UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16225
EMCON
(Exact name of Registrant as specified in its charter)
California 94-1738964
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1200
San Mateo, California 94402
- ---------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 375-1522
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
8,715,464 shares of Common Stock Issued and Outstanding as of May 8, 1998.
1
EMCON
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Page
Number
FACING SHEET......................................................... 1
TABLE OF CONTENTS.................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997............... 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997......... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997......... 5
Notes to Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 11
PART II. OTHER INFORMATION......................................... 13
Signatures........................................................... 14
Index to Exhibits.................................................... 15
2
EMCON
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------- -------------- ----------------
March 31, December 31,
1998 1997
(In thousands, except share amounts) (Unaudited) (Audited)
------------------------------------------------------------------------------------- -------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,356 $ 6,106
Accounts Receivable:
Billed accounts receivable, net of allowance for doubtful accounts
of $689 and $634 at March 31, 1998 and December 31, 1997 respectively 24,808 31,413
Unbilled accounts receivable, net of allowance for doubtful accounts
of $283 and $295 at March 31, 1998 and December 31, 1997, respectively 6,659 5,310
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,201 678
Prepaid expenses and other current assets 3,149 3,401
Inventory 2,703 2,238
Deferred taxes, current portion 4,235 4,235
------- -------
Total Current Assets 51,111 53,381
Net property and equipment, at cost 15,521 16,182
Notes receivable 2,426 2,811
Cash surrender value of insurance policies 2,366 2,346
Other assets 2,783 2,597
Deferred tax assets 1,028 1,028
Goodwill, net of amortization 13,778 13,916
Other intangible assets, net of amortization 841 814
-------- ---------
Total Assets $89,854 $93,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,218 $ 8,391
Accrued payroll and related benefits 4,662 4,356
Other accrued liabilities 3,266 2,969
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,785 2,732
Long-term obligations due within one year 2,269 2,350
-------- --------
Total Current Liabilities 18,200 20,798
Long-term debt 10,816 11,441
Other noncurrent obligations 2,714 2,736
Commitments and contingencies -- --
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, no par value, 15,000,000 shares authorized;
8,577,262 and 8,571,764 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 42,193 42,184
Retained earnings 15,931 15,916
------ -------
Total Shareholders' Equity 58,124 58,100
------ -------
Total Liabilities and Shareholders' Equity $89,854 $93,075
======= =======
See accompanying notes.
3
EMCON
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------- ---------------------------------
Three months ended
March 31,
(Unaudited)
---------------------------------
(In thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------- ----------------- ---------------
Gross revenue $28,779 $31,363
Outside services at cost 2,957 3,782
--------- ---------
Net revenue 25,822 27,581
Costs and expenses:
Direct expenses 13,822 12,606
Indirect expenses 11,857 14,226
Restructuring/other charges -- (75)
Loss on disposition of laboratory -- 333
Gain on sale of assets -- (826)
---------- ---------
Income from operations 143 1,317
Interest income (168) (94)
Interest expense 293 331
Equity in income of affiliates (15) (18)
Minority interest (income) expense (22) 35
----------- --------
Income before provision for income taxes 55 1,063
Provision for income taxes 35 372
--------- ---------
Net income $ 20 $ 691
========== ==========
Basic earnings per share $ 0.00 $ 0.08
========== ===========
Diluted earnings per share $ 0.00 $ 0.08
========== ===========
Shares used in computing basic earnings per share 8,573 8,535
========= ==========
Shares used in computing diluted earnings per share 8,827 8,540
========= ==========
4
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------- -------------------------------
Three months ended
March 31,
(Unaudited)
-------------------------------
Increase (decrease) in cash and cash equivalents (in thousands) 1998 1997
- -------------------------------------------------------------------------- ---------------- --------------
Cash flow from operating activities:
Net income $ 20 $ 691
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation 967 893
Amortization 153 151
Bad debt expense 73 501
Gain on sale/disposal of property and equipment (257) (142)
Loss on disposition of laboratory -- 333
Gain on disposition of assets -- (826)
Increase in salary continuation plan 40 17
Changes in operating assets and liabilities:
Accounts receivable 5,183 (2,256)
Costs and estimated earnings in excess of billings on uncompleted (1,523) (346)
contracts
Inventory (465) (489)
Prepaid expenses and other assets 252 385
Notes receivable 385 116
Cash surrender value, insurance policies (20) (185)
Other assets (268) (78)
Accounts payable (3,173) (416)
Accrued payroll and related benefits 306 (1,247)
Billings in excess of costs and estimated earnings on uncompleted 53 1,189
projects
Other accrued liabilities 275 604
- -------------------------------------------------------------------------- ---------------- --------------
Net cash provided by (used for) operating activities 2,001 (1,105)
- -------------------------------------------------------------------------- ---------------- --------------
Cash flow from investing activities:
Additions to property and equipment (395) (1,157)
Net cash on disposition of laboratory -- 3,794
Net cash from dispositions of assets -- 840
Proceeds from sale of property and equipment 346 512
- -------------------------------------------------------------------------- ---------------- --------------
Net cash (used for) provided by investing activities (49) 3,989
- -------------------------------------------------------------------------- ---------------- --------------
Cash flow from financing activities:
Proceeds of new debt obligation -- 250
Payments of current and long term portion of debt (706) (619)
Issuance of common stock for cash, net of cancellations 9 76
Dividend payments (5) (21)
- -------------------------------------------------------------------------- ---------------- --------------
Net cash used for financing activities (702) (314)
- -------------------------------------------------------------------------- ---------------- --------------
Increase in cash and cash equivalents 1,250 2,570
Cash and cash equivalents, beginning of year 6,106 5,331
- -------------------------------------------------------------------------- ---------------- --------------
Cash and cash equivalents, end of year $7,356 $7,901
- -------------------------------------------------------------------------- ---------------- --------------
See accompanying notes.
5
EMCON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
While the financial information is unaudited, the statements in this report
reflect all adjustments, which are normal and recurring, that are necessary
for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the dates
of the consolidated balance sheets. The operating results for the interim
periods presented are not necessarily indicative of performance for the
entire year.
These consolidated financial statements and notes should be read in
conjunction with the Company's consolidated financial statements for the
fiscal year ended December 31, 1997.
2. Restructuring Charges
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further
improving the Company's competitiveness and overall profitability. Based on
this review, the Company's Board of Directors approved a strategic
restructuring plan to reposition the Company to fully exploit its core
strengths in engineering, design, construction, operations and maintenance.
The plan included closure or downsizing of underperforming offices,
write-off of employment contracts for former employees no longer
participating in the Company's affairs and employee severance. During the
quarter ended March 31, 1998, $18,000 relating to the restructuring were
incurred and charged against the established reserve. At March 31, 1998,
$346,000 of accrued restructuring costs have been incurred and $300,000
remains in other accrued liabilities.
3. Acquisition
Effective May 1, 1997, Organic Waste Technology, Inc. ("OWT"), a wholly
owned subsidiary of EMCON, acquired all of the equity interest in National
Earth Products, Inc. ("NEP"), a Lancaster, Pennsylvania-based company with
significant expertise in landfill civil construction and related soils
processing. NEP was acquired for $933,000 in cash and $800,000 in notes
payable. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,476,000
resulting from this acquisition are included in goodwill and are being
amortized over twenty-five years using the straight line method.
Accumulated amortization as of March 31, 1998, was approximately $54,000.
Additional consideration may be paid for the purchase of NEP subject to the
achievement of certain earnout goals over the next two years. This
acquisition would not have had a material effect on net revenue, net
income, or income per share, had it been effective at January 1, 1997.
6
4. Credit Agreement
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a long term basis with
interest at a variable rate, generally not to exceed the prime rate.
Principal is to be amortized over seven years, but with any unpaid amount
finally due and payable on June 30, 2001. In April, 1997, following the
infusion of cash upon the first quarter sale of the Company's laboratory
operations, the Company prepaid, on an accelerated basis, $3,000,000 of the
then outstanding principal balance of the term loan. The remaining
$10,000,000 under the credit agreement is available on a line of credit
basis for working capital purposes (with up to $5,000,000 of this amount
available for non-working capital purposes). The line of credit component
of the credit agreement expires on May 31, 1998.
5. Litigation
As a professional services firm engaged in environmental-related matters,
the Company encounters potential liability, including claims for
significant environmental damage in the normal course of business. The
Company is party to lawsuits and is aware of potential exposure related to
certain claims, but in the opinion of management the resolution of these
matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
6. Earnings Per Share
-------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
-------------------
(In thousands, except for earnings per share) 1998 1997
-------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 20 $ 691
------ -------
Numerator for basic earnings per share -
income available to common stockholders 20 691
Effect of dilutive securities:
8% convertible debentures N/A(1) N/A(1)
------ -------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions 20 691
====== =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,573 8,535
Effect of dilutive securities:
Employee stock options 254 5
8% convertible debentures N/A(1) N/A(1)
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed 8,827 8,540
====== ======
conversions
Basic earnings per share $ 0.00 $ 0.08
====== ======
Diluted earnings per share $ 0.00 $ 0.08
====== ======
-------------------------------------------------------------------------------------------------------------
(1)Excluded from the above reconciliations were approximately 269,000
shares of common stock that may be issued at $6.50 per share to convert
$1,747,000 of indebtedness to certain senior management of OWT because they
were antidilutive at March 31, 1998. Conversion of debt, if it occurs,
would be within ninety days after November 30, 2001. Also excluded from the
above reconciliations were approximately 123,000 shares of common stock
that may be issued at $6.50 per share to convert $800,000 of indebtedness
to certain senior management of NEP because they were antidilutive at March
31, 1998. Conversion of debt, if it occurs, would be 50% at May 1, 2000,
and 50% at May 1, 2002.
7
7. Other
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year
which will result in a fifty-two week year in 1998. The Company's year end
falls on the Friday closest to the last day of the calendar year. The
Company also follows a five-four-four week quarterly cycle. For
convenience, the accompanying financial statements have been shown as
ending on the last day of the calendar period.
8. Adoption of Statement 131
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting standards No. 131,
Disclosure about Segments of an Enterprise and Related Information,
("Statement 131"). Statement 131 superseded FASB Statement 14, Financial
Reporting for Segments of a Business Enterprise. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. The adoption of Statement 131 did not affect
results of operations or financial position, but did affect the disclosure
of segment information. See note 9.
9. Segment Reporting
Description of the types of services from which each reportable segment
derives its revenues.
EMCON provides comprehensive environmental engineering, design,
construction, operations and maintenance, and equipment fabrication
services to a variety of public and private industrial and solid waste
clients. The Company is comprised of two reportable segments -- the
Operations and Construction Division (EOC) and the Professional Services
Division (PSD) -- and services three key service lines: Solid Waste, Site
Restoration and Facility Services.
In the first quarter of 1997, the Company had, in addition to the two
reportable segments listed above, a third reportable segment which was its
laboratory operations known as Columbia Analytical Services, Inc. (CAS).
During the first quarter of 1997, the Company completed the sale of CAS.
Measurement of segment profit or loss and segment assets.
The Company evaluates performance of its reportable segments, EOC and PSD,
based on operating income or loss before and after corporate overhead
allocations, but before interest income, interest expense, equity in income
of affliates and minority interest income (loss). Corporate overhead
expenses are substantially allocated to the reporting segments based on
revenue and/or headcount when an item cannot be specifically identifiable
to a reporting segment. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies as disclosed in EMCON's Form 10K as of December 31, 1997.
Intersegment sales consist primarily of labor and are marked up to provide
the supplying reportable segment a measure of profit. The receiving
reportable segment records the transfer as an "Outside Service" and may or
may not further mark up the labor cost prior to passing
8
the cost through to its customer. If the cost is not passed through to the
customer, the receiving reportable segment records the transaction as an
indirect cost. All intersegment accounts are eliminated in consolidation.
Factors management used to identify the enterprise's reportable segments.
EMCON's reportable segments are divisional units that offer different
services. The reportable segments are each managed separately. The PSD
reportable segment concentrates on professional engineering, design and
consulting services in solid waste, site restoration and facilities
services. The PSD reportable segment has regional operations situated in
the North, South, Northwest and Southwest, each overseen by an Area
Operations Manager. These regional operations have the same operating
parameters (services offered and required operating margins), may serve the
same national customers and often share personnel. For reportable segment
reporting, these regional operations are aggregated. The EOC reportable
segment concentrates on construction, equipment fabrication and operations
and maintenance services, primarily to our solid waste clients.
In 1997, there was a third reportable segment, Columbia Analytical
Services, Inc. (CAS), a laboratory division that was subsequently sold
during the first quarter of 1997.
Segment Information
----------------------------------------------------------------------------------------------------------------
(Three months ended March 31, 1998) PSD EOC CAS Other Total
----------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $18,047 $10,732 N/A $ -- $28,779
Intersegment revenues 197 524 N/A -- 721
Outside services from:
External subcontractors 2,872 85 N/A -- 2,957
Intersegment services 572 151 N/A -- 723
Net revenues 14,800 11,020 N/A 2 25,822
Depreciation expense 553 343 N/A 71 967
Amortization expense -- 15 N/A 138 153
Segment operating profit (loss) before allocations 721 881 N/A -- 1,602
Segment operating profit (loss) after allocations (230) 382 N/A (9) 143
Segment assets(1)
Accounts receivable, net $21,215 $10,252 N/A $ -- $31,467
----------------------------------------------------------------------------------------------------------------
(Three months ended March 31, 1997)
----------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $20,916 $5,988 $ 4,453 $ 6 $31,363
Intersegment revenues 331 580 734 -- 1,645
Outside services from:
External subcontractors 3,507 -- 275 -- 3,782
Intersegment services 1,479 132 8 -- 1,619
Net revenues 16,261 6,436 4,904 (20) 27,581
Depreciation expense 424 292 462 177 1,355
Amortization expense -- -- -- 151 151
Restructuring/other charges -- -- -- (75) (75)
Loss on disposition of laboratory -- -- -- 333 333
Gain on sale of assets -- 826 -- -- 826
Segment operating profit (loss) before allocations 1,520 1,076 108 -- 2,704
Segment operating profit (loss) after allocations 880 703 (59) (207) 1,317
Segment assets(1)
Accounts receivable, net $26,807 $7,808 $ -- $ -- $34,615
----------------------------------------------------------------------------------------------------------------
(1)The Company reviews its consolidated balance sheet and reviews only
accounts receivable on a segment basis.
9
----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1998 1997
----------------------------------------------------------------------------------------------------------------
Revenues
Total external revenues for reportable segments $28,779 $31,357
Intersegment revenues for reportable segments 721 1,645
Other revenues -- 6
Elimination of intersegment revenues (721) (1,645)
------- -------
Total gross consolidated revenues 28,779 31,363
Less outside services 2,957 3,782
------- -------
Total net revenue $25,822 $27,581
----------------------------------------------------------------------------------------------------------------
Profit or Loss
Total operating profit for reportable segments before allocations $ 1,602 $ 2,704
Overhead allocations expense (1,450) (1,180)
Unallocated overhead (9) (207)
------- -------
Total operating profit after allocations 143 1,317
Interest income 168 94
Interest expense (293) (331)
Equity earnings 15 18
Minority interest 22 (35)
-------- -------
Income before income taxes $ 55 $ 1,063
----------------------------------------------------------------------------------------------------------------
March 31, 1998 1997
----------------------------------------------------------------------------------------------------------------
Assets
Accounts receivable for reportable segments $31,467 $34,615
Other current assets 19,644 14,116
Net property and equipment at cost 15,521 14,552
Goodwill, net of amortization 13,778 13,501
Other assets 9,444 12,629
------- -------
Total consolidated assets $89,854 $89,413
----------------------------------------------------------------------------------------------------------------
10
EMCON
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
RESULTS OF OPERATIONS
Net Revenue. Net revenue for the first quarter of 1998 totaled $25,822,000, a
6.4% decrease from $27,581,000 for the first quarter of 1997. The decrease in
net revenue was, in part, attributable to the divestiture of Columbia Analytical
Services, Inc. (CAS), a reportable segment, at the end of the first quarter of
1997 (CAS contributed $4,904,000 to net revenue in the first quarter of 1997).
Excluding net revenue contributed by CAS in the first quarter of 1997, net
revenue increased 13.9% in the first quarter of 1998 from $22,677,000 in the
same period in 1997. The increase in net revenue (excluding CAS) was primarily
due to a 71.2% increase in net revenue from EMCON's Operations and Construction
(EOC) reportable segment as the demand for its services continues to expand.
This was offset by a 9.0% decrease in net revenue from the Professional Services
reportable segment (PSD) due to unanticipated project delays, unusually severe
weather conditions and the anticipated impact from the contraction of the PSD's
operations throughout the course of 1997.
Direct Expenses. Direct expenses include compensation for billable hours for
technical and professional staff and other project related expenses, as well as
direct labor and materials for in-house testing and construction activities.
Direct expenses for the first quarter of 1998 totaled $13,822,000, a 9.6%
increase from $12,606,000 during the first quarter of 1997. Excluding the impact
of CAS (which incurred direct expenses of $2,267,000 in the first quarter of
1997) direct expenses increased 33.7% from $10,339,000 in the first quarter of
1997. As a percentage of net revenue, direct expenses as reported increased from
45.7% in the first quarter of 1997 (45.6% if the impact of CAS is excluded) to
53.5% in the first quarter of 1998. The increase was due in large part to a
shift in business mix resulting from the divestiture of CAS, the contraction of
the PSD reportable segment and the continued expansion of the EOC reportable
segment.
Indirect Expenses. Indirect expenses include salary compensation for
non-billable hours for professional, technical and administrative staff and
general administrative expenses such as rent, bonuses, benefits, insurance,
legal, depreciation and amortization. Indirect expenses for the first quarter of
1998 totaled $11,857,000, a 16.7% decrease from indirect expenses of $14,226,000
during the first quarter of 1997. Excluding the impact of CAS (which incurred
indirect expenses of $2,529,000 in the first quarter of 1997) indirect expenses
during the quarter increased 1.4% from $11,697,000 during the first quarter of
1997. As a percentage of net revenue, indirect expense decreased from 51.6%
(both on a reported basis and excluding the impact of CAS) in the first quarter
of 1997 to 45.9% in the first quarter of 1998. The decrease was due in part to
the above-noted shift in business mix, the expansion of the EOC reportable
segment, the contraction of the Professional Services reportable segment and the
continued positive impact of cost containment measures.
Adjustment of Restructuring Accrual. During the first quarter of 1997, the
Company reversed an accrual of $75,000 made as part of the restructuring actions
taken in the fourth quarter of 1996. The 1996 year end accrual was revised to
reflect lower than anticipated costs associated with the abandonment and
subsequent sublease of certain office space.
11
Loss on Disposition of Laboratory. During the first quarter of 1997, the Company
completed the sale of CAS to the employees of CAS for $4,000,000 in cash, CAS'
promissory notes for $3,219,000 ("CAS Notes") and a continuing preferred stock
interest in CAS valued at $500,000. The Company paid to CAS $206,000 in cash for
retired employee contracts and for accelerated vesting of stock options and
other non-vested stock rights. In anticipation of completing the sale, the
Company recognized impairment in the value of its investment in CAS of
$3,327,000 at the end of 1996. As a result of several pre closing adjustments,
the Company recognized an additional loss on disposition of CAS in the first
quarter of 1997, of $333,000.
Gain on Sale of Assets. During the first quarter of 1997, the Company completed
the sale of one of its landfill gas-to-energy projects, including the related
leasehold production rights and associated machinery and equipment. The Company
recognized a gain on disposition of the project in the first quarter of 1997, of
$826,000.
Income From Operations. Income from operations for the first quarter of 1998
was $143,000 compared to $1,317,000 during the comparable period last year.
Interest Income. The Company recorded interest income of $168,000 in the first
quarter of 1998 compared to $94,000 in the first quarter of 1997. The increase
in interest income in the first quarter of 1998 compared to the first quarter of
1997 was primarily due to the recognition of interest income on the CAS Notes.
Interest Expense. The Company incurred interest expense of $293,000 in the
first quarter of 1998 compared to $331,000 in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company's uses of cash for non-operating
activities primarily consisted of repayment of debt in the amount of $706,000
and additions to property and equipment in the amount of $395,000; mainly
computers and field equipment. This was offset by net cash provided by operating
activities during the period of $2,001,000.
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank,
replacing its previous $10,000,000 unsecured line of credit. Under the new
agreement, the Company borrowed $10,000,000 on a term loan basis with interest
at a 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. In April 1997, following the infusion of cash upon the sale of CAS, the
Company prepaid, on an accelerated basis, $3,000,000 of the then outstanding
principal balance of the term loan. The remaining $10,000,000 under the Credit
Agreement is available for working capital purposes (with up to $5,000,000 also
being available for non-working capital purposes). The line of credit component
of the Credit Agreement expires on May 31, 1998. The Company expects to renew
the line of credit component of the Credit Agreement prior to its expiration.
The Credit Agreement contains provisions with respect to the payment of
dividends and the level of capital expenditures and requires the maintenance of
specific levels of working capital, tangible net worth and continued quarterly
profitability.
The Company believes that its cash on hand and cash generated from operations,
together with its available bank financing will be sufficient to meet the
Company's capital needs for at least the next twelve months.
12
EMCON
PART II OTHER INFORMATION
Items 1. - 4. Not applicable.
Item 5. Other Information
On April 3, 1998, the Company acquired all of the outstanding
equity of Advanced Analytical Solutions, Inc. (A2S) for cash
of $600,000 and the issuance of 123,077 shares of EMCON common
stock. The former shareholders of A2S are also eligible to
receive up to two additional earn out payments of $150,000
(payable in cash and additional shares of EMCON common stock)
in each of the two twelve month periods immediately following
the acquisition; which earn out payments will be treated as
additional purchase consideration and will be tied to the
future financial performance of A2S. The Company also extended
a three year full recourse secured loan to one of the former
A2S shareholders in the principal amount of $225,000. A2S is a
nationally recognized provider of alternative dispute
resolution, cost allocation, cost recovery and litigation
support services around Superfund projects with offices in
Denver, Colorado and Philadelphia, Pennsylvania.
Item 6. Exhibits and Reports
(a) Exhibits - See Index to Exhibits on Page 15
(b) Reports on Form 8-K - No reports on Form 8-K were filed with
the Securities and Exchange Commission during the quarter
ended March 31, 1998.
13
EMCON
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 8, 1998 EMCON
\o\ R. Michael Momboisse
-------------------------------------
R. MICHAEL MOMBOISSE
Chief Financial Officer,
Vice President - Legal, and Secretary
(Duly authorized and principal
financial and accounting officer)
14
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
- -------------- ----------------
2.1 Stock Purchase Agreement dated January 30, 1996, *
among Organic Waste Technologies, Inc. ("OWT"),
Registrant and the selling shareholders and option
holders of OWT, incorporated by reference from
Exhibit 2.1 of the Current Report on Form 8-K
dated March 14, 1996,(the "March 1996 8-K").
2.2 Asset Purchase Agreement between Yolo Energy *
Partners, Inc., Yolo Landfill Gas Corporation,
EMCON, Yolo Neo LLC, and Minnesota Methane LLC
dated December 31, 1996, incorporated by reference
from Exhibit 10.20 of the Annual Report on Form
10-K for the fiscal year ended December 31, 1996
(the "1996 10-K").
2.3 Acquisition Agreement between EMCON and its wholly *
owned subsidiary, Monterey Landfill Gas
Corporation, and Biomass Energy Partners V, L.P.,
dated March 6, 1997, incorporated by reference
from Exhibit 10.22 of the 1996 10-K.
2.4 Stock Purchase Agreement dated April 4, 1997 among *
Registrant, Columbia Analytical Services, Inc.
(`CAS"), Northwest Trust as trustee of the CAS
Employee Stock Ownership Trust and certain senior
management employees of CAS,incorporated by
reference from Exhibit 2.4 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997 (the "March 1997
10-Q").
2.5 Stock Purchase Agreement dated April 30, 1997 *
among Registrant, OWT, National Earth Products,
Inc.("NEP") and the selling stockholders of NEP,
incorporated by reference from Exhibit 2.5 of the
March 1997 10-Q.
2.6 Agreement and Plan of Reorganization among 19
Registrant, Advanced Analytical Solutions, Inc.
("A2S") and certain other parties dated April 3,
1998.
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").
15
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3.4 Bylaws, as amended, incorporated by reference from *
Exhibit 4.2 of the June 1991 10-Q.
10.1 EMCON 1986 Incentive Stock Option Plan and *(1)
Amendment, incorporated by reference from Exhibit
10.15 of the Form S-1 Registration Statement.
10.2 Form of Agreement pursuant to Salary Continuation *(1)
Plan, incorporated by reference from Exhibit 10.17
of the Form S-1 Registration Statement.
10.3 Schedule identifying Agreements pursuant to Salary *(1)
Continuation Plan between Registrant and certain
employees, incorporated by reference from Exhibit
10.3 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997
(the "1997 10-K").
10.4 Form of Indemnity Agreement between the Registrant *
and each of the Registrant's officers and
directors, incorporated by reference from Exhibit
10.20 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988
(the "1988 10-K").
10.5 EMCON 1988 Stock Option Plan, amended by *(1)
shareholder approval on May 25,1994, including
form of Nonqualified Stock Option Agreement
(Outside Directors), incorporated by reference
from Exhibit 10.9 of Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30,
1994 (the "June 30, 1994 10-Q").
10.6 EMCON Employee Stock Purchase Plan incorporated by *(1)
reference from Exhibit 10.10 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995.
10.7 EMCON Restricted Stock Plan incorporated by *(1)
reference from Exhibit 10.15 of the Annual Report
on Form 10-K for the fiscal year ended December
31, 1990.
10.8 EMCON Deferred Compensation Plan effective January *(1)
1, 1994, incorporated by reference from Exhibit
10.12 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993
(the "1993 10-K").
10.9 Trust Agreement for the EMCON Deferred *(1)
Compensation Plan and Salary Continuation Plan
Trust dated February 19, 1994, between Registrant
and Wells Fargo Bank, N.A. incorporated by
reference from Exhibit 10.13 of the 1993 10-K.
10.10 Agreement between Eugene M. Herson and Registrant *(1)
dated November 30, 1995, incorporated by reference
from Exhibit 10.21 of Registrant's Annual Report
on Form 10-K for the fiscal year ended December
31, 1995 (the "1995 10-K").
16
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10.12 Credit Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.2 of the
March 1996 8-K.
10.13 Security Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.3 of the
March 1996 8-K.
10.14 Pledge Agreement between The Bank of California, *
N.A. and Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.4 of the
March 1996 8-K.
10.15 Eurodollar Rate Option Agreement between The Bank *
of California, N.A. and Registrant dated February
29, 1996, incorporated by reference from Exhibit
10.5 of the March 1996 8-K.
10.16 Fixed Rate Amortization Option Agreement between *
The Bank of California, N.A and Registrant dated
February 29, 1996, incorporated by reference from
Exhibit 10.6 of the March 1996 8-K.
10.17 Note Agreement among the Registrant, OWT, and *
certain employees of OWT, incorporated by
reference from Exhibit 10.1 of the March 1996 8-K.
10.18 Rescission and Reformation Agreement dated *
effective November 1, 1996 among EMCON, OWT, and
certain employees of OWT, incorporated by
reference from Exhibit 10.18 of the 1996 10-K.
10.19 New Note Agreement dated effective November 1, *
1996 among EMCON, OWT and certain employees of
OWT, incorporated by reference from Exhibit 10.19
of the 1996 10-K.
10.20 Second Amendment to Credit Agreement dated *
effective January 27, 1997 among EMCON and Union
Bank of California, N.A. (formerly known as The
Bank of California, N.A.), incorporated by
reference from Exhibit 10.21 of the 1996 10-K.
10.21 Third Amendment to Credit Agreement dated *
effective March 27, 1997 among EMCON and Union
Bank of California, N.A. (formerly known as The
Bank of California, N.A.), incorporated by
reference from Exhibit 10.23 of the 1996 10-K.
10.22 Convertible Notes dated April 30, 1997 issued by *
EMCON to Dennis Grimm and Charles Gearhart in the
principal amounts of $400,798.40 and $399,201.60,
respectively, incorporated by reference from
Exhibit 10.22 of the March 1997 10-Q.
17
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10.23 Lease Agreement dated April 4, 1997, between EMCON *
and Columbia Analytical Services, Inc.,
incorporated by reference from Exhibit 10.23 of
the March 1997 10-Q.
10.24 Amendment 1997-I to EMCON Deferred Compensation *(1)
Plan dated effective February 22, 1997,
incorporated by reference from Exhibit 10.24 of
the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1997 (the "June
30, 1997 10-Q").
10.25 Fourth Amendment to Credit Agreement dated *
effective June 24, 1997 among EMCON and Union Bank
of California, N.A., incorporated by reference
from Exhibit 10.25 of the June 30, 1997 10-Q.
10.26 Amended and Restated Agreement between Eugene M. *(1)
Herson and Registrant dated November 3, 1997,
incorporated by reference from Exhibit 10.26 of
the 1997 10-K.
10.27 Amended and Restated Agreement between R. Michael *(1)
Momboisse and Registrant dated November 3, 1997,
incorporated by reference from Exhibit 10.27 of
the 1997 10-K.
10.28 Deferred Compensation Plan, Amended and Restated *(1)
effective January 1, 1998, incorporated by
reference from Exhibit 10.28 of the 1997 10-K.
10.29 Registration Rights Agreement among Registrant, 55
and the former shareholders of A2S dated April 3,
1998.
10.30 Secured Promissory Note by Timothy M. Keaten dated 63
April 3, 1998 in the principal amount of $225,000.
27 Financial Data Schedule, included herein. 69
* 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.
18