-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HnBPV3oRDGg7Ecmz/aoUvXCR8CMR80ff0G/qg95f0QiF3UFoXHnfUhRYyXCury2p WNfN3ix3aWhVikyqPciA0g== 0000819977-98-000018.txt : 19981109 0000819977-98-000018.hdr.sgml : 19981109 ACCESSION NUMBER: 0000819977-98-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCON CENTRAL INDEX KEY: 0000819977 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 941738964 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16225 FILM NUMBER: 98739167 BUSINESS ADDRESS: STREET 1: 1433 NORTH MARKET BLVD STE 2 STREET 2: P O BOX 349014 CITY: SACRAMENTO STATE: CA ZIP: 95834 BUSINESS PHONE: 9169281090 MAIL ADDRESS: STREET 1: P O BOX 349014 STREET 2: STE 1200 CITY: SACRAMENTO STATE: CA ZIP: 95834-9014 FORMER COMPANY: FORMER CONFORMED NAME: EMCON ASSOCIATES /CA/ DATE OF NAME CHANGE: 19910611 10-Q 1 THIRD QUARTER, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16225 EMCON (Exact name of Registrant as specified in its charter) California 94-1738964 ---------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 South El Camino Real, Suite 1200 San Mateo, California 94402 - ---------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 375-1522 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] 8,723,099 shares of Common Stock Issued and Outstanding as of November 3, 1998. 1 EMCON REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 Page Number ------ FACING SHEET ............................................................. 1 INDEX .................................................................... 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 and December 31, 1997............ 3 Consolidated Statements of Income - Three and nine months ended September 30, 1998 and 1997....................................... 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997...... 5 Notes to Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 12 PART II. OTHER INFORMATION............................................ 16 Signatures............................................................... 17 Index to Exhibits................................................................. 18 2
EMCON CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------- ------------------ ---------------- September 30, December 31, 1998 1997 (In thousands, except share amounts) (Unaudited) (Audited) --------------------------------------------------------------------------------- ------------------ ---------------- ASSETS Current Assets: Cash and cash equivalents $ 4,260 $ 6,106 Accounts Receivable: Billed accounts receivable, net of allowance for doubtful accounts of $748 and $634 at September 30, 1998 and December 31, 1997, respectively 35,739 31,413 Unbilled accounts receivable, net of allowance for doubtful accounts of $460 and $295 at September 30, 1998 and December 31, 1997, respectively 7,218 5,310 Costs and estimated earnings in excess of billings on uncompleted contracts 1,598 678 Prepaid expenses and other current assets 3,352 3,401 Inventory 3,017 2,238 Deferred taxes, current portion 3,235 4,235 -------- -------- Total Current Assets 58,419 53,381 Net property and equipment, at cost 16,180 16,182 Notes receivable 2,326 2,811 Cash surrender value of insurance policies 3,113 2,346 Other assets 2,599 2,597 Deferred tax assets 1,028 1,028 Goodwill, net of amortization 14,747 13,916 Other intangible assets, net of amortization 868 814 --------- --------- Total Assets $99,280 $93,075 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $11,507 $ 8,391 Accrued payroll and related benefits 5,958 4,356 Other accrued liabilities 4,723 2,969 Billings in excess of costs and estimated earnings on uncompleted contracts 2,876 2,732 Long-term obligations due within one year 2,263 2,350 -------- -------- Total Current Liabilities 27,327 20,798 Long-term debt 9,786 11,441 Other noncurrent obligations 2,083 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; 8,723,099 and 8,571,764 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 42,875 42,184 Retained earnings 17,209 15,916 ------- ------- Total Shareholders' Equity 60,084 58,100 ------- ------- Total Liabilities and Shareholders' Equity $99,280 $93,075 ======= ======= See accompanying notes.
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EMCON CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, (Unaudited) (Unaudited) --------------------------- ---------------------------- (In thousands, except per share amounts) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Gross revenue $41,585 $40,764 $111,349 $105,241 Outside services at cost 5,954 10,865 13,687 23,294 ------- ------- -------- -------- Net revenue 35,631 29,899 97,662 81,947 Costs and expenses: Direct expenses 21,809 15,916 57,610 40,728 Indirect expenses 12,254 12,194 37,151 37,597 Restructuring/other charges -- -- -- (75) Loss on disposition of laboratory -- -- -- 333 Gain on sale of assets -- -- -- (826) ------ ------ ------ ------ Income from operations 1,568 1,789 2,901 4,190 Interest income (125) (145) (444) (364) Interest expense 294 275 891 923 Equity in earnings of affiliates -- (63) (15) (97) Minority interest (income) expense 11 271 (9) 454 ------ ------ ------ ------ Income before provision for income taxes 1,388 1,451 2,478 3,274 Provision for income taxes 658 508 1,154 1,146 ------ ------ ------ ------ Net income $ 730 $ 943 $1,324 $2,128 ====== ====== ====== ====== Basic earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25 ====== ====== ====== ====== Diluted earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25 ====== ====== ====== ====== Shares used in computing basic earnings per share 8,723 8,557 8,670 8,541 ====== ====== ====== ====== Shares used in computing diluted earnings per share 8,816 8,768 8,856 8,608 ====== ====== ====== ====== See accompanying notes.
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EMCON CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------- Nine months ended September 30, (Unaudited) ------------------------------- Increase (decrease) in cash and cash equivalents (in thousands) 1998 1997 - ---------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $1,324 $2,128 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 2,818 2,776 Amortization 491 477 Bad debt expense 691 1,022 Gain (loss) on sale/disposal of property and equipment (230) 48 Loss on disposition of laboratory -- 333 Gain on disposition of assets -- (826) Increase in salary continuation plan 187 64 Changes in operating assets and liabilities: Accounts receivable (6,567) (8,396) Costs and estimated earnings in excess of billings on uncompleted (920) (1,344) contracts Inventory (779) (908) Prepaid expenses and other assets -- 217 Notes receivable 485 (2,375) Cash surrender value of insurance policies (767) (409) Other assets 3 2,290 Deferred tax assets 1,000 -- Accounts payable 2,893 3,857 Accrued payroll and related benefits 1,587 (111) Billings in excess of costs and estimated earnings on uncompleted 144 1,209 projects Other accrued liabilities 868 2,851 - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,228 2,903 - ---------------------------------------------------------------------------------------------------------- Cash flow from investing activities: Additions to property and equipment (2,968) (3,222) Acquisitions, net of cash acquired (719) (858) Addition to other intangible assets (101) -- Net cash on disposition of laboratory -- 3,794 Net cash from dispositions of assets -- 840 Proceeds from sale of property and equipment 389 122 - ---------------------------------------------------------------------------------------------------------- Net cash (used for) provided by investing activities (3,399) 676 - ---------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds of new debt obligation 58 137 Payments of current and long term portion of debt (1,800) (5,165) Issuance of common stock for cash, net of cancellations 98 210 Dividend payments (31) (30) - ---------------------------------------------------------------------------------------------------------- Net cash used for financing activities (1,675) (4,848) - ---------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (1,846) (1,269) Cash and cash equivalents, beginning of year 6,106 5,331 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $4,260 $4,062 - ---------------------------------------------------------------------------------------------------------- See accompanying notes.
5 EMCON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. While the financial information is unaudited, the statements in this report reflect all adjustments, which are normal and recurring, that are necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the dates of the consolidated balance sheets. The consolidated operating results for the interim periods presented are not necessarily indicative of performance for the entire year. These consolidated financial statements and notes should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended December 31, 1997. 2. Restructuring Charges In the fourth quarter of 1996, senior management reviewed the Company's operational and administrative functions for the purpose of further improving the Company's competitiveness and overall profitability. Based on this review, the Company's Board of Directors approved a strategic restructuring plan to reposition the Company to fully exploit its core strengths in engineering, design, construction, operations and maintenance. The plan included closure or downsizing of underperforming offices, write-off of employment contracts for former employees no longer participating in the Company's affairs and employee severance. During the quarter ended September 30, 1998, $6,000 of costs relating to the restructuring were incurred and charged against an established reserve. Through September 30, 1998, $405,000 of restructuring costs have been incurred and charged against the reserve and $286,000 of the reserve remains in other accrued liabilities, which includes present value adjustments during 1998 of $18,000. 3. Acquisitions On April 3, 1998, EMCON acquired all 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 September 30, 1998, was approximately $29,000. Additional consideration may be paid for the purchase of A2S subject to the achievement of predetermined operating performance goals over the next two years. This acquisition would not have had a material affect on net revenue, net income, or earnings per share, had it been effective at January 1, 1998. 6 Effective May 1, 1997, Organic Waste Technology, Inc. ("OWT"), a wholly owned subsidiary of EMCON, acquired all of the equity interest in National Earth Products, Inc. ("NEP"), a Lancaster, Pennsylvania-based company with significant expertise in landfill civil construction and related soils processing. NEP was acquired for $933,000 in cash and $800,000 in notes payable. The transaction was accounted for as a purchase. Specifically identifiable intangible assets and goodwill of approximately $1,601,000 resulting from this acquisition are included in goodwill and are being amortized over twenty-five years using the straight line method. Accumulated amortization as of September 30, 1998, was approximately $86,000. Included in goodwill, is an additional $125,000 cash payment that was made to NEP shareholders in May, 1998, as a result of their attaining certain predetermined operating performance goals. Additional consideration may be paid for the purchase of NEP subject to the achievement of certain earnout goals over the next year to be measured as of April, 1999. This acquisition would not have had a material effect on net revenue, net income, or earnings per share, had it been effective at January 1, 1997. 4. Credit Agreement In conjunction with the acquisition of OWT in the first quarter of 1996, the Company entered into a $20,000,000 secured credit agreement with its existing commercial bank (the "Credit Agreement"), replacing its previous $10,000,000 unsecured line of credit. Under the new agreement, the Company borrowed $10,000,000 on a term loan basis with interest at a managed rate not to exceed the prime rate. Principal is to be amortized over seven years with any unpaid amounts due and payable on June 30, 2001. In April 1997, following the infusion of cash upon the sale of Columbia Analytical Services, Inc., the Company prepaid, on an accelerated basis, $3,000,000 of the then outstanding principal balance of the term loan. The remaining $10,000,000 under the Credit Agreement is available for working capital purposes in the form of a line of credit (with up to $5,000,000 also being available for non-working capital purposes). The line of credit component of the Credit Agreement expires on November 30, 1998. The Company expects to renew the line of credit component of the Credit Agreement prior to its expiration. The Credit Agreement contains provisions with respect to the payment of dividends and the level of capital expenditures and requires the maintenance of specific levels of working capital, tangible net worth and continued quarterly profitability. 5. Litigation As a professional services firm engaged in environmental-related matters, the Company encounters potential liability, including claims for significant environmental damage, in the normal course of business. The Company is party to lawsuits and is aware of potential exposure related to certain claims, but in the opinion of management the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 7 6. Earnings Per Share
Three months ended Nine months ended September 30 September 30 ------------------------------ ---------------------------- (In thousands, except for earnings per share) 1998 1997 1998 1997 -------------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 730 $ 943 $1,324 $2,128 ------ ------ ------ ------ Numerator for basic earnings per share - income available to common stockholders 730 943 1,324 2,128 Effect of dilutive securities: 8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1) ------ ------ ------ ----- Numerator for diluted earnings per share - income available to common stockholders after assumed conversions $ 730 $ 943 $1,324 $2,128 ===== ====== ====== ====== Denominator: Denominator for basic earnings per share - weighted-average shares 8,723 8,557 8,670 8,541 Effect of dilutive securities: Employee stock options 93 211 186 67 8% convertible debentures N/A(1) N/A(1) N/A(1) N/A(1) Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 8,816 8,768 8,856 8,608 ====== ====== ====== ====== Basic earnings per share $ 0.08 $ 0.11 $ 0.15 $ 0.25 ====== ====== ====== ====== Diluted earnings per share $ 0.08 $ 0.11 $ 0.15 $ 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 such shares were antidilutive at September 30, 1998. Conversion of debt, if it occurs, would be within ninety days after November 30, 2001. Also excluded from the above reconciliations were approximately 123,000 shares of common stock that may be issued at $6.50 per share to convert $800,000 of indebtedness to certain senior management of NEP because such shares were antidilutive at September 30, 1998. Conversion of debt, if it occurs, would be 50% at May 1, 2000, and 50% at May 1, 2002.
7. Other In 1994, the Company converted to a fifty-two/fifty-three week fiscal year which will result in a fifty-two week year in 1998. The Company's year end falls on the Friday closest to the last day of the calendar year. The Company also follows a five-four-four week quarterly cycle. For convenience, the accompanying consolidated financial statements have been shown as ending on the last day of the calendar period. 8. Adoption of Statement 131 Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting standards No. 131, Disclosure about Segments of an Enterprise and Related Information, ("Statement 131"). Statement 131 superseded FASB Statement 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. The adoption of Statement 131 did not affect consolidated results of operations or financial position, but did affect the disclosure of segment information. See note 9. 8 9. Segment Reporting Description of the types of services from which each reportable segment derives its revenues. 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 the first quarter of 1997, the Company had, in addition to the two reportable segments listed above, a third reportable segment which was its laboratory operations known as Columbia Analytical Services, Inc. (CAS). During the first quarter of 1997, the Company completed the sale of CAS. Measurement of segment profit or loss and segment assets. The Company evaluates performance of its reportable segments, EOC and PSD, based on operating income or loss before and after corporate overhead allocations, but before interest income, interest expense, equity in income of affiliates and minority interest income (loss). Corporate overhead expenses are substantially allocated to the reporting segments based on revenue and/or headcount when an item 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 as disclosed in EMCON's Form 10K as of December 31, 1997. Intersegment sales consist primarily of labor and are marked up to provide the supplying reportable segment a measure of profit. The receiving reportable segment records the transfer as an "Outside Service" and may or may not further mark up the labor cost prior to passing the cost through to its customer. If the cost is not passed through to the customer, the receiving reportable segment records the transaction as an indirect cost. All intersegment accounts are eliminated in consolidation. Factors management used to identify the enterprise's reportable segments. 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 North, South, 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 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. In 1997, there was a third reportable segment, Columbia Analytical Services, Inc., a laboratory division that was sold during the first quarter of 1997. 9
Segment Information --------------------------------------------------------------------------------------------------- (Three months ended September 30, 1998) PSD EOC Other Total --------------------------------------------------------------------------------------------------- Gross revenues from: External subcontractors $23,134 $17,920 $ 531 $41,585 Intersegment revenues 1,137 1,405 -- 2,542 Outside services from: External subcontractors 5,921 2 31 5,954 Intersegment services 1,505 1,039 3 2,547 Net revenues 16,845 18,284 502 35,631 Depreciation expense 500 354 69 923 Amortization expense -- 16 159 175 Segment operating profit (loss) before 2,713 1,191 133 4,037 allocations Segment operating profit (loss) after allocations 1,602 642 (676) 1,568 --------------------------------------------------------------------------------------------------- (Three months ended September 30, 1997) --------------------------------------------------------------------------------------------------- Gross revenues from: External customers $22,037 $18,725 $ 2 $40,764 Intersegment revenues 443 593 -- 1,036 Outside services from: External subcontractors 5,139 5,726 -- 10,865 Intersegment services 645 376 -- 1,021 Net revenues 16,696 13,216 (13) 29,899 Depreciation expense 581 200 87 868 Amortization expense -- 29 136 165 Segment operating profit (loss) before 2,047 1,404 -- 3,451 allocations Segment operating profit (loss) after allocations 918 844 27 1,789 --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- (Nine months ended September 30, 1998) PSD EOC CAS Other Total ---------------------------------------------------------------------------------------------------------------- Gross revenues from: External customers $61,465 $48,895 N/A $ 989 $111,349 Intersegment revenues 2,009 2,558 N/A -- 4,567 Outside services from: External subcontractors 13,535 105 N/A 47 13,687 Intersegment services 2,753 1,833 N/A 8 4,594 Net revenues 47,186 49,515 N/A 961 97,662 Depreciation expense 1,581 1,032 N/A 205 2,818 Amortization expense -- 46 N/A 445 491 Segment operating profit (loss) before 3,908 4,465 N/A 259 8,632 allocations Segment operating profit (loss) after allocations 807 2,873 N/A (779) 2,901 Segment assets (1) Accounts receivable, net 23,829 18,688 N/A 440 42,957 ---------------------------------------------------------------------------------------------------------------- (1) The Company reviews its consolidated balance sheet and reviews only accounts receivable on a segment basis.
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----------------------------------------------------------------------------------------------------------------- (Nine months ended September 30, 1997) PSD EOC CAS Other Total ----------------------------------------------------------------------------------------------------------------- Gross revenues from: External customers $63,143 $37,633 $4,453 $ 12 $105,241 Intersegment revenues 1,136 1,684 734 -- 3,554 Outside services from: External subcontractors 12,780 10,239 275 -- 23,294 Intersegment services 2,708 776 8 -- 3,492 Net revenues 48,791 28,302 4,904 (50) 81,947 Depreciation expense 1,700 846 462 230 3,238 Amortization expense -- 70 -- 407 477 Restructuring/other charges -- -- -- (75) (75) Loss on disposition of laboratory -- -- -- 333 333 Gain on sale of assets -- 826 -- -- 826 Segment operating profit (loss) before 5,076 3,682 108 -- 8,866 allocations Segment operating profit (loss) after allocations 2,184 2,176 (59) (111) 4,190 Segment assets(1) Accounts receivable, net 27,491 14,059 N/A -- 41,550 ----------------------------------------------------------------------------------------------------------------- (1)The Company reviews its consolidated balance sheet and reviews only accounts receivable on a segment basis.
------------------------------------------------------------------------------------------------------------------ Three months ended Nine months ended September 30, September 30, ------------------------------------------------------------------------------------------------------------------ Three months ended September 30, 1998 1997 1998 1997 ------------------------------------------------------------------------------------------------------------------ Revenues Total external revenues for reportable segments $41,054 $40,762 $110,360 $105,229 Intersegment revenues for reportable segments 2,542 1,036 4,567 3,554 Other revenues 531 2 989 12 Elimination of intersegment revenues (2,542) (1,036) (4,567) (3,554) ------- ------- -------- -------- Total gross consolidated revenues 41,585 40,764 111,349 105,241 Less outside services (5,954) (10,865) (13,687) (23,294) ------- ------- -------- -------- Total net revenue $35,631 $29,899 $97,662 $81,947 ------------------------------------------------------------------------------------------------------------------ Profit or Loss Total operating profit for reportable segments before $ 4,037 $ 3,451 $ 8,632 $ 8,866 allocations Overhead allocations expense (1,660) (1,689) (4,693) (4,565) Unallocated overhead (809) 27 (1,038) (111) ------- ------ ------- ------- Total operating profit after allocations 1,568 1,789 2,901 4,190 Interest income 125 145 444 364 Interest expense (294) (275) (891) (923) Equity in earnings of affiliates -- 63 15 97 Minority interest income (expense) (11) (271) 9 (454) ------- ------ ------- ------- Income before provision for income taxes $1,388 $1,451 $ 2,478 $ 3,274 ------------------------------------------------------------------------------------------------------------------ September 30, 1998 1997 ------------------------------------------------------------------------------------------------------------------ Assets Accounts receivable for reportable segments $42,957 $41,550 Other current assets 15,462 11,904 Net property and equipment at cost 16,180 15,371 Goodwill, net of amortization 14,747 13,786 Other assets 9,934 13,798 ------- ------- Total consolidated assets $99,280 $96,409 ------------------------------------------------------------------------------------------------------------------
11 EMCON ITEM 2. Management's Discussion and Analysis of Financial Condition and Results Of Operations. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," including statements regarding the Company's beliefs, expectations or strategies regarding the future, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, including those discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"), that could cause actual results to differ materially from those projected. RESULTS OF OPERATIONS Current Year-to-Date ended September 30, 1998 versus Prior Year-to-Date ended September 30, 1997. Net Revenue: Net revenue for the first nine months of 1998 totaled $97,662,000, a 19.2% increase from $81,947,000 for the first nine months of 1997. At the end of the first quarter of 1997, the Company divested its laboratory subsidiary, Columbia Analytical Services, Inc. (CAS); a reportable segment. CAS contributed $4,904,000 to net revenue in the first quarter of 1997. Excluding net revenue contributed by CAS in the first quarter of 1997, net revenue from continuing operations increased 26.8% in the first nine months of 1998 from $77,043,000 in the same period in 1997. The increase in net revenue was primarily due to a 75.0% increase in net revenue from EMCON's Operations and Construction (EOC) reportable segment as the demand for its services continued to increase. This was offset by a 3.3% decrease in net revenue from the Professional Services Division (PSD) reportable segment due to unanticipated project delays, unusually severe weather conditions and the contraction of the PSD's Northwest and Southwest operations throughout the course of 1997 and the first nine months of 1998. Direct Expenses: Direct expenses include compensation for billable hours for technical and professional staff and other project related expenses, as well as direct labor and materials for in-house testing, construction and drilling activities. Direct expenses for the first nine months of 1998 totaled $57,610,000, a 41.5% increase compared to direct expenses of $40,728,000 during the first nine months of 1997. Excluding the impact of CAS (which incurred direct expenses of $2,267,000 in the first quarter of 1997) direct expenses increased 49.8% from $38,461,000 in the first nine months of 1997. As a percentage of net revenue, direct expenses as reported increased from 49.7% in the first nine months of 1997 to 59.0% in the first nine months of 1998. The increase was due in large part to a shift in business mix resulting from the divestiture of CAS, the contraction of the PSD reportable segment and the continued expansion of the EOC reportable segment. 12 Indirect Expenses: Indirect expenses include salary compensation for nonbillable hours of professional, technical and administrative staff and general administrative expenses such as rent, bonuses, benefits, insurance, legal, depreciation and amortization. Indirect expenses for the first nine months of 1998 totaled $37,151,000, a 1.2% decrease compared to indirect expenses of $37,597,000 for the first nine months of 1997. Excluding the impact of CAS (which incurred indirect expenses of $2,529,000 in the first quarter of 1997) indirect expenses during the first nine months of 1998 increased 5.9% from $35,068,000 during the first nine months of 1997. As a percentage of net revenue, indirect expenses as reported decreased from 45.9% in the first nine months of 1997 (42.8% after excluding the impact of CAS) to 38.0% in the first nine months of 1998. The decrease was due in part to the above-noted shift in business mix, the expansion of the EOC reportable segment, the contraction of the PSD reportable segment and the continued positive impact of cost containment measures. Adjustment of Restructuring Accrual: During the first quarter of 1997, the Company reversed an accrual of $75,000 made as part of the restructuring actions taken in the fourth quarter of 1996. The year end accrual was revised to reflect lower than anticipated costs associated with the abandonment and subsequent sublease of certain office space. Loss on Disposition of Laboratory: During the first quarter of 1997, the Company completed the sale of CAS to the employees of CAS for $4,000,000 in cash, CAS' promissory notes for $3,219,000 ("CAS Notes") and a continuing preferred stock interest in CAS valued at $500,000. The Company paid $206,000 in cash to CAS for retired employee contracts and for accelerated vesting of stock options and other non vested stock rights. In anticipation of completing the sale, the Company recognized impairment in the value of its investment in CAS of $3,327,000 at the end of 1996. As a result of several pre closing adjustments, the Company recognized an additional loss on disposition of CAS in the first quarter of 1997 of $333,000. Gain on Sale of Assets: During the first quarter of 1997, the Company completed the sale of one of its landfill gas-to-energy projects, including the related leasehold production rights and associated machinery and equipment. The Company recognized a gain on disposition of the project in the first quarter of 1997, of $826,000. Income From Operations: Income from operations for the first nine months of 1998 was $2,901,000, a 30.8% decrease compared to $4,190,000 during the comparable period last year. Income from operations, as a percent of net revenue decreased to 3.0% for the first nine months of 1998 from 5.1% in the comparable period in 1997. Interest Income: The Company recorded interest income of $444,000 in the first nine months of 1998 compared to $364,000 in the first nine months of 1997. The increase in interest income in the first nine months of 1998 compared to the first nine months of 1997 was primarily due to the recognition of interest income on the CAS Notes. Interest Expense. The Company incurred interest expense of $891,000 in the first nine months of 1998 compared to $923,000 in the first nine months of 1997. 13 Quarters Ended September 30, 1998 and 1997 Net Revenue. Net revenue for the quarter ended September 30, 1998, totaled $35,631,000, a 19.2% increase from net revenue of $29,899,000 for the third quarter of 1997. The increase in net revenue was primarily due to a 38.3% increase in net revenue from the EOC reportable segment as the demand for its services continues to expand. Net revenue from the PSD reportable segment was relatively unchanged with a 1.0% increase. Direct Expenses. Direct expenses for the quarter ended September 30, 1998, totaled $21,809,000, a 37.0% increase from $15,916,000 during the third quarter of 1997. As a percentage of net revenue, direct expenses increased from 53.2% in the third quarter of 1997 to 61.2% in the third quarter of 1998. The increase was due in large part to a shift in business mix resulting from the continued expansion of the EOC reportable segment. Indirect Expenses. Indirect expenses for the quarter ended September 30, 1998 totaled $12,254,000, a 0.5% increase from indirect expenses of $12,194,000 during the third quarter of 1997. As a percentage of net revenue, indirect expenses decreased from 40.8% in the third quarter of 1997 to 34.4% in the third quarter of 1998. The decrease was due in part to the above-noted shift in business mix resulting from the expansion of the EOC reportable segment and the continued positive impact of cost containment measures. Income From Operations. Income from operations for the quarter ended September 30, 1998, was $1,568,000, a 12.4% decrease compared to $1,789,000 during the third quarter of 1997. Income from operations, as a percent of net revenue decreased to 4.4% in the third quarter of 1998 from 6.0% in the comparable period in 1997. Interest Income. The Company recorded interest income of $125,000 in the quarter ended September 30, 1998 compared to $145,000 in the third quarter of 1997. Interest Expense. The Company incurred interest expense of $294,000 in the quarter ended September 30, 1998 compared to $275,000 in the third quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1998, the Company's uses of cash for non-operating activities primarily consisted of repayment of debt in the amount of $1,800,000 and additions to property and equipment in the amount of $2,968,000; mainly computers, field equipment and developed leachate evaporation system (LES) projects. Net cash provided by operating activities during the period was $3,228,000. In conjunction with the acquisition of OWT in the first quarter of 1996, the Company entered into a $20,000,000 secured credit agreement with its existing commercial bank (the "Credit Agreement"), replacing its previous $10,000,000 unsecured line of credit. Under the new agreement, the Company borrowed $10,000,000 on a term loan basis with interest at a managed rate not to exceed the prime rate. Principal is to be amortized over seven years with any unpaid amounts due and payable on June 30, 2001. In April 1997, following the infusion of cash upon the sale of Columbia Analytical Services, Inc., the Company prepaid, on an accelerated basis, $3,000,000 of the then outstanding principal balance of the term loan. The remaining $10,000,000 under the Credit Agreement is available for working capital purposes in the form of a line of credit (with up to $5,000,000 also being available for non-working capital purposes). The line of credit component of the Credit 14 Agreement expires on November 30, 1998. The Company expects to renew the line of credit component of the Credit Agreement prior to its expiration. The Credit Agreement contains provisions with respect to the payment of dividends and the level of capital expenditures and requires the maintenance of specific levels of working capital, tangible net worth and continued quarterly profitability. The Company believes that its cash on hand and cash generated from operations, together with its available bank financing will be sufficient to meet the Company's capital needs for at least the next twelve months. 15 EMCON PART II OTHER INFORMATION Items 1. - 5. Not applicable. Item 6. Exhibits and Reports (a) Exhibits - See Index to Exhibits on Page 18 (b) Reports on Form 8-K - No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30, 1998. 16 EMCON SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 31, 1998 EMCON \s\ R. Michael Momboisse ------------------------------------- R. MICHAEL MOMBOISSE Chief Financial Officer, Vice President - Legal, and Secretary (Duly authorized and principal financial and accounting officer) 17 INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Page - -------------- ------------- 2.1 Stock Purchase Agreement dated January 30, 1996, * among Organic Waste Technologies, Inc. ("OWT"), Registrant and the selling shareholders and option holders of OWT, incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated March 14, 1996, (the "March 1996 8-K"). 2.2 Asset Purchase Agreement between Yolo Energy * Partners, Inc., Yolo Landfill Gas Corporation, EMCON, Yolo Neo LLC, and Minnesota Methane LLC dated December 31, 1996, incorporated by reference from Exhibit 10.20 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 10-K"). 2.3 Acquisition Agreement between EMCON and its wholly * owned subsidiary, Monterey Landfill Gas Corporation, and Biomass Energy Partners V, L.P., dated March 6, 1997, incorporated by reference from Exhibit 10.22 of the 1996 10-K. 2.4 Stock Purchase Agreement dated April 4, 1997 among * Registrant, Columbia Analytical Services, Inc. (`CAS"), Northwest Trust as trustee of the CAS Employee Stock Ownership Trust and certain senior management employees of CAS, incorporated by reference from Exhibit 2.4 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997 (the "March 1997 10-Q"). 2.5 Stock Purchase Agreement dated April 30, 1997 * among Registrant, OWT, National Earth Products, Inc. ("NEP") and the selling stockholders of NEP, incorporated by reference from Exhibit 2.5 of the March 1997 10-Q. 2.6 Agreement and Plan of Reorganization among * Registrant, Advanced Analytical Solutions, Inc. ("A2S") and certain other parties dated April 3, 1998, incorporated by reference from Exhibit 2.6 of the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 (the "March 1998 10-Q"). 3.1 Articles of Incorporation, as amended, * incorporated by reference from Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 (File No. 33-16337) effective September 16, 1987 (the "Form S-1 Registration Statement"). 3.2 Certificate of Amendment of Restated Articles of * Incorporation as filed on May 24, 1988, incorporated by reference from Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "1988 10-K"). 3.3 Certificate of Amendment of Restated Articles of * Incorporation as filed on June 4, 1991, incorporated by reference from Exhibit 4.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1991 (the "June 1991 10-Q"). 18 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - -------------- ------------ 3.4 Bylaws, as amended, incorporated by reference from * Exhibit 4.2 of the June 1991 10-Q. 10.1 EMCON 1986 Incentive Stock Option Plan and *(1) Amendment, incorporated by reference from Exhibit 10.15 of the Form S-1 Registration Statement. 10.2 Form of Agreement pursuant to Salary Continuation *(1) Plan, incorporated by reference from Exhibit 10.17 of the Form S-1 Registration Statement. 10.3 Schedule identifying Agreements pursuant to Salary *(1) Continuation Plan between Registrant and certain employees, incorporated by reference from Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 10-K"). 10.4 Form of Indemnity Agreement between the Registrant * and each of the Registrant's officers and directors, incorporated by reference from Exhibit 10.20 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "1988 10-K"). 10.5 EMCON 1988 Stock Option Plan, amended by *(1) shareholder approval on May 25,1994, including form of Nonqualified Stock Option Agreement (Outside Directors), incorporated by reference from Exhibit 10.9 of Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994 (the "June 30, 1994 10-Q"). 10.6 EMCON Employee Stock Purchase Plan incorporated by *(1) reference from Exhibit 10.10 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. 10.7 EMCON Restricted Stock Plan incorporated by *(1) reference from Exhibit 10.15 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 10.8 EMCON Deferred Compensation Plan effective January *(1) 1, 1994, incorporated by reference from Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K"). 10.9 Trust Agreement for the EMCON Deferred *(1) Compensation Plan and Salary Continuation Plan Trust dated February 19, 1994, between Registrant and Wells Fargo Bank, N.A. incorporated by reference from Exhibit 10.13 of the 1993 10-K. 10.10 Agreement between Eugene M. Herson and Registrant *(1) dated November 30, 1995, incorporated by reference from Exhibit 10.21 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K"). 19 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - -------------- ------------ 10.12 Credit Agreement between The Bank of California, * N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.2 of the March 1996 8-K. 10.13 Security Agreement between The Bank of * California, N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.3 of the March 1996 8-K. 10.14 Pledge Agreement between The Bank of California, * N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.4 of the March 1996 8-K. 10.15 Eurodollar Rate Option Agreement between The Bank * of California, N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.5 of the March 1996 8-K. 10.16 Fixed Rate Amortization Option Agreement between * The Bank of California, N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.6 of the March 1996 8-K. 10.17 Note Agreement among the Registrant, OWT, and * certain employees of OWT , incorporated by reference from Exhibit 10.1 of the March 1996 8-K. 10.18 Rescission and Reformation Agreement dated * effective November 1, 1996 among EMCON, OWT, and certain employees of OWT, incorporated by reference from Exhibit 10.18 of the 1996 10-K. 10.19 New Note Agreement dated effective November 1, * 1996 among EMCON, OWT and certain * employees of OWT, incorporated by reference from Exhibit 10.19 of the 1996 10-K. 10.20 Second Amendment to Credit Agreement dated * effective January 27, 1997 among EMCON and Union Bank of California, N.A. (formerly known as The Bank of California, N.A.), incorporated by reference from Exhibit 10.21 of the 1996 10-K. 10.21 Third Amendment to Credit Agreement dated * effective March 27, 1997 among EMCON and Union Bank of California, N.A. (formerly known as The Bank of California, N.A.), incorporated by reference from Exhibit 10.23 of the 1996 10-K. 10.22 Convertible Notes dated April 30, 1997 issued by * EMCON to Dennis Grimm and Charles Gearhart in the principal amounts of $400,798.40 and $399,201.60, respectively, incorporated by reference from Exhibit 10.22 of the March 1997 10-Q. 20 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - -------------- ------------ 10.23 Lease Agreement dated April 4, 1997, between * EMCON and Columbia Analytical Services, Inc., incorporated by reference from Exhibit 10.23 of the March 1997 10-Q. 10.24 Amendment 1997-I to EMCON Deferred Compensation *(1) Plan dated effective February 22, 1997, incorporated by reference from Exhibit 10.24 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (the "June 30, 1997 10-Q"). 10.25 Fourth Amendment to Credit Agreement dated * effective June 24, 1997 among EMCON and Union Bank of California, N.A., incorporated by reference from Exhibit 10.25 of the June 30, 1997 10-Q. 10.26 Amended and Restated Agreement between Eugene M. *(1) Herson and Registrant dated November 3, 1997, incorporated by reference from Exhibit 10.26 of the 1997 10-K. 10.27 Amended and Restated Agreement between R. Michael *(1) Momboisse and Registrant dated November 3, 1997, incorporated by reference from Exhibit 10.27 of the 1997 10-K. 10.28 Deferred Compensation Plan, Amended and Restated *(1) effective January 1, 1998, incorporated by reference from Exhibit 10.28 of the 1997 10-K. 10.29 Registration Rights Agreement among Registrant, * and the former shareholders of A2S dated April 3, 1998, incorporated by reference from Exhibit 10.29 of the March 1998 10-Q. 10.30 Secured Promissory Note of Timothy M. Keaten * dated April 3, 1998, in the principal amount of $225,000, incorporated by reference from Exhibit 10.30 of the March 1998 10-Q. 10.31 EMCON 1998 Stock Option Plan, with standard form * of Incentive Stock Option 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"). 10.32 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. 21 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - -------------- ------------ 10.33 Seventh Amendment to Credit Agreement among 23 Registrant and Union Bank of California dated August 31, 1998. 27 Financial Data Schedule, included herein. 28 * 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. 22 EX-10.33 2 SEVENTH AMENDMENT TO CREDIT AGREEMENT SEVENTH AMENDMENT TO CREDIT AGREEMENT THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Seventh Amendment") dated as of August 31, 1998, is made and entered into by and between EMCON, a California Corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank"), successor in interest to the Bank of California, N.A. RECITALS: A. Borrower and Bank are parties to that certain Credit Agreement dated February 29, 1996 as amended from time to time (the "Agreement"), pursuant to which Bank agreed to extend credit to Borrower. B. Borrower is currently indebted to Bank under the Agreement in the aggregate commitment amount of $14,142,856 and Borrower has not defense, offset or counterclaim against Bank or any other person or entity that diminishes such indebtedness. Now, therefore, in consideration of the above recitals and of the mutual covenants and conditions contained herein, Borrower and Bank agree as follows: AGREEMENT: 1. Defined Terms. Initially capitalized terms used herein which are not otherwise defined shall have the meanings assigned thereto in the Agreement. 2. Amendments to the Agreement. (a) In ARTICLE 1 - DEFINITIONS, "Termination Date" is amended in its entirety to read as follows: ""Termination Date" means the earlier of (a) the date Bank may terminate making Advances or extending credit pursuant to the rights of Bank under Article 7; or (b) November 30, 1998 for the Line of Credit; or (c) June 30, 2001 for the Term Loan." 3. Effectiveness of the Seventh amendment. This Seventh Amendment shall become effective as of the date hereof when, and only when, Bank shall have received all of the following, in form and substance satisfactory to Bank: (a) The counterpart of this Seventh Amendment, duly executed by Borrower; (b) Such other documents, instruments or agreements as Bank may reasonably deem necessary. 4. Ratification. Except as specifically amended hereinabove, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. 23 5. Representations and Warranties. Borrower represents and warrants as follows: (a) Each of the representations and warranties contained in the Agreement, as may be amended hereby, is hereby reaffirmed as of the date hereof, each as if set forth herein: (b) The executive, delivery and performance of the Seventh Amendment and any other instruments or documents in connection herewith are within Borrower's power, have been duly authorized, are legal, valid and binding obligations of Borrower, and are not in conflict with the terms of any charter, bylaw, or other organization papers of Borrower or with any law, indenture, agreement or undertaking to which Borrower is a party or by which Borrower is bound or affected; (c) No event has occurred and is continuing or would result from this Seventh Amendment which constitutes or would constitute an Event of Default under the Agreement. 6. Governing Law. This Seventh Amendment and all other instruments or documents in connection herewith shall be governed by and construed according to the laws of the State of California. 7. Counterparts. This Seventh Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. WITNESS the due execution hereof as of the date first above written. UNION BANK OF CALIFORNIA, N.A. EMCON By: /o/ Susan Cunliffe By: /o/ Eugene M. Herson - ----------------------------- ------------------------------ Title: Vice President Title: CFO & President By: /o/ R. Mike Momboisse ------------------------------ Title: CFO and VP Legal 24 PROMISSORY NOTE (BASE RATE) Borrower Name: EMCON Borrower Address: Office 90161 400 SOUTH EL CAMINO REAL, STE 1200 Loan Number 259-668-752 0002-00-0-000 SAN MATEO, CA 94402 Maturity Date AUGUST 27, 1998 Amount $10,000,000.00 $10,000,000.00 Date AUGUST 27, 1998 - -------------- --------------- FOR VALUE RECEIVED, on NOVEMBER 30, 1998, the undersigned ("Debtor") promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the principal sum of TEN MILLION AND NO/100 Dollars ($10,000,000.00), or so much thereof as is disbursed, together with interest on the balance of such principal from time to time outstanding, at the per annum rate or rates and at the times set forth below. 1. INTEREST PAYMENTS. Debtor shall pay interest on the LAST day of each MONTH (commencing SEPTEMBER 30, 1998). Should interest not be paid when due, it shall become a part of the principal and bear interest as herein provided. All computations of interest under this note shall be made on the basis of a year of 360 days, for actual days elapsed. a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in minimum amounts of at least $100,000.00 shall bear interest at a rate, based on an index selected by Debtor, which is 1.50% per annum in excess of Bank's LIBOR-Rate for the Interest Period selected by Debtor, acceptable to Bank. No Base Interest Rate may be changed, altered or otherwise modified until the expiration of the Interest Period selected by Debtor. The exercise of interest rate options by Debtor shall be as recorded in Bank's records, which records shall be prima facie evidence of the amount borrowed under either interest option and the interest rate; provided, however, that failure of Bank to make any such notation in its records shall not discharge Debtor from it obligations to repay in full with interest all amounts borrowed. In no event shall any Interest Period extend beyond the maturity date of this note. To exercise this option, Debtor may, from time to time with respect to principal outstanding on which a Base Interest Rate is not accruing, and on the expiration of any Interest Period with respect to principal outstanding on which a Base Interest Rate has been accruing select an index offered by Bank for a Base Interest Rate Loan and an Interest Period by telephing an authorized lending officer of Bank located at the banking office identified below prior to 10:00 a.m., Pacific time, on any Business Day and advising that officer of the selected index, the Interest Period and the Origination Date selected (which Origination Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall follow the date of such selection by no more than two (2) Business Days). Bank will mail a written confirmation of the terms of the selection to Debor promptly after the selection is made. Failure to send such confirmation shall not affect Bank's rights to collect interest at athe rate selected. If, on the date of the selection, the index selected is unavailable for any reason, the selection shall be void. Bank reserves the right to fund the principal from any source of funds notwithstanding any Base Interst Rate selected by Debtor. b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not bearing interest at a Base Interest Rate shall bear interest at a rate per annum of equal to the Reference Rate, which rate shall vary as and when the Reference Rate changes. At any time piror to the maturity of this note, subject to the provisions of paragraph 4, below, of this note, Debtor may borrow, repay and reborrow hereon so long as the total outstanding at any one time does not exceed the principal amount of this note. Debor shall pay any amounts due under this note in lawful money of the United States at Bank's SAN MATEO COMMERCIAL BANKING Office, or such other office as may be designated by Bank, from time to time. 2. LATE PAYMENTS. If any payment required by the terms of this note shall remain unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee of $100 to Bank. 25 3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of Bank, and, to the extend permitted by law, interest shall be payable on the outstanding principal under this n ote at a per annum rate equal to five percent (5%) in excess of the interest rate specified in paragraph 1.b., above, calculated fromthe date of default until all amounts payable under this note are paid in full. 4. PREPAYMENT. a. Amounts outstanding under this note bearing interest at a rate based on the Reference Rate may be prepaid in whole or in part at any time, without penalty or premium. Debtor may prepay amounts outstanding under this note bearing interest at a Base Interest Rate in whole or in part provided Debtor has given Bank not less than five (5) Business Days prior writtennotice of Debtor's intention to make such prepayment and pays to Bank the liquidated damages due as a result. Liquidated Damages shall also be paid, if Bank, for any other reason, including acceleration or foreclosure, receives all or any portion of principal bearin interest at a Base Interest Rate prior to its scheduled payment date. Liquiedate Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) betwen (a) the Base Interest Rate applicable to the principal amount which is being prepaid, and (b) the return which Bank could obtain if it used the amount of such prepayment of principal to purchase at bid price regularly quoted securities issued by the United State having a maturity date most closely coinciding with the relevant Base Rate Maturity Date and such securities were held by Bank until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator of which is the number of days in the period between the date of prepayment and the relevant Base Rate Maturity Date and the denominator of which is 360; and (iii) the amount of the principal so prepaid (except in the event that principal payments are scheduled under the terms of the Base Interest Rate Loan being prepaid, then an amount equal to the lesser of (A) the amount prepaid or (B) 50% of the sum of (1) the amount prepaid and (2) the amount of principal scheduled under the terms of the Base Interest Rate Loan being prepaid to be outstanding at the relevant Base Rate Maturity Date). Present value under this note is determined by discounting the aboe product to present value using the Yield Rate as the annual discount factor. b. In no event shall Bank be obligated to make any payment or refund to Debtor, nor shall Debtor be entitled to any setoff or other claim against bank, should the return which Bank could obtain under this prepayment formula exceed the interest that Bank would have received if no prepayment had occurred. All prepayments shall include payment of accrued interst on the principal amount so prepaid and shall be applied to payment of interest before application to principal. A determination by Bank as to the prepayment fee amount, if any, shall be conclusive. c. Bank shall provide Debtor a statement of the amount payable on account of prepayment. Debtor ackowledges that (i) Bank establishes a Base Interest Rate upon the understanding that it apply to the Base Interest Rate Loan for the entire Interest Period, and (ii) any prepaymen tmay result in Bank incurring additional costs, expenses or liabilities; and Debtor agrees to pay these liquiedated damages as a reasonable estimate of the costs, expenses and liabilities of Bank associated with such prepayment. 5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not be limited to, any of the following: (a) the failure of Debtor to make any payment required under this note when due; (b) any breach, misrepresentation or other default by Debtor, any guarantor, co-maker endorser, or any person or entity other than Debtor providing security for this note (hereinafter individually and collectively referred to as the "Obligor") under any security oagreement, guaranty or other agreement between Bank and any obligor; (c) the insolvency of any Obligor or the failure of any Obligor generally to pay such Obligor's debts as such debts become due; (d) the commencement as to any Obligor of any voluntary or involuntary proceeding under any laws relating to bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor relief; (e) the assignment by any Obligor for the benefit of such Obligor's creditors; (f) the appointment, or commencement of any proceeding for the appointment of a receiver, trustee, custodian or similar official for all or substantially all of any Obligor's property; (g) the commencement of any proceeding for the dissolution or liquidation of any Obligor; (h) the termination of existence or death of any Obligor; (i) the revocation of any guaranty or subordination agreement given in connection with this note; (j) the failure of any Obligor to comply with any order, judgement, injunction, decree, writ or demand of any court or other public authority; (k) the filing or recording against any Obligor, or the property of any Obligor, of any notice or levy, notice to withhold, or other legal process for tazes other than property tazes; (l) the default by any obligor personally liable for amonts owed hereunder on any obligation concerning the borrowing of money; (m) the issuance against any Obligor, or the property of any Obligor, of any writ of attachment, execution, or other judicial lien; or (n) the deterioration of the financial condition of any Obligor which results in Bank deeming itself in good faith, insecure. Upon the occurrence of any such default, Bank, in its discretion, may cease to advance funds hereunder and may declare 26 all obligations under this note immediately due and payble; however, upon the occurrence of an event of default under d, e, f, or g, all principal and interest shall automatically become immediately due and payable. 6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not paid when due, Debtor promises to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the collection or enforcement of this note. Debtor and any endorsers of this note for the maximum period of time and the full extent permitted by law, (a) waive diligence, presentment, demand, notice oof nonpayment, protest, notice of protest, and notice of every kind; (b) waive the right to assert the defense of any statute of limitations to any debt or obligation hereunder; and (c) consent to renewals and extensions of time for the payment of any amounts due under this note. If this note is signed by more than one party, the term "Debtor" includes each of the undersigned and any successors in interest thereof; all of whose liability shall be joint and several. Any married person who signs this note agrees that recourse may be had against the separate property of that person for any obligations hereunder. The receipt of any check or other item of payment by Bank, at its option, shall not be considered a payment on account until such check or other item of payment is honored when presented for payment at the drawee bank. Bank may delay the credit of such payment based upon Bank's schedule of funds availablity, and interest under this note shall accrue until the funds are deemed collected. In any action brought under or arising out of this note, Debtor and any Obligor, including their successors and assigns, hereby consent to the jurisdication of any competent court within the State of California, as provided in any alternative dispute resolution agreement executed between Debtor and Bank, and consent to service of process by any means authorized by said state's law. The term "Bank" includes, without limitation, any holder of this note. This note shall be construed in accordance with and governed by the laws of the State of California. This note hereby incorporates any alternative dispute resolution agreement previously, concurrently or hereafter executed between Debtor and Bank. 7. DEFINITIONS. As used herein, the following terms shall have the meanings respectively set forth below: "Base Interest Rate" means a rate of interest based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding under this note that bear interest at a Base Interest Rate. "Base Rate Maturity Date" means the last day of the Interest Period with respect to principal outstanding under a Base Interest Rate Loan. "Business Day" means a day on which Bank is open for business for the funding of corporate loans, and, with respect to the rate of interest based on the LIBOR Rate, on which dealings in U.S. dollar deposits outside of the United States may be carried on by Bank. "Interest Period" means with respect to funds bearing interest at a rate based on the LIBOR Rate, any calendar period of one, three, six, nine or twelve months. In determining an Interest Period, a month means a period that starts on one Business Day in a month and ends on and includes the day preceding thenumerically corresponding day in the next month. For any month in which there is no such numerically corresponding day, then as to that month, such day shall be deemed to be the last calendar day of such month. Any Interest Period which would otherwise an on a non-Business Day shall end on the next succeeding Business Day unless that is the first day of a month, in which event such Interest Period shall end onthe next preceding Business Day. "LIBOR Rate" means a per annum rate of interest (rounded upward, if necessary, to the nearest 1/100 of 1%) at whcih dollar deposits, in immediately available funds and in lawful money of the United Sates would be offered to Bank, outside of the United Sates, for a term coinciding with the Interest Period delected by Debtor and for an amount equal to the amount of principal covered by Debtors' interest rate selection, plus Bank's costs, including the costs, if any, of reserve requirements. "Origination Date" means the first day of the Interest Period. "reference Rate" means the rate announced by Bank from time to time at its corporate headquarters as its Reference Rate. The Reference Rate is an index rate determined by Bank from time to time as a means of pricing certain extensions of credit and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest or index nor necessarily the lowest rate of interest charged by Bank at any given time. EMCON By: /o/ Eugene M. Herson ----------------------------- Title: CFO and President By: /o/ R. Michael Momboisse ----------------------------- Title: CFO and VP Legal 27 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets, consolidated statements of income and consolidated statements of cash flows included in the Company's Form 10-Q for the six month period ended June 30, 1998, and is qualified in its entirety by reference to such financial statements and the notes thereto. U.S. DOLLARS 9-MOS DEC-31-1998 JAN-1-1998 SEP-30-1998 1 4,260,000 0 44,165,000 (1,208,000) 3,017,000 58,419,000 34,079,000 (17,899,000) 99,280,000 27,327,000 0 42,875,000 0 0 0 99,280,000 97,662,000 97,662,000 57,610,000 57,610,000 35,992,000 691,000 891,000 2,478,000 1,154,000 1,324,000 0 0 0 1,324,000 0.08 0.08
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