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, 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 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 (650) 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.
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 March 1, 1999, was $23,174,519. 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
26, 1999, was 8,317,649.
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, 1998 are incorporated by reference in Part III of this Form 10-K.
The Index to Exhibits appears on Page 47 of this Report. This Report, including
all exhibits and attachments, contains 113 pages.
2
TABLE OF CONTENTS
PART I PAGE
Item 1: Business................................... 4
Item 2: Properties................................. 9
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.............................. 13
Item 8: Financial Statements and Supplementary
Data.................................... 18
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.. 43
PART III
Item 10: Directors and Executive Officers of the
Registrant.............................. 43
Item 11: Executive Compensation..................... 43
Item 12: Security Ownership of Certain Beneficial
Owners and Management.................. 43
Item 13: Certain Relationships and Related
Transactions........................... 43
PART IV
Item 14: Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................ 44
Signatures................................ 45
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 industrial and
solid waste clients. The Company is comprised of two reporting segments -- the
Operation and Construction Division (EOC) and the Professional Services Division
(PSD) -- and services three key service lines: Solid Waste, Site Restoration and
Facility Services.
EMCON is a leader in the design, construction and remediation of solid and
hazardous waste facilities, having participated in the design, construction and
remediation of several hundred transfer, storage and disposal facilities in the
United States, as well as Argentina, Canada, Hong Kong, India, Indonesia,
Israel, Kuwait, Malaysia, Russia, Saudi Arabia, Mexico, Peru and Venezuela.
EMCON's solid waste services include site selection and evaluation, facility
design, development of preprocessing and operating facilities, 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; ecologists; chemists; geologists;
hydrogeologists; hydrologists; industrial hygienists; toxicologists; computer
programmers; planners and regulatory analysts. References to the Company and
EMCON in this report include the Company's subsidiaries, unless the context
indicates otherwise.
On April 3, 1998, EMCON acquired all of the outstanding capital stock of
Advanced Analytical Solutions, Inc. ("A2S"), a provider of alternative dispute
resolution, cost allocation, cost recovery, and litigation support services
primarily for superfund projects. A2S has offices in Denver, Colorado and
Philadelphia, Pennsylvania. The Company purchased A2S for $593,000 in stock and
$601,000 in cash and direct acquisition costs. The transaction was accounted for
as a purchase. Goodwill of approximately $1,150,000 is being amortized over
twenty years using the straight-line method. Accumulated amortization at
December 31, 1998, was approximately $43,000. Additional consideration may be
paid for the purchase of A2S subject to the achievement of predetermined
operating performance goals over the next two years. The acquisition would not
have had a material affect on consolidated net revenue, net income or earnings
per share, had it been effective at January 1, 1998.
On December 4, 1998, Organic Waste Technologies, Inc. ("OWT"), a wholly-owned
subsidiary of EMCON, acquired all of the outstanding capital stock of Western
Industrial Resources Corporation ("WI"), an industrial maintenance outsourcing
firm based in Arizona. The Company purchased WI for $155,000 in cash and assumed
liabilities in excess of assets acquired of $103,000. The transaction was
accounted for as a purchase. Goodwill of approximately $258,000 is being
amortized over ten years using the straight-line method. Accumulated
amortization at December 31, 1998, was approximately $1,000. Additional
consideration may be paid for the purchase of WI subject to the achievement of
predetermined operating performance goals over the next three years. The
acquisition would not have had a material affect on consolidated net revenue,
net income, or earnings per share, had it been effective at January 1, 1998.
4
Services
The Company is comprised of two reportable segments: the Professional Services
Division (PSD); and the Operations and Construction Division (EOC). These two
reportable segments work in concert to address the needs of the Company's
clients in three key service lines: Solid Waste, Site Restoration and Facility
Services.
Solid Waste Services: The Company's Professional Services Segment and Operations
and Construction Segment 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 fabrication 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 the solid waste industry, the Company has
developed expertise in several critical areas of waste disposal technology -
landfill cells and related infrastructure, 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 technology.
Federal regulation now requires that all new landfill 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 solid waste 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.
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.
5
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 Company is also seeing more opportunities to provide fully
integrated design-build projects, utilizing the combined solid waste expertise
of PSD and EOC.
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 site restoration 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
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 groundwater 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.
6
Facility 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, regulatory, health and safety compliance and plant maintenance
requirements. EMCON services this niche by offering stand-alone and bundled
plant packages wrapped around client's industrial operations.
Air Quality: Air emission permits; emission credit trading (specified states);
air quality modeling; source monitoring and inventory services; exposure
monitoring; risk analysis; and air quality control system designs.
Water/Waste Water: Industrial process wastewater evaluation and treatment
design; toxicity reduction evaluations; storm water monitoring and control;
NPDES permits and monitoring; wastewater source assessments; receiving water
studies; industrial pretreatment packages and; operations of related systems.
Health and Safety: Training; site specific plans; indoor exposure evaluations;
noise and ergonomics; accident investigations; development of process safety
evaluation; OSHA compliance; emergency response plans; respiratory/health and
hazard communication; and industry specific assessment and training.
Regulatory Compliance: Multimedia audits; environmental risk assessments; agency
negotiations; compliance packages; and oversight of programs.
Environmental Management Consulting: Development and implementation of EMS' for
ISO 14001 certification; translating regulatory requirements into job
procedures/processes.
Environmental management Information Systems: Manifest tracking software; point
source solutions; groundwater monitoring tools; data management and regulatory
compliance products; regulatory analysis and summary web based packages; and EMS
and GIS Key products.
Information Technology Services: Network system integration; e-Commerce
consulting, web design and web-based training; and related equipment/software
packages.
Industrial Maintenance: Outsourcing scheduled and emergency fabrication, plant
improvement, facility and pipeline maintenance; HVAC and hydraulics maintenance,
specialty welding; and equipment relocations.
Clients and Marketing
EMCON's principal clients are industrial concerns, predominantly in the solid
waste, petroleum, wood products, aerospace, power generation, chemicals and
manufacturing industries. The Company also provides services to utilities,
non-regulatory government entities, and financial institutions. 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.
7
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.
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.
8
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 applicable
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, 1998, the Company had a total of 1,088 employees, including
525 technical professionals; 404 construction, operations and maintenance and
field technicians; and 159 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; toxicologists and construction and field personnel. 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.
Seasonality
EMCON's business has experienced an increase in seasonality in recent years, due
in part to the increase in on-site investigation, construction and other field
work. Consequently, the consolidated financial results in its second and third
quarters (ending June 30 and September 30, respectively) tend to be stronger
than such results in its first and fourth quarters.
Backlog
The Company estimates that at December 31, 1998, the backlog of future net
revenue from contracts in existence and orders believed to be firm was in excess
of $75 million, all of which is expected to be received within the next twelve
months, compared to $75 million backlog at December 31, 1997. 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, 2000.
The Company owns 4.4 acres of real property in Kelso, Washington, including
37,000 square feet of office and analytical lab space. The facilities are
currently leased to Columbia Analytical Services, Inc. ("CAS") under a long term
lease expiring April 3, 2007. The Company also owns a 10 acre piece of property
in New Concord, Ohio, including 30,000 square feet of office and equipment
fabrication facilities.
9
The Company leases office and warehouse space in a total of 50 facilities
located in Alaska, Arizona, California, Colorado, Connecticut, Florida, Georgia,
Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York,
Ohio, Oregon, Pennsylvania, Puerto Rico, Texas, Vermont, Virginia and Washington
under leases expiring at various times through December 2003.
These facilities have a combined area of approximately 345,500 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 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 consolidated
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, 1998.
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 1998 and 1997:
- - -------------------------------------------------------------------------------------------------------------------------------
High Low
- - -------------------------------------------------------------------------------------------------------------------------------
January 1 - March 31, 1997 3.75 3.00
April 1 - June 30, 1997 4.06 2.88
July 1 - September 30, 1997 5.50 3.13
October 1 - December 31, 1997 6.88 4.63
January 1 - March 31, 1998 5.13 4.63
April 1 - June 30, 1998 5.25 3.31
July 1 - September 30, 1998 5.13 2.81
October 1 - December 31, 1998 3.50 2.50
- - -------------------------------------------------------------------------------------------------------------------------------
On January 1, 1999, there were 1,771 shareholders of record of the Company's
common stock.
Although the Company does make annual distributions to a minority shareholder of
one of OWT's subsidiaries, the Company did not pay cash dividends to EMCON
shareholders in 1998 or 1997 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) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
Operations Statement Data (a)
Gross revenue $151,348 $139,343 $137,626 $122,542 $115,638
Net revenue 129,960 109,502 117,705 103,409 95,926
Direct expenses 76,749 56,134 52,608 39,473 37,307
Indirect expenses 49,373 49,782 65,844 61,498 59,302
Restructuring/other charges (4) (1,612) 8,197 (17) 1,958
Loss on disposition of laboratory -- 333 3,327 -- --
Income (loss) from operations 3,842 4,865 (12,271) 2,455 (2,641)
Interest income 548 516 317 369 348
Interest expense 1,234 1,251 1,112 181 66
Equity in income (loss) of affiliates (15) (2) 227 (74) (58)
Minority interest expense -- 810 188 -- --
Income (loss) before provision (benefit) for
income taxes 3,141 3,318 (13,027) 2,569 (2,417)
Provision (benefit) for income taxes 1,508 1,161 (2,936) 783 (500)
Net income (loss) 1,633 2,157 (10,091) 1,786 (1,917)
- - ------------------------------------------------------------------------------------------------------------------
Per Share Data (a)
Basic earnings (loss) per share $ 0.19 $ 0.25 $(1.19) $ 0.22 $ (0.24)
Diluted earnings per share $ 0.19 $ 0.25 -- $ 0.21 --
Shares used in computing basic earnings (loss)
per share 8,648 8,549 8,485 8,274 7,919
Shares used in computing diluted earnings per
share 8,795 8,693 -- 8,338 --
- - ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (a)
Total assets $95,889 $93,075 $ 90,912 $ 78,636 $ 80,989
Working capital 28,307 32,583 34,601 36,313 32,582
Noncurrent obligations and deferred income
taxes 11,584 14,177 16,799 1,700 1,348
Shareholders' equity 59,137 58,100 55,812 65,306 63,059
- - ------------------------------------------------------------------------------------------------------------------
(a) The Company was involved in several acquisitions, mergers, and
divestitures during the five year period presented. See Notes 5 and 8
to the Company's consolidated financial statements.
12
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
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)
------------------------------------ --------------------------------
1998 1997
vs. vs.
Years Ended December 31, 1998 1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------
Net revenue 100.0% 100.0% 100.0% 18.7% (7.0%)
Direct expenses 59.1% 51.3% 44.7% 36.7% 6.7%
Indirect expenses 38.0% 45.5% 55.9% 0.1% (24.4%)
Restructuring/other charges -- (0.5%) 7.0% (99.3%) (107.1%)
Loss on disposition of laboratory -- 0.3% 2.8% -- (90.0%)
Gain on disposition of assets -- (1.0%) -- -- --
Income (loss) from operations 2.9% 4.4% (10.4%) (21.0%) 139.6%
Interest income (expense), net (0.5%) (0.7%) (0.7%) (6.7%) 7.5%
Equity in income(loss) of affiliates -- -- 0.2% (650.0%) (100.9%)
Minority interest expense -- (0.7%) (0.2%) -- (330.9%)
Income (loss) before provision (benefit)
for income taxes 2.4% 3.0% (11.1%) (5.3%) 125.5%
Provision (benefit) for income
taxes 1.2% 1.0% (2.5%) 29.9% 139.5%
Net income (loss) 1.2% 2.0% (8.6%) (24.3%) 121.4%
- - --------------------------------------------------------------------------------------------------------------------------
Net Revenue: Net revenues for 1998 totaled $129,960,000, an 18.7% increase from
$109,502,000 in 1997. At the end of the first quarter of 1997, the Company
divested its laboratory line of business, CAS. CAS contributed net revenues of
$4,904,000 in 1997. Excluding net revenue contributed by CAS in the first
quarter of 1997, net revenue from continuing operations in 1998 increased 24.3%
from $104,598,000 in 1997. The increase in net revenue was primarily due to a
57.6% increase in net revenue from EMCON's EOC reportable segment and a 2.6%
increase in net revenue from EMCON's PSD reportable segment, as the demand for
EMCON's services continued to increase.
Net revenue for 1997 decreased 7.0% from $117,705,000 in 1996. The decrease was
due in part to the divestiture of CAS at the end of the first quarter of 1997
(CAS contributed net revenue of $4,904,000 in 1997 and $20,505,000 in 1996), as
well as lower demand for the Company's services within the Company's PSD
reportable segment. The decrease in net revenue was offset in part by the growth
of the EOC reportable segment from net revenues of $22,167,000 in 1996
(following the acquisition of OWT on February 29, 1996) to $41,386,000 in 1997.
13
Direct Expenses: Direct expenses include compensation for billable hours for
technical and professional staff and other project related expenses, as well as
direct labor and materials for in-house testing, construction, drilling and
operations/maintenance activities. Direct expenses for 1998 totaled $76,749,000,
a 36.7% increase compared to direct expenses of $56,134,000 during 1997.
Excluding the impact of CAS (which incurred direct expenses of $2,267,000 in the
first quarter of 1997), direct expenses increased 42.5% from $53,867,000 in
1997. As a percentage of net revenue, direct expenses, as reported, increased
from 51.3% in 1997 to 59.1% in 1998. The increase was due in large part to a
shift in business mix resulting from the divestiture of CAS and the continued
expansion of the EOC reportable segment.
Direct expenses for 1997 increased 6.7% over direct expenses of $52,608,000 in
1996. Direct expenses as a percent of net revenue increased to 51.3% in 1997
from 44.7% in 1996. The increase was due in large part to a shift in business
mix resulting from the divestiture of CAS and the continued expansion of the EOC
reportable segment combined with higher utilization of professional staff within
the PSD reportable segment.
Indirect Expenses: Indirect expenses include salary compensation for
non-billable hours of professional, technical and administrative staff and
general administrative expenses such as rent, bonuses, benefits, insurance,
legal, depreciation and amortization. Indirect expenses for 1998 totaled
$49,373,000; essentially flat as compared to indirect expenses of $49,782,000 in
1997. Excluding the impact of CAS (which incurred indirect expenses of
$2,529,000 in the first quarter of 1997) indirect expenses during 1998 increased
4.5% from $47,253,000 during 1997. As a percentage of net revenue, however,
indirect expenses, as reported, decreased from 45.5% in 1997 to 38.0% in 1998.
The decrease was due in part to the above-noted shift in business mix, the
expansion of the EOC reportable segment and the continued positive impact of
cost containment measures.
Indirect expenses for 1997 decreased 24.4% from indirect expenses of $65,844,000
in 1996. Indirect expenses as a percent of net revenue decreased to 45.5% in
1997 from 55.9% in 1996. The decrease was due in part to the above-noted shift
in business mix following the divestiture of CAS, the expansion of the EOC
reportable segment and the planned short-term contraction of the PSD reportable
segment as it refocused its service offerings, combined with the effect of
significant severance costs and expenses related to the closure of several small
offices during 1996. In addition, during the fourth quarter of 1996, the Company
increased reserves relating to pending litigation matters by an additional
$1,553,000. The increased litigation reserves proved adequate for resolution of
the matters contemplated.
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, in 1996 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 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. Net reductions of
$4,000 and
14
$586,000 to the reserve were recorded in 1998 and 1997, respectively, to reflect
lower than anticipated costs associated with the abandonment and subsequent
sublease of certain office space and lower than anticipated severance costs due
to retaining certain previously identified personnel.
Loss on Disposition of Laboratory: In December 1996, the Company executed a
letter of intent to sell its laboratory line of business, Columbia Analytical
Services, Inc. (CAS), to the employees of CAS 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.
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. As a result of several closing adjustments, the Company recognized
an additional loss on disposition of CAS in the first quarter of 1997 of
$333,000. CAS and the Company also entered into a Master Service Agreement
(subsequently amended April, 1998) relating to the continued provision of
laboratory services to the Company (the "MSA"). The CAS Notes are subject to
offset, in certain circumstances, based upon the levels of future revenues to
CAS accruing under the amended MSA. The Company currently does not anticipate
that any offset will occur under the terms of the amended MSA.
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 1997 of $1,026,000.
Interest Income: The Company recorded interest income of $548,000 in 1998
compared to $516,000 in 1997 and $317,000 in 1996. The increase in interest
income in 1998 and 1997 compared to 1996 was primarily due to the recognition of
interest income on the CAS Notes.
Interest Expense: The Company incurred interest expense of $1,234,000 in 1998
compared to $1,251,000 in 1997. The decrease in interest expense was due
primarily to a decrease in debt.
The Company incurred interest expense of $1,112,000 in 1996. The increase in
interest expense in 1997 compared to 1996 was due primarily to an increase in
debt in connection with (i) the acquisition of National Earth Products, Inc. and
(ii) the acquisition and expansion of the EOC reporting segment's equipment
fabrication facility. This was offset by the $3,000,000 prepayment on the OWT
secured term loan.
Income Taxes Provision (Benefit): The provision (benefit) for income taxes in
1998 was $1,508,000 compared to $1,161,000 in 1997 and ($2,936,000) in 1996. The
effective tax rate for 1998 was 48.0% versus 35.0% in 1997 and (22.5%) for 1996.
The increase in the 1998 effective tax rate compared to 1997 was primarily due
to the reduction in alternative fuel tax credits generated by the Company
following the sale of one of EMCON's landfill gas-to-energy projects in 1997 and
the increase in the level of non-deductible goodwill. 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 increase in the legal reserve.
15
Included in the Company's consolidated balance sheet at December 31, 1998, are
total current and long-term net deferred tax assets of $4,466,000. The full
utilization of such assets is dependent upon a number of factors including the
Company's ability to generate future profits and the anticipated reduction in
the level of new tax credits generated from the Company's existing landfill
gas-to-energy project. 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.
Liquidity and Capital Resources
Working Capital: Cash provided by operating activities for fiscal 1998, 1997 and
1996 was $4,741,000, $6,189,000, and $1,583,000, respectively. The changes in
cash provided by operating activities in 1998, 1997 and 1996 were primarily
attributed to changes in the Company's net income (loss), accounts receivable,
accounts payable, depreciation and amortization, bad debt expense, gain on
disposition of assets, prepaid expense and other current tax assets and other
accrued liabilities. During 1998, the Company's uses of cash for non-operating
activities primarily consisted of repayment of debt in the amount of $2,430,000,
repurchase of 408,000 shares of common stock in the amount of $1,247,000 and
$4,094,000 in additions to property and equipment.
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 line of credit component of the Credit Agreement is available for
working capital purposes. The line of credit component of the Credit Agreement
has been extended to April 30, 1999 at a level of $5,000,000 pending completion
of negotiations of a long-term facility. The Company expects to renew the line
of credit component of the Credit Agreement at the $10,000,000 level 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. In April 1997, following the infusion of cash
upon the divestiture of CAS, the Company prepaid, on an accelerated basis,
$3,000,000 of the then outstanding principal balance of the secured loan.
Amounts outstanding as of December 31, 1998, were $3,429,000 and $0 for the term
loan and line of credit, respectively.
Capital Expenditures: The Company invested $4,094,000 in 1998 in additions to
property and equipment, mainly computers, field equipment and development of the
Company's leachate evaporation system (LES) projects. 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.
In 1998, the Company announced a plan to repurchase, under certain
circumstances, up to 1,000,000 shares of its common stock. In 1998, the Company
repurchased 407,700 shares under the program for a total purchase price of
$1,247,000.
Year 2000
Impact of Year 2000: The year 2000 (Y2K) issue is the result of computer
programs being written using two digits rather than four to define applicable
years. Any of the Company's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
16
The Company's State of Readiness: The Company is in the process of completing
its internal analysis of potential Y2K compliance issues. Internal surveys are
being completed to identify potential hardware and software concerns and other
potential non-IT systems that may be affected. During 1998, the Company began
testing its internal systems for Y2K compliance and anticipates completing the
testing phase in the first quarter of 1999. The Company has begun to review
third party vendor/suppliers and customers that management believes could have a
material effect to its business, to ascertain if and when they will be Y2K
compliant. Survey letters to these third parties will be distributed early in
the first quarter of 1999. Information supplied by third parties will be entered
into a database and reviewed by the Company's IT department and business
managers to determine whether there are any potential issues. Once issues are
identified (anticipated to occur in the second quarter of 1999), senior
management will determine their potential impact to the Company's business and
develop action plans accordingly.
The Cost to Address the Company's Year 2000 Issues: Budgets for the Company's
internal computer, network, phone and related system needs were completed in the
fourth quarter of 1998. It is anticipated that the costs to bring these systems
into Y2K compliance is approximately $1,850,000; consisting primarily of
software updates, computer replacements, telephone system changes and other
costs, including disposition of assets, and outside consulting. The majority of
these costs are being incurred in the ordinary course of business as part of
EMCON's normal replacement/upgrade program for it's computer, network, telephone
and related systems. It is expected that 40%, 35%, 20% and 5% of the total costs
will be incurred in first, second, third and fourth quarters of 1999,
respectively. Approximately $1,000,000 of the $1,850,000 estimated costs will be
financed through multi-year operating leases. The costs of the project and the
dates on which the Company believes it will complete the Y2K modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events.
The Company believes it will be able to test and remedy the majority of any Y2K
issues utilizing its existing IT staff with minimal use of outside consultants.
The Risks of the Company's Year 2000 Issues: The Company does not expect the Y2K
project to have a significant effect on operations. At this time, the Company
believes that any internal Y2K issues can be resolved prior to the year 2000.
The potential impact of Y2K issues on the Company's two reporting segments, the
PSD and EOC is expected to be somewhat different. PSD, a consulting operation,
has less exposure due to the professional services nature of its business. A
portion of EOC's revenues, however, involve the use of sophisticated equipment
which at this time, based on initial testing, the Company believes to be Y2K
compliant. To date, the Company has not received from its vendors, any
indication that the Company would not be able to receive necessary supplies for
its construction or fabrication processes.
The Company's Contingency Plans: The Company has not established a contingency
plan to address unexpected failures due to Y2K problems. Internal testing of
systems should be substantially finished prior to April, 1999. The Company plans
to evaluate the status of its internal testing and the information supplied by
its vendors and customers in June, 1999 and determine whether such a plan is
necessary.
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, 1998,
1997, and 1996................................................ 19
Consolidated Balance Sheets as of December 31, 1998 and 1997.... 20
Consolidated Statements of Shareholders' Equity for each of the
three years ended December 31, 1998, 1997, and 1996........... 21
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1998, 1997, and 1996................. 22
Notes to Consolidated Financial
Statements.................................................... 23
Report of Ernst & Young LLP, Independent Auditors............... 42
18
EMCON
CONSOLIDATED STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------
Gross revenue $151,348 $139,343 $137,626
Outside services at cost 21,388 29,841 19,921
-------- -------- --------
Net revenue 129,960 109,502 117,705
Costs and expenses:
Direct expenses 76,749 56,134 52,608
Indirect expenses 49,373 49,782 65,844
Restructuring/other charges (4) (586) 8,197
Loss on disposition of laboratory -- 333 3,327
Gain on sale of assets -- (1,026) --
-------- -------- --------
Income (loss) from operations 3,842 4,865 (12,271)
Interest income 548 516 317
Interest expense (1,234) (1,251) (1,112)
Equity in income (loss) of affiliates (15) (2) 227
Minority interest expense -- (810) (188)
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes 3,141 3,318 (13,027)
Provision (benefit) for income taxes 1,508 1,161 (2,936)
-------- -------- --------
Net income (loss) $ 1,633 $ 2,157 $(10,091)
========= ========= ========
Basic earnings (loss) per share $ 0.19 $ 0.25 $ (1.19)
========= ========= ========
Diluted earnings per share $ 0.19 $ 0.25 --
========= ========= ========
Shares used in computing basic earnings (loss) per share 8,648 8,549 8,485
========= ========= ========
Shares used in computing diluted earnings per share 8,795 8,693 --
========== ========= ========
See accompanying notes.
19
EMCON
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------
(In thousands, except share amounts) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,677 $ 6,106
Accounts Receivable:
Billed accounts receivable, net of allowance for doubtful accounts
of $737 and $634 at December 31, 1998 and 1997, respectively 32,683 31,413
Unbilled accounts receivable, net of allowance for doubtful accounts
of $801 and $295 at December 31, 1998 and 1997, respectively 6,664 5,310
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,511 678
Prepaid expenses and other current assets 2,876 3,401
Inventory 2,630 2,238
Deferred taxes, current portion 3,434 4,235
------- -------
Total Current Assets 53,475 53,381
Net property and equipment, at cost 16,519 16,182
Notes receivable 2,724 2,811
Cash surrender value of insurance policies 3,466 2,346
Other assets 2,971 2,597
Deferred tax assets 1,032 1,028
Goodwill, net of amortization 14,850 13,916
Other intangible assets, net of amortization 852 814
------- -------
Total Assets $95,889 $93,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $10,711 $ 8,391
Accrued payroll and related benefits 5,335 4,356
Other accrued liabilities 4,347 2,969
Billings in excess of costs and estimated earnings
on uncompleted contracts 2,598 2,732
Long-term obligations due within one year 2,177 2,350
------- -------
Total Current Liabilities 25,168 20,798
Long-term debt 9,400 11,441
Other noncurrent obligations 2,184 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;
8,315,399 and 8,571,764 shares issued and outstanding at
December 31, 1998 and 1997, respectively 41,628 42,184
Retained earnings 17,509 15,916
------- -------
Total Shareholders' Equity 59,137 58,100
------- -------
Total Liabilities and Shareholders' Equity $95,889 $93,075
======= =======
See accompanying notes.
20
EMCON
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, 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
Issuance of common stock upon exercise of options,
net of redemptions 42 151 -- -- 151
Issuance of common stock under the Employee Stock
Purchase Plan 36 99 -- -- 99
Cancellation of restricted stock (19) (67) -- -- (67)
Dividends paid -- -- (52) -- (52)
Net income -- -- 2,157 -- 2,157
-----------------------------------------------------------------------
Balance at December 31, 1997 8,572 42,184 15,916 -- 58,100
Issuance of common stock upon exercise of options,
net of redemptions 29 104 -- -- 104
Issuance of common stock for the purchase of
Advanced Analytical Solutions (A2S) 123 593 -- -- 593
Cancellation of restricted stock (1) (6) -- -- (6)
Dividends paid -- -- (40) -- (40)
Repurchase of common stock (408) (1,247) -- -- (1,247)
Net income -- -- 1,633 -- 1,633
-----------------------------------------------------------------------
Balance at December 31, 1998 8,315 $41,628 $17,509 $0 $59,137
-----------------------------------------------------------------------
See accompanying notes.
21
EMCON
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
Increase (decrease) in cash and cash equivalents (in thousands) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income (loss) $ 1,633 $ 2,157 $(10,091)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,781 3,808 7,330
Amortization 663 652 1,034
Bad debt expense 755 1,424 717
(Gain) loss on sale/disposal of property and equipment (279) 227 474
Loss on disposition of laboratory -- 333 --
Gain on disposition of assets -- (1,026) --
Write-down of gas production rights -- -- 247
Impairment of goodwill -- -- 6,194
Increase (decrease) in salary continuation plan (203) 102 133
Changes in operating assets and liabilities:
Accounts receivable (2,957) (3,971) 509
Costs in excess of billings (1,833) 226 (421)
Inventory (392) (1,359) (102)
Prepaid expenses and other assets 847 (1,015) (782)
Notes receivable 87 (2,211) (257)
Cash surrender value, insurance policies (1,120) (639) (381)
Other assets (369) 2,425 (1,238)
Deferred tax assets 797 1,193 (3,616)
Accounts payable 1,862 2,912 (351)
Accrued payroll and related benefits 940 (562) 661
Billings in excess of costs (134) 2,638 (217)
Other accrued liabilities 663 (1,125) 1,740
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,741 6,189 1,583
- - ---------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Additions to property and equipment (4,094) (5,325) (2,484)
Maturities of available for sale securities -- -- 514
Net cash on disposition of laboratory -- 3,794 --
Net cash from dispositions of assets -- 1,040 --
Cash portion of assets held for sale -- -- (593)
Acquisitions, net of cash acquired (827) (858) (13,827)
Additional investment in intangible assets (102) -- --
Proceeds from sale of property and equipment 414 203 508
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,609) (1,146) (15,882)
- - ---------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds of new debt obligation 58 1,314 17,526
Payments of current and noncurrent obligations (2,430) (5,731) (7,931)
Issuance of common stock for cash, net of cancellations 98 201 600
Repurchase of common stock (1,247) -- --
Dividend payments (40) (52) (16)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (3,561) (4,268) 10,179
- - ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,429) 775 (4,120)
Cash and cash equivalents, beginning of year 6,106 5,331 9,451
- - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,677 $ 6,106 $ 5,331
- - ---------------------------------------------------------------------------------------------------------------------------
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 1996 financial statements have been reclassified to conform to
the 1997 and 1998 presentations.
In 1994, the Company converted to a fifty-two/fifty-three week fiscal year,
resulting in a fifty-two week year in 1998 and 1997. 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 1998 and 1997 were January 1, 1999 and January 2, 1998,
respectively, for convenience, the date shown on accompanying consolidated
financial statements is December 31, the last day of the calendar periods.
Use of Estimates in the Preparation of Financial Statements: The preparation of
consolidated 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, revenue from construction projects is
recognized on a percentage of completion basis and revenue from maintenance
contracts is recognized on a straight-line basis over the life of the contract.
The Company routinely subcontracts for outside services, such as 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, depreciation
and amortization.
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 held as
investments as either held-to-maturity or available-for-sale at the time of
purchase and reevaluates such designation as of each consolidated 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 consolidated
shareholders' equity. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity, which is 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 debt securities held as investment as of
December 31, 1998 or 1997.
Supplemental Cash Flow Information: Cash paid for income taxes was approximately
$926,000, $1,673,000 and $659,000 for the years ended December 31, 1998, 1997
and 1996, respectively. Cash paid for interest was approximately $1,026,000,
$1,210,000 and $951,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
23
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 2003, and the Company expects to
utilize such credits prior to expiration. To date, $506,000 of the trade credits
have been applied to payments. The Company has agreements for the utilization of
an additional $175,000 of the trade credits and are included on the December 31,
1998 consolidated balance sheet in other current assets. As of December 31,
1998, the remaining balance of $419,000 is included in other assets.
Inventories: Inventories are recorded at the lower of cost using the first-in,
first-out method, or market.
Property and Equipment: Property and equipment consists of (in thousands):
- - -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
Land and buildings $ 4,688 $ 4,683
Machinery and equipment 22,995 19,895
Furniture and fixtures 3,661 3,685
Vehicles 2,253 2,362
Leasehold improvements 1,293 1,074
- - -------------------------------------------------------------------------------------------------------------------------
Total 34,890 31,699
Less accumulated depreciation and amortization 18,371 15,517
- - -------------------------------------------------------------------------------------------------------------------------
Net property and equipment $16,519 $16,182
- - -------------------------------------------------------------------------------------------------------------------------
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 2-31 years).
Amortization of property and equipment acquired under capital leases is included
with depreciation expense. Approximately $1,187,000 and $3,963,000 of fixed
assets, net of accumulated depreciation of $1,052,000 and $3,533,000,
respectively, were sold or disposed of in 1998 and 1997, respectively.
Basic and Diluted Net Income (Loss) per Share: In 1997, the Financial Accounting
Standards Board issued Statement No. 128, Earnings per Share. Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to fully
diluted earnings per share as previously computed under APB 15. Income (loss)
per share amounts for all periods have been presented, and where appropriate,
the presentation has been restated to conform to the requirements under
Statement 128.
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 2.
Business Segment and Concentration of Credit Risk: The Company operates within
two reportable segments, the Operations and Construction Division (EOC) and the
Professional Services Division (PSD), which provides comprehensive environmental
engineering, consulting, construction facilities operations and
24
maintenance, and 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.
In 1998, one customer, Waste Management, accounted for 12% and 11% of
consolidated gross and net revenues, respectively. On a reportable segment
basis, the customer represented approximately 21% and 5% of the gross revenues
of the EOC and PSD reportable segments, respectively.
In 1997, one customer, Commonwealth Environmental Systems, accounted for 10% and
1% of consolidated gross and net revenues, respectively. All of the revenue was
recorded by the EOC reportable segment and represented approximately 27% and 3%
of EOC's gross and net revenues, respectively.
In 1996, no customer accounted for more than 10% of consolidated gross revenue.
Recent Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income is comprised of net income (loss),
changes in the value of available-for-sale securities and foreign currency
translation adjustments, and other such items disclosed in the statement of
stockholders' equity. The Company adopted SFAS 130 in the first quarter of 1998,
with no effect on its consolidated financial statements.
Fair Value of Financial Instruments: The following methods and assumptions were
used by the Company in estimating its fair value disclosure for financial
instruments:
Cash and cash equivalents: The carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates
its fair value.
Notes receivable: The carrying amount reported in the consolidated
balance sheet for notes receivable approximates its fair value.
Short and long-term debt: The carrying amounts reported in the
consolidated balance sheet for short and long-term debt approximates
their fair value because the interest rates are either market variable
rates or fixed rates that approximate market rates.
2. Segment Reporting
Description of the types of services from which each reportable segment derives
its revenues: The Company provides comprehensive environmental engineering,
design, construction, operations and maintenance, and equipment fabrication
services to a variety of public and private industrial and solid waste clients.
The Company is comprised of two reportable segments -- the Operations and
Construction Division (EOC) and the Professional Services Division (PSD) -- and
services three key service lines: Solid Waste, Site Restoration and Facility
Services.
In 1996 and the first quarter of 1997, the Company had, as part of its PSD
reportable segment, a laboratory operation known as Columbia Analytical
Services, Inc. (CAS). During the first quarter of 1997, the Company completed
the sale of CAS.
25
Measurement of segment profit or loss and segment assets: The Company evaluates
performance of its reportable segments, EOC and PSD, based on operating income
or loss before and after corporate overhead allocations, but before interest
income, interest expense, equity in income of affiliates and minority interest
income (loss). Corporate overhead expenses are substantially allocated to the
reporting segments based on revenue and/or headcount when an item is not
specifically identified to a reporting segment. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies in Note 1.
Intersegment sales consist primarily of labor and are marked up to provide the
supplying reportable segment a measure of profit. The receiving reportable
segment records the transfer as an "Outside Service" and may or may not further
mark up the labor cost prior to passing the cost through to its customer. If the
cost is not passed through to the customer, the receiving reportable segment
records the transaction as an indirect cost. All intersegment accounts are
eliminated in consolidation.
Factors management used to identify the enterprise's reportable segments: The
Company's reportable segments are divisional units that offer different
services. The reportable segments are each managed separately. The PSD
reportable segment concentrates on professional engineering, design and
consulting services in solid waste, site restoration and facilities services.
The PSD reportable segment has regional operations situated in the Northeast,
Southeast, Northwest and Southwest portions of the United States, each overseen
by an Area Operations Manager. These regional operations have the same operating
parameters (services offered and required operating margins), may serve the same
national customers, and often share personnel. For reportable segment reporting,
these regional PSD operations are aggregated. The EOC reportable segment
concentrates on construction, drilling, equipment fabrication and operations and
maintenance services, primarily to the Company's solid waste clients.
26
Segment Information
- - --------------------------------------------------------------------------------------------------------------------------------
PSD EOC Other Total
------------------------------------
Year ended December 31, 1998 Consulting Lab Total
- - --------------------------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $86,366 N/A $86,366 $64,982 -- $151,348
Intersegment revenues 3,187 N/A 3,187 3,597 -- 6,784
Outside services from:
External subcontractors 20,979 N/A 20,979 409 -- 21,388
Intersegment services 3,852 N/A 3,852 2,937 -- 6,789
Net revenues 64,722 N/A 64,722 65,233 5 129,960
Depreciation expense 2,120 N/A 2,120 1,406 255 3,781
Amortization expense -- N/A -- 64 599 663
Segment operating profit before allocations 4,483 N/A 4,483 5,018 -- 9,501
Segment operating profit after allocations 595 N/A 595 3,007 240 3,842
Accounts receivable, net(1) 27,607 N/A 27,607 11,740 -- 39,347
- - --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- - --------------------------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $81,738 $4,453 $86,191 $52,883 $ 269 $139,343
Intersegment revenues 1,513 734 2,247 2,375 -- 4,622
Outside services from:
External subcontractors 16,813 275 17,088 12,754 (1) 29,841
Intersegment services 3,385 8 3,393 1,118 -- 4,511
Net revenues 63,053 4,904 67,957 41,386 159 109,502
Depreciation expense 2,285 462 2,747 1,207 316 4,270
Amortization expense -- -- -- 101 551 652
Restructuring/other charges -- -- -- -- (586) (586)
Loss on disposition of laboratory -- -- -- -- 333 333
Gain on sale of assets -- -- -- -- (1,026) (1,026)
Segment operating profit before allocations 4,923 108 5,031 4,982 -- 10,013
Segment operating profit (loss) after
allocations 1,294 (59) 1,235 3,067 563 4,865
Accounts receivable, net(1) 23,164 N/A 23,164 13,559 -- 36,723
- - --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
- - --------------------------------------------------------------------------------------------------------------------------------
Gross revenues from:
External customers $94,836 $17,305 $112,141 $25,191 $294 $137,626
Intersegment revenues 536 4,013 4,549 528 -- 5,077
Outside services from:
External subcontractors 15,794 806 16,600 3,321 -- 19,921
Intersegment services 4,820 8 4,828 231 -- 5,059
Net revenues 74,758 20,505 95,263 22,167 275 117,705
Depreciation expense 3,841 2,297 6,138 1,172 20 7,330
Amortization expense -- -- -- -- 1,034 1,034
Restructuring/other charges -- -- -- -- 8,197 8,197
Loss on disposition of laboratory -- -- -- -- 3,327 3,327
Segment operating profit before allocations 2,891 754 3,645 2,493 -- 6,138
Segment operating profit (loss) after
allocations (815) (455) (1,270) 510 (11,511) (12,271)
Accounts receivable, net(1) 26,704 -- 26,704 6,156 -- 32,860
- - --------------------------------------------------------------------------------------------------------------------------------
(1) The Company reviews its consolidated balance sheet and reviews only accounts
receivable on a segment basis.
27
- - ----------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- - ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
Revenues
Total external revenues for reportable segments $151,348 $139,343 $137,626
Intersegment revenues for reportable segments 6,784 4,622 5,077
Elimination of intersegment revenues (6,784) (4,622) (5,077)
-------- -------- --------
Total gross consolidated revenues 151,348 139,343 137,626
Less outside services 21,388 29,841 19,921
-------- -------- --------
Total net revenue $129,960 $109,502 $117,705
- - ----------------------------------------------------------------------------------------------------------------------
Profit or Loss
Total operating profit for reportable segments before allocations $ 9,501 $10,013 $ 6,138
Overhead allocations expense (5,899) (5,711) (6,898)
Unallocated overhead 240 563 (11,511)
------- ------- -------
Total operating profit (loss) after allocations 3,842 4,865 (12,271)
Interest income 548 516 317
Interest expense (1,234) (1,251) (1,112)
Equity in earnings (loss) of affiliates (15) (2) 227
Minority interest expense -- (810) (188)
------- ------- -------
Income (loss) before provision (benefit) for income taxes $ 3,141 $3,318 ($13,027)
- - ----------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------
As of December 31, 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
Assets
Accounts receivable for reportable segments $39,347 $36,723 $32,860
Other current assets 14,628 16,658 20,042
Net property and equipment at cost 16,519 16,182 14,722
Goodwill, net of amortization 14,850 13,916 12,716
Other assets 10,545 9,596 10,572
------- ------- -------
Total consolidated assets $95,889 $93,075 $90,912
- - ----------------------------------------------------------------------------------------------------------------------
28
3. Contracts in Progress
Information related to contracts in progress (in thousands):
- - ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $28,219 $12,995
Estimated earnings on uncompleted contracts 3,380 2,187
-------- --------
31,599 15,182
Less billings to date on uncompleted contracts 31,686 17,236
- - ----------------------------------------------------------------------------------------------------------------------------
Total $ (87) $(2,054)
- - ----------------------------------------------------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheets on an individual
contract basis are (in thousands):
- - ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
Costs and estimated earnings in excess of billings
on uncompleted contracts. $2,511 $ 678
Billings in excess of costs and estimated earnings
on uncompleted contracts (2,598) (2,732)
- - ----------------------------------------------------------------------------------------------------------------------------
Total $ (87) $(2,054)
- - ----------------------------------------------------------------------------------------------------------------------------
4. 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
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, 1998, $367,000 of the 1996 restructuring charges have been
paid and $275,000 remains in other accrued liabilities. Net reductions of $4,000
and $586,000 to the reserve were recorded in 1998 and 1997, respectively, to
reflect lower than anticipated costs associated with the abandonment and
subsequent sublease of certain office space and lower than anticipated severance
costs due to retaining certain previously identified personnel.
29
5. Impairment of Assets Held for Sale/Loss on Disposition of Laboratory
In December 1996, the Company executed a letter of intent to sell its CAS
laboratory line of business to the employees of CAS 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.
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. As a result of several closing adjustments, the Company recognized
an additional loss on disposition of CAS in the first quarter of 1997 of
$333,000. CAS and the Company also entered into a Master Service Agreement
(subsequently amended April, 1998) relating to the continued provision of
laboratory services to the Company (the "MSA"). The CAS Notes are subject to
offset, in certain circumstances, based upon the levels of future revenues to
CAS accruing under the amended MSA. The Company currently does not anticipate
that any material offset will occur under the terms of the amended MSA. At
December 31, 1998, the outstanding principal balance of the CAS Notes was
$2,435,000, of which $436,000 and $1,999,000 were recorded in the consolidated
balance sheet in prepaid and other current assets, and in notes receivable,
respectively. The notes bear interest at a rate of 8% compounded annually and
mature in April, 2004. Payments of interest and principal are due quarterly.
6. Notes Receivable and Advances
During the year ended December 31, 1998, the Company provided a $500,000 loan to
e-Com Solutions, Inc. ("e-Com"), an unrelated third party, in exchange for a
convertible promissory note receivable. The note bears interest at a rate of 9%
compounded annually and matures on demand, but not later than December 31, 2000.
In addition, the Company has provided $770,000 of non-interest bearing net
short-term cash advances to e-Com to fund its working capital requirements in
connection with its start-up activities. e-Com is in the business of high-end
technical consulting, specializing in computer network integration, e-Commerce,
and the development of web-based tools. The note agreement entitles the Company
to convert its outstanding principal and accrued interest into e-Com common
shares at a rate of $0.064516 per share at the Company's sole discretion after
June 30, 1998. Should the Company convert the entire note into e-Com common
shares, the Company would be a majority shareholder (holding approximately an
83% interest) of e-Com.
The Company's recovery of the note receivable balance and related accrued
interest and advances of working capital is dependent upon e-Com's ability to
successfully execute its business plan and generate sufficient cash flows to
repay its obligations. It is reasonably possible that e-Com's estimates of
future cash flows may change in the near term. As a result, the carrying amount
of the note and interest receivable and advances may be materially reduced in
the future.
In connection with the acquisition of A2S as further discussed in Note 8, the
Company extended a note receivable to one of A2S's former officers for $225,000.
The note bears interest at a rate of 8% compounded annually and matures on the
third anniversary (April, 2001) of the note date. Repayment is secured by EMCON
stock (approximately 56,000 shares) and rights to subsequent earnouts of A2S to
which the borrower may be entitled.
See note 5 for discussion of the CAS notes receivable.
30
7. Other Dispositions
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 1997 of $1,026,000.
8. Acquisitions
Goodwill: On April 3, 1998, EMCON acquired all of the outstanding capital stock
of Advanced Analytical Solutions, Inc. ("A2S"), a provider of alternative
dispute resolution, cost allocation, cost recovery, and litigation support
services primarily for superfund projects. A2S has offices in Denver, Colorado
and Philadelphia, Pennsylvania. The Company purchased A2S for $593,000 in stock
and $601,000 in cash and direct acquisition costs. The transaction was accounted
for as a purchase. Goodwill of approximately $1,150,000 is being amortized over
twenty years using the straight-line method. Accumulated amortization at
December 31, 1998, was approximately $43,000. Additional consideration may be
paid for the purchase of A2S subject to the achievement of predetermined
operating performance goals over the next two years. The acquisition would not
have had a material affect on consolidated net revenue, net income or earnings
per share, had it been effective at January 1, 1998.
On December 4, 1998, Organic Waste Technologies, Inc. ("OWT"), a wholly-owned
subsidiary of EMCON, acquired all of the outstanding capital stock of Western
Industrial Resources Corporation ("WI"), an industrial maintenance outsourcing
firm based in Arizona. The Company purchased WI for $155,000 in cash and assumed
liabilities in excess of assets acquired of $103,000. The transaction was
accounted for as a purchase. Goodwill of approximately $258,000 is being
amortized over ten years using the straight-line method. Accumulated
amortization at December 31, 1998, was approximately $1,000. Additional
consideration may be paid for the purchase of WI subject to the achievement of
predetermined operating performance goals over the next three years. The
acquisition would not have had a material affect on consolidated net revenue,
net income, or earnings per share, had it been effective at January 1, 1998.
Effective May 1, 1997, OWT acquired all of the outstanding 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 the issuance of EMCON's
convertible promissory notes in the aggregate principal amount of $800,000.
Approximately 50% of the convertible notes are due on May 1, 2000, with the
balance due on May 1, 2002. The indebtedness bears interest at the rate of 8%
per annum and is convertible into EMCON common stock at a conversion price of
$6.50 per share. The transaction was accounted for as a purchase. Specifically
identifiable intangible assets and goodwill of approximately $1,601,000
resulting from this acquisition are being amortized over twenty-five years using
the straight line method. Accumulated amortization as of December 31, 1998 and
1997, was approximately $102,000 and $39,000, respectively. Included in goodwill
is an additional $125,000 cash payment made to the former NEP shareholders in
May, 1998 as a result of NEP attaining certain predetermined operating
performance goals following its acquisition. Additional consideration may be
paid for the purchase of NEP subject to the achievement of certain earn out
goals over the next year to be measured as of April, 1999. This acquisition
would not have had a material effect on consolidated net revenue, net income, or
income per share, had it been effective at January 1, 1997.
On February 29, 1996, EMCON acquired all the outstanding capital stock of 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 to certain senior OWT management in the aggregate
principal amount of $1,747,000. The transaction was accounted for as a purchase.
The indebtedness bears interest at the rate of
31
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 $11,382,000, which included a $253,000
increase resulting from the establishment of a deferred tax asset related to
this acquisition, is being amortized over thirty years using the straight line
method. Related accumulated amortization at December 31, 1998 and 1997, was
approximately $1,068,000 and $689,000, respectively.
Acquisitions made by the Company from 1992 through 1994 have resulted in
goodwill of approximately $3,112,000 which is included with intangible assets
and is being amortized over a period of twenty years using the straight-line
method. Related accumulated amortization was approximately $1,439,000 and
$1,327,000 at December 31, 1998 and 1997, respectively.
Other Intangible Assets: Other intangible assets at December 31, 1998, also
include $989,000, representing the gross cost to reacquire certain patent rights
associated with the Company's proprietary leachate evaporation system
technology. Accumulated amortization at December 31, 1998 and 1997, was
approximately $137,000 and $74,000, respectively. The patent is being amortized
over the fifteen year life of the patent.
9. 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 the salary
continuation agreements. Liabilities under salary continuation agreements were
$1,097,000 and $1,088,000 at December 31, 1998 and 1997, respectively and
represent the estimated present value of the future obligation discounted at the
Company's incremental borrowing rate of 7.5%. These liabilities have been
indirectly funded through insurance policies which are recorded at their
estimated cash surrender value.
The Company also provides, for certain employees, a Company contributory
deferred compensation plan. Contributions by the Company were $430,000 and
$387,150 in 1998 and 1997, respectively. Cumulative individual compensation
liabilities range from $10,000 to $124,817 and vest in varying amounts from one
year to six years and accrue interest. Deferred compensation liabilities were
$254,000 and $43,000 as of December 31, 1998 and 1997, respectively, and are
included in non-current liabilities.
Capital lease obligations are included in property and equipment with a cost and
accumulated depreciation of $101,000 and $30,000, respectively, at December 31,
1998, and $87,000 and $44,000, respectively, at December 31, 1997.
32
10. 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 Code.
Employees may elect to contribute up to 20% of their annual compensation to the
plan up to the Internal Revenue Code annual contribution limit of $10,000 and
$9,500 for 1998 and 1997, respectively. Prior to 1997, the Company voluntarily
matched the employee's contribution to a maximum of 3% of annual compensation.
In 1997 and 1998, the Company elected to suspend the Company match. The
Company's contributions to the retirement plan were $1,146,000 for the year
ended December 31, 1996.
11. Commitments
The Company's minimum annual lease commitments under all operating leases for
the five years subsequent to December 31, 1998 are approximately (in thousands):
- - --------------------------------------------------------------------------------
Years Ending December 31,
- - --------------------------------------------------------------------------------
1999 $5,143
2000 3,779
2001 2,345
2002 1,310
2003 593
- - --------------------------------------------------------------------------------
Rent expense was approximately $4,271,000, $5,523,000 and $5,263,000 for the
years ended December 31, 1998, 1997 and 1996, 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 9.)
12. 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 at December 31, 1996. No significant
increases to legal reserves occurred in 1998 and 1997. 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
consolidated financial position, results of operations or cash flows.
33
13. Long-term Debt
Long-term debt consists of the following (in thousands):
- - -------------------------------------------------------------------------------------------- -------------- -------------
Years Ended December 31, 1998 1997
- - -------------------------------------------------------------------------------------------- -------------- -------------
Variable-rate note payable to bank $ 3,429 $ 4,857
(effective rate at 12/31/98 and 12/31/97 was 6.77% and 7.46%, respectively). Payable
in quarterly installments of $357 with a final payment of $571 in 2001.
Collateralized by the assets of EMCON.
8.00% unsecured notes payable to certain former OWT shareholders. Payable on termination 1,747 1,747
date in 2001. This debt may be converted into common stock at $6.50 per share.
Conversion of debt, if it occurs, would be within ninety days after November 30,
2001.
7.99% note payable to bank in monthly installments through 2006. Cross-collateralized by 3,937 4,285
the assets of OWT with a net book value of $9,372.
8.49% note payable to bank in monthly installments through 2001. Collateralized by 202 284
equipment of OWT with a net book value of $268.
8.99% note payable to bank in monthly installments through 2000. Cross-collateralized by 130 206
the assets of OWT with a net book value of $9,372.
7.89% note payable to bank in monthly installments through 2012. Cross-collateralized by 1,085 1,158
the assets of OWT with a net book value of $9,372.
8.00% unsecured notes payable to former NEP shareholders. Approximately 50% of the 800 800
convertible notes are due on May 1, 2000 with the balance due on May 1, 2002. This
debt may be converted into common stock at $6.50 per share. Conversion of debt, if
it occurs, would be 50% on May 1, 2000, and 50% on May 1, 2002.
9.07% note payable to finance company in monthly installments through 2001. 107 142
Collateralized by equipment of NEP with a net book value of $53.
Other indebtedness, interest rates vary from 5.3% to 15.9% payable in installments through 140 312
2000. (Primarily lease obligations)
----------------------------
Total Long-term Debt $ 11,577 $13,791
Less current portion $ 2,177 $ 2,350
- - -------------------------------------------------------------------------------------------------------------------------
Long-term Debt, net of current portion $ 9,400 $11,441
- - -------------------------------------------------------------------------------------------------------------------------
Interest paid on all outstanding debt amounted to $956,000 in 1998 and
$1,135,000 in 1997.
Aggregate principal payments for the next five years for years ending December
31,
- - --------------------------------------------------------------------------------
1999 $ 2,177
2000 2,575
2001 1,175
2002 2,767
2003 647
thereafter 2,236
- - --------------------------------------------------------------------------------
34
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. Amounts outstanding under the term loan as of December 31, 1998 were
$3,429,000. The line of credit component of the Credit Agreement is available
for working capital purposes. No amount was outstanding as of December 31, 1998.
Subsequent to year-end, the line of credit component of the Credit Agreement was
extended to April 30, 1999 at a level of $5,000,000. 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.
14. 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 and Restricted Stock Plans: The Company has issued options to
purchase shares of common stock pursuant to its 1986 and 1988 Incentive Stock
Option Plans (both expired in 1997) and its 1998 Stock Option Plan. These
options were 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.
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, 1998, 119,573 shares were
available for issuance.
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, 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
- - --------------------------------------------------------------------------------------------------------------------------
Options granted (1,261,500) 1,261,500 $3.13 - $ 5.00 5,250,375
Options canceled 534,043 (534,043) $3.25 - $11.25 (3,030,431)
Options exercised -- (42,374) $3.33 - $ 3.75 (150,621)
Options expired (1,004,671) -- -- --
- - --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 118,361 1,864,515 $3.13 - $10.00 8,789,581
- - --------------------------------------------------------------------------------------------------------------------------
Options authorized 1,000,000 -- -- --
Options granted (510,500) 510,500 $2.69 - $ 4.50 1,568,764
Options canceled 58,286 (58,286) $3.25 - $10.00 (188,465)
Options exercised -- (29,470) $3.25 - $ 4.13 (104,731)
Options expired (57,074) -- -- --
- - --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 609,073 2,287,259 $2.69 - $10.00 $10,065,149
- - --------------------------------------------------------------------------------------------------------------------------
35
Employee Stock Purchase Plan: The EMCON Employee Stock Purchase Plan (ESPP)
provided that substantially all employees could 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
------- ----
1998 1997 1996 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Expected life (years) 5.0 4.5 6.6 -- -- 0.5
Expected volatility .80 .66 .49 -- -- .32
Risk-free interest rate 4.9% 6.1% 6.1% -- -- 5.5%
- - ------------------------------------------------------------------------------------------------------------------------------
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 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $1,633 $2,157 $(10,091)
Pro forma $1,089 $1,918 $(10,311)
Basic (loss) earnings per share
As reported $ 0.19 $ 0.25 $ (1.19)
Pro forma $ 0.13 $ 0.22 $ (1.22)
- - ------------------------------------------------------------------------------------------------------------------------------
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 1998, 1997 and 1996
was $1.93, $2.11 and $2.14 per share, respectively.
36
The following summarizes information about fixed stock options outstanding at
December 31, 1998:
- - --------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted Weighted
Number Weighted Average Average Average
Range of Exercise Prices Outstanding at Remaining Contractual Exercise Price Number Exercise Price
12/31/98 Life Exercisable
- - --------------------------------------------------------------------------------------------------------------------------
$9.25 - $10.00 171,300 3.61 $9.31 171,300 $9.31
6.50 - 8.83 69,950 4.60 6.98 69,950 6.98
5.00 - 6.00 680,500 4.03 5.02 22,000 5.26
2.69 - 4.88 1,365,509 4.49 3.34 361,843 3.71
- - --------------------------------------------------------------------------------------------------------------------------
$2.69 - $10.00 2,287,259 4.29 $4.40 625,093 $5.66
- - --------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997, 415,153 shares were exercisable at an average exercise
price of $6.67 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 to 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 options for an additional 203,727
shares being canceled in exchange for the grant of new options covering 47,247
shares with an option exercise price of $3.68 per share.
37
15. Earnings Per Share
- - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(In thousands, except for earnings per share) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) $ 1,633 $ 2,157 $(10,091)
------- ------- ---------
Numerator for basic earnings per share -
income (loss) available to common stockholders $ 1,633 $ 2,157 $(10,091)
Effect of dilutive securities:
8% convertible debentures N/A(1) N/A(1) --
------- ------- --------
Numerator for diluted earnings per share -
income (loss) available to common stockholders
after assumed conversions $ 1,633 $ 2,157 $(10,091)
------- ------- --------
Denominator:
Denominator for basic earnings (loss) per share -
weighted-average shares 8,648 8,549 8,485
Effect of dilutive securities:
Employee stock options 147 144 --
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
conversions 8,795 8,693 --
======= ======= ========
Basic earnings (loss) per share $ 0.19 $ 0.25 $ (1.19)
======== ======= ========
Diluted earnings per share $ 0.19 $ 0.25 --
======== ======= ========
- - ----------------------------------------------------------------------------------------------------------------------------
(1)Excluded from the above reconciliations were approximately 269,000 shares of
common stock that may be issued at $6.50 per share to convert $1,747,000 of
indebtedness to certain senior management of OWT because they were antidilutive
at December 31, 1998 and 1997.
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 December 31, 1998 and 1997. Conversion of debt, if it occurs, would be 50% at
May 1, 2000, and 50% at May 1, 2002.
38
16. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
- - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Federal:
Current $ 330 $ 43 $ 607
Deferred 768 832 (3,358)
- - ---------------------------------------------------------------------------------------------------------------------------
Total Federal $1,098 $ 875 ($2,751)
- - ---------------------------------------------------------------------------------------------------------------------------
State:
Current $ 476 $ 179 $ 73
Deferred (66) 107 (258)
- - ---------------------------------------------------------------------------------------------------------------------------
Total State $ 410 $ 286 ($ 185)
- - ---------------------------------------------------------------------------------------------------------------------------
Total Federal and State $1,508 $1,161 ($2,936)
- - ---------------------------------------------------------------------------------------------------------------------------
A reconciliation between the Company's effective tax rate of 48.0% in 1998,
35.0% in 1997, and (22.5%) in 1996 and the U.S. statutory rate of 34% is as
follows (in thousands):
- - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate $1,068 $1,128 ($4,559)
State taxes, net of federal benefit 185 189 (280)
Fuel tax credits (170) (416) (454)
Goodwill amortization 203 180 2,306
Meals and entertainment 185 90 94
Other individually immaterial items 37 (10) (43)
- - ---------------------------------------------------------------------------------------------------------------------------
Total Federal and State $1,508 $1,161 ($2,936)
- - ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998, the Company has federal alternative minimum tax credit
carryforwards of approximately $1,386,000 which have no expiration date.
39
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 (in
thousands):
- - -------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $1,386 $1,980
Deferred compensation 370 342
Allowance for doubtful accounts 631 318
Vacation accruals 715 582
Restructuring accruals 871 2,330
Book over tax depreciation 149 --
Other individually immaterial items 439 221
- - -------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $4,561 $5,773
- - -------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation $ -- $ 436
Tax accounting method changes 95 72
Payment liabilities deducted -- 2
- - -------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 95 $ 510
- - -------------------------------------------------------------------------------------------------------------------------------
Total net deferred tax assets $4,466 $5,263
- - -------------------------------------------------------------------------------------------------------------------------------
17. Related Party Transactions
The Company's Chief Financial Officer, currently serves as a member of the Board
of Directors of Columbia Analytical Services, Inc. (CAS), an analytical
laboratory company in which the Company retains a minority interest. CAS remains
a significant outside vendor of laboratory services to the Company.
40
18. Quarterly Data (unaudited)
- - --------------------------------------------------------------------------------------------------------------------------
(In thousands First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------------------------------------------------
1997
Gross revenue $31,363 $33,114 $40,764 $34,102
Net revenue 27,581 24,467 29,899 27,555
Income from operations 1,317 1,084 1,789 675
Net income 691 494 943 29
Basic earnings per share $ 0.08 $ 0.06 $ 0.11 $ 0.00
Diluted earnings per share $ 0.08 $ 0.06 $ 0.11 $ 0.00
- - --------------------------------------------------------------------------------------------------------------------------
1998
Gross revenue $28,779 $40,985 $41,585 $39,999
Net revenue 25,822 36,209 35,631 32,298
Income from operations 143 1,190 1,568 941
Net income 20 574 730 309
Basic earnings per share $ 0.00 $ 0.07 $ 0.08 $ 0.04
Diluted earnings per share $ 0.00 $ 0.07 $ 0.08 $ 0.04
- - --------------------------------------------------------------------------------------------------------------------------
Historically, the Company's net revenue is adversely affected in the first and
fourth quarters of each year, primarily as a result of restricted field work due
to weather conditions.
41
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EMCON
We have audited the accompanying consolidated balance sheets of EMCON as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EMCON
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, 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, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
February 23, 1999
42
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 1999
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1998.
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 1999
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1998.
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 1999
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1998.
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 1999
Annual Meeting of Shareholders to be filed with the Commission within 120 days
of the end of Registrant's fiscal year ended December 31, 1998.
43
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 46
(b) Reports on Form 8-K --
No reports on Form 8-K were filed during
the quarter ended December 31, 1998. 47
(c) Index to Exhibits
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.
44
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: March 25, 1999 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/ Douglas P. Crane Chairman of the Board and Director March 25, 1999
- - ---------------------
Douglas P. Crane
/s/ Eugene M. Herson President, Chief Executive Officer March 25, 1999
- - --------------------- and Director (Principal Executive
Eugene M. Herson Officer)
/s/ R. Michael Momboisse Chief Financial Officer, Vice March 25, 1999
- - ------------------------ President-Legal and Secretary
R. Michael Momboisse (Principal Financialand Accounting Officer)
/s/ Richard A. Peluso Vice President and Director March 25, 1999
- - ------------------------
Richard A. Peluso
/s/ Franklin J. Agardy Director March 25, 1999
- - ------------------------
Franklin J. Agardy
/s/ Donald R. Kerstetter Director March 25, 1999
- - ------------------------
Donald R. Kerstetter
/s/ Peter Vardy Director March 25, 1999
- - ------------------------
Peter Vardy
45
SCHEDULE II
EMCON
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
Charged to
Balance Costs and Balance
at Beginning Expenses or at End
of Period Bonuses Write-Offs of Period
------------ ----------- ---------- ---------
Allowance for
Doubtful Accounts:
Year Ended
December 31, 1996 $ 1,052 $1,985 $(2,086) $ 951
Year Ended
December 31, 1997 $ 951 $1,295 $(1,317) $ 929
Year Ended
December 31, 1998 $ 929 $1,349 $ (740) $ 1,538
46
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").
2.7 Stock Purchase Agreement dated December 52
4, 1998 by and among Registrant, Western
52 Industrial Resources Corporation, and
various affiliated parties.
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").
47
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- - -------------- ------------
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 *(1)
and 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 *(1)
to 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 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
Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31,
1993 (the "1993 10-K").
48
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- - -------------- ------------
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 Note Agreement among the Registrant, *
OWT, and certain employees of OWT,
incorporated by reference from Exhibit
10.1 of the March 1996 8-K.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
49
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- - -------------- ------------
10.20 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.
10.21 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").
10.22 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.
10.23 Amended and Restated Agreement between *(1)
Eugene M. Herson and Registrant dated
November 3, 1997, incorporated by
reference from Exhibit 10.26 of the 1997
10-K.
10.24 Amended and Restated Agreement between *(1)
R. Michael Momboisse and Registrant
dated November 3, 1997, incorporated by
reference from Exhibit 10.27 of the 1997
10-K.
10.25 Deferred Compensation Plan, Amended and *(1)
Restated effective January 1, 1998,
incorporated by reference from Exhibit
10.28 of the 1997 10-K.
10.26 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.
10.27 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.
10.28 EMCON 1998 Stock Option Plan, with *(1)
standard form of Incentive Stock Option
*(1) Agreement, Non-Statutory Stock
Option Agreement and Non-Statutory Stock
Option Agreement (outside Director
Option) attached, incorporated by
reference from Exhibit 10.31 of the
Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June
30, 1998 (the "June 30, 1998 10-Q").
10.29 Sixth Amendment to Credit Agreement *
among Registrant and Union Bank of
California dated June 1, 1998,
incorporated by reference from Exhibit
10.32 of the June 30, 1998 10-Q.
50
Sequentially
Exhibit Numbered
Number INDEX TO EXHIBITS (Continued) Page
- - -------------- ------------
10.30 Seventh Amendment to Credit Agreement *
among Registrant and Union Bank of
California dated August 31, 1998,
incorporated by reference from Exhibit
10.33 of the September 30, 1998 10-Q.
10.31 Employment Agreement between Registrant 77(1)
and Patrick Gillespie dated November 10,
1998.
10.32 Employment Agreement between Registrant 80(1)
and Gerard Ridzon dated November 10,
1998.
10.33 Amendment 1998-1 to EMCON Deferred 83(1)
Compensation Plan dated November 12,
1998.
10.34 Eighth Amendment to Credit Agreement 84
among Registrant and Union Bank of
California dated November 30, 1998.
10.35 Ninth Amendment to Credit Agreement 89
among Registrant and Union Bank of
California dated December 22, 1998.
10.36 Tenth Amendment to Credit Agreement 94
among Registrant and Union Bank of
California dated January 27, 1999.
10.37 Extension and Modification Agreement 99
between the Union Bank of California and
Registrant dated March 19, 1999.
23.1 Consent of Ernst & Young, LLP, 112
Independent Auditors
27 Financial Data Schedule, included 113
herein.
* 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.
51