-----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, OqUR4MwI71b+sTuJ9qICnPMwfdaUutd/4KGq7ry1g+SboHjxDw1inUjm3x91SIRR ULAy7ci95sWBe0FUmrSqDA== 0000819977-97-000001.txt : 19970401 0000819977-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000819977-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMCON CENTRAL INDEX KEY: 0000819977 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 941738964 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16225 FILM NUMBER: 97568278 BUSINESS ADDRESS: STREET 1: 400 S EL CAMINO REAL STE 1200 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4153751522 MAIL ADDRESS: STREET 1: P O BOX 349014 CITY: SACRAMENTO STATE: CA ZIP: 95834-9014 FORMER COMPANY: FORMER CONFORMED NAME: EMCON ASSOCIATES /CA/ DATE OF NAME CHANGE: 19910611 10-K 1 1996 FORM 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, 1996 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 (415) 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. [ X ] 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 February 28, 1997, was $16,410,000 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 28, 1997, was 8,543,012. 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, 1996 are incorporated by reference in Part III of this Form 10-K. The Index to Exhibits appears on pages 41 of this Report. This Report, including all exhibits and attachments, contains 127 pages. 2 TABLE OF CONTENTS PART I PAGE Item 1: Business................................................. 4 Item 2: Properties............................................... 10 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..................... 12 Item 8: Financial Statements and Supplementary Data.............. 18 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 37 PART III Item 10: Directors and Executive Officers of the Registrant....... 37 Item 11: Executive Compensation................................... 37 Item 12: Security Ownership of Certain Beneficial Owners and Management............................................. 37 Item 13: Certain Relationships and Related Transactions........... 37 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 38 Signatures............................................... 39 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 clients. EMCON is a leader in the design, construction and remediation of solid and hazardous waste transfer, storage and disposal facilities, having participated in the design, construction and remediation of several hundred such facilities in the United States, as well as Argentina, Canada, Hong Kong, Mexico, Peru and Venezuela. EMCON's waste facility services include site selection and evaluation, facility design, development of preprocessing and operating plans, 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; oceanographers; plant ecologists; chemists; geologists; hydrogeologists; hydrologists and toxicologists. References to the Company and EMCON in this report include the Company's subsidiaries, unless the context indicates otherwise. On February 29, 1996, EMCON acquired all the outstanding capital stock of Organic Waste Technologies, Inc. ("OWT"), a Cleveland-based construction, equipment and operations and maintenance company with significant expertise in solid waste management. OWT was subsequently integrated into and is now a significant component of the Company's Operation and Construction Division. The Company purchased OWT for $13,859,000 in cash plus the issuance of convertible notes and other contractual obligations to pay certain senior OWT management in the aggregate principal amount of $1,747,000. The notes and other contractual obligations to pay bear interest payable at the rate of 8% per annum with all principal due and payable in full on March 1, 2001. The above obligations 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 notes have not been converted into OWT shares they 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. The Company, through its wholly owned subsidiary, Columbia Analytical Services, Inc. ("CAS"), also operates a full-service, integrated network of analytical laboratories in Alaska, Arizona, California, Florida, New York and Washington. On December 31, 1996, the Company signed a Letter of Intent to sell CAS to the CAS employees for cash, notes and other consideration valued, in total, at approximately $7.5 million. The sale is expected to close prior to the end of 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. On December 31, 1996, the Company completed the sale of its Yolo landfill gas-to-energy project in return for a one-time cash payment in January, 1997 of $800,000. The Company incurred a loss in 1996 of $88,000 on the sale. 4 On March 6, 1997, the Company completed the sale of its Marina landfill gas-to-energy project for a net up front cash payment of $800,000. The Company is eligible to receive an additional $200,000 prior to December 31, 1997 subject to certain post-closing contingencies - specifically, that no material adverse changes are made to the provisions of Section 29 of the Internal Revenue Code of 1986, as amended, pertaining to the availability of unconventional fuel credits. Services Following the sale of CAS, the Company will be comprised of two distinct operating divisions: the Professional Services Division (formerly known as the Consulting Division); and the Operations and Construction Division. Solid Waste Services The Company's Professional Services Division and Operations and Construction Division 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 provision 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 disposal site design, the Company has developed expertise in three critical areas of waste disposal technology - 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 system. Federal regulation now requires that all new land 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 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. 5 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. 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 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 such 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 6 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 ground-water 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. In-Plant 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 and health and safety compliance requirements. EMCON offers responsive assistance to the regulated community in a broad range of areas including air quality regulatory compliance through provision of air quality assessment and engineering services. Company personnel have direct experience in air quality permitting under the New Source Review (NSR), Prevention of Significant Deterioration (PSD) and added requirements under the Clean Air Act Amendments of 1990, preparing emission inventories (for criteria and toxic air pollutants), performing risk assessment to evaluate potential human and ecological risk, evaluating emission control technologies (BACT/RACT/LAER/MACT), dispersion modeling, ambient air quality and meteorological measurements, pollution prevention and waste minimization, indoor air, litigation support and expert testimony, and compliance audits. EMCON's air quality staff are fully integrated with staff in other environmental disciplines to provide cost effective evaluations and compliance solutions to situations which involve multiple media contamination. In addition, EMCON provides OSHA required environmental health and safety training to its clients and other EMCON subsidiaries. Analytical Laboratory Services Columbia Analytical Services, Inc. (CAS), EMCON's wholly-owned laboratory subsidiary, provides a broad spectrum of analytical services for its clients in industry and government. Industrial accounts include aerospace, defense, electronics, petroleum, pulp and paper, and waste disposal. CAS is comprised of a network of analytical laboratories headquartered in Kelso, Washington, with branches in Anchorage, Alaska; Phoenix, Arizona; Canoga Park and San Jose, California; Jacksonville, Florida; Tuxedo, New York, and Bothell, Washington. CAS also operates a number of mobile laboratories. With a highly qualified staff, a rigorous quality assurance program, and state-of-the-art analytical testing equipment, CAS implements a rigorous quality assurance program, which with its state-of-the-art equipment, permits the provision of timely cost-effective services tailored to the individual needs of its clients. Approximately 25% of CAS revenues have been generated from within EMCON's Professional Services Division. In addition to participation in the US EPA Water Pollution and Water Supply programs, CAS performs work for the Department of Defense under programs sponsored by the U.S. Army Corps of Engineers and the U.S. Navy. CAS currently holds or has pending certifications/accreditations in a number of states including Alaska, Arizona, California, Florida, Idaho, Massachusetts, New York, Oregon, Utah and Washington. Other accreditations include the American Association of Laboratory Accreditations (A2LA) and the American Industrial Hygiene Associations (AIHA). 7 On December 31, 1996, the Company signed a Letter of Intent to sell CAS to the CAS employees for cash, notes and other consideration valued, in total, at approximately $7.5 million. The sale is expected to close prior to the end of 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. Clients and Marketing EMCON's principal clients are industrial concerns, predominantly in the waste disposal, petroleum, wood products, chemicals and manufacturing industries. The Company also provides services to utilities, non-regulatory government entities, and financial institutions. No single client accounts for 10% or more of the Company's net revenue. 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. 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. 8 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. 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 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, 1996, the Company had a total of 1,057 employees, including: 454 professionals; 279 technical personnel; and 324 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 and toxicologists. 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. 9 Backlog The Company estimates that at December 31, 1996, the backlog of future net revenue from contracts in existence and orders believed to be firm (excluding CAS) was in excess of $80 million, all of which is expected to be received within the next twelve months, compared to $55 million backlog at December 31, 1995. 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, 1997. The Company owns a 25,000 square-foot building in Kelso, Washington. The facility includes office and warehouse space and currently houses the CAS corporate operations. The Company leases office, warehouse and laboratory space in a total of 72 facilities located in Alaska, Arizona, California, Connecticut, Florida, Georgia, Illinois, Iowa, Maine, Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Puerto Rico, Texas, Vermont, Virginia and Washington under leases expiring at various times through December 2002. These facilities have a combined area of approximately 482,000 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 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. 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 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, 1996. 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 1996 and 1995: - ------------------------------------------------------------------------------- High Low - ------------------------------------------------------------------------------- January 1 - March 31, 1995 $4.50 $3.00 April 1 - June 30, 1995 5.13 3.75 July 1 - September 30, 1995 6.50 4.00 October 1 - December 31, 1995 5.00 3.38 January 1 - March 31, 1996 4.88 4.00 April 1 - June 30, 1996 5.13 4.13 July 1 - September 30, 1996 4.13 3.19 October 1 - December 31, 1996 4.25 3.50 - ------------------------------------------------------------------------------- On February 28, 1997, there were 579 shareholders of record of the Company's common stock. Although the Company does make annual distributions to a minority shareholder of one of the OWT subsidiaries, the Company did not pay cash dividends to EMCON shareholders in 1996 or 1995 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) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATIONS STATEMENT DATA (a) Gross revenue ........................................ $ 137,626 $ 122,542 $ 115,638 $ 98,612 $ 93,438 Net revenue .......................................... 117,705 103,409 95,926 83,062 79,636 Direct expenses ...................................... 52,608 39,473 37,307 32,201 29,411 Indirect expenses .................................... 65,844 61,498 59,302 47,528 46,676 Restructuring/other charges .......................... 8,197 (17) 1,958 -- -- Impairment of assets held for sale ................... 3,327 -- -- -- -- Income (loss) from operations ........................ (12,271) 2,455 (2,641) 3,333 3,549 Interest income ...................................... 317 369 348 313 588 Interest expense ..................................... 1,112 181 66 57 40 Equity in income/(loss) of affiliates ................ 39 (74) (58) -- -- Income (loss) before provision (benefit) for income taxes ...................................... (13,027) 2,569 (2,417) 3,589 4,097 Provision (benefit) for income taxes ................. (2,936) 783 (500) 1,165 1,098 Net income (loss) .................................... (10,091) 1,786 (1,917) 2,424 2,999 - ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA (a) Income (loss) per share .............................. $ (1.19) $ 0.22 $ (0.24) $ 0.33 $ 0.40 Shares used in computing income (loss) per share ............................................. 8,485 8,961 7,919 7,720 7,506 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (a) Total assets ......................................... $ 90,912 $ 78,636 $ 80,989 $ 68,852 $ 66,247 Working capital ...................................... 34,601 36,313 32,582 36,200 35,491 Noncurrent obligations and deferred income taxes ............................................. 16,799 1,700 1,348 882 1,773 Shareholders' equity ................................. 55,812 65,306 63,059 58,997 56,591 ----------------------------------------------------------------------------------------------------------------------------------
(a) The Company was involved in several acquisitions and mergers during the five year period presented. See Note 5 to the Company's consolidated financial statements. 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 12 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) -------------------------------------- ------------------ 1996 1995 vs. vs. Years Ended December 31, 1996 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Net Revenue .............................................. 100.0% 100.0% 100.0% 13.8% 7.8% Direct Expenses .......................................... 44.7% 38.2% 38.9% 33.3% 5.8% Indirect Expenses ........................................ 55.9% 59.4% 61.8% 7.1% 3.7% Restructuring/Other Charges .............................. 7.0% -- 2.0% -- -- Impairment of Assets held for sale ....................... 2.8% -- -- -- -- Income (Loss) from Operations ............................ (10.4%) 2.4% (2.7%) (599.8%) -- Interest Income (Expense), Net ........................... (0.7%) 0.2% 0.3% (522.9%) (33.3%) Equity in Income/(Loss) of Affiliates .................... -- (0.1%) (0.1%) -- (27.6%) Income (Loss) before Provision (Benefit) for Income Taxes .......................................... (11.1%) 2.5% (2.5%) (607.1%) -- Provision (Benefit) for Income Taxes .................................................. (2.5%) 0.8% (0.5%) 475.0% -- Net Income (Loss) ........................................ (8.6%) 1.7% (2.0%) (665.0%) -- - -----------------------------------------------------------------------------------------------------------------------------------
Net Revenue: Net revenue for 1996 increased by 13.8% to $117,705,000 from $103,409,000 in 1995. Excluding net revenue of $20,596,000 contributed by Organic Waste Technologies, Inc. ("OWT"), following its acquisition on February 29, 1996, net revenue in 1996 totaled $97,109,000, a 6.1% decrease from 1995. The decrease was primarily attributable to significant underperformance of the Company's Professional Services Division (formerly known as the Consulting Division) in the Alaska, Washington and Southeast markets, combined with a general decrease in revenue following recent reductions in work force throughout the Professional Services Division. The decrease was, to a lesser extent, also attributable to particularly difficult weather conditions in the Northeast and Northwest areas during the first quarter. Net revenue for 1995 increased by 7.8% over net revenue of $95,926,000 in 1994. The increase in net revenue in 1995 was partly attributable to significant improvements in the Company's consulting division in its West and Southeast areas. The increase was also due in part to the inclusion of Wehran Envirotech, Inc. ("Wehran") for all of 1995 as compared to all but the first quarter of 1994, following its acquisition in April of 1994. Although Wehran contributed net revenue of $5,472,000 in the quarter ended March 31, 1995, due to the underperformance of their Northeast and Midwest operations, Wehran only contributed an additional $3,730,000 in net revenue in 1995 over 1994. Net revenue was also positively impacted by the expansion of the laboratory division's operations in Florida and Southern California. 13 Direct Expenses: Direct expenses in 1996 were $52,608,000, a 33.3% increase over $39,473,000 in direct expenses in 1995. Excluding direct expenses of $14,744,000 incurred by OWT, direct expenses in 1996 totaled $37,864,000, a 4.1% decrease from 1995. Direct expense includes compensation for billable hours for technical and professional staff and other project related expenses, as well as direct labor and materials for in-house laboratory testing and construction activities. Excluding OWT, direct expenses, as a percent of net revenue in 1996, increased to 39.0% from 38.2% in 1995; due largely to relative increases in the cost of labor and materials within the laboratory division. Direct expenses in 1995 were up 5.8% over direct expenses of $37,307,000 in 1994. The increase was due in part to higher overall salary costs, increased utilization of technical and professional staff, and the inclusion of Wehran for all of 1995 versus only the last three quarters of 1994 (Wehran incurred direct expenses of $7,739,000 and $6,524,000 in 1995 and 1994, respectively). The ratio of direct expenses to net revenue in 1995 decreased to 38.2% from 38.9% in 1994. Indirect Expenses: Indirect expenses totaled $65,844,000 in 1996, an increase of 7.1% over 1995 indirect expenses of $61,498,000. Excluding indirect expenses of $3,173,000 incurred by OWT, indirect expenses in 1996 totaled $62,671,000, a 1.9% increase over 1995. Indirect expenses include salary compensation for nonbillable hours for professional and technical staff, and general and administrative expenses such as facility rent, bonuses, benefits, insurance, depreciation, and legal/settlement expenses. Excluding OWT, indirect expenses as a percent of net revenue in 1996 increased to 64.5% from 59.4% in 1995; due in part to the above noted decrease in net revenue, combined with the effect of significant severance costs and expenses related to the closing of several small offices during the first nine months of 1996. In addition, during the fourth quarter of 1996 the Company increased reserves relating to pending litigation matters by an additional $1,553,000. Indirect expenses in 1995 increased by 3.7% over 1994 indirect expenses of $59,302,000. The ratio of indirect expenses to net revenue decreased from 61.8% in 1994 to 59.4% in 1995, due to improved utilization of technical and professional staff as well as selective reductions in force and other cost containment and restructuring measures put in place during the fourth quarter of 1994 and throughout 1995. 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 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 14 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. Anticipated savings in 1997 from the restructuring charge alone are estimated to exceed $1,500,000. As of December 31, 1996, $119,000 of the 1996 restructuring adjustment has been incurred and $1,113,000 remains in other accrued liabilities. All remaining actions are expected to be substantially completed by the third quarter of 1997. In October 1994, the Board of Directors appointed Eugene M. Herson to serve as the Company's new President and Chief Executive Officer. Shortly thereafter, in December, 1994, the Company's Board of Directors approved senior management's recommendation to implement a restructuring plan designed to improve operational efficiencies. Under the plan, the Company eliminated substantially all of its regional consulting subsidiaries in favor of a divisional structure. In addition, the Company consolidated and streamlined all unnecessary and/or redundant administrative functions. As a result of the actions taken, the Company recognized a pre-tax restructuring charge in the fourth quarter of 1994 of $1,181,000. Of this amount, $611,000 related to the write-off of employment contracts for former employees no longer actively participating in the Company's affairs, $287,000 related to employee severance, and $263,000 related to costs associated with excess facilities and equipment. Anticipated savings from the 1994 restructuring plan were estimated to exceed $1,000,000 per year. To date, $1,142,000 of restructuring costs have been incurred and adjustments of $5,000 and ($17,000) were made to increase/(reduce) the reserve in 1996 and 1995, respectively, to the required remaining balances. At December 31, 1996, $27,000 of accrued restructuring costs for write-off of employment contracts in 1994 were included in accrued liabilities in the accompanying consolidated balance sheet. All remaining actions are expected to be completed by the first quarter of 1997. During the fourth quarter of 1994, the Company also incurred nonrecurring charges of $777,000 related to the write-down of the carrying value of certain of the Company's landfill gas production rights and of certain related fixed assets due to the reevaluation of future cash flows expected to be generated from the related projects. Impairment of Assets Held for Sale: In December 1996, the Company executed a letter of intent to sell its laboratory division, Columbia Analytical Services, Inc. ("CAS"), to the employees of CAS for cash, notes and other consideration valued in total at approximately $7,500,000. The transaction is expected to be completed 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. Interest Income: The Company recorded interest income of $317,000 in 1996 compared to $369,000 in 1995 and $348,000 in 1994. 15 Interest Expense: The Company incurred interest expense of $1,112,000 in 1996 compared to $181,000 in 1995. The increase in interest expense in 1996 over 1995 was due primarily to increases in long-term debt of $11,747,000 incurred for purposes of financing the acquisition of OWT in February of 1996 and $5,000,000 for purposes of financing the subsequent expansion of OWT's landfill gas-to-energy project. The increase in interest expense in 1995 over 1994 was primarily due to an imposition of interest on a one-time state tax assessment with respect to prior years. Income Taxes Provision (Benefit): The provision (benefit) for income taxes in 1996 was ($2,936,000) compared to $783,000 for 1995 and ($500,000) for 1994. The effective tax rate for 1996 was (22.5%) versus 30.5% in 1995 and (20.7%) for 1994. 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 legal reserve. Included in the Company's balance sheet at December 31, 1996 are total current and long-term net deferred tax assets of $6,455,000. The full utilization of such assets is dependent upon a number of factors including the Company's ability to generate future profits, the successful implementation of the Company's restructuring plan and the anticipated reduction in the level of new tax credits generated from the Company's existing landfill gas-to-energy projects. 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. SUBSEQUENT MATTERS On March 6, 1997, the Company completed the sale of its Marina landfill gas-to-energy project for a net up front cash payment of $800,000. The Company is eligible to receive an additional $200,000 prior to December 31, 1997 subject to certain post-closing contingencies - specifically, that no material adverse changes are made to the provisions of Section 29 of the Internal Revenue Code of 1986, as amended, pertaining to the availability of unconventional fuel credits. LIQUIDITY AND CAPITAL RESOURCES Working Capital: Cash provided by operating activities for fiscal 1996, 1995 and 1994 was $1,583,000, $5,232,000, and $4,875,000, respectively. The changes in cash provided by operating activities in 1996, 1995 and 1994 were primarily attributed to changes in the Company's net income (loss), accounts receivable and accounts payable and in 1996 and 1995, depreciation and amortization. Cash, cash equivalents, and marketable securities decreased to $5,331,000 in 1996 from $9,952,000 in 1995. 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 an interest at a managed rate not to exceed the prime rate. Principal is to be 16 amortized over seven years, but with any unpaid amount finally due and payable on June 30, 2001. The remaining $10,000,000 under the Credit Agreement is available for working capital purposes (with up to $5,000,000 also being available for non-working capital purposes). The line of credit component of the Credit Agreement expires on May 31, 1997. The Company expects to renew the line of credit component of the Credit Agreement following 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. As a result of the fourth quarter loss in 1996, the impact of the related restructuring actions and the payment of certain profit distributions to a minority shareholder in one of OWT's subsidiaries, the Company was not in compliance with these covenants at year-end. However, the Company obtained a waiver from the bank for its non compliance and agreed to related amendments of the Credit Agreement reducing the tangible net worth requirement and permitting distribution to the minority shareholder in OWT's subsidiary. Capital Expenditures: The Company invested $2,484,000 in 1996 in additions to property and equipment; mainly computers, field and laboratory equipment. 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. 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, 1996, 1995, and 1994....... 19 Consolidated Balance Sheets as of December 31, 1996 and 1995..... 20 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1996, 1995, and 1994....... 21 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1996, 1995, and 1994................. 22 Notes to Consolidated Financial Statements....................... 23 Report of Ernst & Young LLP, Independent Auditors................ 36 18 EMCON CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------------------------- Gross revenue ....................................................... $ 137,626 $ 122,542 $ 115,638 Outside services at cost ............................................ 19,921 19,133 19,712 --------- --------- --------- Net revenue ................................................ 117,705 103,409 95,926 Costs and expenses: Direct expenses ................................................ 52,608 39,473 37,307 Indirect expenses .............................................. 65,844 61,498 59,302 Restructuring/other charges .................................... 8,197 (17) 1,958 Impairment of assets held for sale ............................. 3,327 -- -- --------- --------- --------- Income (loss) from operations .............................. (12,271) 2,455 (2,641) Interest income ..................................................... 317 369 348 Interest expense .................................................... (1,112) (181) (66) Equity in income (loss) of affiliate ................................ 39 (74) (58) --------- --------- --------- Income (loss) before provision (benefit) for income taxes ..................................................... (13,027) 2,569 (2,417) Provision (benefit) for income taxes ................................ (2,936) 783 (500) --------- --------- --------- Net income (loss) ................................................... $ (10,091) $ 1,786 $ (1,917) --------- --------- --------- Income (loss) per share ............................................. $ (1.19) $ 0.22 $ (0.24) --------- --------- --------- Shares used in computing income (loss) per share .................... 8,485 8,961 7,919 ========= ========= =========
See accompanying notes. 19
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------------------------ December 31, ---------------------------- (In thousands, except share amounts) 1996 1995 ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents .................................................................. $ 5,331 $ 9,451 Marketable securities ...................................................................... -- 501 Accounts receivable, net of allowance for doubtful accounts of $951 and $1,052 at December 31, 1996 and 1995, respectively ................................. 32,860 34,925 Costs and estimated earnings in excess of billings on uncompleted contracts ................................................................. 904 -- Prepaid expenses and other current assets .................................................. 4,425 3,066 Assets held for sale ....................................................................... 9,382 -- ------- ------- Total Current Assets ................................................................... 52,902 47,943 Net property and equipment, at cost ........................................................ 14,722 16,690 Other assets ............................................................................... 4,800 3,579 Deferred tax assets ........................................................................ 4,818 1,677 Goodwill, net of amortization .............................................................. 12,716 7,609 Other intangible assets, net of amortization ............................................... 954 1,138 -------- -------- Total Assets ........................................................................... $ 90,912 $ 78,636 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable ........................................................................... $ 5,483 $ 4,174 Accrued payroll and related benefits ....................................................... 6,020 4,975 Other accrued liabilities .................................................................. 4,454 2,109 Billings in excess of costs and estimated earnings on uncompleted contracts .............................................................. 94 -- Long-term obligations due within one year .................................................. 2,250 372 -------- -------- Total Current Liabilities .............................................................. 18,301 11,630 Long-term debt ............................................................................. 14,667 431 Other noncurrent obligations ............................................................... 2,132 1,269 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; 8,512,688 and 8,329,343 shares issued and outstanding at December 31, 1996 and 1995, respectively ............................................... 42,001 41,401 Retained earnings .......................................................................... 13,811 23,918 Unrealized losses on marketable securities ................................................. -- (13) -------- -------- Total Shareholders' Equity ............................................................. 55,812 65,306 -------- -------- Total Liabilities and Shareholders' Equity ............................................. $ 90,912 $ 78,636 ======== ========
20
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, 1993 ................................. 7,279 $ 34,948 $ 24,049 $ 58,997 Issuance of common stock upon exercise of options, net of redemptions ................................ 55 243 -- 243 Income tax benefits of employee stock option exercises .................................................. -- 103 -- 103 Issuance of common stock under purchase of Wehran Envirotech, Inc. .................................... 915 6,029 -- 6,029 Issuance of common stock under the Employee Stock Purchase Plan ........................................ 69 439 -- 439 Issuance of restricted stock, net of cancellation ............ 1 8 -- 8 Repurchase of common stock ................................... (133) (812) -- (812) Unrealized losses on marketable securities ................... -- -- -- (31) (31) Net loss ..................................................... -- -- (1,917) (1,917) ----------------------------------------------------------------- Balance at December 31, 1994 ................................. 8,186 40,958 22,132 (31) 63,059 Issuance of common stock upon exercise of options, net of redemptions ................................ 30 35 -- 35 Income tax benefits of employee stock option exercises .................................................. -- 50 -- 50 Issuance of common stock under the Employee Stock Purchase Plan ........................................ 114 369 -- 369 Issuance of restricted stock, net of cancellation ............ (1) (11) -- (11) Net change in unrealized losses on marketable securities ................................................. -- -- -- 18 18 Net income ................................................... -- -- 1,786 1,786 ---------------------------------------------------------------- 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 ----------------------------------------------------------------
See accompanying notes. 21
EMCON CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, Increase (decrease) in cash and cash equivalents (in thousands) 1996 1995 1994 ----------------------------------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income (loss) ..................................................................... $(10,091) $ 1,786 $ (1,917) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ....................................................................... 7,330 4,487 3,710 Amortization ....................................................................... 1,034 613 654 Loss on sale/disposal of property and equipment .................................... 474 129 416 Write-down of gas production rights ................................................ 247 -- 655 Impairment of goodwill ............................................................. 6,194 -- -- Increase in salary continuation plan ............................................... 133 62 93 Changes in operating assets and liabilities: Accounts receivable ............................................................ 1,226 3,398 (1,290) Prepaid expenses and other current assets ...................................... (1,527) 187 1,056 Other assets ................................................................... (2,275) (786) 642 Deferred tax assets ............................................................ (2,995) 382 (1,469) Accounts payable ............................................................... (351) (4,672) 2,300 Accrued payroll and related benefits ........................................... 661 (605) 1,173 Other accrued liabilities ...................................................... 1,523 251 (1,148) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities ................................... 1,583 5,232 4,875 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flow from investing activities: Additions to property and equipment ................................................ (2,484) (4,082) (7,050) Purchase of available for sale securities .......................................... -- -- (5,967) Maturities of available for sale securities ........................................ 514 1,953 8,800 Cash portion of assets held for sale ............................................... (593) -- -- Acquisitions, net of cash acquired ................................................. (13,827) -- 258 Proceeds from sale of property and equipment ....................................... 508 327 442 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities ...................................... (15,882) (1,802) (3,517) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Proceeds of new debt obligation .................................................... 17,526 476 (6,662) Payments of current and noncurrent obligations ..................................... (7,931) -- -- Issuance of common stock for cash .................................................. 600 393 690 Repurchase of common stock ......................................................... -- -- (812) Dividend payments .................................................................. (16) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities ........................ 10,179 869 (6,784) - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents ...................................... (4,120) 4,299 (5,426) Cash and cash equivalents, beginning of year .......................................... 9,451 5,152 10,578 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year ................................................ $ 5,331 $ 9,451 $ 5,152 - ----------------------------------------------------------------------------------------------------------------------------------- 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 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. In 1994, the Company converted to a fifty-two/fifty-three week fiscal year, resulting in a fifty-three week year in 1996 and a fifty-two week year in 1995. 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 1996 and 1995 were January 3, 1997 and December 29, 1995, respectively, for convenience, the date shown on accompanying financial statements is December 31, the last day of the calendar periods. Use of Estimates in the Preparation of Financial Statements: The preparation of 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 and revenue from construction projects is recognized on a percentage of completion basis. The Company routinely subcontracts for outside services, such as drilling and 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 and depreciation. 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 at the time of purchase and reevaluates such designation as of each 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 shareholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is 23 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 available-for-sale securities as of December 31, 1996. The following is a summary of available-for-sale securities as of December 31, 1995: - ------------------------------------------------------------------------------- Gross Gross Unrealized Unrealized Estimated (In thousands) Cost Gains Loss Fair Value - -------------------------------------------------------------------------------- U.S. Treasury Bills/Notes $514,000 $ - $13,000 $501,000 - ------------------------------------------------------------------------------- All marketable securities held by the Company as of December 31, 1995 were available for the Company's current working capital requirements and matured in less than one year. Accordingly, all such amounts were classified as current assets in the accompanying consolidated balance sheets. Supplemental Cash Flow Information: Cash paid for income taxes was approximately $659,000, $58,000 and $469,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for interest was approximately $951,000, $181,000 and $66,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 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 eight years, and the Company expects to utilize such credits prior to expiration. The Company has agreements for the utilization of $625,000 of the trade credits. $225,000 and $400,000 of these credits are included on the December 31, 1996 consolidated balance sheet in other current assets and other assets, respectively. To-date, $55,000 of the trade credits have been applied to payments. The remaining balance of $420,000 is included on the December 31, 1996 consolidated balance sheet in other assets. Property and Equipment: Property and equipment, net of assets held for sale, consists of (in thousands): - ------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - ------------------------------------------------------------------------------- Land and buildings $ 2,808 $ 2,723 Machinery and equipment 18,886 23,723 Furniture and fixtures 4,130 5,915 Vehicles 2,871 3,638 Leasehold improvements 1,328 2,324 - ------------------------------------------------------------------------------- Total 30,023 38,323 Less accumulated depreciation and amortization 15,301 21,633 - -------------------------------------------------------------------------------- Net property and equipment $14,722 $16,690 - ------------------------------------------------------------------------------- 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 3-31 years). Amortization of property and equipment acquired under capital leases is included with depreciation expense. Approximately $7,058,000 of fixed assets net of accumulated depreciation of $6,236,000 were sold or disposed of in 1996. 24 Income (Loss) per Share: Primary and fully diluted earnings per share are substantially the same. Loss per share in 1996 and 1994 were based on the weighted average number of common shares outstanding. Income per share in 1995 was based on the weighted average number of common and dilutive common equivalent shares outstanding using the modified treasury stock method. Common equivalent shares are comprised of shares issuable under the Company's stock option plans. Business Segment and Concentration of Credit Risk: The Company operates within one business segment, which provides comprehensive environmental engineering, consulting, construction, facilities operations and maintenance, and laboratory 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. 2. CONTRACTS IN PROGRESS Information related to contracts in progress (in thousands): - -------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $4,181 $ -- Estimated earnings on uncompleted contracts 940 -- ------- 5,121 Less billings to date on uncompleted contracts 4,311 -- - ------------------------------------------------------------------------------- Total $ 810 $ -- - -------------------------------------------------------------------------------- Included in the accompanying consolidated balance sheets on an individual contract basis are (in thousands): - -------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts. $ 904 $ -- Billings in excess of costs and estimated earnings on uncompleted contracts (94) -- - -------------------------------------------------------------------------------- Total $ 810 $ -- - -------------------------------------------------------------------------------- 3. 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 25 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, 1996, $119,000 of the 1996 restructuring adjustment has been incurred and $1,113,000 remains in other accrued liabilities. All remaining actions are expected to be substantially completed by the third quarter of 1997. In October 1994, the Board of Directors appointed Eugene M. Herson to serve as the Company's new President and Chief Executive Officer. Shortly thereafter, in December, 1994, the Company's Board of Directors approved senior management's recommendation to implement a restructuring plan designed to improve operational efficiencies. Under the plan, the Company eliminated substantially all of its regional consulting subsidiaries in favor of a divisional structure. In addition, the Company consolidated and streamlined all unnecessary and/or redundant administrative functions. As a result of the actions taken, the Company recognized a pre-tax restructuring charge in the fourth quarter of 1994 of $1,181,000. Of this amount, $611,000 related to the write-off of employment contracts for former employees no longer actively participating in the Company's affairs, $287,000 related to employee severance, and $263,000 related to costs associated with excess facilities and equipment. Anticipated savings from the 1994 restructuring plan were estimated to exceed $1,000,000 per year. To date, $1,142,000 of restructuring costs have been incurred and adjustments of $5,000 and ($17,000) were made to increase/(reduce) the reserve in 1996 and 1995, respectively, to the required remaining balances. At December 31, 1996, $27,000 of accrued restructuring costs for write-off of employment contracts in 1994 were included in accrued liabilities in the accompanying consolidated balance sheet. All remaining actions are expected to be completed by the first quarter of 1997. During the fourth quarter of 1994, the Company also incurred nonrecurring charges of $777,000 related to the write-down of the carrying value of certain of the Company's landfill gas production rights and of certain related fixed assets due to the reevaluation of future cash flows expected to be generated from the related projects. 4. IMPAIRMENT OF ASSETS HELD FOR SALE In December 1996, the Company executed a Letter of Intent to sell its laboratory division, Columbia Analytical Services, Inc. ("CAS"), to the employees of CAS for cash, notes and other consideration valued in total at approximately $7,500,000. The transaction is expected to be completed the first quarter of 1997. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", 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. The estimated fair value of CAS is reflected in the accompanying consolidated balance sheets as assets held for sale as of December 31, 1996. 26 5. ACQUISITIONS Goodwill On February 29, 1996, EMCON acquired all the outstanding capital stock of Organic Waste Technologies, Inc. ("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 held by certain senior OWT management in the principal amount of $1,747,000. The transaction was accounted for as a purchase. The indebtedness bears interest at the rate of 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 $11,129,000 resulting from this acquisition is being amortized over thirty years using the straight line method. Related accumulated amortization at December 31, 1996, was approximately $310,000. The following summarizes the unaudited pro forma net revenue, net income (loss), and income (loss) per share of the combined company for the unaudited twelve months ended December 31, 1996 compared to unaudited twelve months ended December 31, 1995 (in thousands): - ------------------------------------------------------------------------------- Pro Forma Pro Forma 1996 1995 Twelve months ended December 31, (unaudited) (unaudited) - ------------------------------------------------------------------------------- Net revenue $120,738 $120,928 Net income (loss) (10,407) 1,606 Income (loss) per share ($1.23) $ 0.20 - ------------------------------------------------------------------------------- The above pro forma results of operations do not purport to reflect the actual results of operations had the Company actually acquired OWT as of the beginning of 1996. Effective April 1, 1994, the Company acquired all of the capital stock of Wehran Envirotech, Inc. ("Wehran"), an environmental consulting company headquartered in Middletown, New York, in exchange for 410,000 shares of the Company's common stock valued at $2,818,000 and $439,000 in direct acquisition costs. The transaction was accounted for as a purchase. An additional 80,000 shares, valued at $290,000, were issued to Wehran shareholders in December, 1994 as a result of their attaining certain predetermined operating performance goals. Goodwill of approximately $1,896,000 resulting from this acquisition is being amortized over twenty years using the straight line method. Accumulated amortization as of December 31, 1996, was approximately $253,000. Subsequent to the purchase of Wehran, the Company issued an additional 425,000 shares of its common stock to retire approximately $5,000,000 of Wehran's convertible subordinated notes. In addition, the Company also paid approximately $6,100,000 in cash to satisfy amounts borrowed against Wehran's revolving credit line ($5,000,000) and obligations due to settlement of certain litigation ($1,100,000). On May 31, 1996, EMCON acquired the operations of Cascade Pacific Engineering, Inc. ("Cascade"). The transaction was structured as an asset acquisition with EMCON acquiring substantially all the assets of Cascade for $546,000 in cash plus the assumption of substantially all of Cascade's liabilities. The tangible net assets were valued at $80,000. The $466,000 excess of cost over the fair 27 value of net assets acquired, net of accumulated amortization at December 31, 1996, of $93,000 was subsequently written-off in 1996 due to an evaluation based on a discounted cash flow analysis. Acquisitions made in the Southeast and Alaska between 1990 and 1993 were evaluated based on a discounted cash flow basis and resulted in a write-down of goodwill of $4,394,000. Remaining goodwill and accumulated amortization at December 31, 1996 were approximately $1,734,000 and $1,480,000, respectively. Other Intangible Assets: Intangible assets include $879,000 and $2,476,000 at December 31, 1996 and 1995, respectively, representing gross costs incurred to obtain landfill gas production rights. Amortization of these gas production rights is recognized as the greater of either the straight-line or units-of-production method over a term not exceeding the period of the gas production leases. The expected amortization periods range from one to ten years. The related accumulated amortization was approximately $798,000 and $1,338,000 at December 31, 1996 and 1995, respectively. In December, 1996 the Company reduced the value of these landfill gas production rights by $247,000 to their estimated fair value. Other intangible assets at December 31, 1996 also include $888,000, representing the gross cost to reacquire certain patent rights associated with the Company's proprietary leachate evaporation system technology. Accumulated amortization at December 31, 1996 was approximately $15,000 and the patent is being amortized over the 15 year life of such patents. 6. 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 salary continuation agreements and capital leases. Liabilities under salary continuation agreements were $939,000 and $802,000 at December 31, 1996 and 1995, respectively. Capital lease obligations are collateralized by equipment included in property and equipment with a cost and accumulated depreciation of $324,000 and $80,000, respectively, at December 31, 1996, and $1,020,000 and $863,000, respectively, at December 31, 1995. 7. 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. Employees may elect to contribute up to 15% of their annual compensation to the plan up to the Internal Revenue Service annual contribution limit $9,500 for 1996. The Company voluntarily matched the employee's contribution to a maximum of 3% of annual compensation. The Company's contributions to the retirement plan were $1,146,000, $1,177,000 and $674,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 28 8. COMMITMENTS The Company leases its office facilities, as well as office and computer equipment, under operating leases in various locations. Until 1995, certain office facilities were leased from partnerships in which certain officers and shareholders of the Company had controlling interests. Lease arrangements with the partnerships were terminated in 1995. The annual rents under leases from partnerships were approximately $473,000 and $516,000 for 1995 and 1994, respectively. The Company's minimum annual lease commitments under all operating leases are approximately (in thousands): - ------------------------------------------------------------------------------- Years Ending December 31, - -------------------------------------------------------------------------------- 1997 $5,385 1998 4,044 1999 3,313 2000 2,155 2001 and thereafter 2,657 - -------------------------------------------------------------------------------- Rent expense was approximately $5,263,000, $4,429,000 and $3,964,000 for the years ended December 31, 1996, 1995 and 1994, 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 6.) 9. 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. 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 financial position, results of operations or cash flows. 29 10. LONG-TERM DEBT
Long-term debt consists of the following (in thousands): - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Variable-rate note payable to bank ................................................................. $ 9,286 -- (effective rate at 12/31/96 was 7.35%). Payable in quarterly installments of $357 with a final payment of $3,214 in 2001. Collateralized by the assets of EMCON. 8% unsecured notes payable to OWT shareholders. Payable on......................................... 1,747 -- termination date in 20001 7.99% note payable to bank in monthly installments through 2006..................................... 4,661 -- Collateralized by the assets of OWT with a net book value of $6,186 8.49% note payable to bank in monthly installments through 2001..................................... 374 -- Collateralized by equipment of OWT with a net book value of $458 8.99% note payable to bank in monthly installments through 2000..................................... 296 -- Collateralized by the assets of OWT with a net book value of $6,186 Other indebtedness, interest rates vary from 5.3% to 15.9% payable.................................. 553 803 in installments through 2000. (Primarily lease obligations) ------- ------- Total Long-term Debt ............................................................................... $16,917 $ 803 ------- ------- Less current portion ............................................................................... $ 2,250 $ 372 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term Debt, net of current portion ............................................................. $14,667 $ 431 - ------------------------------------------------------------------------------------------------------------------------------------
Interest paid on all outstanding debt amounted to $951,000 in 1996 and $58,000 in 1995. Carrying value of the debt approximates fair value. Aggregate principal payments for the next five years for years ending December 31, - ------------------------------------------------------------------------------- 1997 $ 2,250 1998 2,172 1999 2,039 2000 2,030 2001 and thereafter 8,426 - ------------------------------------------------------------------------------- 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 remaining $10,000,000 under the Credit Agreement is available for working capital purposes (with up to $5,000,000 also being available for non-working capital purposes). The line of credit component of the Credit Agreement expires on May 31, 1997. The Company expects to renew the line of credit component of the Credit Agreement following its expiration. The Credit 30 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. As a result of the fourth quarter loss in 1996, the impact of the related restructuring actions and the payment of certain profit distributions to a minority shareholder in one of OWT's subsidiaries, the Company was not in compliance with these covenants at year-end. However, the Company obtained a waiver from the bank for its non compliance and agreed to related amendments of the Credit Agreement reducing the tangible net worth requirement and permitting distributions to the minority shareholders in OWT's subsidiary. 11. 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 Plan: The Company has issued options to purchase shares of common stock pursuant to its 1986 Incentive Stock Option Plan (now expired) and its 1988 Stock Option Plan (the "Plans"). These options are 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. 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, 1993 ........ 383,482 1,985,745 $ 1.15 - $11.25 $ 16,034,340 Options authorized .......... 750,000 -- -- -- Options granted ............. (448,900) 448,900 $ 5.00 - $ 8.37 2,984,999 Options canceled ............ 153,702 (153,702) $ 3.33 - $11.25 (1,322,592) Options exercised ........... -- (54,606) $ 1.15 - $ 7.67 (250,724) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 ........ 838,284 2,226,337 $ 1.15 - $11.25 17,446,023 Options granted ............. (386,650) 386,650 $ 3.50 - $ 4.88 1,545,537 Options canceled ............ 72,629 (72,629) $ 3.33 - $10.00 (591,701) Options exercised ........... -- (30,000) $ 1.15 (34,666) - ------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------
31 Restricted Stock Plan: 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, 1996, 99,191 shares were available for issuance. Employee Stock Purchase Plan: The Employee Stock Purchase Plan (ESPP) provides that substantially all employees may 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 ------- ---- 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Expected life (years) 6.6 7.0 0.5 0.5 Expected volatility .49 .49 .32 .42 Risk-free interest rate 6.1% 6.3% 5.5% 6.1% - ------------------------------------------------------------------------------- 32 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 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Net income (loss) As reported ............................................................... $ (10,091) $ 1,786 Pro forma ................................................................. $ (10,393) $ 1,688 Primary (loss) earnings per share As reported ............................................................... $ (1.19) $ 0.22 Pro forma ................................................................. $ (1.27) $ 0.20 - ---------------------------------------------------------------------------------------------------------------
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 1996 and 1995 was $2.14 and $2.30 per share, respectively. The following summarizes information about fixed stock options outstanding at December 31, 1996:
- ------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable Weighted Weighted Number Weighted Average Average Average Range of Exercise Outstanding at Remaining Exercise Number Exercise Prices 12/31/96 Contractual Life Price Exercisable Price - ------------------------------------------------------------------------------------------------------------- $ 9.25 - $11.25 239,125 5.6 $ 9.34 238,450 $ 9.34 $ 6.50 - $ 8.83 227,694 4.0 $ 7.43 198,644 $ 7.50 $ 5.00 - $ 6.00 36,015 4.2 $ 5.59 28,265 $ 5.69 $ 3.25 - $ 4.88 676,598 7.9 $ 3.83 208,041 $ 3.80 - ------------------------------------------------------------------------------------------------------------- $ 3.25 - $11.25 1,179,432 6.5 $ 5.70 673,400 $ 6.93 - ------------------------------------------------------------------------------------------------------------
At December 31, 1995, 1,562,833 shares were exercisable at an average exercise price of $8.10 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 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 an additional 203,727 shares canceled in exchange for the grant of new options covering 47,247 shares with an option exercise price of $3.68 per share. 33 12. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands): - ------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------- Federal: Current $607 $438 $(112) Deferred (3,358) 61 (378) - ------------------------------------------------------------------------------- Total Federal (2,751) 499 (490) - ------------------------------------------------------------------------------- State: Current 73 78 200 Deferred (258) 206 (210) - ------------------------------------------------------------------------------- Total State (185) 284 (10) - ------------------------------------------------------------------------------- Total Federal and State $(2,936) $783 $(500) - ------------------------------------------------------------------------------- A reconciliation between the Company's effective tax rate of (22.5%) in 1996, 30.5% in 1995 and (20.7%) in 1994 and the U.S. statutory rate is as follows (in thousands): - ------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------- Tax at U.S. statutory rate $(4,559) $899 $(846) State taxes, net of federal benefit (280) 149 (7) Tax exempt income -- -- (38) Fuel tax credits (454) (515) -- Goodwill amortization 2,306 150 135 Meals and entertainment 94 105 101 Other individually immaterial items (43) (5) 155 - ------------------------------------------------------------------------------- Total Federal and State $(2,936) $783 $(500) - ------------------------------------------------------------------------------- As of December 31, 1996, the Company has federal alternative minimum tax credit carryforwards of approximately $2,327,000 which have no expiration date. 34 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 at (in thousands): - ------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - ------------------------------------------------------------------------- Deferred tax assets: Alternative minimum tax credit carryforwards $2,327 $1,744 Deferred compensation 340 306 Allowance for doubtful accounts 403 421 Vacation accruals 636 595 Restructuring accruals 3,145 -- Unrecognized loss on property -- -- Other individually immaterial items 424 454 - -------------------------------------------------------------------------- Total deferred tax assets $7,275 $3,520 - -------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $ 532 $ 352 Tax accounting method changes 70 102 Payment liabilities deducted 108 116 Supplies 110 110 - -------------------------------------------------------------------------- Total deferred tax liabilities $ 820 $ 680 - -------------------------------------------------------------------------- Total net deferred tax assets $6,455 $2,840 - -------------------------------------------------------------------------- 13. QUARTERLY DATA (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------- (In thousands First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------------- 1995 Gross revenue ......................................................... $ 30,369 $ 31,116 $ 32,106 $ 28,951 Net revenue ........................................................... 26,276 26,453 26,636 24,044 Income from operations ................................................ 528 985 816 126 Net income ............................................................ 397 711 650 28 Income per share ...................................................... $ 0.05 $ 0.09 $ 0.08 $ 0.01 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Gross revenue ......................................................... $ 28,564 $ 35,881 $ 36,416 $ 36,765 Net revenue ........................................................... 24,607 30,542 31,560 30,996 Income (loss) from operations ......................................... 119 790 582 (13,762) Net income (loss) ..................................................... 34 365 259 (10,749) Income (loss) per share ............................................... $ 0.01 $ 0.05 $ 0.03 $ (1.26) - -----------------------------------------------------------------------------------------------------------------------------------
Historically, the Company's net revenue is adversely affected in the first quarter of each year, primarily as a result of restricted field work due to weather conditions. 35 The Board of Directors and Shareholders EMCON We have audited the accompanying consolidated balance sheets of EMCON as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of EMCON at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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, present fairly in all material respects the information set forth therein. Ernst & Young LLP San Francisco, California February 6, 1997 36 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 1997 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of Registrant's fiscal year ended December 31, 1996. 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 1997 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of Registrant's fiscal year ended December 31, 1996. 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 1997 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of Registrant's fiscal year ended December 31, 1996. 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 1997 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of Registrant's fiscal year ended December 31, 1996. 37 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 40 (b) Reports on Form 8-K -- No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) Index to Exhibits 41 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. 38 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: 3/28/97 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/Dougals P. Crane Chairman of the Board and Director March 28, 1997 - -------------------- Douglas P. Crane /s/Eugene M. Herson President, Chief Executive Officer March 28, 1997 - -------------------- and Director (Principal Executive Eugene M. Herson Officer) /s/R. Michael Momboisse Chief Financial Officer, March 28, 1997 - ----------------------- Vice President - Legal and R. Michael Momboisse Secretary (Principal Financial and Accounting Officer) /s/Donald R. Andres Vice President and Director March28, 1997 - -------------------- Donald R. Andres /s/Richard A. Peluso Vice President and Director March 28, 1997 - --------------------- Richard A. Peluso Director March __, 1997 - ----------------------- Donald R. Kerstetter /s/Jack M. Marzluft Director March 28, 1997 - -------------------- Jack M. Marzluft /s/Peter Vardy Director March 28 1997 - --------------- Peter Vardy 39 SCHEDULE II EMCON VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Additions Balance Charged to Balance at Beginning Costs and at End of Period Expenses Write-offs of Period ------------ --------- ---------- --------- Allowance for Doubtful Accounts: Year Ended December 31, 1994 ......... $ 480 $ 2,889 $(2,394) $ 975 Year Ended December 31, 1995 ......... $ 975 $ 765 $ (688) $ 1,052 Year Ended December 31, 1996 ......... $ 1,052 $ 1,985 $(2,086) $ 951
40 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 optionholders 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"). 3.1 Articles of Incorporation, as amended, incorporated by * reference from Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 (File No. 33-16337) effective September 16, 1987 (the "Form S-1 Registration Statement"). 3.2 Certificate of Amendment of Restated Articles of Incorporation * as filed on May 24, 1988, incorporated by reference from Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "1988 10-K"). 3.3 Certificate of Amendment of Restated Articles of Incorporation * as filed on June 4, 1991, incorporated by reference from Exhibit 4.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1991 (the "June 1991 10-Q"). 3.4 Bylaws, as amended, incorporated by reference from Exhibit 4.2 * of the June 1991 10-Q. 10.1 EMCON 1986 Incentive Stock Option Plan and Amendment, *(1) incorporated by reference *(1) from Exhibit 10.15 of the Form S-1 Registration Statement. 10.2 Form of Agreement pursuant to Salary Continuation Plan, *(1) incorporated by *(1) reference from Exhibit 10.17 of the Form S-1 Registration Statement. 10.3 Schedule identifying Agreements pursuant to Salary Continuation 44(1) Plan between 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 shareholder approval *(1) on May 25,1994, *(1) including form of Nonqualified Stock Option Agreement (Outside Directors), incorporated by reference from Exhibit 10.9 of Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994 (the "June 30, 1994 10-Q"). 10.6 EMCON Employee Stock Purchase Plan incorporated by reference *(1) from Exhibit 10.10 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995. 41 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - ----- ----------- 10.7 EMCON Restricted Stock Plan incorporated by reference from *(1) Exhibit 10.15 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1990. 10.8 EMCON Deferred Compensation Plan effective January 1, 1994, *(1) incorporated by reference from Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K"). 10.9 Trust Agreement for the EMCON Deferred Compensation Plan and *(1) Salary Continuation Plan Trust dated February 19, 1994, between Registrant and Wells Fargo Bank, N.A. incorporated by reference from Exhibit 10.13 of the 1993 10-K. 10.10 Agreement between Eugene M. Herson and Registrant dated *(1) November 30, 1995, incorporated by reference from Exhibit 10.21 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 10-K"). 10.11 Agreement between R. Michael Momboisse and Registrant dated *(1) November 10, 1995, incorporated by reference from Exhibit 10.22 of the 1995 10-K.. 10.12 Credit Agreement between The Bank of California, N.A. and * Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.2 of the March 1996 8-K. 10.13 Security Agreement between The Bank of California, N.A. and * Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.3 of the March 1996 8-K. 10.14 Pledge Agreement between The Bank of California, N.A. and * Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.4 of the March 1996 8-K. 10.15 Eurodollar Rate Option Agreement between The Bank of * California, N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.5 of the March 1996 8-K. 10.16 Fixed Rate Amortization Option Agreement between The Bank of * California, N.A. and Registrant dated February 29, 1996, incorporated by reference from Exhibit 10.6 of the March 1996 8-K. 10.17 Note Agreement among the Registrant, OWT, and certain employees * of OWT , * incorporated by reference from Exhibit 10.1 of the March 1996 8-K. 10.18 Rescission and Reformation Agreement dated effective November 45 1, 1996 among EMCON, OWT, and certain employees of OWT. 10.19 New Note Agreement dated effective November 1, 1996 among 66 EMCON, OWT and certain employees of OWT. 42 Sequentially Exhibit Numbered Number INDEX TO EXHIBITS (Continued) Page - -------------- ----------- 10.20 Asset Purchase Agreement between Yolo Energy Partners, Inc., 78 Yolo Landfill Gas Corporation, EMCON, Yolo Neo LLC, and Minnesota Methane LLC dated December 31, 1996. 10.21 Second Amendment to Credit Agreement dated effective January 111 27, 1997 among EMCON and Union Bank of California, N.A. (formerly known as The Bank of California, N.A.) 10.22 Acquisition Agreement between EMCON and its wholly owned 112 subsidiary, Monterey Landfill Gas Corporation and Biomass Energy Partners V, L.P., dated March 6, 1997 10.23 Third Amendment to Credit Agreement dated effective March 27, 123 1997 among EMCON and Union Bank of California, N.A. (formerly known as The Bank of California, N.A.) 11.1 Computation of Income (Loss) Per Share. 124 21.1 Significant Subsidiaries of Registrant. 125 23.1 Consent of Ernst & Young, LLP, Independent Auditors. 126 27 Financial Data Schedule, included herein. 127 * 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. 43 EX-10.3 2 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 Gary O. McEntee ................ $ 600 $ 400 November 2004 Mark H. Shipps ................. $1,800 $1,200 March 2006 Alan Ortiz ..................... $1,200 $ 800 October 2006 44 EX-10.18 3 RESCISSION & REFORMATION AGREEMENT EXHIBIT 10.18 RESCISSION AND REFORMATION AGREEMENT This Rescission and Reformation Agreement is entered into effective as of November 1, 1996 (the "Effective Date") by and among EMCON, a California corporation ("EMCON"); Organic Waste Technologies, Inc., a Delaware corporation (the "Company"); and the undersigned former holders of the Company's common stock and options to acquire the Company's common stock (individually a "Management Stakeholder," and collectively the "Management Stakeholders"). RECITALS A. Pursuant to a Stock Purchase Agreement entered into as of January 30, 1996 (the "Stock Purchase Agreement"), the Company purchased (the "Purchase") from the Management Stakeholders some or all of the shares of the Company's common stock (the "Shares at Issue") and options to purchase shares of the Company's common stock (the "Options at Issue") held by each such Management Stakeholder as set forth opposite such Management Stakeholder's name on Exhibit A in exchange for a convertible promissory note executed by the Company, a copy of which is set forth on Exhibit B (individually a "Note" and collectively the "Notes"). B. EMCON guaranteed payment of the Notes and entered into a note agreement in the form set forth as Exhibit C (the "Note Agreement"), pursuant to which, among other obligations, EMCON agreed to (i) exchange each Note for shares of EMCON common stock if the Note had not been converted into the Company's common stock in accordance with the terms of the Note prior to the fifth anniversary of the date of the Note Agreement and (ii) loan each Management Stakeholder, pursuant to the terms of a loan agreement set forth as Exhibit A to the Note Agreement (the "Loan Agreement"), an amount equal to any federal, state and local income taxes required to be paid by each Management Stakeholder as a result of the Purchase. None of the obligations set forth in the Note Agreement has arisen and EMCON has not executed any Loan Agreement. C. The purchase of the Options at Issue by the Company resulted in cancellation of the Options at Issue. The parties intended that the portion of the principal amount of the Notes representing payment for the Options at Issue, plus interest related thereto (collectively the "Option Payment Amounts"), be a mere unfunded, unsecured promise of the Company, guaranteed by EMCON, to pay the Option Payment Amounts in the future, when due. D. The parties desire to rescind the Purchase ab initio so that the Management Stakeholders shall own the Shares at Issue and Options at Issue held by each of them immediately prior to consummation of the Purchase. E. The Management Stakeholders desire to sell their Shares at Issue and the Company desires to acquire the Shares at Issue in exchange for new promissory notes (the "New Notes") in the same form set forth in the Notes, but in the amounts set forth in Exhibit D. The Management Stakeholders desire to have their Options at Issue canceled, and the Company desires to cancel such Options at Issue, pursuant to the terms of this Agreement. 45 F. Capitalized terms not defined herein have the same meaning as set forth in the Stock Purchase Agreement. AGREEMENT 1. RESCISSION. EMCON, the Company and Management Stakeholders hereby rescind the Purchase ab initio, and thereby undo such Purchase so as to place the parties for all purposes with respect to the Shares at Issue and the Options at Issue in the same position as of the Effective Date in which they would have been had such Purchase never occurred. To effect such rescission, the parties agree that: (a) STOCK PURCHASE AGREEMENT. With respect to the Purchase, the Stock Purchase Agreement is of no force and effect, except as otherwise set forth herein. All of the parties to the Stock Purchase Agreement remain bound by the Stock Purchase Agreement for all other purposes, including, by way of example but not by way of limitation, (i) all representations, warranties, covenants, agreements, objections and rights other than with respect to the Purchase, and (ii) all representations, warranties, covenants, agreements, obligations, rights and actions of any person who is a Management Stakeholder in any capacity other than as a Management Stakeholder. In addition, Sections 12.1 to 12.8 of the Stock Purchase Agreement apply with full force and effect to the transactions contemplated by this Agreement. (b) OPTIONS AT ISSUE AND SHARES AT ISSUe. Pursuant to this Section 1, the Management Stakeholders own the Shares at Issue and Options at Issue as of the Effective Date, and the assignment of the Options at Issue executed by each of the Management Stakeholders pursuant to the Stock Purchase Agreement and the cancellation thereof is null and void. (c) NOTES. The Management Stakeholders have marked the Notes canceled and have returned the original, executed Notes to the Company. (d) NOTE AGREEMENT. The Note Agreement is null and void. 2. SALE OF SHARES AT ISSUE. The Management Stakeholders hereby sell their Shares at Issue to the Company and the Company hereby buys the Shares at Issue of each of the Management Stakeholders in exchange for a New Note in the amount and form set forth as Exhibit D. The parties hereto agree that as a result of the sale pursuant to this Agreement, it shall not be necessary for the Company to reissue certificates for the Shares at Issue to effect the rescission set forth in Section 1. 3. CANCELLATION OF OPTIONS AT ISSUE. The Options at Issue are hereby canceled in exchange for the Company's unfunded, unsecured promise to pay to Management Stakeholders the amounts set forth on Exhibit D (the "Option Cancellation Amounts"), on the dates set forth on Exhibit D. The Company shall have no right to prepay the Option Cancellation Amounts. (a) ISSUANCE OF COMPANY STOCK. If the Company consummates a sale of the Company's common stock (the "OWT Common Stock") to the public pursuant to a firm commitment underwritten public offering in an amount of at least Ten Million Dollars ($10,000,000) or any lesser amount as may be approved in writing by Mark H. Shipps, (the "Initial Public Offering") at any time prior to the expiration of the term hereof, upon the consummation of the Initial Public 46 Offering, the Option Base Amount as set forth on Exhibit D shall be automatically converted (the "Conversion") into shares of OWT Common Stock, pursuant to the terms of this Section 3. In such event, a pro-rata portion of the unpaid Option Cancellation Amounts for each of the first through fifth periods set forth on Exhibit D shall be immediately due and payable by the Company to the Management Stakeholders, based on the Option Cancellation Amount for each such period multiplied by the ratio of (i) the number of days within such period which have elapsed prior to the Conversion divided by (ii) the total number of days in such period (the "Period Ratio"); provided, however, that if the Option Cancellation Amount for the first period has not been paid in full, the amount paid shall include the First Period Acceleration Penalty plus the product of (x) the Remainder set forth on Exhibit D, multiplied by (y) the Period Ratio for the first period. (1) CONVERSION PRICE. The number of shares of OWT Common Stock into which the Option Base Amount shall be converted shall be the amount of the Option Base Amount, divided by the OWT Conversion Price. The OWT Conversion Price shall initially be Four Dollars and Eighty Cents ($4.80), and shall be adjusted as set forth in Section 3(a)(2) hereof. (2) ADJUSTMENTS TO OWT CONVERSION PRICE. The OWT Conversion Price shall be adjusted as set forth in this section 3(a)(2): (i) SUBDIVISIONS. If the Company shall at any time subdivide the outstanding shares of OWT Common Stock, the OWT Conversion Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of OWT Common Stock, the OWT Conversion Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision or combination, as the case may be. (ii) STOCK DIVIDENDS. If the Company shall at any time pay a dividend with respect to OWT Common Stock payable in OWT Common Stock, then the OWT Conversion Price in effect immediately prior to the record date for distribution of such dividend shall be adjusted to that price determined by multiplying the OWT Conversion Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of OWT Common Stock outstanding immediately prior to such dividend and (ii) the denominator of which shall be the total number of shares of OWT Common Stock outstanding immediately after such dividend. (iii) RECLASSIFICATION OR MERGER. If any reclassification, change or conversion of the OWT Common Stock occurs (other than as a result of a subdivision or combination described above and other than upon any Acceleration Event, as defined below), the Management Stakeholders shall have the right to receive, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or conversion by a holder of the number of shares of OWT Common Stock into which the Option Base Amount could then be exchanged in the event that an Initial Public Offering had occurred. The provisions of this subparagraph (iii) shall similarly apply to successive reclassifications, changes, and conversions. (iv) ANTI-DILUTION PROTECTion. If the Company issues and sells shares of OWT Common Stock to EMCON or affiliated companies of EMCON, at a price per share that is less than the OWT Conversion Price then in effect, then the OWT Conversion Price shall be adjusted to equal such per share price. 47 (3) Participation in Initial Public Offering. If the Company undertakes an Initial Public Offering or any other public registered underwritten offering pursuant to the Securities Act of 1933, as amended (the "Act"), each Management Stakeholder may, at his option, sell the shares of OWT Common Stock into which the Option Base Amount may be converted pursuant to Section 3 hereof on a pro rata basis with EMCON and the other holders of OWT Common Stock participating in such offering, subject to the approval of the managing underwriters for such offering. This right shall expire at such time as Management Stakeholder may sell all shares of OWT Common Stock into which the Option Base Amount may be converted in any three month period pursuant to Rule 144 under the Act. The procedures and terms of such registration rights shall be as set forth in Sections 4 to 7 of the Agreement Note (as defined below). (b) OFFSET. (1) The Option Cancellation Amounts due hereunder may be reduced by any amounts due from the Management Stakeholder to EMCON pursuant to Section 12.2 of the Stock Purchase Agreement, which section remains in full force and effect. (2) In addition, the Option Cancellation Amounts may be reduced by any amount outstanding from the Management Stakeholders under the Loan Note (as defined in the Note Agreement) which the Management Stakeholders then owes to OWT or EMCON. (c) ACCELERATION. (1) Notwithstanding anything to the contrary herein, if any of the events set forth in paragraphs (a) through (h) of this Section 3(c) (each, an "Acceleration Event") shall occur at any time after the date hereof, then, at the option of the Management Stakeholders, the Option Base Amount, plus a pro-rata portion of the unpaid Option Cancellation Amounts for each of the first through fifth periods set forth on Exhibit D shall be immediately due and payable by the Company to the Management Stakeholders. The pro-rata portion of the unpaid Option Cancellation Amounts for each period shall be based on the Option Cancellation Amount for each such period multiplied by the Period Ratio; provided, however, that if the Option Cancellation Amount for the first period has not been paid in full, the amount paid shall include the First Period Acceleration Penalty plus the product of (x) the Remainder set forth on Exhibit D, multiplied by (y) the Period Ratio for the first period. An Acceleration Event includes the following: (i) upon a consolidation or merger of EMCON with or into any other corporation or corporations (other than a wholly-owned subsidiary of EMCON and other than a merger in which EMCON is the surviving corporation), or the sale, transfer or other disposition of all or substantially all of the assets of EMCON; (ii) upon a change in ownership of Fifty Percent (50%) or more, in a single transaction, of the stock of the Company, other than to an affiliate or affiliates of EMCON which does not materially alter EMCON's direct or indirect ownership of the Company; (iii) upon a change in ownership of Fifty Percent (50%) or more, in a series of two (2) or more transactions, of the outstanding stock of the Company, other than to an affiliate or affiliates of the Company and a substantial diminution in the responsibilities of Mark H. Shipps with respect to the Company in his capacity as an employee of EMCON; 48 (iv) upon a change in ownership of Thirty-Five Percent (35%) or more of the stock of EMCON to a single buyer or an affiliated group of buyers, resulting in a change in the majority of the board of directors of EMCON from the board of directors as it existed immediately prior to such change in ownership, or upon a change in ownership of Fifty Percent (50%) or more, in a single transaction, of the stock of EMCON; (v) upon the liquidation, dissolution or winding up of the Company or the consolidation or merger of the Company with and into another corporation (other than a merger in which the Company is the surviving corporation);Error! Bookmark not defined. (vi) upon the occurrence of any transaction, without the consent of Mark H. Shipps, in which Twenty Percent (20%) or more of the outstanding stock of the Company becomes owned by persons other than EMCON or an affiliate or affiliates of EMCON; (vii) upon the death of the Management Stakeholders or termination of the Management Stakeholders' employment by the Company, other than a Termination for Cause. "Termination for Cause" is intended to embrace intentionally or grossly negligent conduct on the part of the Management Stakeholders which is materially detrimental to the operations and/or reputation of the Company or EMCON. By way of illustration such actions would include (but would not be limited to) a material breach of the Management Stakeholders' obligations under any employment agreement between the Management Stakeholders and OWT 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 the Management Stakeholders' ability to perform the Management Stakeholders' employment obligations; (viii) upon a fundamental change in EMCON's current strategy of focussing a material amount of EMCON's resources on services relating to the design, construction, ownership, operation and maintenance of infrastructure; provided, however, that upon any Acceleration Event, no amount shall be due and payable hereunder in the event that the Management Stakeholder has exchanged this Note for common stock of EMCON, pursuant to the Note Agreement. 4. NOTE AGREEMENT. The parties hereto shall enter into a note agreement substantially in the form attached hereto as Exhibit E. 5. CONSISTENT TREATMENT. Each party shall treat the Purchase as rescinded for all purposes and shall take no action inconsistent with such treatment. 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants, as of the Date of the Deposit, to EMCON that, except as set forth on the Company Disclosure Schedule and without giving effect to the Contemplated Transactions: (a) CORPORATION ORGANIZATION. (1) The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power to own, operate and lease its properties and to conduct its business as now being conducted. The Company is duly qualified or licensed to do business, and is in good standing as a foreign corporation, in each state or other jurisdiction in which it owns or leases 49 properties or where the nature of its business or operations requires such qualification or licensing, unless the failure to do so would not have a material adverse effect on the Company's assets, business, operations or financial condition. To the knowledge of the Company, the Company has obtained all approvals, authorizations, consents, licenses, clearances and orders of, and has currently effective all registrations with, all governmental and regulatory authorities that are necessary to the conduct of its business or operations as now being conducted, except where the failure to do so would not have a material adverse effect on the Company. (2) The only Subsidiaries of the Company are: Omni Gen Technologies, Inc., an Ohio corporation ("Omni Gen"); Keystone Recovery, Inc., an Ohio corporation ("Keystone"); LFG Specialties, Inc., an Ohio corporation ("LFG"); O.W.T. Construction Company, an Ohio corporation ("OWT"); and American Landfill Supply Co., an Iowa corporation ("ALS") (collectively, Omni Gen, Keystone, LFG, OWT and ALS, the "Company Subsidiaries"). (Except where otherwise indicated or, given the context otherwise appropriate, references herein to the "Company" shall also include the Company Subsidiaries.) Except for a five percent (5%) minority interest in Keystone, as of the Closing Date, the Company will own all of the issued and outstanding capital stock of each of the Company Subsidiaries. Each of the Company Subsidiaries is duly incorporated, validly existing and in good standing in the state of its incorporation. Each of the Company Subsidiaries has all requisite corporate power to own, operate and lease its properties and to conduct its business as now being conducted. Each of the Company Subsidiaries is duly qualified or licensed to do business, and is in good standing as a foreign corporation in each state or other jurisdiction in which it owns or leases properties or where the nature of its business or operations requires such qualification or licensing, unless the failure to do so would not have a material adverse effect on its assets, business, operations or financial condition. To the knowledge of the Company, each of the Company Subsidiaries has obtained all approvals, authorizations, consents, licenses, clearances and orders of, and has currently effective all registrations with, all governmental and regulatory authorities which are necessary to the conduct of its business or operations as now being conducted, except where the failure to do so would not have a material adverse effect on the Company. (b) CAPITALIZATION. (1) The authorized capital stock of the Company consists solely of 7,500,000 shares of common stock, $0.01 par value, and 2,841,481 shares of preferred stock, $0.01 par value, 1,360,000 of which are designated Series A Preferred Stock, 740,740 of which are designated Series B Preferred Stock and 740,741 of which are designated Series C Preferred Stock. There are currently issued and outstanding 712,000 shares of common stock, 1,360,000 shares of Series A Preferred Stock, 740,740 shares of Series B Preferred Stock and 740,741 shares of Series C Preferred Stock. The Company Disclosure Schedule sets forth a true and complete description of the authorized, issued and outstanding shares of the capital stock of the Company and each of the Company Subsidiaries showing all stockholders of the Company and each of the Company Subsidiaries as of the date of this Agreement. All of the issued and outstanding shares of the Company and the Company Subsidiaries are duly authorized, validly issued, fully paid and nonassessable except where failure to be so would not have a material adverse effect on the business, financial position or operating results of the Company. All such shares have been issued in accordance with federal and applicable state securities laws concerning the issuance of securities. The Company Disclosure Schedule accurately lists all holders of the Company's capital stock and each such person's actual ownership interest. The rights, preferences and privileges of the Company's capital stock are as stated in the Company's Certificate of Incorporation, as heretofore amended. 50 (2) Except for the Options and as otherwise set forth in the Company Disclosure Schedule, no options, warrants, conversion privileges, preemptive rights, rights to first refusal or other rights, agreements or commitments written or otherwise by the Company or to the knowledge of the Company by any Management Stakeholder are currently outstanding to purchase or otherwise receive any of the capital stock of the Company or the Company Subsidiaries. (3) The Company has delivered to the Buyer complete and accurate copies of the Certificates of Incorporation and Bylaws (including all amendments thereto) of the Company and each of the Company Subsidiaries. Not less than twenty (20) days before the Closing Date the Company will make available to the Buyer the minute books of the Company and the Company Subsidiaries containing minutes for all meetings of, and written consents issued by the Company and executed by, each such corporation's stockholders, Board of Directors and all committees of such Board since the date of organization of such corporation. (c) CORPORATE AUTHORITY. The Company has all requisite corporate authority and power to execute and deliver this Agreement and the other agreements referenced herein and to perform all of its obligations with respect to the Contemplated Transactions. The execution, delivery and performance of this Agreement and the other agreements referenced herein and the consummation of the transactions contemplated hereby and thereby have been duly authorized, or prior to the Closing will be duly authorized, by the Company's Board of Directors and, if required, by its stockholders. (d) DISSOLUTION; FORFEITURE. No action at law or in equity and to the Knowledge of the Company no investigation or proceeding, whatsoever is now pending or threatened to: (a) liquidate, dissolve or disincorporate the Company or any of the Company Subsidiaries, (b) declare any of the corporate rights, powers or privileges of the Company or any of the Company Subsidiaries, to be null and void or otherwise than in full force and effect, (c) declare that the Company or any of the Company Subsidiaries, or their respective Boards of Directors or any of their respective officers, agents or employees has exceeded or violated any of their respective corporate rights, powers or privileges, or (d) obtain any decree, order, judgment or other judicial determination or administrative or other ruling that would or might impede or detract from any of the corporate rights, powers or privileges now vested in or claimed by the Company or any of the Company Subsidiaries. (e) THE COMPANY FINANCIAL STATEMENTS. The consolidated financial statements of the Company for the fiscal years ended December 31, 1993 and December 31, 1994 have been prepared and audited in accordance with GAAP (the "Audited Financial Statements") and the consolidated financial statements of the Company for year ended December 31, 1995 (the "Unaudited Financial Statements") (collectively, the Audited Financial Statements and the Unaudited Financial Statements being referred to as the "Company Financial Statements") have been prepared in accordance with GAAP and fairly present the financial position of the Company in accordance with GAAP as at the dates thereof; provided, however, that the Unaudited Financial Statements do not contain the footnote disclosures required by GAAP. (f) Absence of Unaccrued or Undisclosed Liabilities. Except for claims, liabilities or obligations: 51 (1) which were properly reflected or adequately reserved against in the balance sheet included as part of the Unaudited Financial Statements; (2) which were incurred in the Ordinary Course of Business since December 31, 1995; (3) which are listed on the Company Disclosure Schedule; (4) which are less than $25,000 in any single case; or (5) which result from any failure to properly account for any of the Company's estimated project costs and/or project revenue recognized in the Audited Financial Statements or Unaudited Financial Statements and which, taken in the aggregate with all other accrued project and related costs and/or revenue recognized as of December 31, 1995, do not result in a net reduction in the aggregate profit recognized by the Company on all projects subsequent to December 31, 1995,the Company does not have any material liabilities whether absolute, accrued, unaccrued, contingent or otherwise whether due or to become due. Except as set forth in paragraphs (1) through (5) of this Section 6(f), the Company does not have knowledge of and has no reasonable grounds to know of any basis for any assertion against the Company of any material claims, liabilities or obligations of any nature required by GAAP to be reflected in a corporate balance sheet which have not been fully reflected or reserved against in the December 31, 1995 balance sheet included as part of the Unaudited Financial Statements, provided, however, that no limitation set forth in this Section 6(f) shall in any way affect any other representation or warranty contained in this Agreement. (g) ABSENCE OF CERTAIN CHANGES. Since December 31, 1995 there has not been any: (1) material adverse change in the business, financial condition or operations of the Company and the Company Subsidiaries taken as a whole, (2) recapitalization, amendment to the Certificate of Incorporation or Bylaws or any change in, authorization, creation, issuance or agreement for issuance of, the capital stock or any securities convertible into, or options, warrants or other rights to subscribe to any shares of capital stock of the Company or the Company Subsidiaries, or any declaration setting aside or payment of any dividend or distribution (whether in cash, securities or property) with respect thereto, except as contemplated hereby, (3) increase in the compensation, direct or indirect, payable to any of the officers or employees of the Company or the Company Subsidiaries, including adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement, or any other agreement or arrangement with its officers, employees or stockholders, except as contemplated hereby, (4) unwaived default in respect of any Material Contracts (as defined in Section 6(n), except for such defaults, if any, which do not have a material adverse effect on the financial position, business or operating results of the Company, (5) material change in the methods and procedures employed in keeping the books and records of the Company or the Company Subsidiaries or (6) strike or material labor dispute. (h) TAXES. All tax returns of the Company required by law (including, without limitation, all income, unemployment compensation, worker's compensation, Social Security, excise, privilege and franchise tax laws of the United States or any state or municipal subdivision thereof) to be filed through the Closing Date (true and complete copies of which have been made available to the Buyer) have been or will be duly and timely filed, and all taxes, assessments, contributions, fees and governmental charges or impositions shown on said returns or reports (other than those not yet due and payable or payable without penalty or interest) have been paid, except where any failure to so file 52 or pay would, individually or in the aggregate, have a material adverse effect on the Company and the Company subsidiaries, taken as a whole. The Company has not received any notice of assessment of any federal, state, municipal or other tax upon or measured by its income and, to the Company's knowledge, there is no basis for an additional assessment of any such tax, except for those for which the Company has established adequate reserves. The Company has not knowingly waived any law or regulation fixing, or consented to the extension of, any period of time for the assessment of any tax or other governmental imposition, or become committed so to do. There are no audits of the Company pending and there are no matters under discussion with any federal, state, local or foreign authorities with regard to the payment of any taxes by the Company. There are no issues that have been raised by the IRS or other taxing authority in connection with an examination or otherwise which by application of similar principles could reasonably be expected to result in a proposed deficiency for any period not examined. (i) TITLE TO PROPERTIES; ACCOUNTS RECEIVABLE (1) Except for property and assets that the Company has disposed of in the Ordinary Course of Business, the Company has, and will have at the Closing Date, good and marketable title to all properties and assets shown or represented on the balance sheet included as part of the Unaudited Financial Statements or acquired since December 31, 1995, free and clear of all mortgages, pledges, liens, defects in title, conditional sale agreements and other encumbrances, except for liens, encumbrances and defects in title in respect of property or assets of the Company which: (i) are incidental to the conduct of the Company's business; (ii) have arisen in the Company's Ordinary Course of Business; (iii) were not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than credit arrangements related to purchase money liens); and (iv) do not in the aggregate materially detract from the property and assets of the Company. The Company has performed all the obligations required to be performed by it with respect to all assets leased by it through the date hereof, except where the failure to perform would not have a material adverse effect on the business or financial condition of the Company. The Company enjoys peaceful and undisturbed possession of all of its offices, warehouses, buildings and all other real property and related facilities, whether owned, leased or operated (collectively, the "Facilities"), and such Facilities are not subject to any claims, liens, pledges, options, charges, easements, security interests, rights-of-way, encumbrances or other rights, or any encroachments, building or use restrictions, exceptions, reservations or limitations which in any material respect interfere with or impair the present and continued use thereof in the usual and normal conduct of its business. There are no pending or threatened condemnation proceedings relating to any of the Facilities. The Facilities and the real property improvements (including leasehold improvements), equipment and other tangible assets owned or used by the Company at the Facilities are insured in amounts believed by the Company to be adequate and, to the Knowledge of the Company, are structurally sound with no material defects. Said items are not subject to any commitment or other arrangement for their sale by the Company or use by third parties other than commitments or arrangements entered into in the Ordinary Course of Business. The assets are valued at or below the lower of fair market value or actual cost less an adequate and proper depreciation charge. For tax purposes, the Company has not depreciated any of the assets in any manner inconsistent with applicable IRS guidelines, if any. (2) All tangible property, real and personal, owned or leased by the Company is in good operating condition and repair, except for ordinary wear and tear and any defects the cost of repairing which, singly or in 53 the aggregate, would not be material or are accrued for on the Company Financial Statements. To the knowledge of the Company, such property is in conformity with all applicable laws, ordinances, orders, regulations, rules and other requirements (including applicable zoning, environmental, motor vehicle safety or standards, occupational safety and health laws and regulations) currently in effect and relating thereto, except where the failure to conform would not have a material adverse effect on the business, operations or financial condition of the Company. (3) All accounts receivable of the Company shown on the Company Financial Statements are valid, genuine and subsisting, arose in the Ordinary Course of Business, and the aggregate amount thereof less the reserve for doubtful accounts with respect thereto set forth in the Company Financial Statements, are, to the best knowledge of the Company after due inquiry, current and collectible within customary payment terms. (j) Proprietary Rights. (1) The Company owns the rights to use all trademarks, trade secrets, trade names, copyrights, processes, designs, formulas, know-how, inventions, licenses and intellectual property rights used in connection with its business and the same are believed by the Company to be sufficient to conduct such business as it is now or heretofore has been conducted with no known or asserted conflict with or infringement of the asserted or actual rights of others. The Company has no Knowledge of any infringement by any third party in connection with any of the foregoing and the Company has not taken or omitted to take any action which would have the effect of waiving any of its rights thereunder, in each case except where such infringement or waiver would not have a material adverse effect on the business, prospects, condition (financial or otherwise) or results of operations of the Company. To the Knowledge of the Company, no third party has filed or been issued or granted any applications for patents, trademarks, trade names or registered copyrights relating to the Company's assets. (2) The Company Disclosure Schedule lists all patents, patent applications, trademarks, trade names and registered copyrights owned by the Company. Except as set forth in the Company Disclosure Schedule, the Company is not required to pay any royalty, license fee or similar type of compensation in connection with the conduct of its business as it is now or heretofore has been conducted. (3) The Company has obtained written agreements from all required parties and entities assigning to the Company any material proprietary rights relating to the Company's assets. Such agreements are currently valid and in full force and effect and except as set forth in the Company Disclosure Schedule, do not contain any provisions or restrictions with regard to the rights granted to the Buyer under this Agreement. Except as set forth on the Company Disclosure Schedule, each of the Company's employees and any other Person who, either alone or in concert with others, developed, invented, discovered, derived, programmed, or designed any trade secrets of the Company, or who have knowledge of or access to information related to them, have entered into appropriate confidentiality agreements, copies of which will, at least twenty (20) days prior to the Closing Date, have been provided to the Buyer. All material trade secrets of the Company are currently protectable and are not part of the public knowledge or literature, nor have they been used, divulged, or appropriated for the benefit of any past or present employees or other persons, or to the detriment of, the Company. (k) CUSTOMER LISTS. The Company has provided the Buyer access to a complete and accurate list of each of the material customers of the 54 Company. The relationships between the Company and its active customers and suppliers are, in the aggregate, in good standing, and since December 31, 1994, no material customer or supplier has canceled or terminated, or, to the Knowledge of the Company, threatened to cancel, terminate or change its relationship with the Company in any manner adverse to the Company. (l) BENEFIT PLANS AND ARRANGEMENTS. (1) Except as set forth in the Company Disclosure Schedule, or as otherwise contemplated by this Agreement, the consummation of the Contemplated Transactions will not result in any payment (whether of severance pay or otherwise) becoming due from the Company to any employee, consultant or other third party. (2) The Company Disclosure Schedule lists all pension, retirement, stock purchase, stock option, stock bonus, savings or profit sharing plan, individual employment agreement, bonus or incentive compensation programs, deferred compensation agreements, severance pay plans, consultant, bonus, or group insurance contracts, or any other material incentive, welfare or employee benefit plan, or similar arrangement, understanding or course of dealing, including all employee benefit plans and employee pension benefit plans as defined in Section 3(3) of ERISA (the "Employee Plans"). (3) With respect to the Employee Plans, the Company will, at least twenty (20) days prior to the Closing Date, have delivered or made available to the Buyer copies of any: (1) plans and related trust documents and amendments thereto; (ii) the most recent summary plan descriptions and the most recent annual report; (iii) annual reports on Form 5500 which were filed in each of the most recent three (3) plan years, including, without limitation, all schedules thereto and all financial statements with attached opinions of independent accountants; (iv) Form PBGC-1 which was filed in each of the most recent three (3) plan years; (v) the most recent actuarial valuation; and (vi) the most recent determination letter received from the IRS. Such financial statements fairly present the financial condition of each Employee Plan in accordance with United States generally accepted accounting principles applied on a consistent basis. All Employee Plans have been administered in substantial compliance with their terms, ERISA to the extent applicable, and, where applicable, Section 401 of the Code. (4) No event of the type set forth in Section 4043(b) of ERISA has occurred and is continuing with respect to Employee Plans except insofar as such an event may arise as a result of the consummation of the Contemplated Transactions or would not have a material adverse effect upon the Company's business, financial position or operating results. There exists no material violation of ERISA with respect to the filing of reports, documents, and notices regarding the Employee Plan participants or beneficiaries. No action, suit, or proceeding is pending, nor, to the Knowledge of the Company, is any threatened or imminent, with respect to the assets of any of the trusts under any Employee Plan. All amendments required to bring an Employee Plan into conformity, in all applicable and material respects, with ERISA have been made. Any bonding with respect to an Employee Plan required under ERISA is in full force and effect. To the Knowledge of the Company, the Company has not incurred any liability, pursuant to Subtitle A of Title IV of ERISA, to the Pension Benefit Guaranty Corporation. (5) No breach of fiduciary responsibility has occurred with respect to any of the Employee Plans other than such breach, if any, which would not have a material adverse effect on the Company's business, financial position or operating results. There is no suit, litigation or claim (other than 55 routine benefit claims) pending or, to the Knowledge of the Company, threatened against the Company or any fiduciary of any Employee Plan involving any Employee Plan or against any such plan or its assets by any employee or former employee (or beneficiary thereof) of the Company which individually or in the aggregate would adversely affect the financial condition of any such Employee Plan. (m) Compliance with Laws; Legal Proceedings. (1) The Company is not in violation of, or in default with respect to, any term or provision of (i) its Certificate of Incorporation or Bylaws, or (ii) any judgment, writ, order, injunction, or decree of any court or of any federal, state, or municipal agency or authority in any case or proceeding expressly naming the Company. (2) To the Knowledge of the Company, the Company and its operations are in compliance with applicable statutes, ordinances, regulations, requirements and orders of the federal government and of all states, municipalities, and agencies thereof, and of all other authorities having jurisdiction in respect of any of its assets or operations (including any applicable foreign government or agency or subdivision thereof), except where the failure to do so would not have a material adverse effect on the Company. (3) The Company has not been threatened with, nor is it a party to, directly or indirectly, nor, to the Knowledge of the Company, is there any set of facts that is likely to give rise to, any material legal action, governmental investigation, or other proceeding (governmental or private), including investigations, inquiries, citations, complaints, orders or stipulations by any federal, state or local agency or governmental unit, and there are no judgments, orders, restrictions or decrees of a continuing nature outstanding against the Company. The Company has not been threatened with, nor, to the Knowledge of the Company is there any set of facts that is likely to give rise to, a charge of any material violation of any provision of any federal, state, local or other law (including common law), or administrative regulations in respect of its business or property. (n) Contracts and Obligations. The Company Disclosure Schedule sets forth a true and complete list of the following agreements and instruments to which the Company is a party: (a) all executory contracts, agreements and instruments having a total contract price in excess of $50,000; (b) all contracts, agreements or instruments which are in the nature of teaming agreements, joint venture agreements, non-compete agreements, franchise agreements, exclusive license agreements or other similar agreements restricting access to any business opportunity of the Company; (c) all loan or debt agreements, guarantees, indemnities and bonding commitments; (d) all license or technology transfer agreements; (e) all leases, subleases and equipment leases, having a total contract price in excess of $50,000; (f) all agreements between the Company, on the one hand, and any of the officers, directors or stockholders; (g) all material agreements between the Company, on the one hand, and any other employees of the Company on the other hand; (h) all material licenses or permits issued by any government agency or authority for the benefit of the Company and/or one or more of the Company Subsidiaries; (i) any management or consultation agreement not terminable at will without liability; (j) any contracts or agreements requiring the payment of fees or commissions in connection with any sale of all or substantially all of the Company's stock or assets or any sale of a substantial interest in the Company; and (k) any other agreement which materially affects the Company's business, financial position or 56 operating results or which was entered into other than in the Ordinary Course of Business (collectively, the "Material Contracts"). The Company has delivered to the Buyer true and complete copies of each of the Material Contracts. The Company is not in material violation of, or in default with respect to, any Material Contract and the Material Contracts are valid, binding and enforceable, subject only to applicable bankruptcy, insolvency and similar laws affecting creditors rights generally and subject, as to enforceability, to general principles of equity. To the Knowledge of the Company, the relationships between the Company and the other parties to each of the Material Contacts are in good standing, and no such other contract party has canceled or terminated, or threatened to cancel, terminate or change in any manner adverse to the Company such relationship or the terms of any Material Contract. (o) EMPLOYEE RELATIONS. (1) The Company has no union or collective bargaining agreement, any contract or other agreement with any labor organization or with any employee or consultant which is not terminable at will by the Company, without liability, and no such contract or agreement is under discussion by management of the Company with any employee or consultant. There are no pending or threatened (i) strikes, work stoppages, slowdowns or picketing respecting employees of the Company, (ii) unfair labor practice complaints against the Company, or (iii) statutes, contracts or agreements, domestic or foreign, which will obligate the Company to make any severance payments as a consequence of the execution of this Agreement or the consummation of the Contemplated Transactions. (2) The Company has not received notice that there is any key employee who intends to leave the Company's employ as a result of, or at the conclusion of, the Contemplated Transactions. The Company's relationship with its employees is good. (p) INSURANCE. The properties and risks of the Company are covered by valid and currently effective insurance policies issued in favor of the Company, which policies are set forth on the Company Disclosure Schedule, and the Company is included as an insured party under such policies, with full rights as loss payee. The Company Disclosure Schedule contains a list and brief description of each insurance policy (copies of which have been previously provided to the Buyer) maintained with respect to the Company (or such corporation's assets or operations), which provides continuing coverage as of the date hereof. The Company Disclosure Schedule also includes a list and brief description of individual claims in excess of $10,000 now pending or made during the 36-month period immediately preceding the date of this Agreement, by or on behalf of the Company under any insurance policies. (q) ENVIRONMENTAL COMPLIANCE. (1) The Company has all material permits, licenses and other authorizations required under applicable laws and regulations relating to pollution control and protection of the environment necessary for the operation of its Facilities. The Company is not in material violation of any of the terms or conditions of any such permits, licenses, leases, or authorizations. To the Knowledge of the Company, the Company has not acted or failed to act in violation of any law or regulation, order or other requirement of governmental authorities with respect to the pollution or the atmosphere, surface water, groundwater and noise, the handling of toxic or hazardous waste material or other matters related to the environment. There are no pending or, to the Knowledge of the Company, threatened civil or criminal actions, notices of violations or administrative proceedings relating to pollution control or protection of the environment that would have a material adverse effect on the business or financial condition of the Company. 57 (2) To the Knowledge of the Company, there are no material conditions, circumstances, activities, practices, incidents, actions or plans which would be reasonably likely to interfere with or prevent compliance or continued compliance by the Company with any environmental laws currently in force or with any existing regulation, code, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, or which may give rise to any common law or other legal liability, including without limitation, liability under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state, foreign or local laws, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study or investigation of or against the Company, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the workplace or the environment, of any pollutant, contaminant, chemical, or industrial, toxic or hazardous material, substance or waste on any properties owned or leased by, or under the direct control of, the Company. Without in any way limiting the foregoing, no release, emission or discharge to the environment of any hazardous substance (as that term is currently defined under CERCLA or under any applicable analogous state law ("Hazardous Substance")) has occurred or is currently occurring in connection with any action or failure to act on any properties owned or leased by, or under the direct control of, the Company which has or could give rise to any liability of the Company. 15 (r) ADVANCES; RELATED PARTY TRANSACTIONS (1) There are no receivables of the Company owing by any directors, officers, employees or consultants of the Company or to any affiliate of any such Company person or entity, other than advances by the Company in the ordinary course of business to officers and employees for reimbursable business expenses. (2) No stockholder, officer, director or employee of the Company, nor any member of the Family of any such stockholder, officer, director or employee owns, or since December 31, 1993, has owned, directly or indirectly, any interest exceeding five percent (5%) in (a) any business, corporate or other, which is material party to any material business arrangement with the Company or (b) any material property or rights, tangible or intangible, used in the business of the Company. No stockholder, officer, or director of the Company, owns, directly or indirectly, any interest in, or is an officer or director of, any business, corporate or other (other than as a stockholder of a public company), which competes with the Company. (s) POWERS OF ATTORNEY. The Company Disclosure Schedule contains a complete list of all powers of attorney (or similar instruments or authorizations) granted by the Company to any person or entity. All such powers of attorney (or similar instruments or authorizations) are subject to termination or revocation by the Company at any time, without notice to any other person or entity and without penalty. (t) NO BROKERS. The Company has not entered into and will not enter into any contract, agreement or understanding with any Person, except for Raymond James & Associates, Inc. (a copy of which contract has been provided to Buyer), which may result in the obligation of the Company or the Buyer to pay any finder's fee, brokerage commission or similar payment in connection with the Contemplated Transactions. (u) OTHER AGREEMENTS TO SELL THE COMPANY. Except as set forth herein, the Company has no legal obligation, absolute or contingent, to any person or firm to sell any capital stock of the Company or to effect any merger, 58 consolidation or other reorganization, or disposition of all or substantially all the assets, of the Company. (v) BANKING RELATIONSHIPS. The Company Disclosure Schedule correctly and completely lists all banks and accounts in such banks, with which the Company has deposits, indicating the names of those authorized to sign documents with respect to such accounts as of the date of the most recently approved banking resolution with respect to each. (w) INFORMATION SUPPLIED. Neither this Agreement, the Company Financial Statements, the Company Disclosure Schedule, the Exhibits attached to this Agreement, nor any other certificate, statement or document furnished or to be furnished by the Company or the Sellers pursuant to the terms of this Agreement, contains or will contain any untrue statement of a material fact known to the Company or the Sellers, respectively, or omits or will omit to state a material fact known by the Company or the Sellers respectively necessary to make the statements contained in such information not misleading in light of the circumstances under which such statements were made. 7. REPRESENTATIONS AND WARRANTIES OF MANAGEMENT STAKEHOLDERS. Each Management Stakeholder, as to himself, herself or itself only, represents and warrants, as of the Date of the Deposit, and except as set forth on the Company Disclosure Schedule, to the Company and EMCON as follows: (a) OWNERSHIP OF SHARES AT ISSUE AND OPTIONS AT ISSUE. Except as set forth in the Company Disclosure Schedule, after giving effect to the rescission provided for in Section 1 hereof, the Management Stakeholder owns of record and beneficially the number of Shares at Issue and Options at Issue, indicated opposite such Management Stakeholder's name in Exhibit B to the Stock Purchase Agreement, with full right and authority to exchange such Shares at Issue hereunder and to assign such Options at Issue hereunder, and upon delivery of such Shares at Issue and/or Options at Issue hereunder, the Company 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 Buyer is a party. (b) EXECUTION, DELIVERY AND ENFORCEABILITY OF AGREEMENT; NO VIOLATION. This Agreement has been duly executed and delivered by or on behalf of the Management Stakeholder and any other documents required hereunder to be executed and delivered by or on behalf of the Management Stakeholders will have been duly executed and delivered. This Agreement constitutes the legal, valid and binding obligation of the Management Stakeholder, enforceable against such Management Stakeholder in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws affecting creditor's rights generally. Any other agreements or documents required hereunder to be executed and delivered by the Management Stakeholder hereunder constitute the legal, valid and binding agreements of the Management Stakeholder executing the same, enforceable against such Management Stakeholder 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. Neither the execution of this Agreement nor the consummation of the transactions contemplated hereby by the Management Stakeholder will violate, or 59 constitute a default under, or permit the acceleration of maturity of, except to the extent waived, any indentures, mortgages, promissory notes, contracts or agreements to which such Management Stakeholder is a party or by which such Management Stakeholder or such Management Stakeholder's properties are bound. (c) INFORMATION SUPPLIED. To the Knowledge of such Management Stakeholder, neither this Agreement, the Stock Purchase Agreement, the Company Financial Statements, the Company Disclosure Schedule, the Exhibits attached to this Agreement, or the Stock Purchase Agreement, nor any other certificate or document furnished or to be furnished by the Company or the Management Stakeholders pursuant to the terms of this Agreement or the Stock Purchase Agreement contains or will contain any untrue statement of a material fact known to the Management Stakeholder or the Company, 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. (d) RESIDENCE AND DOMICILE. The Management Stakeholder is a resident of, and domiciled in, the State indicated on Exhibit B to the Stock Purchase Agreement as being the residence of such Management Stakeholder. (e) BROKERS OR FINDERS. Except as set forth in Section 3.20 of the Stock Purchase Agreement, neither the Management Stakeholder or any of such Management Stakeholder's agents have 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. 8. REPRESENTATIONS AND WARRANTIES OF EMCON. EMCON represents and warrants to Management Stakeholders and the Company, as of the date hereof and except as set forth in the Buyer Disclosure Schedule, as follows: (a) ORGANIZATION AND GOOD STANDING. EMCON is a corporation duly organized, validly existing, and in good standing under the laws of the State of California. (b) EXECUTION, DELIVERY AND ENFORCEABILITY OF AGREEMENT; NO VIOLATION. This Agreement has been duly executed and delivered by or on behalf of EMCON, and any other documents required hereunder to be executed and delivered by or on behalf of EMCON will have been duly executed and delivered. This Agreement constitutes the legal, valid and binding obligation of EMCON, enforceable against EMCON in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws affecting creditor's rights generally. Any other agreements required hereunder to be executed and delivered by EMCON constitute the legal, valid and binding agreements of EMCON, enforceable against EMCON in accordance with its respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws affecting creditor's rights generally. Neither the execution of this Agreement nor the consummation of the transactions provided for herein by EMCON will violate, or constitute a default under, or permit the acceleration of maturity of, except to the extent waived, any indentures, mortgages, promissory notes, contracts or agreements to which EMCON is a party or by which EMCON or its properties are bound. Except as set forth in the Buyer Disclosure Schedule, EMCON is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated hereby. 60 (c) CERTAIN PROCEEDINGS. There is no pending Proceeding that has been commenced against EMCON that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the transactions contemplated hereby. To EMCON's Knowledge, no such Proceeding has been threatened. (d) BROKERS OR FINDERS. EMCON and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. (e) INFORMATION SUPPLIED. Neither EMCON's Annual Report on Form 10-K for the fiscal year ending December 31, 1994, nor Quarterly Reports on Form 10-Q for the quarters ending March 31, 1995, June 30, 1995 or September 30, 1995 contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which such statements were made. (f) NO MATERIAL CHANGE. Since September 30, 1995, there has been no material adverse change in EMCON's business, financial position or operations. 9. GENERAL PROVISIONS. (a) EXPENSES. Except as otherwise expressly provided in this Agreement, each party to the Agreement will bear his, her or its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement, the transactions contemplated hereby and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants. (b) CONFIDENTIALITY. Between the date of this Agreement and January 30, 2001, EMCON and Management Stakeholders will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of EMCON and the Company to maintain in confidence, and not use to the detriment of another party or the Company any written, oral, or other information obtained in confidence from another party or the Company in connection with this Agreement, the transactions contemplated hereby, or the Contemplated Transactions, expressly including the reports of all consultants retained pursuant to the terms of this Agreement and the Stock Purchase Agreement, unless (a) such information becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the transactions contemplated hereby or the Contemplated Transactions, or (c) the furnishing or use of such information is required by legal proceedings. (c) NOTICES All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed within three (3) business days by registered mail, return receipt requested, (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), or (d) three (3) business days after being sent by registered or certified mail, return receipt requested, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): 61 Management Stakeholders: To each Management Stakeholder at the address set forth on Exhibit B to the Stock Purchase Agreement. The Company: Organic Waste Technologies, Inc. 7550 Lucerne Drive, Suite 110 Cleveland, Ohio 44130 Attn: Mark H. Shipps, President Fax No.: (216) 891-8288 with a copy to: Dale C. LaPorte, Esq. Calfee, Halter & Griswold 1400 McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2688 Fax No.: (216) 241-0816 EMCON: EMCON 400 S. El Camino Real, Suite 1200 San Mateo, California 94402 Attention: R. Michael Momboisse, Esq. Fax No.: (415) 375-0763 with a copy to: Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attention: Eric J. Lapp, Esq. Fax No.: (415) 327-3699 (d) BINDING ARBITRATION; SERVICE OF PROCESS. In the event of a dispute between the parties related to or arising out of this Agreement, the Agent and representatives of EMCON and the Company will meet promptly in an effort to resolve the dispute amicably. If such parties cannot agree upon a resolution within thirty (30) days of any such party requesting a meeting for resolution of a dispute, then the matter will promptly be submitted to binding arbitration in accordance with this Section 13.5. (i) Arbitration will be held in San Francisco, California, in accordance with the rules and regulations of the American Arbitration Association. The number of arbitrators will be one and will be selected in accordance with the rules and regulations of the American Arbitration Association. The determination of the arbitrator will be conclusive and binding upon the parties, and any determination by the arbitrator of an award may be filed with the clerk of a court of competent jurisdiction as a final adjudication of the claim involved, or application may be made to such court for judicial acceptance of the award and an order of enforcement, as the case may be. Except to the extent otherwise directed by the arbitrator, each party will bear its own expenses, including legal and accounting fees, if any, with respect to the arbitration, and one-half of the costs of the arbitrator and of the fees imposed by the American Arbitration Association. (ii) In any arbitration hereunder, the demand for arbitration shall specifically delineate the claims asserted and the material issues with respect thereto. Within thirty (30) days after filing a demand for arbitration, claimant shall provide to respondent a list of all fact witnesses known to 62 claimant, the names and curriculum vitae of each expert witness anticipated to be called by claimant, and a copy of relevant documents. Within thirty (30) days after receipt of the foregoing information, respondent shall provide to claimant a list of all fact witnesses known to respondent, the names and curriculum vitae of each expert witness anticipated to be called by respondent, and a copy of relevant documents known to respondent. Within ten (10) days after discovery has been closed by the arbitrator (but in no event later than sixty (60) days prior to the arbitration hearing), claimant shall present to respondent a list of all fact and expert witnesses anticipated to be called by claimant, a summary of the substance of each such witness' testimony, and a list of all documents anticipated to be introduced by claimant (and a copy of such documents if not previously provided to respondent). Within thirty (30) days after receipt of the foregoing information, respondent shall present to claimant a list of all fact and expert witnesses anticipated to be called by respondent, a summary of the substance of each such witness' testimony, and a list of all documents anticipated to be introduced by respondent (and a copy of such documents if not previously provided to claimant). Any award by the arbitrator shall be subject to all dollar and other limitations set forth in this Agreement. (iii) A demand for arbitration may be served on EMCON or Management Stakeholders by certified U.S. Mail, postage prepaid, or reliable overnight delivery service, to the address set forth in Section 13.4 hereof. (e) FURTHER ASSURANCES. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. (f) WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. (g) ENTIRE AGREEMENT AND MODIFICATION. Except as set forth in Section 1 hereof, this Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. (h) ASSIGNMENTS, SUCCESSORS, AND NO THIRD PARTY RIGHTS Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, which will not be unreasonably withheld, except that EMCON may assign any of its rights under this Agreement to any Subsidiary 63 of EMCON but EMCON will not be relieved of its obligations hereunder as a result of such assignment. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. (i) SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (j) SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. Unless otherwise indicated, all references to "Sections" refer to the corresponding Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. (k) INTERPRETATION OF AGREEMENT. This Agreement has been submitted to the scrutiny of all parties hereto and their respective counsel and shall be given a fair and reasonable interpretation without consideration being given to its having been drafted by either party or its counsel. (l) TIME OF ESSENCE. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. (m) GOVERNING LAW. This Agreement will be governed by and construed under the laws of the State of Delaware without regard to conflicts of laws principles. (n) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EMCON THE COMPANY EMCON, a California corporation ORGANIC WASTE TECHNOLOGIES,INC., a Delaware corporation By: /s/R. Michael Momboisse By: /s/Mark H. Shipps --------------------------- ----------------------- R. Michael Momboisse Mark H. Shipps Its: CFO & Vice President Legal Its: President --------------------------- ----------------------- 64 THE MANAGEMENT STAKEHOLDERS /s/Mark H. Shipps ------------------------------- MARK H. SHIPPS /s/Anthony A. Alexander ------------------------------- ANTHONY A. ALEXANDER /s/James Helmick ------------------------------- JAMES HELMICK /s/Raymond J. Nardelli ------------------------------- RAYMOND J. NARDELLI /s/Stephen Lingafelter ------------------------------- STEPHEN LINGAFELTER /s/Randall W. Chapman ------------------------------- RANDALL W. CHAPMAN 65 EX-10.19 4 NEW NOTE AGREEMENT EXHIBIT 10.19 NEW NOTE AGREEMENT THIS AGREEMENT is made effective as of the 1st day of November, 1996, by and among EMCON, a California corporation ("EMCON"), Organic Waste Technologies, Inc., a Delaware corporation, ("OWT"), and the undersigned holders of common stock ("Shares at Issue") of OWT and holders of options to purchase the common stock of OWT ("Options at Issue") listed on the signature pages hereto (collectively, the holders thereof being the "Management Stakeholders"). WHEREAS, the Management Stakeholders are parties to that certain Rescission and Reformation Agreement dated as of November 1, 1996 by and among the Management Stakeholders, OWT and EMCON (the "Rescission Agreement"); WHEREAS, pursuant to the Rescission Agreement, each Management Stakeholder has agreed to the cancellation of the Options at Issue held by him in exchange for an unfunded, unsecured promise of OWT to pay certain sums, and the exchange of Shares at Issue held by him for a new convertible note made by OWT (collectively, the "Notes"); WHEREAS, in connection therewith, the parties hereto desire to enter into additional agreements regarding the Notes; WHEREAS, EMCON desires to lend each Management Stakeholder an amount equal to any additional federal, state and local income taxes (the "Tax Liability") paid by him as a result of the cancellation of the Options in exchange for an unfunded, unsecured promise to pay certain sums and the exchange of the Shares at Issue owned by him for a Note (the "Loan Amount"). NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the parties agree with each other as follows: 1. LOAN. Upon the date on which any amounts are withheld by OWT or EMCON for each Management Stakeholder's Tax Liability or paid directly by such Management Stakeholder to the appropriate taxing authority, EMCON shall pay to such Management Stakeholder an amount equal to such withholding or Tax Liability, by cashier's check or wire transfer, and such Management Stakeholder shall execute a note in the principal amount of the Loan Amount, in the form of Exhibit A hereto (the "Loan Note"). 2. (a) EXCHANGE RIGHT. In the event that the Note or the Option Base Amount (as defined in the Rescission Agreement) has not been converted into OWT Common Stock in accordance with its terms prior to the fifth anniversary of the date hereof, each Management Stakeholder shall have the right, for a period of ninety (90) days prior to the fifth anniversary of the date hereof, to exchange the Note payable to him for fully paid and nonassessable shares of Common Stock, no par value, of EMCON as such stock exists on the date of issuance of the Note payable to him and the date of the Rescission Agreement, or any shares of 66 capital stock of EMCON into which such stock shall hereafter be changed or reclassified (the "EMCON Common Stock") at the exchange price determined as provided herein (the "EMCON Exchange Price"). Upon the surrender of the Note, accompanied by a Notice of Exchange of Convertible Note in the form attached hereto as Exhibit B with respect to both the amount due under the Note and the Option Base Amount, properly completed and duly executed by the Management Stakeholder (an "Exchange Notice"), EMCON shall issue and deliver to or upon the order of the Management Stakeholder that number of shares of EMCON Common Stock for which the sum of the Principal (as defined in the Note) and the Option Base Amount shall be exchanged, as determined in accordance herewith. Upon such exchange, any accrued but unpaid interest on the Notes shall be immediately due and payable. The number of shares of EMCON Common Stock to be issued upon conversion of each Note and Option Base Amount shall be determined by dividing the sum of the Principal of such Note and the Option Base Amount of such Management Stakeholder by the EMCON Exchange Price in effect on the date the Exchange Notice is delivered to EMCON by the Management Stakeholder. (b) EXCHANGE PRICE. The EMCON Exchange Price shall initially be $6.50. (i) SUBDIVISIONS. In case EMCON shall at any time subdivide the outstanding shares of EMCON Common Stock, the EMCON Exchange Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of EMCON Common Stock, the Exchange Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision or combination, as the case may be. (ii) STOCK DIVIDENDS. In case EMCON shall at any time pay a dividend with respect to EMCON Common Stock payable in EMCON Common Stock, then the EMCON Exchange Price in effect immediately prior to the record date for distribution of such dividend shall be adjusted to that price determined by multiplying the EMCON Exchange Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend and (ii) the denominator of which shall be the total number of shares of EMCON Common Stock outstanding immediately after such dividend. (iii) RECLASSIFICATION OR MERGER. In case of any reclassification, change or conversion of the EMCON Common Stock (other than as a result of a subdivision or combination described above and other than upon any Acceleration Event, as defined below), each Management Stakeholder shall have the right to receive, upon exchange of the Note owned by him and satisfaction of the promise to pay the Option Base Amount the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or conversion by a holder of the number of shares of EMCON Common Stock the number of EMCON Common Shares into which his Note and his respecting Option Base Amount could then be exchanged. The provisions of this subparagraph (iii) shall similarly apply to successive reclassifications, changes, and conversions. (c) AUTHORIZED SHARES. EMCON covenants that during the period the exchange right set forth in this Section 2 exists, EMCON will reserve from the authorized and unissued EMCON Common Stock a sufficient number of shares to provide for the issuance of EMCON Common Stock upon the full exchange of the Notes and the Option Base Amounts. EMCON represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. 67 (d) METHOD OF EXCHANGE. Except as otherwise provided in the Note or the Rescission Agreement, or agreed by the Management Stakeholder, the Note held by him and his respective Option Base Amount may be exchanged by the Management Stakeholder in whole by (i) submitting to EMCON an Exchange Notice and (ii) surrendering the Note held by him at the principal office of EMCON. (e) RESTRICTIONS CONCERNING THE SHARES. The shares of EMCON Common Stock to be held by Management Stakeholders pursuant to the exercise of the exchange rights set forth in Section 2 may not be sold or transferred unless either (i) such shares first shall have been registered under the Securities Act of 1933 (the "Act") and applicable state securities laws or (ii) EMCON shall have been furnished with an opinion of legal counsel to the effect that such sale or transfer is exempt from the registration requirements of the Act and all applicable state securities laws. Each certificate for shares of EMCON Common Stock to be held by the Management Stakeholders that have not been so registered and that have not been sold pursuant to an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. Upon the request a Management Stakeholder, EMCON shall remove the foregoing legend from the certificate representing the EMCON Common Stock held by such Management Stakeholder upon exercise of the exchange rights pursuant to Section 2 or issue to such Management Stakeholder a new certificate therefor free of any transfer legend, if, with such request, EMCON shall have received either (i) an opinion of counsel to the effect that any such legend may be removed from such certificate, or (ii) if the present paragraph (k) of Rule 144 or a substantially similar successor rule remains in force and effect, satisfactory representations from the Management Stakeholder that such Management Stakeholder is not then, and has not been during the preceding three (3) months, an affiliate of EMCON, and that a period of at least three (3) years has elapsed since the later of the date the securities were acquired (as determined under Rule 144) from EMCON or an affiliate of EMCON. (f) ACCELERATION OF EXCHANGE RIGHTS. Notwithstanding anything to the contrary herein, in the event that any of the following events set forth in paragraphs (i) through (v) of this Section 2(f) (each, an "Acceleration Event") shall occur, then the exchange rights set forth in Section 2(a) shall, at the option of each Management Stakeholder, be immediately exercisable: (i) by any Management Stakeholder upon a consolidation or merger of EMCON with or into any other corporation or corporations (other than a wholly-owned subsidiary of EMCON and other than a merger in which EMCON is the surviving corporation), or the sale, transfer or other disposition of all or substantially all of the assets of EMCON; 68 (ii) by any Management Stakeholder, upon a change in ownership of Fifty Percent (50%) or more, in a single transaction, of the stock of OWT, other than to an affiliate or affiliates of EMCON which does not materially alter EMCON's direct or indirect ownership of OWT; (iii) by any Management Stakeholder, upon a change in ownership of Fifty Percent (50%) or more, in a series of two (2) or more transactions, of the outstanding stock of OWT, other than to an affiliate or affiliates of OWT and a substantial diminution in the responsibilities of Mark H. Shipps with respect to OWT in his capacity as an employee of EMCON; (iv) (A) upon a change in ownership of Thirty-Five Percent (35%) or more of the stock of EMCON to a single buyer or an affiliated group of buyers, resulting in a change in the majority of the board of directors of EMCON from the board of directors as it existed immediately prior to such change in ownership, or (B) upon a change in ownership of Fifty Percent (50%) or more, in a single transaction, of the stock of EMCON; (v) by any Management Stakeholder, upon the liquidation, dissolution or winding up of OWT or the consolidation or merger of OWT with and into another corporation (other than a merger in which OWT is the surviving corporation); (vi) by any Management Stakeholder, upon the occurrence of any transaction, without the consent of Mark H. Shipps, in which Twenty Percent (20%) or more of the outstanding common stock of OWT becomes owned by persons other than EMCON or an affiliate or affiliates of EMCON; (vii) by any Management Stakeholder upon his death or the termination of his employment by OWT other than a Termination for Cause, the "Termination for Cause" is intended to embrace intentionally or grossly negligent conduct on the part of the Maker which is materially detrimental to the operations and/or reputation of OWT or the Holder. By way of illustration such actions would include (but would not be limited to) a material breach of Maker's obligations under any employment agreement between the Maker and OWT and/or the Holder, 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 the Maker's ability to perform the Maker's employment obligations; or (viii) by any Management Stakeholder upon a fundamental change in EMCON's current strategy of focussing a material amount of EMCON's resources on services relating to the design, construction, ownership, operation and maintenance of infrastructure. 3. REQUEST FOR REGISTRATION. (a) Upon the receipt by EMCON of Exchange Notices from Management Stakeholders holding Notes, the aggregate Principal of which together with the Option Base Amounts owed to such Management Stakeholders, may be exchanged for EMCON Common Stock with an aggregate value, based on the closing price of the 69 EMCON Common Stock on the principal market on which such stock is traded on the date of such Exchange Notices, $1,000,000 or more, EMCON will: (i) promptly file a registration statement with the Securities and Exchange Commission (the "Commission") and effect all such registrations, qualifications and compliances (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualifications under the applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act of 1933, as amended (the "Securities Act"), and any other governmental requirements or regulations) as would permit or facilitate the sale and distribution of all of the EMCON Common Stock issuable upon the full exchange of the Notes by the Management Stakeholders and the cancellation of (the "Management Shares"); provided, however, that EMCON shall not be obligated to effect such registration, qualification or compliance pursuant to this Section 3(a)(i)(A) in any particular jurisdiction in which EMCON would be required to execute a general consent to service of process unless EMCON is already subject to service in such jurisdiction and except as required by the Securities Act and (B) after EMCON has already effected one such registration, qualification or compliance; (ii) promptly give notice to all Management Stakeholders of the expected registration of the Management Shares; (iii) use its best efforts to cause such registration to be declared effective by the Commission; (iv) keep such registration statement effective for a period of one year or until the Management Stakeholders have completed the distribution described in the registration statement, whichever first occurs; (v) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities offered by such registration statement; (vi) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Management Stakeholder from time to time may reasonably request; (vii) notify each Management Stakeholder selling EMCON Common Stock covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such Management Stakeholder, prepare and furnish to such Management Stakeholder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; 70 (viii) cause all such EMCON Common Stock registered pursuant hereunder to be listed on each securities exchange, if any, on which similar securities issued by EMCON are then listed; (ix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission; and (x) in connection with any underwritten offering pursuant to a registration statement filed pursuant to this Section, enter into an underwriting agreement reasonably necessary to effect the offer and sale of EMCON Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions. (b) During the period that EMCON's registration statement is effective pursuant to this Section 3, the Management Stakeholders shall comply with all applicable EMCON policies regarding trading of securities by insiders and members of management, including the observance of "window period" and other restrictions. 4. EMCON REGISTRATION. (a) If, at any time after the registration statement described in Section 3 is no longer effective, EMCON shall determine to register any of its securities either for its own account or the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form that does not permit secondary sales, EMCON will: (i) promptly give to each Management Stakeholder written notice thereof; (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 4(b) below, and in any underwriting involved therein, all the Management Shares specified in a written request or requests, made by any Management Stakeholder and received by EMCON within twenty (20) days after the written notice from EMCON described in clause (i) above is mailed or delivered by EMCON. Such written request may specify all or a part of a Management Stakeholder's Management Shares; (iii) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Management Stakeholder from time to time may reasonably request; (iv) cause all such EMCON Common Stock registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by EMCON are then listed; and (v) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission. 71 (b) If the registration of which EMCON gives notice is for a registered public offering involving an underwriting, EMCON shall so advise the Management Stakeholders as a part of the written notice given pursuant to Section 4(a)(i). In such event, the right of any Management Stakeholder to registration pursuant to this Section 4 shall be conditioned upon such Management Stakeholder's participation in such underwriting and the inclusion of such Management Stakeholder's Management Shares in the underwriting to the extent provided herein. All Management Stakeholders proposing to distribute their securities through such underwriting shall (together with EMCON and the other holders of securities of EMCON with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by EMCON. (c) Notwithstanding any other provision of this Section 4, if the representative of the underwriters advises EMCON in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all the Management Stakeholders from, or limit the number of the Management Shares to be included in, the registration and underwriting. EMCON shall so advise the Management Stakeholders and all other holders of EMCON securities (the "Other Shares") requesting registration and the number of Management Shares and Other Shares that may be included shall be allocated among the Management Stakeholders and other selling stockholders requesting inclusion of shares pro rata on the basis of the number of Management Shares and Other Shares that are requested to be registered. (d) EMCON's obligations pursuant to this Section 4 shall expire as to each Management Stakeholder at such time as such Management Stakeholder may sell all shares of EMCON Common Stock issued upon exchange for such Management Stakeholder's Note during any successive two quarter period pursuant to Rule 144 under the Securities Act. 5. EXPENSES OF REGISTRATIOn. All Registration Expenses (as hereinafter defined) incurred in connection with any registration, qualification or compliance pursuant to Section 3 and 4 hereof shall be borne by EMCON. All Selling Expenses (as hereinafter defined) relating to securities so registered shall be borne by the Management Stakeholders who own such Management Shares pro rata on the basis of the number of Management Shares so registered on their behalf. For purposes of this Section 5, Registration Expenses shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for EMCON, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses and fees and disbursements of counsel for the Management Stakeholders. For purposes of this Section 5. Selling Expenses shall mean all underwriting discounts and selling commissions applicable to the sale of the Management Shares and fees and disbursements of counsel for any Management Stakeholder (other than the fees and disbursements of counsel included in Registration Expenses). 6. INDEMNIFICATION. (a) EMCON will indemnify each Management Stakeholder with respect to which registration, qualification, or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act, any underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, 72 or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by EMCON of the Securities Act or any rule or regulation thereunder applicable to EMCON and relating to action or inaction required of EMCON in connection with any such registration, qualification, or compliance, and will reimburse each such Management Stakeholder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability or action, provided that EMCON will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission based upon written information furnished to EMCON by such Management Stakeholder or underwriter and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of EMCON (which consent has not been unreasonably withheld). (b) Each Management Stakeholder will, if Management Shares held by him or her are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify EMCON, each of its directors, officers, partners, legal counsel, and accountants and each underwriter, if any, of EMCON's securities covered by such a registration statement, each person who controls EMCON or such underwriter within the meaning of Section 15 of the Securities Act, and each other Management Stakeholder against all claims, losses, damages any liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse EMCON and such Management Stakeholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to EMCON by such Management Stakeholder and stated to be specifically for use therein provided, however, that the obligations of such Management Stakeholder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Management Stakeholder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any 73 Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the Indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expenses as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provision in the underwriting agreement shall control. 7. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of restricted securities to the public without registration, EMCON agrees to use its best efforts to: (a) Make and keep public information regarding EMCON available as those terms are understood and defined in Rule 144 under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of EMCON under the Securities Act and the Securities Exchange Act of 1934, as amended; and (c) So long as a Management Stakeholder owns any restricted securities, furnish to the Management Stakeholder forthwith upon written request a written statement by EMCON as to its compliance with the reporting requirements of Rule 144; and of the Securities Act and the Exchange Act. 8. OWT'S REGISTRATION RIGHTS OBLIGATIONS. In the event that OWT shall be required to register shares of its stock pursuant to Section 2.3 of the Notes, then the provisions of Sections 4 to 7 hereof shall apply with respect to such registration. 74 9. MISCELLANEOUS. (a) NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed within three (3) business days by registered mail, return receipt requested, (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), or (d) three (3) business days after being sent by registered or certified mail, return receipt requested, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): Management Stakeholders: To each Management Stakeholder at the address set forth on Schedule 1 EMCON: EMCON 400 S. El Camino Real, Suite 1200 San Mateo, California 94402 Attention: R. Michael Momboisse, Esq. Fax No.: (415) 375-0763 (b) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the matters contemplated herein. This Agreement supersedes any and all prior understandings as to the subject matter of this Agreement. (c) AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein set forth may be omitted or waived, if agreed to by EMCON and Management Stakeholders holding Notes representing in aggregate in excess of Fifty Percent (50%) of the aggregate amount due under all of the Notes. (d) BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the personal representatives and successors of the respective parties hereto, except that no Management Stakeholder shall have the right to assign its rights hereunder or any interest herein without obtaining the prior written consent of EMCON. Notwithstanding the foregoing, each Management Stakeholder may assign his rights hereunder (i) to his spouse, parents, grandparents, children or grandchildren or other family members (including relatives by marriage), or to a custodian, trustee or other fiduciary for his account or the account of a member of his family, or (ii) by way of bequest or inheritance upon death. (e) GENERAL. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. In this Agreement the singular includes the plural, the plural the singular. (f) SEVERABILITY. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable, the parties hereby waive such provision to the extent that it is found to be invalid 75 or unenforceable. Such provision shall, to the maximum extent allowable by law, be modified by such court so that it becomes enforceable, and, as modified, shall be enforced as any other provision hereof, all the other provisions hereof continuing in full force and effect. (g) COUNTERPARTS. This Agreement may be execute in counterparts, all of which together shall constitute one and the same instrument. (h) GOVERNING LAW. This Agreement shall be governed by the internal laws of the State of Delaware without regard to the principles of conflict of laws. 76 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. EMCON /s/ R. Michael Momboisse ---------------------------------- By: R. MICHAEL MOMBOISSE Title: CFO and VP Legal ORGANIC WASTE TECHNOLOGIES, INC. /s/ Anthony A. Alexander ---------------------------------- By: ANTHONY A. ALEXANDER Title: Secretary MANAGEMENT STAKEHOLDERS /s/Mark H. Shipps ---------------------------------- MARK H. SHIPPS /s/Anthony A. Alexander ---------------------------------- ANTHONY A. ALEXANDER /s/James Helmick ---------------------------------- JAMES HELMICK /s/Raymond J. Nardelli ---------------------------------- RAYMOND J. NARDELLI /s/Stephen Lingafelter ---------------------------------- STEPHEN LINGAFELTER /s/Randall W. Chapman ---------------------------------- RANDALL W. CHAPMAN 77 EX-10.20 5 ASSET PURCHASE AGREEMENT - YOLO EXHIBIT 10.20 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is dated as of December 31, 1996, by and among YOLO ENERGY PARTNERS, INC., an Indiana corporation ("Seller"), YOLO LANDFILL GAS CORPORATION, a California corporation ("Yolo Gasco"), EMCON, a California corporation ("Emcon"), YOLO NEO LLC, a Delaware limited liability company ("NEO Yolo") and Minnesota Methane LLC, a Wyoming limited liability company ("Buyer"). A. Seller is the owner of the lessee's interest under a Commercial Gas Production Agreement dated June 18, 1985 (the "Production Agreement") with the County of Yolo, California, as lessor, pursuant to which the Seller is granted the rights to collect, process, use and sell landfill gas and produce electric power at the Yolo County Central Landfill in Yolo County, California. B. On April 22, 1988 certain of the rights and responsibilities under the Production Agreement were delegated to and assumed by Yolo Gasco pursuant to an amendment to the Production Agreement and the terms of a Delegation Agreement between Seller and Yolo Gasco (the "Delegation Agreement"). C. Pursuant to the terms of the Delegation Agreement Yolo Gasco has caused to be installed, owned and operated certain landfill gas collection wells, piping, compressors and associated equipment for the collection, sale, processing and sale to Seller of landfill gas (the "Gas Project"). D. Pursuant to the terms of the Production Agreement the Seller has acquired, installed, owned and operated certain electric generation equipment and associated rights, permits, contracts and other authorizations for the production and sale of electric power (the "Electric Project"). E. EMCON owns all of the issued and outstanding shares of Yolo Gasco. EMCON also has provided services to Yolo Gasco for the operation and maintenance of the landfill gas collection system owned by Yolo Gasco. F. In 1995, Seller entered into an agreement with Pacific Gas & Electric Company ("PG&E") pursuant to which Seller agreed to terminate all of its rights to sell power to PG&E from the Power Project (the "Termination Agreement"). The Termination Agreement includes certain other restrictions on the sale of electric power to PG&E by any purchasers of the Electric Project that may continue to utilize the electric power generation equipment at the Yolo County Central Landfill. G. Seller desires to sell and Buyer desires to buy the assets of the Power Project for the purchase price and on the terms set forth herein. 78 H. Yolo Gasco desires to sell and NEO Yolo desires to buy the assets of the Gas Project for the purchase price and on the terms set forth herein. I. As an inducement to NEO Yolo and Buyer to enter into this Agreement, EMCON has agreed to provide its services at attractive rates for the operation and maintenance of the landfill gas collection system in connection with the Gas Project to be acquired by NEO Yolo. J. In order to settle all claims that may exist between Yolo Gasco and the Seller, the Seller and Buyer have agreed upon the terms of a settlement of such claims which settlement will be a condition precedent to the closing of this transaction. NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements herein contained, the parties hereto agree as follows: 1. PURCHASE AND SALE OF ELECTRIC PROJECT ASSETS. On the terms and subject to the conditions set forth in this Agreement, Seller hereby agrees to sell, assign, convey, transfer and deliver to Buyer, and Buyer hereby agrees to purchase from Seller, on a going concern basis, all of the assets and business properties of every kind and description, wherever located, personal or mixed, tangible and intangible, owned or held by Seller and used or held for use in connection with the Electric Project (collectively, the "Electric Assets"), including, without limitation, all right, title and interest of Seller in, to and under: (a) All raw materials, supplies, work-in-process, and other materials included in the inventory of the Electric Project or including, without limitation, such items that have been ordered by Seller but have not yet been received by Seller; (b) All of the real estate and personal property leases listed and described in Schedule 1(b) attached hereto (collectively the "Electric Project Assumed Leases"); (c) All machinery and equipment, vehicles, furniture, fixtures, and other personal property owned by Seller and used or useful in connection with the Electric Project including, without limitation, the items listed or described on Schedule 1(c) attached hereto; (d) The contracts, agreements or understandings listed or described on Schedule 1(d) attached hereto (collectively, the "Electric Project Assumed Contracts"); (e) All of the permits, licenses and authorizations listed or described on Schedule 1(e) attached hereto (collectively, the "Electric Project Permits"); (f) All customer lists, processes, trade secrets, know how and other proprietary or confidential information used in or related to the Electric Project (but excluding privileged attorney-client communications, attorney work product and such other confidential information as would ordinarily fall within the category of "privileged" material for purposes of discovery in general civil litigation in California's state or federal courts); (g) All trademarks and trade names associated with the Electric Project (the "Goodwill"); 79 (h) All of Seller's rights, claims or causes of action against third parties related to the assets, properties, business or operations of the Electric Project arising out of transactions occurring prior to the Closing Date; and (i) Copies of all books and records which copies shall be made at Buyer's expense to the extent such cost exceeds $200. 2. PURCHASE AND SALE OF THE GAS PROJECT ASSETS. On the terms and subject to the conditions set forth in this Agreement, Yolo Gasco hereby agrees to sell, assign, convey, transfer and deliver to NEO Yolo, and NEO Yolo hereby agrees to purchase from Yolo Gasco, on a going concern basis, all of the assets and business properties of every kind and description, wherever located, personal or mixed, tangible or intangible, owned by Yolo Gasco and used or held for use in connection with the Gas Project (collectively, the "Gas Assets"), excluding cash and accounts receivable, but including, without limitation, all right, title and interest of Seller in, to and under: (a) All raw materials, supplies, work-in-process, and other materials included in the inventory of the Gas Project, including, without limitation, such items that have been ordered by Yolo Gasco but have not yet been received by Yolo Gasco; (b) All of the real estate and personal property leases listed and described in Schedule 2(b) attached hereto (collectively the "Gas Project Assumed Leases"); (c) All machinery and equipment and other personal property owned by Yolo Gasco and exclusively used in connection with the Gas Project including, without limitation, the items listed or described on Schedule 2(c) attached hereto; (d) The contracts, agreements or understandings listed or described on Schedule 2(d) attached hereto (collectively, the "Gas Project Assumed Contracts"); (e) All of the permits, licenses and authorizations listed or described on Schedule 2(e) attached hereto (collectively, the "Gas Project Permits"); (f) All customer lists, processes, trade secrets, know-how and other proprietary or confidential information exclusively used in or related to the Gas Project (but excluding privileged attorney-client communications, attorney work product and such other confidential information as would ordinarily fall within the category of "privileged" material for purposes of discovery in general civil litigation in California's state or federal courts); (g) All trademarks and trade names of Yolo Gasco associated with the Gas Project (the "Goodwill"); (h) All of Yolo Gasco's rights, claims or causes of action against third parties related to the assets, properties, business or operations of the Gas Project arising out of transactions occurring prior to the Closing Date; and (i) Copies of all books and records, which copies shall be made at NEO Yolo's expense to the extent such cost exceeds $200. 3. PURCHASE PRICE FOR ELECTRIC PROJECT. On the terms and subject to the conditions set forth in this Agreement, and in 80 consideration of the sale, conveyance, assignment, transfer and delivery of the Electric Assets, Buyer agrees to deliver at Closing good funds in the amount of $550,000 as the purchase price for the Electric Assets (the "Electric Project Purchase Price"). As a condition to the Closing, Buyer shall pay the Electric Project Purchase Price, and shall also pay certain other amounts, in accordance with the following provisions: (a) On the terms and subject to the conditions set forth in this Agreement, including, without limitation, Section 3(b) below, upon the Closing, Buyer agrees to assume and discharge the liabilities of Seller set forth on Schedule l(b) attached hereto. All of the foregoing liabilities and obligations of Seller to be assumed by Buyer pursuant to this Section 3(a) are referred to as the "Electric Project Assumed Liabilities". (b) Buyer expressly does not assume and does not agree to assume any liability or obligation of Seller, direct or indirect, known or unknown, absolute or contingent, not expressly assumed by Buyer pursuant to Section 3(a) and, notwithstanding anything to the contrary in Section 3(a), none of the following shall be Electric Project Assumed Liabilities for purposes of this Agreement: (i) any income taxes (including foreign, federal, state, county or local) of Seller or Yolo Gasco; (ii) any costs and expenses incurred by Seller incident to its negotiation and preparation of this Agreement and the consummation of the transactions contemplated herein (it being understood that such costs and expenses are being and will be paid by Seller); (iii) any liability under any insurance, pension, deferred compensation or any other employee benefit plan including any claim or liability to make any contribution to any such plan relating to the period prior to Closing; (iv) any sales, use or transfer taxes, if any, in connection with this transaction, any tax liability of Yolo Gasco or Seller resulting from the transactions contemplated herein, including, without limitation, any recapture by Seller of investment tax credit or depreciation; (v) any claim or liability the existence of which would constitute a breach of any of the representations of Seller hereunder (provided, however, that the existence of any such claim or liability shall not give rise to, or create an inference with respect to, any independent basis for asserting or initiating any claim for damages for breach of any representation of Seller hereunder); and (vi) any debt, liability or obligation of Seller, its shareholders, or any one of them, other than the Electric Project Assumed Leases. (c) Buyer expressly does not assume and does not agree to assume any income, business, occupation, employment, withholding, sales and use, personal property or real estate tax, assessment or governmental charge or any other tax, assessment or governmental charge of any kind related to the Electric Project or the Electric Assets for any period ending prior to or on the Closing; provided, however, Buyer does expressly assume taxes, assessments or governmental charges, if any, which accrue or relate to a period subsequent to the Closing as a result of Buyer's ownership, operation, sale or transfer of the Electric Project or the Electric Assets subsequent to the Closing or as provided elsewhere herein. 81 (d) The purchase price for the Electric Assets shall be allocated as set forth on Schedule 3(d) attached hereto. 4. Purchase Price for Gas Project Assets. On the terms and subject to the conditions set forth in this Agreement, and in consideration of the sale, conveyance, assignment, transfer and delivery of the Gas Assets, at the Closing NEO Yolo agrees to deliver at Closing good funds in the amount of $250,000 as the purchase price for the Gas Assets (the "Gas Project Purchase Price"). As a condition to the Closing, Buyer shall pay the Gas Purchase Price, and shall also pay certain other amounts, in accordance with the following provisions: (a) On the terms and subject to the conditions set forth in this Agreement, including, without limitation, Section 4(b) below, upon the Closing, NEO Yolo agrees to assume and discharge the liabilities of Yolo Gasco set forth on Schedule 2(b) attached hereto. All of the foregoing liabilities and obligations of Yolo Gasco to be assumed by NEO Yolo pursuant to this Section 4(a) are referred to as the "Gas Project Assumed Liabilities". (b) NEO Yolo expressly does not assume and does not agree to assume any liability or obligation of Yolo Gasco, direct or indirect, known or unknown, absolute or contingent, not expressly assumed by NEO Yolo pursuant to Section 4(a) and, notwithstanding anything to the contrary in Section 4(a), none of the following shall be Gas Project Assumed Liabilities for purposes of this Agreement: (i) any income taxes (including foreign, federal, state, county or local) of Seller or Yolo Gasco; (ii) any costs and expenses incurred by Yolo Gasco incident to its negotiation and preparation of this Agreement and the consummation of the transactions contemplated herein (it being understood that such costs and expenses are being and will be paid by Yolo Gasco); (iii) any liability under any insurance, pension, deferred compensation or any other employee benefit plan including any claim or liability to make any contribution to any such plan relating to the period prior to Closing; (iv) any sales, use or transfer taxes, if any, in connection with this transaction, any tax liability of Yolo Gasco or Seller resulting from the transactions contemplated herein, including, without limitation, any recapture by Yolo Gasco of investment tax credit or depreciation; (v) any claim or liability the existence of which would constitute a breach of any of the representations of Yolo Gasco hereunder (provided, however, that the existence of any such claim or liability shall not give rise to, or create an inference with respect to, any independent basis for asserting or initiating any claim for damages for breach of any representation of Yolo Gasco hereunder); and (vi) any debt, liability or obligation of Yolo Gasco, its shareholders, or any one of them, other than the Gas Project Assumed Liabilities. (c) NEO Yolo expressly does not assume and does not agree to assume any income, business, occupation, employment, withholding, sales and use, personal property or real estate tax, assessment or governmental charge or any 82 other tax, assessment or governmental charge of any kind related to the Gas Project or the Gas Assets for any period ending prior to or on the Closing; provided, however, NEO Yolo does expressly assume, taxes, assessments, and governmental charges, if any, which accrue or relate to a period subsequent to the Closing as a result of NEO Yolo's ownership, operation, sale or transfer of the Gas Project or the Gas Assets subsequent to the Closing. 5. CLOSING. The purchase and sale of the Gas Assets and the Electrical Assets (the "Closing") shall take place at the offices of Poindexter & Doutre', Inc., at 10:00 a.m. local time on December 13, 1996, (the "Closing Date"), or at such other place and time as the parties may mutually agree. (a) Deliveries by Seller. At or prior to the Closing, Seller shall deliver to Buyer, in a form reasonably satisfactory to Buyer, the following items: (i) A bill of sale and assignment in the form attached hereto as Schedule 5(a)(i), duly executed by Seller, conveying all of Seller's rights, title and interest in and to all of the Electric Assets to Buyer, to the full extent of Seller's interest in the Electric Assets; (ii) An assignment and assumption agreement in the form attached hereto as Exhibit 5(a)(ii), duly executed by Seller, and such other assignment agreements as are necessary to transfer, assign, and convey all of Seller's right, title, and interest in and to all leases, agreements, contracts, licenses, permits, orders and other Electric Assets which constitute an Electric Project Assumed Lease, an Electric Project Assumed Contract or Electric Project Permit; (iii) Such other instruments of sale, conveyance, transfer and assignment as Buyer may reasonably request, duly executed by Seller, as are necessary to vest in Buyer as of the Closing all of Seller's rights, title and interest in and to all of the Electric Assets to the full extent of Seller's interest in the Electric Assets; and (iv) A duly certified copy of resolutions of the Board of Directors and shareholders of Seller authorizing the transactions that are the subject of this Agreement. (v) A duly executed Certificate of Seller certifying the accuracy of Seller's representations contained in this Agreement as of the Closing Date and Seller's compliance with, and fulfillment of, all covenants, agreements, obligations and conditions as required by this Agreement. (vi) Opinion of Sommer & Barnard, P.C., counsel for Seller, dated the Closing Date and in the form attached hereto as Exhibit 5(a) (vi). (vii) Signed consents or approvals by third parties set forth in Schedule 6(c). (viii) A power purchase agreement on Form Standard Offer 1 between Southern California Edison and Buyer with respect to the Electric Project on terms satisfactory to Buyer. 83 (ix) A transmission and interconnection agreement between Pacific Gas and Electric Company and Buyer with respect to the delivery of electric power from the Electric Project to Southern California Edison on terms satisfactory to Buyer. In connection with the foregoing deliveries, on the Closing Date, Seller shall deliver full possession and enjoyment of all of the Electric Assets to Buyer, to the full extent of Seller's interest therein, in accordance with the provisions of this Agreement. Seller shall cooperate with Buyer after the Closing and shall execute and deliver such additional documents or instruments which are reasonably necessary to sell, convey, transfer or assign Seller's interest in the Electric Assets to Buyer. (b) DELIVERIES BY BUYER. At or prior to the Closing, Buyer shall deliver to Seller, in form reasonably satisfactory to Seller, the following items: (i) Good funds in the amount of $550,000; (ii) An assignment and assumption agreement in the form attached hereto as Exhibit 5(a)(ii), duly executed by Buyer, pursuant to which Buyer assumes and agrees to discharge all of the Electric Project Assumed Liabilities; (iii) A duly certified copy of resolutions of the Managers or Members of Buyer authorizing the transactions contemplated by this Agreement; (iv) A duly executed Certificate of President or Manager of Buyer certifying the accuracy of Buyer's representations and warranties contained in this Agreement and Buyer's compliance with, and fulfillment of, all covenants, agreements, obligations and conditions as required by this Agreement; (c) DELIVERIES BY YOLO GASCO. At or prior to the Closing, Yolo Gasco shall deliver to NEO Yolo, in a form reasonably satisfactory to NEO Yolo, the following items: (i) A bill of sale and assignment in the form attached hereto as Exhibit 5(c)(i), duly executed by Yolo Gasco, conveying all of Yolo Gasco's rights, title and interest in and to all of the Gas Assets to NEO Yolo, to the full extent of Yolo Gasco's interest in the Gas Assets; (ii) An assignment and assumption agreement in the form attached hereto as Exhibit 5(c)(ii), duly executed by Yolo Gasco, and such other assignment agreements as are necessary to transfer, assign, and convey all of Yolo Gasco's right, title and interest in and to all leases, agreements, contracts, licenses, permits, orders and other Gas Assets which constitute a Gas Project Assumed Lease, a Gas Project Assumed Contract or a Gas Project Permit; (iii) Such other instruments of sale, conveyance, transfer and assignment as NEO Yolo may reasonably request, duly executed by Yolo Gasco, as are necessary to vest in NEO Yolo as of the Closing all of Yolo Gasco's rights, title and interest in and to all of the Gas Assets to the full extent of Seller's interest in the Gas Assets; (iv) A certified copy of resolutions of the Board of Directors and Shareholder of Yolo Gasco authorizing the transactions that are the subject of this Agreement. 84 (v) A duly executed Certificate of President of Yolo Gasco certifying the accuracy of Yolo Gasco's representations contained in this Agreement as of the Closing Date and Yolo Gasco's compliance with, and fulfillment of, all covenants, agreements, obligations and conditions as required by this Agreement. In connection with the foregoing deliveries, on the Closing Date, Yolo Gasco shall deliver full possession and enjoyment of all of the Gas Assets to NEO Yolo to the full extent of Yolo Gasco's interest therein, in accordance with the provisions of this Agreement. Yolo Gasco shall cooperate with NEO Yolo after the closing and shall execute and deliver such additional documents or instruments which are reasonably necessary to sell, convey, transfer or assign Yolo Gasco's interest in the Gas Assets to NEO Yolo. (d) Deliveries by NEO Yolo. At or prior to the Closing, NEO Yolo shall deliver to Yolo Gasco, in a form reasonably satisfactory to Yolo Gasco, the following items: (i) Good funds in the amount of $250,000; (ii) An assignment and assumption agreement in the form attached hereto as Exhibit 5(c)(ii), duly executed by NEO Yolo, pursuant to which NEO Yolo assumes and agrees to discharge all of the Gas Project Assumed Liabilities; (iii) A duly certified copy of resolution of the manager or members of NEO Yolo authorizing the transactions contemplated by this Agreement; (iv) Consents, waivers, settlement and termination agreements and such other documents duly executed by other third parties listed on Schedule 3(b)(iv), as are reasonably required for the consummation of the transactions contemplated by this Agreement; (v) An agreement of indemnification by NEO Yolo in the form of Exhibit 5(c)(v) of Yolo Gasco and EMCON for liabilities, costs and expenses that arise after the Closing Date for actions by NEO Yolo for actions taken after the Closing Date that relate to the Gas Project. (vi) A duly executed Certificate of the President or a Manager or Member of NEO Yolo certifying the accuracy of NEO Yolo's representations and warranties contained in this Agreement and NEO Yolo's compliance with, and fulfillment of, all covenants, agreements, obligations and conditions as required by this Agreement. 6. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer the following (both as of the Closing Date and as of the date hereof): (a) DUE CORPORATE FORMATION AND QUALIFICATION. Seller is a corporation duly organized and validly existing under the laws of the State of Indiana, and is qualified to do business in the State of California and has the power and lawful authority to carry on its business as now being conducted, and to own or lease and operate its properties and assets as now owned, leased or operated by it. To the best knowledge and belief of the Seller, the Seller is not required to be licensed or qualified as a foreign corporation in any other jurisdiction other than the State of California except where a failure to be so qualified would have a material adverse effect upon the business of the Seller. Seller has no subsidiaries and does not own any securities issued by any other business organization or governmental authority. Seller does not own or have any direct or indirect interest in or control over any other corporation, partnership, joint venture or entity of any kind. (b) CORPORATE AUTHORIZATION OF SELLER. The Seller has full corporate power and authority to execute and deliver this Agreement and each agreement, document and instrument executed and delivered by Seller pursuant to this Agreement and to consummate the transactions contemplated hereby, and assuming due authorization, execution and delivery of this Agreement by the Buyer, Yolo Gasco and NEO Yolo, this Agreement and each agreement, document and instrument executed and delivered by Seller pursuant to this Agreement constitutes the valid and binding obligation of the Seller enforceable in accordance with its terms, except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors rights 85 generally and the remedy of specific performance and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) AUTHORITY OF THE SELLER. Except as set forth in Schedule attached hereto, to the best knowledge and belief of the Seller, no consent, authorization or approval of, or declaration, filing or registration with, any governmental, administrative or regulatory body, or any consent, authorization or approval of any other third party, is necessary in order to enable the Seller to enter into and perform its obligations under this6 Agreement and to consummate the transactions contemplated hereby, and, to the best knowledge and belief of the Seller, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will: (i) be in violation of the articles of incorporation or code of bylaws of the Seller or constitute a breach of any evidence of indebtedness or agreement relating to the business to which the Seller is a party; (ii) cause a default under any mortgage or deed of trust or other lien, charge or encumbrance to which any of the Electric Assets is subject or under any contract relating to the Seller's business to which the Seller is a party, or permit the termination of any such contract by another person; (iii) result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of the Electric Assets under any agreement or commitment to which the Seller is bound; (iv) accelerate, or constitute an event entitling, or which would, on notice or lapse of time or both, entitle, the holder of any indebtedness of the Seller to accelerate the maturity of any such indebtedness; (v) conflict with or result in the breach of any writ, injunction or decree of any court or governmental instrumentality; or (vi) violate any statute, law, regulation, permit order or other governmental authorization of any jurisdiction as such statute, law, regulation, permit, order or other governmental authorization relates to the properties of the Electric Project. (d) FINANCIAL STATEMENTS AND TAX RETURNS. Seller has heretofore furnished the Buyer with the balance sheet of Seller dated December 31, 1994 86 (the "Seller Balance Sheet Date"), together with the statement of earnings, stockholders equity and cash flow of Seller for the twelve-month period ending December 31, 1994 and for the two years ending December 31, 1992 and 1993 (collectively, the "Seller Financial Statements"). Copies of the Seller Financial Statements are attached hereto as Schedule 6(d). Except as otherwise indicated in the Seller Financial Statements, to the best knowledge and belief of Seller, the Seller Financial Statements have been prepared utilizing generally accepted accounting principles consistently applied. Seller has furnished to Buyer true and correct copies of its federal and state tax returns and all amendments thereto for the years 1992, 1993 and 1994. (e) ABSENCE OF UNDISCLOSED LIABILITIES. All liabilities of the Seller with respect to the Seller's business and the Electric Assets (whether accrued, absolute, contingent or otherwise and whether due or to become due) are set forth or adequately reserved against in the Seller Financial Statements in accordance with generally accepted accounting principles, except for liabilities set forth on Schedule 6(e) attached hereto and except for liabilities incurred since the Seller Balance Sheet Date in the ordinary course of business as therefore conducted. (f) TITLE TO PROPERTIES; ENCUMBRANCES. Except as reflected in the Seller Financial Statements, and except for assets and properties which have been sold or otherwise disposed of in the ordinary course of business, the Seller has good, valid and marketable title (except for leasehold interests, rights pursuant to easements, licenses and other interests of third parties specifically set forth on any Schedule annexed hereto) to all its material tangible and intangible personal properties and assets, including all tangible and intangible personal properties and assets, which are included among the Electric Assets reflected in the Seller Financial Statements, and all other tangible and intangible personal properties and assets, which are included among the Electric Assets, purchased by the Seller since the Seller Balance Sheet Date, in each case subject to no encumbrance, lien, charge or other restriction of any kind or character, except for (i) consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real or tangible or intangible personal property which are described in Schedule 6(f) attached hereto, (ii) liens for current taxes, assessments or governmental charges or levies on property not yet due and delinquent and (iii) liens, encumbrances and easements under the contracts and agreements which are included among the Electric Assets and which are specifically identified on any Schedule annexed hereto (liens of the type described in clause (i), (ii), and (iii) above are hereinafter sometimes referred to as "Electric Project Permitted Liens"), and (iv) the liens or other encumbrances set forth on Schedule 6(f) attached hereto. (g) COMPLIANCE WITH LAWS. Except as set forth on Schedule attached hereto, to the Seller's best knowledge and belief, with respect to the Seller's business, (i) Seller has received no notice from any governmental authority that it is in violation of applicable laws and regulations, and (ii) Seller has not received any notification of past violations of such laws or regulations that could reasonably be expected to result in future material claims against it. To the best knowledge and belief of the Seller, set forth on Schedule 6(g) attached hereto is a list of all of the Seller's licenses, permits, orders and approvals of any federal, state or local governmental or regulatory bodies that are material to or necessary for the conduct of the Seller's business (collectively "Electric Project Permits"). To the best knowledge and belief of the Seller, all Electric Project Permits are in full force and effect and no proceeding is pending or threatened to revoke or limit any Electric Project Permit. (h) LITIGATION. Except as set forth on Schedule 6(h) attached hereto, there are no actions, suits or claims, or legal, administrative or 87 arbitral proceedings or investigations pending or, to the best knowledge and belief of the Seller, threatened against or involving the Seller or any of its properties or assets with respect to the Seller's business. To the best knowledge and belief of the Seller, none of the actions, suits, claims, proceedings or investigations set forth on Schedule 6(h), individually or in the aggregate, can reasonably be expected to have a material adverse effect on the Electric Project. (i) POWER PURCHASE AGREEMENTS. Seller has delivered true and correct copies of the termination agreement and any amendments thereto entered into between Seller and PG&E. Schedule 6(i) sets forth a list of all documents and agreements between Seller and PG&E that have or could have a material adverse effect on the Electric Project or on the use of the Electric Assets at the Yolo County Central Landfill, copies of which documents have been provided to Buyer. (j) CONTRACTS AND OTHER AGREEMENTS. Schedule 6(j) attached hereto contains a complete and accurate list of all of the following contracts and other agreements with respect to the Electric Project to which the Seller is a party or by or to which it or its assets or properties are bound or subject; (i) contracts and other agreements with any current or former officer, director, or employee not cancelable without penalty on notice of thirty (30) days or less; (ii) contracts and other agreements with material suppliers of products sold or leased by Seller in the normal course of the Seller's business; (iii) contracts and other agreements relating to the borrowing of money including any indenture, mortgage, promissory note, loan agreement, or guaranty; (iv) operations and maintenance agreements with respect to the Electric Project; (v) any water supply agreement or any other agreement for condensate or other liquid disposal; and (vi) any other contract or other agreement which the Seller reasonably believes is material to the Electric Project (other than those reflected on any of the other Schedules to this Agreement). There have been delivered or made available to the Buyer true and complete copies of all of the contracts and other agreements set forth on Schedule 6(j) or on any other Schedule attached hereto. To the best knowledge and belief of the Seller, all of such contracts and other agreements are valid and binding upon the Seller in accordance with their terms, and, except as set forth on Schedule 6(c), the Seller is not in material default under any such contracts. (k) REAL ESTATE LEASES. Schedule 6(k) attached hereto sets forth a list and summary description of all leases, subleases, easements, licenses or other agreement under which the Seller is the lessor or lessee of, or uses or occupies or allows the use or occupancy of, any real property (the "Seller Leases and Easements"). All of the Seller Leases and Easements, true and complete copies of which have been delivered or made available to the Buyer, are in effect and, to the best knowledge and belief of the Seller, the Seller is not in material default under or with respect to any of the Seller Leases or Easements nor has the Seller received or sent any notice of any default under or with respect to 88 any of the same. To the best knowledge and belief of the Seller, no other party to any of the Seller Leases and Easements is in material default under or with respect to any of the same. (l) ACCOUNTS AND NOTES RECEIVABLE. To the best knowledge and belief of the Seller, all accounts receivable reflected on the Seller Financial Statements, and all accounts receivable arising subsequent to the Seller Balance Sheet Date and prior to the Closing Date, have arisen, or will have arisen at the Closing Date, in the ordinary course of business of the Seller and represent, or will represent, valid obligations due to the Seller and subject to no set off and counterclaim. Seller has no account or loans receivable from any person, firm or corporation which is affiliated with Seller or from any director, officer or employee of Seller. (m) INTELLECTUAL PROPERTY. Schedule 6(m) attached hereto sets forth a list of all patents, trade secrets, proprietary rights, trademarks, service marks and trade names (collectively, "Intellectual Property") that relate to the Seller's business. Except as set forth on Schedule 6(m), to the best knowledge and belief of the Seller, all Intellectual Property is owned outright by Seller, free and clear of any lien or encumbrance and except as so set forth, there exist no obligations with respect to any Intellectual Property requiring the Seller to make any payment in respect of its use or otherwise. Except as set forth on Schedule 6(m), to the best knowledge and belief of the Seller, the Seller has no notice of any patent, trademark, service mark or trade name of any other person that infringes upon, or is infringed upon by, any of the property set forth on Schedule 6(m) or notice of any claim of any other person relating to any of the property set forth or any process or confidential information of the Seller. Seller's rights in all of such Intellectual Property are freely transferable. (n) BROKER'S OR FINDER'S FEES. No agent, broker, person or firm acting on behalf of the Seller is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any person controlling, controlled by or under common control with any of the parties hereto, in connection with any of the transactions contemplated herein. (o) EMPLOYEE BENEFIT PLANS. (i) Schedule 6(o) attached hereto lists all employee benefit plans, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements, and any employment or compensation agreements, written or otherwise, currently or heretofore maintained, contributed to or entered into by the Seller for the benefit or, relating to, or with any employee of the Seller employed in the Seller's business (the "Employee Plans"). None of the Employee Plans is a multi-employer plan, as defined in Section 4001(a)(3) of ERISA (a "Multi-employer Plan"). 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 Employee Plan. No Employee Plan has breached any requirement prescribed by any applicable statute, order, or governmental rule or regulation currently in effect with respect thereto, nor has the Seller failed to perform any obligations required to be performed by it under, nor is it in default under or in violation of, nor has it knowledge of any default or violation by any other party of the Employee Plans which would result in liability to the Buyer. Each 89 Employee Plan intended to qualify under Section 401(a) of the Code does so qualify, and each trust created thereunder intended to be exempt from tax under the provisions of Section 501(a) of the Code is so exempt, a determination letter from the Internal Revenue Service (the "IRS") that each such plan is so qualified and each such trust is so exempt has been applied for and the Seller is aware of no reason why each such favorable determination letter should not be issued; and there exists no fact which would adversely affect the qualified status of any such plan or which would eliminate or partially eliminate the tax treatment accorded to the employers, employees or the corpus of any such plan under the Code. The Seller has not incurred and does not reasonably expect to incur (i) any liability to the Pension Benefit Guaranty Corporation (other than a liability for premiums pursuant to Section 4007 of ERISA) with respect to any employee plan subject to Title IV of ERISA or (ii) any withdrawal liability with respect to any Multi-employer Plan. All contributions required to be made to any Employee Plan have been made, and all appropriate accruals of contributions, disbursements and expenses have been made with respect to such Employee Plans. With respect to each Employee Plan which is covered by Title IV of ERISA, the market value of assets of such plan as of the date hereof exceeds the actuarial present value of benefits accrued under such plan as of the date hereof, determined in accordance with the actuarial assumptions set forth in the most recent actuarial valuation report of such plan. (ii) The Seller has delivered to the Buyer true and complete copies of all Employee Plans listed in Schedule 6(o) and of all agreements, including trust agreements and other funding instruments, such as insurance contracts, embodying such plans. With respect to each employee benefit plan, as defined in Section 3(3) of ERISA, listed in Schedule 6(o), true and complete copies of the (i) last filed Form 5500 and all applicable schedules thereto; (ii) summary plan description and all modifications thereto communicated to employees; and (iii) most recent annual and periodic accounting of related plan assets, if any, have been delivered to the Buyer and are correct in all material respects. With respect to each employee pension benefit plan, as defined in Section 3(2) of ERISA, listed on Schedule 6(o), true and complete copies of the (i) most recent determination letter, if any, issued by the IRS and the application therefor, and (ii) most recent annual actuarial valuation report, if any, have been delivered to the Buyer and are correct in all material respects. (p) LABOR MATTERS. Except as set forth in Schedule 6(p) attached hereto, with respect to the Seller's business, the Seller is currently in compliance in all material respects with all applicable laws, rules and regulations relating to the employment of labor, including those related to wages, hours, collective registrations, and authorizations. (q) TAX RETURNS. Seller, as appropriate, has timely filed (including extensions) with the appropriate governmental authorities, all tax and other returns required to be filed by it and such returns are true and complete and all taxes due have been paid. The Seller will timely file (including extensions) with appropriate governmental authorities, all tax and other returns which shall be required to be filed by it after the Closing Date and such returns shall be true and complete and all taxes due shall be paid by the Seller. (r) INSURANCE. All insurance policies and arrangements of Seller relative the Electric Project are set forth on Schedule 6(r) attached hereto. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and Seller is in compliance in all material respects with the terms thereof. (s) ENVIRONMENTAL MATTERs. Seller has provided to Buyer copies of all documents, records and information available to Seller, a complete listing of which is set forth on Schedule 6(s) attached hereto, concerning any environmental or health and safety matter relevant to Seller, whether generated 90 by Seller or others, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding offsite disposal, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. (t) QUALIFYING FACILITY. Seller has taken all actions and filed all notices or applications necessary to obtain and maintain qualifying facility status of the Electric Project pursuant to the Public Utility Regulatory Policies Act of 1978. Seller has received no notices and has no knowledge of any facts or circumstances that (i) violate the requirements for maintaining qualifying facility status for the operations of the Electric Project, or (ii) following the purchase of the Electric Project by Buyer, would prevent the obtaining or maintaining or would increase the cost of obtaining or maintaining qualifying facility status under such statute for the Electric Project by the Buyer. (u) PERMITS AND GOVERNMENTAL AUTHORITY. (i) All Electric Project Permits required for the construction and operation of the Electric Project either (i) have been obtained and remain in full force and effect and are not subject to any appeals or further proceedings or to any unsatisfied conditions that may allow material modification or revocation or (ii) with respect to Electric Project Permits required for operation and construction and not yet obtained, are of a type that are routinely granted on application and that could not be reasonably obtained before the Closing Date. Upon the purchase of the Electric Assets, the Buyer will, to the extent permitted by law, without penalty, additional cost or consent of any person, be entitled to the benefit of each such Electric Project Permit so that the operation of the Electric Project may continue, except as set forth on Schedule 6(u). All applicable Electric Project Permits obtained as of the Closing Date are listed in Schedule l(e). (ii) Except for the Electric Project Permits identified in Schedule l(e), no action by, and no notice to or filing with, any federal, state or local governmental authority or regulatory body (x) is or will be required for the due execution, delivery and performance by the Seller of this Agreement or any agreement, lease or document to be entered into, assigned or delivered pursuant to the terms hereof of to which it is or will be a party, or (y) is or will be required for the financing and operation of the Electric Assets. (v) ENVIRONMENTAL COMPLIANCE. Seller has taken all necessary steps to investigate the past and present condition and usage of its properties and the operations conducted thereon and, based upon such diligent investigation, has determined and hereby represents and warrants that: (i) Neither the Seller nor any operator of its properties is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to the environmental matters, including without limitation, those arising under federal, state or local environmental laws, which violation would have a material adverse effect on the business, assets or financial condition of the Seller; (ii) The Seller has not received notice from any third party including, without limitation; any federal, state or local governmental authority, (a) that it has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (b) that any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous waste, as defined by 42 U.S.C. ss.9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss.9601(33) or any toxic 91 substance, oil or hazardous materials or other chemicals or substances regulated by any federal, state or local environmental laws ("Hazardous Substances") which it has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party has conducted or has ordered that the Seller conduct a remedial investigation, removal or other response action pursuant to any federal, state or local environmental law; or (c) that it is or shall be a named party to any claim, action, cause of action, complaint, legal or administrative proceeding arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances; (iii) (a) No portion of the Seller's leased real property has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable federal, state or local environmental laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on such real property; (b) in the course of any activities conducted by the Seller or operators of the real property, no Hazardous Substances have been generated or are being used on such real property except in accordance with applicable federal, state or local environmental laws; (c) there have been no unpermitted releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases property, which releases would have a material adverse effect on the value of such real property or adjacent properties or the environment; (d) to the best of the Seller's knowledge, there have been no releases on, upon, from or into any real property in the vicinity of the real property which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the real property; and (e) in addition, any Hazardous Substances that have been generated on the real property have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed of only by treatment or disposal facilities maintaining valid permits as required under applicable federal, state or local environmental laws, which transporters and facilities have been and are, to the best of the Seller's knowledge, operating in compliance with such permits and applicable environmental laws; (iv) The real property owned or leased by Seller in Yolo County, California is not subject to any applicable environmental clean up responsibility law or environmental restrictive transfer law or regulation by virtue of the transactions set forth herein and contemplated hereby; and (v) The Seller has provided the Buyer with true and complete copies of all material, documents, reports, site assessments, data, communications and other materials in its possession or to which it has access which contain information with respect to potential environmental liabilities of the Seller related to compliance with federal, state and local environmental laws. (w) Disclosure. No representation or warranty made by the Seller in this Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to the Buyer by or on behalf of or at the request of the Seller in connection with any of the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. 7. REPRESENTATIONS AND WARRANTIES OF BUYER. The Buyer represents and warrants to Seller and Yolo Gasco the following (both as of the Closing Date and as of the date hereof): 92 (a) DUE FORMATION AND QUALIFICATION. The Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of its state of formation, and has the power and lawful authority to carry on its business as now being conducted and to own or lease its properties and assets as now owned, leased or operated by it. The Buyer is duly qualified or otherwise authorized as a foreign limited liability company to transact business and is in good standing in each jurisdiction in which, to the best knowledge and belief of the Buyer, a failure to be so qualified would have a material adverse effect on the business of the Buyer. (b) AUTHORIZATION. The Buyer has full power and authority under its formation documents and operating agreement and, the managers and members of Buyer have taken all necessary action to authorize the Buyer to execute and deliver this Agreement and to consummate the transactions contemplated hereby and, assuming due authorization, execution and delivery of this Agreement by the Seller and Yolo Gasco, this Agreement constitutes the valid and binding obligation of the Buyer enforceable in accordance with its terms except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws now or hereafter in effect relating to creditors' rights generally and the remedy of specific performance and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) NON-CONTRAVENTION. Neither the execution and delivery of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby does or will violate, conflict with, result in a breach of any provision of, constitute a default under, result in the termination of or permit any third party to terminate (with or without notice, lapse of time or pursuant to any legal or equitable principle) or accelerate the performance required on the part of the Buyer by the terms of, or accelerate the maturity of or require the prepayment of any indebtedness of the Buyer under, any judgment, order, decree or agreement or instrument to or by which the Buyer or any of its assets is subject or bound. (d) AUTHORITY OF THE BUYER. Except as set forth on Schedule 7(d) attached hereto, no consent, authorization or approval of, or declaration, filing or registration with, any governmental, administrative or regulatory body, or any consent, authorization or approval of any other third party, is necessary in connection with the Buyer's purchase of the Electric Assets contemplated hereby or the consummation of the other transactions contemplated hereby. (e) LITIGATION. Except as set forth on Schedule 7(e) attached hereto, there are no claims, actions, suits, proceedings or investigations pending or, to the best knowledge and belief of the Buyer, threatened by or against the Buyer with respect to the transactions contemplated hereby, at law or in equity or before or by any federal, state, municipal, foreign or other 93 governmental department, commission, board, agency, instrumentality or authority nor does the Buyer know or have any reason to know of any basis for any such claim, action, suit, proceeding or investigation except with respect to those claims, actions, suits, proceedings or investigations which would not have a material adverse effect on the Buyer. (f) BROKER'S OR FINDER'S FEES. No agent, broker, person or firm acting on behalf of Buyer is, or will be, entitled to any commission or broker's or finder's fees from the Seller or from any person controlling, controlled by or under common control with the Seller in connection with any of the transactions contemplated herein. 8. REPRESENTATIONS AND WARRANTIES OF YOLO GASCO. Yolo Gasco represents and warrants to NEO Yolo the following (both as of the Closing Date and as of the date hereof): (a) DUE CORPORATE FORMATION AND QUALIFICATION. Yolo Gasco is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has the power and lawful authority to carry on its business as now being conducted, and to own or lease and operate its properties and assets as now owned, leased or operated by it. To the best knowledge and belief of Yolo Gasco, Yolo Gasco is not required to be licensed or qualified as a foreign corporation in any other jurisdiction except where a failure to be so qualified would have a material adverse effect upon the Gas Project. Yolo Gasco has no subsidiaries and does not own any securities issued by any other business organization or governmental authority. Yolo Gasco does not own or have any direct or indirect interest in or control over any corporation, partnership, joint venture or entity of any kind. (b) CORPORATE AUTHORIZATION OF YOLO GASCO. Yolo Gasco has full power and authority under its corporate charter to execute and deliver this Agreement and each agreement, document and instrument executed and delivered by Yolo Gasco pursuant to this Agreement and to consummate the transactions contemplated hereby, and assuming due authorization, execution and delivery of this Agreement by the other parties hereto, this Agreement and each agreement, document and instrument executed and delivered by Yolo Gasco pursuant to this Agreement constitutes the valid and binding obligation of Yolo Gasco enforceable in accordance with its terms, except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and the remedy of specific performance and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (c) AUTHORITY OF YOLO GASCO. Except as set forth in Schedule 8(c) attached hereto, to the best knowledge and belief of Yolo Gasco, no consent, authorization or approval of, or declaration, filing or registration with, any governmental, administrative or regulatory body, or any consent, authorization or approval of any other third party, is necessary in order to enable Yolo Gasco to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby, and, to the best knowledge and belief of Yolo Gasco, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will: (i) be in violation of the articles of incorporation or bylaws of Yolo Gasco or constitute a breach of any evidence of indebtedness or agreement relating to the Gas Project to which Yolo Gasco is a party; (ii) cause a default under any mortgage or deed of trust or other lien, charge or encumbrance to which any Gas Asset is subject or under any contract relating to the Gas Project to which Yolo Gasco is a party, or permit the termination of any such contract by another person; (iii) result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any Gas Assets under any agreement or commitment to which Yolo Gasco is bound; 94 (iv) accelerate, or constitute an event entitling, or which would, on notice or lapse of time or both, entitle, the holder of any indebtedness of Yolo Gasco to accelerate the maturity of any such indebtedness; (v) conflict with or result in the breach of any writ, injunction or decree of any court or governmental instrumentality; or (vi) violate any statute, law, regulation, permit, order or other governmental authorization of any jurisdiction as such statute, law, regulation, permit, order or other governmental authorization relates to the properties of the Gas Project. (d) TITLE TO PROPERTIES; ENCUMBRANCES. Yolo Gasco has good, valid and marketable title (except for leasehold interests, rights pursuant to easements, licenses and other interests of third parties specifically set forth on any Schedule annexed hereto) to all its material tangible and intangible personal properties and assets, including all tangible and intangible personal properties and assets which are included among the Gas Assets, to be purchased by Yolo Gasco in each case subject to no encumbrance, lien, charge or other restriction of any kind or character, except for (i) liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real or tangible or intangible personal property which are described in Schedule 8(d) attached hereto, (ii) liens for current taxes, assessments or governmental charges or levies on property not yet due and delinquent and (iii) liens, encumbrances and easements under the contracts and agreements which are included among the Gas Assets and which are specifically identified on any Schedule annexed hereto (liens of the type described in clause (i), (ii), and (iii) above are hereinafter sometimes referred to as "Yolo Gasco Permitted Liens"), and (iv) the liens or other encumbrances set forth on Schedule 8(d) attached hereto. (e) COMPLIANCE WITH LAWS. Except as set forth on Schedule 8e(i) attached hereto, to Yolo Gasco's best knowledge and belief, with respect to the Gas Project, (i) Yolo Gasco has received no notice from any governmental authority that it is in violation of applicable laws and regulations, and (ii) Yolo Gasco has not received any notification of past violations of such laws or regulations that could reasonably be expected to result in future material claims against it. To the best knowledge and belief of Yolo Gasco, set forth on Schedule 8e(ii) attached hereto is a list of all of Yolo Gasco's licenses, permits, orders and approvals of any federal, state or local governmental or regulatory bodies that are material to or necessary for the conduct of the Gas Project (collectively "Gas Project Permits"). To the best knowledge and belief of Yolo Gasco, all Gas Project Permits are in full force and effect and no proceeding is pending or threatened to revoke, or limit any Gas Project Permit. (f) LITIGATION. There are no actions, suits or claims, or legal, administrative or arbitral proceedings or investigations pending or, to the best knowledge and belief of Yolo Gasco, threatened against or involving Yolo Gasco or any of its properties or assets with respect to the Gas Project. (g) DELEGATION AGREEMENT. Yolo Gasco has received no notice from either Seller or Yolo County that it is in violation or breach of any material provision of the Delegation Agreement. The Delegation Agreement is in full force and effect, and Yolo Gasco is not in default or breach under such agreement. 95 (h) CONTRACTS AND OTHER AGREEMENTS. Schedule 8(h) attached hereto contains a complete and accurate list of all of the Gas Project contracts and other agreements with respect to the Gas Project to which the Yolo Gasco is a party or by or to which it or its assets or properties are bound or subject; (i) contracts and other agreements with any current or former officer, director, or employee not cancelable without penalty on notice of thirty (30) days or less; (ii) contracts and other agreements with material suppliers of products sold or leased by Yolo Gasco in the normal course of the Gas Project; (iii) contracts and other agreements relating to the borrowing of money including any indenture, mortgage, promissory note, loan agreement, or guaranty; (iv) operations and maintenance agreements with respect to the Gas Project; (v) any water supply agreement or any other agreement for condensate or other liquid disposal; and (vi) any other contract or other agreement which Yolo Gasco reasonably believes is material to the Gas Project (other than those reflected on any of the other Schedules to this Agreement). There have been delivered or made available to NEO Yolo true and complete copies of all of the contracts and other agreements set forth on Schedule 8(h) or on any other schedule attached hereto. To the best knowledge and belief of Yolo Gasco, all of such contracts and other agreements are valid and binding upon Yolo Gasco in accordance with their terms, and Yolo Gasco is not in material default under any such contracts. (i) REAL ESTATE LEASES. Schedule 8(i) attached hereto sets forth a list and summary description of all leases, subleases, easements, licenses or other agreements under which Yolo Gasco is the lessor or lessee of, or uses or occupies or allows the use or occupancy of, any real property (the "Yolo Gasco Leases and Easements"). All of the Yolo Gasco Leases and Easements, true and complete copies of which have been delivered to NEO Yolo, are in effect and, to the best knowledge and belief of Yolo Gasco, Yolo Gasco is not in material default under or with respect to any of Yolo Gasco Leases or Easements nor has the Yolo Gasco received or sent any notice of any default under or with respect to any of the same. To the best knowledge and belief of Yolo Gasco, no other party to any of the Yolo Gasco Leases and Easements is in material default under or with respect to any of the same. (j) INTELLECTUAL PROPERTY. Schedule 8(j) attached hereto sets forth a list of all patents, trade secrets, proprietary rights, trademarks, service marks and trade names (collectively, "Yo1o Gasco Intellectual Property") owned by Yolo Gasco that relate to the Gas Project. Except as set forth on Schedule 8(j), to the best knowledge and belief of Yolo Gasco, all Yolo Gasco Intellectual Property is owned outright by Yolo Gasco, free and clear of any lien or encumbrance and except as so set forth, there exist no obligations with respect to any Yolo Gasco Intellectual Property requiring Yolo Gasco to make any payment in respect of its use or otherwise. Except as set forth on Schedule 8(j), to the best knowledge and belief of Yolo Gasco, Yolo Gasco has no notice of any patent, trademark, service mark or trade name of any other person that 96 infringes upon, or is infringed upon by, any of the property set forth on Schedule 8(j) or notice of any claim of any other person relating to any of the property set forth on Schedule 8(j) or any process or confidential information of Yolo Gasco. Yolo Gasco's rights in all of such Yolo Gasco Intellectual Property are freely transferable. (k) BROKER'S OR FINDER'S FEES. No agent, broker, person or firm acting on behalf of Yolo Gasco is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any person controlling, controlled by or under common control with any of the parties hereto, in connection with any of the transactions contemplated herein. (l) EMPLOYEE BENEFIT PLANS. (i) Schedule 8(l) attached hereto lists all employee benefit plans, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, programs or arrangements, and any employment or compensation agreements, written or otherwise, currently or heretofore maintained, contributed to or entered into by Yolo Gasco for the benefit or, relating to, or with any employee of Yolo Gasco employed in the Gas Project (the "Employee Plans"). None of the Employee Plans is a multi-employer plan, as defined in Section 4001(a)(3) of ERISA (a "Multi-employer Plan"). 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 Employee Plan. No Employee Plan has breached any requirement prescribed by any applicable statute, order, or governmental rule or regulation currently in effect with respect thereto, nor has Yolo Gasco failed to perform any obligations required to be performed by it under, nor is it in default under or in violation of, nor has it knowledge of any default or violation by any other party of the Employee Plans which would result in liability to NEO Yolo. Each Employee Plan intended to qualify under Section 401 (a) of the Code does so qualify, and each trust created thereunder intended to be exempt from tax under the provisions of Section 501 (a) of the Code is so exempt a determination letter from the Internal Revenue Service (the "IRS") that each such plan is so qualified and each such trust is so exempt has been applied for and Yolo Gasco is aware of no reason why each such favorable determination letter should not be issued, and there exists no fact which would adversely affect the qualified status of any such plan or which would eliminate or partially eliminate the tax treatment accorded to the employers, employees or the corpus of any such plan under the Code. Yolo Gasco has not incurred and does not reasonably expect to incur (i) any liability to the Pension Benefit Guaranty Corporation (other than a liability for premiums pursuant to Section 4007 of ERISA) with respect to any employee plan subject to Title IV of ERISA or (ii) any withdrawal liability with respect to any Multi-employer Plan. All contributions required to be made to any Employee Plan have been made, and all appropriate accruals of contributions, disbursements and expenses have been made with respect to such Employee Plans. With respect to each Employee Plan which is covered by Title IV of ERISA, the market value of assets of such plan as of the date hereof exceeds the actuarial present value of benefits accrued under such plan as of the date hereof, determined in accordance with the actuarial assumptions set forth in the most recent actuarial valuation report of such plan. (ii) Yolo Gasco has delivered to NEO Yolo true and complete copies of all Employee Plans listed in Schedule 8(1) and of all agreements, including trust agreements and other funding instruments, such as insurance contracts, embodying such plans. With respect to each employee benefit plan, as defined in Section 3(3) of ERISA, listed in Schedule 8(1), true and complete copies of the (a) last filed Form 5500 and all applicable Schedules thereto, (b) 97 summary plan description and all modifications thereto communicated to employees and (c) most recent annual and periodic accounting of related plan assets, if any, have been delivered to NEO Yolo and are correct in all material respects. With respect to each employee pension benefit plan, as defined in Section 3(2) of ERISA, listed on Schedule 8(1), true and complete copies of the (a) most recent determination letter, if any, issued by the IRS and the application therefor and (b) most recent annual actuarial valuation report, if any, have been delivered to NEO Yolo and are correct in all material respects. (m) LABOR MATTERS. Except as set forth in Schedule attached hereto, with respect to the Gas Project, Yolo Gasco is currently in compliance in all material respects with all applicable laws, rules and regulations relating to the employment of labor, including those related to wages, hours, collective registrations, and authorizations. (n) TAX RETURNS. Yolo Gasco, as appropriate, has timely filed (including extensions) with the appropriate governmental authorities, all tax and other returns required to be filed by it and such returns are true and complete and all taxes due have been paid. Yolo Gasco will timely file (including extensions) with appropriate governmental authorities, all tax and other returns which shall be required to be filed by it after the Closing Date and such returns shall be true and complete and all taxes due shall be paid by Yolo Gasco. (o) ENVIRONMENTAL MATTERS. Yolo Gasco has provided to NEO Yolo copies of all documents, records and information available to Yolo Gasco, a complete listing of which is set forth on Schedule attached hereto, concerning any environmental or health and safety matter relevant to Yolo Gasco, whether generated by Yolo Gasco or others, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding off-site disposal, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. (p) Section 29 Qualification. Yolo Gasco submitted a purchase order for the requisition of certain equipment for the extraction of landfill gas in connection with the Gas Project, a true and correct copy of which purchase order is attached hereto as Exhibit 8 (p). (q) PERMITS AND GOVERNMENTAL AUTHORITY. (i) All Gas Project permits required for the construction and operation of the Gas Project either (i) have been obtained and remain in full force and effect and are not subject to any appeals or further proceedings or to any unsatisfied conditions that may allow material modification or revocation or (ii) with respect to Gas Project Permits required for operation and construction and not yet obtained, are of a type that are routinely granted on application and that could not be reasonably obtained before .the Closing Date. Upon the purchase of the Gas Assets, NEO Yolo will, to the extent permitted by law, without penalty, additional cost or consent of any person, be entitled to the benefit of each such Gas Project Permit so that the operation of the Gas Project may continue. All applicable Gas Project Permits obtained as of the Closing Date are listed in Schedule 8(u)(i). (ii) Except for the permits identified in Schedule 8(q)(ii), no action by, and no notice to or filing with, any federal, state or local governmental authority or regulatory body (i) is or will be required for the due execution, delivery and performance by Yolo Gasco of this Agreement or any agreement, lease or document to be entered into, assigned or delivered pursuant to the terms hereof of to which it is or will be a party, or (ii) is required for the construction, financing and operation of the Gas Project through the Closing Date. 98 (r) ENVIRONMENTAL COMPLIANCE. Yolo Gasco has taken all reasonable steps to investigate the past and present condition and usage of the Gas Project and the operations conducted thereon and, based upon such diligent investigation, has determined and hereby represents and warrants that, except as set forth on Schedule 8(r): (i) Neither Yolo Gasco nor any operator of the Gas Project is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to the environmental matters, including without limitation, those arising under federal, state or local environmental laws, which violation would have a material adverse effect on the Gas Project or the Gas Assets. (ii) Yolo Gasco has not received notice from any third party including, without limitation, any federal, state or local governmental authority, (a) that it has been identified by the United States Environmental Protection Agency ("EPA") as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B (1986); (b) that any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous waste, as defined 42 U.S.C. ss.9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss.9601(33) or any toxic substance, oil or hazardous materials or other chemicals or substances regulated by any federal, state or local environmental laws ("Hazardous Substances") which Yolo Gasco has generated, transported or disposed of has been found at any site at which a federal, state or local agency or other third party to the best of Yolo Gasco's knowledge has conducted or has ordered that Yolo Gasco conduct a remedial investigation, removal or other response action pursuant to any federal, state or local environmental law, or (c) that it is or shall be a named party to any claim, action, cause of action, complaint, legal or administrative proceeding arising out of any third party's incurrence of costs, expenses, losses or damages of any kind whatsoever in connection with the release of Hazardous Substances, (iii) (a) No portion of Yolo Gasco's leased real property has been used by Yolo Gasco for the handling, processing, storage or disposal of Hazardous Substances except in accordance with applicable federal, state or local environmental laws, and to the best of Yolo Gasco's knowledge no underground tank or other underground storage receptacle for Hazardous Substances is located on such real property; (b) in the course of any activities conducted by Yolo Gasco, no Hazardous Substances have been generated or are being used on such real property by Yolo Gasco except in accordance with applicable federal, state or local environmental laws; (c) to the best of Yolo Gasco's knowledge there have been no unpermitted releases (i.e. any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping) or threatened releases caused by Yolo Gasco, which releases Yolo Gasco has responsibility to correct and which it left uncorrected and which would have a material adverse effect on the value of such real property or adjacent properties or the environment; (d) to the best of Yolo Gasco's knowledge, there have been no releases by Yolo Gasco on, upon, from or into, any real property in the vicinity of the real property which, through soil or groundwater contamination, may have come to be located on, and which would have a material adverse effect on the value of, the real property; and (e) in addition, any Hazardous Substances that have been generated by Yolo Gasco on the real property have been (i) either delivered to Yolo County for treatment and disposal or (ii) have been transported offsite only by carriers having an identification number issued by the EPA, treated or disposed 99 of only by treatment or disposal facilities maintaining valid permits as required under applicable federal, state or local environmental laws, which transporters and facilities have been and are, to the best of the Yolo Gasco's knowledge, operating in compliance with such permits and applicable environmental laws; (iv) To the best of Yolo Gasco's knowledge, the real property owned or leased by Yolo Gasco in Yolo County, California is not subject to any applicable environmental clean up responsibility law or environmental restrictive transfer law or regulation by virtue of Yolo Gasco's activities on the property; (v) Yolo Gasco has provided NEO Yolo with true and complete copies of all material documents, reports, site assessments, data, communications and other materials in its possession or to which it has access which contain information with respect to potential environmental liabilities of Yolo Gasco related to compliance with federal, state and local environmental laws. (s) DISCLOSURE. No representation or warranty made by Yolo Gasco in this Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to NEO Yolo by or on behalf of or at the request of Yolo Gasco in connection with any of the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. (t) INDEPENDENT OPERATIONS. The operations of Yolo Gasco have been run completely independently from those of Seller, and Yolo Gasco makes no representations or warranties about Seller. Seller's operations or the conditions of Seller's assets or properties, whether owned, leased or used. 9. REPRESENTATIONS AND WARRANTIES OF NEO YOLO. NEO Yolo represents and warrants to Yolo Gasco the following (both as of the Closing Date and as of the date hereof): (a) DUE FORMATION AND QUALIFICATION. NEO Yolo is a corporation duly organized, validly existing and in good standing under the laws of its state of formation, and has the power and lawful authority to carry on its business as now being conducted and to own or lease its properties and assets as now owned, leased or operated by it. NEO Yolo viii, prior to the commencement of activities in California, be duly qualified or otherwise authorized as a foreign limited liability company to transact business in California. (b) AUTHORIZATION. NEO Yolo has full power and authority under its formation documents and operating agreement, and the managers and members of NEO Yolo have taken all necessary action to authorize NEO Yolo to execute and deliver this Agreement and to consummate the transactions contemplated hereby and, assuming due authorization, execution and delivery of this Agreement by Yolo Gasco, Seller and Buyer, this Agreement constitutes the valid and binding obligation of NEO Yolo enforceable in accordance with its terms except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws now or hereafter in effect relating to creditors1 rights generally and the remedy of specific performance and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 100 (c) NON-CONTRAVENTION. Neither the execution and delivery of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby does or will violate, conflict with, result in a breach of any provision of, constitute a default under, result in the termination of or permit any third party to terminate (with or without notice, lapse of time or pursuant to any legal or equitable principle) or accelerate the performance required on the part of NEO Yolo by the terms of, or accelerate the maturity of or require the prepayment of any indebtedness of NEO Yolo under, any judgment, order, decree or agreement or instrument to or by which NEO Yolo or any of its assets is subject or bound. (d) AUTHORITY OF NEO YOLO. Except as set forth on Schedule 9(d) attached hereto, no consent, authorization or approval of, or declaration, filing or registration with, any governmental, administrative or regulatory body, or any consent, authorization or approval of any other third party, is necessary in connection with NEO Yolo's consummation of the other transactions contemplated hereby. (e) LITIGATION. Except as set forth on Schedule 9(e) attached hereto, there are no claims, actions, suits, proceedings or investigations pending or, to the best knowledge and belief of NEO Yolo threatened by or against NEO Yolo with respect to the transactions contemplated hereby, at law or in equity or before or by any federal, state, municipal, foreign or other governmental department, commission, board, agency, instrumentality or authority nor does NEO Yolo know or have any reason to know of any basis for any such claim, action, suit, proceeding or investigation except with respect to those claims, actions, suits, proceedings or investigations which would not have a material adverse effect on NEO Yolo. 10. SELLER'S AND BUYER CONDITIONS OF CLOSING. (a) The obligations of Buyer hereunder are subject to the fulfillment to the reasonable satisfaction of Buyer of each of the following conditions prior to or on the Closing Date: (i) Seller have been performed and complied with all covenants and conditions, and shall have made all deliveries, required by this Agreement to be performed or complied with by Seller prior to or at the Closing and the representations of Seller shall be true and accurate in all material respects as of the Closing. (ii) On the Closing Date, neither Seller nor Buyer shall be a party to, nor will there otherwise be pending, any judicial, administrative or other action, proceeding or investigation (other than any such action brought by Buyer) seeking to enjoin or restrain the transactions contemplated hereby, and there will not be in effect any injunction, writ, temporary restraining order or any order of any nature issued by a court of competent jurisdiction directing that any transactions Provided for herein not be consummated as so provided. (iii) Buyer shall have received executed counterparts of any consents, releases and other documentation, including such consents, releases and other documentation as are reasonably satisfactory to Buyer from the parties listed on Schedule 3(b) (iv), required to permit Seller and Buyer to consummate the transactions contemplated by this Agreement and to vest in Buyer all of Seller's right, title and interest in the Electric Assets, in accordance with the provisions of this Agreement. 101 (iv) There shall have occurred no material adverse change in the operations of the Electric Project or the condition of the Electric Assets during the period from the date hereof to the Closing Date, except for ordinary wear and tear, maintenance and repair of the Electric Assets- For purposes hereof, "material adverse change" shall include, without limitation, (a) any material breach by any party under a material contract to which Seller is a party, by which Seller is bound to which the Electric Assets are subject which causes a material diminution in value of the Electric Project, and the Electric Assets, (b) any material adverse change in relationships with licensees, suppliers, distributors, customers or other having material business relationships with Seller which causes a material diminution in value of the Electric Project and the Electric Assets, (c) any sale or other disposition of any of the Electrical Assets other than in the ordinary course of business, (d) any further encumbrance of any Electric Assets, and (e) any modification, amendment or cancellation of any of Sellers existing commitments, contracts or agreements relating to the Electric Project or the Electric Assets, or the entering into of any new commitments, contracts or agreements other than in the ordinary course of business. (v) All liens, claims and encumbrances upon or against the Electric Assets and the Electric Project other than the Electric Permitted Liens shall be released and discharged against and with respect to the Electric Assets and the Electric Project to the reasonable satisfaction of Buyer. (vi) Buyer shall have received consents and waivers and other documents reasonably satisfactory to Buyer, pursuant to which all third parties under the Electric Project Assumed Contracts and Electric project Assumed Leases have waived or agreed to waive all breaches and defaults by Seller under such Electric Project Assumed Contracts and Electric Project Assumed Leases. (vii) Buyer shall have received the approval of this Agreement and the transaction that is the subject hereof by the Board of Directors of NEO Corporation, as a member of Buyer. (viii) Buyer shall be satisfied with (a) the results of the legal, accounting and business due diligence investigation of the Electric Assets and the Electric Project which will be performed by its attorneys, accountants and representatives, and the performance of the Electric Project prior to Closing and (b) that all legal and administrative proceedings and actions related to the approval of this Agreement and the transactions contemplated hereby have been fully and completely satisfied in such manner as to vest in Buyer good and marketable title to the Electric Assets, free and clear of all liens, claims and encumbrances (other than any such lien, claim or encumbrance which comprises either an Electric Permitted Lien or an Electric Project Assumed Liability) upon the consummation of the transactions contemplated hereby. (ix) NEO Yolo shall have received a bill of sale, in form and substance reasonably satisfactory to NEO Yolo, duly executed by Yolo Gasco, conveying all of Yolo Gasco's rights, title and interest in and to all of the Gas Assets to NEO Yolo. (x) Buyer shall have entered into (a) a Standard Offer No. 1 Power Purchase Agreement in form and substance satisfactory to Buyer with SCE for purchase of electric power from the Electric Project, (b) a transmission agreement in form and substance satisfactory to Buyer with PG&E for the transmission by PG&E to SCE of electric power generated by Buyer from the Electric Project, and (c) such interconnection, scheduling and other agreements 102 with either PG&E or SCE, or both, as may be reasonably required by Buyer with respect to the transmission and purchase of electric power generated by the Electric Project as set forth above. (xi) Buyer shall have received from Seller such other documents, instruments, writings and actions as may. be reasonably requested by Buyer or its legal counsel to confirm to Buyer marketable title to the Electric Assets, the Electric Project and the agreements with SCE, PG&E and all other third parties other than NEO Yolo or Yolo Gasco required for the profitable operation of the Electric Project as contemplated herein. (xii) Buyer shall have received from EMCON an agreement in form and substance satisfactory to Buyer pursuant to which EMCON agrees to use its best efforts to assist Buyer and NEO Yolo to negotiate with and obtain from Yolo County an amended and restated Production Agreement in which Yolo County would agree to reduce the compensation payable to it pursuant to such Production Agreement to a level of compensation that is satisfactory to Buyer and NEO Yolo. (xiii) The concurrent closing of the purchase by NEO Yolo of the Gas Assets and the Gas Project from Yolo Gasco. (b) The obligations of Seller hereunder are subject to the fulfillment to the reasonable satisfaction of Seller of each of the following conditions prior to or at the Closing: (i) Buyer shall have performed and complied with all covenants and conditions, and shall have made all deliveries, required by this Agreement to be performed or complied with by Buyer prior to or at the Closing and the representations and warranties of Buyer shall be true and accurate in all material respects as of the Closing. (ii) On the Closing Date, neither Seller nor Buyer shall be a party to, nor will there otherwise be pending, .any judicial, administrative or other action, proceeding or investigation (other than any such action brought by Seller) seeking to enjoin or restrain the transactions contemplated hereby, and there will not be in effect any injunction, writ, temporary restraining order or any order of any nature issued by a court of competent jurisdiction directing that any transactions Provided for herein not be consummated as so provided. 11. NEO YOLO'S AND THE YOLO GASCO'S CONDITIONS OF CLOSING. (a) The obligations of NEO Yolo hereunder are subject to the fulfillment to the reasonable satisfaction of NEO Yolo of each of the following conditions prior to or on the Closing Date: (i) Yolo Gasco shall have performed and complied with all covenants and conditions, and shall have made all deliveries, required by this Agreement to be performed or complied with by Yolo Gasco prior to or at the Closing and the representations of Yolo Gasco shall be true and accurate in all material respects as of the Closing. (ii) On the Closing Date, neither Yolo Gasco nor NEO Yolo shall be a party to, nor will there otherwise be pending, any judicial, administrative or other action, proceeding or investigation (other than any such action brought by NEO Yolo) seeking to enjoin or restrain the transactions contemplated hereby, and there will not be in effect any injunction, writ, temporary restraining order or any order of any nature issued by a court of competent jurisdiction directing that any transactions Provided for herein not be consummated as so provided. 103 (iii) NEO Yolo shall have received executed counterparts of any consents, releases and other documentation, including such consents, releases another documentation, including such consents, releases and other documentation as are reasonably satisfactory to NEO Yolo from the parties listed on Schedule 11(a)(iii), required to permit Yolo Gasco and NEO Yolo to consummate the transactions contemplated by this Agreement and to vest in NEO Yolo all of Yolo Gasco's right, title and interest in the Gas Assets, in accordance with the provisions of this Agreement. (iv) There shall have occurred no material adverse change in the operations of the Gas Project, or the condition of the Gas Assets during the period from the date hereof to the Closing Date, except for ordinary wear and tear and maintenance and repair of the Gas Assets. For purposes hereof, "material adverse change" shall include, without limitation, (a) any material breach by any party under a material contract to which Yolo Gasco is a party, by which Yolo Gasco is bound or to which the Gas Assets are subject which cause a material diminution in value of the Gas Project, and the Gas Assets, (b) any material adverse change in relationships with licensees, suppliers, distributors, customers or others having material business relationships with Yolo Gasco which causes a material diminution in value of the Gas Project and the Gas Assets, (c) any sale or other disposition of any of the Gas Assets other than in the ordinary course of business, (d) any further encumbrance of any Gas Assets, and (e) any modification, amendment or cancellation of any of Yolo Gasco's existing commitments, contracts or agreements relating to the Gas Project or the Gas Assets, or the entering into of any new commitments, contracts or agreements other than in the ordinary course of business. (v) All liens, claims and encumbrances upon or against the Gas Assets and the Gas Project shall be released and discharged against and with respect to the Gas Assets and the Gas Project, to the reasonable satisfaction of NEO Yolo. (vi) NEO Yolo shall have received consents and waivers and other documents reasonably satisfactory to NEO Yolo pursuant to which all third parties under the Gas Project Assumed Contracts and Gas Project Assumed Leases have waived or agreed to waive all breaches and default by Yolo Gasco under such Gas Project Assumed Contracts and Gas Project Assumed Leases. (vii) NEO Yolo shall have received the approval of this Agreement and the transactions that is the subject hereof by the Board of Directors of NEO Corporation, the sole shareholder of NEO Yolo. (viii) NEO Yolo shall be satisfied with (a) the results of the legal, accounting and business due diligence investigation of the Gas Assets and the Gas Project which will be performed by its attorneys, accountants and representatives, and the performance of the Gas Project prior to Closing and (b) that all legal and administrative proceedings and actions related to the approval of this Agreement and the transactions contemplated hereby have been fully and completely satisfied in such manner as to vest in NEO Yolo good and marketable title to the Gas Assets, free and clear of all liens, claims and encumbrances upon the consummation of the transactions contemplated hereby. (ix) NEO Yolo shall have received a bill of sale, in form and substance reasonably satisfactory to NEO Yolo, duly executed by Yolo Gasco, conveying all of Yolo Gasco's rights, title and interest in and to all of the Gas Assets to NEO Yolo. (x) The receipt by NEO Yolo of an agreement between NEO Yolo and EMCON in which NEO Yolo shall have the right, at its sole option to retain EMCON (i) to install additional landfill gas collection wells at the Yolo County 104 Central Landfill at a cost not to exceed $3,250 per well for the period commencing with the Closing Date and continuing for a period ending twelve months from the Closing Date and (ii) to perform operations, maintenance and repair services with respect to the landfill gas collection system at the Yolo County Central Landfill at either a fixed price or at hourly rates, as set forth in such agreement that are 75% of the normal fixed price or hourly rates published and billed to other clients by EMCON for comparable services for the period commencing on the Closing Date and continuing for a period ending twelve months from the Closing Date. (xi) NEO Yolo shall have received from Yolo Gasco such other documents, instruments, writings and actions as may be reasonably requested by NEO Yolo or its legal counsel to confirm to NEO Yolo marketable title to the Gas Assets and the Gas Project, including any agreements with third parties other than Seller or Buyer required for the Gas Project as contemplated herein. (xii) The concurrent closing of the purchase by Buyer of the Electric Assets and Electric Project from Buyer. (b) The obligations of Yolo Gasco hereunder are subject to the fulfillment to the reasonable satisfaction of Yolo Gasco of each of the following conditions prior to or at the Closing: (i) NEO Yolo shall have performed and complied with all covenants and conditions, and shall have made all deliveries, required by this Agreement to be performed or complied with by NEO Yolo prior to or at the Closing and the representations and warranties of NEO Yolo shall be true and accurate in all material respects as of the Closing. (ii) On the Closing Date, neither Yolo Gasco or NEO Yolo shall be a party to, nor will there otherwise be pending, any judicial, administrative or other action, proceeding or investigation seeking to enjoin or restrain the transactions contemplated hereby, and there will not be in effect any injunction, writ, temporary restraining order or any order of any nature issued by a court of competent jurisdiction directing that any transactions provided for herein not be consummated as so provided. (iii) The receipt from Seller of an agreement with Yolo Gasco on terms and conditions and in a form satisfactory to Yolo Gasco providing for (a) the settlement of outstanding claims between Seller and Yolo Gasco, and (b) such other matters as maybe agreed upon between Seller and Yolo Gasco. 12. COVENANTS OF SELLER. (a) Seller hereby covenants and agrees that, from and after the date hereof and until the Closing Date: (i) Seller shall provide full access to Buyer and its representatives to all of its properties, books, contracts, commitments and records concerning the Electric Assets and the Electric Project (other than privileged attorney-client communications and privilege attorney work product relating to the Electric Assets and the Electric Project) and shall furnish such information relating thereto as Buyer may reasonably request. 105 (ii) Seller will notify Buyer regarding any significant developments, transactions and proposals relating to the Electric Project and the Electric Assets, other than in the ordinary course of business as conducted as of the date hereof. In particular, Seller will notify Buyer of any event that, to Seller's actual knowledge, occurs prior to the Closing Date that (a) would have required disclosure in a Schedule or Exhibit to this Agreement if it had occurred prior to the date hereof or (b) could reasonably cause a failure of any condition set forth in Section 10(a) hereof. 13. COVENANTS OF YOLO GASCO. (a) Yolo Gasco hereby covenants and agrees that, from and after the date hereof and until the Closing Date: (i) Yolo Gasco shall provide full access to NEO (Y) Yolo and its representatives to all of its properties, books, contracts, commitments and records concerning the Gas Assets-and the Gas Project (other than privileged attorney-client communications and privileged attorney work product relating to the Gas Assets and the Gas Project) and shall furnish such information relating thereto as NEO (Y) Yolo may reasonably request. (ii) Yolo Gasco will notify NEO Yolo regarding any significant developments, transactions and proposals relating to the Gas Project and the Gas Assets, other than in the ordinary course of business as conducted as of the date hereof. In particular, Yolo Gasco will notify, NEO Yolo of any event that, to Yolo Gasco's actual knowledge, occurs prior to the Closing Date that (a) would have required disclosure in a Schedule or Exhibit to this Agreement if it had occurred prior to the date hereof, or (b) could reasonably cause a failure of any condition set forth in Section Il(a) hereof. 14. TAXES; PREPAID ITEMS; PRORATIONS; EXPENSES. (a) Buyer shall pay all income, franchise and other taxes and charges, if any, arising out of Buyer's ownership of the Electric Assets or operation of the Electric Project after the Closing Date. Except as may be included in the Electric Project Assumed Liabilities or under assumption agreements, assignment agreements or consents to assignment executed by Buyer in connection herewith, Buyer shall not pay nor be responsible for any income, franchise, sales, use and other taxes and charges, if any, arising out of Seller's ownership of the Electric Assets or operations of the Electric Project prior to and through the Closing Date. (b) NEO Yolo shall pay all income, franchise and other taxes and charges, if any, arising out of NEO Yolo's ownership of the Gas Assets or operation of the Gas Project after the Closing Date. Except as may be included in the Gas Project Assumed Liabilities or under assumption agreements, assignment agreements or consents to assignment executed by NEO Yolo in connection herewith, NEO Yolo shall not pay nor be responsible for any income, franchise, sales, use or other taxes and charges, if any, arising out of Yolo Gasco's ownership of the Gas Assets or operations of the Gas Project prior to and through the Closing Date. (c) Property taxes and the payment for easement rights to James Fitzgerald Kelly and Thomas Ross Kelly as co-trustees of the Margaret Ross Noonan Kelly Irrevocable Trust dated March 14, 1990 shall be prorated as of the 106 Closing Date. All rights of Seller and Yolo Gasco to any refund or reduction in assessment of taxes, whether existing before or after the Closing Date, shall be transferred by Seller and (Y) Yolo Gasco to Buyer and NEO Yolo at the Closing Date. Such prorations shall occur on the Closing Date or as soon thereafter as is reasonable practicable. (d) Each of the parties shall pay its own expenses in connection with this Agreement and the transactions contemplated hereby. The expense of furnishing documents required under this Agreement shall be borne by the parties which is obligated to furnish the same. 15. ATTORNEYS; FEES. If any action be instituted between or among any of the parties to enforce any of the provisions of this Agreement, the prevailing party shall be entitled to recover any expenses incurred in connection with such dispute, including reasonable accountants' and attorneys' fees. 16. MISCELLANEOUS. (a) Buyer and NEO Yolo each acknowledge that after the Closing Seller will have no substantial assets. As a result thereof, any recovery of monetary damages or relief against Seller for any breach of any representation or covenant, or the inaccuracy of any warranty, under this Agreement would be substantially unlikely and speculative. Notwithstanding the foregoing, Buyer and NEO Yolo each hereby waives any claims it may have had against the officers, directors and/or shareholders of Seller under "piercing the corporate veil" and other similar theories for any such breach or inaccuracy. (b) If the Closing Date has not occurred on or before December 31, 1996, any of the parties may terminate this Agreement by giving notice of its election to terminate this Agreement to the other parties in accordance with the provisions hereof. (c) All Exhibits and Schedules referred to and attached to this Agreement are hereby incorporated into and by this reference made apart of this Agreement. Disclosure of information on any of the Schedules to this Agreement shall be regarded for all purposes as disclosure of such information on any other Schedule for which such information is relevant. This Agreement, including all such Exhibits and Schedules, and any agreements and documents delivered or entered into in connection herewith constitute the complete agreement of the parties hereto and supersede all negotiations, prior agreements, or understandings between or among the parties, and no term or provision of this Agreement may be altered, amended or waived except by a writing signed by Buyer, Seller, Yolo Gasco and NEO Yolo. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall constitute a waiver of any other or subsequent breach or a continuing waiver. (d) This Agreement shall be binding upon and inure to the benefit of, and be enforceable by, the respective representatives, successors and assigns of Buyer, Seller, Yolo Gasco and NEO Yolo. (e) This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 107 (f) The subject headings of the Paragraphs of this Agreement are included for purposes of convenience only and shall not affect the constructions or interpretation of any of its provisions. (g) Each party agrees to pay any brokerage commission or finder's fee which may be due on account of the transactions contemplated by this Agreement to any broker or finder employed or retained by it, and to indemnify and hold the other party harmless from all liabilities, expenses (including reasonable attorneys~ fees), damage and claims arising from any claim for such commission or fees. (h) All notices or other communications required or permitted hereunder shall be in writing and shall be given by hand or by registered mail, return receipt requested, addressed as follows: If to Seller: Yolo Energy Partners, Inc. P.O. Box 1186 Frazier, CA 19355 Attn: Theodore H. Van Buren, President With a copy to: Sommer & Barnard, PC 4000 Bank One Tower 111 Monument Circle P.O. Box 44363 Indianapolis, IN 46244 Attn.' Robert J. Hicks, Esq. If to Buyer: Minnesota Methane LLC c/o NEO Corporation 1221 Nicollet Mall, Suite 700 Minneapolis, MN 55403-2445 Attention: President If to Yolo Gasco: Yolo Landfill Gas Corporation c/o Emcon 400 S. El Camino Real, Suite 1200 San Mateo, CA 94402 Attention: R. Michael Momboisse Chief Financial Officer If to Emcon: Emcon 400. S. El Camino Real, Suite 1200 San Mateo, CA 94402 Attention: R. Michael Momboisse 108 If to NEO Yolo: Yolo NEO LLC c/o NEO Corporation 1221 Nicollet Mall, Suite 700 Minneapolis, MN 55403-2445 Attention: President (i) In case one or more provisions of this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected or impaired thereby and the parties hereto shall enter into an agreement amending such provision in such manner as to make it valid, legal and enforceable while retaining the original intent of the parties with respect to such provision. (j) This Agreement shall be governed by and construed in accordance with the laws of the State of California. (k) Time is of the essence as to the provisions of this Agreement. (l) This Agreement shall terminate and shall be of no further force or effect upon mutual agreement of the parties. No termination of this Agreement shall release, or be construed as releasing, any party hereto from any liability or damage to the other party hereto arising out of, in connection with or otherwise relating to, directly or indirectly, such party's material breach, such party's material default or such party's failure in performance of any of its material covenants, agreements, duties or obligations arising hereunder. (m) Each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person or entity other than the parties hereto. (n) This Agreement may be executed in counterparts, which counterparts, taken collectively, shall constitute one and the same document. 109 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SELLER: YOLO ENERGY PARTNERS, INC. an Indiana Corporation By: /s/Theodore H. Van Buren -------------------------- Name: Theodore H. Van Buren Title: President BUYER: Minnesota Methane LLC a Wyoming limited liability company By: /s/Peter D. Jones --------------------------- Name: Peter D. Jones Title: Director YOLO LANDFILL GAS CORPORATION a California Corporation By: /s/R. Michael Momboisse --------------------------- Name: R. Michael Momboisse Title: CFO & Vice President Legal YOLO NEO LLC a Delaware Limited Liability Company By: /s/Peter D. Jones -------------------------- Name: Peter D. Jones Title: Manager EMCON a California Corporation By: /s/R. Michael Momboisse -------------------------- Name: R. Michael Momboisse Title: CFO & Vice President Legal 110 EX-10.21 6 BANK AMENDMENT EXHIBIT 10.21 AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT ("Amendment") is made effective as of the 17th day of January, 1997, by and between EMCON ("Borrower") and Union Bank of California, N.A. ("Bank"). RECITALS A. Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement dated February 29, 1996 and amended on September 13, 1996 (the "Agreement"); B. Borrower and Bank have agreed to amend the Agreement to reflect certain changes in the terms and conditions set forth therein. C. All references to the "Prime Rate" in all the Loan Documents shall be deemed to be references to the "Reference Rate". "Reference Rate" shall mean 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. NOW, THEREFORE, the parties hereto agree as follows: 1. Section 5.2(b) of the Agreement the amount Forty-One Million Dollars ($41,000,000) is deleted and the amount Thirty Six Million Dollars ($36,000,000) is substituted therefore. 2. Section 6.8 of the Agreement the amount Six Million Dollars ($6,000,000) is deleted and the amount Three Million Five Hundred Thousand Dollars ($3,500,000) is substituted therefore. 3. Upon the sale of Columbia Analytical Services, Inc., under the terms of that Agreement between EMCON and Columbia Analytical Services, Inc., EMCON will reduce the outstanding term loan with the Bank by $3,000,000. GENERAL AMENDMENT PROVISIONS A. Except as specifically provided herein, all terms and conditions of the Agreement remain in full force and effect, without waiver or modification. All terms defined in the Agreement shall have the same meaning when used in this Amendment, and this Amendment and the Agreement shall be read together as one document. Where any provisions of the Agreement amended by this Amendment appear in a promissory note tied to the Agreement, the same provisions in said promissory note shall be deemed likewise amended. B. Borrower hereby confirms all representations and warranties contained in the Agreement and reaffirms all covenants set forth therein. Further, Borrower certifies that, as of the date of this Amendment, there exists no Event of Default as defined in the Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this amendment to become effective as of the date and year first written above. Union Bank of California, N.A. EMCON By: /s/ William Hinch By: /s/ R. Michael Momboisse -------------------- ------------------------ William Hinch R. Michael Momboisse Title: Vice President Title: Chief Financial Officer & Vice President Legal Dated: 1/28/97 111 EX-10.22 7 ACQUISITION AGREEMENT - MARINA EXHIBIT 10.22 ACQUISITION AGREEMENT THIS AGREEMENT made and entered into as of this 6th day of March 1997, by and between EMCON, a California corporation ("EMCON"), and its wholly-owned subsidiary, MONTEREY LANDFILL GAS CORPORATION, a California corporation (the "Seller"), both having an address at 400 S. El Camino Real, Suite 1200, San Mateo, California 94402, and BIOMASS ENERGY PARTNERS V, L.P., a Delaware limited partnership having an office at 40 Tower Lane, Avon, Connecticut 06001 (the "Buyer"). W I T N E S S E T H : WHEREAS, the Seller is party to those certain agreements described on Exhibit A annexed hereto (the "Project Agreements"), pursuant to which the Seller was granted the exclusive lease of all rights to the Landfill Gas which is produced within the Monterey Peninsula Landfill located north of the Town of Marina, County of Monterey, State of California, as shown on the attached Exhibit B (hereinafter referred to as the "Landfill"); and WHEREAS, the District has constructed and installed certain Landfill Gas recovery wells and other equipment in the Landfill and further intends to construct additional wells and equipment in the Landfill and all of such wells and equipment are used or are to be used in the Landfill Gas Recovery Project conducted at the Landfill under the terms of the Project Documents and are owned by the Seller; and WHEREAS, the Seller desires to sell to the Buyer and the Buyer desires to acquire from the Seller for the consideration hereinafter set forth, the sole and exclusive right and privilege to drill and recover all Landfill Gas at the Landfill and all other related rights covered by the Project Documents, subject to the terms and conditions of the Project Documents and to the provisions hereof, and the parties further desire that the Seller shall sell to the Buyer all of the Seller's interest in the wells and equipment used in the Landfill Gas Recovery Project. NOW, THEREFORE, in consideration, of the performance and observance of the mutual covenants, terms and conditions herein contained, the parties agree as follows: 112 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "Agreements" - this Agreement, the Assignment, the Bill of Sale and any other agreements between Buyer and Seller relating hereto. (b) "Amendment to and Restatement of Gas Sales Contract" Amendment and Restatement dated December 22, 1986, as amended, originally between Marina Landfill Gas Corporation and Monterey Landfill Gas Corporation. (c) "Amendments" - The Third Lease Amendment and Amendment No. 2 to Amended and Restated Gas Sales Contract, each as more particularly described on Exhibit A annexed hereto. (d) "Assignment" - the assignment of Seller's rights in the Project Documents, in the form annexed hereto as Exhibit E, and in form suitable for recording. (e) "Bill of Sale" - the bill of sale in the form annexed hereto as Exhibit G. (f) "Code" - the Internal Revenue Code of 1986, as amended. (g) "Construction Contract" - defined as in Section 5(c). (h) "District" - Monterey Regional Waste Management District, the owner and operator of the Landfill. (i) "Equipment" - the Landfill Gas recovery wells and other equipment now used and to be used in connection with the Landfill Gas Recovery Project at the Landfill and more particularly described in the Project Documents. (j) "Expansion Area" - Module 3 and the "Wet Weather" area as described on Exhibit B annexed hereto. (k) "Landfill" - Monterey Peninsula Landfill located in Monterey, California, as shown on Exhibit B annexed hereto. (l) "Landfill Gas" - methane gas and other gases produced by the anaerobic decomposition of matter within the Landfill. (m) "Landfill Gas Lease" - the Lease, dated June, 1983, as amended, originally entered into between Monterey Peninsula Garbage and Refuse Disposal District and Marina Landfill Gas Corporation. (n) "Landfill Gas Recovery Project" - the project to recover Landfill Gas now and to be undertaken at the Landfill, utilizing the Project Properties. (o) "Permits" - the permits and licenses relating to the Landfill Gas Recovery Project as more fully described in Section 2(a)(iv). 113 (p) "Project Documents" - The Landfill Gas Lease, the Amendment to and Restatement of Gas Sales Contract and the Amendments, each as more particularly described as Exhibit A annexed hereto. (q) "Project Properties" - the assets described in Section 2(a). (r) "Section 29 Credits" - the credits against income tax liability provided for the production and sale of fuel from a nonconventional source under Section 29 of the Code. (s) "User" - Pacific Gas and Electric Company. 2. SALE AND ASSIGNMENT. (a) Subject to the payment by Buyer of the purchase price of $1,150,000, Seller hereby sells, transfers and assigns unto the Buyer, its successors and assigns, all of Seller's right, title and interest in (i) the Project Documents and the Landfill Gas Recovery Project, including, without limitation, all easements, rights of way, and appurtenances and all rights to drill for Landfill Gas in all sections of the Landfill, whether developed now or hereafter; (ii) the Landfill Gas and the Landfill Gas reserves at, in and under the Landfill; (iii) the Equipment; and (iv) all other tangible and intangible personal property, interests and rights relating to the Landfill Gas Recovery Project, including, without limitation, any use, occupancy, water, environmental, discharge, construction and operating permits or licenses (the "Permits"), to the extent assignable. All the foregoing are referred to herein as the "Project Properties." All of Buyer's rights shall be subject to the rights of the District under the Project Documents. (b) As a material condition hereof and covenant of the Buyer, the Buyer agrees to be bound by all the terms, covenants, obligations and conditions of the Project Documents. (c) The Seller has received from the Buyer simultaneously herewith all of the following duly executed: (i) the Assignment; and (ii) the Bill of Sale. (d) The Buyer has received from the Seller simultaneously herewith: (i) the Assignment, duly executed by the Seller and duly consented to by the District; 114 (ii) the Bill of Sale; (iii) such other instruments of transfer and consent as shall be necessary to transfer to Buyer the rights to the Project Properties. 3. ALLOCATION OF PURCHASE PRICE. The purchase price set forth in section 2(a) shall be allocated as set forth in Exhibit D annexed hereto. The Buyer and the Seller shall report the transfer of project properties in accordance with the provisions of Section 1060 of the Internal Revenue Code of 1986, as amended and the regulations thereunder. 4. PAYMENT. (a) In consideration for the Seller's agreements hereunder, the Buyer shall pay an aggregate of $1,150,000, payable as follows: (i) The Buyer has heretofore paid to the Seller the sum of $7,500. (ii) The Buyer has paid to the Seller the sum of $942,500 in immediately available funds on the date hereof; and (iii) The Buyer shall pay to Seller the sum of $200,000, in immediately available funds, upon the first to occur of the following events, with interest at the rate of 9% per annum from the date of this Agreement through the date of payment, payable at the date of payment: (x) December 31, 1997, if no changes to Section 29 of the Code materially adverse to Buyer with respect to the Landfill Gas Recovery Project shall have been enacted into law prior to that date; or, if enacted, shall have been repealed prior to that date; or (y) the date upon which an amendment to Section 29(g)(1)(A) of the Code shall have been enacted into law; provided that the July 1, 1998 date in such Section shall be changed to a date no earlier than December 31, 1997 and no other amendments to Section 29 of the Code materially adverse to the Buyer with respect to the Landfill Gas Recovery Project shall have been enacted into law; or (z) the date upon which the next Federal budget shall be enacted into law; provided that no changes to Section 29 of the Code materially adverse to the Buyer with respect to the Landfill Gas Recovery Project shall have been enacted into law in connection with the enactment of such budget. If none of the above events shall occur on or before December 31, 1997, then, upon such date, the obligation to make the $200,000 payment along with any accrued interest shall terminate and be of no further force and effect and the aggregate consideration shall be thereupon reduced automatically to $950,000. 5. EMCON'S AND SELLER'S WARRANTIES. EMCON and the Seller jointly represent and warrant to the Buyer on and as of the date hereof: (a) The Seller is a corporation duly and validly organized and existing in good standing under the laws of the state of its organization; the 115 Seller has all necessary power and authority to own its properties and carry on its business in the places where the ownership of such properties and the conduct of such business so requires; the Seller has the necessary power and authority to enter into the Agreements and to carry out the transactions contemplated hereunder and thereunder; the execution and delivery of the Agreements by the Seller and the performance of its obligations hereunder and thereunder, including the conveyance of its rights under the Project Documents and the acceptance of the purchase price in exchange therefor and the sale of the Project Properties, have been duly authorized by all necessary action of the Seller and do not violate or conflict with (i) any provision of the Articles of Incorporation or By-Laws of the Seller, (ii) any law or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority, or (iii) any agreement to which the Seller is a party or by which the Seller's interest in the Project Properties is bound; the Seller is not subject to any restriction or agreement which (with or without the giving of notice or passage of time or both) prohibits or would be violated by, and the Seller has obtained all of the consents of the parties necessary for, the consummation of the transactions contemplated hereby; and the Agreements constitute, and when executed and delivered will constitute, the valid and binding obligations of the Seller enforceable in accordance with their terms. (b) The Seller is the sole owner of the leasehold estate and Landfill Gas rights created or granted by the Project Documents all of which upon transfer to Buyer shall be free and clear of all liens, claims and encumbrances of any kind or nature whatsoever. With respect to the Equipment, the Seller has not transferred any interest in the Equipment, nor made or suffered any lien, claim or encumbrance, to or by any person. (c) The District has entered into a Construction Contract (the "Construction Contract") with O.W.T. Construction Company effective as of December 31, 1996 to build an addition to the Landfill Gas Recovery Project in the Expansion Area. A true and complete copy of this Construction Contract is attached to this Agreement as Exhibit C. The Construction Contract is in full force and effect, is valid and subsisting, and no party is in default thereunder. The Project Documents, including, without limitation, the Amendments, and the Construction Contract, are valid and subsisting and in full force and effect, no party is in default thereunder, and the Project Documents grant all rights necessary for the conduct of the Landfill Gas Recovery Project upon the lands described therein. (d) The Seller has good and lawful right to assign rights under the Project Documents and to assign the Landfill Gas lying in and under the Landfill to the Buyer as done in the Assignment and to sell the Equipment as is done by the Bill of Sale. (e) The Buyer shall have the exclusive right to recover and remove the Landfill Gas in and under the Landfill (including any areas of the Landfills not yet developed), subject to the terms of the Project Documents. (f) The Seller has granted to the Buyer its entire economic interest in the Landfill Gas in the Landfill subject to the terms hereof. (g) The Project Properties will be kept free from any adverse lien, security interest or encumbrance attributable to the acts of the Seller and the Seller warrants specially its title to the leasehold estate granted herein and hereby subject to the terms of the Project Documents. (h) All income, sales, use, value added, or other taxes, licenses, tolls, inspection or other fees, permits or certificates ("Imposts") which were or may be required to be paid or obtained in connection with the Seller and the Seller's business operations have been, or when due will promptly be, paid in full or obtained. 116 (i) There is no action, suit or proceeding pending or threatened against the Seller or any other party before or by any court, administrative agency or other governmental authority affecting the Project Properties, the Landfill Gas Recovery Project or the transactions contemplated by the Agreements. In connection with its operation of the Landfill Gas Recovery Project, the Seller has complied with all applicable laws, statutes, regulations, ordinances and rules, including those relating to the environment and the Seller and the District have secured all necessary Permits, copies of which have been heretofore furnished to the Buyer. (j) The Seller has furnished or will, upon request, furnish to the Buyer a true, correct and complete copy of the Project Documents, the Amendments, the agreement with the User relating to the sale by the Seller to the User of electricity and of each and every material document delivered to or by the Seller, as the case may be, in connection with the purchase of the Project Properties by Seller. (k) To the best of Seller's knowledge, the Equipment is in good working order and operating condition. (l) The gas flow projections prepared by John Pacey, dated December 12, 1996, attached to this Agreement as Exhibit F, represent Seller's best estimate of the flow of Landfill Gas to be produced at the Landfill Gas Recovery Project from January 1, 1997 to 2020. Buyer acknowledges that projections and the related representations herein are not to be construed as a guarantee of the actual flow of Landfill Gas to be provided at the Landfill Gas Recovery Project after the closing. The attached Exhibit H represents Seller's accurate statement of income received from the sale of LFG to the District for the period indicated in Exhibit H. In addition, the Section 29 Credits generated by the Landfill Gas Recovery Project for the period January 1, 1994 through November 30, 1996 are as follows: 1994 - 12 months - $126,588 1995 - 12 months - $173,562 1996 - 11 months - $120,621 (m) In connection with the construction, fuel supply, power generation and transmission and other operations and processes relating to the Landfill Gas Recovery Project, no release, emission, or discharge into the environment of petroleum or petroleum products, or hazardous substances as defined under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss.9601 et seq., or hazardous waste as defined under the Solid Waste Disposal Act, 42 U.S.C. ss.6901 et seq., or air pollutants as defined under the Clean Air Act, 42 U.S.C. ss.7401 et seq., or toxic pollutants as defined under the Clean Water Act, 33 U.S.C. ss.1251 et seq., has, to the best of the Seller's or the Seller's Affiliate's knowledge and after inquiry, occurred, is presently occurring, or is expected to occur other than federally permitted releases or those equal to or less than reportable quantities, or other than releases, emissions or discharges that do not or would not exceed applicable standards or limitations under any other applicable federal, state, or local laws or regulations. The Landfill Gas Recovery Project, the Project Properties, and the Seller's use and proposed use thereof are not in violation of any environmental or occupational safety and health laws, or other applicable law now in effect, the effect of which violation, in any case or in the aggregate, would materially adversely affect the Landfill Gas Recovery Project or the Seller's use thereof, or which, in any case or in the aggregate, would impose a material liability on or jeopardize the interest of the Seller in the Landfill Gas Recovery Project. Seller has no knowledge of any past or existing violations of any such laws, ordinances or regulations issued by any governmental authority. 117 (n) Except with respect to the Equipment, as to which Seller makes no representation, there are no liabilities or obligations affecting the Project Properties or the Landfill Gas Recovery Project, except as specifically set forth in this Agreement or the Project Documents. (o) To the best of their knowledge, neither EMCON nor Seller is aware of any fact or circumstance through the date hereof that would prevent the Landfill Gas to be recovered from the Landfill Gas Recovery Project to be eligible for Section 29 Credits at least through December 31, 2002. For purposes hereof, the liability of EMCON and Seller for a breach of this warranty shall in the aggregate not exceed the total purchase price actually paid to Seller pursuant to Section 4 above. 6. BUYER'S WARRANTIES. the Buyer represents and warrants to the Seller: (a) The Buyer is a limited partnership duly and validly organized and existing in good standing under the laws of the state of Delaware; the Buyer has all power and authority to own its properties and carry on its business in the places where the ownership of such properties and the conduct of such business so requires; the Buyer has the power and authority to enter into the Agreements, and to carry out the transactions contemplated hereunder and thereunder; the execution and delivery of the Agreements by the Buyer and the performance of its obligations hereunder and thereunder, including the payment of the purchase price in exchange for the assignment of the Seller's rights under the Project Documents, have been duly authorized by all necessary action of the Buyer and do not violate or conflict with (i) any provision of the Buyer's limited partnership agreement or certificate of limited partnership, (ii) any law, or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority, or (iii) any agreement to which the Buyer is a party or by which the Buyer is bound; the Buyer is not subject to any restriction or agreement which (with or without the giving of notice or the passage of time or both) prohibits or would be violated by, and the Buyer has obtained all of the consents of third parties necessary for, the consummation of the transactions contemplated hereby; and the Agreements constitute and when executed will constitute, the valid and binding obligations of the Buyer enforceable in accordance with their terms. 7. INDEMNIFICATION BY SELLER. (a) The Seller hereby indemnifies and holds the Buyer harmless from and against any and all loss, cost, damage, injury or expense (including, without limitation, court costs and reasonable attorneys' fees) wheresoever and howsoever arising which the Buyer or its officers, directors, shareholders, agents, employees, successors or assigns may incur by reason of any breach by the Seller of any of the warranties or representations by, or obligations of, the Seller set forth in this Agreement, up to and including the date of this Agreement. The Seller further indemnifies and holds the Buyer harmless from and against any loss sustained or reasonable expense incurred by the Buyer as the direct result of, or arising out of, the imposition on the Equipment of any tax lien, or the foreclosure of such lien, by virtue of the Seller's failure to pay, or the underpayment of, any tax required to be paid by the Seller pursuant to this Agreement. (b) Without limiting the generality of the provisions of Section 7(a) above, the Seller further indemnifies and holds the Buyer harmless from any loss, liability, claim, damage or expense resulting from any defect of title as specially warranted herein and further agrees to assume and bear the reasonable expense of the defense of any action brought against the Buyer as a result of 118 such title defect; and the Seller covenants that it will take no action or omit to take any action which would result in the amendment, modification, cancellation or termination either of the Project Documents unless such amendment, modification, cancellation or termination shall not diminish the Buyer's rights under this Agreement. If the Seller fails to perform any of such covenants and agreements within a reasonable time after written notice thereof, the Buyer shall have the right to make the same and to perform such obligation and cause Seller to reimburse Buyer for its cost in so doing. 8. INDEMNIFICATION BY BUYER. The Buyer hereby indemnifies and holds the Seller harmless from and against any and all loss, cost, damage, injury or expense (including, without limitation, court costs and reasonable attorneys' fees) wheresoever and howsoever arising which the Seller or its officers, agents or employees may incur by reason of any breach by the Buyer of any of the warranties or representations by, or obligations of, the Buyer set forth in this agreement. The Buyer further indemnifies and holds the Seller harmless from and against any loss incurred by the Seller as the direct result of, or arising out of, the imposition on the Equipment of any tax liens, or the foreclosure of such lien, by virtue of the Buyer's failure to pay, or the Buyer's underpayment of, any federal, state or local income tax liability, franchise tax, capital tax, value added tax or other taxes or fees. 9. NOTICES. Any notice, consent, communication or delivery which is permitted or required hereunder shall be duly and properly given if in writing and either delivered personally to the person to whom it is authorized to be given or if sent by nationally recognized over-night courier (including express mail) or registered or certified mail, return receipt requested, postage prepaid, as follows: If to the Seller: Monterey Landfill Gas Corporation c/o EMCON 400 S. El Camino Real, Suite 1200 San Mateo, California 94402 Attention: R. Michael Momboisse, Esq. Telecopy Number: 415-375-0763 If to EMCON: EMCON 400 S. El Camino Real, Suite 1200 San Mateo, California 94402 Attention: R. Michael Momboisse, Esq. Telecopy Number: 415-375-0763 If to the Buyer: 119 Biomass Energy Partners V, L.P. c/o ZFC Energy, Inc. 40 Tower Lane Avon, Connecticut 06001 Attention: Mr. Martin F. Laughlin Telecopy Number: (860) 677-4036 With a copy to: Newman Tannenbaum Helpern Syracuse & Hirschtritt LLP 900 Third Avenue New York, New York 10022 Attention: Stephen Rosenberg, Esq. Telecopy Number: (212) 371-1084 Changes of address or parties to be notified shall be accomplished in like manner. 10. BEST EFFORTS; FURTHER ASSURANCES. Each of the Buyer and the Seller agree to use their best efforts in good faith to consummate the transactions provided for and contemplated by this Agreement. Each of the Buyer and the Seller further agree to execute and deliver to the other party such documents or instruments as shall be reasonably requested by such other party in order to carry out the transactions contemplated by this agreement. 11. MISCELLANEOUS. (a) SURVIVAL. The covenants, agreements, representations and warranties made herein of each of the Seller and the Buyer shall survive the execution and delivery of this Agreement, the other Agreements, and the consummation of the transactions described herein or therein. (b) AMENDMENTS. This Agreement may not be altered, modified, or amended except by a writing signed by the parties. (c) SUCCESSORS. The rights and obligations of the parties hereto shall inure to the benefit of, and be binding and enforceable upon, their respective legal representatives, successors, assigns, and transferees. Without limiting the foregoing, the Buyer shall have the right to assign all of its rights and obligations under this Agreement to a limited partnership of which the Buyer is the general partner. Upon any such assignment, the Buyer shall give notice thereof to the Seller. (d) GOVERNING LAW. This Agreement shall be governed by, and interpreted under, the laws of the State of California applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. (e) GENDER. All terms and words used in this Agreement, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender, as the context may require. (f) CAPTIONS. Captions used herein are inserted for reference purposes only and shall not affect the interpretation or construction of this Agreement. 120 (g) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 121 IN WITNESS WHEREOF, the Buyer and the Seller have executed this Agreement on the date first above written. SELLER: MONTEREY LANDFILL GAS CORPORATION By: /s/ R. Michael Momboisse -------------------------- Name: R. Michael Momboisse Title: Chief Financial Officer Vice President - Legal BUYER: BIOMASS ENERGY PARTNERS V, L.P. By: ZFC Energy, Inc., General Partner By: /s/ Martin F. Laughlin ------------------------ Name: Martin F. Laughlin Title: Vice President EMCON: EMCON, a California corporation By: /s/ R. Michael Momboisse ------------------------- R. Michael Momboisse Chief Financial Officer Vice President -Legal 122 EX-10.23 8 THIRD BANK AMENDMENT EXHIBIT 10.23 AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT ("Amendment") is made effective as of the 27th day of March, 1997, by and between EMCON ("Borrower") and Union Bank of California, N.A. ("Bank"). RECITALS A. Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement dated February 29, 1996 and amended on September 13, 1996 and January 27, 1997 (the "Agreement"); B. Borrower and Bank have agreed to amend the Agreement to reflect certain changes in the terms and conditions set forth therein. C. All references to the "Prime Rate" in all the Loan Documents shall be deemed to be references to the "Reference Rate". "Reference Rate" shall mean 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. NOW, THEREFORE, the parties hereto agree as follows: 1. Section 6.3 of the Agreement the first and the second lines are to read as follows: Pay any dividends except those payable solely in Borrower's capital stock, provided however, that Keystone Recovery, Inc. may pay dividends according to the Keystone Recovery, Inc. Distribution Policy in effect at the time of this Amendment, so long as the aggregate annual distribution does not exceed Fifty Thousand Dollars ($50,000); GENERAL AMENDMENT PROVISIONS A. Except as specifically provided herein, all terms and conditions of the Agreement remain in full force and effect, without waiver or modification. All terms defined in the Agreement shall have the same meaning when used in this Amendment, and this Amendment and the Agreement shall be read together as one document. Where any provisions of the Agreement amended by this Amendment appear in a promissory note tied to the Agreement, the same provisions in said promissory note shall be deemed likewise amended. B. Borrower hereby confirms all representations and warranties contained in the Agreement and reaffirms all covenants set forth therein. Further, Borrower certifies that, as of the date of this Amendment, there exists no Event of Default as defined in the Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this amendment to become effective as of the date and year first written above. Union Bank of California, N.A. EMCON By: /s/ Susan M. Cunliffe By: /s/ R. Michael Momboisse --------------------- ------------------------- Susan M. Cunliffe R. Michael Momboisse Title: Vice President Title: Chief Financial Officer and Vice President- Legal Dated: 3/27/97 123 EX-11.1 9 COMPUTATION OF INCOME EXHIBIT 11.1 EMCON COMPUTATION OF INCOME (LOSS) PER SHARE (In thousands except per share data)
Twelve months ended December 31, 1996 1995 1994 ---- ---- ---- Net income (loss) ......................................................... $(10,091) $ 1,786 $(1,917) Pro forma interest income related to modified treasury stock method ................................................ N/A 221 N/A -------- ------- ------- Adjusted net income (loss) ................................................ $(10,091) $ 2,007 $(1,917) ======== ======= ======= Weighted average number of common shares outstanding during the period ......................................................... 8,485 8,274 7,919 Common equivalent shares from outstanding stock options using the modified treasury stock method........................................ N/A 687 N/A Incremental shares to reflect full dilution .......................... N/A 0 N/A -------- ------- ------- Total shares for purposes of calculating diluted income (loss) per share (1) ............................................... 8,485 8,961 7,919 ======== ======= ======= Primary income (loss) per share ........................................... $ (1.19) $ 0.22 $ (0.24) ======== ======= ======= Fully diluted income (loss) per share ..................................... $ (1.19) $ 0.22 $ (0.24) ======== ======= =======
- -------------------------------------------------------- (1) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by footnote 2 to paragraph 14 to APB opinion No. 15, because it results in dilution of less than 3%. 124 EX-21.1 10 SUBSIDIARIES EXHIBIT 21.1 SIGNIFICANT SUBSIDIARIES OF REGISTRANT NAME PLACE OF ORGANIZATION - ---- -------------------- Columbia Analytical Services, Inc. Washington EMCON Alaska, Inc. Alaska ET Environmental Corporation Delaware (50/50 Joint Venture with The Turner Construction Company) Organic Waste Technologies, Inc. Delaware 125 EX-23.1 11 CONSENT OF AUDITORS EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-83060, 33-61369 and 33-42186) pertaining to the EMCON 1986 Incentive Stock Option and 1988 Stock Option Plans, the EMCON Employee Stock Purchase Plan and the EMCON Restricted Stock Plan of our report dated February 6, 1997, with respect to the consolidated financial statements and schedule of EMCON included in the Annual Report (Form 10-K) for the year ended December 31, 1996. San Francisco, California March 26, 1997 126 EX-27 12 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets, consolidated statements of income, and consolidated statements of cash flows included in the Company's Form 10-K for the twelve month period ended December 31, 1996, and is qualified in its entirety by reference to such financial statements and the notes thereto. U.S. DOLLARS 12-MOS JAN-3-1997 DEC-31-1995 JAN-3-1997 1 5,331,000 0 33,811,000 951,000 0 52,902,000 30,023,000 15,301,000 90,912,000 18,301,000 0 42,001,000 0 0 (16,000) 90,912,000 117,705,000 117,705,000 52,608,000 52,608,000 75,989,000 1,023,000 1,112,000 (13,027,000) (2,936,000) (10,091,000) 0 0 0 (10,091,000) (1.19) (1.19)
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