-----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, D+EPm4MKdYcwXy3G/nV2E5vvau1omPMrGokuLgjaWhxHlqVeKlKP9onns1jWfmJk Jx8N+gti6jPmmx2IzFDFSQ== 0000912057-95-010346.txt : 19951124 0000912057-95-010346.hdr.sgml : 19951124 ACCESSION NUMBER: 0000912057-95-010346 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19950825 FILED AS OF DATE: 19951122 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EARTH TECHNOLOGY CORP USA CENTRAL INDEX KEY: 0000819541 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 330244112 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16121 FILM NUMBER: 95595939 BUSINESS ADDRESS: STREET 1: 100 W BROADWAY STE 5000 CITY: LONG BEACH STATE: CA ZIP: 90802-5785 BUSINESS PHONE: 3104954449 MAIL ADDRESS: STREET 1: 100 W BROADWAY SUITE 5000 CITY: LONG BEACH STATE: CA ZIP: 90802 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 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 August 25, 1995 ------------------ or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________________ to ____________________ Commission File Number 33-16098 ------------------ THE EARTH TECHNOLOGY CORPORATION (USA) (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- Delaware 33-0244112 - ------------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 West Broadway, Suite 5000 Long Beach, California 90802 - ------------------------------------ ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's tel. number, including area code: (310) 495-4449 ------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.10 Par Value - -------------------------------------------------------------------------------- (Title of Class) Indicate by checkmark 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 ----- ----- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by nonaffiliates of the registrant as of November 8, 1995, was approximately $23,245,000, based upon published closing prices for that date. As of November 8, 1995, the registrant had issued and outstanding 8,697,869 shares of common stock. Documents Incorporated by Reference Certain portions of the registrant's ANNUAL REPORT to stockholders for the fiscal year ended August 25, 1995 are incorporated by reference into Part II hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE EARTH TECHNOLOGY CORPORATION (USA) 1995 Form 10-K Annual Report TABLE OF CONTENTS Item No. Description Page - -------- ----------- ---- PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 9 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 10 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. Selected Consolidated Financial Data (In thousands, except per share amounts) . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 11 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 11 10. Directors and Executive Officers of the Registrant . . . . . . . . 12 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 12 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 13. Certain Relationships and Related Transactions . . . . . . . . . . 12 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 13 PART I ITEM 1. BUSINESS GENERAL The Earth Technology Corporation (USA) (the "Company") provides a broad range of environmental, consulting, and engineering services through a nationwide network of 38 offices in 18 states. Earth Technology was incorporated in Delaware in August 1987 as a holding company and operated primarily through its subsidiary company EARTH TECH, Inc., a California corporation, which, with its predecessors, has conducted the business of Earth Technology since its formation in 1970. On May 23, 1994, Earth Technology merged with Summit Environmental Group, Inc. (Summit), a Delaware corporation, in a pooling of interests transaction. Summit was a holding company which operated primarily through its subsidiary companies, WW Engineering & Science, Inc., a Michigan corporation, and HMM Associates, Inc., an Ohio corporation. On February 23, 1995, Earth Technology merged with HazWaste Industries, Inc.(HWI), a Virginia corporation operating principally through its subsidiary company, Environmental Technology of North America, Inc. Summit, HazWaste, and HMM were merged into EARTH TECH, Inc. in August 1995. WW Engineering & Science now does business under the name of EARTH TECH, Inc. Environmental Technology of North America, Inc. has been re-named EARTH TECH Remediation Services, Inc. Principal services of Earth Technology consist of: (1) full-spectrum Environmental and Hazardous Waste Management services, encompassing remedial investigation through turnkey remediation, environmental planning and analysis, compliance assessment, pollution prevention, and air quality assessment and pollution control; (2) Infrastructure design and construction services, which rely on the firm's engineering and geotechnical capabilities for transportation, water/wastewater, solid waste, and other public works projects; (3) Facilities Engineering and Construction Management services for institutional, civic, commercial, and industrial clients; and (4) Contract Operations and management services for water, wastewater, and remediation treatment facilities for municipal and industrial clients. In 1995, Earth Technology adopted a plan to dispose of its analytical laboratory services and, accordingly, has treated them as discontinued operations. Our services are provided to a variety of commercial and industrial clients, state and local governments, and the federal government. In fiscal 1995, 35% of the Company's gross revenues were provided from commercial and industrial clients, 17% were from municipal and other local government agencies, and 48% were derived from the federal government. Earth Technology believes the market for environmental and engineering services increasingly favors larger nationwide companies who can provide a full range of technical services, from investigation, to design, to construction and operation, across the nation. Accordingly, the Company's strategy is to continue to increase its geographic diversity and technical depth through both internal growth and acquisitions. 1 SERVICES The primary services provided by Earth Technology are outlined below. Earth Technology's principal strategy is to market its services on an integrated basis, although it often enters into contracts requiring only one of it services. ENVIRONMENTAL AND HAZARDOUS WASTE MANAGEMENT SERVICES. Earth Technology assists federal, state and local governmental agencies as well as commercial, industrial, and institutional clients with hazardous waste site investigation, cleanup, hazardous materials management, pollution prevention, and regulatory compliance support related to hazardous waste issues. The Company provides full turnkey services, from initial site assessment to characterization of the sources and extent of contamination of various environmental media (soil, water, and air), to analysis of feasible cleanup alternatives, to development of engineering designs for and implementation of appropriate corrective actions. Earth Technology's remediation specialists have applied traditional as well as leading edge technologies to effect the cleanup of soils and groundwater impacted by a variety of contaminants, and have provided short- and long-term operation and maintenance services for treatment systems. Often, these services have been used to enable clients to obtain regulatory approval for site "closure" and to proceed with alternate land use plans. In addition, Earth Technology derives 14% of its revenues from emergency response contracts with the U.S. Environmental Protection Agency ("EPA"). Earth Technology's full range of air quality assessment, modeling, permitting, and control technology evaluation and design services have helped clients achieve and sustain compliance with requirements of the 1990 Clear Air Act Amendments and local regulations. Air engineering specialists, primarily chemical, mechanical and environmental engineers, assist industrial and governmental clients by recommending possible ways to reduce or eliminate emissions, guiding clients through the Title V Operating Permit process, and performing state-of-the-art air quality modeling for planning and permitting purposes. Earth Technology also provides services to assist clients in regulatory compliance and pollution prevention. The Company conducts comprehensive environmental compliance assessments for government, commercial, and industrial clients to assist them in achieving and maintaining positive environmental compliance postures. These assessments evaluate facility operations and processes, materials handling, waste generation and management practices, and compliance with any regulatory permit requirements. Earth Technology identifies and recommends pollution prevention and waste reduction opportunities and may design solutions and help oversee the planning or implementation of facility or operational modifications to achieve regulatory compliance or facilitate pollution prevention. 2 Additional hazardous waste management services also include due diligence assessments for land transfer, as well as asbestos and lead inspections, management and abatement services. These services have been provided to industrial, real estate and government clients for a variety of office, industrial, retail, residential and public facilities. In asbestos and lead abatement projects, Earth Technology does not directly perform abatement services, but operates in a supervisory or quality control role. The Company offers a full range of environmental planning and analysis services to support the National Environmental Policy Act ("NEPA") and various other federal, state, and local government regulations. Since the passage of NEPA in 1969, the role of environmental resource analysis and evaluation has become critical in project planning and permitting of major projects, particularly for DOD clients. This process includes resource analysis and related services, including reviewing system requirements and translating them into action planning; evaluating the potential for action plans to affect the environment; identifying issues and concerns; and developing solutions. For more than 23 years, Earth Technology has been engaged in scientific and engineering analysis to support major defense acquisition and testing programs. More recently, the Company has been providing environmental compliance, planning, and documentation support for military sites nationwide faced with responding to Base Realignment and Closure ("BRAC") related issues. These services have included the development of environmental impact statements, performing socioeconomic impact analyses, development of environmental baseline surveys at bases scheduled for closure to document the condition of the property, and development of BRAC Cleanup Plans that included strategies and schedules for integrated management of cleanup, compliance, resource conservation, and reuse and disposal planning at closing installations. INFRASTRUCTURE SERVICES. Earth Technology provides a broad range of engineering, geotechnical, and construction services to governmental units for public works projects and infrastructure development and improvements. The Company's civil, environmental, transportation, and geotechnical engineers, geologists, and urban planners provide planning, engineering design and analysis, permitting, and construction management services to public and private clients for water treatment, storage, and distribution systems; wastewater treatment plants; solid waste landfills; roads, bridges and rail systems; airports; ports and harbors; as well as a variety of related projects and improvements. In the area of water resources management services range from studies for alternative sources of water supply to the design of intakes, production wells, treatment plants, water mains, and storage tanks. In water treatment, Earth Technology's technical staff carefully monitors new safe drinking water regulations and the more stringent treatment requirements that they impose on municipal water systems for both organic and inorganic constituents. The Company has served nearly 100 municipal water utilities, and has won many awards for its innovative and cost-effective designs. 3 Geotechnical engineering and geological assessment services are applied to: solid waste management; earthquake hazard assessment and mitigation; transportation facilities; power, utilities, and public works projects; ports and harbors; water resources development and management; facility siting; and residential, commercial, and industrial land development. Transportation services offered by Earth Technology include: corridor selection studies, traffic impact analyses, capacity analyses, infrastructure analyses, as well as assistance with transit facilities, equipment, and operation. These services have been provided to villages, townships, cities, regional transit agencies, and state departments of transportation across the country. FACILITIES ENGINEERING AND CONSTRUCTION MANAGEMENT SERVICES. Earth Technology provides professional engineering and construction management services for the design and construction of new or retrofitted industrial and institutional facilities. The Company specializes in chemical process as well as HVAC system designs for the chemical, pharmaceutical, and medical industries. Other services include mechanical-hydraulics, electrical, instrument and control, and civil/structural engineering, architecture, and construction management. Earth Technology has provided full-service design/build services in addition to more specific process and system design and construction management services offered as part of a larger design team. Facilities engineers also work closely with its environmental engineers, providing integrated detailed engineering and construction management services for remedial action treatment systems. CONTRACT OPERATIONS SERVICES. Earth Technology provides a full range of contract operation and management services for environmental and infrastructure systems. Contract operation services include technical assistance programs, troubleshooting, plant start-ups, preventive maintenance programs, training, facility evaluations, and hands-on operation. The company employs licensed treatment plant operators, maintenance specialists, electrical technicians, operations specialists, and engineering support staff necessary to provide complete on-site operation of environmental and infrastructure systems. Earth Technology is currently operating more than 75 water and wastewater treatment facilities, in addition to providing operations services for groundwater remediation systems and landfills. While the primary client base for these services has historically consisted of municipalities, Earth Technology has been successful at expanding these services to private industrial and federal government clients. MARKETS AND COMPETITION Earth Technology competes primarily in the continental U.S. market against numerous competitors including small local firms, medium-size regional and a smaller number of large national and international competitors whose resources are substantially greater than the Company's. The various firms compete on the basis of technical excellence, quality of service, local presence, and price. There are few barriers to entry into these markets other than technical qualifications. 4 Much of the demand for Earth Technology's services is derived from governmental regulations concerning environmental quality and standards. While these regulations number in the thousands at all levels of government, among the most influential of these regulations at the federal government level are the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund), the Resource Conservation and Recovery Act ("RCRA"), NEPA and the Clean Air Act. With regard to seasonality, while demand for Earth Technology's services are not strictly seasonal, winter time weather often prevents construction and field service projects from being performed at a rate commensurate with the other periods of the year, often resulting in a "seasonally" weaker second quarter for Earth Technology's fiscal year. CLIENTS Services are provided to clients in both the public and private sectors, including the DOD, EPA, and other federal agencies, state and local departments of public works, port authorities, state environmental agencies, manufacturers, chemical companies, utilities and other commercial companies. Earth Technology's contract with the Air Force Center for Environmental Excellence ("AFCEE") to provide services related to Base Closure and Realignment activities provided 4% of gross revenues in fiscal 1995; and a separate contract with AFCEE for services related to the Installation Restoration Program provided an additional 11% of consolidated gross revenues. Emergency response contracts with the EPA provided 14% of consolidated gross revenues. In fiscal 1995, the Company was awarded three additional contracts with the U.S. Air Force: (1) a $78-million, 5-year AFCEE contract to provide environmental services, primarily environmental compliance, pollution prevention, and environmental and land use planning, at Air Force sites worldwide; (2) a $50 million, 5-year contract to perform a broad spectrum of occupational and environmental health assessments for Armstrong Laboratory at Brooks Air Force Base in Texas, and (3) a 5-year, $38.5 million contract with Wright-Patterson Air Force Base to provide environmental and engineering services related primarily to environmental compliance, pollution prevention, and environmental and land use planning. In addition to its Air Force and EPA work, Earth Technology has a number of major contracts with the U.S. Army. For the U.S. Army Corps of Engineers ("USACE") Huntsville Division, Earth Technology is providing facilities engineering and construction management services for renovation and retrofit projects at medical facilities across the country as well as in the Caribbean under a 5-year contract. In fiscal 1995 Earth Technology was awarded a 5-year, $50 million contract from the USACE Huntsville Division to provide remedial investigation, design, and construction oversight services at formerly used ordnance sites on U.S. Army facilities in the western United States. Under a USACE Fort Worth District contract, Earth Technology is providing environmental compliance assessment services at a number of Army installations. Earth Technology was also awarded a 5-year, $12.5 million contract by the Fort Worth District in fiscal 1995 to perform cultural resources services at military sites worldwide. Underground storage tank removal and site cleanup services are being provided under contracts with the USACE Savannah District and Norfolk District. A wide range of environmental 5 engineering and hazardous waste management services are being conducted at Army bases nationwide for the Army Environmental Center under contract to the USACE Baltimore District. Earth Technology is also a primary subcontractor on several Army contracts including two Total Environmental Restoration Contracts (TERCs) through the USACE Omaha District, as subcontractor to RUST International. In fiscal 1995, Earth Technology was awarded a 10-year, $200 million contract, the largest award in the Company's history, to support the U.S. Navy's Comprehensive Long-term Environmental Action Navy (CLEAN) program in the Pacific. Under this contract, the Company will provide a full range of site characterization, risk assessment, remedial design, and emergency cleanup services for Navy and Marine Corps activities in Hawaii, Guam, Midway Island, and other areas of the Pacific Rim. Earth Technology is also a primary subcontractor to Foster-Wheeler Environmental on a remedial action contract with the Naval Facilities Engineering Command, Northern Division. Earth Technology's commercial and industrial client base includes clients from the automotive, pharmaceutical, chemical, pulp and paper products, food, electronics, oil and gas, aerospace, and industrial manufacturing industries. In addition, Earth Technology's clients include major utilities, financial institutions and property management companies, and industry associations. Earth Technology has master service agreements in place with more than 60 major clients, including numerous Fortune 500 businesses. Earth Technology's contractual fee arrangements vary among clients and projects and include cost plus award or fixed fees, time and materials fee structures based on hourly fee schedules and a schedule of costs for certain purchased services and materials, to fixed price arrangements. Earth Technology bills substantially all of its clients on a monthly basis. The following table sets forth the percentages of total revenues represented by the broad contract type categories for each of the three years ended August 25, 1995:
FY95 FY94 FY93 ---- ---- ---- Cost plus 15% 24% 19% Time and materials 80% 67% 74% Fixed price 5% 9% 7% --- --- --- Totals 100% 100% 100% ---- ---- ---- ---- ---- ----
6 RELIANCE ON GOVERNMENT CONTRACTS Earth Technology traditionally has pursued multiyear contracts with U.S. government agencies. During fiscal 1995, U.S. Government contracts accounted for approximately 48% of Earth Technology's gross revenues. Reliance on major government contracts subjects Earth Technology to risks associated with public budgetary restrictions and uncertainties, discrepancies between awarded contract amounts and actual revenues, and cancellation at the option of the government. Earth Technology attempts to mitigate these risks by staffing only to meet reasonably anticipated average workloads, by using subcontractors to handle peak workloads, and by obtaining termination benefit contract provisions. Cancellation of any of the Company's major government contracts, however, could have a material adverse effect. BACKLOG The following table shows Earth Technology's backlog in millions of dollars as of the end of the following periods:
August 25, August 26, August 27, 1995 1994 1993 ---------- ---------- ---------- Amounts funded $173 $146 $135 Additional contract space available under signed 658 302 258 contracts ---------- ---------- ---------- Total contract backlog $831 $448 $393 ---------- ---------- ---------- ---------- ---------- ----------
Approximately 48% of the funded backlog and 89% of the total contract backlog as of August 25, 1995 was attributable to U.S. government contracts. An additional 27% of the funded backlog and 5% of the total contract backlog was comprised of multiyear contracts for the operation of environmental and infrastructure systems. Of the total backlog of funded commitments at August 25, 1995, Earth Technology estimates approximately $25 million will be utilized in fiscal 1996. There can be no assurance that Earth Technology will actually obtain revenues equal to the full amount of this backlog. PERSONNEL Earth Technology has a staff of more than 1,600 professional and support personnel in a variety of technical disciplines, including civil, environmental, chemical, mechanical and electrical engineering, geology, hydrology, environmental science, computer science, environmental science, chemistry, and construction management. Approximately 350 employees have advanced 7 technical degrees. Professional staff includes more than 100 registered engineers, 40 registered geologists, and several hundred other employees with various professional registrations, certifications, and specialty licenses. There is one collective bargaining agreement relating to six employees employed at the Berkeley Heights, New Jersey, wastewater treatment facility who are presently represented by International Brotherhood of Teamsters, Local 866. None of the other employees is represented by a labor union and management considers its relations with all its employees to be good. POTENTIAL LIABILITY AND INSURANCE The Company derives a substantial portion of its revenues from waste management services. Such services involve hazardous materials, toxic substances, and other pollutants that, if not handled or stored properly, can cause significant personal injury and property damage. As a result, the Company is exposed to the risk of civil liability for personal injury and property damages and to the imposition of substantial fines by federal, state, and local authorities. The Company carries a $15 million professional liability claims made insurance policy, which includes certain coverages for claims related to hazardous materials, toxic substances, and other pollutants and an $11 million comprehensive general liability insurance policy. The self-insured retention on the professional liability insurance policy is $1,500,000. The Company attempts to reduce its liability risks by including contract provisions by which clients indemnify the Company against all claims not resulting from willful actions or negligence on the part of the Company. Not all clients, however, have accepted such broad indemnification clauses, and there can be no assurance that clients that have accepted such clauses will have the financial resources or legal authority necessary to indemnify the Company against actual judgments that may be rendered against it. A substantial damage award, if not covered by the indemnification or if not covered or only partially covered by insurance, could have a material adverse effect on the Company. PATENTS AND SERVICE MARKS The Company owns one patent covering certain design features of onsite testing equipment. In addition, the Company has registered the name "The Earth Technology Corporation". A service mark for "EARTH TECH" is pending with the United States Patent and Trademark office. The expiration of the patent and service mark would not have a material adverse impact on the Company. RESEARCH AND DEVELOPMENT The Company's expenditures for research and development are not material. 8 REGULATORY MATTERS In the ordinary course of its business, the Company and certain members of its professional staff become subject to a variety of state and local licensing and permit requirements. The Company believes that it and its staff are in substantial compliance with such requirements. The Company is ordinarily not a generator of pollution and hazardous materials. As an inherent result of its business, the Company may, however, have some liability associated with its environmental work. In response to this risk potential, the Company has implemented a professional liability insurance program and contracting practices to offset this risk (see "Potential Liability and Insurance"). Accordingly, the Company does not anticipate any material adverse effects upon capital expenditures, earnings or the competitive position of the Company associated with compliance with Federal, State and local provisions regulating the discharge of materials into the environment or protecting the environment. ITEM 2. PROPERTIES The Company occupies approximately 447,000 square feet of office facilities in 38 cities across the nation. The Company's principal office is located in a six-story office building at 100 West Broadway, Long Beach, California. The facility includes 43,000 square feet of office space. The Company has signed a 15-year lease, with two five-year options to extend, which commenced January 15, 1989 for this space. In Concord, Massachusetts, the Company leases approximately 45,000 square feet of office space under a ten year lease which commenced July, 1989. In Grand Rapids, Michigan, the Company owns, subject to a mortgage, a 62,000 square foot facility housing office space and an analytical laboratory. The Company has sublet the laboratory space. The Company leases an additional 28,800 square feet of office space in Grand Rapids. All other office locations are leased, primarily under three to five year lease agreements. ITEM 3. LEGAL PROCEEDINGS As a professional services firm engaged in engineering, environmental safety matters, the Company encounters potential claims, including claims for environmental damage, in the normal course of business. The Company practices a vigorous response to such claims including a legal defense when necessary. To minimize its risk against these claims, the Company promotes risk management techniques when providing professional services. The Company also maintains an insurance program which includes coverage for environmental and asbestos claims related to its business. Certain pending legal actions, which are described below, make claims for substantial damages which, if awarded, would have a material adverse effect on the Company's financial position and the results of its operations. 9 (1) One of the Company's subsidiaries, Alternative Ways, Inc. (AWI) has been named a co-defendant in certain action filed on October 9, 1990 in the Supreme Court for the State of New York, County of New York. Other defendants in the lawsuit include Madison Square Garden Corporation, Paramount Communications, Inc. and Herbert Construction Company/HRH Construction Corporation. Plaintiff, an asbestos abatement contractor, seeks $20 million in compensatory damages and up to $100 million in punitive damages. While this dispute involved asbestos removal, Plaintiff makes no environmental claim related to asbestos. Plaintiff rather alleges that defendants misrepresented the job and underpaid for the work. AWI vigorously denies these assertions and had no contractual relationship with the Plaintiff. (2) A California, nonprofit homeowners association, Canyon Estates Community Association, commenced on November 25, 1992 a civil action for negligence in Superior Court for the County of Orange California against the company and twenty-two other defendants including certain soils engineering firms, certain land developers and certain home builders. As to the Company, the suit challenges certain preliminary soils engineering work completed in the mid-1980s. In December, 1994, Plaintiff presented the Defendants with an expert witness report which asserts corrective remedies will cost more than $140 million. The Company vigorously disputes this opinion and any claim of liability against it. (3) Various property owners, merchants, residents, and tenants located on Hollywood Boulevard in Los Angeles, California have filed on April 28, 1985 a multi-count civil action in Superior Court for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority and approximately 50 contractors associated with the Metro Rail project, including the Company. The legal action seeks unspecified damages and other judicial relief for damages arising out of the construction of the Metro Rail red line along Hollywood Boulevard. Given the recent commencement of this action, the Company believes it is premature to venture any reasonable evaluation of the outcome of this matter or reasonable estimate of damages. The Company intends, however, to vigorously dispute any claim of liability against it. Because the three cases are at an early stage in the legal process, the ultimate outcome or the range of costs, if any, cannot be determined at this time. There are other claims and suits pending against the Company for alleged damages to persons and property and for alleged liabilities arising out of matters occurring during the normal operation of the Company's business. In the opinion of management, the uninsured liability, if any, of these other claims and suits would not materially affect the financial position or results of operations of the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 No matters were submitted to a vote of the Security Holders during the fourth quarter of fiscal 1995. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the paragraphs under the captions "Stock Information", "Dividend Policy", and "Holders of Stock" on page 22 of the Company's Annual Report to Stockholders for fiscal year August 25, 1995 ("Annual Report"), which are incorporated herein by reference. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reference is made to the Selected Consolidated Financial Data (for the five years ended August 25, 1995) set forth on page 1 of the Annual Report and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 2, 3, 4 and 5 of the Annual Report and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) The report of Ernst & Young LLP, Independent Auditors, the Consolidated Statements of Income for the years ended August 25, 1995, August 26, 1994, and August 27, 1993; Consolidated Balance Sheets as of August 25, 1995 and August 26, 1994; Consolidated Statements of Stockholders' Equity and of Cash Flows for the years ended August 25, 1995, August 26, 1994, and August 27, 1993; and Notes to Consolidated Financial Statements set forth on pages 6 through 21 of the Annual Report, are incorporated by reference herein. (b) Quarterly Results of Operations (Unaudited) are set forth on page 22 of the Annual Report, and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were none. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The sections entitled "Election of Directors" and "Executive Officers and Significant Employees of Earth Technology" in the registrants definitive proxy statement to be filed with the Securities and Exchange Commission for the Annual Meeting of the Stockholders of the Company (the "proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Executive Compensation" and "Management of Earth Technology" in the registrant's Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership" in the registrant's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There have been no transactions that are required to be disclosed under Item 404 of Regulation S-K. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits I. FINANCIAL STATEMENTS INCORPORATED HEREIN BY REFERENCE TO THE COMPANY'S ANNUAL REPORT. Except for the following which are specifically incorporated by this reference, the Company's Annual Report to stockholders is not deemed to be filed with the Securities and Exchange Commission. (i) Report of Ernst & Young LLP, Independent Auditors; (ii) Consolidated Statements of Income for the years ended August 25, 1995, August 26, 1994 and August 27, 1993. (iii) Consolidated Balance Sheets, as of August 25, 1995 and August 26, 1994. (iv) Consolidated Statements of Stockholders' Equity for the years ended August 25, 1995, August 26, 1994, and August 27, 1993. (v) Consolidated Statements of Cash Flows for the years ended August 25, 1995, August 26, 1994, and August 27, 1993. (vi) Notes to Consolidated Financial Statements. II. SCHEDULES Schedules not filed herein are omitted because of the absence of conditions under which they are required or because the information called for is shown in the consolidated financial statements or notes thereto. 14 III. EXHIBITS The following exhibits are filed as part of this report. Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger, dated as of February 7, 1994 by and among The Earth Technology Corporation (USA), ET-Sub, Inc. and Summit Environmental Group, Inc.(5) 2.2 Agreement and Plan of Merger, dated as of October 24, 1994, by and among The Earth Technology Corporation (USA), ET-Sub. II, Inc. and HazWaste Industries, Inc. (6) 3.1 Restated Certificate of Incorporation of the Registrant.(5) 3.2 Bylaws of the Registrant.(1) 4.1 Registration Rights Agreement dated as of February 7, 1994 between certain shareholders and the Registrant.(5) 4.2 Registration Rights Agreement dated as of October 24, 1994 between certain shareholders and the Registrant.(6) 10.1 Restated Employment Agreement dated as of February 15, 1988, between Robert A. Colonna and the Registrant.(2) 10.2 Amendment to Restated Employment Agreement dated as of June 10, 1992, between Robert A. Colonna and the Registrant.(4) 10.3 Employment Agreement dated as of May 15, 1992, between Charles S. Alpert and the Registrant.(4) 10.4 Employment Agreement dated as of May 15, 1992 between Diane C. Creel and the Registrant.(4) 10.5 Amendment to Employment Agreement dated as of March 2, 1994 between Diane C. Creel and the Registrant.(5) 10.6 Employment Agreement dated as of May 15, 1992, between Creighton K. Early and the Registrant.(4) 15 10.8 Employment Agreement dated as of May 15, 1992 between Steve Scott and the Registrant.(4) 10.9 Employment Agreement dated as of May 23, 1994, between Theodore A. Barten and the Registrant.(7) 10.10 Employment Agreement dated as of May 23, 1994, between William J. Cretens and the Registrant.(7) 10.11 The Earth Technology Corporation (USA) 1987 Stock Plan.(2) 10.11.1 Amendment to the Earth Technology Corporation (USA) 1987 Stock Plan.(5) 10.12 Commercial lease dated as of August 23, 1988, between IDM Properties Corporation and a subsidiary of Registrant.(2) 10.13 The Earth Technology Corporation (USA) Director Option Plan, as amended and restated.(5) 10.14 Agreement dated as of May 24, 1994, between Bank of America-Illinois (formerly Continental Bank) and the Registrant.(7) 10.15 The Earth Technology Corporation (USA) annual bonus program.(4) 10.16 The Earth Technology Corporation (USA) 1994 Employee Stock Purchase Plan.(5) 10.17 Amendment dated February 23, 1995 to the Credit Agreement dated as of May 24, 1994 between Bank of America-Illinois and the Registrant.(7) 11.1 Statement RE: Computation of per share earnings.(7) 13.1 Registrant's Annual Report to Stockholders for fiscal year ended August 26, 1994.(7) 22.1 List of Subsidiaries of the Registrant.(7) 23.1 Consent of Ernst & Young LLP, Independent Auditors.(7) 23.2 Consent of Ernst & Young LLP, Independent Auditors.(7) 25.1 Power of Attorney.(7) - -------------------- (1) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement, as amended, on Form S-1 (File No. 33-16098) and incorporated herein by reference. 16 (2) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1988 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1989 and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1992 and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement as amended, on Form S-4 (File No. 33-77462) and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement as amended, on Form S-4 (File No. 33-86364) and incorporated herein by reference. (7) Exhibits included herein. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the fourth quarter ended August 25, 1995. 17 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. THE EARTH TECHNOLOGY CORPORATION (USA) By DIANE C. CREEL ---------------------------------- Diane C. Creel Chief Executive Officer and Director Date: November 22, 1995 -------------------------------- 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 and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- DIANE C. CREEL Chairwoman of the Board of November 22, 1995 - ------------------------ Directors, Chief Executive Diane C. Creel Officer, and President CREIGHTON K. EARLY Executive Vice President, November, 22, 1995 - ------------------------ Chief Financial Creighton K. Early Officer, (Principal Financial and Accounting Officer), and Director CHARLES D. APPLEQUIST Director November 22, 1995 - ------------------------ Charles D. Applequist JAMES E. CLARK Director November 22, 1995 - ------------------------ James E. Clark RICHARD J. HECKMANN Director November 22, 1995 - ------------------------ Richard J. Heckmann LARRY J. LAWRENCE Director November 22, 1995 - ------------------------ Larry J. Lawrence MARTHA L. ROBINSON Director November 22, 1995 - ------------------------ Martha L. Robinson WARD W. JOHNSON Director November 22, 1995 - ------------------------ Ward W. Johnson RICHARD H. GUILFORD Director November 22, 1995 - ------------------------ Richard H. Guilford THE EARTH TECHNOLOGY CORPORATION (USA) INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated as of February 7, 1994 by and among The Earth Technology Corporation (USA), ET-Sub, Inc. and Summit Environmental Group, Inc.(5) 2.2 Agreement and Plan of Merger, dated as of October 24, 1994, by and among The Earth Technology Corporation (USA), ET-Sub. II, Inc. and HazWaste Industries, Inc. (6) 3.1 Restated Certificate of Incorporation of the Registrant.(5) 3.2 Bylaws of the Registrant.(1) 4.1 Registration Rights Agreement dated as of February 7, 1994 between certain shareholders and the Registrant.(5) 4.2 Registration Rights Agreement dated as of October 24, 1994 between certain shareholders and the Registrant.(6) 10.1 Restated Employment Agreement dated as of February 15, 1988, between Robert A. Colonna and the Registrant.(2) 10.2 Amendment to Restated Employment Agreement dated as of June 10, 1992, between Robert A. Colonna and the Registrant.(4) 10.3 Employment Agreement dated as of May 15, 1992, between Charles S. Alpert and the Registrant.(4) 10.4 Employment Agreement dated as of May 15, 1992, between Diane C. Creel and the Registrant.(4) 10.5 Amendment to Employment Agreement dated as of March 2, 1994, between Diane C. Creel and the Registrant.(5) 10.6 Employment Agreement dated as of May 15, 1992, between Creighton K. Early and the Registrant.(4) 10.8 Employment Agreement dated as of May 15, 1992, between Steve Scott and the Registrant.(4) 10.9 Employment Agreement dated as of May 23, 1994, between Theodore A. Barten and the Registrant.(5) 10.10 Employment Agreement dated as of May 23, 1994, between William J. Cretens and the Registrant.(5) 10.11 The Earth Technology Corporation (USA) 1987 Stock Plan.(2) 10.11.1 Amendment to the Earth Technology Corporation (USA) 1987 Stock Plan.(5) 10.12 Commercial lease dated as of August 23, 1988, between IDM Properties Corporation and a subsidiary of Registrant.(2) 10.13 The Earth Technology Corporation (USA) Director Option Plan.(3) 10.14 Agreement dated as of May 24, 1994, between Bank of America-Illinois (formerly Continental Bank) and the Registrant.(5) 10.15 The Earth Technology Corporation (USA) annual bonus program.(4) 10.16 The Earth Technology Corporation (USA) 1994 Employee Stock Purchase Plan.(5) 10.17 Amendment dated February 23, 1995 to the Credit Agreement dated as of May 24, 1994 between Bank of America-Illinois and the Registrant.(7) 11.1 Statement RE: Computation of per share earnings.(7) 13.1 Registrant's Annual Report to Stockholders for fiscal year ended August 25, 1995.(7) 22.1 List of Subsidiaries of the Registrant.(7) 23.1 Consent of Ernst & Young LLP, Independent Auditors.(7) 23.2 Consent of Ernst & Young LLP, Independent Auditors.(7) 25.1 Power of Attorney.(7) ________________ (1) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement, as amended, on Form S-1 (File No. 33-16098) and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1988 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1989 and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Annual Report Form 10K for fiscal year 1992 and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement, as amended, on Form S-4 (File No. 33-77462) and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement as amended, on Form S-4 (File No. 33-86364) and incorporated herein by reference. (7) Exhibits included herein. EX-10.17 2 EXHIBIT 10.17 SECOND AMENDMENT Dated as of February 23, 1995 THIS SECOND AMENDMENT, dated as of February 23, 1995, amends the Credit Agreement, dated as of May 24, 1994 (as previously amended, the "Credit Agreement"), among THE EARTH TECHNOLOGY CORPORATION (USA) (the "Company"), various financial institutions and BANK OF AMERICA ILLINOIS (formerly Continental Bank N.A.), as Agent (the "Agent"). Terms defined in the Credit Agreement as amended by this Second Amendment are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Company, the Agent and the Banks have entered into the Credit Agreement which provides for the Banks to make Loans to, and to issue or participate in Letters of Credit issued for the account of, the Company from time to time; and WHEREAS, the parties hereto desire to amend the Credit Agreement in certain-respects as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows: SECTION 1 AMENDMENTS. Effective as of the Second Amendment Effective Date (as defined below), the Credit Agreement is amended in accordance with SECTIONS 1.1 through 1.15 below. 1.1 AMENDED DEFINITIONS. Section 1 is amended by deleting the definitions of "Collateral Documents", "Computation Period", "Eligible Account Receivable" and "Interest Coverage Ratio" therein and substituting the following therefor: "COLLATERAL DOCUMENTS means the Company Pledge Agreement, the Subsidiary Pledge Agreements, the Security Agreement, the Mortgages and any other agreement pursuant to which the Company or any Guarantor grants collateral to the Agent for the benefit of itself and the Lenders." "COMPUTATION PERIOD means any period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter, PROVIDED that the Computation Periods ending on February 24, 1995 and May 26, 1995 shall consist of two and three Fiscal Quarters, respectively." "ELIGIBLE ACCOUNT RECEIVABLE means an Account Receivable owing to the Company or any Subsidiary (other than an Immaterial Subsidiary) which meets all of the following requirements: (1) it is evidenced by an invoice rendered to the Account Debtor with respect thereto and is due within thirty (30) days after its invoice date; (2) it is not more than 90 days past due; (3) the Account Debtor thereunder is not the Account Debtor with respect to Accounts Receivable which are more than 90 days past due representing 25% or more of the unpaid amount of all Accounts Receivable from such Account Debtor; (4) it is genuine and in all respects what it purports to be, and is evidenced by an invoice which (i) is dated NOT EARLIER than the date of performance; and (ii) has payment terms consistent with those historically used by the Company and its Subsidiaries in the conduct of their respective businesses in the ordinary course; (5) it arises from the Company's or such Subsidiary's environmental assessment, site remediation, environmental and hazardous waste management, infrastructure, facilities engineering, construction management or analytical laboratory services or from contract operations for wastewater facilities, in each case in the ordinary course of business, and the applicable services have been fully performed and, if applicable, acknowledged and/or accepted by the Account Debtor thereunder; (6) it is payable in the United States and in Dollars; (7) it is not subject to any assignment, claim or Lien, other than (a) a Lien in favor of the Agent, for the benefit of itself and the Lenders, and (b) Liens consented to by the Required Lenders in writing; (8) it is a valid, legally enforceable and unconditional obligation of the Account Debtor thereunder, and is not subject to setoff, counterclaim, credit or allowance (except (i) any credit or allowance which has been deducted in computing the net amount of the applicable invoice as shown in the original schedule or Borrowing Base Certificate furnished to the Agent identifying or including such Account Receivable and (ii) the amount of any Retention); (9) it is not subject to any claim by the Account Debtor thereunder denying liability therefor in whole or in part, and such Person has not refused to accept any of the goods or services which are the subject of -2- such Account Receivable or offered or attempted to return any of such goods; (10) there are no proceedings or actions which are then threatened or pending against the Account Debtor thereunder, and there has been no event or occurrence relating to such Person, which might result in any material adverse change in such Person's financial condition which is reasonable likely to result in the nonpayment of such Account Receivable in full when due; (11) it does not arise out of a contract or order which, by its terms, forbids, restricts or makes void or unenforceable the assignment by the owner thereof to the Agent, for the benefit of itself and the Lenders, of the Account Receivable arising with respect thereto; (12) the Account Debtor thereunder is not an Affiliate of the Company or any Subsidiary, or a director, officer, employee or agent of the Company or any Subsidiary; (13) the Account Debtor with respect thereto is located within the United States of America; (14) the Account Debtor thereunder is not located in Indiana, New Jersey or Minnesota; PROVIDED, HOWEVER, that such restriction shall not apply to an Account Receivable if at the time the Account Receivable was created and at all times thereafter (a) the Company or the Subsidiary to which such Account Receivable is owed, as the case may be, had filed and has maintained effective a current Notice of Business Activities Report with the appropriate office or agency of the State of Indiana, New Jersey or Minnesota, as applicable, or (b) the Company or the Subsidiary to which such Account Receivable is owed, as the case may be, was and has continued to be exempt from the filing of such Report and has provided the Agent with satisfactory evidence thereof; (15) it is not an Account Receivable which in any way fails to meet or violates any warranty, representation or covenant contained in this Agreement or the Security Agreement relating directly or indirectly to the Company's or any Subsidiary's Accounts Receivable; and (16) it does not arise from any contract with respect to which the Company or such Subsidiary maintains bonds, undertakings or instruments of guaranty guarantying the performance by the Company or such Subsidiary of its obligations under such contract. -3- An Account Receivable which is at any time an Eligible Account Receivable, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account Receivable. Without limiting any of the foregoing eligibility requirements, no Retention shall be included in Eligible Accounts Receivable (but any Account Receivable which at any time constitutes Retention may subsequently be included in Eligible Accounts Receivable if (a) all conditions to the Account Debtor's obligation to make payment thereof have been met so that it no longer constitutes "Retention" and (b) it otherwise meets the eligibility requirements set forth above.) Further, with respect to any Account Receivable, if the Agent at any time hereafter determines in its reasonable discretion that the prospect of payment or performance by the Account Debtor thereunder is or will be impaired for any reason whatsoever, notwithstanding anything to the contrary contained above, such Account Receivable shall, upon notice to the Company from the Agent, forthwith cease to be an Eligible Account Receivable." "INTEREST COVERAGE RATIO means, for any period, the ratio of (a) Consolidated Net Income for such period before deducting (i) interest expense and taxes of the Company and its Subsidiaries (other than the Immaterial Subsidiaries) and (ii) the HazWaste Merger Charge (to the extent deducted in such period) to (b) the Company's and its Subsidiaries' (other than the Immaterial Subsidiaries') consolidated interest expense for such period; IT BEING UNDERSTOOD that for purposes of calculating the Interest Coverage Ratio, HazWaste shall be deemed to have become a Subsidiary on August 27, 1994." 1.2 NEW DEFINITIONS. Section 1 Agreement is amended by adding the following definitions in appropriate alphabetical order: "HAZWASTE means HazWaste Industries Incorporated, a Virginia corporation." "HAZWASTE MERGER means the merger of HazWaste into ET-Sub II, Inc., a wholly owned Subsidiary of the Company, pursuant to the Agreement and Plan of Merger dated as of October 24, 1994 among the Company, ET-Sub II, Inc. and HazWaste." "HAZWASTE MERGER CHARGE means the one-time special charge taken by the Company in connection with the HazWaste Merger as described in the Proxy dated January 19, 1995; PROVIDED that for purposes of this Agreement the HazWaste Merger Charge shall not exceed $4,500,000." -4- 1.3 SECTION 2.1.3. Section 2.1.3 is amended by deleting the amount "$20,000,000" therein and substituting the amount "$25,000,000" therefor. 1.4 SECTION 9.4. Section 9.4 is amended in its entirety to read as follows: "9.4 FINANCIAL INFORMATION. (a) The Company's audited consolidated financial statements as at August 26, 1994, and the Company's unaudited consolidated financial statements as at November 25, 1994, have been prepared in accordance with generally accepted accounting principles (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and fairly present the financial condition of the Company and its Subsidiaries on a consolidated basis as of such dates and their consolidated results of operations for the Fiscal Year and fiscal period then ended. The unaudited pro forma consolidated financial statements of the Company and its Subsidiaries as at August 26, 1994 and November 25, 1994, after giving effect to the HazWaste Merger, which are included in the Proxy dated January 19, 1995, copies of which have been furnished to the Lenders, have been prepared in accordance with generally accepted accounting principles and fairly present the pro forma financial condition of the Company and its Subsidiaries as at such dates, after giving effect to the HazWaste Merger. (b) HazWaste's unaudited consolidated financial statements as at December 2, 1994, copies of which have been furnished to the Lenders, have been prepared in accordance with generally accepted accounting principles, subject to the absence of footnotes and to normal year-end adjustments, and fairly present the financial condition of HazWaste and its Subsidiaries on a consolidated basis as of such date and their consolidated results of operations for the periods then ended." 1.5 SECTION 10.1.8. Section 10.1.8 is amended by delating the language "and an aging of Accounts Receivable in such detail as the Agent shall require" at the end thereof and substituting the following language therefor: ", together with (a) an aging of Accounts Receivable in such detail as the Agent shall require, (b) a 50% Complete Report by Billing-ID and an Overrun Report by Billing-ID, in each case substantially in the form customarily prepared by the Company as of the date of the First Amendment to this Agreement, and (c) a HazWaste Unbilled Rollforward Report, substantially in the form customarily prepared by HazWaste as of the date of the First Amendment to this Agreement". -5- 1.6 SECTION 10.6.1. Section 10.6.1 is amended in its entirety to read as follows: "10.6.1 MINIMUM TANGIBLE NET WORTH. Not at any time permit Tangible Net Worth to be less than (a) during the Computation Quarter commencing February 24, 1995, the greater of Tangible Net worth on February 24, 1995 and $8,500,000; and (b) during any Computation Quarter commencing on or after May 26, 1995, an amount equal to the sum of (i) the minimum Tangible Net Worth required under this SECTION 10.6.1 during the immediately prior Computation Quarter, PLUS (ii) 50% of Consolidated Net Income during the Fiscal Quarter ending on the first day of such current Computation Quarter, PLUS (iii) 100% of all proceeds (net of any underwriting discounts and brokers' commissions) of any offering or distribution of the Company's common stock or any other equity interest in the Company received during the Fiscal Quarter ending on the first day of such current Computation Quarter." 1.7 SECTION 10.6.2. Section 10.6.2 is amended by adding the following parenthetical clause at the end thereof: "(it being understood that the HazWaste Merger Charge shall be excluded in calculating Consolidated Net Income for the Fiscal Quarter ending February 24, 1995)". 1.8 SECTION 10.6.4. Section 10.6.4 is amended in its entirety to read as follows: "10.6.4 LEVERAGE RATIO. Not permit the ratio of (a) Total Debt to (b) the sum of Total Debt PLUS the consolidated stockholders' equity of the Company (excluding any portion thereof attributable to Immaterial Subsidiaries) during any period set forth below to be greater than the percentage set forth opposite such period: PERIOD MAXIMUM LEVERAGE RATIO Effective Date through and including May 26, 1995 65% May 27, 1995 through and including November 24, 1995 62% November 25, 1995 through and including May 24, 1996 59% May 25, 1996 through and including November 29, 1996 56% November 30, 1996 through and including February 28, 1997 53% -6- \ March 1, 1997 and at all times thereafter 50%." 1.9 SECTION 10.6.6. Section 10.6.6 is amended in its entirety to read as follows: "10.6.6 FIXED CHARGE COVERAGE. Not permit the ratio, for any Computation Period commencing with the Computation Period ending February 24, 1995, of (i) EBITDA PLUS operating lease expense (whether or not paid) of the Company and its Subsidiaries (other than the Immaterial Subsidiaries) for such Computation Period (plus, to the extent deducted in such Computation Period, the HazWaste Merger Charge) to (ii) (x) interest expense of the Company and its Subsidiaries (other than the Immaterial Subsidiaries) PLUS all payments on Capital Leases and operating leases (without double-counting with interest expense) by the Company and its Subsidiaries (other than the Immaterial Subsidiaries) PLUS preferred stock dividends paid by the Company and its Subsidiaries (other than the Immaterial Subsidiaries) (on a consolidated basis) PLUS all taxes paid by the Company and its Subsidiaries (other than the Immaterial Subsidiaries) PLUS Capital Expenditures of the Company and its Subsidiaries (other than the Immaterial Subsidiaries), in each case during such Computation Period, PLUS (y) scheduled maturities of long-term debt of the Company and its Subsidiaries (other than the Immaterial Subsidiaries) for the next succeeding four Fiscal Quarters (or, in the case of the Computation Periods ending on February 24, 1995 and May 26, 1995, for the next succeeding two or three Fiscal Quarters, respectively), to be less than 1.0 to 1.0." 1.10 SECTION 10.6.7. Section 10.6 is amended by adding a new Section 10.6.7 to read as follows: "10.6.7 MAXIMUM UNDERBILLINGS RATIO. Not permit, as of the last day of any Fiscal Quarter, the ratio of (i) the product of (a) the sum of (x) the amount of the outstanding Trade Receivables-Unbilled as shown on a balance sheet of HazWaste PLUS (y) the amount of outstanding Work-In- Process as shown on a balance sheet of HazWaste multiplied by (b) 365 to (ii) the product of (a) the gross revenues of HazWaste for such Fiscal Quarter multiplied by (b) 4, to be greater than 70 to 1.0." 1.11 SECTION 10.7. Section 10.7 is amended in its entirety to read as follows: "10.7 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Not, and not permit any Subsidiary to, be a party to any merger or consolidation, or, except in the ordinary course of its business, sell, transfer, convey or lease all or any Substantial Part of its assets, or sell or assign with or -7- without recourse any receivables, or make any Acquisition, except for (i) any such merger or consolidation, sale, transfer, conveyance, lease or assignment of or by any Subsidiary into, with or to the Company or into, with or to any wholly-owned Subsidiary (other than any Immaterial Subsidiary); (ii) any such Acquisition by the Company or any Subsidiary (other than any Immaterial Subsidiary) of the assets or stock of any wholly-owned Subsidiary; or (iii) the HazWaste Merger. For purposes of this SECTION 10.7, "SUBSTANTIAL PART" means 10% or more of the book value of the consolidated tangible assets of the Company and its Subsidiaries, taken as a whole." 1.12 SECTION 10.12. Section 10.12 is amended by deleting the amount "$4,000,000" therein and substituting the amount "$5,000,000" therefor. 1.13 SECTION 10.20. Section 10.20 is amended in its entirety to read as follows: "10.20 BUSINESS ACTIVITIES. Not, and not permit any Subsidiary to, engage in any business activity other than environmental assessment, site remediation, environmental and hazardous waste management, infrastructure, construction management and analytical laboratory services and contract operations for wastewater facilities, and such other activities as are reasonably incidental to any of the foregoing." 1.14 SCHEDULE I. Schedule I to the Credit Agreement is deleted and SCHEDULE I attached hereto is substituted therefor. 1.15 EXHIBIT C. Exhibit C to the Credit Agreement is deleted and the EXHIBIT C attached hereto is substituted therefor. SECTION 2 REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Agent and the Banks that (a) the execution and delivery by the Company of this Second Amendment, the New Note (as defined below) and the Company Pledge Amendment (as defined below) and the performance by the Company of its obligations under the Credit Agreement as amended by this Second Amendment (as so amended, the "Amended Credit Agreement"), the New Note and the Company Pledge Agreement as amended by the Company Pledge Amendment (as so amended, the "Amended Company Pledge Agreement") (i) are within the corporate powers of the Company, (ii) have been duly authorized by all necessary corporate action, (iii) have received all necessary governmental approval and (iv) do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Company or of any indenture, loan agreement or other contract, order or decree which is binding upon the Company and (b) each of the Amended Credit Agreement, the New Note and the Amended Company Pledge Agreement is the legal, valid and binding obligation of -8- the Company, enforceable against the Company in accordance with its terms. SECTION 3 EFFECTIVENESS. The amendments set forth in SECTION 1 above shall become effective, as of the day and year first above written, on such date (the "Second Amendment Effective Date") when the Agent shall have received (a) evidence that the HazWaste Merger has occurred, (b) the fee required to be paid pursuant to the letter agreement dated as of the date hereof between the Agent and the Company, (c) evidence, satisfactory to the Agent, that all existing indebtedness for borrowed money of HazWaste and its Subsidiaries has been (or concurrently with the effectiveness hereof will be) paid in full and that all liens securing such indebtedness have been (or concurrently with the effectiveness hereof will be) terminated and (d) each of the following documents, each in form and substance satisfactory to the Agent and each Bank. 3.1 SECOND AMENDMENT. Counterparts of this Second Amendment executed by the parties hereto. 3.2 NEW NOTE. The promissory note of the Company (the "New Note"), substantially in the form of Exhibit A to the Credit Agreement, payable to the order of Bank of America Illinois in the principal amount of $25,000,000. 3.3 SUBSIDIARY GUARANTY. A counterpart of the Subsidiary Guaranty duly executed by HazWaste and each of its Subsidiaries. 3.4 SECURITY AGREEMENT. A counterpart of the Security Agreement duly executed by HazWaste and each of its Subsidiaries. 3.5 COMPANY PLEDGE AGREEMENT AMENDMENT. An amendment (the "Company Pledge Amendment") to the Company Pledge Agreement, duly executed by the Company and the Agent, in form and substance satisfactory to the Agent, together with all collateral and other items required to be delivered in connection therewith. 3.6 SUBSIDIARY PLEDGE AGREEMENT. A pledge agreement (the "HazWaste Subsidiary Pledge Agreement"), substantially in the form of Exhibit H to the Credit Agreement, duly executed by HazWaste, together with all collateral and other items required to be delivered in connection therewith. 3.7 UCC FINANCING STATEMENTS. Evidence, satisfactory to the Agent, that all filings (including, without limitation, UCC-1 Financing Statements) and other actions necessary to perfect the Agent's Lien on any collateral granted under the Security Agreement have been duly made and are in full force and effect. 3.8 RESOLUTIONS. Certified copies of resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Second Amendment, the New Note and the Company Pledge Amendment and the performance by the Company of its obligations under the Amended Credit Agreement, the New Note and -9- the Amended Company Pledge Agreement; and certified copies of resolutions of the Board of Directors of each of HazWaste and each of its Subsidiaries authorizing the execution and delivery by such entity of the Subsidiary Guaranty, the Security Agreement and, in the case of HazWaste, the HazWaste Subsidiary Pledge Agreement and the performance by such entity of its obligations under the Subsidiary Guaranty, the Security Agreement and, in the case of HazWaste, the HazWaste Subsidiary Pledge Agreement. 3.9 INCUMBENCY CERTIFICATES. A certificate of the Secretary or an Assistant Secretary of each of the Company, HazWaste and each of HazWaste's Subsidiaries as to the incumbency and signatures of the officers of such entity who will be executing (a) in the case of the Company, this Second Amendment, and (b) in the case of each such entity, any document pursuant hereto. 3.10 CONFIRMATION. A confirmation in the form of ATTACHMENT I hereto from each of the Guarantors (other than HazWaste and its Subsidiaries). 3.11 OPINION. The opinions of Skadden, Arps, Slate, Meagher & Flom, special counsel to the Company and its Subsidiaries (including HazWaste and its Subsidiaries), and Williams, Mullen, Christian & Dobbins, counsel to HazWaste and its Subsidiaries, in each case in form and substance satisfactory to the Agent. 3.12 MERGER AGREEMENT. A certified copy of the Agreement and Plan of Merger dated as of October 24, 1994 among the Company, ET-Sub II, Inc. and HazWaste. SECTION 4 MISCELLANEOUS. 4.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the effectiveness hereof, all references in the Credit Agreement, the New Note and the other Loan Documents to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. 4.2 COUNTERPARTS. This Second Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Second Amendment. 4.3 GOVERNING LAW. This Second Amendment shall be a contract made under and governed by the internal laws of the State of Illinois. 4.4 SUCCESSORS AND ASSIGNS. This Second Amendment shall be binding upon the Company, the Banks and the Agent and their respective successors and assigns, and shall inure to the benefit -10- of the Company, the Banks and the Agent and the respective successors and assigns of the Agent and the Banks. Delivered at Chicago, Illinois, as of the day and year first above written. THE EARTH TECHNOLOGY CORPORATION (USA) By /s/ Diane C. Creel --------------------------------- Title Chairwoman, CEO & President ---------------------------- BANK OF AMERICA ILLINOIS, individually and as Agent By /s/ Paul R. Fry --------------------------------- Senior Vice President -11- EX-11 3 EXHIBIT 11 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
--------------------------------------- --------------------------------------- TWELVE MONTHS ENDING AUGUST 25, 1995 AUGUST 26, 1994 --------------- --------------- PRIMARY Average shares outstanding 8,643,340 5,597,148 Net effect of dilutive options and convertible issues based on the treasury stock method using average market price 247,403 -- -------------- ------------- Total primary shares 8,890,743 5,597,148 -------------- ------------- -------------- ------------- Loss applicable to common shares $ (521,000) $ (1,083,000) -------------- ------------- -------------- ------------- Per share $ (.06) $ (.20) -------------- ------------- -------------- ------------- Income (loss) from continuing operations $ 1,081,000 $ (718,000) Less dividend requirement on preferred stock (185,000) (272,000) -------------- ------------- Income (loss) from continuing operations applicable to common shares 896,000 (990,000) Per share $ .10 $ (.18) -------------- ------------- -------------- ------------- Loss from discontinued operations $ (1,417,000) $ (93,000) Per share $ (.16) $ (.02) -------------- ------------- -------------- ------------- FULLY DILUTED Average Shares Outstanding 8,643,340 5,597,148 Net Effect of dilutive options and convertible issues based on the treasury stock method using average market price 247,403 -- -------------- ------------- Total primary shares 8,890,743 5,597,148 -------------- ------------- -------------- ------------- Loss applicable to common shares $ (521,000) $ (1,083,000) -------------- ------------- -------------- ------------- Per share $ (.06) $ (.20) -------------- ------------- -------------- ------------- Income (loss) from continuing operations $ 1,081,000 $ (718,000) Less dividend requirement on preferred stock (185,000) (272,000) -------------- ------------- Income (loss) from continuing operations applicable to common shares 896,000 (990,000) Per share $ .10 $ (.18) -------------- ------------- -------------- ------------- Loss from discontinued operations $ (1,417,000) $ (93,000) Per share $ (.16) $ (.02) -------------- ------------- -------------- -------------
Attachment 2 EX-13.1 4 EXHIBIT 13.1 this is earth tech annual report 1995 To our shareholders: Earth Tech's transition accelerated in fiscal year 1995. We continued to build on established client relationships, while laying the groundwork for balance in clients, markets, services, and revenue streams. We began to see tangible results, evidenced by the diverse work performed and contracts won. Given the time-delayed nature of these procurements, their impact will be evident in future growth and revenue mix. At 25, we're a new firm, especially in terms of the markets open to us, yet, we have the network and track record of an established company. This makes us very competitive in an economy in which companies are linking environmental policy to business strategy and growth goals. Key Events. Earth Tech's fastest growing businesses in 1995 reflected our expansion strategy. They included contract operations (+24%), air quality management (+28%), facilities engineering (+14%), infrastructure (+5%), and remediation (+3%). By the end of FY 1995, our contract backlog was a record $831 million ($173 million funded), nearly double FY 1994's record $448 million. The work is spread over a larger number and variety of contracts In a little over six quarters, Backlog in millions starting just prior to the merger Feb. '94 (Pre-Summit) - $255,000,000 between The Earth Technology May '94 (Post-Summit) - $322,000,000 Corporation and Summit Environmental Aug. '94 (Post-HWI) - $451,000,000 and running through FY 1995, Earth May '95 (Post-HWI) - $574,000,000 Tech's contract backlog has more than Aug. '95 - $831,000,000 tripled.
and is more evenly divided among commercial (35%), municipal (17%), and federal sectors (48%). This is in sharp contrast to three years ago when our revenues came mostly from study-intensive environmental and federal contracts. Our second major corporate expansion in as many years was finalized when shareholders approved the merger of Earth Tech and HazWaste Industries (HWI). In adding HWI's emergency response/rapid remediation services, Earth Tech became a legitimate contracting service provider and firmly established a base in the US's southeast. In the fourth quarter, with HWI's integration largely complete, the US Navy awarded us a $200-million contract for a full spectrum of environmental assessment, compliance, and cleanup services at defense sites throughout the Pacific. When we competed for this contract in 1990, we were told we needed to be bigger and have more technical depth. Now we're viewed as a firm fully capable of running $200-million jobs. There was other evidence, Since the initial development of Revenues (in thousands) our growth-oriented strategic business ETCO FY '92 - $55,061 plan in 1992, Earth Tech's annual ETCO FY '93 - $62,906 revenues have increased by some 225%, ETCO & Summit FY '94 - $136,802 reflecting the combined operations of ETCO, Summit, & HWI FY - $179,491 ETCO, Summit, and HWI.
too, that the marketplace is responding to our new capabilities. A $30-million, US Army medical facilities contract is chiefly design and construction, while a $3.5-million contract for one of the world's leading brewers cuts across three service areas: contract operations and management, remediation, and engineering. Our air quality management growth was the result of booking over 200 Title V operating permit projects with major corporations across the US. These contracts, along with master services agreements with General Electric and Monsanto, a $6-million Department of Energy contract operations project, an engineering/construction management contract with Upjohn, and many others represent work we couldn't have competed for prior to our recent mergers. 1995 Financial Summary. Gross revenue from continuing operations for the 12 months ended August 25, 1995 was $179,492,000, up 1.9% from FY 1994's $176,199,000. Net reveune was $113,639,000, up 1.4% from $112,034,000 the prior year. The same strategy that produced Operating income* (in thousands) Earth Tech's revenue increases has ETCO FY '92 - $380 had an even more profound impact on ETCO FY '93 - $2,501 the company's annual operating income, ETCO & Summit FY '94 - $7,052 expanding it nearly threefold since ETCO, Summit, & HWI FY '95 - $10,472 the close of FY 1992. *Excludes special charges
Net income to common shareholders from continuing operations and before special charges was $4,543,000, 10% above 1994's $4,115,000. On a per-share basis, FY 1995 results were $0.51 per share versus $0.53 in 1994. This reflected a year- to-year increase in the number of shares outstanding from 5,597,148 to 8,890,743, and a $0.04 per share contribution in tax benefits in 1994. Our operating margins on net revenues for continuing operations were 9.2% in 1995, and 8.8% a year ago, while utilization rates increased from 65% in 1994 to 67% in 1995. The Road Ahead. Our strategic plan is on schedule. Congress' stagnant decision-making is slowing environmental funding so we will continue to strengthen technical resources and geographic presence beyond environmental markets. We've signed a letter of intent to acquire Barrett Consulting Group, a $26 million international water/wastewater, transportation, and infrastructure engineering firm. Barrett will increase our workforce to The costs and distractions of our expansion, mergers, and integration notwithstanding, we have managed to improve Earth Tech's operating margin as a percent of net revenue by nearly 750% since 1992. Operating margin* % of net revenue ETCO FY '92 - 1.1% ETCO FY '93 - 6.4% ETCO & Summit FY '94 - 7.0% ETCO, Summit, & HWI FY - 9.4% *Excludes special charges nearly $1,900, and expand our presence on the West Coast and in the Pacific. We can now focus on new opportunities and on improving profitability. The markets we're penetrating promise to grow as clients outsource more engineering and operations. This should have a positive effect on Earth Tech's future earnings and investment value. My thanks to our shareholders, employees, and clients for helping us move toward these goals. Sincerely, /s/ DIANE C. CREEL ------------------ Diane C. Creel Chairwoman, CEO, and President STRATEGIC SUCCESS AND 1995 FINANCIAL REVIEW EARTH TECH is one of the nation's leading engineering firms, serving the public and private sector markets for water resources, air quality, remediation, infrastructure, facilities management and environmental science. Founded in 1970, the company employs 1,700 people in over 40 US offices. Engineering. Industrial downsizing and increases in cleanup and turnkey work drove our engineering growth in 1995. And it was broad-based: facilities design, remediation, wastewater treatment facilities, air quality, solid waste, and transportation. Our three-year partnering agreement with Upjohn includes architectural, structural, mechanical, instrumentation and controls, and electrical engineering. We're providing civil and structural engineering on a $15-million highway interchange in New England, for which we're also preparing an Environmental Impact Statement. In the Midwest, we're designing a calcium chloride plant. Engineering is also part of our responsibilities in several of master services, contract operations, and design-build contracts. Among these is the design of a landfill closure for General Electric. Our potential for new work is huge, given the market's size. ENGINEERING NEWS RECORD has estimated that the US's 500 largest design and engineering firms billed nearly $30 billion in 1994. Of this nearly 80% was in industrial process, hazardous waste, infrastructure, and manufacturing, all markets in which we are growing. 1994 Engineering Market (Chart) Petroleum/Industrial process - 21% Hazardous waste - 20% General Building - 16% Transportation - 15% Sewer/wastewater - 8% Power - 7% Manufacturing - 5% Water supply - 4% Miscellaneous - 4% Construction. With the shift in environmental work from study to cleanup, construction has become a prime focus for us. Domestic remediation construction alone totaled some $3 billion in 1994 and was growing at 5% to 10%. Furthermore, there's rising interest in the public and private sectors for design-build, a market that registers in the tens of billions of dollars. Construction and construction-related work was a major part of our backlog growth in 1995. We designed, built, and will operate one of the nation's largest soil vapor extraction systems for the Air Force. A major manufacturer chose us to design and build an automated storage and retrieval system warehouse. Another named us construction manager on a $10-million chemical plant expansion. We'll also provide process design, automated process control, and environmental engineering. And we're construction manager on a nationwide, $30-million hospital renovation program for the Army and Air Force. As more construction clients see the added value of our total services and environmental expertise, we expect our construction opportunities to increase. "At-risk" CM revenue vs. Design-build revenue (Chart) Domestic - $17.5 billion* - $22 billion International - $2 billion* - $10.5 billion * Construction management at-risk Design-build Environmental Sciences. Earth Tech's envirnmental work in 1995 was more varied than ever, from the 200+ Title V permitting projects to the Navy CLEAN contract and a lot in between. We broadened our environmental services with Occidental Chemical Corporation by signing a new services agreement, while one of the world's foremost food processors hired us to perform environmental compliance audits. The latter comes just as many states are enticing clients to voluntarily audit their compliance status with new "environmental audit privilege" laws. We're out front in the new "brownfield" movement, in which contaminated urban sites are being reclaimed in favor of suburban relocating. A new contract with the US Air Force involves us heavily in OSHA-related work: public health assessment, industrial hygiene, radiation surveys, and workplace ergonomics. Our ability to provide a full spectrum of services, from audits to strategic environmental management, is timely. We're helping an increasingly proactive marketplace implement environmental policies aimed at economic competitiveness. 1994 Environmental Sciences Market Segments (Chart) Air Quality - $500 million Pollution prevention - $800 million Strategic environmental management - $600 million Permitting/compliance - $2.1 billion Remediation consulting - $5 billion Contract Operations and Management. Another product of corporate and government downsizing, the US market for contract operations and management has been estimated at $20 billion, with current penetration projected to be only about 5%. Earth Tech's contract operations revenue grew 24% from 1994 to 1995, with 1995 fourth quarter revenue running 43% ahead of the same quarter a year ago. An example: we are operating and maintaining a Department of Energy wastewater treatment facility. Summit's contract operations experience and Earth Tech's relationship with DOE created the synergy to win this $6-million contract away from the incumbent. Earth Tech has targeted numerous private and public sector clients and intends to market this service aggressively in the coming years. We believe cost savings to clients can range from 15% to 35% a year. The more efficient we are, the greater clients' savings and our profitability. Not only is there the prospect of long-term recurring revenues, there's also a logical, marketable link between contract operations and management and our environmental sciences, facilities engineering, and design-build services. Potential Contract Operations Market (Chart) Estimated potential market - $20 billion Penetrate market: less than $1 billion - (5%) Alabama, Arizona, California, Florida, Georgia, Hawaii, Indiana, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, North Carolina, Ohio, Tennessee, Texas, Virginia, West Verginia ENGINEERING pollution control process/plant remediation systems solid/hazardous waste transportation wastewater water supply CONSTRUCTION construction management design-build demolition/renovation facilities infrastructure procurement site cleanup turnkey installations CONTRACT OPERATIONS facility operations and maintenance process troubleshooting remediation systems/sites solid waste management systems startups wastewater treatment systems water supply systems ENVIRONMENTAL air quality asbestos and lead compliance assistance cleanup emergency response pollution prevention resource management risk assessment strategic environmental management management's discussion & 1995 financial review SELECTED CONSOLIDATED FINANCIAL DATA The following is selected consolidated financial data for each of the five years in the period ended August 25, 1995. The information below should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." On May 23, 1994, Summit Environmental Group, Inc. (Summit) was merged with and into the Company and on February 23, 1995, HazWaste Industries Incorporated (HWI) was merged with and into the Company. Both mergers were accounted for as poolings of interests, and accordingly, the selected consolidated financial data shown below has been restated to include the accounts and operations of Summit and HWI for all periods presented. On August 11, 1995, the Board of Directors of the Company approved a plan to dispose of its laboratory operations. Accordingly, the selected financial data below reports, as discontinued operations, the net assets and operating results of the laboratory operations for all periods presented.
Years Ended August 25, August 26, August 27, August 28, August 30, (In thousands, except per share data) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA Gross revenues $179,492 $176,199 $187,467 $142,410 $124,787 Net revenues 113,639 112,034 108,861 92,297 83,233 Operating income (loss) 6,157 2,961 ( 4,964) 5,866 (305) Net Income (loss) from continuing operations 1,081 (718) (9,743) 847 (3,750) Income (loss) from discontinued operations, net of income taxes (757) (93) 764 1,089 863 Loss on disposition of laboratory business, net of income taxes (660) -- -- -- -- Net income (loss) applicable to common shares ( 521) ( 1,083) (10,079) 1,405 ( 3,893) - ------------------------------------------------------------------------------------------------------------------------------------ PER COMMON SHARE DATA Net income (loss) per share from continuing operations $0.10 $(0.18) $(2.16) $0.05 $(1.10) Net income (loss) per share from discontinued operations (0.16) (0.02) 0.15 0.16 0.20 Net income (loss) per share (0.06) (0.20) (2.01) 0.21 (0.90) Weighted average common shares outstanding 8,643 5,597 5,007 6,717 4,373 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $31,664 $25,638 $21,285 $20,189 $18,079 Total assets 95,046 99,410 91,588 99,353 78,444 Long-term liabilities 36,945 31,873 34,434 36,841 31,495 Stockholders' equity 24,676 24,487 20,082 29,019 22,668 - -----------------------------------------------------------------------------------------------------------------------------------
1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS AND MARKET CONSIDERATIONS In performing its services, the Company often employs subcontractors over whom the Company has the responsibility of supervision and management. The Company's payments to subcontractors are recorded as direct project costs which also include other costs (other than direct labor) directly attributable to individual projects. These project costs are passed through directly to the Company's clients. In addition to recovery of the actual payments to subcontractors, the Company receives and records, as gross revenues, fees for the Company's managerial and supervisory services performed in connection with subcontracting work. Net revenues are determined by subtracting direct project costs, other than labor, from gross revenues. Because the extent of the use of subcontractors can vary substantially from period to period, and in light of the fact that the cost of subcontractors is passed through directly to the Company's clients, the Company believes that its operating performance is best judged as a percentage of net revenues as opposed to gross revenues. Direct labor and related expenses reflect the cost of professional and technical staff billable hours. Such costs consist of salaries and related fringe benefits, including employer-paid insurance, payroll taxes, vacations, sick leave, and retirement plan contributions. Indirect expenses include the non- billable cost of professional and technical staff labor hours, including non- billable time devoted to marketing, proposals, supervision, and professional development, as well as other expenses such as technical, office and field supplies, and related facility and support expenses, and corporate administrative expenses for marketing, accounting, and human resource functions. The Company traditionally has pursued multi-year contracts with governmental agencies. U.S. government contracts accounted for approximately 48%, 50% and 48% of the Company's gross revenues in fiscal 1995, 1994, and 1993, respectively. Reliance on major government contracts subjects the Company to risks associated with public budgetary restrictions and uncertainties, discrepancies between awarded contract amounts and actual revenues, and cancellation at the option of the government. The Company attempts to mitigate these risks by staffing only to meet reasonably anticipated average workloads, by using subcontractors to handle peak workloads, and by obtaining termination benefit contract provisions. Cancellation of any of the Company's major government contracts, however, could have a material adverse effect on the Company. The Company is dependent on a small number of contracts for producing a substantial portion of its revenues. Revenues from three U.S. government contracts accounted for 28.7% of the Company's gross revenues in fiscal 1995; three contracts provided 31.9% of fiscal 1994 revenues and four contracts provided 37.5% of fiscal 1993 revenues. RESULTS OF OPERATIONS The following table sets forth (I) certain items in the Consolidated Statements of Operations as a percentage of net revenues, and (ii) the percentage increase (decrease) in the dollar amount of such items from year to year for the 3-year period ended August 25, 1995.
August 25, August 26, August 27, August 25, 1995 vs. August 26, 1994 1995 1994 1993 August 26, 1994 vs. August 27, 1993 - -------------------------------------------------------------------------------------------------------------------- Gross revenues 157.9% 157.3% 172.2% 1.9% (6.0)% Net revenues 100.0 100.0 100.0 1.4 2.9 Direct labor and related expenses 45.3 45.0 44.1 2.1 4.9 Indirect expenses 45.5 46.2 46.6 (0.2) 2.0 Special charges 3.8 6.1 13.8 (37.2) (54.2) - --------------------------------------------------------------------------------------------------------------------
2 FISCAL 1995 COMPARED TO FISCAL 1994 CONTINUING OPERATIONS Gross revenues increased 1.9% from $176,199,000 in 1994 to $179,492,000 in 1995. Net revenues increased 1.4% from $112,034,000 in 1994 to $113,639,000 in 1995. Individually, revenues from contract operations of wastewater and environmental facilities increased 24%; engineering services for industrial facilities increased 14% and municipal infrastructure services increased 5%. Also, individually, revenues from environmental consulting were flat in the commercial sector, while uncertainty in the federal regulatory and budgetary environment resulted in a 5% decline in government consulting. Direct labor and related expenses increased slightly faster than revenues, growing from 45.0% of net revenues in 1994 to 45.3 % in 1995. The increase was due to the increasing mix of contract operations revenues, which have a lower mark-up on direct labor, an unfavorable contract mix in remediation services resulting in lower margins and continued pricing pressures in commercial consulting. These impacts were more than offset by improvements in indirect expenses as a percent of net revenues. Indirect expenses decreased 0.2% in 1995 to a total of $51,696,000, due primarily to cost-control initiatives implemented by the Company late in 1994, and an overall increase in technical staff utilization rates, which decreases the amount of salaries classified as indirect costs. Indirect expenses declined from 46.2% of net revenues in 1994 to 45.5% in 1995. Special charges of $4,315,000 ($3,647,000 net of tax) were incurred in 1995. These charges resulted from the completion of the business combination with HazWaste Industries completed on February 23, 1995. The charges include $2,510,000 in merger related expenses, $580,000 in severance costs, $555,000 for the consolidation of facilities and $670,000 for the conversion and integration of insurance, and fringe benefit programs. As of August 25, 1995, a liability of $465,000 remained accrued primarily for severance and office consolidation costs and is expected to be fully utilized in fiscal 1996. In 1994, special charges of $6,873,000 ($5,105,000 net of tax) consisted of $4,993,000 in costs related to the Summit merger and $1,880,000 for the closure of the Minneapolis office. As of August 25, 1995, a liability of $404,000 remained for the Minneapolis office closure, primarily related to the collection of certain accounts receivable. Absent the special charges in each of the years above, operating income from continuing operations would have been $10,472,000 in 1995 versus $9,834,000 in 1994. The increase in operating income was the result of reduced general and administrative costs and improved staff utilization. Interest expense declined 16.2% from $3,582,000 in 1994 to $3,003,000 in 1995. This decline was primarily due to the conversion of $4,556,000 in subordinated debt which carried a 14.5% interest rate to common stock in May 1994. Income tax expense of $2,359,000 represents 68.6% of pre-tax income from continuing operations. The abnormally high tax rate results from the fact that $2,500,000 of the special charges are not deductible for income tax purposes. Absent the special charges, the income tax rate on income from continuing operations would have been 40%. In 1994, non-deductible merger costs also impacted the tax rates. Absent the special charges, income tax expense in 1994 would have been 32.5%. The lower tax rate in 1994 related primarily to the utilization of certain tax benefits, including operating loss carryforwards. The Company anticipates net deferred tax assets will be realized partially through available taxable income in carryback periods and through the generation of approximately $2 million of future taxable income. Dividend requirements on preferred stock declined from $272,000 in 1994 to $185,000 in 1995 due to the redemption of all remaining outstanding redeemable preferred stock in May, 1995. DISCONTINUED OPERATIONS In August, 1995, the Company adopted a plan to sell its remaining laboratory operations and discontinue that line of business. In conjunction with this action, the Company recorded a net after-tax loss of $660,000 related to the expected loss on the sale of laboratory assets in fiscal 1995. Net losses after tax from operations of the discontinued laboratory business totaled $757,000 in 1995 compared to a $93,000 loss in 1994. A significant decline in both prices and volume in the labs accounted for the expanded loss. The Company expects to complete the sale of the remaining laboratory operations in the first half of fiscal 1996. 3 FISCAL 1994 COMPARED TO FISCAL 1993 CONTINUING OPERATIONS Gross revenues decreased 6.0% from $187,467,000 in 1993 to $176,199,000 in 1994, while net revenues increased 2.9% from $108,861,000 in 1993 to $112,034,000 in 1994. While non-labor project costs included in gross revenues declined by $14,500,000 from 1993 to 1994, primarily as a result of the completion of certain large remediation projects, labor-related net revenues expanded primarily as a result of a 13% increase in contract operations revenues and a 11% increase in federal government consulting revenues. Direct labor and related expenses expanded by 4.9% in 1994 and increased to 45.0% of net revenues in 1994 compared to 44.1 % in 1993. The increase in this percentage reflects the loss of fees, normally included in net revenues, on the lower non-labor costs from completed remediation projects, as well as the increase in the percentage of net revenues derived from contract operations of wastewater treatment plants and federal government consulting, both of which are sold at lower mark-ups on direct labor than in the commercial consulting sector of the Company's business. Indirect expenses increased by 2.0% in 1994, representing 46.2% of net revenues compared to 46.6% of net revenues in 1993. Cost increases associated with the expansion of the Company's consulting businesses were offset by reductions in general and administrative expenses, including the closure of Summit's headquarters facility in conjunction with the merger in May 1994. In 1994, special charges of $6,873,000 ($5,105,000, net of tax) consisted of $4,993,000 in costs related to the pooling of interests with Summit Environmental and $1,880,000 for the closure of the Minneapolis office. The special charges for the closure of Summit's Minneapolis office include $430,000 for unexpired facility and lease obligations, $300,000 in severance pay, $500,000 in estimated losses on uncompleted contracts and $650,000 in additions to the allowance for doubtful accounts. The office was closed and all employees terminated prior to the end of the third fiscal quarter of operation in 1994. As of August 26, 1994, there was a reserve balance of $642,000 relating to the merger charges and $404,000 relating to the closure of the Minneapolis office. In 1993, prior to the merger with the Company, Summit recorded special charges of $15,000,000 ($13,461,000, net of tax) including $11,259,000 for the write down of goodwill, $2,551,000 to recognize the effect of an unfavorable lease and $1,190,000 to provide for the consolidation of certain administrative functions. The Company has, at each balance sheet date, made a determination as to whether or not there has been an impairment in the goodwill, and that prior to fiscal 1993, no impairment had occurred. At August 26, 1994, a liability of $2,187,000 existed relating to the unfavorable lease. This balance will be utilized over the remaining five years of the lease. A separate balance of $169,000 also existed at that date relating to the consolidation of administrative functions which will be completely utilized in fiscal 1995. Absent the special charges in each of the years above, operating income from continuing operations would have been $9,834,000 in 1994 compared to $10,036,000 in 1993. The decline was primarily related to the reduced fees on non-labor project costs associated with the completed remediation contracts. In 1994, the Company realized $248,000 in other income as a result of interest income and a gain on the sale of certain assets. In 1993, the Company incurred other expenses of $414,000, primarily representing the costs of disposing of certain assets and legal costs for non-operating activities. Interest expenses declined by $502,000, or 12.3%, from 1993 to 1994. This reduction was primarily the result of a reduction in borrowing levels and interest rates under revolving credit agreements and the conversion of $4,556,000 in 14.5% subordinated notes to common stock upon the closing of the merger with Summit in May 1994. The reported income tax rate in both 1994 and 1993 was adversely affected by the inability to deduct certain merger-related costs and goodwill write-downs for income tax purposes. Absent these special charges, the income tax rate would have been 32.5% in 1994 versus 33.6% in 1993. These lower rates relate primarily to the realization of certain tax benefits, including tax loss carry- forwards. Dividend requirements on preferred stock declined from $1,100,000 in 1993 to $272,000 in 1994 as a result of the conversion to common stock of most preferred stock issues upon the closing of the merger with Summit. 4 DISCONTINUED OPERATIONS Net after-tax losses from the discontinued laboratory operations totaled $93,000 in 1994 compared to a net after-tax profit of $764,000 in 1993. The erosion of profitability occurred primarily as a result of reduced levels of demand for certain of the Company's laboratory services, partially as a result of severe winter weather, and reduced pricing levels in certain parts of the country. LIQUIDITY AND CAPITAL RESOURCES At August 25, 1995, the Company's working capital was $31,664,000 versus $25,638,000 at August 26, 1994. Cash balances increased from $2,803,000 to $4,572,000 at August 25, 1995, while borrowing under the Company's bank line of credit increased from $12,553,000 at August 26, 1994 to $18,700,000 at August 25, 1995. The increase in borrowing levels is primarily attributable to the Company's redemption of $2,500,000 in senior preferred stock, and to the costs associated with the HazWaste Industries merger. Cash flow from operating activities totaled $3,966,000 in 1995. Capital expenditures increased to $4,376,000 from $4,314,000 in fiscal 1995,primarily for computers, software and office and field equipment. The Company has commitments for capital expenditures at August 25, 1995 for $1,000,000. The Company anticipates that capital expenditures of approximately $5,000,000 will be made in fiscal 1996, primarily for the computers and other equipment needed for general expansion of the business. At August 25, 1995, the Company had $18,700,000 in borrowings outstanding under a Revolving Credit Agreement which allows borrowings based on eligible accounts receivable to a maximum of $25,000,000. The maximum available borrowing based on the eligible accounts receivable at August 25, 1995 was $21,268,000. On September 11, 1995, the Company entered into a letter of intent to acquire Barrett Consulting Group, Inc. (Barrett). The letter of intent expired on October 31, 1995 without a definitive agreement being reached. The parties are continuing to negotiate terms and conditions with the objective of reaching a definitive agreement which result in Barrett being acquired as a wholly-owned subsidiary of the Company in a transaction to be accounted for as a purchase. Funding requirements for operations, capital expenditures and future growth are expected to be met from cash generated from operations, borrowing under the above noted bank credit facilities, or utilization of common stock. The Company believes that cash provided from these areas will be sufficient to meet its operating requirements for the foreseeable future. INFLATION Although the Company's operations are influenced by general economic trends, the Company does not believe that inflation has had a material adverse impact on its operations during the three fiscal years ended August 25, 1995. 5
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended August 25, August 26, August 27, (In thousands, except per share data) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Gross revenues $ 179,492 $ 176,199 $ 187,467 Less direct project costs 65,853 64,165 78,606 ------------------------------------------------------------ Net revenues 113,639 112,034 108,861 Other costs and expenses: Direct labor and related expenses 51,471 50,426 48,054 Indirect expenses 51,696 51,774 50,771 Special charges 4,315 6,873 15,000 ------------------------------------------------------------ Operating income (loss) 6,157 2,961 (4,964) Other income and (expense), net 286 248 (414) Interest expense (3,003) (3,582) (4,084) ------------------------------------------------------------ Income (loss) from continuing operations before income taxes 3,440 (373) (9,462) Provision for income taxes 2,359 345 281 ------------------------------------------------------------ Income (loss) from continuing operations 1,081 (718) (9,743) Discontinued operations, net of taxes: Income (loss) from operations (757) (93) 764 Loss on disposition (660) -- -- ------------------------------------------------------------ Net loss (336) (811) (8,979) Dividend requirement on preferred stock 185 272 1 ,100 Net loss applicable to common shares $(521) $(1,083) $(10,079) - -------------------------------------------------------------------------------------------------------------- Net income (loss) per share from continuing operations $0.10 $(0.18) $(2.16) Net income (loss) per share from discontinued operations (0.16) (0.02) 0.15 ------------------------------------------------------------ NET LOSS PER SHARE $(0.06) $(0.20) $(2.01) - -------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------------------------------------
6
CONSOLIDATED BALANCE SHEETS (In thousands, except share data) August 25, August 26, 1995 1994 - -------------------------------------------------------------------------------- ASSETS: Current Assets Cash and cash equivalents $ 4,572 $ 2,803 Contract receivables, net 53,172 55,662 Notes and other receivables 2,224 1,525 Prepaid expenses 1,494 2,447 Deferred income taxes 2,361 2,300 Other current assets 1,266 1,451 ---------------------------------------- Total current assets 65,089 66,188 Equipment and improvements, net 15,442 18,592 Goodwill 11,936 12,549 Deferred income taxes -- 383 Other assets 2,579 1,698 ---------------------------------------- Total assets $95,046 $99,410 ---------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities Accounts payable $14,466 $18,791 Billings in excess of revenues 6,267 3,681 Accrued payroll and related liabilities 7,913 8,513 Other accrued liabilities 3,583 4,515 Income taxes payable -- 599 Current portion of long-term debt 1,196 4,451 ---------------------------------------- Total current liabilities 33,425 40,550 Revolving credit agreement 18,700 12,553 Other long-term debt 4,476 5,383 Other long-term liabilities 3,662 3,937 Deferred income taxes 107 -- Subordinated debt 10,000 10,000 ---------------------------------------- Total long-term liabilities 36,945 31,873 Total liabilities 70,370 72,423 Redeemable Senior Preferred Stock -- 2,500 Stockholders' equity Preferred stock -- l ,800 Common stock, $.10 par value, 20,000,000 shares authorized; 8,776,858 shares issued and 8,697,869 outstanding; (6,703,341 at August 26, 1994) 877 678 Additional paid in capital 36,613 34,302 Deficit (12,528) (12,007) Less: 78,989 shares of common stock held in treasury (78,989 at August 26, 1994) (286) (286) ---------------------------------------- Total stockholders' equity 24,676 24,487 ---------------------------------------- Total liabilities and stockholders' equity $ 95,046 $ 99,410 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
7
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Preferred Additional Retained Stock Paid-in- Earnings (In thousands) (All Issues) Common Stock Capital (Deficit) Treasury Stock Total - -------------------------------------------------------------------------------------------------------------------------------- Balance - August 28, 1992 as previously reported $82 $422 $24,448 $2,038 $(284) $26,706 Pooling of interest with HWI 1,800 59 495 (41) - 2,313 -------------------------------------------------------------------------------------------------- Balance - as restated 1,882 481 24,943 1,997 (284) 29,019 Issuance of net shares under employee's stock option and restricted option plan - 6 264 - (2) 268 Sale of common stock - 3 11 - - 14 Directors' fees under directors' stock option plan - - 42 - - 42 Dividends on preferred stock - - - (281) - (281) Net loss - - - (8,979) - (8,979) -------------------------------------------------------------------------------------------------- Balances - August 27, 1993 1,882 490 25,260 (7,263) (286) 20,083 Adjustment to conform fiscal year of Summit (118) (118) Issuance of 1,673,295 shares in connection with the Summit recapitalization (82) 167 8,711 (3,543) - 5,253 Issuance of net shares under employees' stock option and restricted option plan - 21 243 - - 264 Directors' fees under directors' stock option plan - - 88 - - 88 Dividends on preferred stock - - - (272) - (272) Net loss (811) - (811) --------------------------------------------------------------------------------------------------- Balance - August 26, 1994 1,800 678 34,302 (12,007) (286) 24,487 Issuance of net shares under employees' stock option and restricted option plan - 7 191 - - 198 Conversion of preferred stock in connection with the HWI merger (1,800) 181 1,619 - - - Conversion of unvested options in connection with the HWI merger 4 (4) - Issuance of net shares under employees' stock purchase plan - 7 415 - - 422 Directors' fees under directors' stock option plan - - 90 - - 90 Dividends on preferred stock - - - (185) - (185) -------------------------------------------------------------------------------------------------- Net loss - - - (336) - (336) -------------------------------------------------------------------------------------------------- Balance - August 25, 1995 $ - $877 $36,613 $(12,528) $(286) $24,676 - ------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------------------------------------------------------
8
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED August 25, August 26, August 27, (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Net loss $(336) $(811) $(8,979) Adjustments to reconcile net loss to net cash provided by operating activities: Adjustment to conform fiscal year of Summit - (118) - Depreciation/amortization 5,788 5,371 5,308 Provision for losses on contract receivables 658 1,534 447 Deferred income taxes 429 (1,269) (2,697) Special charges (1,293) (74) 15,000 Changes in assets and liabilities: Contract receivables 1,832 (6,845) (3,224) Notes, prepaids and other assets (443) (3,912) 598 Accounts payable (4,325) 2,650 1,731 Other liabilities 1,656 3,474 2,790 ----------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 3,966 0 10,974 Proceeds from disposals 2,351 223 76 Purchase of property and equipment (4,376) (4,314) (3,140) Proceeds from sale of investments - 93 465 Purchased businesses, net of cash acquired - (490) - ----------------------------------------------- CASH USED IN INVESTING ACTIVITIES (2,025) (4,488) (2,599) Redemption of Preferred Stock (2,500) - - Principal payments on debt obligations (79,241) (47,566) (40,252) Borrowing from debt obligations 81,228 50,996 33,540 Sale of common stock, net 526 208 124 Dividends on preferred stock (185) (272) (281) ----------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (172) 3,366 (6,869) ----------------------------------------------- Net cash flow 1,769 (1,122) 1,506 Cash and equivalents at beginning of period 2,803 3,925 2,419 ----------------------------------------------- Cash and equivalents at end of period $4,572 $2,803 $3,925 ----------------------------------------------- Non-cash activities Interest paid during period $2,569 $3,637 $4,142 Income taxes paid during period 4,097 2,703 3,137 Capital lease obligations from purchase of equipment 207 768 1,598 - ------------------------------------------------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------------------------------------------------------------
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION - The accompanying consolidated financial statements include the accounts of The Earth Technology Corporation (USA) and its wholly-owned subsidiaries (the Company). All material intercompany transactions have been eliminated in consolidation. The consolidated financial statements account for the mergers with Summit Environmental, Inc. in May 1994 and with HazWaste Industries, Inc., in February, 1995 as poolings of interests, and the accompanying consolidated financial statements have been restated. (See Note 2). Certain reclassifications have been made in the 1994 and 1993 information to conform to the 1995 presentations. The Company is a technical services consulting organization specializing in the assessment, management, and remediation of complex environmental problems, engineering, construction, and planning services, and contract operations of water and wastewater treatment plants for federal, state and local governmental agencies and commercial and industrial clients. For financial reporting purposes, the Company operates in two segments, environmental services and contract operations, of which environmental services is the predominant industry. FISCAL YEAR END - The Company is on a 52-53 week accounting period with the fiscal year ending on the last Friday in August. REVENUE RECOGNITION - Revenues on contracts are recognized on the percentage-of- completion method, based primarily on the ratio of costs incurred to date to total estimated contract costs. Services are performed under cost-plus, time and material, and fixed-price contracts. Anticipated losses under contracts are recorded as they become evident. Revenues from fixed price contracts are recognized using the cost-to-cost method to determine the progress made under percentage of completion accounting. For cost-plus-fixed-fee contracts, revenues are recognized as costs are incurred. Applicable fees are included in revenues in the proportion that incurred costs bear to total estimated costs. Incentives or penalties applicable to performance on contracts are considered in estimating revenues and are recorded when there is sufficient information available to assess performance. Any changes from estimates are recorded when adjustments are determined. Approximately $85,362,000 of gross revenues were from U.S. Government contracts in 1995 ($89,203,000 and $90,026,000 in 1994 and 1993, respectively). CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. CREDIT - Credit is extended based on an evaluation of the client's financial condition, with terms consistent in the industry and normally collateral is not required. Losses from credit sales are provided for in the financial statements and consistently have been within the allowance provided. DEPRECIATION AND AMORTIZATION - Depreciation and amortization are provided using straight line and accelerated methods over the following estimated useful lives: Field and laboratory equipment 2 to 10 years Office furniture and equipment 2 to 7 years Transportation equipment 5 years Equipment under capital leases 3 to 5 years Leasehold improvements are amortized over the remaining lives of the leases. Amortization of assets under capital leases is included in depreciattion expense. INTANGIBLE ASSETS - Excess cost over the fair value of net assets acquired (or goodwill) generally is amortized on a straight-line basis over periods ranging from 20-40 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill is reduced by the estimated shortfall of cash flows. The Company has, at each balance sheet date, made a determination as to whether or not there has been an impairment of goodwill and in fiscal 1995 and 1994, no impairment had occurred. Accumulated amortization was approximately $1,784,000 at August 25, 1995 and $1,567,000 at August 26, 1994. INVESTMENTS - Marketable securities are recorded at fair value. In fiscal 1995, the Company adopted Financial Accounting Standards Board issued Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The adoption did not have a material impact on the financial position or results of operations of the Company. RENT EXPENSE - The Company leases certain office space under leases containing free rent and reduced rent periods. The accompanying financial statements reflect rent expense on a straight-line basis over the terms of the leases. ACCOUNTING STANDARDS - In March, 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company is required to adopt this Statement no later than fiscal 1997 and the adoption is not anticipated to be material to the financial position or results of operations of the Company. 10 2. BUSINESS COMBINATIONS In February, 1995, HazWaste Industries Incorporated (HWI) was merged with and into The Earth Technology Corporation (USA) (Earth Technology) (combined, the Company). Earth Technology issued 2,639,620 shares of common stock for all outstanding common shares, including preferred shares (See Note 12) and unvested options, of HWI. The merger was accounted for as a pooling of interests, and accordingly, the Company's consolidated financial statements have been restated for all periods prior to the merger to include the accounts and operations of HWI. Net revenues and net earnings for the individual entities for the periods before the merger was consummated are as follows:
In thousands Earth Technology HWI Total - ---------------------------------------------------------------------------------------------------- Six months ended February 24, 1995 Revenues $ 69,590 $ 21,274 $ 90,864 Net Loss (647) (1,233) (1,880) Dividend requirement on preferred 125 -- 125 Year ended August 26, 1994 Revenue $136,802 $ 39,397 $176,199 Net (loss) income (2,224) 1,413 (811) Dividend requirement on preferred 272 -- 272 Year ended August 27, 1993 Revenue $135,097 $ 52,370 $187,467 Net (loss) income (10,735) 1,756 (8,979) Dividend requirement on preferred 1,100 -- 1,100 - ----------------------------------------------------------------------------------------------------
No material adjustments were necessary to eliminate intercompany transactions or conform accounting policies. Prior to the merger, HWI used a fiscal year ending on the last Friday of December. The financial statements of HWI have been restated for all periods to conform to the fiscal year end of Earth Technology. In connection with the merger, approximately $4,315,000 of merger costs and expenses ($3,647,000, or $.41 per share, net of taxes, classified as special charges in the Consolidated Statement of Operations) were incurred and have been charged to expense. The non-recurring costs and expenses include the following: (a) $2,510,000 in merger-related costs; (b) $555,000 to provide for the consolidation of facilities; $580,000 in severance payments to former HWI employees; and (d) $670,000 for the conversion and integration of various programs. All costs had been committed to and all appropriate personnel had been notified by the end of the second quarter of fiscal 1995. In May 1994, Summit Environmental Group, Inc. (Summit) was merged with and into Earth Technology (combined, the Company). Earth Technology issued 2,903,103 shares of common stock for all of the common stock of Summit. The merger was accounted for as a pooling of interests, and accordingly, the Company's fiscal 1994 consolidated financial statements had been restated for all periods prior to the merger to include the accounts and operations of Summit. During the three years ended August 25, 1995, the Company made one acquisition accounted for by the purchase method. The results of operations of the acquired company have been included in the Company's financial statements since the date of acquisition. Total consideration paid for the fiscal 1994 acquisition was approximately $509,000 in cash and notes. The Company's financial results would not be materially different if the results of the acquisition were included as though the acquisition occurred at the beginning of each period. 11 3. DISCONTINUED OPERATIONS During fiscal 1995, the Company incurred a $156,000 loss (net of income tax benefits of $94,000) on the sale of certain laboratories. Subsequent to those sales, on August 11, 1995 the Company announced its intention to dispose of its remaining laboratory operations. The Company anticipates the disposal to be completed during fiscal 1996 through the sale of the remaining operations. The disposal of the laboratory operations has been accounted for as a discontinued operation and accordingly, its operating results are segregated and reported as discontinued operations in the Consolidated Statement of Operations. Prior year financial statements have been reclassified to conform to the current year presentation. The condensed statements of discontinued operations for the three fiscal years ended August 25, 1995 are as follows:
In thousands 1995 1994 1993 - -------------------------------------------------------------------------------- Sales $8,714 $12,706 $13,756 Intercompany sales 2,891 3,251 3,982 Income (loss) before tax (1,300) (149) 1,222 Income tax (benefit) (543) (56) 458 Income (loss) $ (757) $ (93) $ 764
The effective tax rates for discontinued operations differ from the federal statutory rate primarily due to state taxes. The estimated loss on disposal of $660,000 (net of income tax benefit of $395,000) includes the estimated loss on the laboratory disposal, the write-down of equipment and improvements, and the estimated loss through the date of disposal. Net assets of the discontinued operation of $789,000 are classified in other current assets at August 25, 1995. 12 4. CONTRACT RECEIVABLES Contract receivables consist of the following:
In thousands August 25, August 26, 1995 1994 - -------------------------------------------------------------------------------- U.S. Government Amounts billed $11,655 $12,712 Unbilled contract costs and fees 10,935 11,867 Retentions, due upon completion of contracts 1,761 1,253 ------------------------------ Total U.S. Government 24,351 25,832 ------------------------------ Commercial Amounts billed 26,298 26,874 Unbilled contract costs and fees 4,014 4,346 Retentions, due upon completion of contracts 535 703 ------------------------------ Total commercial 30,847 31,923 Less allowance for doubtful accounts 2,026 2,093 ------------------------------ Net commercial 28,821 29,830 ------------------------------ Total $53,172 $55,662 - --------------------------------------------------------------------------------
Unbilled contract costs and fees include amounts not billable under specific conditions of the applicable contracts, which are expected to be billed within one year. Amounts not paid by customers pursuant to retention provisions in contracts will be due upon completion of the contracts and acceptance by the customer. Allowance for doubtful accounts activity is summarized as follows:
August 25, August 26, August 27, In thousands 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at beginning of year $2,093 $1,034 $1,179 Provision charged to income 658 1,534 447 Accounts written off (725) (475) (592) -------------------------------------------- Balance at the end of year $2,026 $2,093 $1,034 - --------------------------------------------------------------------------------
13 5. PROPERTY AND EQUIPMENT Property and equipment, at cost, consist of the following:
August 25, August 26, In thousands 1995 1994 - -------------------------------------------------------------------------------- Land $ 1,000 $ 1,020 Buildings 5,005 5,668 Field and laboratory equipment 5,925 8,344 Office furniture and equipment 16,449 14,609 Transportation equipment 3,243 2,989 Equipment under capital leases 1,616 4,323 Leasehold improvements 2,075 1,646 ------------------------------ 35,313 38,599 ------------------------------ Less accumulated depreciation and amortization 19,871 20,007 ------------------------------ $15,442 $18,592 - --------------------------------------------------------------------------------
6. LONG-TERM DEBT Long-term debt consists of the following:
In thousands August 25, August 26, 1995 1994 - -------------------------------------------------------------------------------- Resolving credit agreement at floating rate options $18,700 $12,553 Mortgage note payable, 8.25%, payable in monthly installments, through March, 2004 3,930 4,016 Notes payable to banks with interest ranging from 2.9% to 12.75%, due through August 1996 337 488 Unsecured notes payable to former shareholders with interest ranging from 6% to 12%, payable through February 1999 245 575 Capitalized lease obligations secured by property and equipment with interest ranging from 6.93% to 12.4%, payable in monthly installments through March 1998 1,160 2,587 Bank term loan - 2,079 Mortgage note payable - 89 ------------------------------- 24,372 22,387 Less: amounts due within one year 1,196 4,451 ------------------------------ $23,176 $17,936 - --------------------------------------------------------------------------------
Principal payments due after August 25, 1995 are: 1996 - $1,196,000; 1997 -$512,000; 1998 - $18,972,000; 1999 - $150,000; 2000 - $136,000; Beyond - $3,406,000 14 In May 1994, the Company entered into a revolving credit agreement with a bank, secured by substantially all of its assets, which provides for borrowing to a maximum of $25,000,000, subject to a formula based on eligible accounts receivable. The revolving line of credit expires May 24, 1997. The agreement allows for borrowing at a floating interest rate based on the bank's reference rate, or at Eurodollar rates, plus 2%, for specified periods of time. Premium interest charges over reference or Eurodollar rates may vary from quarter to quarter by .25%, up or down, based on the ratio of total debt to EBITDA as of the end of each quarter. Borrowings at August 25, 1995 included $6,700,000 at the reference rate of 9%, and $12,000,000 at the Eurodollar rate of 8.19% . The credit agreement places various restrictions on the Company, including prohibitions on the payment of dividends and additional borrowing, and provides that specific financial ratios be maintained. On June 26, 1995, The Revolving Credit Agreement was amended to provide for a temporary increase through November 1995 in the advance rate from 75% to 85% of eligible accounts receivable. Under the original formula which will be reinstated in November 1995, the maximum borrowings allowed at August 25, 1995 would have been $21,268,000. 7. SUBORDINATED DEBT AND REDEEMABLE SENIOR PREFERRED STOCK The $10 million subordinated note was issued in August 1990 with warrants to acquire 166,500 shares of the Company's common stock (see Note 12). The note carries an interest rate of 12.5% and is due June 30, 1998. In May, 1995, the Company, redeemed for cash the 25,000 outstanding shares of Redeemable Senior Preferred Stock at the base liquidation value of $100 per share. The shares had earned annual cumulative dividends of $10 per share. 8. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are:
In thousands August 25, August 26, 1995 1994 - -------------------------------------------------------------------------------- Deferred Tax Liabilities Tax over book depreciation $1,020 $1,119 Prepaid expenses 541 506 Government contract retentions 679 496 Award fees 172 255 Other 394 742 ------------------------------ Total deferred tax liabilities 2,806 3,118 Deferred Tax Assets: Project and other accruals 3,495 4,231 Provision for special charges 738 801 Deferred compensation 371 234 Change in accounting methods 151 181 Net operating loss carryforwards 118 151 Other 187 203 ------------------------------ Total deferred tax assets 5,060 5,801 ------------------------------ Net deferred tax assets $2,254 $2,683 - --------------------------------------------------------------------------------
15 Significant components of the provision for income taxes attributable to continuing operations are as follows:
Fiscal Year (In thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Current: Federal $1,114 $1,531 $2,336 State 421 83 642 ------------------------------------------- Total Current 1,535 1,614 2,978 Deferred: Federal 691 (555) (1,905) State 133 7 (503) ------------------------------------------- Total deferred 824 (548) (2,408) Change in valuation allowance -- (721) (289) ------------------------------------------- Total $2,359 $ 345 $ 281 -------------------------------------------
17 The following table reconciles the provision for income taxes to the statutory federal income tax rate:
Fiscal Year (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Income tax provision (benefit) computed at the statutory tax $1,170 $ (127) $(3,217) State taxes, net of federal benefit 366 59 92 Benefit from net operating losses -- -- (692) Alternative minimum tax (credit) -- -- (95) Goodwill amortization 118 192 3,947 Deferred taxes resulting from change in accounting methods -- -- 363 Nondeductible merger costs 865 872 -- Change in valuation allowance -- (721) (289) Other, net (160) 70 172 ------------------------------------ $2,359 $345 $281 ------------------------------------ Effective tax rate 68.6% 92.5% 3.0% ------------------------------------ ------------------------------------
As of August 25, 1995 the Company has a federal net operating loss carryforward of approximately $274,000 which expires in 2001. Usage is limited to approximately $44,000 in each remaining year. 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The following is a schedule of future minimum lease payments at August 25, 1995 under the Company's capital leases (together with the present value of minimum lease payments) and operating leases that have initial or remaining noncancellable lease terms in excess of one year: 17
Fiscal Year (In thousands) Capital Leases Operating Leases - ------------------------------------------------------------------------ 1996 $ 760 $4,045 1997 260 3,626 1998 107 3,053 1999 27 2,600 2000 6 1,485 ------------------------------------- 1,160 $14,809 ------------------------------------- Amount representing interest (221) ----------------- $ 939 - ------------------------------------------------------------------------
Rental expense under operating leases totaled approximately $5,071,000, $5,159,000, and $5,491,000, for the fiscal years 1995, 1994, and 1993, respectively. Certain operating leases have renewal options. U.S. Government contracts are subject to government audit. Such audits could lead to inquiries from the government regarding the appropriateness of expenses under U.S. Government regulations. The Company believes that such inquiries, if any, will not result in significant changes to revenues recorded. NOTE 10 - LITIGATION As a professional services firm engaged in engineering, environmental safety matters, the Company encounters potential claims, including claims for environmental damage, in the normal course of business. The Company practices a vigorous response to such claims including a legal defense when necessary. To minimize its risk against these claims, the Company promotes risk management techniques when providing professional services. The Company also maintains an insurance program which includes coverage for environmental and asbestos claims related to its business. Certain pending legal actions, which are described below, make claims for substantial damages which, if awarded, would have a material adverse effect on the Company's financial position and the results of its operations. (1) One of the Company's subsidiaries, Alternative Ways, Inc. (AWI) has been named a co-defendant in certain action filed on October 9, 1990 in the Supreme Court for the State of New York, County of New York. Other defendants in the lawsuit include Madison Square Garden Corporation, Paramount Communications, Inc. and Herbert Construction Company/HRH Construction Corporation. Plaintiff, an asbestos abatement contractor, seeks $20 million in compensatory damages and up to $100 million in punitive damages. While this dispute involved asbestos removal, Plaintiff makes no environmental claim related to asbestos. Plaintiff rather alleges that defendants misrepresented the job and underpaid for the work. AWI vigorously denies these assertions and had no contractual relationship with the Plaintiff. (2) A California, nonprofit homeowners association, Canyon Estates Community Association, commenced on November 25, 1992 a civil action for negligence in Superior Court for the County of Orange California against the company and twenty-two other defendants including certain soils engineering firms, certain land developers and certain home builders. As to the Company, the suit challenges certain preliminary soils engineering work completed in the mid-1980s. In December, 1994, Plaintiff presented the Defendants with an expert witness report which asserts corrective remedies will cost more than $140 million. The Company vigorously disputes this opinion and any claim of liability against it. (3) Various property owners, merchants, residents, and tenants located on Hollywood Boulevard in Los Angeles, California have filed on April 28, 1995 a multi-count civil action in Superior Court for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority and approximately 50 contractors associated with the Metro Rail project, including the Company. The legal action seeks unspecified damages and other judicial relief for damages arising out of the construction of the Metro Rail red line along Hollywood Boulevard. Given the recent commencement of this action, the Company believes it is premature to venture any reasonable evaluation of the outcome of this matter or reasonable estimate of damages. The Company intends, however, to vigorously dispute any claim of liability against it. Because the two cases are at an early stage in the legal process, the ultimate outcome or the range of costs, if any, cannot be determined at this time. There are other claims and suits pending against the Company for alleged damages to persons and property and for alleged liabilities arising out of matters occurring during the normal operation of the Company's business. In the opinion of management, the uninsured liability, if any, of these other claims and suits would not materially affect the financial position or results of operations of the Company. 18 11. EMPLOYEE BENEFIT PLANS RETIREMENT SAVINGS PLAN - The Company and its subsidiaries have defined contribution retirement savings plans covering substantially all full time employees who have completed sixty days of continuous service. The Company funds a percentage of the plan cost based upon each employee's voluntary contribution. The Company's contributions expensed were approximately $1,307,000, $1,360,000, and $1,250,000, for the fiscal years 1995, 1994, and 1993, respectively. BONUS PLAN - The Company has a discretionary bonus plan, covering substantially all employees. The Company has expensed approximately $1,655,000, $2,511,000, and $2,940,000, under this plan for the fiscal years 1995, 1994, and 1993, respectively. 12. STOCKHOLDERS' EQUITY PER SHARE INFORMATION - Net income (loss) per share is computed on the basis of the weighted average number of shares outstanding plus the common stock equivalents which would arise from the exercise of stock options as follows: 1995 - 8,890,743; 1994 - 5,597,148, and 1993 - 5,006,884. WARRANTS - In 1990, the Company issued warrants to purchase 166,500 shares of common stock at an exercise price of $24.32 per share expiring in June, 1998. No warrants have been exercised to date. The Company has reserved 166,500 shares of common stock for the possible exercise of the outstanding warrants. OPTIONS AND STOCK PURCHASE PLANS - The Company has three stock plans for employees and directors. The 1987 Stock Option and Restricted Plan provides for the granting of options at the discretion of the Company, to key employees at a purchase price discount of up to 65% of the market value on the date the options are granted. The options vest over a period of three to five years and expire ten years after the date of grant. All options granted to date have been issued at an exercise price equal to fair market value at the date of the grant. Employees also may be granted restricted stock under the plan. The restricted stock grants normally vest from one to three years from the date of grant. During fiscal 1995 and 1994, the Company awarded 3,536 and 28,207 shares of restricted stock, respectively, vesting in varying periods through fiscal 1998. The Director Option Plan provides for the granting of options to directors in lieu of 100% of the retainer fees earned at a purchase price of 25% of the fair market value on the date the options are granted. The options become exercisable on the first day of the calendar year following the date of the grant, or upon termination of the director's services, and expire 10 years after the date of grant. Compensation expense of $90,000, $87,500 and $41,650 has been recognized in fiscal years 1995, 1994 and 1993, respectively. The 1994 Employee Stock Purchase Plan provides for all full-time employees to purchase common stock at a purchase price discount of up to 15% of the lower of market value at the beginning or end of a six month option period, subject to certain compensation limitations. The purchase price discount will be determined biannually by a Committee approved by the Board of Directors. The Company has reserved 150,000 shares under this plan. Employees purchased 68,679 shares in 1995. On August 25, 1995, 81,321 shares remained unissued under the plan and are available for future purchase. Effective with the business combinations with HWI and Summit, the Company converted the options outstanding and remaining options reserved under the HWI Stock Option Plan and Summit 1988 Stock Option Plan to options of common stock exercisable at existing options and prices, adjusted for the common stock exchange ratios in effect at the respective merger dates. RECAPITALIZATION AND CONVERSIONS - The fiscal 1994 Summit merger included a conversion to common stock of several of the instruments that had been issued by Summit in financing its growth. In May 1994, $4,556,000 in 14.5% subordinated notes, $620,000 in 5% Senior Preferred Stock, $7,505,000 in Series B Preferred Stock, $3,537,000 in preferred dividend arrearages, and $600,000 in Series A Preferred Stock were converted to common stock. The fiscal 1995 merger with HWI included the conversion of 1,800,000 HWI Series A Preferred Stock and 56,934 unvested options into 1,852,105 shares of common stock. The conversion of the unvested options is included with exercised options in the following table. 19 Information with respect to options granted under the plans is as follows:
Stock Option and Director Option Restricted Stock Plans Plan - ------------------------------------------------------------------------------------------ Outstanding at August 27, 1993 805,922 32,137 Granted 348,922 28,761 Exercised (57,457) (9,614) Canceled (159,531) - -------------------------------------------------- Outstanding at August 26, 1994 937,856 51,284 Granted 224,536 21,518 Exercised (127,741) - Canceled (86,004) - -------------------------------------------------- Outstanding at August 25, 1995 948,647 72,802 - ------------------------------------------------------------------------------------------ Exercisable at August 25, 1995 522,083 54,024 Common stock reserved 1,143,623 190,386 Option price range $0.05 - $24.32 $0.72 - $9.54 - ------------------------------------------------------------------------------------------
13. SPECIAL CHARGES In fiscal 1995, operating income includes $4,315,000 ($3,647,000 or $.41 per share, net of taxes) of special charges related to the HWI merger (see Note 2). A liability of $465,000 remains at August 25, 1995. In fiscal 1994, operating income includes special charges of $6,873,000. The charges include costs related to the Summit merger of $4,993,000 ($.66 per share net of taxes) and $1,880,000 ($0.25 per share net of taxes) for the closure of its Minneapolis office, including lease obligations and severance pay. At August 25, 1995, all merger charges had been paid and $404,000 remained relating to the closure of the Minneapolis office, including $319,000 in Allowance for Doubtful Accounts. In fiscal 1993, operating losses include special charges of $15,000,000 ($2.69 per share net of tax). This charge includes $11,259,000 for the write-down of goodwill as a result of the Company's determination that, based upon weaker than expected operating results due to poor regional economic conditions, the carrying value of intangible assets relating to certain acquisitions were impaired. The balance of the fiscal 1993 special charges, $3,741,000 was to currently recognize the effect of an unfavorable lease ($2,551,000) and to provide for the consolidation of certain administrative functions ($1,190,000). At August 25, 1995, a balance of $1,716,000 existed relating to the unfavorable lease. This balance will be utilized over the remaining four years of the lease. The balances are included in Other Accrued Liabilities and Other Long-Term Liabilities, in the Consolidated Balance Sheet, unless noted otherwise. 14. SUBSEQUENT EVENT On September 11, 1995, the Company entered into a letter of intent to acquire Barrett Consulting Group, Inc. (Barrett). The letter of intent expired on October 31, 1995 without a definitive agreement being reached. The parties are continuing to negotiate terms and conditions with the objective of reaching a definitive agreement which would result in Barrett being acquired as a wholly- owned subsidiary of the Company in a transaction to be accounted for as a purchase. 20 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS THE EARTH TECHNOLOGY CORPORATION (USA) We have audited the accompanying consolidated balance sheets of The Earth Technology Corporation (USA) as of August 25, 1995 and August 26, 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended August 25, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 The Earth Technology Corporation (USA) at August 25, 1995 and August 26, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 25, 1995, in conformity with generally accepted accounting principles. As discussed in Note 10 to the consolidated financial statements, the Company is a defendant in certain lawsuits for breach of contract and other allegations which claim substantial compensatory and punitive damages. The Company denies the allegations, and preliminary hearings and discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision has been made in the consolidated financial statements. /s/ ERNST & YOUNG LLP - --------------------- Long Beach, California October 18, 1995, except for Note 14, as to which the date is November 1, 1995 21 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter - ---------------------------------------------------------------------------------------------------------------------------------- FISCAL 1995 Gross revenues $ 47,561 $ 43,303 $ 43,020 $ 45,608 Net revenues 29,018 27,559 28,958 28,104 Operating income (loss) 2,326 (3,190)(1) 2,192 2,112 Net income (loss) 1,203 (3,208) 1,023 461 Net income (loss) per common share $ 0.14 $ (0.37) $ 0.12 $ 0.05 FISCAL 1994 Gross revenues $ 47,008 $ 40,675 $ 40,482 $ 48,034 Net revenues 28,440 26,656 27,759 29,179 Operating income (loss) 1,617 1,558 (6,098)(2) 2,550 Net income (loss) 1,175 761 (4,773) 1,754 Net income (loss) per common share $ 0.16 $ 0.10 $ (0.89) $ 0.20
(1) INCLUDES SPECIAL CHARGES OF $4,315,000 REPRESENTING MERGER COSTS. (2) INCLUDES SPECIAL CHARGES OF $6,873,000 REPRESENTING MERGER COSTS AND COSTS OF MINNEAPOLIS OFFICE CLOSURE. STOCK INFORMATION The Company's common stock is traded on the NASDAQ National Market System under the symbol "ETCO". The following table sets forth the range of high and low bid quotations per share of common stock, as reported by the National Association of Security Dealers Automatic Quotation ("NASDAQ"). The bid quotations reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions, and may not necessarily represent actual transactions.
High Low - --------------------------------------------------------------- Fiscal 1995 First quarter 10 7/8 8 3/8 Second quarter 9 1/2 6 Third quarter 6 1/2 4 5/8 Fourth quarter 6 1/2 4 3/4 Fiscal 1994 First quarter 10 3/4 7 5/8 Second quarter 14 7 7/8 Third quarter 16 1/8 11 3/4 Fourth quarter 12 7/8 7 1/2 - ---------------------------------------------------------------
DIVIDEND POLICY The Company has never paid any dividends on its common stock. The Company has no present intention of paying cash dividends on its common stock in the foreseeable future and intends to retain all earnings to finance its future growth. The Revolving Credit Agreement prohibits the declaration and payment of dividends. HOLDERS OF STOCK As of November 13, 1995, there were approximately 1,116 record holders of common stock. The Company estimates that there are an additional 2,500 holders of stock in nominees' names. 22
BOARD OF DIRECTORS OFFICERS Diane C. Creel Chairwoman(3), Diane C. Creel Chief Executive Officer and President President and Chief Executive Officer The Earth Technology Corporation (USA) Creighton K. Early Charles D. Applequist(2) Chief Financial Officer/Executive Vice President Vice President Minnesota Gas Company, Inc. Charles S. Alpert Corporate Secretary James E. Clark(1,3) Consultant and former President of Patricia E. Montgomery Western Operations for Prudential Insurance Assistant Corporate Secretary Creighton K. Early(3) Chief Financial Officer/Executive Vice President The Earth Technology Corporation (USA) Richard H. Guilford Chairman The United States Company Richard J. Heckmann(1,3) Chairman and Chief Executive Officer U.S. Filter Corporation Ward W. Johnson(1) Retired-former President/Owner Bralley-Willet Tank Lines Larry J. Lawrence(2) Lawrence, Smith & Horey Martha L. Robinson(2) Vice President Prudential Equity Investors, Inc. (1)Compensation/Stock Plan Committee (2)Audit Committee (3)Nominating Committee
23 Annual Stockholders' Meeting 10:00 a.m., January 25, 1996 Hyatt Regency Hotel 200 S. Pine Avenue Long Beach, CA 90802 Stock Trading NASDAQ-OTC-Symbol ETCO 10K/Investor Contact Requests for the 1995 Form 10K filed by the Company with the Securities and Exchange Commission and for other information about the Company should be addressed to: Patricia E. Montgomery Assistant Corporate Secretary The Earth Technology Corporation (USA) 100 West Broadway, Suite 5000 Long Beach, CA 90802 Telephone: (310) 495-4449 Legal Counsel Sheppard, Mullin, Richter & Hampton 333 South Hope Street Los Angeles, CA 90071 Independent Auditors Ernst & Young LLP One World Trade Center, Suite 2000 Long Beach, CA 90831 Registrar and Transfer Agent First Interstate Bank of California Stock Transfer Administration (W11-2) P.O. Box 54168, Terminal Annex Los Angeles, CA 90054-0168 Corporate Office The Earth Technology Corporation (USA) 100 West Broadway, Suite 5000 Long Beach, CA 90802 Telephone: (310) 495-4449 24 EX-22.1 5 EXHIBIT 22.1 EXHIBIT 22.1 THE EARTH TECHNOLOGY CORPORATION (USA) LIST OF SUBSIDIARIES 1) EARTH TECH, Inc., a California Corporation a) WW Engineering & Science, Inc., a Michigan Corporation 2) Alternative Ways, Inc., a New Jersey Corporation 3) Environmental Technology of North America, Inc., a Virginia Corporation EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Earth Technology Corporation (USA) of our report dated October 18, 1995 (except for Note 14, as to which the date is November 1, 1995), included in the 1995 Annual Report to Stockholders of The Earth Technology Corporation (USA). /s/ ERNST & YOUNG LLP - -------------------- Long Beach, California November 22, 1995 EX-23.2 7 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-82232 and No. 33-48303) pertaining to The Earth Technology Corporation (USA) 1987 Stock Plan and Director Option Plan and in the related Prospectus, and in the Registration Statement (Form S-8 No. 33-77156) pertaining to The Earth Technology Corporation (USA) Employee Stock Purchase Plan and in the related Prospectus of our report dated October 18, 1995 (except for Note 14, as to which the date is November 1, 1995), with respect to the consolidated financial statements of The Earth Technology Corporation (USA) incorporated by reference in the Annual Report (Form 10-K) for the year ended August 25, 1995. /s/ ERNST & YOUNG LLP - --------------------- Long Beach, California November 22, 1995 EX-25.1 8 EXHIBIT 25.1 EXHIBIT 25.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Diane C. Creel and Creighton K. Early, and each or either of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the report on Form 10-K by the Earth Technology Corporation (USA), a Delaware corporation for the fiscal year ended August 25, 1995, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them or their substitutes, may lawfully do or cause to be done by virtue thereof. 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 and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- DIANE C. CREEL Chairwoman of the Board of November 22, 1995 -------------- Directors, Chief Executive Diane C. Creel Officer, and President CREIGHTON K. EARLY Executive Vice President, Chief November 22, 1995 ------------------ Financial Officer, (Principal Financial Creighton K. Early and Accounting Officer), and Director CHARLES D. APPLEQUIST Director November 22, 1995 --------------------- Charles D. Applequist JAMES E. CLARK Director November 22, 1995 -------------- James E. Clark RICHARD J. HECKMANN Director November 22, 1995 ------------------- Richard J. Heckmann
LARRY J. LAWRENCE Director November 22, 1995 ----------------- Larry J. Lawrence MARTHA L. ROBINSON Director November 22, 1995 ------------------ Martha L. Robinson WARD W. JOHNSON Director November 22, 1995 --------------- Ward W. Johnson RICHARD H. GUILFORD Director November 22, 1995 ------------------- Richard H. Guilford
EX-27 9 EXHIBIT 27 (FDS)
5 12-MOS AUG-25-1995 AUG-25-1995 4,572 0 23,172 2,026 0 65,089 35,313 19,871 95,046 33,425 0 877 0 0 (12,814) 95,046 0 179,492 117,324 117,324 56,011 0 2,717 3,440 2,359 1,081 (336) 0 0 (521) (0.06) (0.06)
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