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
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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)
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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
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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
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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