UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16225
EMCON
(Exact name of Registrant as specified in its charter)
California 94-1738964
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.
400 South El Camino Real
Suite 1200
San Mateo, California 94402
(Address, of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 375-1522
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant, based on the closing price of the Registrant's
Common Stock as quoted by the National Association of Securities Dealers'
Automated Quotation System on February 28, 1997, was $16,410,000 Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of February
28, 1997, was 8,543,012.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's definitive proxy statement to be filed with the
Commission within 120 days of the end of Registrant's fiscal year ended December
31, 1996 are incorporated by reference in Part III of this Form 10-K.
The Index to Exhibits appears on pages 41 of this Report. This Report, including
all exhibits and attachments, contains 127 pages.
2
TABLE OF CONTENTS
PART I PAGE
Item 1: Business................................................. 4
Item 2: Properties............................................... 10
Item 3: Legal Proceedings........................................ 10
Item 4: Submission of Matters to a Vote of Security Holders...... 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 11
Item 6: Selected Financial Data.................................. 12
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 8: Financial Statements and Supplementary Data.............. 18
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 37
PART III
Item 10: Directors and Executive Officers of the Registrant....... 37
Item 11: Executive Compensation................................... 37
Item 12: Security Ownership of Certain Beneficial Owners and
Management............................................. 37
Item 13: Certain Relationships and Related Transactions........... 37
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................ 38
Signatures............................................... 39
3
PART I
Item 1. BUSINESS
EMCON (referred to herein as "EMCON" and the "Company") provides comprehensive
environmental engineering, design, construction, operations and maintenance, and
equipment fabrication services to a variety of public and private clients. EMCON
is a leader in the design, construction and remediation of solid and hazardous
waste transfer, storage and disposal facilities, having participated in the
design, construction and remediation of several hundred such facilities in the
United States, as well as Argentina, Canada, Hong Kong, Mexico, Peru and
Venezuela. EMCON's waste facility services include site selection and
evaluation, facility design, development of preprocessing and operating plans,
assistance in regulatory compliance and permitting, final closure, end-use
planning and design, construction, and operations and maintenance. The Company's
services also include the development of programs dealing with environmental
assessments and remediation of contaminated sites, as well as services related
to applied sciences such as fuel spill damage assessment, marine fate-and-effect
studies and natural resource damage assessment. The Company's professional staff
includes chemical, civil, geotechnical, mechanical, electrical and environmental
engineers; marine and terrestrial biologists; oceanographers; plant ecologists;
chemists; geologists; hydrogeologists; hydrologists and toxicologists.
References to the Company and EMCON in this report include the Company's
subsidiaries, unless the context indicates otherwise.
On February 29, 1996, EMCON acquired all the outstanding capital stock of
Organic Waste Technologies, Inc. ("OWT"), a Cleveland-based construction,
equipment and operations and maintenance company with significant expertise in
solid waste management. OWT was subsequently integrated into and is now a
significant component of the Company's Operation and Construction Division. The
Company purchased OWT for $13,859,000 in cash plus the issuance of convertible
notes and other contractual obligations to pay certain senior OWT management in
the aggregate principal amount of $1,747,000. The notes and other contractual
obligations to pay bear interest payable at the rate of 8% per annum with all
principal due and payable in full on March 1, 2001. The above obligations may be
converted into shares of OWT common stock upon an underwritten public offering
of OWT's common stock in an amount in excess of $10,000,000. In the event the
notes have not been converted into OWT shares they may instead be converted into
shares of EMCON common stock for a period of ninety days after November 30,
2001, at a conversion price of $6.50 per share.
The Company, through its wholly owned subsidiary, Columbia Analytical Services,
Inc. ("CAS"), also operates a full-service, integrated network of analytical
laboratories in Alaska, Arizona, California, Florida, New York and Washington.
On December 31, 1996, the Company signed a Letter of Intent to sell CAS to the
CAS employees for cash, notes and other consideration valued, in total, at
approximately $7.5 million. The sale is expected to close prior to the end of
the first quarter of 1997. In anticipation of the sale, the Company recognized
an impairment in its investment in CAS of $3,327,000; including, a write-down in
the carrying value of goodwill associated with previous laboratory acquisitions
of $1,426,000.
On December 31, 1996, the Company completed the sale of its Yolo landfill
gas-to-energy project in return for a one-time cash payment in January, 1997 of
$800,000. The Company incurred a loss in 1996 of $88,000 on the sale.
4
On March 6, 1997, the Company completed the sale of its Marina landfill
gas-to-energy project for a net up front cash payment of $800,000. The Company
is eligible to receive an additional $200,000 prior to December 31, 1997 subject
to certain post-closing contingencies - specifically, that no material adverse
changes are made to the provisions of Section 29 of the Internal Revenue Code of
1986, as amended, pertaining to the availability of unconventional fuel credits.
Services
Following the sale of CAS, the Company will be comprised of two distinct
operating divisions: the Professional Services Division (formerly known as the
Consulting Division); and the Operations and Construction Division.
Solid Waste Services
The Company's Professional Services Division and Operations and Construction
Division offer a full range of services to operators of solid and hazardous
waste transfer, storage, recycling, and disposal facilities; from the design,
permitting and construction of the facility, to the provision of necessary
equipment and components, to post-closure, operations and maintenance services
and end-use planning. Customers may utilize the full range or a portion of the
Company's services.
Through its extensive experience in disposal site design, the Company has
developed expertise in three critical areas of waste disposal technology - liner
systems, leachate treatment, and gas control/recovery systems. To protect
surrounding soil and water, natural and synthetic liners are used to collect and
contain potentially hazardous liquids percolating through the waste that have
been deposited at the site ("leachate"). Leachate is then collected on the
surface of the liner, withdrawn from the landfill and treated using physical,
chemical, evaporative and/or biological methods. Gas control and recovery
systems, which may be installed on active or closed landfills, are used to
control the methane gas produced by decomposing organic refuse. Where
economical, recovery systems are designed to extract methane to generate heat
and/or electricity, or in some cases to evaporate leachate using the Company's
patented leachate evaporation system. Federal regulation now requires that all
new land disposal facilities utilize liners and methane control systems, and
that these systems be required to meet increasingly stringent design standards.
EMCON's services to its clients often begin with the evaluation of potential
disposal facility sites. The hydrogeological and geotechnical staff of the
Professional Services Division evaluate soils, groundwater occurrence and
quality, seismic stability and potential flooding at possible locations, while
other professionals analyze operational considerations, such as proximity of a
site to water sources, visibility to the public and estimated operating
expenses. Once desirable sites are identified, the Company assists in obtaining
regulatory approvals by drafting environmental impact reports and permit
applications, appearing at hearings and negotiating with government agencies.
EMCON performs detailed cost/benefit analyses of design alternatives, using, if
possible, natural features of the site to reduce cost. EMCON engineers design
the waste disposal facility, considering such factors as the volume and types of
material to be disposed at the site, land use and public policy, physical
characteristics of the site and regulatory requirements. EMCON identifies the
type of natural or synthetic liners which are appropriate or required for the
site and designs the monitoring systems, landfill gas control systems and
leachate recovery and treatment systems. EMCON also monitors statutory and
regulatory developments, and assists operators in implementing required design
or operating changes and preparing additional permit applications and
environmental reports.
5
Throughout the construction process, the Professional Services Division performs
services such as preparing detailed construction documents, assisting in
contractor selection, scheduling and monitoring work in progress, performing
construction quality assurance review, review of contractor requests for payment
and assisting with regulatory compliance and permitting. The Company also trains
disposal facility personnel, performs environmental monitoring services, and
designs site maintenance programs and operating plans.
Where appropriate, the Operations and Construction Division can perform a broad
range of related services, including construction of landfill cells, landfill
remediation and collection systems, landfill gas flares and control systems, and
leachate evaporation systems, as well as the capping, closure, development of
landfill gas recovery projects, and long-term operation and maintenance of old
landfills.
The Operations and Construction Division is complimented by ET Environmental
Corporation ("ET"), a 50/50 joint venture between EMCON and The Turner
Construction Company ("Turner"). ET's charter is to provide primarily
above-ground environmental, remedial and construction services on a national
basis, utilizing the regional resources of EMCON and Turner. ET is a leader in
the development and construction of solid waste transfer stations and materials
recovery facilities on a design build basis.
Site Restoration Services
EMCON's environmental expertise incorporates analytical and risk-assessment
capabilities enabling remediation specialists to design site-specific solutions
to environmental compliance and contamination problems. The Company is often
called upon to design and monitor remediation plans when corrective action is
required at solid or hazardous waste storage or disposal facilities and at
commercial or industrial plant sites. Problems which may require remediation
include leaching of hazardous chemicals or wastes into groundwater, ground
instability or erosion, flooding and migration of landfill gas. Work generally
entails site reconnaissance, drilling exploratory borings, and soil and
groundwater sampling as part of the assessment program. Using data collected in
the assessment phase of a project, the Company then defines the nature and
extent of the problem, develops a remediation program and monitors its
implementation.
The Company generally approaches such projects by consulting with the client on
the nature and scope of the problem. Historical information about the site, if
available, is reviewed to determine the most likely sources and locations of
contamination. Information about the local geology and hydrogeology is also
reviewed to determine potential migration pathways. A detailed work plan is then
prepared that describes the field investigation program to be conducted,
including the number and location of samples to be collected and the specific
chemical analyses to be performed. Trained personnel then conduct the field
investigation program, which may include drilling soil borings, installing
groundwater monitoring wells, and collecting samples of soil, groundwater,
surface water and/or industrial discharges.
Following laboratory analysis of the various samples collected, the results are
evaluated by Company engineers and scientists to determine the nature and extent
of contamination at the site. Depending on the complexity of the site, this may
require more than one round of sampling. Site cleanup levels are then determined
based on the media that have been impacted, the contaminants of concern, the
intended use of the property, and state and federal regulations. In consultation
with the client, various remediation alternatives are then identified and
evaluated for implementability, effectiveness, permanence and cost. Remedial
6
alternatives at a site may include the excavation and removal of the sources of
contamination and contaminated soil, the removal and treatment of groundwater
using physical and chemical treatment systems, or the installation of surface
caps and vertical hydraulic barriers. EMCON also applies in-situ technologies,
such as vapor extraction or bioremediation as appropriate, to remediate
contaminated soils and ground-water as a means to reduce cost and minimize
disturbance. To assure continued compliance during and after remediation, EMCON
designs and provides operations and maintenance programs for affected
facilities.
Through its ET joint venture with Turner, the Company is also able to provide a
complete turnkey package to clients, combining planning and implementation of
facility/plant decommissioning; remediation of soil and groundwater
contamination, and lead based paint and asbestos abatement.
In-Plant Services
In the last several years the market has seen a significant trend among many of
the larger industrial clients to outsourcing many of their environmental and
health and safety compliance requirements. EMCON offers responsive assistance to
the regulated community in a broad range of areas including air quality
regulatory compliance through provision of air quality assessment and
engineering services. Company personnel have direct experience in air quality
permitting under the New Source Review (NSR), Prevention of Significant
Deterioration (PSD) and added requirements under the Clean Air Act Amendments of
1990, preparing emission inventories (for criteria and toxic air pollutants),
performing risk assessment to evaluate potential human and ecological risk,
evaluating emission control technologies (BACT/RACT/LAER/MACT), dispersion
modeling, ambient air quality and meteorological measurements, pollution
prevention and waste minimization, indoor air, litigation support and expert
testimony, and compliance audits. EMCON's air quality staff are fully integrated
with staff in other environmental disciplines to provide cost effective
evaluations and compliance solutions to situations which involve multiple media
contamination. In addition, EMCON provides OSHA required environmental health
and safety training to its clients and other EMCON subsidiaries.
Analytical Laboratory Services
Columbia Analytical Services, Inc. (CAS), EMCON's wholly-owned laboratory
subsidiary, provides a broad spectrum of analytical services for its clients in
industry and government. Industrial accounts include aerospace, defense,
electronics, petroleum, pulp and paper, and waste disposal. CAS is comprised of
a network of analytical laboratories headquartered in Kelso, Washington, with
branches in Anchorage, Alaska; Phoenix, Arizona; Canoga Park and San Jose,
California; Jacksonville, Florida; Tuxedo, New York, and Bothell, Washington.
CAS also operates a number of mobile laboratories. With a highly qualified
staff, a rigorous quality assurance program, and state-of-the-art analytical
testing equipment, CAS implements a rigorous quality assurance program, which
with its state-of-the-art equipment, permits the provision of timely
cost-effective services tailored to the individual needs of its clients.
Approximately 25% of CAS revenues have been generated from within EMCON's
Professional Services Division.
In addition to participation in the US EPA Water Pollution and Water Supply
programs, CAS performs work for the Department of Defense under programs
sponsored by the U.S. Army Corps of Engineers and the U.S. Navy. CAS currently
holds or has pending certifications/accreditations in a number of states
including Alaska, Arizona, California, Florida, Idaho, Massachusetts, New York,
Oregon, Utah and Washington. Other accreditations include the American
Association of Laboratory Accreditations (A2LA) and the American Industrial
Hygiene Associations (AIHA).
7
On December 31, 1996, the Company signed a Letter of Intent to sell CAS to the
CAS employees for cash, notes and other consideration valued, in total, at
approximately $7.5 million. The sale is expected to close prior to the end of
the first quarter of 1997. In anticipation of the sale, the Company recognized
an impairment in its investment in CAS of $3,327,000; including a write-down in
the carrying value of goodwill associated with previous laboratory acquisitions
of $1,426,000.
Clients and Marketing
EMCON's principal clients are industrial concerns, predominantly in the waste
disposal, petroleum, wood products, chemicals and manufacturing industries. The
Company also provides services to utilities, non-regulatory government entities,
and financial institutions. No single client accounts for 10% or more of the
Company's net revenue. The Company often enters into master service agreements
with major clients, which set forth the general terms and conditions under which
EMCON will perform services and which facilitate repeated use of the Company's
services.
EMCON focuses significant efforts on providing high quality services in a timely
manner and developing long-term relationships with its clients. EMCON assigns an
experienced project manager to each project to coordinate work undertaken by the
numerous professionals from different disciplines within the Company. This
approach reduces the time and cost required to complete a project and relieves
the client of the responsibility of coordinating the efforts of independent
consultants. Because the Company provides a broad range of services, work
performed for a client in one technical area often leads to work in other
technical areas.
In the last several years, an increasing amount of work has been done on a
competitive bid basis in response to client requests for proposals. This has
required the dedication of significantly greater resources to proposal writing
and general business development, and the implementation of a more formal
marketing program to share leads and coordinate resources nationwide.
To further promote its services, the Company takes an active role in industry
trade associations to enhance its national reputation for technical expertise.
Similarly, EMCON provides services to a wide variety of local, state and federal
government agencies and contractors. Participation in such contracts allows
EMCON to remain on the leading edge of new technological developments and to
publicize its expertise.
Regulation
Public concern over health, safety and preservation of the environment has
resulted in the enactment of a broad range of environmental laws and regulations
by local, state and federal lawmakers and agencies. These laws and the
implementing regulations affect nearly every industry, as well as the agencies
of federal, state and local governments charged with their enforcement.
Recently, the level of enforcement has waned given governmental budget
constraints and a number of environmental laws set for renewal have been allowed
to lapse. Nonetheless, those laws and regulations still in force will continue
to stimulate demand for the kinds of services offered by EMCON. They also
subject the Company to stringent regulation in the conduct of its operations.
Potential Liability and Insurance
The Company's work involves assisting clients in handling, storing and disposing
of hazardous materials, toxic wastes and other pollutants, as well as the
remediation of existing contamination. The Company therefore is exposed to a
significant risk of professional liability for environmental damage and personal
injury.
8
EMCON maintains health and safety and quality assurance/quality control programs
to reduce the risk of potential damage to persons and property and the
associated potential liability. In addition, EMCON currently maintains
professional liability insurance (covering damages resulting from negligent
acts, errors, mistakes or omissions in rendering or failing to render its
professional services) as well as commercial general liability insurance
(covering bodily injury and property damage).
EMCON endeavors contractually to limit its potential liability to the amount and
terms of its insurance policies, and to be indemnified by its clients from
potential liability to third parties. However, the Company is not always able to
obtain such limitations on liability or indemnification, and such provisions,
when obtained, may not adequately shelter the Company from liability.
Consequently, a partially or completely uninsured claim, if successful and of
sufficient magnitude, could have a material adverse effect on the Company and
its financial condition and results of operations.
Although the liabilities arising out of environmental laws are more directly
applicable to the Company's clients, such laws could, under certain factual
circumstances, apply to some of the activities pursued by the Company in the
course of business, including failure to properly design a cleanup, removal or
remedial action plan or failure to achieve required cleanup standards in
compliance with such laws and standards. Such liabilities can be joint and
several where other parties are involved. Because much of the Company's business
is generated either directly or indirectly as a result of federal and state
governmental programs and regulations, changes in governmental policies
affecting such programs, or regulations or administrative actions affecting the
funding or sponsorship of such programs, could have a material adverse effect on
the Company's business. See Item 3 - Legal Proceedings.
Competition
EMCON competes directly with a wide variety of national and local engineering,
consulting, construction, equipment, and operations and maintenance companies
which offer services similar to those provided by the Company. However, many of
these competitors are only engaged in certain segments of the industry and do
not provide the broad range of services provided by the Company. In addition,
the Company competes indirectly with remediation companies which offer
environmental consulting and engineering services, as well as transportation,
storage or disposal capabilities generally not provided by EMCON. The Company
believes that the principal competitive factors in its industry are price,
reputation, technical proficiency, management experience and breadth of services
offered. The industry has also experienced a significant amount of consolidation
activity. Management anticipates that these trends will continue for the
foreseeable future.
Employees
As of December 31, 1996, the Company had a total of 1,057 employees, including:
454 professionals; 279 technical personnel; and 324 administrative and support
personnel. The Company's professional staff includes chemical, civil,
geotechnical, mechanical, electrical and environmental engineers; marine and
terrestrial biologists; oceanographers; plant ecologists; chemists; geologists;
hydrogeologists; hydrologists and toxicologists. The Company's ability to
attract and retain qualified engineers, scientists and other professionals is an
important factor in determining its future success. EMCON's employees have never
been represented by a union, and the Company believes its relations with its
employees are good.
9
Backlog
The Company estimates that at December 31, 1996, the backlog of future net
revenue from contracts in existence and orders believed to be firm (excluding
CAS) was in excess of $80 million, all of which is expected to be received
within the next twelve months, compared to $55 million backlog at December 31,
1995. However, there can be no assurance that this work will not be postponed or
canceled. Furthermore, a substantial portion of the Company's work is performed
pursuant to agreements by which the Company is compensated for time and expenses
devoted to projects with indefinite lives.
Item 2. PROPERTIES
The Company's corporate office, located in San Mateo, California, occupies
approximately 3,000 square feet and is leased through July, 2001. The Company's
accounting center, located in Sacramento, California, occupies approximately
4,000 square feet and is leased through December 31, 1997.
The Company owns a 25,000 square-foot building in Kelso, Washington. The
facility includes office and warehouse space and currently houses the CAS
corporate operations.
The Company leases office, warehouse and laboratory space in a total of 72
facilities located in Alaska, Arizona, California, Connecticut, Florida,
Georgia, Illinois, Iowa, Maine, Massachusetts, Michigan, Nevada, New Jersey, New
York, Ohio, Oregon, Pennsylvania, Puerto Rico, Texas, Vermont, Virginia and
Washington under leases expiring at various times through December 2002. These
facilities have a combined area of approximately 482,000 square feet.
Item 3. LEGAL PROCEEDINGS
As a firm engaged in environmental-related matters, the Company encounters
potential liability, including claims for significant environmental damage, in
the normal course of business. The Company is party to lawsuits and is aware of
potential exposure related to certain claims. In the fourth quarter of 1996 the
Company agreed to settlement terms on a number of outstanding legal matters. At
the same time the Company assessed the potential exposure relative to all other
known pending matters. Based on the foregoing, the Company increased its legal
reserve by an additional $1,553,000. In the opinion of management the resolution
of all known lawsuits/claims at amounts in excess of established reserves will
not have a material adverse affect on the Company's financial position, results
of operations or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
10
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol MCON. The following table sets forth the quarterly range of high and
low bid quotations per quarter for 1996 and 1995:
- -------------------------------------------------------------------------------
High Low
- -------------------------------------------------------------------------------
January 1 - March 31, 1995 $4.50 $3.00
April 1 - June 30, 1995 5.13 3.75
July 1 - September 30, 1995 6.50 4.00
October 1 - December 31, 1995 5.00 3.38
January 1 - March 31, 1996 4.88 4.00
April 1 - June 30, 1996 5.13 4.13
July 1 - September 30, 1996 4.13 3.19
October 1 - December 31, 1996 4.25 3.50
- -------------------------------------------------------------------------------
On February 28, 1997, there were 579 shareholders of record of the Company's
common stock.
Although the Company does make annual distributions to a minority shareholder of
one of the OWT subsidiaries, the Company did not pay cash dividends to EMCON
shareholders in 1996 or 1995 and does not plan to pay cash dividends to its
shareholders in the near future. Furthermore, the payment of cash dividends is
restricted by the Company's bank line of credit arrangement. The Company
presently intends to retain earnings for further development of its business.
11
Item 6. SELECTED FINANCIAL DATA
Five Year Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA (a)
Gross revenue ........................................ $ 137,626 $ 122,542 $ 115,638 $ 98,612 $ 93,438
Net revenue .......................................... 117,705 103,409 95,926 83,062 79,636
Direct expenses ...................................... 52,608 39,473 37,307 32,201 29,411
Indirect expenses .................................... 65,844 61,498 59,302 47,528 46,676
Restructuring/other charges .......................... 8,197 (17) 1,958 -- --
Impairment of assets held for sale ................... 3,327 -- -- -- --
Income (loss) from operations ........................ (12,271) 2,455 (2,641) 3,333 3,549
Interest income ...................................... 317 369 348 313 588
Interest expense ..................................... 1,112 181 66 57 40
Equity in income/(loss) of affiliates ................ 39 (74) (58) -- --
Income (loss) before provision (benefit) for
income taxes ...................................... (13,027) 2,569 (2,417) 3,589 4,097
Provision (benefit) for income taxes ................. (2,936) 783 (500) 1,165 1,098
Net income (loss) .................................... (10,091) 1,786 (1,917) 2,424 2,999
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (a)
Income (loss) per share .............................. $ (1.19) $ 0.22 $ (0.24) $ 0.33 $ 0.40
Shares used in computing income (loss) per
share ............................................. 8,485 8,961 7,919 7,720 7,506
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (a)
Total assets ......................................... $ 90,912 $ 78,636 $ 80,989 $ 68,852 $ 66,247
Working capital ...................................... 34,601 36,313 32,582 36,200 35,491
Noncurrent obligations and deferred income
taxes ............................................. 16,799 1,700 1,348 882 1,773
Shareholders' equity ................................. 55,812 65,306 63,059 58,997 56,591
----------------------------------------------------------------------------------------------------------------------------------
(a) The Company was involved in several acquisitions and mergers during the
five year period presented. See Note 5 to the Company's consolidated
financial statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth (i) certain items in the Company's Consolidated
Statements of Operations as a percentage of net revenue and (ii) the percentage
increase (decrease) in the dollar amount of those items for the period
12
indicated. Net revenue is determined by subtracting the costs of outside
subcontractor services, largely drilling contractors and specialized consultant
services, from gross revenue. Since EMCON's use of subcontractors can vary from
period to period and the costs of these services are passed directly to the
Company's clients, the Company believes that net revenue is a more accurate
measure of the value of its services.
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of Percentage
Net Revenue Increase (Decrease)
-------------------------------------- ------------------
1996 1995
vs. vs.
Years Ended December 31, 1996 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net Revenue .............................................. 100.0% 100.0% 100.0% 13.8% 7.8%
Direct Expenses .......................................... 44.7% 38.2% 38.9% 33.3% 5.8%
Indirect Expenses ........................................ 55.9% 59.4% 61.8% 7.1% 3.7%
Restructuring/Other Charges .............................. 7.0% -- 2.0% -- --
Impairment of Assets held for sale ....................... 2.8% -- -- -- --
Income (Loss) from Operations ............................ (10.4%) 2.4% (2.7%) (599.8%) --
Interest Income (Expense), Net ........................... (0.7%) 0.2% 0.3% (522.9%) (33.3%)
Equity in Income/(Loss) of Affiliates .................... -- (0.1%) (0.1%) -- (27.6%)
Income (Loss) before Provision (Benefit) for
Income Taxes .......................................... (11.1%) 2.5% (2.5%) (607.1%) --
Provision (Benefit) for Income
Taxes .................................................. (2.5%) 0.8% (0.5%) 475.0% --
Net Income (Loss) ........................................ (8.6%) 1.7% (2.0%) (665.0%) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Revenue:
Net revenue for 1996 increased by 13.8% to $117,705,000 from $103,409,000 in
1995. Excluding net revenue of $20,596,000 contributed by Organic Waste
Technologies, Inc. ("OWT"), following its acquisition on February 29, 1996, net
revenue in 1996 totaled $97,109,000, a 6.1% decrease from 1995. The decrease was
primarily attributable to significant underperformance of the Company's
Professional Services Division (formerly known as the Consulting Division) in
the Alaska, Washington and Southeast markets, combined with a general decrease
in revenue following recent reductions in work force throughout the Professional
Services Division. The decrease was, to a lesser extent, also attributable to
particularly difficult weather conditions in the Northeast and Northwest areas
during the first quarter.
Net revenue for 1995 increased by 7.8% over net revenue of $95,926,000 in 1994.
The increase in net revenue in 1995 was partly attributable to significant
improvements in the Company's consulting division in its West and Southeast
areas. The increase was also due in part to the inclusion of Wehran Envirotech,
Inc. ("Wehran") for all of 1995 as compared to all but the first quarter of
1994, following its acquisition in April of 1994. Although Wehran contributed
net revenue of $5,472,000 in the quarter ended March 31, 1995, due to the
underperformance of their Northeast and Midwest operations, Wehran only
contributed an additional $3,730,000 in net revenue in 1995 over 1994. Net
revenue was also positively impacted by the expansion of the laboratory
division's operations in Florida and Southern California.
13
Direct Expenses:
Direct expenses in 1996 were $52,608,000, a 33.3% increase over $39,473,000 in
direct expenses in 1995. Excluding direct expenses of $14,744,000 incurred by
OWT, direct expenses in 1996 totaled $37,864,000, a 4.1% decrease from 1995.
Direct expense includes compensation for billable hours for technical and
professional staff and other project related expenses, as well as direct labor
and materials for in-house laboratory testing and construction activities.
Excluding OWT, direct expenses, as a percent of net revenue in 1996, increased
to 39.0% from 38.2% in 1995; due largely to relative increases in the cost of
labor and materials within the laboratory division.
Direct expenses in 1995 were up 5.8% over direct expenses of $37,307,000 in
1994. The increase was due in part to higher overall salary costs, increased
utilization of technical and professional staff, and the inclusion of Wehran for
all of 1995 versus only the last three quarters of 1994 (Wehran incurred direct
expenses of $7,739,000 and $6,524,000 in 1995 and 1994, respectively). The ratio
of direct expenses to net revenue in 1995 decreased to 38.2% from 38.9% in 1994.
Indirect Expenses:
Indirect expenses totaled $65,844,000 in 1996, an increase of 7.1% over 1995
indirect expenses of $61,498,000. Excluding indirect expenses of $3,173,000
incurred by OWT, indirect expenses in 1996 totaled $62,671,000, a 1.9% increase
over 1995. Indirect expenses include salary compensation for nonbillable hours
for professional and technical staff, and general and administrative expenses
such as facility rent, bonuses, benefits, insurance, depreciation, and
legal/settlement expenses. Excluding OWT, indirect expenses as a percent of net
revenue in 1996 increased to 64.5% from 59.4% in 1995; due in part to the above
noted decrease in net revenue, combined with the effect of significant severance
costs and expenses related to the closing of several small offices during the
first nine months of 1996. In addition, during the fourth quarter of 1996 the
Company increased reserves relating to pending litigation matters by an
additional $1,553,000.
Indirect expenses in 1995 increased by 3.7% over 1994 indirect expenses of
$59,302,000. The ratio of indirect expenses to net revenue decreased from 61.8%
in 1994 to 59.4% in 1995, due to improved utilization of technical and
professional staff as well as selective reductions in force and other cost
containment and restructuring measures put in place during the fourth quarter of
1994 and throughout 1995.
Restructuring/Other Charges:
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further improving
the Company's competitiveness and overall profitability. Based on this review,
the Company's Board of Directors approved a strategic restructuring plan in
December, 1996 to reposition the Company to fully exploit its core strengths in
engineering, design, construction, operations and maintenance. As a result of
these actions, the Company recognized pre-tax restructuring and other charges of
$1,237,000 and $6,960,000, respectively. Included in the restructuring charge
were $604,000 relating to the closure or downsizing of several underperforming
offices, $628,000 related to employee severance and the write-off of employment
contracts for former employees no longer actively participating in the Company's
affairs, and a $5,000 adjustment to the 1994 restructuring plan. Included in
14
other charges were $4,768,000 related to the write-down in the carrying value of
goodwill associated with the Company's continuing operating units in accordance
with the Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", $1,529,000 related to the write-off of idle or disposed of assets, $368,000
related to the write-down of the Company's landfill gas production rights and
related fixed assets, and $156,000 related to the buyout and cancellation of
outstanding stock options to purchase approximately 743,000 shares of the
Company's common stock held by employees of the Company. Also, included in other
charges were $139,000 for various other operational costs.
Anticipated savings in 1997 from the restructuring charge alone are estimated to
exceed $1,500,000. As of December 31, 1996, $119,000 of the 1996 restructuring
adjustment has been incurred and $1,113,000 remains in other accrued
liabilities. All remaining actions are expected to be substantially completed by
the third quarter of 1997.
In October 1994, the Board of Directors appointed Eugene M. Herson to serve as
the Company's new President and Chief Executive Officer. Shortly thereafter, in
December, 1994, the Company's Board of Directors approved senior management's
recommendation to implement a restructuring plan designed to improve operational
efficiencies. Under the plan, the Company eliminated substantially all of its
regional consulting subsidiaries in favor of a divisional structure. In
addition, the Company consolidated and streamlined all unnecessary and/or
redundant administrative functions. As a result of the actions taken, the
Company recognized a pre-tax restructuring charge in the fourth quarter of 1994
of $1,181,000. Of this amount, $611,000 related to the write-off of employment
contracts for former employees no longer actively participating in the Company's
affairs, $287,000 related to employee severance, and $263,000 related to costs
associated with excess facilities and equipment. Anticipated savings from the
1994 restructuring plan were estimated to exceed $1,000,000 per year. To date,
$1,142,000 of restructuring costs have been incurred and adjustments of $5,000
and ($17,000) were made to increase/(reduce) the reserve in 1996 and 1995,
respectively, to the required remaining balances. At December 31, 1996, $27,000
of accrued restructuring costs for write-off of employment contracts in 1994
were included in accrued liabilities in the accompanying consolidated balance
sheet. All remaining actions are expected to be completed by the first quarter
of 1997.
During the fourth quarter of 1994, the Company also incurred nonrecurring
charges of $777,000 related to the write-down of the carrying value of certain
of the Company's landfill gas production rights and of certain related fixed
assets due to the reevaluation of future cash flows expected to be generated
from the related projects.
Impairment of Assets Held for Sale:
In December 1996, the Company executed a letter of intent to sell its laboratory
division, Columbia Analytical Services, Inc. ("CAS"), to the employees of CAS
for cash, notes and other consideration valued in total at approximately
$7,500,000. The transaction is expected to be completed by the first quarter of
1997. In anticipation of the sale, the Company recognized an impairment in its
investment in CAS of $3,327,000; including a write-down in the carrying value of
goodwill associated with previous laboratory acquisitions of $1,426,000.
For the year ended December 31, 1996, CAS had a loss before taxes of $142,000.
Interest Income:
The Company recorded interest income of $317,000 in 1996 compared to $369,000 in
1995 and $348,000 in 1994.
15
Interest Expense:
The Company incurred interest expense of $1,112,000 in 1996 compared to $181,000
in 1995. The increase in interest expense in 1996 over 1995 was due primarily to
increases in long-term debt of $11,747,000 incurred for purposes of financing
the acquisition of OWT in February of 1996 and $5,000,000 for purposes of
financing the subsequent expansion of OWT's landfill gas-to-energy project.
The increase in interest expense in 1995 over 1994 was primarily due to an
imposition of interest on a one-time state tax assessment with respect to prior
years.
Income Taxes Provision (Benefit):
The provision (benefit) for income taxes in 1996 was ($2,936,000) compared to
$783,000 for 1995 and ($500,000) for 1994. The effective tax rate for 1996 was
(22.5%) versus 30.5% in 1995 and (20.7%) for 1994. The 1996 tax benefit is
primarily due to the alternative minimum tax credits generated from the
Company's landfill gas-to-energy project and from temporary timing differences
consisting of the restructuring charges, impairment of assets held for sale and
the legal reserve.
Included in the Company's balance sheet at December 31, 1996 are total current
and long-term net deferred tax assets of $6,455,000. The full utilization of
such assets is dependent upon a number of factors including the Company's
ability to generate future profits, the successful implementation of the
Company's restructuring plan and the anticipated reduction in the level of new
tax credits generated from the Company's existing landfill gas-to-energy
projects. Based on these factors, the Company believes that it is more likely
than not that the full benefit of the net deferred tax assets will be realized
by the Company in due course.
SUBSEQUENT MATTERS
On March 6, 1997, the Company completed the sale of its Marina landfill
gas-to-energy project for a net up front cash payment of $800,000. The Company
is eligible to receive an additional $200,000 prior to December 31, 1997 subject
to certain post-closing contingencies - specifically, that no material adverse
changes are made to the provisions of Section 29 of the Internal Revenue Code of
1986, as amended, pertaining to the availability of unconventional fuel credits.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital:
Cash provided by operating activities for fiscal 1996, 1995 and 1994 was
$1,583,000, $5,232,000, and $4,875,000, respectively. The changes in cash
provided by operating activities in 1996, 1995 and 1994 were primarily
attributed to changes in the Company's net income (loss), accounts receivable
and accounts payable and in 1996 and 1995, depreciation and amortization. Cash,
cash equivalents, and marketable securities decreased to $5,331,000 in 1996 from
$9,952,000 in 1995.
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a term loan basis with an
interest at a managed rate not to exceed the prime rate. Principal is to be
16
amortized over seven years, but with any unpaid amount finally due and payable
on June 30, 2001. The remaining $10,000,000 under the Credit Agreement is
available for working capital purposes (with up to $5,000,000 also being
available for non-working capital purposes). The line of credit component of the
Credit Agreement expires on May 31, 1997. The Company expects to renew the line
of credit component of the Credit Agreement following its expiration. The Credit
Agreement contains provisions with respect to the payment of dividends and the
level of capital expenditures and requires the maintenance of specific levels of
working capital, tangible net worth and continued quarterly profitability. As a
result of the fourth quarter loss in 1996, the impact of the related
restructuring actions and the payment of certain profit distributions to a
minority shareholder in one of OWT's subsidiaries, the Company was not in
compliance with these covenants at year-end. However, the Company obtained a
waiver from the bank for its non compliance and agreed to related amendments of
the Credit Agreement reducing the tangible net worth requirement and permitting
distribution to the minority shareholder in OWT's subsidiary.
Capital Expenditures:
The Company invested $2,484,000 in 1996 in additions to property and equipment;
mainly computers, field and laboratory equipment. 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.
17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----------
Consolidated Statements of Operations for each of
the three years ended December 31, 1996, 1995, and 1994....... 19
Consolidated Balance Sheets as of December 31, 1996 and 1995..... 20
Consolidated Statements of Shareholders' Equity for each of
the three years ended December 31, 1996, 1995, and 1994....... 21
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1996, 1995, and 1994................. 22
Notes to Consolidated Financial Statements....................... 23
Report of Ernst & Young LLP, Independent Auditors................ 36
18
EMCON
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
Gross revenue ....................................................... $ 137,626 $ 122,542 $ 115,638
Outside services at cost ............................................ 19,921 19,133 19,712
--------- --------- ---------
Net revenue ................................................ 117,705 103,409 95,926
Costs and expenses:
Direct expenses ................................................ 52,608 39,473 37,307
Indirect expenses .............................................. 65,844 61,498 59,302
Restructuring/other charges .................................... 8,197 (17) 1,958
Impairment of assets held for sale ............................. 3,327 -- --
--------- --------- ---------
Income (loss) from operations .............................. (12,271) 2,455 (2,641)
Interest income ..................................................... 317 369 348
Interest expense .................................................... (1,112) (181) (66)
Equity in income (loss) of affiliate ................................ 39 (74) (58)
--------- --------- ---------
Income (loss) before provision (benefit) for
income taxes ..................................................... (13,027) 2,569 (2,417)
Provision (benefit) for income taxes ................................ (2,936) 783 (500)
--------- --------- ---------
Net income (loss) ................................................... $ (10,091) $ 1,786 $ (1,917)
--------- --------- ---------
Income (loss) per share ............................................. $ (1.19) $ 0.22 $ (0.24)
--------- --------- ---------
Shares used in computing income (loss) per share .................... 8,485 8,961 7,919
========= ========= =========
See accompanying notes.
19
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------
(In thousands, except share amounts) 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents .................................................................. $ 5,331 $ 9,451
Marketable securities ...................................................................... -- 501
Accounts receivable, net of allowance for doubtful accounts of $951
and $1,052 at December 31, 1996 and 1995, respectively ................................. 32,860 34,925
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................................................. 904 --
Prepaid expenses and other current assets .................................................. 4,425 3,066
Assets held for sale ....................................................................... 9,382 --
------- -------
Total Current Assets ................................................................... 52,902 47,943
Net property and equipment, at cost ........................................................ 14,722 16,690
Other assets ............................................................................... 4,800 3,579
Deferred tax assets ........................................................................ 4,818 1,677
Goodwill, net of amortization .............................................................. 12,716 7,609
Other intangible assets, net of amortization ............................................... 954 1,138
-------- --------
Total Assets ........................................................................... $ 90,912 $ 78,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................................... $ 5,483 $ 4,174
Accrued payroll and related benefits ....................................................... 6,020 4,975
Other accrued liabilities .................................................................. 4,454 2,109
Billings in excess of costs and estimated earnings
on uncompleted contracts .............................................................. 94 --
Long-term obligations due within one year .................................................. 2,250 372
-------- --------
Total Current Liabilities .............................................................. 18,301 11,630
Long-term debt ............................................................................. 14,667 431
Other noncurrent obligations ............................................................... 2,132 1,269
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;
8,512,688 and 8,329,343 shares issued and outstanding at
December 31, 1996 and 1995, respectively ............................................... 42,001 41,401
Retained earnings .......................................................................... 13,811 23,918
Unrealized losses on marketable securities ................................................. -- (13)
-------- --------
Total Shareholders' Equity ............................................................. 55,812 65,306
-------- --------
Total Liabilities and Shareholders' Equity ............................................. $ 90,912 $ 78,636
======== ========
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Total
Common Stock Retained Marketable Shareholders'
(In thousands) Shares Amount Earnings Securities Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 ................................. 7,279 $ 34,948 $ 24,049 $ 58,997
Issuance of common stock upon exercise of
options, net of redemptions ................................ 55 243 -- 243
Income tax benefits of employee stock option
exercises .................................................. -- 103 -- 103
Issuance of common stock under purchase of
Wehran Envirotech, Inc. .................................... 915 6,029 -- 6,029
Issuance of common stock under the Employee
Stock Purchase Plan ........................................ 69 439 -- 439
Issuance of restricted stock, net of cancellation ............ 1 8 -- 8
Repurchase of common stock ................................... (133) (812) -- (812)
Unrealized losses on marketable securities ................... -- -- -- (31) (31)
Net loss ..................................................... -- -- (1,917) (1,917)
-----------------------------------------------------------------
Balance at December 31, 1994 ................................. 8,186 40,958 22,132 (31) 63,059
Issuance of common stock upon exercise of
options, net of redemptions ................................ 30 35 -- 35
Income tax benefits of employee stock option
exercises .................................................. -- 50 -- 50
Issuance of common stock under the Employee
Stock Purchase Plan ........................................ 114 369 -- 369
Issuance of restricted stock, net of cancellation ............ (1) (11) -- (11)
Net change in unrealized losses on marketable
securities ................................................. -- -- -- 18 18
Net income ................................................... -- -- 1,786 1,786
----------------------------------------------------------------
Balance at December 31, 1995 ................................. 8,329 41,401 23,918 (13) 65,306
Issuance of common stock upon exercise of
options, net of redemptions ................................ 5 15 -- 15
Issuance of common stock under the Employee
Stock Purchase Plan ........................................ 88 258 -- 258
Issuance of restricted stock, net of cancellation ............ 91 327 -- 327
Net change in unrealized losses on marketable
securities ................................................. -- -- -- 13 13
Dividends paid ............................................... -- -- (16) (16)
Net loss ..................................................... -- -- (10,091) (10,091)
----------------------------------------------------------------
Balance at December 31, 1996 ................................. 8,513 $ 42,001 $ 13,811 $ 0 $ 55,812
----------------------------------------------------------------
See accompanying notes.
21
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
Increase (decrease) in cash and cash equivalents (in thousands) 1996 1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income (loss) ..................................................................... $(10,091) $ 1,786 $ (1,917)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ....................................................................... 7,330 4,487 3,710
Amortization ....................................................................... 1,034 613 654
Loss on sale/disposal of property and equipment .................................... 474 129 416
Write-down of gas production rights ................................................ 247 -- 655
Impairment of goodwill ............................................................. 6,194 -- --
Increase in salary continuation plan ............................................... 133 62 93
Changes in operating assets and liabilities:
Accounts receivable ............................................................ 1,226 3,398 (1,290)
Prepaid expenses and other current assets ...................................... (1,527) 187 1,056
Other assets ................................................................... (2,275) (786) 642
Deferred tax assets ............................................................ (2,995) 382 (1,469)
Accounts payable ............................................................... (351) (4,672) 2,300
Accrued payroll and related benefits ........................................... 661 (605) 1,173
Other accrued liabilities ...................................................... 1,523 251 (1,148)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................................... 1,583 5,232 4,875
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment ................................................ (2,484) (4,082) (7,050)
Purchase of available for sale securities .......................................... -- -- (5,967)
Maturities of available for sale securities ........................................ 514 1,953 8,800
Cash portion of assets held for sale ............................................... (593) -- --
Acquisitions, net of cash acquired ................................................. (13,827) -- 258
Proceeds from sale of property and equipment ....................................... 508 327 442
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities ...................................... (15,882) (1,802) (3,517)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds of new debt obligation .................................................... 17,526 476 (6,662)
Payments of current and noncurrent obligations ..................................... (7,931) -- --
Issuance of common stock for cash .................................................. 600 393 690
Repurchase of common stock ......................................................... -- -- (812)
Dividend payments .................................................................. (16) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities ........................ 10,179 869 (6,784)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents ...................................... (4,120) 4,299 (5,426)
Cash and cash equivalents, beginning of year .......................................... 9,451 5,152 10,578
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year ................................................ $ 5,331 $ 9,451 $ 5,152
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all significant
intercompany accounts and transactions. Certain amounts in the 1995 and 1994
financial statements have been reclassified to conform to the 1996 presentation.
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year,
resulting in a fifty-three week year in 1996 and a fifty-two week year in 1995.
The Company's year end falls on the Friday closest to the last day of the
calendar quarter. The Company also follows a five-four-four week quarterly
cycle. While the actual period ends for the fiscal years 1996 and 1995 were
January 3, 1997 and December 29, 1995, respectively, for convenience, the date
shown on accompanying financial statements is December 31, the last day of the
calendar periods.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements, in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition and Expenses:
Revenue from engineering service contracts is recognized as services are
provided and revenue from construction projects is recognized on a percentage of
completion basis. The Company routinely subcontracts for outside services, such
as drilling and specialized laboratory services. These costs are generally
passed through to the Company's customers. The Company believes net revenue is a
more accurate measure of the value of its services than gross revenue. Direct
costs include compensation for billable hours for professional and technical
staff and other project expenses reimbursed by clients. Indirect costs include
compensation for non-billable professional and technical staff hours, all
employee fringe benefits, marketing, and general and administrative expenses
such as rent, insurance and depreciation.
Cash and Cash Equivalents and Marketable Securities:
The Company considers all investment instruments and marketable securities with
an original maturity date of 90 days or less at the date of purchase to be cash
equivalents. Management determines the appropriate classifications of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investments consisting primarily of high grade U.S.
government and corporate marketable debt securities are classified as
available-for-sale, and are carried at fair value, based on quoted market
prices, with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity, which is
23
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary, as well as any interest on these securities,
are included in interest income. The cost of securities sold is based on the
specific identification method. There were no available-for-sale securities as
of December 31, 1996.
The following is a summary of available-for-sale securities as of December 31,
1995:
- -------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
(In thousands) Cost Gains Loss Fair Value
- --------------------------------------------------------------------------------
U.S. Treasury Bills/Notes $514,000 $ - $13,000 $501,000
- -------------------------------------------------------------------------------
All marketable securities held by the Company as of December 31, 1995 were
available for the Company's current working capital requirements and matured in
less than one year. Accordingly, all such amounts were classified as current
assets in the accompanying consolidated balance sheets.
Supplemental Cash Flow Information:
Cash paid for income taxes was approximately $659,000, $58,000 and $469,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for
interest was approximately $951,000, $181,000 and $66,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
In 1995, the Company sold certain land and buildings in exchange for $1,100,000
in marketable trade credits which will be used to reduce cash payments of future
recurring corporate expenses. No significant gain or loss was incurred on the
transaction. The trade credits expire in eight years, and the Company expects to
utilize such credits prior to expiration. The Company has agreements for the
utilization of $625,000 of the trade credits. $225,000 and $400,000 of these
credits are included on the December 31, 1996 consolidated balance sheet in
other current assets and other assets, respectively. To-date, $55,000 of the
trade credits have been applied to payments. The remaining balance of $420,000
is included on the December 31, 1996 consolidated balance sheet in other assets.
Property and Equipment:
Property and equipment, net of assets held for sale, consists of (in thousands):
- -------------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- -------------------------------------------------------------------------------
Land and buildings $ 2,808 $ 2,723
Machinery and equipment 18,886 23,723
Furniture and fixtures 4,130 5,915
Vehicles 2,871 3,638
Leasehold improvements 1,328 2,324
- -------------------------------------------------------------------------------
Total 30,023 38,323
Less accumulated depreciation and amortization 15,301 21,633
- --------------------------------------------------------------------------------
Net property and equipment $14,722 $16,690
- -------------------------------------------------------------------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line basis over the lesser of the estimated useful
lives of the assets or the term of the lease (lives range from 3-31 years).
Amortization of property and equipment acquired under capital leases is included
with depreciation expense.
Approximately $7,058,000 of fixed assets net of accumulated depreciation of
$6,236,000 were sold or disposed of in 1996.
24
Income (Loss) per Share:
Primary and fully diluted earnings per share are substantially the same. Loss
per share in 1996 and 1994 were based on the weighted average number of common
shares outstanding. Income per share in 1995 was based on the weighted average
number of common and dilutive common equivalent shares outstanding using the
modified treasury stock method. Common equivalent shares are comprised of shares
issuable under the Company's stock option plans.
Business Segment and Concentration of Credit Risk:
The Company operates within one business segment, which provides comprehensive
environmental engineering, consulting, construction, facilities operations and
maintenance, and laboratory services to industrial, private and governmental
concerns, predominantly in the waste disposal, petroleum, wood products,
chemical and manufacturing industries; as well as to utilities, non-regulatory
government entities, financial institutions and real estate developers. There
are no significant operations or revenues generated from non United States
locations. Ongoing credit evaluations of its customers' financial condition are
performed by the Company, generally requiring no collateral.
2. CONTRACTS IN PROGRESS
Information related to contracts in progress (in thousands):
- --------------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $4,181 $ --
Estimated earnings on uncompleted contracts 940 --
-------
5,121
Less billings to date on uncompleted contracts 4,311 --
- -------------------------------------------------------------------------------
Total $ 810 $ --
- --------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheets on an individual
contract basis are (in thousands):
- --------------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Costs and estimated earnings in excess of billings
on uncompleted contracts. $ 904 $ --
Billings in excess of costs and estimated earnings
on uncompleted contracts (94) --
- --------------------------------------------------------------------------------
Total $ 810 $ --
- --------------------------------------------------------------------------------
3. RESTRUCTURING/OTHER CHARGES
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further improving
the Company's competitiveness and overall profitability. Based on this review,
the Company's Board of Directors approved a strategic restructuring plan in
December, 1996 to reposition the Company to fully exploit its core strengths in
engineering, design, construction, operations and maintenance. As a result of
these actions, the Company recognized pre-tax restructuring and other charges of
$1,237,000 and $6,960,000, respectively. Included in the restructuring charge
were $604,000 related to the closure or downsizing of several underperforming
offices, $628,000 related to employee severance and the write-off of employment
contracts for former employees no longer actively participating in the Company's
affairs, and a $5,000 adjustment to the 1994 restructuring plan. Included in
25
other charges were $4,768,000 related to the write-down in the carrying value of
goodwill associated with the Company's continuing operating units in accordance
with the Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", $1,529,000 related to the write-off of idle or disposed of assets, $368,000
related to the write-down of the Company's landfill gas production rights and
related fixed assets, and $156,000 related to the buyout and cancellation of
outstanding stock options to purchase approximately 743,000 shares of the
Company's common stock held by employees of the Company. Also, included in other
charges were $139,000 for various other operational costs. Fair value of the
goodwill associated with the Company's continuing operating units was based on
each operating unit's expected future discounted cash flows.
As of December 31, 1996, $119,000 of the 1996 restructuring adjustment has been
incurred and $1,113,000 remains in other accrued liabilities. All remaining
actions are expected to be substantially completed by the third quarter of 1997.
In October 1994, the Board of Directors appointed Eugene M. Herson to serve as
the Company's new President and Chief Executive Officer. Shortly thereafter, in
December, 1994, the Company's Board of Directors approved senior management's
recommendation to implement a restructuring plan designed to improve operational
efficiencies. Under the plan, the Company eliminated substantially all of its
regional consulting subsidiaries in favor of a divisional structure. In
addition, the Company consolidated and streamlined all unnecessary and/or
redundant administrative functions. As a result of the actions taken, the
Company recognized a pre-tax restructuring charge in the fourth quarter of 1994
of $1,181,000. Of this amount, $611,000 related to the write-off of employment
contracts for former employees no longer actively participating in the Company's
affairs, $287,000 related to employee severance, and $263,000 related to costs
associated with excess facilities and equipment. Anticipated savings from the
1994 restructuring plan were estimated to exceed $1,000,000 per year. To date,
$1,142,000 of restructuring costs have been incurred and adjustments of $5,000
and ($17,000) were made to increase/(reduce) the reserve in 1996 and 1995,
respectively, to the required remaining balances. At December 31, 1996, $27,000
of accrued restructuring costs for write-off of employment contracts in 1994
were included in accrued liabilities in the accompanying consolidated balance
sheet. All remaining actions are expected to be completed by the first quarter
of 1997.
During the fourth quarter of 1994, the Company also incurred nonrecurring
charges of $777,000 related to the write-down of the carrying value of certain
of the Company's landfill gas production rights and of certain related fixed
assets due to the reevaluation of future cash flows expected to be generated
from the related projects.
4. IMPAIRMENT OF ASSETS HELD FOR SALE
In December 1996, the Company executed a Letter of Intent to sell its laboratory
division, Columbia Analytical Services, Inc. ("CAS"), to the employees of CAS
for cash, notes and other consideration valued in total at approximately
$7,500,000. The transaction is expected to be completed the first quarter of
1997. In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company recognized an impairment in its investment in CAS
of $3,327,000; including a write-down in the carrying value of goodwill
associated with previous laboratory acquisitions of $1,426,000. For the year
ended December 31, 1996, CAS had a loss before taxes of $142,000. The estimated
fair value of CAS is reflected in the accompanying consolidated balance sheets
as assets held for sale as of December 31, 1996.
26
5. ACQUISITIONS
Goodwill
On February 29, 1996, EMCON acquired all the outstanding capital stock of
Organic Waste Technologies, Inc. ("OWT"), a Cleveland based construction,
equipment and operations and maintenance company with significant expertise in
solid waste management. The Company purchased OWT for $13,859,000 in cash plus
the issuance of convertible notes and other contractual indebtedness held by
certain senior OWT management in the principal amount of $1,747,000. The
transaction was accounted for as a purchase. The indebtedness bears interest at
the rate of 8% per annum with all principal due and payable in full on March 1,
2001. The indebtedness may be converted into shares of OWT common stock upon an
underwritten public offering of OWT's common stock in an amount in excess of
$10,000,000. In the event the indebtedness has not been converted into OWT
shares, it may instead be converted into shares of EMCON common stock for a
period of ninety days after November 30, 2001 at a conversion price of $6.50 per
share. Goodwill of approximately $11,129,000 resulting from this acquisition is
being amortized over thirty years using the straight line method. Related
accumulated amortization at December 31, 1996, was approximately $310,000.
The following summarizes the unaudited pro forma net revenue, net income (loss),
and income (loss) per share of the combined company for the unaudited twelve
months ended December 31, 1996 compared to unaudited twelve months ended
December 31, 1995 (in thousands):
- -------------------------------------------------------------------------------
Pro Forma Pro Forma
1996 1995
Twelve months ended December 31, (unaudited) (unaudited)
- -------------------------------------------------------------------------------
Net revenue $120,738 $120,928
Net income (loss) (10,407) 1,606
Income (loss) per share ($1.23) $ 0.20
- -------------------------------------------------------------------------------
The above pro forma results of operations do not purport to reflect the actual
results of operations had the Company actually acquired OWT as of the beginning
of 1996.
Effective April 1, 1994, the Company acquired all of the capital stock of Wehran
Envirotech, Inc. ("Wehran"), an environmental consulting company headquartered
in Middletown, New York, in exchange for 410,000 shares of the Company's common
stock valued at $2,818,000 and $439,000 in direct acquisition costs. The
transaction was accounted for as a purchase. An additional 80,000 shares, valued
at $290,000, were issued to Wehran shareholders in December, 1994 as a result of
their attaining certain predetermined operating performance goals. Goodwill of
approximately $1,896,000 resulting from this acquisition is being amortized over
twenty years using the straight line method. Accumulated amortization as of
December 31, 1996, was approximately $253,000. Subsequent to the purchase of
Wehran, the Company issued an additional 425,000 shares of its common stock to
retire approximately $5,000,000 of Wehran's convertible subordinated notes. In
addition, the Company also paid approximately $6,100,000 in cash to satisfy
amounts borrowed against Wehran's revolving credit line ($5,000,000) and
obligations due to settlement of certain litigation ($1,100,000).
On May 31, 1996, EMCON acquired the operations of Cascade Pacific Engineering,
Inc. ("Cascade"). The transaction was structured as an asset acquisition with
EMCON acquiring substantially all the assets of Cascade for $546,000 in cash
plus the assumption of substantially all of Cascade's liabilities. The tangible
net assets were valued at $80,000. The $466,000 excess of cost over the fair
27
value of net assets acquired, net of accumulated amortization at December 31,
1996, of $93,000 was subsequently written-off in 1996 due to an evaluation based
on a discounted cash flow analysis.
Acquisitions made in the Southeast and Alaska between 1990 and 1993 were
evaluated based on a discounted cash flow basis and resulted in a write-down of
goodwill of $4,394,000. Remaining goodwill and accumulated amortization at
December 31, 1996 were approximately $1,734,000 and $1,480,000, respectively.
Other Intangible Assets:
Intangible assets include $879,000 and $2,476,000 at December 31, 1996 and 1995,
respectively, representing gross costs incurred to obtain landfill gas
production rights. Amortization of these gas production rights is recognized as
the greater of either the straight-line or units-of-production method over a
term not exceeding the period of the gas production leases. The expected
amortization periods range from one to ten years. The related accumulated
amortization was approximately $798,000 and $1,338,000 at December 31, 1996 and
1995, respectively. In December, 1996 the Company reduced the value of these
landfill gas production rights by $247,000 to their estimated fair value.
Other intangible assets at December 31, 1996 also include $888,000, representing
the gross cost to reacquire certain patent rights associated with the Company's
proprietary leachate evaporation system technology. Accumulated amortization at
December 31, 1996 was approximately $15,000 and the patent is being amortized
over the 15 year life of such patents.
6. OTHER NONCURRENT OBLIGATIONS
Certain employees participate in a salary continuation plan which will provide
the employees with a 10-year benefit from the Company. Monthly benefits range
from $600 to $4,500, and the employees vest in varying amounts from the fifth to
the tenth anniversary date of their contracts. Such amounts will be paid in
addition to those payments due specifically as consideration for the employees
meeting the non-competition provisions of their contracts.
Included in other noncurrent obligations are the Company's liabilities under
salary continuation agreements and capital leases. Liabilities under salary
continuation agreements were $939,000 and $802,000 at December 31, 1996 and
1995, respectively. Capital lease obligations are collateralized by equipment
included in property and equipment with a cost and accumulated depreciation of
$324,000 and $80,000, respectively, at December 31, 1996, and $1,020,000 and
$863,000, respectively, at December 31, 1995.
7. RETIREMENT PLAN
The Company sponsors a qualified retirement plan, generally available to all
employees, which is based on Section 401(k) of the Internal Revenue. Employees
may elect to contribute up to 15% of their annual compensation to the plan up to
the Internal Revenue Service annual contribution limit $9,500 for 1996. The
Company voluntarily matched the employee's contribution to a maximum of 3% of
annual compensation. The Company's contributions to the retirement plan were
$1,146,000, $1,177,000 and $674,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
28
8. COMMITMENTS
The Company leases its office facilities, as well as office and computer
equipment, under operating leases in various locations. Until 1995, certain
office facilities were leased from partnerships in which certain officers and
shareholders of the Company had controlling interests. Lease arrangements with
the partnerships were terminated in 1995. The annual rents under leases from
partnerships were approximately $473,000 and $516,000 for 1995 and 1994,
respectively. The Company's minimum annual lease commitments under all operating
leases are approximately (in thousands):
- -------------------------------------------------------------------------------
Years Ending December 31,
- --------------------------------------------------------------------------------
1997 $5,385
1998 4,044
1999 3,313
2000 2,155
2001 and thereafter 2,657
- --------------------------------------------------------------------------------
Rent expense was approximately $5,263,000, $4,429,000 and $3,964,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Certain employees have signed non-competition agreements which will provide them
with monthly payments from $400 to $3,000 for a period of up to ten years,
commencing on the tenth anniversary date of the agreements. (See note 6.)
9. LITIGATION
As a firm engaged in environmental-related matters, the Company encounters
potential liability, including claims for significant environmental damage, in
the normal course of business. The Company is party to lawsuits and is aware of
potential exposure related to certain claims. In the fourth quarter of 1996 the
Company agreed to settlement terms on a number of outstanding legal matters. At
the same time the Company assessed the potential exposure relative to all other
known pending matters. Based on the foregoing, the Company increased its legal
reserve by an additional $1,553,000. In the opinion of management the resolution
of all known lawsuits/claims at amounts in excess of established reserves will
not have a material adverse affect on the Company's financial position, results
of operations or cash flows.
29
10. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Variable-rate note payable to bank ................................................................. $ 9,286 --
(effective rate at 12/31/96 was 7.35%). Payable in quarterly
installments of $357 with a final payment of $3,214 in 2001.
Collateralized by the assets of EMCON.
8% unsecured notes payable to OWT shareholders. Payable on......................................... 1,747 --
termination date in 20001
7.99% note payable to bank in monthly installments through 2006..................................... 4,661 --
Collateralized by the assets of OWT with a net book value of $6,186
8.49% note payable to bank in monthly installments through 2001..................................... 374 --
Collateralized by equipment of OWT with a net book value of $458
8.99% note payable to bank in monthly installments through 2000..................................... 296 --
Collateralized by the assets of OWT with a net book value of $6,186
Other indebtedness, interest rates vary from 5.3% to 15.9% payable.................................. 553 803
in installments through 2000. (Primarily lease obligations)
------- -------
Total Long-term Debt ............................................................................... $16,917 $ 803
------- -------
Less current portion ............................................................................... $ 2,250 $ 372
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term Debt, net of current portion ............................................................. $14,667 $ 431
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid on all outstanding debt amounted to $951,000 in 1996 and $58,000
in 1995. Carrying value of the debt approximates fair value.
Aggregate principal payments for the next five years for years ending December
31,
- -------------------------------------------------------------------------------
1997 $ 2,250
1998 2,172
1999 2,039
2000 2,030
2001 and thereafter 8,426
- -------------------------------------------------------------------------------
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured Credit Agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a term loan basis with interest
at a managed rate not to exceed the prime rate. Principal is to be amortized
over seven years, but with any unpaid amount finally due and payable on June 30,
2001. The remaining $10,000,000 under the Credit Agreement is available for
working capital purposes (with up to $5,000,000 also being available for
non-working capital purposes). The line of credit component of the Credit
Agreement expires on May 31, 1997. The Company expects to renew the line of
credit component of the Credit Agreement following its expiration. The Credit
30
Agreement contains provisions with respect to the payment of dividends and the
level of capital expenditures and requires the maintenance of specific levels of
working capital, tangible net worth and continued quarterly profitability. As a
result of the fourth quarter loss in 1996, the impact of the related
restructuring actions and the payment of certain profit distributions to a
minority shareholder in one of OWT's subsidiaries, the Company was not in
compliance with these covenants at year-end. However, the Company obtained a
waiver from the bank for its non compliance and agreed to related amendments of
the Credit Agreement reducing the tangible net worth requirement and permitting
distributions to the minority shareholders in OWT's subsidiary.
11. SHAREHOLDERS' EQUITY
Preferred Stock:
The Board of Directors of the Company has the authority to determine the rights,
preferences, privileges and restrictions of the authorized preferred stock.
Stock Option Plan:
The Company has issued options to purchase shares of common stock pursuant to
its 1986 Incentive Stock Option Plan (now expired) and its 1988 Stock Option
Plan (the "Plans"). These options are granted with option exercise prices which
are equal to 100%, 105% or 110% of fair market value on the date of grant, and
expire over terms ranging from five to ten years. Options generally vest ratably
over a two year or four year period. A summary of activity of the Plans follows:
- -------------------------------------------------------------------------------------------------------------
Options Outstanding
--------------------------------------------------
Available Number Price Aggregate
for Grant of Shares Per Share Value
- --------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 ........ 383,482 1,985,745 $ 1.15 - $11.25 $ 16,034,340
Options authorized .......... 750,000 -- -- --
Options granted ............. (448,900) 448,900 $ 5.00 - $ 8.37 2,984,999
Options canceled ............ 153,702 (153,702) $ 3.33 - $11.25 (1,322,592)
Options exercised ........... -- (54,606) $ 1.15 - $ 7.67 (250,724)
- -------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 ........ 838,284 2,226,337 $ 1.15 - $11.25 17,446,023
Options granted ............. (386,650) 386,650 $ 3.50 - $ 4.88 1,545,537
Options canceled ............ 72,629 (72,629) $ 3.33 - $10.00 (591,701)
Options exercised ........... -- (30,000) $ 1.15 (34,666)
- -------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 ........ 524,263 2,510,358 $ 3.33 - $11.25 18,365,193
Options granted ............. (192,448) 192,448 $ 3.25 - $ 4.88 728,144
Options canceled ............ 1,518,674 (1,518,674) $ 3.33 - $11.25 (12,357,381)
Options exercised ........... -- (4,700) $ 3.33 - $ 3.50 (15,698)
- -------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 ........ 1,850,489 1,179,432 $ 3.25 - $11.25 $ 6,720,258
- -------------------------------------------------------------------------------------------------------------
31
Restricted Stock Plan:
The Company's Restricted Stock Plan was approved by its shareholders in May,
1991. A total of 225,000 shares of the Company's Common Stock were reserved for
issuance under the Restricted Stock Plan. Shares granted to employees under the
Restricted Stock Plan generally vest in equal annual installments over periods
ranging from three to four years. At December 31, 1996, 99,191 shares were
available for issuance.
Employee Stock Purchase Plan:
The Employee Stock Purchase Plan (ESPP) provides that substantially all
employees may purchase the Company's common stock at a price equal to 85% of its
fair value on certain specified dates via a payroll deduction plan. At December
31, 1996, 248,338 shares were available for issuance. The Company discontinued
the ESPP effective February 1, 1997.
Stock-Based Compensation:
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) in accounting for stock-based awards to employees. Under APB 25, the Company
generally recognizes no compensation expense with respect to such awards.
Pro Forma information regarding net income (loss) and earnings (loss) per share
is required by FASB 123 for awards granted after December 31, 1994, as if the
Company had accounted for its stock-based awards to employees under the fair
value method of FASB 123. For these purposes, the fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
valuation model. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions.
- -------------------------------------------------------------------------------
Options ESPP
------- ----
1996 1995 1996 1995
- -------------------------------------------------------------------------------
Expected life (years) 6.6 7.0 0.5 0.5
Expected volatility .49 .49 .32 .42
Risk-free interest rate 6.1% 6.3% 5.5% 6.1%
- -------------------------------------------------------------------------------
32
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period (for options)
and the six-month purchase period (for stock purchases under the ESPP). The
Company's pro forma information follows:
- ----------------------------------------------------------------------------------------------------------------
In thousands except for earnings (loss) per share information 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported ............................................................... $ (10,091) $ 1,786
Pro forma ................................................................. $ (10,393) $ 1,688
Primary (loss) earnings per share
As reported ............................................................... $ (1.19) $ 0.22
Pro forma ................................................................. $ (1.27) $ 0.20
- ---------------------------------------------------------------------------------------------------------------
Because FASB 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until approximately 1999.
The weighted average fair value of options granted during 1996 and 1995 was
$2.14 and $2.30 per share, respectively.
The following summarizes information about fixed stock options outstanding at
December 31, 1996:
- -------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted Weighted
Number Weighted Average Average Average
Range of Exercise Outstanding at Remaining Exercise Number Exercise
Prices 12/31/96 Contractual Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------
$ 9.25 - $11.25 239,125 5.6 $ 9.34 238,450 $ 9.34
$ 6.50 - $ 8.83 227,694 4.0 $ 7.43 198,644 $ 7.50
$ 5.00 - $ 6.00 36,015 4.2 $ 5.59 28,265 $ 5.69
$ 3.25 - $ 4.88 676,598 7.9 $ 3.83 208,041 $ 3.80
- -------------------------------------------------------------------------------------------------------------
$ 3.25 - $11.25 1,179,432 6.5 $ 5.70 673,400 $ 6.93
- ------------------------------------------------------------------------------------------------------------
At December 31, 1995, 1,562,833 shares were exercisable at an average exercise
price of $8.10 per share.
In December, 1996 employees (other than officers and directors) with options
having exercise prices of $5.00 per share or greater were given the right to
either sell back their options to the Company, to exchange their options for new
options, to retain their original options or elect a combination of the three.
The rates at which the outstanding options could be exchanged or sold back to
the Company varied depending on the original option exercise price. Participants
could exchange their outstanding stock options for newly granted options at
rates ranging from one new share for every three old option shares to one new
share for every five old option shares. Alternatively, participants could sell
back their options at prices ranging from $0.10 to $0.40 per option share. This
resulted in options for 743,319 shares being canceled for a cash settlement of
approximately $156,000, and an additional 203,727 shares canceled in exchange
for the grant of new options covering 47,247 shares with an option exercise
price of $3.68 per share.
33
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
- -------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Federal:
Current $607 $438 $(112)
Deferred (3,358) 61 (378)
- -------------------------------------------------------------------------------
Total Federal (2,751) 499 (490)
- -------------------------------------------------------------------------------
State:
Current 73 78 200
Deferred (258) 206 (210)
- -------------------------------------------------------------------------------
Total State (185) 284 (10)
- -------------------------------------------------------------------------------
Total Federal and State $(2,936) $783 $(500)
- -------------------------------------------------------------------------------
A reconciliation between the Company's effective tax rate of (22.5%) in 1996,
30.5% in 1995 and (20.7%) in 1994 and the U.S. statutory rate is as follows (in
thousands):
- -------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Tax at U.S. statutory rate $(4,559) $899 $(846)
State taxes, net of federal benefit (280) 149 (7)
Tax exempt income -- -- (38)
Fuel tax credits (454) (515) --
Goodwill amortization 2,306 150 135
Meals and entertainment 94 105 101
Other individually immaterial items (43) (5) 155
- -------------------------------------------------------------------------------
Total Federal and State $(2,936) $783 $(500)
- -------------------------------------------------------------------------------
As of December 31, 1996, the Company has federal alternative minimum tax credit
carryforwards of approximately $2,327,000 which have no expiration date.
34
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at
(in thousands):
- -------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- -------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $2,327 $1,744
Deferred compensation 340 306
Allowance for doubtful accounts 403 421
Vacation accruals 636 595
Restructuring accruals 3,145 --
Unrecognized loss on property -- --
Other individually immaterial items 424 454
- --------------------------------------------------------------------------
Total deferred tax assets $7,275 $3,520
- --------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation $ 532 $ 352
Tax accounting method changes 70 102
Payment liabilities deducted 108 116
Supplies 110 110
- --------------------------------------------------------------------------
Total deferred tax liabilities $ 820 $ 680
- --------------------------------------------------------------------------
Total net deferred tax assets $6,455 $2,840
- --------------------------------------------------------------------------
13. QUARTERLY DATA (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------
(In thousands First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------------------------
1995
Gross revenue ......................................................... $ 30,369 $ 31,116 $ 32,106 $ 28,951
Net revenue ........................................................... 26,276 26,453 26,636 24,044
Income from operations ................................................ 528 985 816 126
Net income ............................................................ 397 711 650 28
Income per share ...................................................... $ 0.05 $ 0.09 $ 0.08 $ 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Gross revenue ......................................................... $ 28,564 $ 35,881 $ 36,416 $ 36,765
Net revenue ........................................................... 24,607 30,542 31,560 30,996
Income (loss) from operations ......................................... 119 790 582 (13,762)
Net income (loss) ..................................................... 34 365 259 (10,749)
Income (loss) per share ............................................... $ 0.01 $ 0.05 $ 0.03 $ (1.26)
- -----------------------------------------------------------------------------------------------------------------------------------
Historically, the Company's net revenue is adversely affected in the first
quarter of each year, primarily as a result of restricted field work due to
weather conditions.
35
The Board of Directors and Shareholders
EMCON
We have audited the accompanying consolidated balance sheets of EMCON as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EMCON at December
31, 1996 and 1995, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Ernst & Young LLP
San Francisco, California
February 6, 1997
36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1996.
Item 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1996.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated by reference
from the Registrant's definitive proxy statement for the Registrant's 1997
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1996.
37
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K Page
(a)(1) Financial Statements 18
(a)(2) Schedule II - Valuation and Qualifying Accounts 40
(b) Reports on Form 8-K --
No reports on Form 8-K were filed during
the quarter ended December 31, 1996.
(c) Index to Exhibits 41
Exhibits filed herewith and attached
hereto under separate cover or
incorporated by reference herein will be
furnished to security holders of the
Registrant upon written request and
payment of a fee of $.30 per page which
fee covers only the Registrant's
reasonable expenses in furnishing such
exhibits.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMCON
Dated: 3/28/97 By /s/ Eugene M. Herson
--------- --------------------
Eugene M. Herson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Dougals P. Crane Chairman of the Board and Director March 28, 1997
- --------------------
Douglas P. Crane
/s/Eugene M. Herson President, Chief Executive Officer March 28, 1997
- -------------------- and Director (Principal Executive
Eugene M. Herson Officer)
/s/R. Michael Momboisse Chief Financial Officer, March 28, 1997
- ----------------------- Vice President - Legal and
R. Michael Momboisse Secretary (Principal Financial
and Accounting Officer)
/s/Donald R. Andres Vice President and Director March28, 1997
- --------------------
Donald R. Andres
/s/Richard A. Peluso Vice President and Director March 28, 1997
- ---------------------
Richard A. Peluso
Director March __, 1997
- -----------------------
Donald R. Kerstetter
/s/Jack M. Marzluft Director March 28, 1997
- --------------------
Jack M. Marzluft
/s/Peter Vardy Director March 28 1997
- ---------------
Peter Vardy
39
SCHEDULE II
EMCON
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
Balance Charged to Balance
at Beginning Costs and at End
of Period Expenses Write-offs of Period
------------ --------- ---------- ---------
Allowance for
Doubtful Accounts:
Year Ended
December 31, 1994 ......... $ 480 $ 2,889 $(2,394) $ 975
Year Ended
December 31, 1995 ......... $ 975 $ 765 $ (688) $ 1,052
Year Ended
December 31, 1996 ......... $ 1,052 $ 1,985 $(2,086) $ 951
40
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 optionholders 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").
3.1 Articles of Incorporation, as amended, incorporated by *
reference from Exhibit 3.1 of the Registrant's Registration
Statement on Form S-1 (File No. 33-16337) effective September
16, 1987 (the "Form S-1 Registration Statement").
3.2 Certificate of Amendment of Restated Articles of Incorporation *
as filed on May 24, 1988, incorporated by reference from
Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal
year ended December 31, 1988 (the "1988 10-K").
3.3 Certificate of Amendment of Restated Articles of Incorporation *
as filed on June 4, 1991, incorporated by reference from
Exhibit 4.1 of the Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1991 (the "June 1991 10-Q").
3.4 Bylaws, as amended, incorporated by reference from Exhibit 4.2 *
of the June 1991 10-Q.
10.1 EMCON 1986 Incentive Stock Option Plan and Amendment, *(1)
incorporated by reference *(1) from Exhibit 10.15 of the Form
S-1 Registration Statement.
10.2 Form of Agreement pursuant to Salary Continuation Plan, *(1)
incorporated by *(1) reference from Exhibit 10.17 of the Form
S-1 Registration Statement.
10.3 Schedule identifying Agreements pursuant to Salary Continuation 44(1)
Plan between
10.4 Form of Indemnity Agreement between the Registrant and each of *
the Registrant's officers and directors, incorporated by
reference from Exhibit 10.20 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988 (the
"1988 10-K").
10.5 EMCON 1988 Stock Option Plan, amended by shareholder approval *(1)
on May 25,1994, *(1) 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 reference *(1)
from Exhibit 10.10 of the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
41
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- ----- -----------
10.7 EMCON Restricted Stock Plan incorporated by reference from *(1)
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, 1994, *(1)
incorporated by reference from Exhibit 10.12 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (the "1993 10-K").
10.9 Trust Agreement for the EMCON Deferred Compensation Plan and *(1)
Salary Continuation Plan Trust dated February 19, 1994, between
Registrant and Wells Fargo Bank, N.A. incorporated by reference
from Exhibit 10.13 of the 1993 10-K.
10.10 Agreement between Eugene M. Herson and Registrant dated *(1)
November 30, 1995, incorporated by reference from Exhibit 10.21
of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K").
10.11 Agreement between R. Michael Momboisse and Registrant dated *(1)
November 10, 1995, incorporated by reference from Exhibit 10.22
of the 1995 10-K..
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 45
1, 1996 among EMCON, OWT, and certain employees of OWT.
10.19 New Note Agreement dated effective November 1, 1996 among 66
EMCON, OWT and certain employees of OWT.
42
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- -----------
10.20 Asset Purchase Agreement between Yolo Energy Partners, Inc., 78
Yolo Landfill Gas Corporation, EMCON, Yolo Neo LLC, and
Minnesota Methane LLC dated December 31, 1996.
10.21 Second Amendment to Credit Agreement dated effective January 111
27, 1997 among EMCON and Union Bank of California, N.A.
(formerly known as The Bank of California, N.A.)
10.22 Acquisition Agreement between EMCON and its wholly owned 112
subsidiary, Monterey Landfill Gas Corporation and Biomass
Energy Partners V, L.P., dated March 6, 1997
10.23 Third Amendment to Credit Agreement dated effective March 27, 123
1997 among EMCON and Union Bank of California, N.A. (formerly
known as The Bank of California, N.A.)
11.1 Computation of Income (Loss) Per Share. 124
21.1 Significant Subsidiaries of Registrant. 125
23.1 Consent of Ernst & Young, LLP, Independent Auditors. 126
27 Financial Data Schedule, included herein. 127
* 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.
43