-----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, TOTd9zVm+M5LF4KR4NmjZjj3GL6AjwQ+6oj5XANMed6pZHrKDe/6T9o38Au5LfWc zlNU49iRX9uT2G55e9HTDg== 0000819977-99-000004.txt : 19990423 0000819977-99-000004.hdr.sgml : 19990423 ACCESSION NUMBER: 0000819977-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCON CENTRAL INDEX KEY: 0000819977 STANDARD INDUSTRIAL CLASSIFICATION: 8711 IRS NUMBER: 941738964 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16225 FILM NUMBER: 99576367 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-K 1 1998 10-K 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 EX-2.7 2 STOCK PURCHASE AGREEMENT EXHIBIT 2.7 STOCK PURCHASE AGREEMENT BY AND AMONG WESTERN INDUSTRIAL RESOURCES CORPORATION, AN ARIZONA CORPORATION, ORGANIC WASTE TECHNOLOGIES, INC., A DELAWARE CORPORATION, BRUCE NAVE AND MARCIA NAVE, AND, WITH RESPECT TO SECTIONS 6.4, 6.8 and 8.5, EMCON, A CALIFORNIA CORPORATION 52 TABLE OF CONTENTS Page 1. Definitions ...................................................... 55 1.1 Affiliate ............................................ 55 1.2 Cash Consideration ................................... 55 1.4 Closing Date ......................................... 55 1.5 Commission ........................................... 55 1.6 "GAAP" ............................................... 55 1.7 Governmental Entity .................................. 55 1.8 Holder Knowledge ..................................... 55 1.9 Material Adverse Effect .............................. 55 1.10 "Purchase" ........................................... 55 1.11 Securities Act ....................................... 55 2. Purchase and Sale ................................................ 56 2.1 Purchase and Sale .................................... 56 2.2 Aggregate Consideration .............................. 56 2.3 Closing; Delivery .................................... 56 3. Representations and Warranties of WI and the Sellers ............. 56 3.1 Organization, Standing and Power ..................... 56 3.2 Authority ............................................ 57 3.3 Title to Property .................................... 57 3.4 Capital Structure .................................... 57 3.5 Financial Statements ................................. 58 3.6 Absence of Certain Changes ........................... 58 3.7 Absence of Undisclosed Liabilities ................... 58 3.8 Governmental Authorization ........................... 58 3.9 Litigation ........................................... 58 3.10 Restrictions on Business Activities .................. 58 3.11 Intellectual Property ................................ 59 3.12 Interested Party Transactions ........................ 59 3.13 Minute Books ......................................... 59 3.14 Complete Copies of Materials ......................... 59 3.15 Material Contracts ................................... 59 3.16 Accounts Receivable .................................. 59 3.17 Customers and Suppliers .............................. 60 3.18 Employees and Consultants ............................ 60 3.19 Environmental Matters ................................ 60 3.20 Taxes ................................................ 60 3.21 Employee Benefit Plans ............................... 62 3.22 Employee Matters ..................................... 63 3.23 Insurance ............................................ 63 3.24 Compliance With Laws ................................. 63 3.25 Ownership of Shares and Options ...................... 63 3.26 Information Supplied ................................. 64 3.27 Brokers or Finders ................................... 64 3.28 Representations Complete ............................. 64 4. Representations and Warrantees of EMCON .......................... 64 4.1 Organization, Standing and Power ..................... 64 4.2 Authority ............................................ 64 5. Preclosing Covenants of WI ....................................... 64 5.1 Conduct of Business of WI ............................ 64 5.2 Access to Information ................................ 66 5.3 Exclusivity .......................................... 66 53 TABLE OF CONTENTS Page 6. Mutual Covenants ................................................. 66 6.1 No Public Announcement ............................... 66 6.2 Consents; Cooperation ................................ 67 6.3 Legal Requirements ................................... 67 6.4 Confidentiality ...................................... 67 6.5 Public Disclosure .................................... 67 6.6 Further Assurances ................................... 67 6.7 Expenses ............................................. 67 7. Conditions to Each Party's Obligations ........................... 67 7.1 No Injunctions or Restraints; Illegality ............. 67 7.2 Governmental Approval ................................ 68 8. Conditions to the Sellers' Obligations ........................... 68 8.1 Accuracy of Representations and Warranties ........... 68 8.2 Covenants and Conditions ............................. 68 8.3 Employment and Non-Competition Agreements ............ 68 8.4 Documents ............................................ 68 8.5 Release of Personal Guaranty ......................... 68 9. Conditions to Emcon's Obligations ................................ 68 9.1 Accuracy of Representations and Warranties ........... 68 9.2 Covenants and Conditions ............................. 68 9.3 Certificate of Secretary ............................. 68 9.4 No Material Adverse Change ........................... 68 9.5 Repayment and Cancellation of Promissory Note ........ 68 9.6 Third Party Consents ................................. 68 9.7 Employment and Non-Competition Agreements ............ 69 9.8 Delivery of Stock Certificates ....................... 69 9.9 Opinion of Counsel ................................... 69 9.10 Termination of Employment Contracts .................. 69 9.11 Documents ............................................ 69 10. Termination ...................................................... 69 10.1 Termination .......................................... 69 10.2 Effect of Termination ................................ 69 10.3 Extension; Waiver .................................... 69 10.4 Obligations Following Termination .................... 70 11. Miscellaneous .................................................... 70 11.1 Governing Law ........................................ 70 11.2 Notices .............................................. 70 11.3 Binding Upon Successors and Assigns .................. 72 11.4 Severability.......................................... 72 11.5 Remedies Cumulative .................................. 72 11.6 Entire Agreement ..................................... 72 11.7 Counterparts ......................................... 72 11.8 Amendment and Waivers ................................ 72 11.9 Survival of Agreements ............................... 72 11.10 Construction of Agreement ............................ 72 11.11 Absence of Third Party Beneficiary Rights ............ 72 54 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is effective as of the 4th day of December, 1998, by and among Western Industrial Resources Corporation, an Arizona corporation ("WI"), Organic Waste Technologies, Inc., a Delaware corporation ("OWT"), Bruce Nave and Marcia Nave (collectively, the "Sellers" and each a "Seller") and, with respect to Sections 6.4, 6.8 and 8.5, EMCON, a California Corporation ("EMCON"). RECITALS A. The Sellers are the owners of all of the outstanding capital stock of WI (the "WI Shares") prior to the Closing Date (as defined below). B. OWT wishes to acquire the WI Shares in exchange for certain cash payments pursuant to the terms of this Agreement and each of the Sellers wishes to sell all WI Shares which he, she or it holds as of the Closing Date (as defined below) to OWT pursuant to the terms of this Agreement (the "Purchase"). C. The parties hereto desire to set forth certain representations, warranties and covenants made by each of the other as an inducement to the consummation of the Purchase. AGREEMENT NOW, THEREFORE, in reliance on the foregoing recitals and in and for the consideration and mutual covenants set forth herein, the parties agree as follows: 1. Definitions. 1.1 "Affiliate" shall have the meaning set forth in the rules and regulations promulgated by the Commission pursuant to the Securities Act. 1.2 "Cash Consideration" shall mean the amount to be paid to the Sellers under Sections 2.2(a) and (b), subject to Section 2.2(c). 1.3 "Closing" shall have the meaning set forth in Section 2.3 hereof. 1.4 "Closing Date" shall have the meaning set forth in Section 2.3 hereof. 1.5 "Commission" shall mean the United States Securities and Exchange Commission. 1.6 "GAAP" shall mean generally accepted accounting principals. 1.7 "Governmental Entity" means any (i) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (ii) federal, state, local, municipal, foreign or other government; or (iii) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, official, organization, and any court or other tribunal). 1.8 "Knowledge" means any reference to a party's "knowledge" means such party's actual knowledge after reasonable inquiry of officers, directors and other employees of such party reasonably believed to have knowledge of such matters. 1.9 "Material Adverse Effect" means any reference with respect to any entity or group of entities to a material adverse effect on the business, assets (including intangible assets), financial condition or results of operations of such entity, taken as a whole. When the word "material" is not capitalized it shall mean material with respect to the matter referenced. 1.10 "Purchase" shall mean the purchase and sale of the WI shares as described in Section 2.1 hereof. 1.11 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations thereunder, all as the same shall be in effect at the time. 55 2. Purchase and Sale. 2.1 Purchase and Sale. At the Closing, the Sellers shall sell to OWT, and OWT shall purchase from the Sellers, all of the issued and outstanding WI Shares for the Cash Consideration described below. 2.2 Cash Consideration. (a) The initial purchase price for the WI Shares shall be One Hundred Eighty Nine Thousand Dollars ($189,000), of which One Hundred Fifty Nine Thousand Dollars ($159,000) shall be paid to the Sellers at the Closing (the "Initial Payment") and Thirty Thousand Dollars ($30,000) shall be withheld pursuant to Section 2.2(c) hereof for payment of the Outstanding Tax Liabilities (as defined below). The Initial Payment will be allocated to each Seller pro rata based on the number of WI Shares being sold to OWT by such Seller. (b) In addition to the Initial Payment, the Sellers will be eligible to earn additional consideration, regardless of the either Sellers' employment status with the Company, based on the performance of WI subsequent to the Closing, as described on Exhibit A attached hereto (each an "Earn-out Payment"). Each Earn-out Payment paid to Sellers, if any, will be allocated to each Seller pro rata based on the number of WI Shares sold to OWT by such Seller. (c) OWT shall withhold Thirty Thousand Dollars ($30,000) from the Initial Consideration for payment to applicable tax authorities of interest and penalties paid or payable after September 21, 1998 and any undisclosed taxes as of the Closing (the "Outstanding Tax Liabilities"). In the event the Outstanding Tax Liabilities are less than $30,000 as of March 31, 1999, the amount of the shortfall shall be paid as soon as practicable by OWT to the Sellers pro rata based on the number of WI Shares sold to OWT by such Seller. In the event the Outstanding Tax Liabilities are greater than $30,000 as of March 31, 1999, the amount of the excess (the "Excess Liability") shall be paid as soon as practicable to OWT by Sellers pro rata based on the number of WI Shares sold to OWT by such Seller; provided, however, that any Excess Liability owed that is not assessed at March 31, 1999 or that is unpaid by the Sellers, shall be deducted from the first Earn-out Payment and, to the extent necessary, from each subsequent Earn-out Payment to the extent such subsequent Earn-out Payments are sufficient to offset the Excess Liability. 2.3 Closing; Delivery. The closing of the Purchase (the "Closing") shall take place at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California at 10:00 a.m., on December 4, 1998 (the "Closing Date"), or at such other time and place as OWT and the Sellers shall mutually agree. At the Closing, each Seller shall deliver to OWT certificate(s) representing the WI Shares that the Seller is selling, duly endorsed or with assignments separate from certificate, against delivery to the Seller by OWT of a check in the amount of the Initial Payment due to such Seller. 3. Representations and Warranties of WI and the Sellers. Except as disclosed in a document of even date herewith and delivered by WI to OWT prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "WI Disclosure Schedule"), each of the Sellers and WI, represents and warrants to OWT as follows (any representation or warranty of WI herein being deemed to be a representation and warranty of each Seller): 3.1 Organization, Standing and Power. WI is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona. WI has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect on WI. WI has delivered to OWT a true and correct copy of the Articles of Incorporation and Bylaws of WI each as amended to date. WI is not in violation of any of the provisions of its Articles of Incorporation or Bylaws. WI does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 3.2 Authority. (a) WI has, and will have as of the Closing Date, all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement has, and as of the Closing Date the consummation of the transactions contemplated hereby will have been, duly authorized by all necessary corporate action on the part of WI. This Agreement has been duly executed and delivered by WI and constitutes the valid and binding obligation of WI enforceable against WI in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally, and is subject to general principles of equity. The execution and delivery of this Agreement by WI does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any 56 material obligation or loss of any material benefit under (i) any provision of the Articles of Incorporation or Bylaws of WI, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to WI or any of its properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to WI in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for such consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on WI and would not prevent, or materially alter or delay any of the transactions contemplated by this Agreement. (b) Each Seller has, and will have as of the Closing Date, all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement has, and as of the Closing Date the consummation of the transactions contemplated hereby will have been, duly authorized by all necessary action on the part of each Seller, to the extent necessary. This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally, and is subject to general principles of equity. Any other agreements or documents required hereunder to be executed and delivered by each Seller at Closing will constitute the legal, valid and binding agreements of each Seller executing the same, enforceable against such Seller in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws affecting creditor's rights generally. The execution and delivery of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any material obligation or loss of any material benefit under any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Seller or any of Seller's properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for such consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on Seller and would not prevent, or materially alter or delay any of the transactions contemplated by this Agreement. 3.3 Title to Property. WI has good and marketable title to all of its properties, interests in properties and assets, real and personal, reflected in the WI Balance Sheet or acquired after the WI Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the WI Balance Sheet Date in the ordinary course of business), and with respect to leased properties and assets, valid leasehold interests therein, free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties and (iii) liens securing debt which is reflected on the WI Balance Sheet. The property and equipment of WI that are used in the operations of its businesses are in all material respects in good operating condition and repair, subject to normal wear and tear. All material properties used in the operations of WI are reflected in the WI Balance Sheet to the extent GAAP require the same to be reflected. All leases to which WI is a party are in full force and effect and are valid, binding and enforceable in accordance with their respective terms, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. True and correct copies of all such leases have been provided to OWT. WI owns no real property. 3.4 Capital Structure. (a) The authorized capital stock of WI consists of 100,000 shares of Common Stock. As of the Closing Date, there will be issued and outstanding 100,000 shares of Common Stock. All outstanding shares of Common Stock of WI are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws of WI or any agreement to which WI is a party or by which it is bound. 57 (b) Except for the rights created pursuant to this Agreement, there are no other options, warrants, calls, rights, commitments or agreements of any character to which WI is a party or by which it is bound obligating WI to issue, deliver, sell, repurchase or redeem or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Capital Stock of WI or obligating WI to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. There are no other contracts, commitments or agreements relating to voting, purchase or sale of WI's capital stock (i) between or among WI and any of its shareholders and (ii) to WI's knowledge, between or among any of WI's shareholders. All shares of outstanding Common Stock of WI were issued in compliance with all applicable federal and state securities laws. 3.5 Financial Statements. WI has delivered to OWT its unaudited financial statements for the fiscal year ended December 31, 1997, and for the nine-month period ended September 30, 1998 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP (except that the Financial Statements do not contain footnotes) applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements fairly present the financial condition and operating results of WI as of the dates, and for the periods, indicated therein, subject to normal end of period adjustments. WI maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP. 3.6 Absence of Certain Changes. Since September 30, 1998 (the "WI Balance Sheet Date"), WI has conducted its business in the ordinary course consistent with past practice, and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect on WI; (ii) any acquisition, sale or transfer of any material asset of WI other than in the ordinary course of business and consistent with past practice; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by WI or any revaluation by WI of any of its assets; (iv) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of WI or any direct or indirect redemption, purchase or other acquisition by WI of any of its shares of capital stock; (v) any material contract entered into by WI, other than in the ordinary course of business and as provided to OWT, or any material amendment or termination of, or default under, any material contract to which WI is a party or by which it is bound; (vi) any amendment or change to the Articles of Incorporation or Bylaws of WI; (vii) any increase in or modification of the compensation or benefits payable or to become payable by WI to any of its directors or employees; or (viii) any negotiation or agreement by WI to do any of the things described in the preceding clauses (i) through (vii) (other than negotiations with OWT and its representatives regarding the transactions contemplated by this Agreement). At the Effective Time, there will be no accrued but unpaid dividends on shares of WI's capital stock. 3.7 Absence of Undisclosed Liabilities. WI has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet for the period ended September 30, 1998 (the "WI Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the WI Balance Sheet under GAAP, (iii) those incurred in the ordinary course of business since the WI Balance Sheet Date and consistent with past practice; and (iv) those incurred in connection with the execution of this Agreement. 3.8 Governmental Authorization. WI has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which WI currently operates or holds any interest in any of its properties or (ii) that is required for the operation of WI's business or the holding of any such interest, and all of such authorizations are in full force and effect except where the failure to obtain or have any such authorizations could not reasonably be expected to have a Material Adverse Effect on WI. 3.9 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of WI, threatened against WI or any of their respective properties or any of their respective officers or directors (in their capacities as such) that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on WI. There is no judgment, decree or order against WI, or, to the knowledge of WI, any of their respective directors or officers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on WI. All litigation to which WI is a party (or, to the knowledge of WI, threatened to become a party) is disclosed in the WI Disclosure Schedule. 3.10 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon WI which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of WI, any acquisition of property by WI or the conduct of business by WI as currently conducted or as proposed to be conducted by WI. 58 3.11 Intellectual Property. (a) WI owns or is licensed or otherwise possesses legally enforceable rights to use, all patents, patent applications, trademarks, trade names, service marks, copyrights (whether registered or unregistered), and any applications therefor, maskworks, maskwork applications, net lists, schematics, technology, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs and applications (in both source code and object code form), client lists and tangible or intangible proprietary information and material ("Intellectual Property") that are used or currently proposed to be used in the business of WI as currently conducted or as proposed to be conducted by WI, except to the extent that the failure to have such rights has not had and would not reasonably be expected to have a Material Adverse Effect on WI. WI is the exclusive owner of all Intellectual Property. WI has not licensed any of the Intellectual Property on an exclusive basis. (b) All patents, registered trademarks, service marks and copyrights held by WI are valid and subsisting. WI is not infringing, misappropriating or making unlawful use of, and has not received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of any proprietary asset owned or used by any third party. WI (i) has not been sued in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party; and (ii) has not brought any action, suit or proceeding for infringement of Intellectual Property or breach of any license or agreement involving Intellectual Property against any third party. (c) All current and former officers, employees and consultants of WI have executed and delivered to WI an agreement (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to WI of any Intellectual Property arising from services performed for WI by such persons, the form of which has been supplied to OWT. 3.12 Interested Party Transactions. WI is not indebted to any director, officer, employee or agent of WI (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and no such person is indebted to WI. 3.13 Minute Books. The minute books of WI made available to OWT contain a complete and accurate summary of all meetings of directors and shareholders or actions by written consent since the time of incorporation of WI through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects. 3.14 Complete Copies of Materials. WI has delivered or made available true and complete copies of each document which has been requested by OWT or its counsel in connection with their legal and accounting review of WI. 3.15 Material Contracts. All material contracts and agreements to which WI is a party are listed in the WI Disclosure Schedule hereto. With respect to each such agreement: (i) the agreement is legal, valid, binding and enforceable and in full force and effect with respect to WI, and to WI's knowledge is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto, in either case subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and except as the availability of equitable remedies may be limited by general principles of equity; (ii) the agreement will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing, subject to the effect of bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and except as the availability of equitable remedies may be limited by general principles of equity; and (iii) neither the WI nor, to WI's knowledge, any other party, is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach of default by WI or, to WI's knowledge, by any such other party, or permit termination, modification or acceleration, under the agreement. WI is not a party to any material oral contract, agreement or other arrangement other than as may be disclosed in the WI Disclosure Schedule. 3.16 Accounts Receivable. Subject to any reserves set forth in the Financial Statements, the accounts receivable shown on the Financial Statements represent and will represent bona fide claims against debtors for sales and other charges, are collectible in accordance with their terms at their recorded amounts and are not subject to discount except for normal cash and immaterial trade discounts. The amount carried for doubtful accounts and allowances disclosed in the Financial Statements is sufficient to provide for any losses which may be sustained on revaluation of the receivables. 59 3.17 Customers and Suppliers. As of the date hereof, no customer which individually accounted for more than 5% of WI's gross revenues during the 12 month period preceding the date hereof and no supplier of WI has canceled or otherwise terminated, or made any written threat to WI to cancel or otherwise terminate, its relationship with WI or has at any time on or after September 30, 1998 decreased materially its services or supplies to WI in the case of any such supplier, or its usage of the services or products of WI in the case of such customer, and to WI's knowledge, no such supplier or customer has indicated either orally or in writing that it will cancel or otherwise terminate its relationship with WI or to decrease materially its services or supplies to WI or its usage of the services or products of WI, as the case may be. WI has not knowingly breached any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier of WI. 3.18 Employees and Consultants. The WI Disclosure Schedule contains a list of the names of all employees and consultants of WI, their respective salaries or wages, other compensation and dates of employment and positions. 3.19 Environmental Matters. (a) As used in this Agreement: (i) "Environmental Laws" shall mean any federal, state or local laws, ordinances, codes, regulations, rules, policies and orders that are intended to assure the protection of the environment, or that classify, regulate, call for the remediation of, require reporting with respect to, or list or define air, water, groundwater, solid waste, hazardous or toxic substances, materials, wastes, pollutants or contaminants, or which are intended to assure the safety of employees, workers or other persons, including the public. (ii) "Hazardous Materials" shall mean any toxic or hazardous substance, material or waste or any pollutant or contaminant, or infectious or radioactive substance or material, including without limitation, those substances, materials and wastes defined in or regulated under any Environmental Laws. (b) WI is not and has not been in violation of any Environmental Law relating to the properties or facilities of WI at which any part of WI's business is or has been conducted. WI has not used, generated, manufactured or stored on or under any part of its properties or facilities at which any part of WI's business is or has been conducted, or transported to or from any part thereof, any Hazardous Materials in violation of any applicable Environmental Laws. There has not been any presence, disposal, or release of any Hazardous Materials on, from or under any part of WI's properties or facilities at which any part of WI's business is or has been conducted. No civil, criminal or administrative action, proceeding or investigation is pending or, to WI's knowledge, threatened against WI, and WI is not aware of any facts or circumstances which could form the basis for assertion of a claim or liability, regarding non-compliance with Environmental Laws relating to WI's business. 3.20 Taxes. (a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes" means any and all federal, state, local and foreign taxes, assessments and other similar governmental charges, duties and impositions, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Each of the Company and its Subsidiaries have accurately prepared and timely filed (or will so file) all federal, state, local and foreign returns, estimates, information statements and reports relating to any and all Taxes concerning or attributable to the Company or any of its Subsidiaries or to their operations ("Returns") required to be filed at or before the Closing Date, and such Returns are true and correct in all material respects and have been completed in all material respects in accordance with applicable law. Each of the Company and its Subsidiaries has disclosed on its federal income Tax returns all positions taken therein that could give rise to a substantial understatement of federal income tax within the meaning of Section 6662 of the Code. (c) Each of the Company and its Subsidiaries as of the Closing Date: (i) will have paid all Taxes it is required to pay prior to the Closing Date and (ii) will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld, except for Taxes contested in good faith by appropriate proceedings for which adequate reserves have been taken. 60 (d) There is no Tax deficiency outstanding, proposed or assessed against the Company or any of its Subsidiaries that is not reflected as a liability on the Company Balance Sheet nor has the Company or any of its Subsidiaries executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (e) Neither the Company nor any of its Subsidiaries has any liability for unpaid federal, state, local or foreign Taxes that has not been accrued for or reserved on the Company Balance Sheet, whether asserted or unasserted, contingent or otherwise. (f) No audit or other examination of any Return of the Company or any of its Subsidiaries is presently in progress, nor has the Company or any of its Subsidiaries been notified of any request for such an audit or other examination. (g) The Company has made available to Buyer or its legal counsel copies of all foreign, federal and state income and all state sales and use Returns for the Company and all its Subsidiaries filed for all periods since their respective inceptions. (h) There are (and immediately following the Closing Date there will be) no liens, pledges, charges, claims, restrictions on transfer, mortgages, security interests or other encumbrances of any sort (collectively, "Liens") on the assets of the Company nor any of its Subsidiaries relating to or attributable to Taxes other than Liens for Taxes not yet due and payable. (i) Neither the Company nor any of its Subsidiaries has knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the Company or any of its Subsidiaries. (j) None of the assets of the Company of any of its Subsidiaries are treated as "tax-exempt use property" within the meaning of Section 168(h) of the Code. (k) As of the Closing Date, there will not be any contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount that would not be deductible by the Company or any of its Subsidiaries as an expense under applicable law. (l) Neither the Company nor any of its Subsidiaries has filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company or any of its Subsidiaries. (m) Neither the Company nor any of its Subsidiaries is a party to, or owes any amount under, any Tax sharing, indemnification or allocation agreement. Neither the Company nor any of its Subsidiaries (i) has been a member of an affiliated group filing a consolidated federal income Tax return (other than a group the common parent of which was the Company) or (ii) has any liability for Taxes of any person (other than any of the Company and its Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise. (n) Each of the Company's and its Subsidiaries' Tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income Tax deductions is accurately reflected on its respective Tax books and records. WI Disclosure Schedule sets forth the following information with respect to each of the Company and its Subsidiaries (or with respect to each of the Subsidiaries) as of the most recent practicable date: (i) the basis of the stockholder(s) of any Subsidiary it its stock (or the amount of any excess loss account); (ii) the amount of any net operating loss, net capital loss, unused investment or other credit, unused foreign tax, or excess charitable contribution allocable to the Company or any Subsidiary; and (iii) the amount of any deferred gain or loss allocable to the Company or any Subsidiary arising out of any deferred intercompany transaction. (o) Neither the Company nor any of its Subsidiaries is and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. 61 (p) Except as may be required as a result of the Purchase, the Company and its Subsidiaries have not been and will not be required to include any adjustment in taxable income for any Tax period (or portion thereof) pursuant to Section 481 or Section 263A of the Code or any comparable provision under state or foreign Tax laws as a result of the transactions, events or accounting methods employed prior to Closing. (q) WI Disclosure Schedule lists (i) any Tax exemption, Tax holiday or other Tax-sparing arrangement that the Company or any of its subsidiaries has in any jurisdiction, including the nature, amount and lengths of such Tax exemption, Tax holiday or other Tax-sparing arrangement and (ii) any expatriate tax programs or policies affecting the Company or any of its Subsidiaries. Each of the Company and its Subsidiaries is in full compliance in all material respects with all terms and conditions required to maintain any Tax exemption, Tax holiday or other Tax-sparing arrangement or order of any Governmental Entity and the consummation of the Purchase will not have any adverse effect on the continued validity and effectiveness of any such Tax exemption, Tax holiday or other Tax-sparing arrangement or order. 3.21 Employee Benefit Plans. (a) The WI Disclosure Schedule lists, with respect to WI and any trade or business (whether or not incorporated) which is treated as a single employer with WI (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all material employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) each loan to a non-officer employee in excess of $5,000, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements, (iii) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (iv) other fringe or employee benefit plans, programs or arrangements that apply to senior management of WI and that do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of WI of greater than $5,000 remain for the benefit of or relating to, any present or former employee, consultant or director of WI (together, the "WI Employee Plans"). (b) WI has furnished to OWT a copy of each of the WI Employee Plans and related plan documents (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respect to each WI Employee Plan which is subject to reporting requirements under ERISA or the Code, provided copies of the Form 5500 reports filed for the last three plan years. Any WI Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation (to the extent required by the Code), or has applied to the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination, or has been established under a standardized prototype plan for which an Internal Revenue Service opinion letter has been obtained by the plan sponsor and is valid as to the adopting employer. WI has also furnished OWT with the most recent Internal Revenue Service determination or opinion letter issued with respect to each such WI Employee Plan, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any WI Employee Plan subject to Code Section 401(a). (c) (i) None of the WI Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any WI Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Effect; (iii) each WI Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect, and WI and each subsidiary or ERISA Affiliate have performed all material obligations required to be performed by them under, are not in any material respect in default under or violation of and have no knowledge of any material default or violation by any other party to, any of the WI Employee Plans; (iv) neither WI nor any other ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the WI Employee Plans; (v) all material contributions required to be made by WI or any other ERISA Affiliate to any WI Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each WI Employee Plan for the current plan years; (vi) with respect to each WI Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 or ERISA has occurred; and (vii) no WI Employee Plan is covered by, and neither WI or ERISA 62 Affiliate has incurred or expects to incur any liability under Title IV of ERISA or Section 412 of the Code. With respect to each WI Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(l) of ERISA, WI has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such WI Employee Plan. No suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of WI is threatened, against or with respect to any such WI Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither WI nor any other ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA. (d) With respect to each WI Employee Plan, WI and each of its United States subsidiaries have complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 and the regulations thereunder, except to the extent that such failure to comply would not in the aggregate, have a Material Adverse Effect. (e) The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of WI or any other ERISA Affiliate to severance benefits or any other payment (including, without limitation, unemployment compensation, golden parachute or bonus), except as expressly provided in this Agreement or (ii) accelerate the time of payment or vesting of any such benefits, or increase the amount of compensation due any such employee or service provider. (f) There has been no amendment to, written interpretation or announcement (whether or not written) by WI or any other ERISA Affiliate relating to, or change in participation or coverage under, any WI Employee Plan which would materially increase the expense of maintaining such plan above the level of expense incurred with respect to that plan for the most recent fiscal year included in WI's financial statements. 3.22 Employee Matters. WI is in compliance with all currently applicable laws and regulations respecting discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, except for such noncompliance as has not and would not reasonably be expected to have had a Material Adverse Effect on WI, and is not engaged in any unfair labor practice. There are no pending claims against WI under any workers' compensation plan or policy or for long term disability. WI has no material obligations under COBRA with respect to any former employees or beneficiaries thereunder. There are no proceedings pending or, to the knowledge of WI, threatened, between WI and its employees, which proceedings have or could reasonably be expected to have a Material Adverse Effect on WI. WI is not a party to any collective bargaining agreement or other labor union contract nor does WI know of any activities or proceedings of any labor union to organize its employees. There has been no claim against WI based on actual or alleged race, age, sex, disability or other harassment or discrimination, or similar tortuous conduct, nor, to WI's knowledge, is there any basis for such claim. In addition, WI has provided all employees with all relocation benefits, stock options, bonuses and incentives, and all other compensation earned up through the date of this Agreement. 3.23 Insurance. The WI Disclosure Schedule lists each policy of insurance and bonds held by WI. WI has policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of WI. There is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and WI are otherwise in compliance with the terms of such policies and bonds. WI has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 3.24 Compliance With Laws. WI has complied with, is not in violation of and has not received any notices of violation with respect to, any federal state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on WI. 3.25 Ownership of Shares and Options. Except as set forth in the WI Disclosure Schedule, each Seller owns of record and beneficially the number of shares of WI Common Stock indicated opposite such Seller's name in the WI Disclosure Schedule hereto, as applicable, with full right and authority to sell or exchange, as applicable, such securities hereunder, and upon delivery of such shares hereunder, OWT will receive good title thereto, free and clear of all mortgages, pledges or security interests and not subject to any agreements or understandings among any Persons with respect to the voting or transfer of such securities other than those arising under agreements to which EMCON or OWT is a party. 63 3.26 Information Supplied. Neither this Agreement, the WI Financial Statements, the WI Disclosure Schedule, the Exhibits attached to this Agreement, nor any other certificate or document furnished or to be furnished by WI or the Sellers pursuant to the terms of this Agreement, contains or will contain any untrue statement of a material fact known to the Sellers or WI, respectively, or omits or will omit to state a material fact necessary to make the statements contained in such information not misleading in light of the circumstances under which such statements were made. 3.27 Brokers or Finders. Neither WI nor either of the Sellers nor any of such Sellers' agents has incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement or the transactions contemplated hereby. 3.28 Representations Complete. None of the representations or warranties made by WI herein or in any Schedule or Exhibit hereto, including the WI Disclosure Schedule, or certificate furnished by WI pursuant to this Agreement or any written statement furnished to OWT pursuant hereto or in connection with the transactions contemplated hereby, when all such documents are read together in their entirety, contain, or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. 4. Representations and Warrantees of OWT. OWT represents and warrants to WI as follows: 4.1 Organization, Standing and Power. OWT is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.2 Authority. OWT has, and will have as of the Closing Date, all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement has, and as of the Closing Date the consummation of the transactions contemplated hereby will have been, duly authorized by all necessary corporate action on the part of OWT. This Agreement has been duly executed and delivered by OWT and constitutes the valid and binding obligation of OWT enforceable against OWT in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally, and is subject to general principles of equity. The execution and delivery of this Agreement by OWT does not, and the consummation of the transactions contemplated hereby will not conflict with or result in any violation of (with or without notice or lapse of time, or both) (i) any provision of the Certificate of Incorporation or Bylaws of OWT, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to OWT or any of its properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to OWT in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for such consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on OWT and would not prevent or materially alter or delay any of the transactions contemplated by this Agreement. 5. Preclosing Covenants of WI 5.1 Conduct of Business of WI. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing, WI agrees (except to the extent expressly contemplated by this Agreement or as consented to in writing by OWT), to carry on its and its subsidiaries' business in the usual regular and ordinary course in substantially the same manner as heretofore conducted; to pay and to cause its subsidiaries to pay debts and Taxes when due subject (i) to good faith disputes over such debts or Taxes and (ii) to OWT's consent to the filing of material Tax Returns if applicable; to pay or perform other obligations when due, and to use all reasonable efforts to preserve intact its present business organizations, keep available the services of its and its subsidiaries' present officers and key employees and preserve its and its subsidiaries' relationships with customers, suppliers, distributors, licensers, licensees, and others having business dealings with it or its subsidiaries, to the end that its and its subsidiaries' goodwill and ongoing businesses shall be unimpaired at the Effective Time. WI agrees to promptly notify OWT of (x) any event or occurrence not in the ordinary course of its or its subsidiaries' business, and of any event which could have a Material Adverse Effect on WI and (y) any material change in its capitalization as set forth in Section 3.4. Without limiting the foregoing, except as expressly contemplated by this Agreement or the WI Disclosure Schedule, WI shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of OWT: 64 (a) Charter Documents. Cause or permit any amendments to its Articles of Incorporation or Bylaws; (b) Dividends; Changes in Capital Stock. Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (c) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, other than in the ordinary course of business consistent with past practice; (d) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities; (e) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property other than in the ordinary course of business consistent with past practice; (f) Exclusive Rights. Enter into or amend any agreements pursuant to which any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any of its products or technology; (g) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material individually or in the aggregate, to its business, except in the ordinary course of business consistent with past practice; (h) Indebtedness. Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; (i) Agreements. Enter into, terminate or amend, in a manner which will adversely affect the business of WI (i) any agreement involving an obligation to pay or the right to receive $5,000 or more, (ii) any agreement relating to the license, transfer or other disposition or acquisition of intellectual property rights or rights to market or sell WI products, or (iii) any other agreement which is material to the business or prospects of WI. (j) Payment of Obligations. Pay, discharge or satisfy, in an amount in excess of $5,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the WI Financial Statements; (k) Capital Expenditures. Make any capital expenditures, capital additions or capital improvements except in the ordinary course of business and consistent with past practice; (l) Insurance. Materially reduce the amount of any material insurance coverage provided by existing insurance policies; (m) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (n) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend any employee benefit or stock purchase or option plan, or hire any new employee, pay any special bonus or special remuneration (except payments made pursuant to written agreements outstanding on the date hereof), or increase the salaries or wage rates of its employees except in the ordinary course of business in accordance with its standard past practice; 65 (o) Severance Arrangements. Grant any severance or termination pay (i) to any director or officer or (ii) to any other employee except (A) payments made pursuant to written agreements outstanding on the date hereof or (B) grants which are made in the ordinary course of business in accordance with its standard past practice; (p) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with OWT prior to the filing of such a suit, or (iii) for a breach of this Agreement; (q) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets which are material individually or in the aggregate, to its business; (r) Taxes. Other than in the ordinary course of business, make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, file any material Tax Return or any amendment to a material Tax Return, enter into any closing agreement, settle any material claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any material claim or assessment in respect of Taxes; (s)Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; or (t) Other. Take or agree in writing or otherwise to take, any of the actions described in Sections 5.1 (a) through (s) above, or any action which would cause a material breach of its representations or warranties contained in this Agreement or prevent it from materially performing or cause it not to materially perform its covenants hereunder. 5.2 Access to Information. Until the Closing, WI shall allow OWT and its agents and representatives reasonable access upon reasonable notice and during normal working hours to its files, books, records and offices including, without limitation, any and all information relating to taxes, commitments, contracts, leases, licenses and personal property and financial condition. Until the Closing, WI shall cause its accountants to cooperate with OWT, OWT and their agents and representatives in making available all financial information requested, including, without limitation, the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants. 5.3 Exclusivity.. During the period from the date of this Agreement until the earlier of the termination of this Agreement or the Closing Date, WI or the Sellers shall not, directly or indirectly, through any officer, director, employee, representative or agent, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving WI, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as a "WI Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any WI Acquisition Proposal, or (iii) agree to, approve or recommend any WI Acquisition Proposal. (a) WI or the Sellers shall notify OWT no later than twenty-four (24) hours after receipt by WI (or its advisors) of any WI Acquisition Proposal or any request for nonpublic information in connection with a WI Acquisition Proposal or for access to the properties, books or records of WI by any person or entity that informs WI that it is considering making, or has made, a WI Acquisition Proposal. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. 6. Mutual Covenants.. 6.1 No Public Announcement. Neither WI nor OWT shall make any public announcement concerning this Agreement, any memos, letters or other agreements or the discussions between the parties relating to the Purchase including the Letter of Intent dated September 21, 1998, between OWT and WI (the "Letter of Intent") without the prior written approval 66 of the other party, which approval will not be delayed or unreasonably withheld; provided that either party may make disclosure if required under applicable law, but only after reasonable consultation with the other. 6.2 Consents; Cooperation.. Each of OWT and WI shall promptly apply for or otherwise seek, and use reasonable best efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the transactions contemplated by this Agreement and shall use reasonable best efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with such transactions for the assignment thereof or otherwise. 6.3 Legal Requirements. Each of OWT and WI will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties hereto in obtaining) any consent, approval, order or authorization of or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement. 6.4 Confidentiality. The parties acknowledge that EMCON, OWT and WI have previously executed a non-disclosure agreement dated August 1, 1998 (the "Non-Disclosure Agreement"), which Non-Disclosure Agreement is hereby incorporated herein by reference and shall continue in full force and effect in accordance with its terms. 6.5 Public Disclosure. Unless otherwise permitted by this Agreement, OWT and WI shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law or by obligations pursuant to any listing agreement with any national securities exchange or with NASDAQ. 6.6 Further Assurances. Prior to and following the Closing, each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances, as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 6.7 Expenses. WI is authorized to incur expenses for legal and accounting services to review this Agreement, the Employment Agreement and Non-Competition Agreement with Bruce Nave and the related documents comprising the transactions contemplated herein with the limitation that any such expenses that exceed $10,000 shall be borne exclusively by Bruce and Marcia Nave personally. Such expenses shall be paid after the Closing within a reasonable time after submission of an itemized billing statement by legal counsel and accounting advisor. 6.8 EMCON Stock Options. After the Closing, options to purchase an aggregate 10,000 shares of EMCON Common Stock shall be granted to employees of WI consistent with the standard terms of the EMCON 1998 Stock Option Plan. 7. Conditions to Each Party's Obligations. The obligations of each party to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction, on or before the Closing Date, of each of the following conditions (any of which may be waived by the party benefiting from such condition, but only in a writing executed by such party): 7.1 No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Purchase shall be and remain in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending, which would have a Material Adverse Effect on OWT or WI after the Closing, nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Purchase, which makes the consummation of the Purchase illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted. 67 7.2 Governmental Approval. OWT and WI and their respective subsidiaries shall have timely obtained from each applicable Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Purchase and the several transactions contemplated hereby, other than filings and approvals relating to the Purchase or affecting OWT's ownership of WI or any of its properties if failure to obtain such approval, waiver or consent would not have a Material Adverse Effect on OWT or WI after the Closing. 8. Conditions to the Sellers' Obligations. The Sellers' obligations to close the transactions contemplated under this Agreement are subject to the fulfillment or satisfaction, on or before the Closing Date, of each of the following conditions (any of which may be waived by the Sellers, but only in a writing signed by either Seller): 8.1 Accuracy of Representations and Warranties. The representations and warranties of OWT set forth in Section 4 shall be true in all material respects on and as of the Closing Date with the same force and effect as if they had been made at the Closing, and the Sellers shall receive a certificate to such effect signed by an officer of OWT. 8.2 Covenants and Conditions. All of the covenants of OWT contained in Sections 6 and all of the conditions set forth in Section 7 of this Section 8 shall have been performed, complied with or satisfied in all material respects on or before the Closing, and the Sellers shall receive a certificate to such effect signed by an officer of OWT. 8.3 Employment and Non-Competition Agreements. OWT shall have executed and delivered to Bruce Nave an Employment and Non-Competition Agreement substantially in the form of Exhibit B attached hereto. 8.4 Documents. All of the documents required to be delivered by OWT pursuant to this Agreement shall have been delivered and the Sellers shall be reasonably satisfied with the content and form of all such documents. 8.5 Release of Personal Guaranty. EMCON, WI and each of the Sellers shall have entered into a Letter Agreement, substantially in the form attached hereto as Exhibit C, agreeing to and acknowledging the release of the personal guaranty granted by each of the Sellers to EMCON pursuant to a promissory note of WI dated October 23, 1998 in the principal amount of $27,000, a promissory note of WI dated October 29, 1998 in the principal amount of $10,000 and a promissory note of WI dated November 30, 1998 in the principal amount of $60,000. 9. Conditions to OWT's Obligations. The obligations of OWT are subject to the fulfillment or satisfaction, on or before the Closing Date, of each of the following conditions (any one of which may be waived by OWT, but only in a writing signed by OWT): 9.1 Accuracy of Representations and Warranties. The representations and warranties of WI and the Sellers contained in Section 3 shall be true in all material respects, on and as of the Closing Date with the same force and effect as if they had been made at the Closing, and OWT shall have received a certificate to such effect signed by each of the Sellers. 9.2 Covenants and Conditions. All material respects with all of the covenants of the Sellers contained in Sections 5 and 0 and all of the conditions set forth in Section 7 and this Section 9 shall have been performed, complied with or satisfied in all material respects on or before the Closing, and OWT shall have received a certificate to such effect signed by each of the Sellers. 9.3 Certificate of Secretary. WI shall have delivered to OWT copies of its Articles of Incorporation, Bylaws and all resolutions adopted by the Board of Directors and shareholders of WI pertaining to the Purchase, each certified by the Secretary or an Assistant Secretary of WI as being accurate, complete and in full force and effect. 9.4 No Material Adverse Change. Since the Balance Sheet Date, there shall not have occurred any material adverse change in the financial condition, properties, assets (including intangible assets), liabilities, business, operations or results of operations of WI, taken as a whole. 9.5 Repayment and Cancellation of Promissory Note.. OWT shall have received cash payment from the Sellers against the promissory note of WI in the principal amount of $89,000, and such promissory note and any accrued interest shall be canceled upon receipt of such payment pursuant to the terms thereof. 9.6 Third Party Consents. OWT shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval is required in connection with the Purchase. 68 9.7 Employment and Non-Competition Agreements. Bruce Nave shall have executed and delivered the Employment and Non-Competition Agreement. 9.8 Delivery of Stock Certificates. The Sellers shall have delivered to OWT stock certificates representing all of the outstanding capital stock of WI endorsed or accompanied by executed assignments separate from certificate. 9.9 Opinion of Counsel; WI Legal Expenses. OWT shall have received a written opinion from the offices of Mark A. Sippel, P.C., counsel to WI ("Sippel"), in substantially the form attached hereto as Exhibit D. OWT shall have received a statement from Sippel stating the amount of legal expenses accrued by WI as of the Closing Date, and the Sellers shall have delivered a check to OWT for any legal and accounting expenses in the aggregate over $10,000, pursuant to Section 6.7 hereof. 9.10 Termination of Employment Agreements. WI shall have terminated any oral or written employment agreements between WI and any of its employees. 9.11 Documents. All of the documents required to be delivered by WI or the Sellers pursuant to this Agreement shall have been delivered and OWT shall be reasonably satisfied with the content and form of all such documents. 10. Termination. 10.1 Termination. This Agreement may be terminated at any time prior to the Closing as follows: (a) by the mutual written consent of each of the parties hereto; (b) by either WI or OWT, if the Closing has not occurred by December 31, 1998, provided that the right to terminate this Agreement pursuant to this Section 10.1 (b) shall not be available to any party whose failure to fulfill any obligation or condition under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; (c) by either OWT or WI if a court of competent jurisdiction or other Governmental Entity having jurisdiction over the matter shall have issued a nonappealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Purchase, except, if the party relying on such order, decree or ruling or other action has not complied with its obligations under this Agreement; or (d) by either OWT or WI, if there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in this Agreement, which breach (i) causes the conditions set forth in Section 9.1 or 9.2 (in the case of termination by OWT) or Section 8.1 or 8.2 (in the case of termination by WI) not to be satisfied and (ii) shall not have been cured within ten (10) business days following receipt by the breaching party of written notice of such breach from the other party. Any termination of this Agreement under this Section 10.1 shall be effective by the delivery of written notice of the terminating party to the other parties hereto. 10.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 10.1, there shall be no liability or obligation on the part of OWT, WI or their respective officers, directors, or shareholders, except to the extent that such termination results from the breach by a party of any of its representations, warranties or covenants set forth in this Agreement; provided that the provisions of Section 6.4 shall remain in full force and effect and survive any termination of this Agreement. 10.3 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 69 10.4 Obligations Following Termination. In the event of the termination of this Agreement: (a) each party, if so requested by the other party, will (i) return promptly every document (other than documents publicly available) furnished to it by the other party (or any subsidiary, division, associate or affiliate of such other party) in connection with the transactions contemplated hereby, whether so obtained before or after the execution of this Agreement, and any copies thereof which may have been made, and will cause its representatives and any representatives of financial institutions and investors and others to whom such documents were furnished promptly to return such documents and any copies thereof any of them may have made, or (ii) destroy such documents and cause its representatives and such other representatives to destroy such documents, and such party shall deliver a certificate executed by its President or Vice President stating to such effect; and (b) WI and OWT shall continue to abide by the provisions of the Non-Disclosure Agreement. 11. Miscellaneous. 11.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of California that might otherwise govern under applicable principles of conflicts of law. Each of the parties hereto irrevocably consents to the exclusive jurisdiction of any court located within San Mateo County, State of California, in connection with any matter based upon or arising out of this Agreement or the matters contemplated hereby and it agrees that process may be served upon it in any manner authorized by the laws of the State of California for such persons and waives and covenants not to assert or plead any objection which it might otherwise have to such jurisdiction and such process. 11.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed duly delivered if delivered personally (upon receipt), or three (3) business days after being mailed by registered or certified mail, postage prepaid (return receipt requested), or one (1) business day after it is sent by reputable nationwide overnight courier service, or upon transmission, if sent via facsimile (with confirmation of receipt) to the parties at the following address (or at such other address for a party as shall be specified by like notice): 70 (a) if to OWT: Organic Waste Technologies, Inc. 7550 Lucerne Drive, #110 Cleveland, OH Attention: Mary Geiger, Chief Financial Officer Fax: (440) 891-0300 with a copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 Attention: Paul A. Blumenstein, Esq. Fax: (650) 328-3699 (b) if to WI: Western Industrial Resources Corporation 4711 North Falcon Drive, Suite 201 Mesa, AZ 85215 Attention: President with a copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 Attention: Paul A. Blumenstein, Esq. Fax: (650) 328-3699 (c) if to the Sellers: Bruce and Marcia Nave 2236 North Rico Circle Mesa, AZ 85213 with a copy to: Mark A. Sippel, P.C. 3260 North Hayden Road, Suite 214 Scottsdale, AZ 85251-6651 Attention: Mark A. Sippel, Esq. (d) if to EMCON: EMCON 400 S. El Camino Real, Suite 1200 San Mateo, CA 94402 Attention: R. Michael Momboisse, Chief Financial Officer Fax: (650) 375-0763 with a copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 Attention: Paul A. Blumenstein, Esq. Fax: (650) 328-3699 71 11.3 Binding Upon Successors and Assigns. Subject to, and unless otherwise provided in, this Agreement, each and all of the covenants, terms, provisions, and agreements contained herein shall be binding upon, and inure to the benefit of, the permitted successors, executors, heirs, representatives, administrators and assigns of the parties hereto. 11.4 Severability. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 11.5 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 11.6 Entire Agreement. This Agreement, the exhibits hereto, the documents referenced herein (including the Non-Disclosure Agreement), and the exhibits thereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. 11.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. 11.8 Amendment and Waivers. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof for default in payment of any amount due hereunder or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. 11.9 Survival of Agreements. Except as otherwise provided for herein, all covenants, agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. 11.10 Construction of Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof shall not be construed for or against any party. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. 11.11 Absence of Third Party Beneficiary Rights. No provisions of this Agreement are intended, nor shall be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner of any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 72 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. WESTERN INDUSTRIAL RESOURCES ORGANIC WASTE TECHNOLOGIES, INC. CORPORATION By: /s/ Bruce Nave - - ----------------------------- Bruce Nave, President By:/s/ Mary Geiger ------------------------------------ Mary Geiger, Chief Financial Officer /s/ Bruce Nave - - ----------------------------- Bruce Nave /s/ Marcia Nave - - ----------------------------- Marcia Nave EMCON By:/s/ R. Michael Momboisse - - ---------------------------------------------------- R. Michael Momboisse, Chief Financial Officer 73 EXHIBITS Exhibit A Earn-out Payment Schedule Exhibit B Forms of Employment and Non-Competition Agreement Exhibit C Form of Letter Agreement Exhibit D Form of Legal Opinion 74 EXHIBIT A Earn-Out Payment Schedule OWT will pay to Sellers, as soon as practicable following the end of each of the calendar years 1999, 2000 and 2001, an amount equal to 50% of the amount by which WI's pre-tax income for such year exceeds the following milestone amounts: Pretax Earning Period Income Milestone -------------- ---------------- Calendar 1999 $100,000 Calendar 2000 $150,000 Calendar 2001 $200,000 Calculation of WI's pretax income for purposes of the above earn-out will be based on the application of GAAP, consistently applied, including the use of accrual accounting. OWT shall not allocate any portion of its general corporate overhead to WI for the purposes of the above earn-out calculation, provided that, to the extent OWT incurs expenses (e.g., insurance, in-house or outside legal services, or accounting services) directly for the benefit of WI, or otherwise provide administrative services for the benefit of WI, the actual cost of such items, without markup, shall be charged to WI for purposes of such calculation. 75 EX-10.3 3 SALARY CONTINUATION PLAN EXHIBIT 10.3 EMCON SALARY CONTINUATION PLAN PARTICIPANTS
Monthly Payments -------------------------------------- Salary Date Payments Participant Continuation Non-compete Commence - - --------------------------------- -------------------- ----------------- --------------------------------- Thorley D. Briggs $1,800 $1,200 January 1993 $1,200 $ 800 July 1993 John G. Pacey -0- $1,080 January 1993 Donald R. Andres $1,800 $1,200 January 1993 Richard J. Leach -0- $ 819 January 1993 Fred W. Cope $ 600 $ 400 January 1994 Robert E. Van Heuit -0- $ 400 January 1994 H. Randolph Sweet $1,350 $ 900 April 1997 Eugene M. Herson $1,800 $1,200 November 2000 $2,700 $1,800 November 2004 R. Michael Momboisse $ 600 $ 400 January 2003 $1,200 $ 800 November 2004 $ 600 $ 400 November 2006 $ 600 $ 400 July 2007 Gary O. McEntee $ 600 $ 400 November 2004
76 EX-10.31 4 EMPLOYMENT AGREEMENT EXHIBIT 10.31 EMPLOYMENT AGREEMENT (Patrick Gillespie) THIS AGREEMENT is entered into effective the 10th day of November, 1998 by and between EMCON, a California corporation ("Employer"), and Patrick Gillespie ("Employee"). RECITALS WHEREAS, the parties hereto desire to set forth the terms of Employee's continued employment with Employer. AGREEMENT NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Duties. Employer shall employ Employee as a Vice President of Employer responsible for the North Area of Employer's Professional Services Division as presently configured (inclusive of all office locations, Wehran of Puerto Rico, Airbank, the Clean Harbors alliance and the Xenergy alliance), reporting directly to Employer's Chief Executive Officer and with such duties and responsibilities as are typical for an officer in a similar role. 2. Term. Employee's employment pursuant to this Agreement will commence on the date hereof and continue through January 3, 2002; provided, however, that (i) this Agreement (except Section 7 hereof) shall terminate and be of no further force or effect at the election of Employee, upon violation by Employer of its obligations hereunder or upon ninety (90) days advance notice by Employee at any time after December 31, 1999, and (ii) this Agreement (except Sections 6 and 7 hereof) shall terminate and be of no further force or effect at the election of Employer upon termination of Employee's employment for cause pursuant to Section 5, below. 3. Compensation. (a) Employer shall pay Employee a base salary equivalent to $140,000 per year, in equal bi-weekly installments (less applicable withholding), which salary may be adjusted upward, from time to time during the term of this Agreement by Employer's Board of Directors. (b) During Employee's full time employment with Employer, Employee shall be entitled to participate in all applicable benefit plans and bonus programs generally available to employees of Employer (c) On the first regular pay day of January 1999 and on the first regular pay day of each applicable year of the term of this Agreement (i.e. January 2000, January 2001, and January 2002). Employer shall pay Employee a cash bonus of $50,000 per installment less applicable withholdings. 4. Extent and Place of Services. During Employee's full time employment with Employer, Employee agrees to devote Employee's full business time to employment with Employer. Employer shall 77 not transfer or relocate Employee from Employer's office in New Hampshire during the term hereof without the approval of Employee. In the event of a relocation, Employee shall be entitled to receive relocation assistance consistent with Employer's relocation policy. 5. Termination of Employment. Employee's employment under this Employment Agreement shall not be terminated without good cause shown. Dismissal for cause is intended to embrace intentional or grossly negligent conduct on the part of Employee which is materially detrimental to the operations and/or reputation of Employer. By way of illustration such actions would include (but would not be limited to) material breach of Employee's obligations under this Employment Agreement, and/or conviction of a crime (other than minor infractions such as parking or similar traffic violations), moral turpitude and revocation by the applicable licensing authority of professional licenses (if any) material to Employee's ability to perform Employee's employment obligations. 6. Covenant Not to Compete. In consideration for the hiring of Employee by Employer during the term of this Agreement, Employee shall not render any services or engage in any activities which are competitive with Employer's activities in any other state in which Employer conducts business. In the event of any breach of the foregoing covenant, the Employee acknowledges that Employer's remedies at law will be inadequate and Employer shall be entitled to seek injunctive relief, as well as any rights Employer may have at law or in equity, including any rights regarding the misuse of confidential or proprietary information. 7. Confidentiality. Employee agrees to keep confidential and not disclose or make any use of any confidential or proprietary information of EMCON, except for EMCON's benefit, at any time either during or subsequent to Employee's employment. Confidential or proprietary information is subject matter pertaining to any business of EMCON or any of their clients, consultants or affiliates which Employee may produce, obtain, become aware of or otherwise acquire during the course of employment which is not public knowledge. 8. Miscellaneous. (a) This Agreement and each of its provisions shall be binding upon and inure to the benefit of the parties hereto and their respective successors, representatives, and assigns. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware as applied to transactions between Delaware residents wholly within the State of Delaware. If any provision of the Agreement is held invalid or unenforceable for any reason, the parties hereto agree that such invalidity will not affect the remaining provisions of this Agreement. (c) This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and it hereby supersedes any and all prior agreements or understandings between the parties with respect to such subject matter. This Agreement may not be amended or changed except by an instrument in writing signed by the parties hereto. (d) This Agreement may be executed in one or more counterparts, each of which shall be an original instrument, but all of which together shall constitute one and the same instrument. (e) The headings of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof. 78 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EMPLOYER: EMPLOYEE: EMCON, a California corporation By: /s/ Eugene M. Herson /s/ Patrick Gillespie - - ---------------------------- --------------------- Title: President & Chief Executive Officer Patrick Gillespie 79 EX-10.32 5 EMPLOYMENT AGREEMENT EXHIBIT 10.32 EMPLOYMENT AGREEMENT (Gerard Ridzon) THIS AGREEMENT is entered into effective the 10th day of November, 1998 by and between EMCON, a California corporation ("Employer"), and Gerard Ridzon ("Employee"). RECITALS WHEREAS, the parties hereto desire to set forth the terms of Employee's continued employment with Employer. AGREEMENT NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Duties. Employer shall employ Employee as a Vice President of Employer reporting directly to the Area Operations Manager for the North Area of Employer's Professional Services Division as presently configured (inclusive of all office locations, Wehran of Puerto Rico, Airbank, the Clean Harbors alliance and the Xenergy alliance) and with such duties and responsibilities as are typical for an officer in a similar role. 2. Term. Employee's employment pursuant to this Agreement will commence on the date hereof and continue through January 3, 2002; provided, however, that (i) this Agreement (except Section 7 hereof) shall terminate and be of no further force or effect at the election of Employee, upon violation by Employer of its obligations hereunder or upon ninety (90) days advance notice by Employee at any time after December 31, 1999, and (ii) this Agreement (except Sections 6 and 7 hereof) shall terminate and be of no further force or effect at the election of Employer upon termination of Employee's employment for cause pursuant to Section 5, below. 3. Compensation. (a) Employer shall pay Employee a base salary equivalent to $110,000 per year, in equal bi-weekly installments (less applicable withholding), which salary may be adjusted upward, from time to time during the term of this Agreement by Employer's Board of Directors. (b) During Employee's full time employment with Employer, Employee shall be entitled to participate in all applicable benefit plans and bonus programs generally available to employees of Employer (c) On the first regular pay day of January 1999 and on the first regular pay day of each applicable year of the term of this Agreement (i.e. January 2000, January 2001, and January 2002). Employer shall pay Employee a cash bonus of $50,000 per installment less applicable withholdings. 4. Extent and Place of Services. During Employee's full time employment with Employer, Employee agrees to devote Employee's full business time to employment with Employer. Employer shall 80 not transfer or relocate Employee from Employer's office in New Hampshire during the term hereof without the approval of Employee. In the event of a relocation, Employee shall be entitled to receive relocation assistance consistent with Employer's relocation policy. 5. Termination of Employment. Employee's employment under this Employment Agreement shall not be terminated without good cause shown. Dismissal for cause is intended to embrace intentional or grossly negligent conduct on the part of Employee which is materially detrimental to the operations and/or reputation of Employer. By way of illustration such actions would include (but would not be limited to) material breach of Employee's obligations under this Employment Agreement, and/or conviction of a crime (other than minor infractions such as parking or similar traffic violations), moral turpitude and revocation by the applicable licensing authority of professional licenses (if any) material to Employee's ability to perform Employee's employment obligations. 6. Covenant Not to Compete. In consideration for the hiring of Employee by Employer during the term of this Agreement, Employee shall not render any services or engage in any activities which are competitive with Employer's activities in any other state in which Employer conducts business. In the event of any breach of the foregoing covenant, the Employee acknowledges that Employer's remedies at law will be inadequate and Employer shall be entitled to seek injunctive relief, as well as any rights Employer may have at law or in equity, including any rights regarding the misuse of confidential or proprietary information. 7. Confidentiality. Employee agrees to keep confidential and not disclose or make any use of any confidential or proprietary information of EMCON, except for EMCON's benefit, at any time either during or subsequent to Employee's employment. Confidential or proprietary information is subject matter pertaining to any business of EMCON or any of their clients, consultants or affiliates which Employee may produce, obtain, become aware of or otherwise acquire during the course of employment which is not public knowledge. 8. Miscellaneous. (a) This Agreement and each of its provisions shall be binding upon and inure to the benefit of the parties hereto and their respective successors, representatives, and assigns. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware as applied to transactions between Delaware residents wholly within the State of Delaware. If any provision of the Agreement is held invalid or unenforceable for any reason, the parties hereto agree that such invalidity will not affect the remaining provisions of this Agreement. (c) This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and it hereby supersedes any and all prior agreements or understandings between the parties with respect to such subject matter. This Agreement may not be amended or changed except by an instrument in writing signed by the parties hereto. (d) This Agreement may be executed in one or more counterparts, each of which shall be an original instrument, but all of which together shall constitute one and the same instrument. (e) The headings of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof. 81 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EMPLOYER: EMPLOYEE: EMCON, a California corporation By: /s/ Eugene M. Herson /s/ Gerard Ridzon - - ------------------------- ----------------- Title: President & Chief Executive Officer Gerard Ridzon 82 EX-10.33 6 AMENDMENT TO DEFERRED COMPENSATION PLAN EXHIBIT 10.33 AMENDMENT NO. 1998-1 TO EMCON DEFERRED COMPENSATION PLAN EMCON, a California corporation (the "Company"), pursuant to the power granted to it by Section 11.2 of the EMCON Deferred Compensation Plan, dated as of August 1, 1997, as amended January 1, 1998 (the "Plan"), hereby further amends the Plan, as follows, effective as of January 1, 1999: 1. The first two sentences of Section 4.1 are hereby amended in their entirety to read as follows: "Each Plan Year, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Plan Year's Annual Deferral Amount and Discretionary Company Contribution Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount and the Discretionary Company Contribution Amount for such Plan Year, plus amounts credited or debited thereon in the manner provided in Section 3.5 above, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment)." The Company has caused this Amendment to be signed by its duly authorized officer as of the 12th day of November, 1998. EMCON By: /s/ R. Michael Momboisse ---------------------------------------------- R. Michael Momboisse Chief Financial Officer - Vice President Legal 83 EX-10.34 7 EIGHTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.34 EIGHTH AMENDMENT TO CREDIT AGREEMENT THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Eighth Amendment") dated as of November 30, 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 $13,785,713 and Borrower has no 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) December 31, 1998 for the Line of Credit; or (c) June 30, 2001 for the Term Loan." 3. Effectiveness of the Eighth amendment. This Eighth 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. 84 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 Eighth 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 Eighth Amendment which constitutes or would constitute an Event of Default under the Agreement. 6. Governing Law. This Eighth 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 Eighth 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: /s/ David Jackson By: /s/ Eugene M. Herson - - -------------------------- ----------------------------- Title: Vice President Title: CFO & President By: /s/ R. Mike Momboisse ----------------------------- Title: CFO and VP Legal 85 PROMISSORY NOTE (BASE RATE) Borrower Name: EMCON Borrower Address: Office 70061 400 SOUTH EL CAMINO REAL, STE 1200 Loan Number 259-668-7520 0081-00-000 SAN MATEO, CA 94402 Maturity Date DECEMBER 31, 1998 Amount $10,000,000.00 $10,000,000.00 Date NOVEMBER 30, 1998 - - -------------- ----------------------- FOR VALUE RECEIVED, on DECEMBER 31, 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 at maturity. 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 telephoning 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 Debtor promptly after the selection is made. Failure to send such confirmation shall not affect Bank's rights to collect interest at at the 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 Interest 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 prior 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. Debtor shall pay any amounts due under this note in lawful money of the United States at Bank's NORTHERN CALIFORNIA 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. 86 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 note at a per annum rate equal to five percent (5%) in excess of the interest rate specified in paragraph 1.b., above, calculated from the 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 written notice 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 bearing interest at a Base Interest Rate prior to its scheduled payment date. Liquidated Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) between (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 above 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 interest 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 acknowledges 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 prepayment may result in Bank incurring additional costs, expenses or liabilities; and Debtor agrees to pay these liquidated 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 agreement, 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, judgment, 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 taxes other than property taxes; (l) the default by any obligor personally liable for amounts 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 87 all obligations under this note immediately due and payable; 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 of 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 availability, 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 jurisdiction 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 the numerically 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 on the 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 which 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 selected 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: /s/ Eugene M. Herson - - ------------------------------- Title: CFO and President By: /s/ R. Michael Momboisse - - ------------------------------- Title: CFO and VP Legal 88 EX-10.35 8 NINTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.35 NINTH AMENDMENT TO CREDIT AGREEMENT THIS NINTH AMENDMENT TO CREDIT AGREEMENT (this "Ninth Amendment") dated as of December 22, 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 $13,785,713 and Borrower has no 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) February 1, 1999, for the Line of Credit; or (c) June 30, 2001 for the Term Loan." 3. Effectiveness of the Ninth amendment. This Ninth 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 Ninth 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. 89 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 Ninth 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 Ninth Amendment which constitutes or would constitute an Event of Default under the Agreement. 6. Governing Law. This Ninth 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 Ninth 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: /s/ David Jackson By: /s/ Eugene M. Herson - - ------------------------- ---------------------------- Title: Vice President Title: CFO & President By: /s/ R. Mike Momboisse ---------------------------- Title: CFO and VP Legal 90 PROMISSORY NOTE (BASE RATE) Borrower Name: EMCON Borrower Address: Office 70061 400 SOUTH EL CAMINO REAL, STE 1200 Loan Number 259-668-7520 0081-00-000 SAN MATEO, CA 94402 Maturity Date FEBRUARY 1, 1999 Amount $10,000,000.00 $10,000,000.00 Date DECEMBER 31, 1998 - - -------------- ----------------------- FOR VALUE RECEIVED, on FEBRUARY 1, 1999, 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 at maturity. 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 telephoning 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 Debtor promptly after the selection is made. Failure to send such confirmation shall not affect Bank's rights to collect interest at at the 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 Interest 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 prior 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. Debtor shall pay any amounts due under this note in lawful money of the United States at Bank's NORTHERN CALIFORNIA 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. 91 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 note at a per annum rate equal to five percent (5%) in excess of the interest rate specified in paragraph 1.b., above, calculated from the 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 written notice 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 bearing interest at a Base Interest Rate prior to its scheduled payment date. Liquidated Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) between (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 above 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 interest 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 acknowledges 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 prepayment may result in Bank incurring additional costs, expenses or liabilities; and Debtor agrees to pay these liquidated 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 agreement, 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, judgment, 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 taxes other than property taxes; (l) the default by any obligor personally liable for amounts 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 92 all obligations under this note immediately due and payable; 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 of 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 availability, 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 jurisdiction 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 the numerically 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 on the 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 which 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 selected 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: /s/ Eugene M. Herson Title: CFO and President By: /s/ R. Michael Momboisse Title: CFO and VP Legal 93 EX-10.36 9 TENTH AMENDMENT TO CREDIT AGREEMENT] EXHIBIT 10.36 TENTH AMENDMENT TO CREDIT AGREEMENT THIS TENTH AMENDMENT TO CREDIT AGREEMENT (this "Tenth Amendment") dated as of January 28, 1999, 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 $13,428,570 and Borrower has no 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) March 19, 1999, for the Line of Credit; or (c) June 30, 2001 for the Term Loan." 3. Effectiveness of the Tenth amendment. This Tenth 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 Tenth 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. 94 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 Tenth 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 Eighth Amendment which constitutes or would constitute an Event of Default under the Agreement. 6. Governing Law. This Tenth 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 Tenth 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: /s/ David Jackson By: /s/ Eugene M. Herson - - -------------------------- ------------------------------- Title: Vice President Title: CFO & President By: /s/ R. Mike Momboisse ------------------------------- Title: CFO and VP Legal 95 PROMISSORY NOTE (BASE RATE) Borrower Name: EMCON Borrower Address: Office 70061 400 SOUTH EL CAMINO REAL, STE 1200 Loan Number 259-668-7520 0081-00-000 SAN MATEO, CA 94402 Maturity Date MARCH 19, 1999 Amount $10,000,000.00 $10,000,000.00 Date JANUARY 27, 1999 - - -------------- ---------------------- FOR VALUE RECEIVED, on MARCH 19, 1999 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 at maturity. 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 telephoning 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 Debtor promptly after the selection is made. Failure to send such confirmation shall not affect Bank's rights to collect interest at at the 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 Interest 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 prior 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. Debtor shall pay any amounts due under this note in lawful money of the United States at Bank's NORTHERN CALIFORNIA 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. 96 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 note at a per annum rate equal to five percent (5%) in excess of the interest rate specified in paragraph 1.b., above, calculated from the 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 written notice 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 bearing interest at a Base Interest Rate prior to its scheduled payment date. Liquidated Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) between (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 above 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 interest 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 acknowledges 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 prepayment may result in Bank incurring additional costs, expenses or liabilities; and Debtor agrees to pay these liquidated 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 agreement, 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, judgment, 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 taxes other than property taxes; (l) the default by any obligor personally liable for amounts 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 all obligations under this note immediately due and payable; 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. 97 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 of 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 availability, 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 jurisdiction 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, two or three 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 the numerically 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 on the 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 which 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 selected 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: /s/ Eugene M. Herson Title: CFO and President By: /s/ R. Michael Momboisse Title: CFO and VP Legal 98 EX-10.37 10 EXTENTION AND MODIFICATION AGREEMENTS EXHIBIT 10.37 EXTENSION AND MODIFICATION AGREEMENTS THIS EXTENSION AND MODIFICATION AGREEMENT ("Agreement") is made as of March 19, 1999 between UNION BANK OF CALIFORNIA, N.A., formerly known as The Bank of California, N.A. ("Bank") and EMCON, a California corporation. RECITALS This Agreement is made and entered into in reliance on the accuracy of the following recitals which are acknowledged by Borrower and Bank to be true and accurate: A. Borrower is liable to Bank as follows (collectively, "Liabilities"): a line of credit ("Line of Credit") and a term loan ("Term Loan") originally granted pursuant to the terms of that certain Credit Agreement dated as of February 29, 1996 (as amended, supplemented, extended, restated, or renewed from time to time, the "Credit Agreement") by and between Bank and Borrower and evidenced by that certain (i) Promissory Note Base Rate dated January 27, 1999 in the maximum principal amount of $10,000,000.00 ("Line of Credit Note"); and (ii) Term Loan Note dated February 29, 1996 in the original principal amount of $10,000,000.00 ("Term Note" together with the Line of Credit Note, each a "Note" and collectively, the "Notes"). As of March 17, 1999, the outstanding principal balance under the (1) Line of Credit Note was $1,190,893.71, together with accrued and unpaid interest in the amount of $9,138.86; and (2) Term Note was $3,428,570.00, together with accrued and unpaid interest in the amount of $10,497.94; and (3) together with all accruing interest, fees, costs and expenses provided in the Loan Documents. The purpose of the Line of Credit was to support working capital needs. The purpose of the Term Loan was to support Borrower's acquisition of Organic Waste Technologies ("OWT") and, in connection with this acquisition, Borrower obtained financing for the operating requirements of OWT from Charter One Bank ("Charter One"). As of March 17, 1999, $150,000.000 in the aggregate is unpaid under unexpired letters of credit issued by Bank for the account of Borrower. B. To secure Borrower's obligations to Bank, Borrower executed and delivered to Bank that certain (i) Security Agreement; and (ii) Pledge Agreement, each dated as of February 29, 1996, each executed by Borrower in favor of Bank (each a "Security Agreement" and collectively, the "Security Agreements") pursuant to which Borrower granted to Bank a security interest in personal property and fixtures described therein ("Collateral") which security interest was perfected by that certain UCC-1 Financing Statement filed February 29, 1999, as File No. 9606660051, in the Office of the Secretary of State of the State of California ("UCC-1"). Pursuant to the Security Agreements and UCC-1 Bank has a valid, perfected lien of first priority upon the Collateral. C. The following documents evidence Borrower's obligations to and relationship with Bank: the Agreement, the Line of Credit Note, the Term Note, the Credit Agreement, the Security Agreements, the Additional Security Agreement (defined below), the SLC Agreement (defined below) and the UCC-1. The documents described above, together with any other documents executed by or among the parties in connection with the Liabilities, and any and all amendments and modifications thereto, are referred to collectively in this Agreement as "Loan Documents". There are not written or oral agreements concerning or affecting the Liabilities between Borrower on the one hand and Bank on the other, other than the Loan Documents. Unless otherwise defined herein, all capitalized terms shall have the meanings assigned to them in the Loan Documents. 99 D. Borrower, Bank and Charter One have been working to combine Borrower's and OWT's existing financing arrangements into a combined credit relationship that would be agented by Bank ("Joint Lending Project"). Borrower has recently advised Bank and charter One that Borrower may be sold and has requested that Bank and Charter One defer work on the combined credit relationship. The Line of Credit Note will mature on March 19, 1999, on which date all sums of principal and accrued unpaid interest will be due and payable in full. Borrower has advised Bank that because of the potential sale of Borrower, Borrower will not satisfy it obligations to Bank on the Termination Date ("Potential Default"). In addition, Borrower has advised Bank that financing requirements for its working capital requirements equal approximately $5,000,000.00 for the remaining term (as extended by this Agreement) of the Line of Credit Note. Borrower has further requested that Bank extend the Termination Date and provide additional credit in the form of a cash secured standby letter of credit. Borrower is also agreeable to a reduction in the maximum amount available under the Line of Credit Note and to the cancellation of OWT's line of credit from Charter One. E. At Borrower's request, Bank is willing to modify the Loan Documents as set forth herein, provided that the conditions set forth herein are satisfied within the time periods required under this Agreement, and provided further that all security interests and liens under the Loan Documents shall continue to exist and remain in full force and effect. Bank is entering into this Agreement for the sole purpose of allowing Borrower an additional opportunity to negotiate the possible sale of Borrower. AGREEMENT NOW THEREFORE, in consideration of the foregoing and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: 1. Incorporation of Recitals. Each of the above recitals is incorporated herein and deemed to be the agreement of the Bank and Borrower and is relied upon by each party to this Agreement in agreeing to the terms of this Agreement. 2. Confirmation of Collateral. Borrower hereby grants and confirms that all obligations of Borrower to Bank are secured by a perfected, first priority security interest in Collateral. 3. Conditions Precedent. Borrower understands that this Agreement shall not be effective and Bank shall have no obligation to amend the terms of the Loan Documents as provided herein unless and until each of the following conditions precedent has been satisfied not later than March 19, 1999, or waived by Bank (in Bank's sole discretion): (a) Borrower shall have executed and delivered to Bank this Agreement together with (i) a promissory note, in form and substance satisfactory to Bank in the maximum principal amount of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00), dated as of the date of this Agreement ("Replacement Line of Credit Note"), which Replacement Line of Credit Note shall supersede and replace the Line of Credit Note in its entirety, and which Replacement Line of Credit Note shall evidence all amounts outstanding under the Line of Credit Note, and such outstanding amounts to be repaid as provided in the Replacement Line of Credit Note; and (ii) a security agreement, in form and substance satisfactory to Bank ("Additional Security Agreement"), granting Bank a security interest in that certain certificate of deposit no. 7009033775 in the principal amount of $136,500.00, issued and held by Bank, and all renewals of and substitutions for such certificate ("Additional Collateral"). 100 (b) Borrower shall have reimbursed Bank for Bank's costs and expenses through the date of this Agreement, including, without limitation, reasonable attorney's fees and expenses (including the fees of Bank's inside counsel), incurred in connection with both the Joint Lending Project and the negotiation and drafting of this Agreement and the transactions contemplated hereby in the amount of $6,610.00. (c) On or before such time as Bank may require, Borrower shall have taken any and all actions and executed and delivered to Bank any and all documents necessary or appropriate in Bank's sole discretion to effectuate this Agreement. (d) Borrower shall have paid to Bank a non-refundable documentation fee in the amount of $10,000.00 4. Documentation Fee. In consideration of the extension and modifications granted by Bank to Borrower pursuant to this Agreement, Borrower agrees to pay to Bank a non-refundable fee of $10,000.00 which amount shall be paid as maybe provided in Section 3 above. 5. Waiver of Potential Default. Subject to all of the terms and conditions of this Agreement, including, without limitation, the requirements of Section 3 hereof, Bank hereby agrees to waive its default rights in connection with the Potential Default, provided, however, that this waiver is not a waiver of any subsequent breach of the same provision of the Credit Agreement or any Note or other Loan Documents, nor is it a waiver of any current or future breach of any other provision of the Credit Agreement or any Note or other Loan Documents. Bank is not obligated to provide this or any other waiver of its default rights. Further, the Bank reserves all of the rights, powers and remedies available to it under the Credit Agreement, each Note and any other Loan Documents if any subsequent breach of the same provisions or any other provision of the Credit Agreement, any Note or any other Loan Document should occur. 6. Modification of Loan Documents. To induce Bank to enter into this Agreement, Borrower agrees that the Loan Documents are hereby supplemented and modified as follows, which modifications shall supersede and prevail over any conflicting provisions of the Loan Documents: (a) The date "March 19, 1999" in the paragraph entitled "Termination Date" in Article One of the Credit Agreement is hereby amended to "April 30, 1999". (b) Section 2.1.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "2.1.1 Line of Credit. Subject to the terms and conditions of this Agreement from time to time prior to Termination Date, upon request by Borrower, Bank will provide extensions of credit ("Line of Credit") to Borrower in the form of Advances. Letters of Credit that, in the aggregate, shall not exceed at any time FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) (the "Credit Limit"), in the following manner." (c) Section 2.1.1(a) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(a) Advances. Provide up to the Credit Limit in aggregate outstanding principal amounts ("Advance Sublimit") in Advances to Borrower. Each Advance shall be payable no later than the Termination Date. Borrower may borrow, repay and reborrow under the 101 Advance Sublimit, as Borrower may elect, in minimum amounts of $10,000.000 or integral multiples thereof. Advances shall be used by Borrower for the purpose of working capital for its own operations". (d) A new Section 2.1.3 is hereby added to the Credit Agreement and shall read as follows: "2.1.3 Standby Letter of Credit/Cash Secured. Provide up to $136,500.00 in aggregate outstanding unpaid face amount for the purpose of issuing an irrevocable, standby letter of credit, in form and substance satisfactory to Bank, for the account of Borrower in United States Dollars ("SLC"). The SLC shall expire on September 30, 1999. Borrower shall execute, deliver and perform in accordance with Bank's standard form Standby Letter of Credit Application & Agreement, all terms of which are incorporated herein by this reference ("SLC Agreement"). To secure Borrower's obligations to Bank evidenced by the SLC Agreement, Borrower execute and deliver to Bank that certain security agreement dated as of March 19, 1999 (Additional Security Agreement")" providing to Bank a first priority security interest in that certain certificate of deposit no. 7009033775 in the principal amount of $136,500.00, issued and held by Bank, and all renewals of an substitutions for such certificate". 7. Representations and Warranties. To induce Bank to enter into this Agreement, Borrower hereby represents and warrants to Bank as follows: (a) All representations and warranties contained in this Agreement and in any and all of the other Loan Documents are true and correct as of the date of this Agreement, and all such representations and warranties shall survive the execution of this Agreement. (b) The execution, delivery and performance by Borrower of this Agreement and all documents contemplated hereunder are within Borrower's powers, have been duly authorized, and are not in conflict with Borrower's articles of incorporation or by-laws, or the terms of any charter or other organizational document of Borrower; and all such documents constitute valid and binding obligations of Borrower, enforceable in accordance with their terms. In addition, such execution, delivery and performance by Borrower will not violate any law, rule or order of any court or governmental agency or body to which Borrower is subject; and cannot (except as expressly provided or contemplated herein) result in the creation or imposition of any lien, security interest or encumbrance on any now owned or hereafter acquired property of Borrower. (c) With the exception of the Potential Default, no event has occurred or failed to occur that is, or, with notice or lapse of time or both would constitute a default, an event of default, or a breach or failure of any condition under any Loan Document. (d) Each Note represents an unconditional, absolute, valid and enforceable obligation against Borrower. Borrower has no claims or defenses against Bank or any other person or entity which would or might affect; (a) the enforceability of any provisions of the Loan Documents; or (b) the collectability of sums advanced by Bank in connection with the Liabilities. Borrower understands and acknowledges that the Bank is entering into this Agreement in reliance upon, and in partial consideration for, this acknowledgment and representation, and agrees that such reliance is reasonable and appropriate. 102 8. Borrower's Covenants. Unless Bank otherwise consents in writing during the extension period provided herein, Borrower will do the following: (a) Comply with all requirements of all Loan Documents to the extent not inconsistent with this Agreement. (b) On or before April 5, 1999, provide Bank with written evidence of the cancellation of OWT's credit facility with Charter One. (c) Not enter into any agreements with any of its other creditors that might impair it ability to perform under this Agreement. (d) Ensure that Bank is fully informed at all times of all matters relating to the operation of Borrower's business, including any new reformed or revived subsidiaries or affiliates, any planned changes in key personnel or manner of operating its business. (e) Ensure that Bank is fully informed at all times of all matters relating to the possible sale of Borrower. (f) Take any and all actions of any kind or nature whatsoever, either directly or indirectly, that are necessary to prevent Bank from suffering a loss with respect to the Liabilities or being deprived of the Collateral or the Additional Collateral, or of any rights or remedies of Bank with respect to the Liabilities, the Loan Documents or this Agreement in the event of a default by Borrower under this Agreement or any other Loan Documents (or the ability to exercise such any rights or remedies). (g) Reimburse Bank for Bank's costs and expenses as set forth in Section 3(b) of this Agreement for such costs and expenses for which Bank did not have invoices or statements as of the date of this Agreement. 9. Additional Events of Default. In addition to the events of default set forth in the Loan Documents, the occurrence of any of the following events of default other than the Potential Default shall be an event of default and, at Bank's option, may make all obligations of Borrower immediately due and payable, all without demand, presentment or notice, all of which requirements Borrower hereby waives: (a) Failure to perform any of the obligations set forth in this Agreement or in any other Loan documents (as the same may be modified by this Agreement). (b) Any representation or warranty of Borrower herein or in any other Loan Document shall be false, misleading or incorrect. (c) If there is any substantial impairment of the prospect of Borrower's satisfaction of its obligations to Bank or substantial impairment of the value of the Collateral or the Additional Collateral, or any substantial impairment of the priority of Bank's security interest in or lien on any Collateral or Additional Collateral. 10. Remedies. Upon the occurrence of an Event of Default and at all times thereafter, Bank, without the necessity of obtaining any prior approval of any court, shall be entitled to terminate all advances or other extensions of credit under the Loan Documents and Bank shall also be entitled to exercise all rights and remedies available to Bank as a creditor generally, including, without limitation, all remedies 103 available to Bank under the Loan Documents, as well as rights and remedies available to Bank at law or in equity. All such rights and remedies shall be cumulative. No failure or delay on the part of Bank in exercising any power, right or remedy under any of the Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any such power, right or remedy shall preclude any further exercise thereof or the exercise of any other power, right or remedy. 11. Dispute Resolution. This Agreement hereby incorporates any alternative dispute resolution agreement previously, concurrently or hereafter executed between Borrower and Bank. 12. Waiver of Statute of Limitations. Borrower shall not please the statute of limitations to any action brought by Bank with respect to the Liabilities, the Notes, Credit Agreement, any other Loan Document, the Collateral, and hereby waives the statute of limitations in respect of any and all sums due from it under the Notes. 13. Miscellaneous (a) All the parties hereto agree to and will cooperate fully with each other in the performance of this Agreement and the Loan Documents including, without limitation, executing any additional documents and instruments reasonable or necessary to the full performance of this Agreement. Without limiting the generality of the foregoing, Borrower agrees to execute such other and further documents and instruments as Bank may request to implement the provisions of this Agreement and to perfect and protect the liens and security interests created by this Agreement or any other Loan Document. (b) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto, their respective successors and assigns. No other person or entity shall be entitled to claim any right or benefit hereunder, including, without limitation, the status of a third party beneficiary hereunder, except the Released Parties. (c) Bank and Borrower agree that except as expressly provided herein, the Loan Documents shall remain in full force and effect in accordance with their respective terms, and this Agreement shall not be construed to: (i) Impair the validity, perfection or priority of any lien or security interest securing Borrower's obligations to Bank; (ii) Waive or impair any rights, powers or remedies of Bank under the Loan Documents; (iii) Constitute an agreement by Bank or require Bank to grant forbearance periods or extend the term of the Credit Agreement, the Line of Credit Note, or the time for payment of any of Borrower's obligations to Bank except as expressly provided herein, none of which Bank agrees or has agreed to do, and all of which matters are in Bank's sole and absolute discretion; or (iv) make any other loans or other extension of credit to or for the benefit of Borrower. In the event of any inconsistency between the terms of this Agreement and any other Loan Document, this Agreement shall govern. Borrower acknowledges that it has consulted with counsel and with such other experts and advisors as it has deemed necessary in connection with 104 the negotiation, execution and delivery of this Agreement, or has had an opportunity to so consult and has knowingly chosen not to do so. This Agreement shall be construed without regard to any presumption or rule requiring that it be construed against the party causing this Agreement or any part hereof to be drafted. The headings used in this Agreement are for convenience only and shall be disregarded in interpreting the substantive provisions of this Agreement. (d) This Agreement and the other Loan Documents shall not be deemed or construed to create a partnership, tenancy in common, joint tenancy, joint venture, co-ownership or any other relationship aside from a continuing debtor-creditor relationship between Borrower on the one hand and Bank on the other. (e) In case any provision in this Agreement shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this agreement and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (f) If Bank receives any payment or rents, issues, profits or proceeds of any Collateral which are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be paid to a trustee, debtor-in-possession, receiver or any other party under any bankruptcy law, common law, equitable cause or otherwise, then, to such extent, the obligations or part thereof intended to be satisfied by such payments or proceeds shall be reserved and continue as if such payments or proceeds had not been received by Bank. (g) This Agreement may not be amended, waived or modified in any manner without the prior written consent of the party against whom the amendment, waiver or modification is sought to be enforced. (h) Borrower shall reimburse Bank for all costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements (and fees and disbursements of Bank's in-house counsel) expended or incurred by Bank in an arbitration, mediation, judicial reference, legal action or otherwise in connection with; (a) the negotiation, preparation, amendment, interpretation and enforcement of the Loan Documents, including, without limitation, during any workout, attempted workout, and/or in connection with the rendering of legal advice as to Bank's rights, remedies and obligations under the Loan Documents; (b) collecting any sum which becomes due Bank under any Loan Document; (c) any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal; or (d) the protection, preservation or enforcement of any rights of Bank. For the purposes of this section, attorneys' fees shall include, without limitation, fees incurred in connection with the following: (1) contempt proceedings; (2) discover; (3) any motion proceeding or other activity of any kind in connection with a bankruptcy proceeding or case arising out of or relating to any petition under Title 11 of the United Sates Code, as the same shall be in effect from time to time, or any similar law; (4) garnishment, levy, and debtor and third party examinations; and (5) postjudgment motions and proceedings of any kind, including, without limitation, any activity taken to collect or enforce any judgment. All of such costs and expenses shall bear interest from the time of demand at the rate then in effect under the Line of Credit Note. (i) Except as otherwise provided herein, this Agreement and all other Loan Documents and the rights and obligations of the parties hereto shall be governed by the laws of the State of California without regard to principles concerning choice of law. In any action arising out of or connected with this Agreement, Borrower hereby expressly consents to the personal jurisdiction of any state or federal court located in the State of California and also consents to service of process by any means authorized by federal or governing state law. 105 (j) This Agreement may be executed in any number of counterparts which, when taken together, shall constitute but one agreement. (k) All representations, warranties, covenants, agreements, waivers and releases of Borrower contained herein shall survive the payment in full of Borrower's obligations to Bank. (l) Any notices or other communications provided for or allowed hereunder shall be effective only when given by one of the following methods and addressed to the respective party at its address given with the signatures at the end of this Agreement and shall be considered to have been validly given: (a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first class postage prepaid, with the United States Postal Service; (c) on the next business day, if sent by overnight courier service of recognized standing; and (d) upon telephoned confirmation of receipt, if telecopied. The addresses to which notices or demands are to be given may be changed from time to time by notice delivered as provided above. (m) In the event of any inconsistency between the terms of this Agreement and any other billings, statements or the like form Bank to Borrower in connection with the Liabilities, the terms of this Agreement shall prevail over the terms of any other such billings, statements or the like. (n) This Agreement and other Loan Documents are intended by the parties as the final expression of their agreement and therefore incorporate all negotiations of the parties hereto and are the entire agreement of the parties hereto. Borrower acknowledges that it is relying on no written or oral agreement, representation, warranty, or understanding of any kind made by Bank or any employee or agent of Bank except for the agreements of Bank set forth herein or in the other Loan Documents. Except as expressly set forth in this Agreement, the other Loan Documents remain unchanged and in full force and effect. Where any provisions of the Credit Agreement amended by this Agreement appear in a promissory note tied to the Credit Agreement, the same provisions in said promissory note shall be deemed likewise amended. IN WITNESS WHEREOF, Bank and Borrower have executed this Agreement as of the date set forth in the preamble. EMCON, a UNION BANK OF CALIFORNIA, N.A. California corporation By: \s\ Eugene M. Herson By: - - ----------------------------- ------------------------------ Title: CEO and President Title: By: \s\ R. Michael Momboisse - - ----------------------------- Title: CFO and VP Legal 106 EX-23.1 11 REPLACEMENT LINE OF CREDIT NOTE EXHIBIT 23.1 REPLACEMENT LINE OF CREDIT NOTE ================================================================================ Borrower Name EMCON ================================================================================ Borrower Address Office Loan Number 400 South El Camino Real, Suite 1200 70061 San Mateo, California 94402-1708 -------------------------------------- Maturity Date Amount April 30, 1999 $5,000,000.00 ================================================================================ $5,000,000.00 Effective as of March 19, 1999 FOR VALUE RECEIVED, on April 30, 1999 ("Maturity Date"), the undersigned ("Borrower") promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the principal sum of FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00), 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. At any time prior to the maturity of this Note, subject to the provisions of paragraph 4, below, of this Note, Borrower 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. All computations of interest under this Note shall be made on the basis of a year of 360 days, for actual days elapsed. 1. INTEREST PAYMENTS. Borrower shall pay interest on the 19TH day of each month commencing the first such date to occur after the first advance under this Note. Should interest not be paid when due, it shall become part of the principal and bear interest as herein provided. On the Maturity Date, all principal and interest then unpaid shall be due and payable. (a) BASE INTEREST RATE. At Borrower's options, amounts outstanding hereunder in increments of at least $100,000.00 shall bear interest at a rate, based on an index selected by Borrower, which is 1-3/4% per annum in excess of Bank's LIBOR Rate for the Interest Period selected by Borrower, in each case acceptable to Bank. No Base Interest Rate may be changed, altered or otherwise modified until the expiration of the Interest Period selected by Borrower. The exercise of interest rate options by Borrower shall be as recorded in Bank's records, which records shall be prima facile 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 Borrower from its 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, Borrower 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 telephoning 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). 107 Bank will mail a written confirmation of the terms of the selection to Borrower promptly after the election is made. Failure to send such confirmation shall not affect Bank's rights to collect interest at the 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 Interest Rate selected by Borrower. (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 equal to the Reference Rate, which rate shall vary as and when the Reference Rate changes. Borrower shall pay all amounts due under this Note in lawful money of the United States at Bank's Northern California 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, Borrower shall pay a fee of $100 to Bank. 3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of Bank, and, to the extent permitted by law, interest shall be payable on the outstanding principal under this Note at a per annum rate equal to five percent (5%) in excess of the Reference Rate, calculated from the 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. Borrower may prepay amounts outstanding under this Note bearing interest at a Base Interest Rate in whole or in part provided Borrower has given Bank not less than five (5) Business Days prior written notice of Borrower'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 bearing interest at a Base Interest Rate prior to its scheduled payment date. Liquidated Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) between (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 States 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 required and have been made as 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 above product to present value using the Yield Rate as the annual discount factor. 108 (b) In no event shall Bank be obligated to make any payment or refund to Borrower, nor shall Borrower 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 not prepayment had occurred. All prepayments shall include payment of accrued interest 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 Borrower a statement of the amount payable on account of prepayment. Borrower acknowledges that (1) 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 prepayment may result in Bank incurring additional costs, expenses or liabilities; and Borrower agrees to pay these liquidated 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 Borrower to make any payment required under this Note when due; (b) any breach, misrepresentation or other default by Borrower, any guarantor, co-maker, endorser, or any person or entity other than Borrower providing security for this Note (hereinafter individually and collectively referred to as the "Obligor") under any security, 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, judgment, 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 of levy, notice to withhold, or other legal process for taxes other than property taxes; (l) the default by any Obligor personally liable for amounts 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 all obligations under this Note immediately due and payable; 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 BORROWER. If any amounts owing under this note are not paid when due, borrower promises to pay all costs and expenses, including reasonable attorneys' fees, incurred by bank in the collection or enforcement of this note. Borrower and any endorser of this Note, for the maximum period of time and the full extent permitted by law, (a) waive diligence, presentment, demand, notice of 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 amount due under this Note. If this Note is signed by more than one party, the term "Borrower" 109 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 availability, and interest under this Note shall accrue until the funds are deemed collected. In any action brought under or arising out of this Note, Borrower and any Obligor, including their successors and assigns, hereby consent to the jurisdiction of any competent court within the State of California, as provided in any alternative dispute resolution agreement executed between Borrower 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 Borrower 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, two, or three 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 the numerically 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 the last calendar day of such month. Any Interest Period which would otherwise end 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 on the 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 which dollar deposits, in immediately available funds and in lawful money of the United States would be offered to Bank, outside of the United States, for a term coinciding with the Interest Period selected by Borrower and for an amount equal to the amount of principal covered by Borrower's interest rate selection, plus Bank's costs, including the cost, 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 charged by Bank at any given time. This Note is the Replacement Line of Credit Note defined in that certain Extension and Modification Agreement dated as of March 19, 1999 between Bank and Borrower (as amended, supplemented, extended, restated, or renewed from time to time, "Agreement"), and is governed by the terms thereof, and supersedes and replaces that certain Line of Credit Note dated January 27, 1999, as amended from time to time, executed by Borrower in favor of Bank (the "Previous Note"). As of the effective date of the Agreement, all unpaid principal, interest and other amounts accrued and outstanding under the Previous Note shall for all purposes be and constitute unpaid 110 amounts outstanding under, and evidenced by this Note. Each capitalized term not otherwise defined in this Note shall have the meaning set forth in the Agreement. EMCON, a California corporation By: \s\ Eugene M. Herson ------------------------------- Title: President and CEO By: \s\ R. Michael Momboisse ------------------------------- Title: CFO and VP Legal 111 EX-23.1 12 CONSENT INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No.333-61151) pertaining to the 1998 Stock Option Plan of EMCON of our report dated February 23, 1999, with respect to the consolidated financial statements and schedules of EMCON included in its Annual Report (Form 10-K) for the year ended December 31, 1998. San Francisco, California March 24, 1999 112 EX-27 13 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 inthe Company's Form 10-K for the twelve month period ended December 31, 1998, and is qualified in its entirety by reference to such financial statements and the notes thereto. U.S. DOLLARS 12-MOS JAN-1-1999 JAN-3-1998 JAN-1-1999 1 2,677,000 0 40,885,000 1,538,000 2,630,000 53,475,000 34,890,000 18,371,000 95,889,000 25,168,000 0 0 0 41,628,000 0 95,889,000 129,960,000 129,960,000 76,749,000 76,749,000 48,081,000 755,000 1,234,000 3,141,000 1,508,000 1,633,000 0 0 0 1,633,000 0.19 0.19
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