SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission file number
June 30, 1995 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
- ------------------------------------ ---------------
(Zip Code)
(415) 375-1522
-----------------------------
Registrant's telephone number, including area code
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
--- ---
8,245,126 shares of Common Stock Issued and Outstanding as of July 31, 1995.
1
EMCON
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
Page
FACING SHEET..................................................................1
TABLE OF CONTENTS.............................................................2
PART I Financial Information
ITEM 1 Financial Statements
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994............................3
Consolidated Statements of Income -
Three months and six months ended
June 30, 1995 and 1994.........................................4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1995 and 1994........................5
Notes to Consolidated Financial Statements.....................6
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................8
PART II Other Information..................................................10
ITEM 4 Submission of Matters to a Vote of Security Holders................10
SIGNATURES...................................................................12
INDEX TO EXHIBITS............................................................13
2
EMCON
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, December 31,
1995 1994
(In thousands, except share amounts) (Unaudited) (Audited)
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 3,808 $ 5,152
Marketable securities .............................. 2,017 2,436
Accounts receivable, net of allowance
for doubtful accounts of $1,125 and
$975 at June 30, 1995 and
December 31, 1994, respectively ................. 37,980 38,323
Prepaid expenses and other current assets .......... 3,406 3,253
--------- ---------
Total Current Assets ............................ 47,211 49,164
Net property and equipment, at cost ................ 18,105 18,651
Intangible assets, net of amortization ............. 8,866 9,202
Other assets ....................................... 4,092 3,810
--------- ---------
Total Assets .................................... $ 78,274 $ 80,827
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................... $ 5,213 $ 8,846
Accrued payroll and related benefits ............... 5,287 5,580
Other accrued liabilities .......................... 2,099 1,908
Non-current obligations due within one year ........ 167 248
--------- ---------
Total Current Liabilities ....................... 12,766 16,582
Non-current obligations ............................ 1,135 1,186
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; 8,245,126 and 8,186,279 shares
issued and outstanding at June 30, 1995 and
December 31, 1994, respectively ................. 41,142 40,958
Retained earnings .................................. 23,240 22,132
Unrealized losses on marketable securities ......... (9) (31)
--------- ---------
Total Shareholders' Equity ...................... 64,373 63,059
--------- ---------
Total Liabilities and Shareholders' Equity ...... $ 78,274 $ 80,827
========= =========
See accompanying notes
3
EMCON
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(In thousands, ------------------ ---------------------
except per share amounts) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
Gross revenue ..................................... $31,116 $ 30,028 $ 61,485 $ 51,740
Outside services, at cost ......................... 4,663 4,610 8,756 7,580
-------- -------- -------- --------
Net revenue .................................... 26,453 25,418 52,729 44,160
Costs and expenses:
Direct expenses ................................ 10,050 10,006 20,036 17,076
Indirect expenses .............................. 15,418 14,983 31,180 26,506
-------- -------- -------- --------
Income from operations ...................... 958 429 1,513 578
Interest income, net .............................. 36 85 95 197
Equity in loss of affiliates ...................... (5) -- (25) --
-------- -------- -------- --------
Income before provision for income taxes .......... 1,016 514 1,583 775
Provision for income taxes ........................ 305 144 475 217
-------- -------- -------- --------
Net income ........................................ $ 711 $ 370 $ 1,108 $ 558
======== ======== ======== ========
Income per share .................................. $ 0.09 $ 0.05 $ 0.14 $ 0.08
======== ======== ======== ========
See accompanying notes
4
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Six months ended
June 30,
Increase (decrease) in cash and cash equivalents --------------------
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
Cash flow from operating activities:
Net income .......................................... $ 1,108 $ 558
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization ..................... 2,562 1,978
Loss on sale/disposal of property
and equipment ................................... 56 68
Increase in salary continuation plan .............. 35 47
Changes in operating assets and liabilities:
Accounts receivable ......................... 343 1,985
Prepaid expenses and other current
assets ..................................... (153) (517)
Other assets ................................ (288) 200
Accounts payable ............................ (3,633) (50)
Accrued payroll and related benefits ........ (293) (501)
Other accrued liabilities ................... 21 (537)
- --------------------------------------------------------------------------------
Net cash provided by (used for) operating activities . (242) 3,231
- -------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment ................. (1,830) (3,905)
Purchases of available for sale securities .......... (28) (3,500)
Maturities of available for sale securities ......... 469 6,301
Acquisitions, net of cash acquired ................. -- 1,148
Proceeds from sale of property and equipment ........ 52 138
- --------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (1,337) 182
- --------------------------------------------------------------------------------
Cash flow from financing activities:
Payment of current and noncurrent obligations ....... (51) (6,530)
Issuance of common stock for cash ................... 286 478
Repurchase of common stock .......................... -- (423)
- --------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 235 (6,475)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents .................. (1,344) (3,062)
Cash and cash equivalents, beginning of year ........... 5,152 10,578
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period ............... $ 3,808 $ 7,516
- --------------------------------------------------------------------------------
See accompanying notes
5
EMCON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
While the financial information is unaudited, the statements in this report
reflect all adjustments, which are normal and recurring, that are necessary
for a fair presentation of the results of operations for the interim periods
covered and of the financial condition of the Company at the dates of the
balance sheets. The operating results for the interim periods presented are
not necessarily indicative of performance for the entire year.
These financial statements and notes should be read in conjunction with the
Company's consolidated financial statements for the fiscal year ended
December 31, 1994.
2. Restructuring Charges
In December 1994, as a result of changes in senior management, the Company's
Board of Directors approved a corporate restructuring plan which included
the write off of employment contracts with no current or future value,
termination of personnel, and the elimination or abandonment of excess and
underperforming assets and facilities. During the six months ended June 30,
1995, $502,000 of cash charges related to the restructuring were incurred
and charged against the established reserve. At June 30, 1995, $287,000 of
accrued restructuring costs remained and were included in other accrued
liabilities.
To-date, $894,000 of restructuring charges have been incurred.
3. 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.
6
The following summarizes the unaudited pro forma net revenue, net income,
and income per share for the combined company for the six month period ended
June 30, 1995 and 1994 had the acquisition occurred at the beginning of the
period presented.
(unaudited)
Six months ended
June 30,
-------------------
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
Net revenue.......................................... $52,729 $48,928
Net income (loss).................................... 1,108 (597)
Income (loss) per share.............................. $ 0.14 $ (0.07)
- --------------------------------------------------------------------------------
The above proforma results of operations do not purport to reflect the
actual results of operations had the Company actually acquired Wehran as of
the beginning of the period presented.
4. Litigation
As a professional services firm engaged in environmental-related matters the
Company encounters potential liability, including claims for significant
environmental damage in the normal course of business. The Company is party
to lawsuits and is aware of potential exposure related to certain claims,
but in the opinion of management the resolution of these matters will not
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
5. Income Per Share
Income per share is based on the weighted average number of common and
dilutive common - equivalent shares outstanding using the modified treasury
stock method for the three months and six months ended June 30, 1995 and
1994.
6. 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 1995. The Company's year end
falls on the Friday closest to the last day of the calendar year. The
Company also follows a five-four-four week quarterly cycle. For convenience,
the accompanying financial statements have been shown as ending on the last
day of the calendar period.
7
EMCON
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations.
RESULTS OF OPERATIONS
Current Year-to-Date versus Prior Year-to-Date. Net revenue for the first six
months of 1995 totaled $52,729,000, a 19% increase from the $44,160,000 for the
same period of 1994. The increase in net revenue is due in part to the inclusion
of Wehran for all of the first six months of 1995 as compared to only the second
quarter of 1994 following its acquisition in April of that year (Wehran
contributed net revenue of $5,471,000 in the quarter ended March 31, 1995.) The
increase in net revenue was also partly attributable to improvement in the
Company's consulting operations in the Southeast and California markets as well
as to increased revenues from the expanded operations of the laboratory division
in Florida and Southern California.
Direct expenses totaled $20,036,000 for the first six months of 1995, a 17%
increase from the $17,076,000 during the same period in 1994. Direct expenses
include compensation for billable hours for technical and professional staff and
other project related costs charged to the client. The increase in direct
expenses is primarily due to the acquisition of Wehran in April 1994 (Wehran
incurred direct expenses of $1,980,000 in the quarter ended March 31, 1995), and
to a lesser extent, to the improved utilization of billable labor in the
consulting operations and the expansion of the laboratory division's operations
in Florida and Southern California. Direct expenses as a percentage of net
revenue decreased to 38% from 39% during the first six months of 1995 and 1994,
respectively.
Indirect expenses for the first six months of 1995 were $31,180,000, an 18%
increase over $26,506,000 for the same period in 1994. Indirect expenses include
nonbillable hours for professional and technical staff and general and
administrative expenses such as rent, bonuses, benefits, insurance, legal and
depreciation. Indirect expenses as a percent of net revenue decreased to 59%
from 60% during the first six months of 1995 and 1994, respectively. The
improvement was principally due to improved utilization of technical and
professional staff as well as cost containment and restructuring measures put in
place during the fourth quarter of 1994.
Income from operations for the first six months of 1995 was $1,513,000, a 162%
increase compared to $578,000 for the same period in 1994.
The company recorded interest income, net of interest expense of $95,000 and
$197,000 for the first six months of 1995 and 1994, respectively. The decrease
was due to a decrease in the average invested cash during the period.
8
Quarter Ended June 30, 1995 and 1994. For the quarter ending June 30, 1995, net
revenue totaled $26,453,000, a 4% increase from net revenue of $25,418,000 in
the second quarter of 1994. The increase in net revenue was partly attributable
to improvements in the Company's consulting operations in the Southeast and
California markets offset in part by softness in the Midwest and Northeast
operations. Net revenue was also positively impacted by the expansion of the
laboratory division's operations in Florida and Southern California.
Direct expenses for the quarter ended June 30, 1995 were $10,050,000 versus
$10,006,000 in the same quarter last year. Direct expenses as a percent of net
revenue decreased to 38% from 39% for the quarters ended June 30, 1995 and 1994,
respectively.
Indirect expenses for quarters ended June 30, 1995 and 1994, respectively, were
$15,418,000, a 3% increase over $14,983,000 for the same quarter last year. Due
to the increase in net revenue and somewhat improved utilization of technical
and professional staff, indirect expenses, as a percent of net revenue decreased
to 58% from 59% for the quarter ended June 30, 1995 and 1994, respectively.
The Company recorded interest income, net of interest expense of $36,000 for the
second quarter of 1995, compared with $85,000 in the same quarter last year. The
decrease was primarily due to a decrease in cash available for investment.
In July 1995, the Company announced that additional cost cutting measures will
be undertaken over the balance of the year including closure of two
underperforming offices and reductions of staff of approximately 5%. The Company
anticipates that although the above actions may have a negative impact on
revenue and expenses in the near term, such actions are an important step in
returning the Company to a more acceptable level of profitability.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1995, the Company financed its operations
principally from cash and marketable securities on hand, cash generated by
operations and the issuance of common stock under the Company's Employee Stock
Purchase Plan, and from the return on investment on its cash, cash equivalents
and marketable securities. Net cash used by operations during the six months
ended June 30, 1995 was $242,000. The Company at June 30, 1995 had cash, cash
equivalents, and marketable securities of $5,825,000.
The Company invested $1,830,000 for the purchase of property and equipment in
the first six months of 1995, primarily for computers, and communication systems
and to a lesser extent, for laboratory equipment.
The Company believes that cash generated from operations and its available bank
line of $10,000,000, together with existing cash and marketable securities, will
be sufficient to meet the Company's capital needs for at least the next twelve
months.
9
EMCON
PART II OTHER INFORMATION
Items 1. - 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
On May 24, 1995, the Annual Meeting of the Shareholders of EMCON was held at
3:00 p.m., local time, at 1921 Ringwood Avenue, San Jose, California. Of the
8,245,126 shares outstanding as of the record date, 7,199,135 shares were
present or represented by proxies at the meeting.
Election of Directors. An election of directors was held with the following
individuals being elected to the Board of Directors:
For Withheld
--------- --------
Thorley D. Briggs 7,023,474 175,661
Eugene M. Herson 7,149,281 49,854
Stephen W. Vincent 7,127,751 71,384
H. Lee Fortier 7,136,807 62,328
Donald R. Andres 7,045,784 153,351
Douglas P. Crane 7,150,245 48,890
Jack M. Marzluft 7,145,359 53,776
Donald R. Kerstetter 7,166,718 32,417
Peter Vardy 7,165,775 33,360
Amendment to Employee Stock Purchase Plan. The shareholders voted to amend the
EMCON Employee Stock Purchase Plan (the "Plan") to increase the number of shares
of Common Stock authorized for issuance thereunder by 350,000. The proposal
received 6,301,755 affirmative votes, 509,103 negative votes, 39,377 abstentions
and 348,900 broker non-votes.
Ratification of Appointment of Independent Auditors. The shareholders voted to
ratify the appointment of Ernst & Young LLP as EMCON's independent auditors for
the fiscal year ending December 31, 1995. The proposal received 7,120,642
affirmative votes, 44,529 negative votes, 33,877 abstentions, and 87 broker
non-votes.
Item 5. Other Information
In July 1995, Mr. Thorley D. Briggs retired as Chairman of the Board and as a
director of the Company. At the July 28, 1995 meeting of the Board of Directors,
Mr. Douglas P. Crane was unanimously elected to serve as the new Chairman of the
Board.
10
Item 6. Exhibits and Reports
(a) Exhibits - See Index to Exhibits on Page 13.
(b) Reports on Form 8-K - No reports on Form 8-K were filed
with the Securities and Exchange Commission during the
quarter ended June 30, 1995.
11
EMCON
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 1995 EMCON
R. Michael Momboisse
-----------------------
R. MICHAEL MOMBOISSE
Chief Financial Officer and
Vice President - Legal
(Duly authorized and principal
financial and accounting officer)
12
EMCON
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
- ------ ------------
2.1 Agreement and Plan of Reorganization dated effective *
April 1, 1994, among Wehran Envirotech, Inc.,
Registrant and certain other related parties,
incorporated by reference from Exhibit 2.1 of the
Current Report on Form 8-K dated May 26, 1994.
2.2 Certificate of Ownership reflecting the merger of *
Registrant's wholly-owned subsidiary, Wehran/Emcon
Northeast, Inc. into Registrant effective December
20, 1994, incorporated by reference from Exhibit 2.2
of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (the "1994
10-K").
2.3 Certificate of Ownership reflecting the merger of *
Registrant's wholly-owned subsidiary, Wehran
Engineering Corporation, into Registrant effective
December 23, 1994, incorporated by reference from
Exhibit 2.3 of the 1994 10-K.
2.4 Certificate of Ownership reflecting the merger of *
Registrant's wholly-owned subsidiary, EA Associates,
into Registrant effective December 31, 1994,
incorporated by reference from Exhibit 2.4 of the
1994 10-K.
2.5 Certificate of Ownership reflecting the merger of *
Registrant's wholly-owned subsidiaries, EMCON
Northwest, Inc., EMCON Southeast, Inc., EMCON
Baker-Shiflett, Inc., and Eldredge Engineering
Associates, Inc., into Registrant effective December
31, 1994, incorporated by reference from Exhibit 2.5
of the 1994 10-K.
13
EMCON
(Index to Exhibit Continued)
Seqentially
Exhibit Numbered
Number Page
- ------ ------------
10.1 Standard Commercial Lease dated August 1, 1985, *
between Archer Business Complex and Registrant (the
"ABC Lease"), incorporated by reference from Exhibit
10.5 of the Registrant's Registration Statement on
Form S-1 (File No. 33-16337) effective September 16,
1987 (the "Form S-1 Registration Statement").
10.2 Amendment to the ABC Lease between Archer Business *
Complex and Registrant dated September 30, 1992,
incorporated by reference from Exhibit 10.10 of the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (the "1992 10-K").
10.3 Second and Third Amendments to the ABC Lease between *
Archer Business Complex and Registrant dated October
4, 1993 and January 1, 1994, respectively,
incorporated by reference from Exhibit 10.2 of the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 10-K").
10.4 Standard Commercial Lease dated August 1, 1986, *
between the Royal Partnership and Sweet-Edwards &
Associates, Inc. (since merged into the Registrant)
incorporated by reference from Exhibit 10.9 of the
Form S-1 Registration Statement.
10.5 EMCON 1986 Incentive Stock Option Plan and *(1)
Amendment, incorporated by reference from Exhibit
10.15 of the Form S-1 Registration Statement.
10.6 Form of Agreement pursuant to Salary Continuation *(1)
Plan, incorporated by reference from Exhibit 10.17
of the Form S-1 Registration Statement.
10.7 Schedule identifying Agreements pursuant to Salary *(1)
Continuation Plan between Registrant and certain
employees incorporated by reference from Exhibit
10.7 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (the
"1994 10-K").
14
EMCON
(Index to Exhibit Continued)
Sequentially
Exhibit Numbered
Number Page
- ------ -------------
10.8 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").
10.9 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").
10.10 EMCON Employee Stock Purchase Plan amended by 18(1)
shareholder approval on May 24, 1995 as part of this
submission as document type EX-10.10.
10.11 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.
10.12 EMCON Deferred Compensation Plan effective January *(1)
1, 1994 incorporated by reference from Exhibit 10.12
of the 1993 10-K.
10.13 Trust Agreement for the EMCON Deferred Compensation *(1)
Plan and Salary Continuation Plan Trust dated
February 29, 1994 between Registrant and Wells Fargo
Bank, N.A. incorporated by reference from Exhibit
10.13 of the 1993 10-K.
10.14 Credit Agreement between The Bank of California, *
N.A. and Registrant dated September 20, 1991 with
Amendment dated May 31, 1992 incorporated by
reference from Exhibits 10.11 and 10.12 of the 1992
10-K.
15
EMCON
(Index to Exhibit Continued)
Sequentially
Exhibit Numbered
Number Page
- ------ -------------
10.15 Second Amendment to Credit Agreement between The *
Bank of California, N.A. and Registrant dated
effective May 31, 1992 incorporated by reference
from Exhibit 10.13 of Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993.
10.16 Third Amendment to Credit Agreement between The Bank *
of California, N.A. and Registrant dated effective
June 2, 1994, incorporated by reference from Exhibit
10.16 of the June 30, 1994 10-Q.
10.17 Fourth Amendment to Credit Agreement between the 32
Bank of California, N.A. and Registrant dated
effective May 31, 1995, as part of this submission
as document type EX-10.17.
10.18 Letter Agreement between Thorley D. Briggs and *(1)
Registrant dated September 15, 1993 incorporated by
reference from Exhibit 10.18 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 (the "September 30, 1993 10-Q").
10.19 Letter of Agreement between H. Lee Fortier and *(1)
Registrant dated March 14, 1994 incorporated by
reference from Exhibit 10.21 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
10.20 Letter of Agreement between James M. Felker and *(1)
Registrant dated December 7, 1992, incorporated by
reference from Exhibit 10.16 of the 1992 10-K.
10.21 Letter Agreement between Thorley D. Briggs and *(1)
Registrant dated July 19, 1994, incorporated by
reference from Exhibit 10.20 of the 1994 10-K.
10.22 Letter Agreement between James M. Felker and *(1)
Registrant dated October 31, 1994, incorporated by
reference from Exhibit 10.21 of the 1994 10-K.
16
EMCON
(Index to Exhibit Continued)
Sequentially
Exhibit Numbered
Number Page
- ------ ------------
11.1 Computation of Income Per Share. Incorporated as 35
part of this submission as document type Ex-11.1.
27 Financial Data Schedule. Incorporated as part of 36
this submission as document type EX-27.
- ------------
* Incorporated by reference
(1) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of the
instructions to Form 10-K.
17