UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16225
EMCON
(Exact name of Registrant as specified in its charter)
California 94-1738964
---------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1200
San Mateo, California 94402
- ---------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 375-1522
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
8,723,099 shares of Common Stock Issued and Outstanding as of November 3, 1998.
1
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EMCON
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page
Number
------
FACING SHEET ............................................................. 1
INDEX .................................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997............ 3
Consolidated Statements of Income -
Three and nine months ended September 30,
1998 and 1997....................................... 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997...... 5
Notes to Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 12
PART II. OTHER INFORMATION............................................ 16
Signatures............................................................... 17
Index to
Exhibits................................................................. 18
2
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------- ------------------ ----------------
September 30, December 31,
1998 1997
(In thousands, except share amounts) (Unaudited) (Audited)
--------------------------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,260 $ 6,106
Accounts Receivable:
Billed accounts receivable, net of allowance for doubtful accounts
of $748 and $634 at September 30, 1998 and December 31, 1997, respectively 35,739 31,413
Unbilled accounts receivable, net of allowance for doubtful accounts
of $460 and $295 at September 30, 1998 and December 31, 1997, respectively 7,218 5,310
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,598 678
Prepaid expenses and other current assets 3,352 3,401
Inventory 3,017 2,238
Deferred taxes, current portion 3,235 4,235
-------- --------
Total Current Assets 58,419 53,381
Net property and equipment, at cost 16,180 16,182
Notes receivable 2,326 2,811
Cash surrender value of insurance policies 3,113 2,346
Other assets 2,599 2,597
Deferred tax assets 1,028 1,028
Goodwill, net of amortization 14,747 13,916
Other intangible assets, net of amortization 868 814
--------- ---------
Total Assets $99,280 $93,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $11,507 $ 8,391
Accrued payroll and related benefits 5,958 4,356
Other accrued liabilities 4,723 2,969
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,876 2,732
Long-term obligations due within one year 2,263 2,350
-------- --------
Total Current Liabilities 27,327 20,798
Long-term debt 9,786 11,441
Other noncurrent obligations 2,083 2,736
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;
8,723,099 and 8,571,764 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 42,875 42,184
Retained earnings 17,209 15,916
------- -------
Total Shareholders' Equity 60,084 58,100
------- -------
Total Liabilities and Shareholders' Equity $99,280 $93,075
======= =======
See accompanying notes.
</TABLE>
3
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(Unaudited) (Unaudited)
--------------------------- ----------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenue $41,585 $40,764 $111,349 $105,241
Outside services at cost 5,954 10,865 13,687 23,294
------- ------- -------- --------
Net revenue 35,631 29,899 97,662 81,947
Costs and expenses:
Direct expenses 21,809 15,916 57,610 40,728
Indirect expenses 12,254 12,194 37,151 37,597
Restructuring/other charges -- -- -- (75)
Loss on disposition of laboratory -- -- -- 333
Gain on sale of assets -- -- -- (826)
------ ------ ------ ------
Income from operations 1,568 1,789 2,901 4,190
Interest income (125) (145) (444) (364)
Interest expense 294 275 891 923
Equity in earnings of affiliates -- (63) (15) (97)
Minority interest (income) expense 11 271 (9) 454
------ ------ ------ ------
Income before provision for income taxes 1,388 1,451 2,478 3,274
Provision for income taxes 658 508 1,154 1,146
------ ------ ------ ------
Net income $ 730 $ 943 $1,324 $2,128
====== ====== ====== ======
Basic earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25
====== ====== ====== ======
Diluted earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25
====== ====== ====== ======
Shares used in computing basic earnings per share 8,723 8,557 8,670 8,541
====== ====== ====== ======
Shares used in computing diluted earnings per share 8,816 8,768 8,856 8,608
====== ====== ====== ======
See accompanying notes.
</TABLE>
4
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<TABLE>
<CAPTION>
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
(Unaudited)
-------------------------------
Increase (decrease) in cash and cash equivalents (in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $1,324 $2,128
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation 2,818 2,776
Amortization 491 477
Bad debt expense 691 1,022
Gain (loss) on sale/disposal of property and equipment (230) 48
Loss on disposition of laboratory -- 333
Gain on disposition of assets -- (826)
Increase in salary continuation plan 187 64
Changes in operating assets and liabilities:
Accounts receivable (6,567) (8,396)
Costs and estimated earnings in excess of billings on uncompleted (920) (1,344)
contracts
Inventory (779) (908)
Prepaid expenses and other assets -- 217
Notes receivable 485 (2,375)
Cash surrender value of insurance policies (767) (409)
Other assets 3 2,290
Deferred tax assets 1,000 --
Accounts payable 2,893 3,857
Accrued payroll and related benefits 1,587 (111)
Billings in excess of costs and estimated earnings on uncompleted 144 1,209
projects
Other accrued liabilities 868 2,851
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,228 2,903
- ----------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment (2,968) (3,222)
Acquisitions, net of cash acquired (719) (858)
Addition to other intangible assets (101) --
Net cash on disposition of laboratory -- 3,794
Net cash from dispositions of assets -- 840
Proceeds from sale of property and equipment 389 122
- ----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (3,399) 676
- ----------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds of new debt obligation 58 137
Payments of current and long term portion of debt (1,800) (5,165)
Issuance of common stock for cash, net of cancellations 98 210
Dividend payments (31) (30)
- ----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,675) (4,848)
- ----------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,846) (1,269)
Cash and cash equivalents, beginning of year 6,106 5,331
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $4,260 $4,062
- ----------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
5
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EMCON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
While the financial information is unaudited, the statements in this report
reflect all adjustments, which are normal and recurring, that are necessary
for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the dates
of the consolidated balance sheets. The consolidated operating results for
the interim periods presented are not necessarily indicative of performance
for the entire year.
These consolidated financial statements and notes should be read in
conjunction with the Company's consolidated financial statements for the
fiscal year ended December 31, 1997.
2. Restructuring Charges
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further
improving the Company's competitiveness and overall profitability. Based on
this review, the Company's Board of Directors approved a strategic
restructuring plan to reposition the Company to fully exploit its core
strengths in engineering, design, construction, operations and maintenance.
The plan included closure or downsizing of underperforming offices,
write-off of employment contracts for former employees no longer
participating in the Company's affairs and employee severance. During the
quarter ended September 30, 1998, $6,000 of costs relating to the
restructuring were incurred and charged against an established reserve.
Through September 30, 1998, $405,000 of restructuring costs have been
incurred and charged against the reserve and $286,000 of the reserve
remains in other accrued liabilities, which includes present value
adjustments during 1998 of $18,000.
3. Acquisitions
On April 3, 1998, EMCON acquired all the outstanding capital stock of
Advanced Analytical Solutions, Inc. ("A2S"), a provider of alternative
dispute resolution, cost allocation, cost recovery, and litigation support
services primarily for superfund projects. A2S has offices in Denver,
Colorado and Philadelphia, Pennsylvania. The Company purchased A2S for
$593,000 in stock and $601,000 in cash and direct acquisition costs. The
transaction was accounted for as a purchase. Goodwill of approximately
$1,150,000 is being amortized over twenty years using the straight line
method. Accumulated amortization at September 30, 1998, was approximately
$29,000. Additional consideration may be paid for the purchase of A2S
subject to the achievement of predetermined operating performance goals
over the next two years. This acquisition would not have had a material
affect on net revenue, net income, or earnings per share, had it been
effective at January 1, 1998.
6
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Effective May 1, 1997, Organic Waste Technology, Inc. ("OWT"), a wholly
owned subsidiary of EMCON, acquired all of the equity interest in National
Earth Products, Inc. ("NEP"), a Lancaster, Pennsylvania-based company with
significant expertise in landfill civil construction and related soils
processing. NEP was acquired for $933,000 in cash and $800,000 in notes
payable. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,601,000
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 September 30, 1998, was approximately
$86,000. Included in goodwill, is an additional $125,000 cash payment that
was made to NEP shareholders in May, 1998, as a result of their attaining
certain predetermined operating performance goals. Additional consideration
may be paid for the purchase of NEP subject to the achievement of certain
earnout goals over the next year to be measured as of April, 1999. This
acquisition would not have had a material effect on net revenue, net
income, or earnings per share, had it been effective at January 1, 1997.
4. Credit Agreement
In conjunction with the acquisition of OWT in the first quarter of 1996,
the Company entered into a $20,000,000 secured credit agreement with its
existing commercial bank (the "Credit Agreement"), 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
with any unpaid amounts due and payable on June 30, 2001. In April 1997,
following the infusion of cash upon the sale of Columbia Analytical
Services, Inc., the Company prepaid, on an accelerated basis, $3,000,000 of
the then outstanding principal balance of the term loan. The remaining
$10,000,000 under the Credit Agreement is available for working capital
purposes in the form of a line of credit (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 November 30, 1998. The Company expects
to renew the line of credit component of the Credit Agreement prior to 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.
5. Litigation
As a professional services firm engaged in environmental-related matters,
the Company encounters potential liability, including claims for significant
environmental damage, in the normal course of business. The Company is party
to lawsuits and is aware of potential exposure related to certain claims,
but in the opinion of management the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
7
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6. Earnings Per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------------ ----------------------------
(In thousands, except for earnings per share) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 730 $ 943 $1,324 $2,128
------ ------ ------ ------
Numerator for basic earnings per share -
income available to common stockholders 730 943 1,324 2,128
Effect of dilutive securities:
8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1)
------ ------ ------ -----
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 730 $ 943 $1,324 $2,128
===== ====== ====== ======
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,723 8,557 8,670 8,541
Effect of dilutive securities:
Employee stock options 93 211 186 67
8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1)
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 8,816 8,768 8,856 8,608
====== ====== ====== ======
Basic earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25
====== ====== ====== ======
Diluted earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25
====== ====== ====== ======
------------------------------------------------------ --------------- ---------------- -------------- ---------------
(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 such shares were
antidilutive at September 30, 1998. 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 such shares were antidilutive at September
30, 1998. Conversion of debt, if it occurs, would be 50% at May 1, 2000, and
50% at May 1, 2002.
</TABLE>
7. Other
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year
which will result in a fifty-two week year in 1998. The Company's year end
falls on the Friday closest to the last day of the calendar year. The
Company also follows a five-four-four week quarterly cycle. For convenience,
the accompanying consolidated financial statements have been shown as ending
on the last day of the calendar period.
8. Adoption of Statement 131
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting standards No. 131,
Disclosure about Segments of an Enterprise and Related Information,
("Statement 131"). Statement 131 superseded FASB Statement 14, Financial
Reporting for Segments of a Business Enterprise. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. The adoption of Statement 131 did not affect
consolidated results of operations or financial position, but did affect
the disclosure of segment information. See note 9.
8
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9. Segment Reporting
Description of the types of services from which each reportable segment
derives its revenues.
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 reportable segments -- the
Operations and Construction Division (EOC) and the Professional Services
Division (PSD) -- and services three key service lines: Solid Waste, Site
Restoration and Facility Services.
In the first quarter of 1997, the Company had, in addition to the two
reportable segments listed above, a third reportable segment which was its
laboratory operations known as Columbia Analytical Services, Inc. (CAS).
During the first quarter of 1997, the Company completed the sale of CAS.
Measurement of segment profit or loss and segment assets.
The Company evaluates performance of its reportable segments, EOC and PSD,
based on operating income or loss before and after corporate overhead
allocations, but before interest income, interest expense, equity in income
of affiliates and minority interest income (loss). Corporate overhead
expenses are substantially allocated to the reporting segments based on
revenue and/or headcount when an item is not specifically identified to a
reporting segment. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting
policies as disclosed in EMCON's Form 10K as of December 31, 1997.
Intersegment sales consist primarily of labor and are marked up to provide
the supplying reportable segment a measure of profit. The receiving
reportable segment records the transfer as an "Outside Service" and may or
may not further mark up the labor cost prior to passing the cost through to
its customer. If the cost is not passed through to the customer, the
receiving reportable segment records the transaction as an indirect cost.
All intersegment accounts are eliminated in consolidation.
Factors management used to identify the enterprise's reportable segments.
The Company's reportable segments are divisional units that offer different
services. The reportable segments are each managed separately. The PSD
reportable segment concentrates on professional engineering, design and
consulting services in solid waste, site restoration and facilities
services. The PSD reportable segment has regional operations situated in
the North, South, Northwest and Southwest portions of the United States,
each overseen by an Area Operations Manager. These regional operations have
the same operating parameters (services offered and required operating
margins), may serve the same national customers and often share personnel.
For reportable segment reporting, these regional operations are aggregated.
The EOC reportable segment concentrates on construction, drilling,
equipment fabrication and operations and maintenance services, primarily to
the Company's solid waste clients.
In 1997, there was a third reportable segment, Columbia Analytical
Services, Inc., a laboratory division that was sold during the first
quarter of 1997.
9
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<TABLE>
<CAPTION>
Segment Information
---------------------------------------------------------------------------------------------------
(Three months ended September 30, 1998) PSD EOC Other Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenues from:
External subcontractors $23,134 $17,920 $ 531 $41,585
Intersegment revenues 1,137 1,405 -- 2,542
Outside services from:
External subcontractors 5,921 2 31 5,954
Intersegment services 1,505 1,039 3 2,547
Net revenues 16,845 18,284 502 35,631
Depreciation expense 500 354 69 923
Amortization expense -- 16 159 175
Segment operating profit (loss) before 2,713 1,191 133 4,037
allocations
Segment operating profit (loss) after allocations 1,602 642 (676) 1,568
---------------------------------------------------------------------------------------------------
(Three months ended September 30, 1997)
---------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $22,037 $18,725 $ 2 $40,764
Intersegment revenues 443 593 -- 1,036
Outside services from:
External subcontractors 5,139 5,726 -- 10,865
Intersegment services 645 376 -- 1,021
Net revenues 16,696 13,216 (13) 29,899
Depreciation expense 581 200 87 868
Amortization expense -- 29 136 165
Segment operating profit (loss) before 2,047 1,404 -- 3,451
allocations
Segment operating profit (loss) after allocations 918 844 27 1,789
---------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
(Nine months ended September 30, 1998) PSD EOC CAS Other Total
----------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $61,465 $48,895 N/A $ 989 $111,349
Intersegment revenues 2,009 2,558 N/A -- 4,567
Outside services from:
External subcontractors 13,535 105 N/A 47 13,687
Intersegment services 2,753 1,833 N/A 8 4,594
Net revenues 47,186 49,515 N/A 961 97,662
Depreciation expense 1,581 1,032 N/A 205 2,818
Amortization expense -- 46 N/A 445 491
Segment operating profit (loss) before 3,908 4,465 N/A 259 8,632
allocations
Segment operating profit (loss) after allocations 807 2,873 N/A (779) 2,901
Segment assets (1)
Accounts receivable, net 23,829 18,688 N/A 440 42,957
----------------------------------------------------------------------------------------------------------------
(1) The Company reviews its consolidated balance sheet and reviews only
accounts receivable on a segment basis.
</TABLE>
10
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(Nine months ended September 30, 1997) PSD EOC CAS Other Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross revenues from:
External customers $63,143 $37,633 $4,453 $ 12 $105,241
Intersegment revenues 1,136 1,684 734 -- 3,554
Outside services from:
External subcontractors 12,780 10,239 275 -- 23,294
Intersegment services 2,708 776 8 -- 3,492
Net revenues 48,791 28,302 4,904 (50) 81,947
Depreciation expense 1,700 846 462 230 3,238
Amortization expense -- 70 -- 407 477
Restructuring/other charges -- -- -- (75) (75)
Loss on disposition of laboratory -- -- -- 333 333
Gain on sale of assets -- 826 -- -- 826
Segment operating profit (loss) before 5,076 3,682 108 -- 8,866
allocations
Segment operating profit (loss) after allocations 2,184 2,176 (59) (111) 4,190
Segment assets(1)
Accounts receivable, net 27,491 14,059 N/A -- 41,550
-----------------------------------------------------------------------------------------------------------------
(1)The Company reviews its consolidated balance sheet and reviews only
accounts receivable on a segment basis.
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1998 1997 1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Total external revenues for reportable segments $41,054 $40,762 $110,360 $105,229
Intersegment revenues for reportable segments 2,542 1,036 4,567 3,554
Other revenues 531 2 989 12
Elimination of intersegment revenues (2,542) (1,036) (4,567) (3,554)
------- ------- -------- --------
Total gross consolidated revenues 41,585 40,764 111,349 105,241
Less outside services (5,954) (10,865) (13,687) (23,294)
------- ------- -------- --------
Total net revenue $35,631 $29,899 $97,662 $81,947
------------------------------------------------------------------------------------------------------------------
Profit or Loss
Total operating profit for reportable segments before $ 4,037 $ 3,451 $ 8,632 $ 8,866
allocations
Overhead allocations expense (1,660) (1,689) (4,693) (4,565)
Unallocated overhead (809) 27 (1,038) (111)
------- ------ ------- -------
Total operating profit after allocations 1,568 1,789 2,901 4,190
Interest income 125 145 444 364
Interest expense (294) (275) (891) (923)
Equity in earnings of affiliates -- 63 15 97
Minority interest income (expense) (11) (271) 9 (454)
------- ------ ------- -------
Income before provision for income taxes $1,388 $1,451 $ 2,478 $ 3,274
------------------------------------------------------------------------------------------------------------------
September 30, 1998 1997
------------------------------------------------------------------------------------------------------------------
Assets
Accounts receivable for reportable segments $42,957 $41,550
Other current assets 15,462 11,904
Net property and equipment at cost 16,180 15,371
Goodwill, net of amortization 14,747 13,786
Other assets 9,934 13,798
------- -------
Total consolidated assets $99,280 $96,409
------------------------------------------------------------------------------------------------------------------
</TABLE>
11
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EMCON
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q. Certain statements in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," including statements regarding the
Company's beliefs, expectations or strategies regarding the
future, constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Although the Company believes
that the expectations reflected in such forward-looking statements
are based on reasonable assumptions, such statements are subject
to risks and uncertainties, including those discussed under the
heading "Risk Factors" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K"), that
could cause actual results to differ materially from those
projected.
RESULTS OF OPERATIONS
Current Year-to-Date ended September 30, 1998 versus Prior Year-to-Date ended
September 30, 1997.
Net Revenue: Net revenue for the first nine months of 1998 totaled $97,662,000,
a 19.2% increase from $81,947,000 for the first nine months of 1997. At the end
of the first quarter of 1997, the Company divested its laboratory subsidiary,
Columbia Analytical Services, Inc. (CAS); a reportable segment. CAS contributed
$4,904,000 to net revenue in the first quarter of 1997. Excluding net revenue
contributed by CAS in the first quarter of 1997, net revenue from continuing
operations increased 26.8% in the first nine months of 1998 from $77,043,000 in
the same period in 1997. The increase in net revenue was primarily due to a
75.0% increase in net revenue from EMCON's Operations and Construction (EOC)
reportable segment as the demand for its services continued to increase. This
was offset by a 3.3% decrease in net revenue from the Professional Services
Division (PSD) reportable segment due to unanticipated project delays, unusually
severe weather conditions and the contraction of the PSD's Northwest and
Southwest operations throughout the course of 1997 and the first nine months of
1998.
Direct Expenses: Direct expenses include 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, construction and drilling
activities. Direct expenses for the first nine months of 1998 totaled
$57,610,000, a 41.5% increase compared to direct expenses of $40,728,000 during
the first nine months of 1997. Excluding the impact of CAS (which incurred
direct expenses of $2,267,000 in the first quarter of 1997) direct expenses
increased 49.8% from $38,461,000 in the first nine months of 1997. As a
percentage of net revenue, direct expenses as reported increased from 49.7% in
the first nine months of 1997 to 59.0% in the first nine months of 1998. The
increase was due in large part to a shift in business mix resulting from the
divestiture of CAS, the contraction of the PSD reportable segment and the
continued expansion of the EOC reportable segment.
12
<PAGE>
Indirect Expenses: Indirect expenses include salary compensation for nonbillable
hours of professional, technical and administrative staff and general
administrative expenses such as rent, bonuses, benefits, insurance, legal,
depreciation and amortization. Indirect expenses for the first nine months of
1998 totaled $37,151,000, a 1.2% decrease compared to indirect expenses of
$37,597,000 for the first nine months of 1997. Excluding the impact of CAS
(which incurred indirect expenses of $2,529,000 in the first quarter of 1997)
indirect expenses during the first nine months of 1998 increased 5.9% from
$35,068,000 during the first nine months of 1997. As a percentage of net
revenue, indirect expenses as reported decreased from 45.9% in the first nine
months of 1997 (42.8% after excluding the impact of CAS) to 38.0% in the first
nine months of 1998. The decrease was due in part to the above-noted shift in
business mix, the expansion of the EOC reportable segment, the contraction of
the PSD reportable segment and the continued positive impact of cost containment
measures.
Adjustment of Restructuring Accrual: During the first quarter of 1997, the
Company reversed an accrual of $75,000 made as part of the restructuring actions
taken in the fourth quarter of 1996. The year end accrual was revised to reflect
lower than anticipated costs associated with the abandonment and subsequent
sublease of certain office space.
Loss on Disposition of Laboratory: During the first quarter of 1997, the Company
completed the sale of CAS to the employees of CAS for $4,000,000 in cash, CAS'
promissory notes for $3,219,000 ("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. In anticipation of completing the sale, the
Company recognized impairment in the value of its investment in CAS of
$3,327,000 at the end of 1996. As a result of several pre closing adjustments,
the Company recognized an additional loss on disposition of CAS in the first
quarter of 1997 of $333,000.
Gain on Sale of Assets: During the 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 in the first quarter of 1997, of
$826,000.
Income From Operations: Income from operations for the first nine months of 1998
was $2,901,000, a 30.8% decrease compared to $4,190,000 during the comparable
period last year. Income from operations, as a percent of net revenue decreased
to 3.0% for the first nine months of 1998 from 5.1% in the comparable period in
1997.
Interest Income: The Company recorded interest income of $444,000 in the first
nine months of 1998 compared to $364,000 in the first nine months of 1997. The
increase in interest income in the first nine months of 1998 compared to the
first nine months of 1997 was primarily due to the recognition of interest
income on the CAS Notes.
Interest Expense. The Company incurred interest expense of $891,000 in the first
nine months of 1998 compared to $923,000 in the first nine months of 1997.
13
<PAGE>
Quarters Ended September 30, 1998 and 1997
Net Revenue. Net revenue for the quarter ended September 30, 1998, totaled
$35,631,000, a 19.2% increase from net revenue of $29,899,000 for the third
quarter of 1997. The increase in net revenue was primarily due to a 38.3%
increase in net revenue from the EOC reportable segment as the demand for its
services continues to expand. Net revenue from the PSD reportable segment was
relatively unchanged with a 1.0% increase.
Direct Expenses. Direct expenses for the quarter ended September 30, 1998,
totaled $21,809,000, a 37.0% increase from $15,916,000 during the third quarter
of 1997. As a percentage of net revenue, direct expenses increased from 53.2% in
the third quarter of 1997 to 61.2% in the third quarter of 1998. The increase
was due in large part to a shift in business mix resulting from the continued
expansion of the EOC reportable segment.
Indirect Expenses. Indirect expenses for the quarter ended September 30, 1998
totaled $12,254,000, a 0.5% increase from indirect expenses of $12,194,000
during the third quarter of 1997. As a percentage of net revenue, indirect
expenses decreased from 40.8% in the third quarter of 1997 to 34.4% in the third
quarter of 1998. The decrease was due in part to the above-noted shift in
business mix resulting from the expansion of the EOC reportable segment and the
continued positive impact of cost containment measures.
Income From Operations. Income from operations for the quarter ended September
30, 1998, was $1,568,000, a 12.4% decrease compared to $1,789,000 during the
third quarter of 1997. Income from operations, as a percent of net revenue
decreased to 4.4% in the third quarter of 1998 from 6.0% in the comparable
period in 1997.
Interest Income. The Company recorded interest income of $125,000 in the quarter
ended September 30, 1998 compared to $145,000 in the third quarter of 1997.
Interest Expense. The Company incurred interest expense of $294,000 in the
quarter ended September 30, 1998 compared to $275,000 in the third quarter of
1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company's uses of cash for
non-operating activities primarily consisted of repayment of debt in the amount
of $1,800,000 and additions to property and equipment in the amount of
$2,968,000; mainly computers, field equipment and developed leachate evaporation
system (LES) projects. Net cash provided by operating activities during the
period was $3,228,000.
In conjunction with the acquisition of OWT in the first quarter of 1996, the
Company entered into a $20,000,000 secured credit agreement with its existing
commercial bank (the "Credit Agreement"), 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 with any unpaid
amounts due and payable on June 30, 2001. In April 1997, following the infusion
of cash upon the sale of Columbia Analytical Services, Inc., the Company
prepaid, on an accelerated basis, $3,000,000 of the then outstanding principal
balance of the term loan. The remaining $10,000,000 under the Credit Agreement
is available for working capital purposes in the form of a line of credit (with
up to $5,000,000 also being available for non-working capital purposes). The
line of credit component of the Credit
14
<PAGE>
Agreement expires on November 30, 1998. The Company expects to renew the line of
credit component of the Credit Agreement prior to 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.
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.
15
<PAGE>
EMCON
PART II OTHER INFORMATION
Items 1. - 5. Not applicable.
Item 6. Exhibits and Reports
(a) Exhibits - See Index to Exhibits on Page 18
(b) Reports on Form 8-K - No reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended September 30,
1998.
16
<PAGE>
EMCON
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 31, 1998 EMCON
\s\ R. Michael Momboisse
-------------------------------------
R. MICHAEL MOMBOISSE
Chief Financial Officer,
Vice President - Legal, and Secretary
(Duly authorized and principal
financial and accounting officer)
17
<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.
2.6 Agreement and Plan of Reorganization among *
Registrant, Advanced Analytical Solutions, Inc.
("A2S") and certain other parties dated April 3,
1998, incorporated by reference from Exhibit 2.6
of the Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998 (the "March
1998 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").
18
<PAGE>
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- ------------
3.4 Bylaws, as amended, incorporated by reference from *
Exhibit 4.2 of the June 1991 10-Q.
10.1 EMCON 1986 Incentive Stock Option Plan and *(1)
Amendment, incorporated by reference from Exhibit
10.15 of the Form S-1 Registration Statement.
10.2 Form of Agreement pursuant to Salary Continuation *(1)
Plan, incorporated by reference from Exhibit 10.17
of the Form S-1 Registration Statement.
10.3 Schedule identifying Agreements pursuant to Salary *(1)
Continuation Plan between Registrant and certain
employees, incorporated by reference from Exhibit
10.3 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997
(the "1997 10-K").
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 *(1)
shareholder 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 *(1)
reference 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 *(1)
Compensation 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").
19
<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.
20
<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 *(1)
Plan 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. *(1)
Herson and Registrant dated November 3, 1997,
incorporated by reference from Exhibit 10.26 of
the 1997 10-K.
10.27 Amended and Restated Agreement between R. Michael *(1)
Momboisse and Registrant dated November 3, 1997,
incorporated by reference from Exhibit 10.27 of
the 1997 10-K.
10.28 Deferred Compensation Plan, Amended and Restated *(1)
effective January 1, 1998, incorporated by
reference from Exhibit 10.28 of the 1997 10-K.
10.29 Registration Rights Agreement among Registrant, *
and the former shareholders of A2S dated April 3,
1998, incorporated by reference from Exhibit 10.29
of the March 1998 10-Q.
10.30 Secured Promissory Note of Timothy M. Keaten *
dated April 3, 1998, in the principal amount of
$225,000, incorporated by reference from Exhibit
10.30 of the March 1998 10-Q.
10.31 EMCON 1998 Stock Option Plan, with standard form *
of Incentive Stock Option Agreement, Non-Statutory
Stock Option Agreement and Non-Statutory Stock
Option Agreement (outside Director Option)
attached, incorporated by reference from Exhibit
10.31 of the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998
(the "June 30, 1998 10-Q").
10.32 Sixth Amendment to Credit Agreement among *
Registrant and Union Bank of California dated June
1, 1998, incorporated by reference from Exhibit
10.32 of the June 30, 1998 10-Q.
21
<PAGE>
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- ------------
10.33 Seventh Amendment to Credit Agreement among 23
Registrant and Union Bank of California dated
August 31, 1998.
27 Financial Data Schedule, included herein. 28
* 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.
22
SEVENTH AMENDMENT
TO CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Seventh Amendment") dated as
of August 31, 1998, is made and entered into by and between EMCON, a California
Corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A.
("Bank"), successor in interest to the Bank of California, N.A.
RECITALS:
A. Borrower and Bank are parties to that certain Credit Agreement dated
February 29, 1996 as amended from time to time (the "Agreement"),
pursuant to which Bank agreed to extend credit to Borrower.
B. Borrower is currently indebted to Bank under the Agreement in the
aggregate commitment amount of $14,142,856 and Borrower has not
defense, offset or counterclaim against Bank or any other person or
entity that diminishes such indebtedness.
Now, therefore, in consideration of the above recitals and of the mutual
covenants and conditions contained herein, Borrower and Bank agree as follows:
AGREEMENT:
1. Defined Terms. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the
Agreement.
2. Amendments to the Agreement.
(a) In ARTICLE 1 - DEFINITIONS, "Termination Date" is amended in its
entirety to read as follows:
""Termination Date" means the earlier of (a) the date Bank may
terminate making Advances or extending credit pursuant to the rights of Bank
under Article 7; or (b) November 30, 1998 for the Line of Credit; or (c) June
30, 2001 for the Term Loan."
3. Effectiveness of the Seventh amendment. This Seventh Amendment shall
become effective as of the date hereof when, and only when, Bank shall
have received all of the following, in form and substance satisfactory
to Bank:
(a) The counterpart of this Seventh Amendment, duly executed by
Borrower;
(b) Such other documents, instruments or agreements as Bank may
reasonably deem necessary.
4. Ratification. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and
confirmed.
23
<PAGE>
5. Representations and Warranties. Borrower represents and warrants as follows:
(a) Each of the representations and warranties contained in the
Agreement, as may be amended hereby, is hereby reaffirmed as of the
date hereof, each as if set forth herein:
(b) The executive, delivery and performance of the Seventh Amendment
and any other instruments or documents in connection herewith are
within Borrower's power, have been duly authorized, are legal, valid
and binding obligations of Borrower, and are not in conflict with the
terms of any charter, bylaw, or other organization papers of Borrower
or with any law, indenture, agreement or undertaking to which Borrower
is a party or by which Borrower is bound or affected;
(c) No event has occurred and is continuing or would result from this
Seventh Amendment which constitutes or would constitute an Event of
Default under the Agreement.
6. Governing Law. This Seventh Amendment and all other instruments or
documents in connection herewith shall be governed by and construed
according to the laws of the State of California.
7. Counterparts. This Seventh Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. EMCON
By: /o/ Susan Cunliffe By: /o/ Eugene M. Herson
- ----------------------------- ------------------------------
Title: Vice President Title: CFO & President
By: /o/ R. Mike Momboisse
------------------------------
Title: CFO and VP Legal
24
<PAGE>
PROMISSORY NOTE
(BASE RATE)
Borrower Name: EMCON
Borrower Address: Office 90161
400 SOUTH EL CAMINO REAL, STE 1200 Loan Number 259-668-752 0002-00-0-000
SAN MATEO, CA 94402 Maturity Date AUGUST 27, 1998
Amount $10,000,000.00
$10,000,000.00 Date AUGUST 27, 1998
- -------------- ---------------
FOR VALUE RECEIVED, on NOVEMBER 30, 1998, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below,
the principal sum of TEN MILLION AND NO/100 Dollars ($10,000,000.00), or so much
thereof as is disbursed, together with interest on the balance of such principal
from time to time outstanding, at the per annum rate or rates and at the times
set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each MONTH
(commencing SEPTEMBER 30, 1998). Should interest not be paid when due, it shall
become a part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year of
360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding
hereunder in minimum amounts of at least $100,000.00 shall bear
interest at a rate, based on an index selected by Debtor, which is
1.50% per annum in excess of Bank's LIBOR-Rate for the Interest Period
selected by Debtor, acceptable to Bank.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in
its records shall not discharge Debtor from it obligations to repay in
full with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing,
and on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephing an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index,
the Interest Period and the Origination Date selected (which
Origination Date, for a Base Interest Rate Loan based on the
LIBOR-Rate, shall follow the date of such selection by no more than two
(2) Business Days).
Bank will mail a written confirmation of the terms of the selection to
Debor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at athe
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds
notwithstanding any Base Interst Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum of equal to the Reference Rate, which rate shall vary as
and when the Reference Rate changes.
At any time piror to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may borrow,
repay and reborrow hereon so long as the total outstanding at any one
time does not exceed the principal amount of this note. Debor shall pay
any amounts due under this note in lawful money of the United States at
Bank's SAN MATEO COMMERCIAL BANKING Office, or such other office as may
be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor
shall pay a fee of $100 to Bank.
25
<PAGE>
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option
of Bank, and, to the extend permitted by law, interest shall be payable
on the outstanding principal under this n ote at a per annum rate equal
to five percent (5%) in excess of the interest rate specified in
paragraph 1.b., above, calculated fromthe date of default until all
amounts payable under this note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based
on the Reference Rate may be prepaid in whole or in part at any time,
without penalty or premium. Debtor may prepay amounts outstanding under
this note bearing interest at a Base Interest Rate in whole or in part
provided Debtor has given Bank not less than five (5) Business Days
prior writtennotice of Debtor's intention to make such prepayment and
pays to Bank the liquidated damages due as a result. Liquidated Damages
shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearin interest at a Base Interest Rate prior to its scheduled payment
date. Liquiedate Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) betwen
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and (b) the return which Bank could obtain if it used
the amount of such prepayment of principal to purchase at bid price
regularly quoted securities issued by the United State having a
maturity date most closely coinciding with the relevant Base Rate
Maturity Date and such securities were held by Bank until the relevant
Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator
of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator
of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are scheduled under the
terms of the Base Interest Rate Loan being prepaid, then an amount
equal to the lesser of (A) the amount prepaid or (B) 50% of the sum of
(1) the amount prepaid and (2) the amount of principal scheduled under
the terms of the Base Interest Rate Loan being prepaid to be
outstanding at the relevant Base Rate Maturity Date). Present value
under this note is determined by discounting the aboe product to
present value using the Yield Rate as the annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim
against bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received if
no prepayment had occurred. All prepayments shall include payment of
accrued interst on the principal amount so prepaid and shall be applied
to payment of interest before application to principal. A determination
by Bank as to the prepayment fee amount, if any, shall be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor ackowledges that (i) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepaymen tmay result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquiedated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include,
but not be limited to, any of the following: (a) the failure of Debtor
to make any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker
endorser, or any person or entity other than Debtor providing security
for this note (hereinafter individually and collectively referred to as
the "Obligor") under any security oagreement, guaranty or other
agreement between Bank and any obligor; (c) the insolvency of any
Obligor or the failure of any Obligor generally to pay such Obligor's
debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or
debtor relief; (e) the assignment by any Obligor for the benefit of
such Obligor's creditors; (f) the appointment, or commencement of any
proceeding for the appointment of a receiver, trustee, custodian or
similar official for all or substantially all of any Obligor's
property; (g) the commencement of any proceeding for the dissolution or
liquidation of any Obligor; (h) the termination of existence or death
of any Obligor; (i) the revocation of any guaranty or subordination
agreement given in connection with this note; (j) the failure of any
Obligor to comply with any order, judgement, injunction, decree, writ
or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any
notice or levy, notice to withhold, or other legal process for tazes
other than property tazes; (l) the default by any obligor personally
liable for amonts owed hereunder on any obligation concerning the
borrowing of money; (m) the issuance against any Obligor, or the
property of any Obligor, of any writ of attachment, execution, or other
judicial lien; or (n) the deterioration of the financial condition of
any Obligor which results in Bank deeming itself in good faith,
insecure. Upon the occurrence of any such default, Bank, in its
discretion, may cease to advance funds hereunder and may declare
26
<PAGE>
all obligations under this note immediately due and payble; however,
upon the occurrence of an event of default under d, e, f, or g, all
principal and interest shall automatically become immediately due and
payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note
are not paid when due, Debtor promises to pay all costs and expenses,
including reasonable attorneys' fees, incurred by Bank in the
collection or enforcement of this note. Debtor and any endorsers of
this note for the maximum period of time and the full extent permitted
by law, (a) waive diligence, presentment, demand, notice oof
nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to
any debt or obligation hereunder; and (c) consent to renewals and
extensions of time for the payment of any amounts due under this note.
If this note is signed by more than one party, the term "Debtor"
includes each of the undersigned and any successors in interest
thereof; all of whose liability shall be joint and several. Any married
person who signs this note agrees that recourse may be had against the
separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option,
shall not be considered a payment on account until such check or other
item of payment is honored when presented for payment at the drawee
bank. Bank may delay the credit of such payment based upon Bank's
schedule of funds availablity, and interest under this note shall
accrue until the funds are deemed collected. In any action brought
under or arising out of this note, Debtor and any Obligor, including
their successors and assigns, hereby consent to the jurisdication of
any competent court within the State of California, as provided in any
alternative dispute resolution agreement executed between Debtor and
Bank, and consent to service of process by any means authorized by said
state's law. The term "Bank" includes, without limitation, any holder
of this note. This note shall be construed in accordance with and
governed by the laws of the State of California. This note hereby
incorporates any alternative dispute resolution agreement previously,
concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the
meanings respectively set forth below: "Base Interest Rate" means a
rate of interest based on the LIBOR-Rate. "Base Interest Rate Loan"
means amounts outstanding under this note that bear interest at a Base
Interest Rate. "Base Rate Maturity Date" means the last day of the
Interest Period with respect to principal outstanding under a Base
Interest Rate Loan. "Business Day" means a day on which Bank is open
for business for the funding of corporate loans, and, with respect to
the rate of interest based on the LIBOR Rate, on which dealings in U.S.
dollar deposits outside of the United States may be carried on by Bank.
"Interest Period" means with respect to funds bearing interest at a
rate based on the LIBOR Rate, any calendar period of one, three, six,
nine or twelve months. In determining an Interest Period, a month means
a period that starts on one Business Day in a month and ends on and
includes the day preceding thenumerically corresponding day in the next
month. For any month in which there is no such numerically
corresponding day, then as to that month, such day shall be deemed to
be the last calendar day of such month. Any Interest Period which would
otherwise an on a non-Business Day shall end on the next succeeding
Business Day unless that is the first day of a month, in which event
such Interest Period shall end onthe next preceding Business Day.
"LIBOR Rate" means a per annum rate of interest (rounded upward, if
necessary, to the nearest 1/100 of 1%) at whcih dollar deposits, in
immediately available funds and in lawful money of the United Sates
would be offered to Bank, outside of the United Sates, for a term
coinciding with the Interest Period delected by Debtor and for an
amount equal to the amount of principal covered by Debtors' interest
rate selection, plus Bank's costs, including the costs, if any, of
reserve requirements. "Origination Date" means the first day of the
Interest Period. "reference Rate" means the rate announced by Bank from
time to time at its corporate headquarters as its Reference Rate. The
Reference Rate is an index rate determined by Bank from time to time as
a means of pricing certain extensions of credit and is neither directly
tied to any external rate of interest or index nor necessarily the
lowest rate of interest or index nor necessarily the lowest rate of
interest charged by Bank at any given time.
EMCON
By: /o/ Eugene M. Herson
-----------------------------
Title: CFO and President
By: /o/ R. Michael Momboisse
-----------------------------
Title: CFO and VP Legal
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of income and consolidated
statements of cash flows included in the Company's Form 10-Q for the six month
period ended June 30, 1998, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,260,000
<SECURITIES> 0
<RECEIVABLES> 44,165,000
<ALLOWANCES> (1,208,000)
<INVENTORY> 3,017,000
<CURRENT-ASSETS> 58,419,000
<PP&E> 34,079,000
<DEPRECIATION> (17,899,000)
<TOTAL-ASSETS> 99,280,000
<CURRENT-LIABILITIES> 27,327,000
<BONDS> 0
<COMMON> 42,875,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 99,280,000
<SALES> 97,662,000
<TOTAL-REVENUES> 97,662,000
<CGS> 57,610,000
<TOTAL-COSTS> 57,610,000
<OTHER-EXPENSES> 35,992,000
<LOSS-PROVISION> 691,000
<INTEREST-EXPENSE> 891,000
<INCOME-PRETAX> 2,478,000
<INCOME-TAX> 1,154,000
<INCOME-CONTINUING> 1,324,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,324,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
