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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16225
EMCON
(Exact name of Registrant as specified in its charter)
California 94-1738964
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1200
San Mateo, California
94402
- ---------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 375-1522
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
8,723,100 shares of Common Stock Issued and Outstanding as of July 27, 1998.
1
EMCON
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Page
Number
-------
FACING SHEET........................................................... 1
TABLE OF CONTENTS...................................................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997.............. 3
Consolidated Statements of Income -
Three and six months ended
June 30, 1998 and 1997........................... 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997.......... 5
Notes to Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................... 12
PART II. OTHER INFORMATION........................................... 16
Signatures............................................................. 17
Index to Exhibits...................................................... 18
2
EMCON
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------- ---------------- ----------------
June 30, December 31,
1998 1997
(In thousands, except share amounts) (Unaudited) (Audited)
----------------------------------------------------------------------------------- ---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,356 $ 6,106
Accounts Receivable:
Billed accounts receivable, net of allowance for doubtful accounts
of $708 and $634 at June 30, 1998 and December 31, 1997, respectively 37,552 31,413
Unbilled accounts receivable, net of allowance for doubtful accounts
of $333 and $295 at June 30, 1998 and December 31, 1997, respectively 7,203 5,310
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,526 678
Prepaid expenses and other current assets 3,703 3,401
Inventory 2,698 2,238
Deferred taxes, current portion 3,235 4,235
--------- -------
Total Current Assets 58,273 53,381
Net property and equipment, at cost 16,576 16,182
Notes receivable 2,471 2,811
Cash surrender value of insurance policies 3,120 2,346
Other assets 2,417 2,597
Deferred tax assets 1,028 1,028
Goodwill, net of amortization 14,904 13,916
Other intangible assets, net of amortization 882 814
---------- ---------
Total Assets $99,671 $93,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $11,225 $ 8,391
Accrued payroll and related benefits 4,927 4,356
Other accrued liabilities 4,366 2,969
Billings in excess of costs and estimated earnings
on uncompleted contracts 4,527 2,732
Long-term obligations due within one year 2,262 2,350
--------- --------
Total Current Liabilities 27,307 20,798
Long-term debt 10,281 11,441
Other noncurrent obligations 2,715 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;
8,722,725 and 8,571,764 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 42,874 42,184
Retained earnings 16,494 15,916
-------- -------
Total Shareholders' Equity 59,368 58,100
-------- -------
Total Liabilities and Shareholders' Equity $99,671 $93,075
======= =======
See accompanying notes.
3
EMCON
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(Unaudited) (Unaudited)
--------------------------- --------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Gross revenue $40,985 $33,114 $69,764 $64,477
Outside services at cost 4,776 8,647 7,733 12,429
--------- ------- ------- -------
Net revenue 36,209 24,467 62,031 52,048
Costs and expenses:
Direct expenses 21,979 12,206 35,801 24,812
Indirect expenses 13,040 11,177 24,897 25,403
Restructuring/other charges -- -- -- (75)
Loss on disposition of laboratory -- -- -- 333
Gain on sale of assets -- -- -- (826)
--------- ------- ------ ------
Income from operations 1,190 1,084 1,333 2,401
Interest income (151) (125) (319) (219)
Interest expense 304 317 597 648
Equity in earnings of affiliates -- (16) (15) (34)
Minority interest (income) expense 2 148 (20) 183
--------- ------- ------ ------
Income before provision for income taxes 1,035 760 1,090 1,823
Provision for income taxes 461 266 496 638
--------- ------- ------ ------
Net income $ 574 $ 494 $ 594 $ 1,185
========= ======= ======= =======
Basic earnings per share $ 0.07 $ 0.06 $ 0.07 $ 0.14
========= ======= ======= =======
Diluted earnings per share $ 0.07 $ 0.06 $ 0.07 $ 0.14
========= ======= ======= =======
Shares used in computing basic earnings per share 8,618 8,534 8,596 8,534
========= ======= ======= =======
Shares used in computing diluted earnings per share 8,830 8,554 8,829 8,545
========= ======= ======= =======
See accompanying notes.
4
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
Six months ended
June 30,
(Unaudited)
-------------------------------
Increase (decrease) in cash and cash equivalents (in thousands) 1998 1997
- -------------------------------------------------------------------------- ---------------- --------------
Cash flow from operating activities:
Net income $ 594 $1,185
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation 1,895 1,908
Amortization 316 312
Bad debt expense 250 499
Gain on sale/disposal of property and equipment (256) (15)
Loss on disposition of laboratory -- 333
Gain on disposition of assets -- (826)
Increase in salary continuation plan 118 42
Changes in operating assets and liabilities:
Accounts receivable (7,924) (4,213)
Costs and estimated earnings in excess of billings on uncompleted (848) (929)
contracts
Inventory (460) (517)
Prepaid expenses and other assets (329) (494)
Notes receivable 340 (2,849)
Cash surrender value of insurance policies (774) (200)
Other assets 187 2,631
Deferred tax assets 1,000 --
Accounts payable 2,611 988
Accrued payroll and related benefits 556 (1,235)
Billings in excess of costs and estimated earnings on uncompleted 1,795 3,472
projects
Other accrued liabilities 1,190 382
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 261 474
- ----------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment (2,384) (2,341)
Acquisitions, net of cash acquired (719) (858)
Addition to other intangible assets (99) --
Net cash on disposition of laboratory -- 3,794
Net cash from dispositions of assets -- 840
Proceeds from sale of property and equipment 358 114
- ----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (2,844) 1,549
- ----------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds of new debt obligation -- 69
Payments of current and long term portion of debt (1,248) (4,344)
Issuance of common stock for cash, net of cancellations 97 71
Dividend payments (16) (30)
- ----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,167) (4,234)
- ----------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (3,750) (2,211)
Cash and cash equivalents, beginning of year 6,106 5,331
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $2,356 $3,120
- ----------------------------------------------------------------------------------------------------------
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 consolidated operating results for
the interim periods presented are not necessarily indicative of performance
for the entire year.
These consolidated financial statements and notes should be read in
conjunction with the Company's consolidated financial statements for the
fiscal year ended December 31, 1997.
2. Restructuring Charges
In the fourth quarter of 1996, senior management reviewed the Company's
operational and administrative functions for the purpose of further
improving the Company's competitiveness and overall profitability. Based on
this review, the Company's Board of Directors approved a strategic
restructuring plan to reposition the Company to fully exploit its core
strengths in engineering, design, construction, operations and maintenance.
The plan included closure or downsizing of underperforming offices,
write-off of employment contracts for former employees no longer
participating in the Company's affairs and employee severance. During the
quarter ended June 30, 1998, $13,000 relating to the restructuring were
incurred and charged against the established reserve. Through June 30,
1998, $392,000 of restructuring costs have been incurred and charged
against the reserve and $293,000 remains in other accrued liabilities,
which includes present value adjustments during 1998 of $12,000.
3. Acquisitions
On April 3, 1998, EMCON acquired all the outstanding capital stock of
Advanced Analytical Solutions, Inc. ("A2S"), a Denver, Colorado based
provider, with an office in Philadelphia, Pennsylvania, of alternative
dispute resolution, cost allocation, cost recovery, and litigation support
services for, primarily, superfund projects. The Company purchased A2S for
$1,194,000, in stock ($593,000), cash and direct acquisition costs
($601,000). The transaction was accounted for as a purchase. Goodwill of
approximately $1,150,000 is being amortized over thirty years using the
straight line method. Accumulated amortization at June 30, 1998, was
approximately $10,000. Additional consideration may be paid for the
purchase of A2S subject to the achievement of predetermined operating
performance goals over the next two years. This acquisition would not have
had a material affect on net revenue, net income, or earnings per share,
had it been effective at January 1, 1998.
6
Effective May 1, 1997, Organic Waste Technology, Inc. ("OWT"), a wholly
owned subsidiary of EMCON, acquired all of the equity interest in National
Earth Products, Inc. ("NEP"), a Lancaster, Pennsylvania-based company with
significant expertise in landfill civil construction and related soils
processing. NEP was acquired for $933,000 in cash and $800,000 in notes
payable. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,601,000
resulting from this acquisition are included in goodwill and are being
amortized over twenty-five years using the straight line method.
Accumulated amortization as of June 30, 1998, was approximately $70,000.
Included in goodwill, is an additional $125,000 cash payment that was made
to NEP shareholders in May, 1998, as a result of their attaining certain
predetermined operating performance goals. Additional consideration may be
paid for the purchase of NEP subject to the achievement of certain earnout
goals over the next year to be measured as of April, 1999. This acquisition
would not have had a material effect on net revenue, net income, or
earnings per share, had it been effective at January 1, 1997.
4. Credit Agreement
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank (the
"Credit Agreement"), replacing its previous $10,000,000 unsecured line of
credit. Under the new agreement, the Company borrowed $10,000,000 on a term
loan basis with interest at a managed rate not to exceed the prime rate.
Principal is to be amortized over seven years with any unpaid amounts due
and payable on June 30, 2001. In April 1997, following the infusion of cash
upon the sale of 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 August 27, 1998. The Company expects to renew the line
of credit component of the Credit Agreement prior to its expiration. The
Credit Agreement contains provisions with respect to the payment of
dividends and the level of capital expenditures and requires the
maintenance of specific levels of working capital, tangible net worth and
continued quarterly profitability.
5. Litigation
As a professional services firm engaged in environmental-related matters,
the Company encounters potential liability, including claims for significant
environmental damage in the normal course of business. The Company is party
to lawsuits and is aware of potential exposure related to certain claims,
but in the opinion of management the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
7
6. Earnings Per Share
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
(In thousands, except for earnings per share) 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 574 $ 494 $ 594 $ 1,185
------- -------- ------- -------
Numerator for basic earnings per share -
income available to common stockholders 574 494 594 1,185
Effect of dilutive securities:
8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1)
------- -------- ------- -------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions $ 574 $ 494 $ 594 $ 1,185
======= ======== ======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares 8,618 8,534 8,596 8,534
Effect of dilutive securities:
Employee stock options 212 20 233 11
8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1)
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 8,830 8,554 8,829 8,545
======== ======== ======= ========
Basic earnings per share $ 0.07 $ 0.06 $ 0.07 $ 0.14
======== ======== ======= ========
Diluted earnings per share $ 0.07 $ 0.06 $ 0.07 $ 0.14
======== ======== ======= ========
---------------------------------------------------------------------------------------------------------------------
(1)Excluded from the above reconciliations were approximately 269,000 shares
of common stock that may be issued at $6.50 per share to convert $1,747,000 of
indebtedness to certain senior management of OWT because such shares were
antidilutive at June 30, 1998. Conversion of debt, if it occurs, would be
within ninety days after November 30, 2001. Also excluded from the above
reconciliations were approximately 123,000 shares of common stock that may be
issued at $6.50 per share to convert $800,000 of indebtedness to certain
senior management of NEP because such shares were antidilutive at June 30,
1998. Conversion of debt, if it occurs, would be 50% at May 1, 2000, and 50%
at May 1, 2002.
7. Other
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year
which will result in a fifty-two week year in 1998. The Company's year end
falls on the Friday closest to the last day of the calendar year. The
Company also follows a five-four-four week quarterly cycle. For convenience,
the accompanying consolidated financial statements have been shown as ending
on the last day of the calendar period.
8. Adoption of Statement 131
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting standards No. 131,
Disclosure about Segments of an Enterprise and Related Information,
("Statement 131"). Statement 131 superseded FASB Statement 14, Financial
Reporting for Segments of a Business Enterprise. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. The adoption of Statement 131 did not affect
consolidated results of operations or financial position, but did affect
the disclosure of segment information. See note 9.
8
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 affiliates and minority interest income (loss). Corporate overhead
expenses are substantially allocated to the reporting segments based on
revenue and/or headcount when an item 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 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 of the United States, each
overseen by an Area Operations Manager. These regional operations have the
same operating parameters (services offered and required operating
margins), may serve the same national customers and often share personnel.
For reportable segment reporting, these regional operations are aggregated.
The EOC reportable segment concentrates on construction, equipment
fabrication and operations and maintenance services, primarily to the
Company's solid waste clients.
In 1997, there was a third reportable segment, Columbia Analytical
Services, Inc., a laboratory division that was sold during the first
quarter of 1997.
9
Segment Information
---------------------------------------------------------------------------------------------------
(Three months ended June 30, 1998) PSD EOC Other Total
---------------------------------------------------------------------------------------------------
Gross revenues from:
External subcontractors $20,284 $20,243 $ 458 $40,985
Intersegment revenues 675 629 -- 1,304
Outside services from:
External subcontractors 4,742 18 16 4,776
Intersegment services 676 643 5 1,324
Net revenues 15,541 20,211 457 36,209
Depreciation expense 528 335 65 928
Amortization expense -- 15 148 163
Segment operating profit (loss) before 474 2,393 126 2,993
allocations
Segment operating profit (loss) after allocations (538) 1,860 (132) 1,190
---------------------------------------------------------------------------------------------------
(Three months ended June 30, 1997)
---------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $20,190 $12,920 $ 4 $33,114
Intersegment revenues 362 511 -- 873
Outside services from:
External subcontractors 4,134 4,513 -- 8,647
Intersegment services 584 268 -- 852
Net revenues 15,834 8,650 (17) 24,467
Depreciation expense 559 365 91 1,015
Amortization expense -- 26 135 161
Segment operating profit (loss) before 1,645 1,206 -- 2,851
allocations
Segment operating profit (loss) after allocations 434 595 55 1,084
---------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
(Six months ended June 30, 1998) PSD EOC CAS Other Total
----------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $38,331 $30.975 N/A $ 458 $69,764
Intersegment revenues 872 1,153 N/A -- 2,025
Outside services from:
External subcontractors 7,614 103 N/A 16 7,733
Intersegment services 1,248 794 N/A 5 2,047
Net revenues 30,341 31,231 N/A 459 62,031
Depreciation expense 1,081 678 N/A 136 1,895
Amortization expense -- 30 N/A 286 316
Segment operating profit (loss) before 1,195 3,274 N/A 126 4,595
allocations
Segment operating profit (loss) after allocations (795) 2,231 N/A (103) 1,333
Segment assets (1)
Accounts receivable, net 23,485 20,904 N/A 366 44,755
----------------------------------------------------------------------------------------------------------------
10
-----------------------------------------------------------------------------------------------------------------
(Six months ended June 30, 1997) PSD EOC CAS Other Total
-----------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $41,106 $18,908 $4,453 $ 10 $64,477
Intersegment revenues 693 1,091 734 -- 2,518
Outside services from:
External subcontractors 7,641 4,513 275 -- 12,429
Intersegment services 2,063 400 8 -- 2,471
Net revenues 32,095 15,086 4,904 (37) 52,048
Depreciation expense 1,119 646 462 143 2,370
Amortization expense -- 41 -- 271 312
Restructuring/other charges -- -- -- (75) (75)
Loss on disposition of laboratory -- -- -- 333 333
Gain on sale of assets -- 826 -- -- 826
Segment operating profit (loss) before 3,029 2,278 108 -- 5,415
allocations
Segment operating profit (loss) after allocations 1,266 1,332 (59) (138) 2,401
Segment assets(1)
Accounts receivable, net 26,689 11,201 N/A -- 37,890
-------------------------------------------------- ---------- ---------- ------------- ------------ -------------
(1)The Company reviews its consolidated balance sheet and reviews only
accounts receivable on a segment basis.
-----------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------------
Revenues
Total external revenues for reportable segments $40,527 $33,110 $69,306 $64,467
Intersegment revenues for reportable segments 1,304 873 2,025 2,518
Other revenues 458 4 458 10
Elimination of intersegment revenues (1,304) (873) (2,025) (2,518)
------- ------- ------- -------
Total gross consolidated revenues 40,985 33,114 69,764 64,477
Less outside services (4,776) (8,647) (7,733) (12,429)
------- ------- ------- -------
Total net revenue $36,209 $24,467 $62,031 $52,048
-----------------------------------------------------------------------------------------------------------------
Profit or Loss
Total operating profit for reportable segments before $ 2,993 $ 2,851 $ 4,595 $ 5,415
allocations
Overhead allocations expense (1,545) (1,836) (3,033) (2,876)
Unallocated overhead (258) 69 (229) (138)
------- ------ ------- -------
Total operating profit after allocations 1,190 1,084 1,333 2,401
Interest income 151 125 319 219
Interest expense (304) (317) (597) (648)
Equity in earnings of affiliates -- 16 15 34
Minority interest income (expense) (2) (148) 20 (183)
-------- ------ ------- -------
Income before provision for income taxes $ 1,035 $ 760 $ 1,090 $ 1,823
-----------------------------------------------------------------------------------------------------------------
June 30, 1998 1997
-----------------------------------------------------------------------------------------------------------------
Assets
Accounts receivable for reportable segments $44,755 $37,890
Other current assets 13,518 10,867
Net property and equipment at cost 16,576 15,429
Goodwill, net of amortization 14,904 13,922
Other assets 9,918 13,773
------- -------
Total consolidated assets $99,671 $91,881
-----------------------------------------------------------------------------------------------------------------
11
EMCON
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q. Certain statements in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," including statements regarding the
Company's beliefs, expectations or strategies regarding the
future, constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Although the Company believes
that the expectations reflected in such forward-looking statements
are based on reasonable assumptions, such statements are subject
to risks and uncertainties, including those discussed under the
heading "Risk Factors" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K"), that
could cause actual results to differ materially from those
projected.
RESULTS OF OPERATIONS
Current Year-to-Date ended June 30, 1998 versus Prior Year-to-Date ended June
30, 1997.
Net Revenue: Net revenue for the first six months of 1998 totaled $62,031,000 a
19.2% increase from $52,048,000 for the first six months of 1997. At the end of
the first quarter of 1997, the Company divested its laboratory subsidiary,
Columbia Analytical Services, Inc. (CAS); a reportable segment. CAS contributed
$4,904,000 to net revenue in the first quarter of 1997. Excluding net revenue
contributed by CAS in the first quarter of 1997, net revenue from continuing
operations actually increased 31.6% in the first six months of 1998 from
$47,144,000 in the same period in 1997. The increase in net revenue was
primarily due to a 107.0% increase in net revenue from EMCON's Operations and
Construction (EOC) reportable segment as the demand for its services continued
to increase. This was offset by a 5.5% decrease in net revenue from the
Professional Services Division reportable segment (PSD) due to unanticipated
project delays, unusually severe weather conditions and the impact from the
contraction of the PSD's West Coast operations throughout the course of 1997 and
the first six months of 1998.
Direct Expenses: Direct expenses include compensation for billable hours for
technical and professional staff and other project related expenses, as well as
direct labor and materials for in-house testing and construction activities.
Direct expenses for the first six months of 1998 totaled $35,801,000, a 44.3%
increase compared to direct expenses of $24,812,000 during the first six months
of 1997. Excluding the impact of CAS (which incurred direct expenses of
$2,267,000 in the first quarter of 1997) direct expenses increased 58.8% from
$22,545,000 in the first six months of 1997. As a percentage of net revenue,
direct expenses as reported increased from 47.7% in the first six months of 1997
to 57.7% in the first six months of 1998. The increase was due in large part to
a shift in business mix resulting from the divestiture of CAS, the contraction
of the PSD reportable segment and the continued expansion of the EOC reportable
segment.
12
Indirect Expenses: Indirect expenses include salary compensation for nonbillable
hours of professional, technical and administrative staff and general
administrative expenses such as rent, bonuses, benefits, insurance, legal,
depreciation and amortization. Indirect expenses for the first six months of
1998 totaled $24,897,000, a 2.0% decrease compared to indirect expenses of
$25,403,000 for the first six months of 1997. Excluding the impact of CAS (which
incurred indirect expenses of $2,529,000 in the first quarter of 1997) indirect
expenses during the first six months of 1998 increased 8.8% from $22,874,000
during the first six months of 1997. As a percentage of net revenue, indirect
expenses decreased from 48.8% in the first six months of 1997 (48.5% after
excluding the impact of CAS) to 40.1% in the first six months of 1998. The
decrease was due in part to the above-noted shift in business mix, the expansion
of the EOC reportable segment, the contraction of the PSD reportable segment and
the continued positive impact of cost containment measures.
Adjustment of Restructuring Accrual: During the first quarter of 1997, the
Company reversed an accrual of $75,000 made as part of the restructuring actions
taken in the fourth quarter of 1996. The year end accrual was revised to reflect
lower than anticipated costs associated with the abandonment and subsequent
sublease of certain office space.
Loss on Disposition of Laboratory: During the first quarter of 1997, the Company
completed the sale of CAS to the employees of CAS for $4,000,000 in cash, CAS'
promissory notes for $3,219,000 ("CAS Notes") and a continuing preferred stock
interest in CAS valued at $500,000. The Company paid $206,000 in cash to CAS for
retired employee contracts and for accelerated vesting of stock options and
other non vested stock rights. In anticipation of completing the sale, the
Company recognized impairment in the value of its investment in CAS of
$3,327,000 at the end of 1996. As a result of several pre closing adjustments,
the Company recognized an additional loss on disposition of CAS in the first
quarter of 1997 of $333,000.
Gain on Sale of Assets: During the first quarter of 1997, the Company completed
the sale of one of its landfill gas-to-energy projects, including the related
leasehold production rights and associated machinery and equipment. The Company
recognized a gain on disposition of the project in the first quarter of 1997, of
$826,000.
Income From Operations: Income from operations for the first six months of 1998
was $1,333,000, a 44.5% decrease compared to $2,401,000 during the comparable
period last year. Income from operations, as a percent of net revenue decreased
to 2.1% for the first six months of 1998 from 4.6% in the comparable period in
1997.
Interest Income: The Company recorded interest income of $319,000 in the first
six months of 1998 compared to $219,000 in the first six months of 1997. The
increase in interest income in the first six months of 1998 compared to the
first six months of 1997 was primarily due to the recognition of interest income
on the CAS Notes.
Interest Expense. The Company incurred interest expense of $597,000 in the first
six months of 1998 compared to $648,000 in the first six months of 1997.
13
Quarters Ended June 30, 1998 and 1997
Net Revenue. Net revenue for the quarter ended June 30, 1998, totaled
$36,209,000, a 48.0% increase from net revenue of $24,467,000 for the second
quarter of 1997. The increase in net revenue was primarily due to a 133.7%
increase in net revenue from EMCON's Operations and Construction Division (EOC)
reportable segment as the demand for its services continues to expand. This was
offset by a 1.6% decrease in net revenue from the PSD reportable segment due to
continued project delays, and the impact from the contraction of the PSD's West
Coast operations throughout the course of 1997 and the first six months of 1998.
Direct Expenses. Direct expenses for the quarter ended June 30, 1998, totaled
$21,979,000, an 80.1% increase from $12,206,000 during the second quarter of
1997. As a percentage of net revenue, direct expenses increased from 49.9% in
the second quarter of 1997 to 60.7% in the second 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 for the quarter ended June 30, 1998 totaled
$13,040,000, a 16.7% increase from indirect expenses of $11,177,000 during the
second quarter of 1997. As a percentage of net revenue, indirect expenses
decreased from 45.7% in the second quarter of 1997 to 36.0% in the second
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 PSD reportable segment and the continued positive impact of cost containment
measures.
Income From Operations. Income from operations for the quarter ended June 30,
1998, was $1,190,000, a 9.8% increase compared to $1,084,000 during the second
quarter of 1997. Income from operations, as a percent of net revenue decreased
to 3.3% in the second quarter of 1998 from 4.4% in the comparable period in
1997.
Interest Income. The Company recorded interest income of $151,000 in the quarter
ended June 30, 1998 compared to $125,000 in the second quarter of 1997.
Interest Expense. The Company incurred interest expense of $304,000 in the
quarter ended June 30, 1998 compared to $317,000 in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998, the Company's uses of cash for
non-operating activities primarily consisted of repayment of debt in the amount
of $1,248,000 and additions to property and equipment in the amount of
$2,384,000; mainly computers and field equipment and developed leachate
evaporation system (LES) projects. Net cash provided by operating activities
during the period was $261,000.
14
In conjunction with the acquisition of OWT, the Company entered into a
$20,000,000 secured credit agreement with its existing commercial bank (the
"Credit Agreement"), replacing its previous $10,000,000 unsecured line of
credit. Under the new agreement, the Company borrowed $10,000,000 on a term loan
basis with interest at a managed rate not to exceed the prime rate. Principal is
to be amortized over seven years with any unpaid amounts due and payable on June
30, 2001. In April 1997, following the infusion of cash upon the sale of 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 August 27, 1998. The Company expects to renew
the line of credit component of the Credit Agreement prior to its expiration.
The Credit Agreement contains provisions with respect to the payment of
dividends and the level of capital expenditures and requires the maintenance of
specific levels of working capital, tangible net worth and continued quarterly
profitability.
The Company believes that its cash on hand and cash generated from operations,
together with its available bank financing will be sufficient to meet the
Company's capital needs for at least the next twelve months.
15
EMCON
PART II OTHER INFORMATION
Items 1. - 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
On May 28, 1998, the Annual Meeting of Shareholders of EMCON was held at 1921
Ringwood Ave., San Jose, California. Of the 8,572,862 shares outstanding as of
the record date, 7,697,769 shares were present or represented by proxies at the
meeting.
Election of Directors. An election of directors was held with the following
individuals being elected to the Board of Directors:
For Withheld
Douglas P. Crane 6,803,314 894,455
Eugene M. Herson 7,137,548 560,221
Richard A. Peluso 7,143,053 554,716
Donald R. Kerstetter 6,801,098 896,671
Peter Vardy 6,803,798 893,971
Franklin J. Agardy 6,800,855 896,914
Approval of 1998 Stock Option Plan. The shareholders voted to approve the 1998
Stock Option Plan. The proposal received 2,770,870 votes for, 2,753,927 votes
against, 160,888 abstentions and 2,012,084 broker non-votes.
Ratification of Appointment of Independent Auditors. The shareholders voted to
ratify the appointment of Ernst & Young LLP as EMCON's independent auditors for
the fiscal year ending December 31, 1998. The proposal received 7,589,152 votes
for, 91,388 votes against, and 17,229 abstentions.
Item 5. Not applicable.
Item 6. Exhibits and Reports
(a) Exhibits - See Index to Exhibits on Page 18
(b) Reports on Form 8-K - No reports on Form 8-K were filed with
the Securities and Exchange Commission during the quarter
ended June 30, 1998.
16
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: July 27, 1998 EMCON
\s\ R. Michael Momboisse
-------------------------------------
R. MICHAEL MOMBOISSE
Chief Financial Officer,
Vice President - Legal, and Secretary
(Duly authorized and principal
financial and accounting officer)
17
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
- -------------- --------------
2.1 Stock Purchase Agreement dated January 30, *
1996, among Organic Waste Technologies, Inc.
("OWT"), Registrant and the selling
shareholders and option holders of OWT,
incorporated by reference from Exhibit 2.1 of
the Current Report on Form 8-K dated March
14, 1996, (the "March 1996 8-K").
2.2 Asset Purchase Agreement between Yolo *
Energy Partners, Inc., Yolo Landfill Gas
Corporation, EMCON, Yolo Neo LLC, and
Minnesota Methane LLC dated December 31,
1996, incorporated by reference from Exhibit
10.20 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the
"1996 10-K").
2.3 Acquisition Agreement between EMCON and *
its wholly owned subsidiary, Monterey
Landfill Gas Corporation, and Biomass Energy
Partners V, L.P., dated March 6, 1997,
incorporated by reference from Exhibit 10.22
of the 1996 10-K.
2.4 Stock Purchase Agreement dated April 4, *
1997 among Registrant, Columbia Analytical
Services, Inc. (`CAS"), Northwest Trust as
trustee of the CAS Employee Stock Ownership
Trust and certain senior management employees
of CAS, incorporated by reference from
Exhibit 2.4 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter
ended March 31, 1997 (the "March 1997 10-Q").
2.5 Stock Purchase Agreement dated April 30, *
1997 among Registrant, OWT, National Earth
Products, Inc. ("NEP") and the selling
stockholders of NEP, incorporated by
reference from Exhibit 2.5 of the March 1997
10-Q.
2.6 Agreement and Plan of Reorganization among *
Registrant, Advanced Analytical Solutions,
Inc. ("A2S") and certain other parties dated
April 3, 1998, incorporated by reference from
Exhibit 2.6 of the Quarterly Report on Form
10-Q for the fiscal quarter ended March 31,
1998 (the "March 1998 10-Q").
3.1 Articles of Incorporation, as amended, *
incorporated by reference from Exhibit 3.1 of
the Registrant's Registration Statement on
Form S-1 (File No. 33-16337) effective
September 16, 1987 (the "Form S-1
Registration Statement").
3.2 Certificate of Amendment of Restated Articles *
of Incorporation as filed on May 24, 1988,
incorporated by reference from Exhibit 3.2 of
the Annual Report on Form 10-K for the fiscal
year ended December 31, 1988 (the "1988
10-K").
3.3 Certificate of Amendment of Restated Articles *
of Incorporation as filed on June 4, 1991,
incorporated by reference from Exhibit 4.1 of
the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1991 (the "June
1991 10-Q").
18
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- ---------------
3.3 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 *(1)
Continuation Plan, incorporated by reference
from Exhibit 10.17 of the Form S-1
Registration Statement.
10.3 Schedule identifying Agreements pursuant to *(1)
Salary 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 *(1)
incorporated by 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 *(1)
by 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 *(1)
January 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 *(1)
Registrant dated November 30, 1995,
incorporated by reference from Exhibit 10.21
of Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995
(the "1995 10-K").
19
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- ---------------
10.12 Credit Agreement between The Bank of *
California, N.A. and Registrant dated
February 29, 1996, incorporated by reference
from Exhibit 10.2 of the March 1996 8-K.
10.13 Security Agreement between The Bank of *
California, N.A. and Registrant dated
February 29, 1996, incorporated by reference
from Exhibit 10.3 of the March 1996 8-K.
10.14 Pledge Agreement between The Bank of *
California, N.A. and Registrant dated
February 29, 1996, incorporated by reference
from Exhibit 10.4 of the March 1996 8-K.
10.15 Eurodollar Rate Option Agreement between The *
Bank of California, N.A. and Registrant dated
February 29, 1996, incorporated by reference
from Exhibit 10.5 of the March 1996 8-K.
10.16 Fixed Rate Amortization Option Agreement *
between The Bank of California, N.A. and
Registrant dated February 29, 1996,
incorporated by reference from Exhibit 10.6
of the March 1996 8-K.
10.17 Note Agreement among the Registrant, OWT, and *
certain employees of OWT , incorporated by
reference from Exhibit 10.1 of the March 1996
8-K.
10.18 Rescission and Reformation Agreement dated *
effective November 1, 1996 among EMCON, OWT,
and certain employees of OWT, incorporated by
reference from Exhibit 10.18 of the 1996
10-K.
10.19 New Note Agreement dated effective November *
1, 1996 among EMCON, OWT and certain
employees of OWT, incorporated by reference
from Exhibit 10.19 of the 1996 10-K.
10.20 Second Amendment to Credit Agreement dated *
effective January 27, 1997 among EMCON and
Union Bank of California, N.A. (formerly
known as The Bank of California, N.A.),
incorporated by reference from Exhibit 10.21
of the 1996 10-K.
10.21 Third Amendment to Credit Agreement dated *
effective March 27, 1997 among EMCON and
Union Bank of California, N.A. (formerly
known as The Bank of California, N.A.),
incorporated by reference from Exhibit 10.23
of the 1996 10-K.
10.22 Convertible Notes dated April 30, 1997 issued *
by EMCON to Dennis Grimm and Charles Gearhart
in the principal amounts of $400,798.40 and
$399,201.60, respectively, incorporated by
reference from Exhibit 10.22 of the March
1997 10-Q.
20
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- -------------- --------------
10.23 Lease Agreement dated April 4, 1997, between *
EMCON and Columbia Analytical Services, Inc.,
incorporated by reference from Exhibit 10.23
of the March 1997 10-Q.
10.24 Amendment 1997-I to EMCON Deferred *(1)
Compensation 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 *(1)
M. 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. *(1)
Michael 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 *(1)
Restated effective January 1, 1998,
incorporated by reference from Exhibit 10.28
of the 1997 10-K.
10.29 Registration Rights Agreement among *
Registrant, and the former shareholders of
A2S dated April 3, 1998, incorporated by
reference from Exhibit 10.29 of the March
1998 10-Q.
10.30 Secured Promissory Note of Timothy M. Keaten *
dated April 3, 1998, in the principal amount
of $225,000, incorporated by reference from
Exhibit 10.30 of the March 1998 10-Q.
10.31 EMCON 1998 Stock Option Plan, with standard 22
form of Incentive Stock Option Agreement,
Non-Statutory Stock Option Agreement and
Non-Statutory Stock Option Agreement (outside
Director Option) attached.
10.32 Sixth Amendment to Credit Agreement among 76(1)
Registrant and Union Bank of California dated
June 1, 1998.
27 Financial Data Schedule, included herein. 81
* 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.
21