31,699,000
<DEPRECIATION> 15,517,000
<TOTAL-ASSETS> 93,075,000
<CURRENT-LIABILITIES> 20,798,000
<BONDS> 0
0
0
<COMMON> 42,184,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 93,075,000
<SALES> 109,502,000
<TOTAL-REVENUES> 109,502,000
<CGS> 56,134,000
<TOTAL-COSTS> 56,134,000
<OTHER-EXPENSES> 47,375,000
<LOSS-PROVISION> 1,424,000
<INTEREST-EXPENSE> 1,251,000
<INCOME-PRETAX> 3,318,000
<INCOME-TAX> 1,161,000
<INCOME-CONTINUING> 2,157,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 2,157,000
<EPS-PRIMARY> .25
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