Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended August 31, 1996 Commission File Number 0-15587
EA Engineering, Science, and Technology, Inc.
(Exact Name of registrant as specified in its charter)
Delaware 52-0991911
------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11019 McCormick Road, Hunt Valley, MD 21031
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 584-7000
---------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 per share
----------------------------------------
(Title of class)
Indicate by check mark whether: the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 1, 1996, the aggregate market value of the outstanding
shares of the Registrant's Common Stock, par value $.01 per share, held by
non-affiliates was approximately $8,200,000 based on the closing price of the
Common Stock as provided by the National Association of Securities Dealers
through NASDAQ on November 1, 1996.
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of the latest practicable date.
Class Outstanding at November 1, 1996
------------------------------------ -----------------------------------
Common Stock, par value $.01 6,177,900 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the year ended August 31, 1996, portions
of which are incorporated by reference in Part II of this Report.
2. Proxy Statement for the Annual Meeting of Stockholders scheduled for
January 15, 1997, portions of which are incorporated by reference in Part
III of this Report.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 Business 1
2 Properties 9
3 Legal Proceedings 10
4 Submission of Matters to a Vote of Shareholders 10
PART II
5 Market for the Registrant's Common Stock and Related
Shareholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
8 Financial Statements and Supplementary Data 17
9 Disagreements on Accounting and Financial Disclosure 32
PART III
10 Directors and Executive Officers of the Registrant 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners and Management 33
13 Certain Relationships and Related Transactions 33
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34
Signatures 38
Exhibit Index 39
<PAGE>
PART I
ITEM 1. BUSINESS
General
EA Engineering, Science, and Technology, Inc. is a multidisciplinary
environmental services organization. Through its nationally oriented business
service areas, the Company offers a wide range of consulting, engineering,
analytical, and remediation capabilities to characterize and resolve existing
and potential threats to the environment and to human health and safety. The
Company provides its services to private sector and government clients from 20
offices located across the nation.
As of August 31, 1996, the Company's organizational structure consisted of the
parent company, EA Engineering, Science, and Technology, Inc. ("EA") and its
wholly-owned subsidiary, EA Financial, Inc.,and its wholly-owned subsidiaries,
EA Global, Inc. and EA Engineering, Science, and Technology de Mexico, S.A. de
C.V. The entities are collectively referred to herein as the "Company."
The Company was founded in 1973 and initially was engaged in environmental
assessment and permitting related to power plant siting and expansion. During
the past decade, the Company has expanded its primary service areas to include
Risk Assessment and Management, Resource Management, Air and Water Quality
Management, Strategic Environmental Management, Analytical Services, Site
Investigations, Engineering Design, and Remediation Services.
To address the multifaceted nature of most environmental problems, the Company's
services normally are performed by a team of engineers and scientists and
include onsite collection of water, soil and air samples, onsite monitoring and
measurement of discharges and emissions, analysis of samples in the Company's
laboratories or in its mobile testing units, evaluation of environmental or
human health risks, development and engineering design of a system or facility
for monitoring, controlling, or eliminating environmental problems,
implementation of remedial actions, and preparation of reports for client and
regulatory agencies.
As a result of its growth strategy, the Company now offers clients a single
source for identifying and solving environmental problems, from assessment and
analysis, through engineering and design of solutions, to remediation
management.
During fiscal 1996, the environmental industry has been beleaguered by certain
interests in Washington, DC. The intent of these special interest groups has
been to weaken key components of environmental conservation and restoration
legislations. The environmental industry has been affected by the delayed
reauthorizations of air, water, and toxic waste programs as both private clients
and governmental agencies have postponed environmental clean-up programs in
response to the regulatory uncertainty.
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Additionally, the delay in federal budget approvals for 1996 have compounded the
industry's condition. The continuing budget curtailment of all federal agencies,
including EPA, has resulted in slowdowns and major delays in regulatory
enforcement of existing programs in nearly every segment of the industry:
assessments, engineering design, and remedial construction and restoration. In
certain cases, even previously approved and funded clean-up programs have been
rescinded.
These conditions have left the industry with excess labor capacity, resulting in
a dramatic increase in competitive pressures. During fiscal 1996, the Company
maximized its revenues by marketing those indefinite delivery/indefinite
delivery (ID/IQ) contracts it currently holds.
The Company's proposal strategy has consistently utilized a teaming approach,
where necessary, to provide the appropriate levels of professional skills and
capabilities (location, staff, and specialized skills or experience). The
Company acts as the prime contractor or a subcontractor depending on the
specific requirements of the proposal and the availability of teaming companies.
As a result of the increasing opportunities with larger and longer term
contracts, particularly within the federal government area, certain contract
awards and current proposals include a higher level of teaming with companies
who are competitors and/or who provide complementary strengths. Prior to fiscal
1996, subcontractor levels have approximated 13% to 22% of total revenue. Fiscal
1996 subcontractors represented almost 27% of total revenue, reflecting
increased use of teaming partners and construction contractors, primarily for
the Company's growing remediation services. Current backlog includes
subcontractor amounts that, if fully authorized, could include subcontractor
levels on specific contracts of approximately 35% to 50%. In cases where the
Company acts as the prime contractor, it generally is able to add its
administrative costs and fee to the subcontracted costs. Management believes
that the increasing levels of teaming for certain larger contracts provide
additional opportunities for future growth. However, the increased level of
subcontracting may increase the potential risk for timely and quality
performance by team members.
In fiscal 1995, EA incorporated EA Engineering, Science and Technology, de
Mexico, S.A. de C.V. (EA de Mexico) in order for the company to submit proposals
and operate its environmental business in Mexico. To date, EA de Mexico has
received only nominal contracts in Mexico. EA de Mexico is a wholly-owned
subsidiary of EA Financial, Inc.
Additionally, EA incorporated EA Global, Inc., a Delaware corporation, in 1995
in order for the Company to submit proposals and operate its environmental
business in countries other than the United States and Mexico. To date, EA
Global has received only nominal contracts. EA Global is a wholly-owned
subsidiary of EA Financial, Inc.
Services
The Company's primary service areas are Risk Assessment and Management, Resource
Management, Air and Water Quality Management, Strategic Environmental Manage-
ment, Analytical Services, Site Investigations, Engineering Design, and
Remediation Services. The multi-faceted nature of most environmental problems,
however, requires a cross-section of professionals to provide an integrated
solution, and strict classification by service area is not practical for most
of the Company's projects. In
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providing its services, the Company has developed certain remedial and
analytical technologies and processes for the mitigation and control of
environmental damage and risks. In addition, the Company assists clients in
responding to issues raised by regulatory agencies and community groups. All of
the service areas are part of the vertically integrated capabilities that the
Company may offer its clients.
The Company's services normally are performed by a team of scientists and
engineers and include a combination of the following:
(bullet) Consultation to determine the nature and scope of a potential
environmental problem.
(bullet) On-site collection of samples.
(bullet) On-site monitoring and measurement of discharges and emissions.
(bullet) Analysis of samples in the Company's laboratories or in its mobile
testing units.
(bullet) Evaluation of environmental or human health risks.
(bullet) Development and engineering design of a system or facility
for monitoring, controlling, or eliminating the problem.
(bullet) Preparation of reports for regulatory agencies.
(bullet) Participation in public and regulatory hearings.
(bullet) Engineering certification of design specifications.
(bullet) Implementation of remedial action.
The Company's contracts are generally undertaken on a time and material, fixed
price, or cost plus fixed fee basis. Fixed price contracts and certain time and
material and cost plus contracts with upset limits require the Company to bear
the risk of cost overruns. Most of the Company's contracts provide that the
client may at any time cancel any portion of the work not yet performed.
The following table reflects the approximate percentage of net revenue derived
by contract type in each of the three years in the period ended August 31, 1996:
Year Ended August 31,
1996 1995 1994
- -----------------------------------------------------------------------
Time and materials 33% 47% 46%
Fixed price 41 26 32
Cost plus fixed fee 26 27 22
- -----------------------------------------------------------------------
100% 100% 100%
=======================================================================
During fiscal 1996, the volume of the Company's work from fixed price contracts
increased substantially. The Company considers this to be an industry trend
whereby clients transfer additional risk to the prime contractor.
In general, the Company's contracts vary in length from one month to ten years
and require performance of a particular project within the contractually
specified time frame. Although the Company holds certain federal contracts with
options for longer durations, most of these contracts require exercise of
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annual renewals by the client. A substantial portion of the Company's contracts
represent the provision of separate services required from time to time by
ongoing clients.
Clients
During fiscal 1996, the Company provided services to more than 550 industrial,
utility, and government clients involving more than 2,100 projects in the
private sector and 600 projects in the federal government sector. Although more
private sector projects were performed, the portion of net revenue provided by
the federal government was 53%, 64%, and 61% for the fiscal year 1996, 1995, and
1994, respectively. This is primarily due to EA's success in acquiring larger
task orders under its existing federal ID/IQ type contracts.
Although a significant portion of net revenue was derived from agencies of the
federal government, the Company's services are performed for many regions,
departments, or agencies that are organized and operated in a decentralized
fashion, thereby reducing the probability of a loss of a particular federal
client's projects in their entirety. Therefore, in management's opinion, the
loss of any one of the Company's clients within its major revenue generating
sector would not have a material effect on operations or profitability.
The following table reflects the approximate percentage of net revenue derived
from the Company's major client sectors for each of the three years in the
period ended August 31, 1996:
Year Ended August 31,
- ------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
Federal government 53% 64% 61%
Industrial and other private sector 33 23 20
Utilities 6 7 10
State and local government 8 6 9
- ------------------------------------------------------------------------
100% 100% 100%
========================================================================
Sales and Marketing
During fiscal 1996, the Company maintained its centrally coordinated business
development efforts to provide greater synergy among the business units, as well
as to position the Company for earlier opportunity identification and proactive
response. The focus within business development was to maximize positive, direct
interaction with clients and to facilitate successful assessment of and response
to real-time marketplace requirements. Business development efforts continue at
a high level with the Department of Defense, with significant resources directed
at diversifying the Company's public sector client base. Efforts in the private
sector have accelerated, with significant attention directed at establishing
long-term relationships and obtaining basic ordering agreements with Fortune 500
clients. These
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efforts to diversify EA's client base are directed to provide the platform for
greater stability and expanded growth.
At the end of fiscal 1996, the Company redirected its private sector business
development to align it more closely with the primary service areas. As in
previous years, marketing efforts are performed by senior professional personnel
at the Company's headquarters and in each of its regional offices. The Company
also conducts seminars and workshops on specific environmental problems for
government, industry, and community groups. Historically, existing clients have
been a significant source of referrals. The Company believes that participation
by professional staff members as expert witnesses in environmental hearings and
litigation results in additional referrals. Government business development will
continue to be performed as a centrally-managed national function.
Backlog
At August 31, 1996, the Company's total contract backlog was approximately $
63.7 million which is approximately 5.3% lower than contract backlog of $ 67.3
million at August 31, 1995. The Company's net contract backlog (total less
estimated subcontractor costs) was approximately $ 52.5 million at the end of
fiscal 1996 compared to approximately $ 53.2 million at the end of fiscal 1995.
The Company expects that approximately 80% of this backlog will be completed in
fiscal 1997. The Company's total contract backlog attributable to federal
government contracts as of August 31, 1996 was $41 million ($32 million, net)
compared to $44 million ($32 million, net) a year earlier.
In addition to this contract backlog, at August 31, 1996, the Company held
indefinite delivery/indefinite quantity type contracts from various clients,
principally governmental agencies for up to $341.4 million ($197.0 million, net)
compared to $393.6 million ($228.4 million, net) in 1995. The Company includes
only work authorized under these contracts in its contract backlog.
There can be no assurance, however, that work under any of these contracts will
be authorized or that work once authorized will not be cancelled. Generally,
these contracts provide for a fixed percentage of profit based on estimated
costs. In the event of cancellation, the Company is entitled to recover its
incurred costs and associated profit. Terminations and cancellations of
government contracts have not been material in the past. The level of backlog
may fluctuate during each year, and accordingly, the backlog at any point in
time does not necessarily reflect near-term anticipated operating results.
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 work-loads, 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 also provides services on major long-term private sector contracts
under continuing service agreements that provide for work on a task basis. Upon
receipt of related authorizations the
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work is included in contract backlog. Because such specific authorizations are
generally for periods considerably shorter than the duration of the period the
Company expects to perform services for a particular client, management believes
that its backlog figures are not necessarily indicative of its future revenues.
Employees
At August 31, 1996, the Company had approximately 720 full time employees
compared to approximately 840 full time employees at August 31, 1995. The
decrease in staff was a result of staff reductions in overhead positions and
excess capacity in technical staff. Approximately 77% of these employees are
engaged primarily in performing scientific, engineering, and remediation
services. The remainder of the employees are engaged primarily in executive,
administrative, and other support activities. The Company also hires part-time
or temporary personnel to meet seasonal needs or the requirements of a
particular contract. The Company's professional staff includes professional
engineers, biologists, chemists, geologists, hydrologists, industrial
hygienists, public health scientists, and computer scientists.
None of the Company's employees are represented by a union. The Company
considers its relations with employees to be good.
Competition
The environmental engineering and consulting market is becoming more highly
competitive and requires skilled and experienced professional, technical, and
management personnel, as well as sophisticated equipment representing a
substantial capital investment. The principal competitive factors are pricing,
reputation, quality of service, expertise, and local presence. The Company
believes that its favorable competitive factors are its multidisciplinary
capabilities, its reputation for quality of services, its certifications to
provide analytical and consulting services to a broad constituency, and its
geographical dispersion. In each national business, the Company competes with
engineering and consulting firms which are both larger and smaller than the
Company, although the Company believes that no one firm currently dominates a
significant portion of any of the service areas.
It has become commonplace within the industry that in certain circumstances,
primarily large DOD opportunities, EA joins a team of competitors to submit
proposals (either as the prime contractor or a subcontractor) as noted in the
"General" section of this item.
The Company believes that it is one of a limited number of companies that offer
a wide range of integrated services for solving complex environmental and health
risk problems. Some of these companies are larger and have greater financial
resources than the Company.
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Licensing and Certification
The laboratory has been approved/validated to perform analyses for the Naval
Facility Engineering Service Center (UFESC), the Air Force Center for
Environmental Excellence (AFCEE), and the U.S. Army Corps of Engineers (Missouri
River Division). Regulatory authorities frequently will not accept analytical
evidence of compliance unless the analysis has been performed by a laboratory
with relevant certifications such as those described above.
The laboratory is also certified by 39 different states including Maryland, New
Jersey, New York, and California, and maintains certain local permits and
licenses. Applications for certification are pending approval in one other
state. Additionally, the laboratory has been authorized to do work by the
District of Columbia and 10 states that do not have formal certification
programs. The laboratory has certifications and permits to operate in states and
jurisdictions where the Company performs its services. To support all of these
programs, the laboratory must be periodically audited by these regulatory
agencies and is required to participate in a variety of performance evaluations
such as those conducted by the EPA and U.S. Army Corps of Engineers.
The criteria necessary for obtaining and maintaining laboratory certifications
and permits varies significantly by agency and by state. Generally the criteria
include:
(bullet) Application for certification/permit
(bullet) Request and initial review for compliance with comprehensive
rules and regulations
(bullet) Periodic verification of compliance through proficiency samples
(bullet) Periodic onsite audits
(bullet) Payment of annual fees
Historically, the laboratory has experienced no significant audit problems.
While audits may result in certain "findings," these are usually procedural in
nature and prompt changes or other adjustments are made to bring the Company
into compliance with the auditor's request. The Company has been able to obtain
and maintain its certifications and permits without break. However, if the
Company is unable to obtain and maintain such participation and certifications,
the operation of the laboratory and the Company's financial condition may be
adversely affected. Management believes that the Company currently possesses the
licenses or permits necessary to perform its engineering and consulting
services.
Regulatory Matters
Many environmental laws and regulations have been enacted by federal, state, and
local governments in response to growing public concern over activities and
substances deemed to have adverse effects on the environment and on human health
and safety. As advances in analytical instrumentation have made detection of
increasingly minute amounts of a substance possible, and as understanding of the
often complex effects of substances on health and the environment has grown,
such laws and regulations have become increasingly detailed and demanding.
Compliance with these environmental laws and regula-
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tions by both private and public sector clients has been and will remain the
primary force in creating demand for the Company's environmental, engineering,
and analytical services.
The principal federal legislation affecting the Company's business in the toxic
and hazardous materials management service area is the Resource Conservation and
Recovery Act of 1976 ("RCRA"). RCRA regulates the management of existing and
newly generated hazardous waste by imposing substantial obligations on
generators to reduce, monitor and control such wastes from the time of
generation through final disposal. The intent of RCRA is to regulate the
management, treatment, and disposal of hazardous wastes by industrial and other
waste generators. Amendments to RCRA have increased significantly the number of
waste generators subject to its terms and have also regulated the identification
and remediation of leaking underground storage tanks. The Company believes that
responding to the needs of industry and other waste generators under RCRA will
account for an increasing part of its business. Additional federal legislation
affecting the Company's business in the toxic and hazardous materials management
service area is the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (CERCLA). This Act, often termed Superfund, along with its
amendments and reauthorizations, addresses the uncontrolled releases from
inactive or abandoned hazardous waste sites. Public sector, private sector, and
DOD clients are all subject to the requirements of CERCLA for geologic,
hydrologic, engineering, risk, and environmental evaluations. Response to CERCLA
requirements has generated substantial investigative and engineering work for
the Company. The Company expects an increased level of business in both the
investigative and engineering aspects of CERCLA work and an increase in
remediation activity as well.
Other federal legislation, such as the National Environmental Policy Act, the
Clean Water Act, the Safe Drinking Water Act, the Toxic Substances Control Act,
and the Clean Air Act Amendments, also strongly influence the Company's
business. These legislative acts and the numerous amendments to them focus on
the detection and monitoring of substances in the environment, the study and
assessment of the effects of those substances and other activities on human
health and the environment, and the development of effective regulatory
compliance programs by industries, municipalities, and regulatory agencies.
Insurance
The Company maintains a full range of insurance coverage with professional
errors and omissions liability insurance, including pollution liability
coverage. There can be no assurance that the Company will not incur liability
with respect to the professional services it renders or that such liability, if
incurred, will not have a material adverse effect upon the Company. However,
these insurance policies will provide limited protection and defense up to the
stated amounts.
EA has endeavored to protect itself through contractual indemnification from
clients when possible and by intensifying its existing quality control and
assurance, and health and safety programs. Generally, indemnification is not
available under the Company's government contracts. The Company's quality
control and assurance program includes a control function to establish standards
and procedures for performance and documentation of performance of project
tasks, and an assurance function to audit the
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control function and to monitor compliance with procedures and quality
standards. An additional objective of this program has been to establish
practices and procedures to protect EA personnel from hazardous substances and
situations through a company-wide occupational safety and health monitoring
program.
Equipment
The Company owns substantially all of the analytical, computer, monitoring,
testing and other equipment required to render its various consulting and
testing services. Additionally, the Company leases certain computer, office
furniture, and other equipment. Equipment and various other items which the
Company purchases on behalf of clients are available from several suppliers and
the Company is not dependent on any one supplier.
Environmental and Other Considerations
The Company does not believe that its compliance with federal, state and local
laws and regulations relating to the protection of the environment will have any
material effect on its capital expenditures, earnings, or competitive position.
ITEM 2. PROPERTIES
The Company's headquarters, Mid-Atlantic regional offices and central
laboratories are located in suburban Baltimore, in approximately 91,000 square
feet of leased space. Leases for these facilities are with partnerships, whose
partners include the Chairman of EA and certain members of his family.
The Company's regional United States offices are located in:
Baltimore, Maryland Boston, Massachusetts Lincoln, Nebraska
Silver Spring, Maryland Pensacola, Florida Dallas, Texas
New Castle, Delaware San Francisco, California San Antonio, Texas
Newburgh, New York Sacramento, California Anchorage, Alaska
Syracuse, New York Seattle, Washington Fairbanks, Alaska
Berkeley Heights, New Jersey Chicago, Illinois Honolulu, Hawaii
The Company leases the office, laboratory, and storage facilities for each
regional office. Presently, the facilities are suitable, adequate, and are
generally utilized to capacity.
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ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
On October 31, 1986, EA common stock began public trading in the
over-the-counter market under the symbol "EACO." The following table shows the
high and low closing sales price reported on the NASDAQ National Market System.
Such over-the-counter market quotations, however, reflect inter-dealer prices,
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
High Low
Fiscal 1995: First Quarter $10.25 $6.75
Second Quarter 8.75 5.50
Third Quarter 7.25 5.25
Fourth Quarter 6.00 4.00
Fiscal 1996: First Quarter $5.25 $3.75
Second Quarter 4.13 3.50
Third Quarter 4.00 2.88
Fourth Quarter 3.50 2.25
On November 1, 1996, the closing price of the common stock as reported by NASDAQ
was $1.50 per share. On that date, there were 1,100 holders of record.
To date the Company has not paid any cash dividends on its common stock and does
not anticipate paying such dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the periods indicated have been derived from the
audited consolidated financial statements of the Company after effecting for the
stock splits described in note (2). This data should be read in conjunction with
the consolidated financial statements and notes thereto included in Item 8.
<TABLE>
<CAPTION>
Year Ended August 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S><C>
Operations data:
Total revenue $88,308 $92,365 $76,873 $61,126 $52,915
Net revenue(1) 64,354 72,471 63,748 52,941 45,411
Income (loss) from operations (444) 4,141 3,305 2,111 (2,058)
Net income (loss) (580) 2,227 1,823 1,004 (1,876)
Net income (loss) per share(2) $(0.09) $0.36 $0.30 $0.17 $(0.34)
Weighted average number of shares
outstanding(2) 6,138 6,171 6,089 5,888 5,542
Balance sheet data:
Working capital $15,955 $17,663 $14,317 $12,146 $ 8,041
Total assets 33,329 36,368 31,575 28,471 28,990
Short-term borrowings -- -- -- -- 6,393
Long-term debt, net of current portion 2,665 4,033 4,798 5,034 2,483
Stockholders' equity $18,558 $18,880 $15,177 $12,721 $11,542
</TABLE>
(1) Net revenue represents total revenue less subcontractor costs.
(2) Results have been restated to reflect the two 3 for 2 stock splits, each
effected in the form of a 50% stock dividend issued on Febuary 23, 1994
and July 5, 1994.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company's results of operations are significantly affected by the timing of
the award of contracts, the timing of performance on contracts, and the extent
to which the Company's employees are performing billable tasks as opposed to
engaging in preparing contract proposals, bids, and other required non-billable
activities. Results of operations may also be affected to the extent that the
Company chooses not to reduce its professional staff during a period of reduced
demand for its services. Due to these factors, quarterly results of operations
are not necessarily indicative of the results of operations for longer periods.
The Company, in the course of providing its services, routinely subcontracts
such services as drilling, certain laboratory analyses, and other specialized
services. In addition, as described in the "General" section of Item 1, the use
of teaming partners for the performance of services similar to those of the
Company, is included in subcontracts. In accordance with industry practice and
contract terms that generally provide for the recovery of overhead costs, these
costs are passed directly through to clients and are included in total revenue.
Because subcontractor costs and direct charges can change significantly from
project to project, the change in total revenue is not necessarily a true
indication of business trends. Accordingly, the Company considers net revenue,
which is total revenue less subcontractor costs, as its primary measure of
revenue.
Results of Operations
The following table sets forth the percentage relationships of selected items in
the statements of operations to net revenue for the years indicated.
Year Ended August 31,
-----------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Net revenue 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------
Operating expenses:
Direct salaries and other operating 95.5 87.9 87.8
General and administrative 5.2 6.4 7.0
- ------------------------------------------------------------------------------
Total operating expenses 100.7 94.3 94.8
- ------------------------------------------------------------------------------
Income (loss) from operations (0.7) 5.7 5.2
Interest expense, net (0.6) (0.6) (0.4)
Income (loss) before income taxes (1.3) 5.1 4.8
(Benefit from) provision for income taxes (0.4) 2.0 1.9
- ------------------------------------------------------------------------------
Net income (0.9)% 3.1% 2.9%
==============================================================================
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Fiscal 1996 Compared to Fiscal 1995
Net revenue during fiscal 1996 decreased to $64,353,700 from $72,471,400. The
decrease was primarily attributed to federal regulatory uncertainties and
budgetary delays, partially offset by an increase in private industry revenues.
Direct salaries and other operating costs decreased 3.6% to $61,430,200 from
$63,694,800. As a percentage of net revenue, however, direct salaries and other
operating costs increased to 95.5% from 87.9% a year earlier. This increase was
attributable to unrecoverable costs on certain projects and lower staff
billability related to the reduction in available work. The Company performed
staff reductions to the extent possible while keeping necessary staff
capabilities required throughout the country for both project and business
development purposes. Additionally, more time was devoted by staff to the
development of new business and the completion of proposals in an attempt to
maintain backlog at higher levels during a challenging economic period.
General and administrative costs decreased 27.4% to $3,367,100 in 1996 from
$4,635,900 in 1995, or 5.2% and 6.4% of net revenue, respectively. The decrease
was due to staff reductions and related overhead expense decreases.
As a result of the above factors, the loss from operations was $443,600 compared
to income from operations of $4,140,700 in the prior year. Interest expense,
net, decreased 16.5% to $357,500 from $428,200. The net decrease in interest
expense is primarily the result of lower interest rates and decreasing long-term
debt principal balances, partially offset by increased borrowings under the
revolving line of credit to fund federal subcontracting payment requirements on
certain projects.
The benefit from income taxes was $221,000 for the year ended August 31, 1996,
compared to a provision for income taxes of $1,485,100, representing effective
rates of 28% and 40%, respectively. The difference in effective tax rates
between years relate primarily to the non-recognition of the future benefits
attributable to a foreign loss and increases to certain permanent differences
between financial and income tax reporting.
The net loss for the twelve months ended August 31, 1996, was $580,100, or .9%
of net revenue, compared to net income of $2,227,400, or 3.1% of net revenue for
the prior year.
Fiscal 1995 Compared to Fiscal 1994
Net revenue during fiscal 1995 increased 13.7% to $72,471,400 from $63,748,100.
The increase reflects increased contract volume associated with federal agencies
with which EA holds indefinite delivery-indefinite quantity type contracts.
Additionally, increased use of team partners and subcontractors provided
increased recovery of overhead costs and fees which are reflected in the net
revenue increase.
Direct salaries and other operating expenses increased 13.8% to $63,694,800 from
$55,995,000, and remained relatively constant as a percentage of net revenue at
87.9% and 87.8%, respectively. General, and administrative costs increased 4.2%
to $4,635,900 from $4,447,900, but decreased as a percent of net
14
<PAGE>
revenue to 6.4% from 7.0%. Management expects the percentage of selling,
general, and administrative expenses to net revenue to further decrease
reflecting a decrease in staff at the end of the fourth quarter.
Interest expense, net, increased 60.2% to $428,200 from $267,300, largely as a
result of increased interest rates and higher average monthly borrowings under
the Company's credit facility.
The provision for income taxes in fiscal 1995 was $1,485,100 compared to
$1,215,300 in fiscal 1994. The effective tax rate for both years was 40%.
For fiscal 1995, net income was $2,227,400, or 3.1% of net revenue, compared to
net income of $1,822,600 or 2.9% of net income for fiscal 1994.
Fiscal 1994 Compared to Fiscal 1993
Net revenue during fiscal 1994 increased 20.4% to $63,748,100 from $52,941,300.
The increase reflects increased contract volume primarily associated with
federal agencies. The Company continues to experience growth in both Department
of Defense and Department of Energy contracts. These increases were somewhat
offset by decreases in net revenue from its industrial and private sector
clients. The Company continues to believe that private sector conditions will
improve as the economy strengthens and has positioned its sales and marketing
efforts to capitalize on new opportunities.
Direct salaries and other operating expenses increased 20.2% to $55,995,000 from
$46,591,000, but decreased as a percentage of net revenue to 87.9% from 88.1%.
The decrease as a percentage of net revenue primarily resulted from decreases in
the incentive compensation plan and bad debt expense, offset by increases in
expanded office quarters and computer networks. General and administrative costs
increased 5.0% to $4,447,900 from $4,239,600, but decreased as a percentage of
net revenue from 8.1% to 7.0%.
Interest expense, net, decreased 39% to $267,300 from $437,900, largely as a
result of reduced borrowings under the Company's credit facility.
The provision for income taxes in fiscal 1994 was $1,215,300 compared to
$668,500 in fiscal 1993. The effective tax rate for both years was 40%.
For fiscal 1994, net income was $1,822,600, or 2.9% of net revenue, compared to
net income of $1,004,200 or 1.9% of net income for fiscal 1993.
Inflation
Because of its ability to pass through increased costs to its clients, as well
as the generally low levels of inflation, the Company believes that inflation
has not had a material impact on its operations.
15
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents (cash) decreased by $2,505,300 in 1996 compared to
decreases of $174,600 in 1995 and $61,100 in 1994. The decrease in 1996
principally resulted from cash used in investing in the purchase of equipment
and the net reduction of long-term debt.
The Company's capital expenditures (consisting primarily of purchases of
equipment and leasehold improvements) of approximately $1,008,500, $1,067,200,
and $1,579,700 in 1996, 1995, and 1994, respectively, have been funded primarily
from cash flows.
The Company has maintained its bank credit arrangement with a regional bank. The
arrangement provides for maximum borrowings of $10,000,000 consisting of a
revolving line of credit. Borrowings are limited to a percentage of accounts
receivable and costs and estimated earnings in excess of billings. The interest
on these borrowings varies between LIBOR + 150 and LIBOR + 200, depending on
certain financial covenants. Borrowings are unsecured under this agreement which
expires in January 1998.
At August 31, 1996, the Company had outstanding long-term debt, including
current portion, of $3,309,100, which represented a decrease of $1,489,100 from
the August 31, 1995 balance of $4,798,200. The Company had no short-term
borrowings under its line of credit at August 31, 1996.
The Company's existing funds, cash from operations, and the available portion of
its $10,000,000 bank line of credit are expected to be sufficient to meet the
Company's present cash needs. The Company also has access to certain capital
equipment financing arrangements through various equipment suppliers. The
Company also believes it has the ability to raise capital through placement of
debt and will pursue such options as the need arises to expand facilities or
acquire equipment in conjunction with a review of the most cost effective means
for the Company and its stockholders.
While the Company believes that there is sufficient demand to absorb the
additional contracting capacity resulting from expansion and from additions to
its professional staff, there can be no assurance that this demand will exist or
continue. Although the Company has the ability to reduce its professional staff
in periods of reduced demand, it may choose not to make full reductions in such
periods, with resulting adverse effects on operations.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Financial Data
<TABLE>
<CAPTION>
Page
<S><C>
Report of Independent Public Accountants 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1996 and 1995 19-20
Consolidated Statements of Operations for the years ended
August 31, 1996, 1995, and 1994 21
Consolidated Statements of Changes in Stockholders' Equity for the years ended
August 31, 1996, 1995, and 1994 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1995, and 1994 23
Notes to Consolidated Financial Statements for the years ended
August 31, 1996, 1995, and 19934 24-31
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
EA Engineering, Science, and Technology, Inc.:
We have audited the accompanying consolidated balance sheets of EA Engineering,
Science, and Technology, Inc. (a Delaware corporation) and subsidiaries as of
August 31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended August 31, 1996. 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 financial position of EA Engineering,
Science, and Technology, Inc. and subsidiaries as of August 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
October 2, 1996
18
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31,
1996 1995
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,308,600 $ 3,813,900
Accounts receivable, net 12,692,700 14,858,100
Costs and estimated earnings in excess
of billings on uncompleted contracts 12,482,200 10,735,000
Prepaid expenses and other 1,576,900 1,711,300
- -------------------------------------------------------------------------------
Total Current Assets 28,060,400 31,118,300
- -------------------------------------------------------------------------------
Property and Equipment, at cost
Furniture, fixtures, and equipment 12,784,500 14,403,800
Leasehold improvements 3,677,800 3,652,400
----------------------------
16,462,300 18,056,200
Less-Accumulated depreciation and amortization (13,337,400) (14,255,900)
- -------------------------------------------------------------------------------
Net Property and Equipment 3,124,900 3,800,300
- -------------------------------------------------------------------------------
Other Assets 2,143,200 1,449,200
- -------------------------------------------------------------------------------
Total Assets $33,328,500 $36,367,800
===============================================================================
The accompanying notes are an integral part of these balance sheets.
19
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31,
1996 1995
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 6,061,000 $ 5,960,800
Accrued expenses 1,019,200 856,500
Accrued salaries, wages and benefits 3,183,400 4,595,700
Income taxes payable -- 227,600
Current portion of long-term debt 644,600 765,500
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,197,700 1,049,300
- --------------------------------------------------------------------------------
Total Current Liabilities 12,105,900 13,455,400
- --------------------------------------------------------------------------------
Long-Term Debt, net of current portion 2,664,500 4,032,700
- --------------------------------------------------------------------------------
Total Liabilities 14,770,400 17,488,100
- --------------------------------------------------------------------------------
Commitments
- --------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,175,000 61,800 60,900
and 6,091,900 shares issued and outstanding
Preferred stock, $.01 par value;
8,000,000 shares authorized; none issued -- --
Capital in excess of par value 10,796,300 10,538,700
Retained earnings 7,700,000 8,280,100
- --------------------------------------------------------------------------------
Total Stockholders' Equity 18,558,100 18,879,700
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $33,328,500 $36,367,800
================================================================================
The accompanying notes are an integral part of these balance sheets.
20
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Total revenue $ 88,307,800 $92,364,900 $76,872,800
Less - Subcontractor costs (23,954,100) (19,893,500) (13,124,700)
- -------------------------------------------------------------------------------
Net revenue 64,353,700 72,471,400 63,748,100
- -------------------------------------------------------------------------------
Operating expenses:
Direct salaries and other operating 61,430,200 63,694,800 55,995,000
General and administrative 3,367,100 4,635,900 4,447,900
- -------------------------------------------------------------------------------
Total operating expenses 64,797,300 68,330,700 60,442,900
- -------------------------------------------------------------------------------
Income (loss) from operations (443,600) 4,140,700 3,305,200
- -------------------------------------------------------------------------------
Interest expense (464,900) (522,800) (403,900)
Interest income 107,400 94,600 136,600
- -------------------------------------------------------------------------------
Income (loss) before income taxes (801,100) 3,712,500 3,037,900
- -------------------------------------------------------------------------------
(Benefit from) provision for income taxes (221,000) 1,485,100 1,215,300
- -------------------------------------------------------------------------------
Net income (loss) $ (580,100) $2,227,400 $1,822,600
===============================================================================
Net income (loss) per share $(0.09) $0.36 $0.30
===============================================================================
Weighted average shares outstanding 6,138,100 6,170,700 6,088,700
===============================================================================
The accompanying notes are an integral part of these statements.
21
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
- ------------------------------------------------------------------------------
Balance, August 31, 1993 $56,500 $8,434,100 $4,230,100 $12,720,700
Issuance of Stock 1,200 464,700 -- 465,900
Tax Benefit from Stock Options
Exercised -- 167,300 -- 167,300
Net Income -- -- 1,822,600 1,822,600
- ------------------------------------------------------------------------------
Balance, August 31, 1994 57,700 9,066,100 6,052,700 15,176,500
Issuance of Stock 3,200 821,700 -- 824,900
Tax Benefit from Stock Options
Exercised -- 650,900 -- 650,900
Net Income -- -- 2,227,400 2,227,400
- ------------------------------------------------------------------------------
Balance, August 31, 1995 60,900 10,538,700 8,280,100 18,879,700
Issuance of Stock 900 233,000 -- 233,900
Tax Benefit from Stock Options
Exercised -- 24,600 -- 24,600
Net Loss -- -- (580,100) (580,100)
- ------------------------------------------------------------------------------
Balance, August 31, 1996 $61,800 $10,796,300 $7,700,000 $18,558,100
==============================================================================
The accompanying notes are an integral part of these statements.
22
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Cash Flows From (Used For) Operating Activities:
Net income (loss) $ (580,100) $2,227,400 $1,822,600
Noncash expenses included in net income (loss)-
Depreciation and amortization 1,683,900 1,633,100 1,453,400
Deferred (benefit from) provision for income taxes (198,300) (418,200) 170,200
Current (benefit from) provision for income taxes (22,700) 1,903,300 1,045,100
Net (increase) decrease in noncash assets -
Accounts receivable, net 2,165,400 (2,714,300) (2,433,200)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,747,200) (2,747,600) (65,600)
Prepaid expenses and other assets (110,800) 179,400 (702,800)
Net increase (decrease) in nondebt liabilities -
Accounts payable and accrued expenses (1,149,400) 1,702,700 435,400
Refunds of income taxes 14,700 50,200 11,000
Payments of income taxes (445,500) (955,500) (1,202,500)
Billings in excess of costs and estimated earnings
on uncompleted contracts 148,400 47,100 520,000
- --------------------------------------------------------------------------------------------------------------------
Net cash flows from (used for) operating activities (241,600) 907,600 1,053,600
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From (Used For) Financing Activities:
Proceeds from issuance of common stock 233,900 824,900 465,900
Reduction of long-term debt (4,489,100) (839,900) (725,900)
Proceeds from issuance of long-term debt 3,000,000 -- 725,000
- --------------------------------------------------------------------------------------------------------------------
Net cash flows from (used for) financing activities (1,255,200) (15,000) 465,000
- --------------------------------------------------------------------------------------------------------------------
Cash Flows Used For Investing Activities:
Purchase of property and equipment, net (1,008,500) (1,067,200) (1,579,700)
- --------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (1,008,500) (1,067,200) (1,579,700)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (2,505,300) (174,600) (61,100)
Cash and Cash Equivalents, beginning of year 3,813,900 3,988,500 4,049,600
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $1,308,600 $3,813,900 $3,988,500
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation--
The accompanying consolidated financial statements present the accounts of EA
Engineering, Science, and Technology, Inc. (EA) and its wholly-owned subsidiary,
EA Financial, Inc., and its wholly-owned subsidiaries, EA Global, Inc. and EA
Engineering, Science, and Technology de Mexico, S.A. de C.V. During fiscal 1995,
EA Remediation Technologies, Inc., formerly a wholly-owned subsidiary, was
merged into EA. The entities are collectively referred to herein as the
"Company." All significant intercompany transactions have been eliminated in
consolidation.
Revenue Recognition--
The Company is a multidisciplinary environmental services organization providing
a wide range of consulting, engineering, remediation, and analytical services.
These services are generally performed under time and material, fixed price, and
cost plus fixed fee contracts which vary in length from one month to ten years.
The Company accounts for contract revenues and costs under fixed price contracts
using the percentage-of-completion method. The percentage-of-completion is
determined using the "cost-to-cost" method for each contract cost component.
Under this method, direct labor and other contract costs incurred to date are
compared to periodically revised estimates of the total of each contract cost
component at contract completion to determine the percentage of revenues to be
recognized. Revenues from time and material and cost plus fixed fee contracts
are recognized currently as the work is performed. Provision for estimated
losses on uncompleted contracts, to the full extent of the loss, is made during
the period in which the Company first becomes aware that a loss on a contract is
probable.
Contract costs and estimated earnings recognized in excess of amounts billed are
classified as current assets under "costs and estimated earnings in excess of
billings on uncompleted contracts." Billings in excess of contract costs and
estimated earnings are classified as current liabilities under "billings in
excess of costs and estimated earnings on uncompleted contracts."
Generally, contracts provide for the billing of costs incurred and estimated
fees on a monthly basis. Amounts included in "costs and estimated earnings in
excess of billings on uncompleted contracts" in the accompanying financial
statements will be billed within twelve months of the balance sheet date.
24
<PAGE>
Major Clients--
Various agencies of the federal government accounted for approximately 53%, 64%,
and 61% of the Company's net revenue for the years ended August 31, 1996, 1995,
and 1994, respectively. Additionally, various agencies of the federal government
accounted for approximately 48% and 65% of the Company's accounts receivable and
costs and estimated earnings in excess of billings on uncompleted contracts as
of August 31, 1996 and 1995, respectively.
Cash and Cash Equivalents--
Cash equivalents consist of money market instruments with a purchased original
maturity of three months or less, stated at cost, which approximates market.
Property and Equipment--
Property and equipment are depreciated using the straight-line method over their
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized over the shorter of the estimated useful life or the term of the
lease.
Segment Information--
The Company operates within one industry segment, providing a wide range of
consulting, engineering, remediation, and analytical services.
Reclassifications--
Certain prior year balances have been reclassified to conform with current year
presentation.
Risks and Uncertainties--
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 work-loads, 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.
Use of Estimates--
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from these estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
25
<PAGE>
Supplemental Disclosures of Cash Flow Information--
Cash paid during the years ended August 31, 1996, 1995, and 1994 for interest,
was $474,200, $521,700, and $400,600, respectively. Retirements of property and
equipment for the same periods were $2,602,400, $46,300, and $148,600,
respectively. The noncash tax benefit attributable to the exercise of
non-qualified stock options was $24,600, $650,900, and $167,300 for the years
ended August 31, 1996, 1995, and 1994, respectively.
Accounting for Income Taxes--
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes as of September 1, 1993. The
effect of the provisions have been implemented prospectively and were not
material to the financial statements as of September 1, 1993 or to the operating
results for the year ended August 31, 1994.
Deferred income taxes are recorded to reflect the tax consequences on future
years for differences between the tax basis of assets and liabilities and their
financial reporting amounts.
New Authoritative Standards Not Yet Implemented--
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This statement is effective
for fiscal years beginning after Decem-ber 15, 1995. The Company does not
anticipate that the adoption of this statement will have a material impact on
its consolidated financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation." This statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages, but does not require, all entities to adopt that
method of accounting for all of their employee stock compensation plans.
Entities electing not to make the change in accounting method must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The accounting and disclosure
requirements of this statement are effective for fiscal years that begin after
December 15, 1995. The Company has not yet determined whether or not it will
adopt the fair value based method of accounting defined in this statement.
26
<PAGE>
Note 2. INCOME TAXES:
The (benefit from) provision for income taxes includes current and deferred tax
amounts summarized as follows:
Year Ended August 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Current tax expense (benefit):
Federal $ (18,400) $1,602,400 $ 879,900
State (4,300) 300,900 165,200
- ------------------------------------------------------------------------------
(22,700) 1,903,300 1,045,100
- ------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal (160,600) (352,100) 92,300
State (37,700) (66,100) 77,900
- ------------------------------------------------------------------------------
(198,300) (418,200) 170,200
- ------------------------------------------------------------------------------
Provision for (benefit from) income taxes $(221,000) $1,485,100 $1,215,300
==============================================================================
Total deferred tax assets and liabilities as of August 31, 1996 and 1995 and the
sources of the differences between the tax and financial reporting basis of the
Company's assets and liabilities which give rise to the deferred tax assets and
liabilities are as follows:
Year Ended August 31,
- -----------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------
Deferred tax assets:
Property and equipment $ 694,200 $ 492,700
Accrued expenses and reserves 962,800 1,028,800
Miscellaneous 46,700 --
- -----------------------------------------------------------------------
$1,703,700 $1,521,500
=======================================================================
Deferred tax liabilities:
Prepaid expenses $ 109,700 $ 90,800
Miscellaneous -- 35,000
- -----------------------------------------------------------------------
$ 109,700 $ 125,800
=======================================================================
The net deferred tax assets of $1,594,000 and $1,395,700 as of August 31, 1996
and 1995 are included to the extent appropriate in Prepaid expenses and other
and Other assets in the accompanying consolidated balance sheets.
27
<PAGE>
Reconciliation of the statutory federal income tax rate and the effective income
tax rate is summarized as follows:
Year Ended August 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Statutory federal income tax (benefit) rate 34.0% 34.0% 34.0%
State income tax, net of federal income tax effect 5.3 5.3 5.3
Non-recognition of future benefit from foreign loss (4.8) -- --
Other (6.9) 0.7 0.7
- ------------------------------------------------------------------------------
Effective income tax rate 27.6% 40.0% 40.0%
==============================================================================
Note 3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
Year Ended August 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Contract accounts receivable $12,931,600 $14,881,600
Retainage by clients 1,373,300 1,362,200
- --------------------------------------------------------------------------------
Total accounts receivable 14,304,900 16,243,800
Less-Allowance for doubtful accounts (1,612,200) (1,385,700)
- --------------------------------------------------------------------------------
Accounts receivable, net $12,692,700 $14,858,100
================================================================================
Management anticipates that substantially all retainages will be billed within
one year.
Note 4. BANK FINANCING ARRANGEMENTS:
The Company renegotiated its line of credit arrangement with a commercial bank
during the fiscal year. In connection with the renegotiation, the Company's
borrowing facility was extended through and a due date of January 31, 1998 was
established. The facility allows for borrowings up to $10 million, a decrease
from $12.5 million. Borrowings under the extended two-year facility are limited
to a percentage of certain accounts receivable and costs and estimated earnings
in excess of billings on uncompleted contracts. The agreement became effective
June 1, 1996. During fiscal years 1996, 1995, and 1994, the Company was either
in compliance or has obtained waivers on all covenants related to these
arrangements.
28
<PAGE>
Short-term borrowings information resulting from the financing arrangements is
as follows:
<TABLE>
<CAPTION>
9 Months Ended
May 31, Year Ended August 31,
-----------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
Balance as of end of period $ -- $ -- $ --
Maximum amount outstanding during the period 5,490,900 3,711,300 3,889,000
Average outstanding month-end balance during
the period 598,800 293,600 273,200
Weighted average interest rate during the period 8.4% 8.6% 6.4%
Interest rate at the end of the period 8.3% 8.8% 7.3%
=====================================================================================================================
</TABLE>
The weighted average interest rate has been calculated based upon the actual
daily interest expense and the daily average balance outstanding.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Revolving credit facility payable to commercial bank, interest charged at LIBOR
plus 150 or LIBOR plus 200, depending
certain financial covenants, facility expires January 1998 $2,276,400 $ --
Note payable to a commercial bank payable in monthly
installments of interest only; interest at prime or LIBOR plus 150 basis
points through January 1997, repaid in connection with revolving credit facility
refinancing -- 3,000,000
Notes payable to a commercial bank payable in equal
monthly installments of $43,650, plus interest at 250 points above LIBOR
through November 1998, and $21,400 plus interest at 250 points above LIBOR
thereafter until November 1999, secured by leasehold improvements and certain
of EA's analytical laboratory equipment 1,032,700 1,435,700
Other -- 362,500
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 3,309,100 4,798,200
Less-current portion (644,600) (765,500)
- -------------------------------------------------------------------------------------------------------------------
Long-term portion $2,664,500 $4,032,700
===================================================================================================================
</TABLE>
29
<PAGE>
Note 5. LEASE COMMITMENTS:
The Company's central office, laboratory facilities, regional offices, and
certain furniture and equipment are held under operating leases. These leases
expire at various dates through fiscal 2004, and certain leases call for annual
proportionate increases due to property taxes and certain other operating
expenses. Rent expense amounted to $8,912,300, $8,469,300, and $6,817,400, for
the years ended August 31, 1996, 1995, and 1994, respectively. Rent expense
included payments of approximately $2,054,900, $1,985,300, and $1,886,100 for
years ended August 31, 1996, 1995, and 1994, respectively, to partnerships
consisting of the Chairman of EA and certain members of his family for its
central office and certain regional offices and laboratory facilities. These
payments include reimbursement for operating expenses incurred by the lessor
such as property taxes, maintenance, and utility costs related to the operation
of the facilities.
The minimum lease commitments under noncancellable operating leases are as
follows:
Year Ending
August 31,
- -------------------------------------------------------------------------
1997...................................................... $ 5,481,900
1998...................................................... 4,374,200
1999...................................................... 3,137,600
2000...................................................... 2,151,600
2001 ..................................................... 1,508,500
2002 and thereafter....................................... 1,775,400
=========================================================================
Total minimum payments.................................... $18,429,200
=========================================================================
Note 6. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period, and
have been adjusted retroactively to reflect two 3 for 2 stock splits, effected
in the form of 50% stock dividends, wherein 1 additional share of stock was
issued on February 23, 1994 and July 5, 1994, for each 2 shares outstanding as
of the record dates of February 8, 1994 and June 28, 1994, respectively. Common
stock equivalents are calculated using the treasury stock method. All
disclosures with regard to the shares of common stock have been adjusted to
reflect these stock splits.
Note 7. PROFIT SHARING AND INCENTIVE PLANS:
EA maintains a defined contribution plan covering all employees who are at least
21 years of age and have completed one year of credited service, as defined by
the plan. The plan provides for discretionary employer contributions for each
fiscal year, in amounts determined annually by the Board of Directors. The plan
also includes a 401(k) provision, allowing for Company matching contributions.
For the years ended August 31, 1996, 1995, and 1994, contributions to the plan,
including matching contributions made under
30
<PAGE>
the 401(k) provisions of the plan, were $729,200, $710,400, and $519,300,
respectively. Certain officers and stockholders of the Company serve as
trustees to the plan, as appointed by the Board of Directors.
Note 8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
The Company maintains a Stock Option Plan (the Plan), which provides for the
grant of nonqualified stock options and incentive stock options to certain key
employees and officers of the Company. The exercise price of an option granted
under the Plan may not be less than the fair market value of the underlying
shares of Common Stock on the date of the grant. A total of 147,082 options are
issued and outstanding as of August 31, 1996 having an average exercise price of
$4.49. There are 425,530 options available for issuance as of August 31, 1996.
The Company maintains an Employee Stock Purchase Plan to provide eligible
employees with the opportunity to purchase shares of the Company's Common Stock
through voluntary payroll deductions. Under the Plan, eligible employees may
purchase shares through monthly payroll deductions at 95% of current market
value at the time of purchase. The Company pays all administrative expenses
related to employee purchases. A total of 210,125 shares remain authorized for
distribution under the Plan as of August 31, 1996.
The Company maintains two Non-Employee Director Stock Option Plans (1993 and
1995) which provide for the granting of nonqualified stock options to its three
non-employee directors. The exercise price of the 30,000 options, which were
outstanding as of August 31, 1996 ranged between $2.45 and $6.13, which equaled
the fair market value at the dates of grant. A total of 38,500 options remain
reserved for the Director Stock Option Plans as of August 31, 1996.
31
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant
Information on the Company's Directors is contained in the Company's Proxy
Statement for its 1996 Annual Meeting of Stockholders to be held on January 15,
1997, and such information is incorporated herein by reference.
(b) Executive Officers of the Registrant
Information on the Company's Executive Officers is contained in the Company's
Proxy Statement for its 1996 Annual Meeting of Stockholders to be held on
January 15, 1997, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on "Executive Compensation" is contained in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on January 15, 1997,
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information on "Security Ownership of Certain Beneficial Owners and Management"
is contained in the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on January 15, 1997, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on "Certain Relationships and Related Transactions" is contained in
the Company's Proxy Statement for its Annual Meeting of Stockholders to be held
January 15, 1997, and such information is incorporated herein by reference.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
A. Financial Statements and Schedule II Page
<S><C>
1. The following financial statements are included in Item 8 of Part II of this report:
Report of Independent Public Accountants 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1996 and 1995 19
Consolidated Statements of Operations for the years ended
August 31, 1996, 1995, and 1994 21
Consolidated Statements of Changes in Stockholders' Equity for the years ended
August 31, 1996, 1995, and 1994 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1995, and 1994 23
Notes to Consolidated Financial Statements for the years ended
August 31, 1996, 1995, and 1994 24
2. The following financial statement schedule for the years ended August 31,
1996, 1995, and 1994 is submitted herewith:
Report of Independent Public Accountants on Schedule 36
Schedule II - Valuation and Qualifying Accounts and Reserves 37
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed herewith unless otherwise indicated:
Exhibit
No. Description
3.1 Certificate of Incorporation of the Company.(1)
3.2 By-laws of the Company.(1)
4.1 Article SIXTH of the Company's Certificate of Incorporation.(1)
10.1 The Company's Profit Sharing Plan.(1)
10.2 The Company's Stock Option Plan.(2)
10.3 Lease: dated March 1, 1990 between ARE Sparks Limited Partnership,
as Landlord, and the Company as tenant.(3)
34
<PAGE>
10.4 The Company's Employee Stock Purchase Plan.(4)
10.5 Lease, dated December 1, 1991, between Ecolair Limited Partnership,
as landlord, and the Company, as tenant.(4)
10.6 Lease, dated January 1, 1992, between Merrymack Limited Partnership,
as Landlord, and the Company, as Tenant.(5)
10.7 Loan Agreement, dated October 31, 1996, between the Company and
Signet Bank/Maryland.(8)
10.8 1993 Non-Employee Director Stock Option Plan.(6)
10.9 The 1993 Stock Incentive Plan.(6)
10.10 The Amended and Restated Stock Option Plan.(7)
10.11 1995 Non-Employee Director Stock Option Plan.(7)
13 1996 Annual Report to Stockholders.
22 Subsidiaries of the Company.
27 Financial Data Schedule.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 33-8958, which was declared effective by the Commission on
October 31, 1986.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-8, File Number 0-15587 filed on October 15, 1990.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 28, 1990.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-8, File Number 0-15587 filed on December 3, 1991.
(5) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 24, 1992.
(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 23, 1993.
(7) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 21, 1994.
(8) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 22, 1996.
b. Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of fiscal
year 1996.
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
EA Engineering, Science, and Technology, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of EA Engineering, Science, and Technology, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
October 2, 1996. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the
foregoing index is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
October 2, 1996
36
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended August 31, 1996, 1995, and 1994
Allowance Balance at
for Doubtful Beginning Charged to Balance at
Accounts of Period Cost and Expense Write-offs End of Period
1996 $1,385,700 $328,000 $101,500 $1,612,200
1995 1,394,900 272,600 281,800 1,385,700
1994 1,508,000 108,000 221,100 1,394,900
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
EA ENGINEERING, SCIENCE, AND
TECHNOLOGY, INC.
Date: November 22, 1996 By /s/ Loren D. Jensen
Loren D. Jensen, Chairman,
President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Name Title Date
/s/ Loren D. Jensen Chairman, President, and November 22, 1996
Loren D. Jensen Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph A. Spadaro Executive Vice President and November 22, 1996
Joseph A. Spadaro Treasurer (Principal Financial
and Accounting Officer)
/s/ Edmund J. Cashman, Jr. Director November 22, 1996
Edmund J. Cashman, Jr.
/s/ Rudolph P. Lamone Director November 22, 1996
Rudolph P. Lamone
/s/ George G. Radcliffe Director November 22, 1996
George G. Radcliffe
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
<S><C>
3.1 Certification of Incorporation of the Company. 34
3.2 By-laws of the Company. 34
4.1 Article SIXTH of the Company's Certificate of Incorporation. 34
10.1 The Company's Profit Sharing Plan. 34
10.2 The Company's Stock Option Plan. 34
10.3 Lease: dated March 1, 1990 between ARE Sparks Limited Partnership, as 34
Landlord, and the Company as tenant.
10.4 The Company's Employee Stock Purchase Plan. 35
10.5 Lease, dated December 1, 1991, between Ecolair Limited Partnership, as landlord, 35
and the Company, as tenant.
10.6 Lease, dated January 1, 1992, between Merrymack Limited Partnership, as 35
landlord, and the Company, as tenant.
10.7 Loan Agreement, dated October 31, 1996, between the Company and Signet 35
Bank/Maryland.
10.8 1993 Non-Employee Director Stock Option Plan 35
10.9 The 1993 Stock Incentive Plan. 35
10.10 The Amended and Restated Stock Option Plan. 35
10.11 1995 Non-Employee Director Stock Option Plan. 35
13 1996 Annual Report to Stockholders. 35
22 Subsidiaries of the Company. 35
27 Financial Data Schedule 35
</TABLE>
39
SIGNET BANK
LOAN AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C>
$10,000,000.00 10-31-1996 01-31-1998 0124843566 000 EAEngine 17548
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
Borrower: EA Engineering Science and Technology, Inc. Lender: SIGNET BANK
11019 McCormick Road SIGNET TOWER
Hunt Valley, MD 21031 7 St. Paul Street
Baltimore, MD 21202
</TABLE>
THIS LOAN AGREEMENT between EA Engineering, Science, and Technology, Inc.
("Borrower") and SIGNET BANK ("Lender") is made on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of October 31, 1996, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means EA Engineering Science and
Technology, Inc. and its successors and assigns. The word "Borrower" also
includes, as applicable, all subsidiaries and affiliates of Borrower as
provided below in the paragraph titled "Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $10,000,000.00; or (b) a percentage
of the aggregate amount of Eligible Accounts.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 2
(Continued)
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Maryland.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of,
or affiliated with or related to Borrower or its shareholders, officers,
or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor
to Borrower.
(a) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(g) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed against
it a petition in bankruptcy or an application for relief under any
provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian, or
receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or fails
generally to pay its debts (including its payrolls) as such debts become
due.
(i) Accounts which have not been paid in full within 90 days from the
Invoice date.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 3
(Continued)
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, and their personal representatives,
successors and assigns.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness and their personal representatives,
successors and assigns.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, including all principal, interest and other fees,
costs and charges, if any, together with all other present and future
liabilities and obligations of Borrower, or any one or more of them, to
Lender, whether direct or indirect, matured or unmatured, and whether
absolute or contingent, joint, several, or joint and several, and no
matter how the same may be evidenced or shall arise.
Lender. The word "Lender" means SIGNET BANK, its successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet delinquent;
(d) purchase money liens or purchase money security interests upon or in
any property acquired or held by Borrower in the ordinary course of
business to secure indebtedness outstanding on the date of this Agreement
or permitted to be incurred under the paragraph of this Agreement titled
"Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the
Lender in writing; and (f) those liens and security interests which in the
aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds
<PAGE>
10-31-1996 LOAN AGREEMENT Page 4
(Continued)
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any and all types of liens and encumbrances, whether created by
law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
<PAGE>
10-31-1996 LOAN AGREEMENT Page 5
(Continued)
Making Loan Advances. Advances under the credit facility, as well as
directions for payment from Borrower's accounts, may be requested orally
or in writing by authorized persons. Lender may, but need not, require
that all oral requests be confirmed in writing. Each Advance shall be
conclusively deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day. Under no
circumstances shall Lender be required to make any Advance in an amount
less than $1,000.00.
Mandatory Loan Repayments. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lander, shall pay
to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the
Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid
principal amount of all Advances then outstanding and all accrued unpaid
interest, together with all other applicable fees, costs and charges, if
any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
Schedules. Concurrently with the execution and delivery of this Agreement,
Borrower shall execute and deliver to Lender a schedule of Accounts and
Eligible Accounts, in form and substance satisfactory to the Lender.
Thereafter and at such frequency as Lender shall require, Borrower shall
execute and deliver to Lender such supplemental schedules of Eligible
Accounts and such other matters and information relating to Borrower's
Accounts as Lander may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and
to confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Maryland and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its businesses
or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or
<PAGE>
10-31-1996 LOAN AGREEMENT Page 6
(Continued)
governmental body; and do not conflict with, result in a violation of, or
constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental regulation,
court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance," "
disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (a) During the period of
Borrower's ownership of Borrower's properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, or
about any such properties. (b) Borrower has no knowledge of, or reason to
believe that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste
or substance by any prior owners or occupants of any such properties, or
(ii) any actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any such properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on , under, or about any such properties; and any such activity
shall be conducted in compliance with all applicable federal, state, and
local laws, regulations, and ordinances, including without limitation those
laws, regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon such properties to make such inspections and
tests as Lender may deem appropriate to determine compliance of such
properties with this section of the Agreement. Any inspections or tests made
by Lender shall be for Lender's purposes only and shall not be construed to
create any responsibility or liability on the part of Lender to Borrower or
to any other person. The representations and warranties contained herein are
based on Borrower's due diligence in investigating such properties for
hazardous waste. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnity and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to Borrower's
ownership or interest in such properties, whether or not the same was or
should have been known to Borrower. The provisions of this section of the
Agreement, including the obligation to indemnify, shall survive the payment
of the Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any such
properties, whether by foreclosure or otherwise.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 7
(Continued)
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 11019 McCormick Road, Hunt Valley, MD 21031. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or
<PAGE>
10-31-1996 LOAN AGREEMENT Page 8
(Continued)
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of
any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender, who shall state
that such financial statements present fairly the consolidated financial
position of Borrower as of the date of such financial statements and the
results of its operations for the period covered by such financial
statements in conformity with generally accepted accounting principles
applied on a consistent basis (except for changes in the application of
which such accountants concur) and shall not contain any "going concern"
or like qualification or exception or qualifications arising out of the
scope of the audit, and, as soon as available, but in no event later than
forty-five (45) days after the end of each fiscal quarter, Borrower's
balance sheet and profit and loss statement for the period ended, prepared
and certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to Lender.
All financial reports required to be provided under this Agreement shall
be prepared in accordance with generally accepted accounting principles
applied on a consistent basis, and certified by Borrower as being true and
correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may reasonably request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 1.30 to 1.00. Current Ratio. Maintain a ratio of
Current Assets to Current Liabilities in excess of 2.00 to 1.00.
Income. Maintain not less than the following Income level: maintain not
less than quarterly net Income greater than or equal to 0, except for
quarter end February 1997 when not loss is not to exceed $250,000.00.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may from time to time
reasonably require with respect to Borrower's properties and
operations, in form, amounts, coverages and with insurance companies
acceptable to Lender. Borrower, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in
form satisfactory to Lender, including stipulations that coverages will
not be canceled or diminished without at least thirty (30) days' prior
written notice to Lender. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be
impaired in any way by any act, omission or default of Borrower or any
other person. In connection with all policies covering assets in which
Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as
Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (a) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than
<PAGE>
10-31-1996 LOAN AGREEMENT Page 9
(Continued)
annually), Borrower will have an independent appraiser satisfactory to
Lender determine, as applicable, the actual cash value or replacement cost
of any Collateral. The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Fees and Charges. In addition to all other agreed upon fees and
charges, pay the following: a commitment fee at the rate of 25% per annum
(based on a year of 360 days for the actual number of days elapsed) on the
average daily unused portion of the Line of Credit, payable on the 1st day
of each month after the date hereof.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims
that, if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits. Provided however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy, lien
or claim so long as (a) the legality of the same shall be contested in
good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act
and with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party
to permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request, all at
Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or
other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as
of the date of the certificate, no Event of Default exists under this
Agreement.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 10
(Continued)
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part
or on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in,
or encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c)
pay any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower
may pay cash dividends on its stock to its shareholders from time to time
in amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which also solely from their status as Shareholders
of a Subchapter S Corporation because of their ownership of shares of
stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) Incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 11
(Continued)
ADDITIONAL FINANCIAL INFORMATION. Borrower shall execute and deliver to Lender a
schedule and aging of receivables as of the end of each month end accounting
period of the Borrower, in form and content satisfactory to Lender, which shall
be Certified if required by Lender, within 15 days after the end of each such
accounting period of Borrower.
ADDITIONAL FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants
and ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than
$18,500,000.00 for fiscal year 1996, increasing to $19,250,000.00 as of
August 31, 1997.
Minimum Cash Flow. Maintain a minimum annual cash flow of not less than
$1,500,000.00.
LIMITS ON ELIGIBLE ADVANCES. The amount of the advances shall be equal to 80% of
unbonded, billed receivables less than 90 days; plus 25% of unbonded, unbilled
receivables less than 90 days; with total bank exposure including term loans,
not to exceed $10,000,000.00.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Borrower given to Lender by
law, Lender shall have, with respect to Borrower's obligations to Lender under
this Agreement and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Borrower hereby assigns,
conveys, delivers, pledges, and transfers to Lender all of Borrower's right,
title, and interest in and to all deposits, moneys, securities, and other
property of Borrower now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Borrower. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement: Default on Indebtedness. Failure of Borrower to make
any payment when due on the Indebtedness. Other Defaults. Failure of
Borrower or any Grantor to comply with or to perform when due any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents, or failure of Borrower to comply with or to
perform any other term, obligation, covenant or condition contained in any
other agreement between Lender and Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 12
(Continued)
Insolvency. The dissolution or termination of Borrower's existence as a
going business, or a trustee or receiver is appointed for Borrower or for
all or a substantial portion of the assets of Borrower, or Borrower makes a
general assignment for the benefit of Borrower's creditors, or Borrower
files for bankruptcy, or an involuntary bankruptcy petition is filed against
Borrower and such involuntary petition remains undismissed for sixty (60)
days.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.
Change In Ownership. Any change in controlling ownership of twenty-five
percent (25%) or more of the common stock of Borrower.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all sums owing in
connection with the Loans, including all principal, interest, and all other
fees, costs and charges, it any, will become immediately due and payable, all
without notice of any kind to Borrower, except that in the case of an Event of
Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender shall have
all the rights and remedies provided in the Related Documents or available at
law, in equity, or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Maryland. LENDER AND
BORROWER EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
WHICH LENDER OR BORROWER MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY
PERTAINING TO, THIS AGREEMENT. IT IS AGREED THAT THIS WAIVER CONSTITUTES A
WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS
OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE
BY LENDER AND BORROWER, AND LENDER AND BORROWER EACH HEREBY REPRESENT THAT
NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS
EFFECT. BORROWER FURTHER REPRESENTS THAT BORROWER HAS BEEN REPRESENTED IN
THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF BORROWER'S OWN FREE WILL, AND THAT
BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 13
(Continued)
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall mean
each and every Borrower. This means that each of the Borrowers signing below is
responsible for all obligations in this Agreement.
Consent to Jurisdiction. Borrower irrevocably submits to the jurisdiction of any
state or federal court sitting in the State of Maryland over any suit, action,
or proceeding arising out of or relating to this Agreement. Borrower irrevocably
waives, to the fullest extent permitted by law, any objection that Borrower may
now or hereafter have to the laying of venue of any such suit, action, or
proceeding brought in any such court and any claim that any such suit, action,
or proceeding brought in any such court has been brought in an inconvenient
forum. Final judgment in any such suit, action, or. proceeding brought in any
such court shall be conclusive and binding upon Borrower and may be enforced in
any court in which Borrower is subject to jurisdiction by a suit upon such
judgment provided that service of process is affected upon Borrower as provided
in this Agreement or as otherwise permitted by applicable law.
Consent to Loan Participation. Borrower agrees that Lender may at any time grant
participating interests in the Loans to one or more purchasers (each a
"Participant). In such event, whether or not upon notice to Borrower, Lender
shall remain responsible for the performance of its obligations hereunder, and
Lender shall continue to deal solely and directly with Borrower in connection
with Lender's rights and obligations under this Agreement. Any agreement
pursuant to which Lender may grant such a participation interest shall provide
that Lender shall retain the sole right and responsibility to enforce the
obligations of Borrower hereunder including, without limitation, the right to
approve any amendment, modification or waiver of any provision of concerning the
Loans; provided that such participation agreement may provide that Lender will
not agree to any such modification, amendment or waiver which would have the
effect increasing or extending the term hereof or subjecting Lender to any
additional obligation, reducing the principal of or rate of interest on any
Loan, postponing the date fixed for any payment of principal or of interest on
any Loan or fees hereunder without the consent of the Participant. Lender may at
any time assign all or any portion of its rights with respect to the Loans to a
Federal Reserve Bank. No such assignment shall release Lender from its
obligations hereunder. Lender may furnish any information concerning Borrower in
its possession from time to time to Participants (including prospective
Participants) and may furnish such information in response to credit inquiries
consistent with general banking practice.
Costs and Expenses. Subject to any limits under applicable law, if Lender hires
an attorney to help enforce this Agreement or to collect any Indebtedness,
Borrower agrees to pay Lender's attorneys' fees, and all of Lender's other
collection expenses, whether or not there is a lawsuit and including legal
expenses for bankruptcy proceedings.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimilie, and shall be effective when actually
delivered if hand delivered or when deposited with a nationally recognized
overnight courier or deposited as certified or registered mal in the United
States mail, first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change the
party's address. To the extent permitted by applicable law, if there is more
than one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower will keep Lender informed at all times
of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 14
(Continued)
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower"' as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and agreements of Borrower in this
Agreement shall survive the making of the Loan or Loans contemplated hereby, and
shall be deemed made and redated by Borrower at the time of the making of each
disbursement of Loan proceeds.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Indulgence by Lender with respect to any of the terms and conditions of
this Agreement or the failure of Lender to exercise any of its rights under this
Agreement shall not constitute a waiver thereof, and Borrower shall remain
liable for the strict performance of such terms and conditions until this
Agreement shall be terminated. No provision of this Agreement may be waived or
modified orally, but all such waivers or modifications shall be in writing.
Whenever the consent of Lender is required under this Agreement, the granting of
such consent by Lender in one instance shall not constitute Lender's continuing
consent in subsequent instances, and in all cases such consent may be granted or
withhold in the sole discretion of Lender.
<PAGE>
10-31-1996 LOAN AGREEMENT Page 15
(Continued)
THIS LOAN AGREEMENT IS SIGNED, SEALED AND DELIVERED EFFECTIVE IN ALL RESPECTS AS
OF OCTOBER 31, 1996.
BORROWER:
EA Engineering, Science, and Technology, Inc.
By: (SEAL)
Joseph A. Spadaro, Executive Vice President-Chief Financial Officer
LENDER:
SIGNET BANK
By: Phil Phillips, Vice President
Authorized Officer
<PAGE>
SIGNET BANK
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C>
$10,000,000.00 10-31-1996 01-31-1998 0124843566 000 EAEngine 17548
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
Borrower: EA Engineering Science and Technology, Inc. Lender: SIGNET BANK
11019 McCormick Road SIGNET TOWER
Hunt Valley, MD 21031 7 St. Paul Street
Baltimore, MD 21202
Principal Amount: $10,000,000.00 Initial Rate: 6.953% Date of Note: October 31, 1996
</TABLE>
PROMISE TO PAY. EA Engineering, Science, and Technology, Inc. ("Borrower")
promises to pay to SIGNET BANK ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Ten Million & 00/100 Dollars
($10,000,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid Interest on January 31, 1998. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning November 1,
1996, and all subsequent interest payments are due on the same day of each month
after that. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. Subject to designation of a different interest rate
index by Borrower as provided below, the interest rate on this Note is subject
to change from time to time based on changes in an independent index which is
the per annum rate of interest determined by Lender to equal the offered rate on
30 day Eurodollar deposits which appear on the display designated as Page Libor
on the Reuters Monitor Money Rates Service (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notice to Borrower. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often than
each 30 days. The Index currently Is 5.453% per annum. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of 1.500
percentage points over the Index, resulting in an initial rate of 6.953% per
annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
INTEREST RATE OPTIONS. The following interest rate options are available under
this Note:
(a) Default Option. The interest rate margin and index described in the
"VARIABLE INTEREST RATE" paragraph above (the "Default Option").
<PAGE>
10-31-1996 PROMISSORY NOTE Page 2
(Continued)
(b) Prime Rate. For purposes of this Note, Prime Rate shall mean 90% of
the announced prime rate of the Lender.
When the interest rate is based on a fixed rate, the rate shall be in effect for
a period of the number of days or months as indicated in the rate option
description (the "Interest Period"), in any case extended to the next succeeding
business day when necessary, beginning on a borrowing date, conversion date or
expiration date of the then current Interest Period. Adjustments in the interest
rate due to changes in the maximum nonusurious interest rate allowed (the
"Highest Lawful Rate") shall be made on the effective day of any change in the
Highest Lawful Rate.
Provided Borrower is not in default under this Note, Borrower may designate in
advance which of the above interest rate indexes shall be applicable to any loan
advance under this Note and shall designate any optional Interest Period
applicable to any fixed rate loan or advance. In the absence of any such
designation, the interest rate option shall be the Default Option. Thereafter,
unpaid principal balances under this Note may be converted (at the end of an
Interest Period if the index used to determine the interest rate therefore is a
fixed rate) to another of the above interest rate options, or continued for an
additional interest period, when applicable, as designated by Borrower in
advance; and in the absence of sufficient advance designation as to conversion
to or continuation of a fixed rate index, the index shall be converted to the
Default Option. Notwithstanding the foregoing, a fixed rate index may not be
elected for a loan or advance under this Note, nor any conversion to or
continuation of a fixed rate index be elected, if the Interest Period thereof
would extend beyond the maturity of this Note.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a) the
failure of any "Party" (which term shall mean and include each Borrower,
endorser, surety and guarantor of this Note) to make any payment on this Note or
on any other indebtedness due Lender when due; (b) if any asset(s) of a Party
are attached, levied upon, seized or repossessed or if any asset(s) of a Party
should come into the possession of a receiver, trustee, custodian or assignee
for the benefit of creditors, or if a Party makes an assignment for the benefit
of creditors; (c) the failure of a Party to observe or perform any obligation or
covenant contained in any agreement, document or instrument furnished in
connection herewith or in any other agreement between a Party and Lender; (d)
any representation or warranty at any time made by a Party to Lender in
connection herewith or in any other agreement between a Party and Lender, or in
any document or instrument delivered to Lender in connection herewith or
pursuant to such other agreement, shall have been materially false at the time
it was made; (e) the termination or withdrawal of a Party's guaranty with
respect to any indebtedness due Lender; (f) any Party files a petition in
bankruptcy, petitions or applies to any tribunal for any receiver or any trustee
of a Party or any substantial part of its property, or commences any proceeding
relating to such party under any insolvency, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in affect; (g) if, within 30 days after
the filing of a petition in bankruptcy against a Party or the commencement of
any proceeding against a Party seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such petition or proceeding shall
not have dismissed, or, if, within 30 days after the appointment, without the
consent or acquiescence of a Party, of any trustee, receiver or liquidator of
such Party or of all or any substantial part of the properties of the such
Party, such appointment shall not have been vacated; (h) the application for the
appointment of a receiver for a party or for property of a Party; (i) the making
or sending of a notice of an intended bulk sale by a Party, (j) commencement of
any foreclosure, levy, seizure or forfeiture proceeding, whether by judicial.
self-help, repossession, or any other method, by any creditor of a Party, any
creditor of the owner of any collateral securing this Note, or by any
governmental agency with respect to a Party or such collateral; (k) it any event
occurs which is or, with the passage of time and/or the giving of notice, could
be a default under or breach of the terms of any instrument or document
evidencing a debt or obligation of a Party to any third party and is not cured
within five (5) days after the occurrence thereof; (1) any judgment against a
Party or any attachment against it or its property remains unpaid, undischarged,
<PAGE>
10-31-1996 PROMISSORY NOTE Page 3
(Continued)
unbonded or undismissed for a period of 30 days, unless and to the extent that
such judgment is appealed in good faith in a court of higher jurisdiction and
such appeal remains pending; (m) if any proceeding is filed for the dissolution
or liquidation of a Party; (n) if any Party shall be enjoined or restrained in
any manner from conducting its business in whole or in part, and such injunction
shall not be dismissed or dissolved within thirty (30) days after the filing
thereof; (o) if any tax lien or notice thereof is filed against a Party or any
of the assets of a Party and remains undismissed, unpaid or unbounded for a
period of thirty (30) days; (p) if, without Lender's prior written consent, any
Party which is not a natural person enters into or becomes a party to any
merger, consolidation or share exchange or if any Party sells, transfers,
conveys or leases, except in the ordinary course of business, any significant
part of its assets or properties or (if not a natural person) alters its capital
structure, business activities or scope of operations; (q) if, without Lender's
prior written consent, there is a sale, exchange or transfer of the voting
control or any significant portion of the stock or ownership interests of any
Party which is not a natural person; (r) if any Party who is a natural person
shall die or become incompetent.*
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest, together with all other
applicable fees, costs and charges, if any, immediately due and payable, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 4.500
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Furthermore, subject to any limits under
applicable law, upon default, Borrower also agrees to pay Lender's attorneys'
fees, and all of Lender's other collection expenses, whether or not there is a
lawsuit and including without limitation legal expenses for bankruptcy
proceedings. This Note shall be governed by, construed and enforced in
accordance with the laws of the State of Maryland. LENDER AND BORROWER EACH
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR
BORROWER MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS NOTE.
IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL
CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS
KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND BORROWER, AND LENDER AND
BORROWER EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE
BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY
WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER FURTHER REPRESENTS THAT BORROWER HAS
BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF BORROWER'S OWN FREE WILL, AND THAT
BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check with which Borrower pays is
later dishonored.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Borrower given to Lender by
law, Lender shall have, with respect to Borrower's obligations to Lender under
this Note and to the extent permitted by law, a contractual possessory security
interest in and a right of setoff against, and Borrower hereby assigns, conveys,
delivers, pledges, and transfers to Lender all of Borrower's right, title, and
interest in and to all deposits, moneys, securities, and other property of
Borrower now or hereafter in the possession of or on deposit with Lender,
whether held in a general or special account or deposit, whether held jointly
with someone else, or whether held for safekeeping or otherwise, excluding
however all IRA, Keogh, and trust accounts. Every such
*DEFAULT. Borrower will be granted a 15-day cure period with respect to all
of the aforementioned, except Sections D, E, and F. The 15-day cure period
will commence on the date of technical default, and will terminate on the
15th calendar day thereafter.
<PAGE>
10-31-1996 PROMISSORY NOTE Page 4
(Continued)
security interest and right of setoff may be exercised without demand upon or
notice to Borrower. No security interest or right of setoff shall be deemed to
have been waived by any act or conduct on the part of Lender or by any neglect
to exercise such right of setoff or to enforce such security interest or by any
delay in so doing. Every right of setoff and security interest shall continue in
full force and effect unfit such right of setoff or security interest is
specifically waived or released by an instrument in writing executed by Lender.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
hereunder shall be conclusively presumed to have been made to and for the
benefit of and at the request of Borrower when: (1) deposited or credited to an
account of Borrower with Lender, notwithstanding that such advance was
requested, orally or in writing, by someone other than the person(s) signing
below or that someone other than the person(s) signing below is authorized to
draw on such account and may or does withdraw the whole or part of any such
advance; or (2) made in accordance with oral or written instructions of Borrower
or anyone signing below for or on behalf of Borrower. Lender is hereby
authorized to maintain records of the date and amount of each advance, the date
and amount of any payment of principal or interest and the principal balance
then remaining unpaid hereon. Borrower hereby agrees that the amount so
evidenced in such records shall, for all purposes, constitute prima facie
evidence thereof and shall be binding upon Borrower, absent manifest error.
LATE CHARGE. Borrower agrees to pay to Lender on demand a late charge not to
exceed 5% of the amount of any payment of principal or interest. or both, that
is more than ten (10) days past due.
ADDITIONAL PROVISION. In the event tangible net worth ratio as measured at the
end of each fiscal quarter equals to or exceeds 1.25x, interest will be charged,
at EA Engineering, Science and Technology, Inc. option on either the Lender's
Prime Rate of interest as it changes from time to time or LIBOR plus 200 basis
points.
CONSENT TO JURISDICTION. Borrower irrevocably submits to the jurisdiction of any
state or federal court sitting in the State of Maryland over any suit, action,
or proceeding arising out of or relating to this Note. Borrower irrevocably
waives, to the fullest extent permitted by law, any objection that Borrower may
now or hereafter have to the laying of venue of any such suit, action, or
proceeding brought in any such court and any claim that any such suit, action,
or proceeding brought in any such court has been brought in an inconvenient
forum. Final judgment in any such suit, action, or proceeding brought in any
such court shall be conclusive and binding upon Borrower and may be enforced in
any court in which Borrower is subject to jurisdiction by a suit upon such
judgment provided that service of process is affected upon Borrower as provided
in this Note or as otherwise permitted by applicable law.
GENERAL PROVISIONS. This loan is being made under the terms and provisions of
the Maryland Interest and Usury Law. If any part of this Note cannot be
enforced, this fact will not affect the rest of the Note. In particular, this
section means (among other things) that Borrower does not agree or intend to
pay, and Lender does not agree or intend to contract for, charge, collect, take,
reserve or receive (collectively referred to herein as "charge or collect"), any
amount in the nature of interest or in the nature of a fee for this loan, which
would in any way or event (including demand, prepayment, or acceleration) cause
Lender to charge or collect more for this loan than the maximum Lender would be
permitted to charge or collect by federal law or the law of the State of
Maryland (as applicable). Any such excess interest or unauthorized fee shall,
instead of anything stated to the contrary, be applied first to reduce the
principal balance of this loan, and when the principal has been paid in full, be
refunded to Borrower. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or for
any party or guarantor or collateral; or impair, fail to realize upon or perfect
Lender's security Interest in the collateral; and take
<PAGE>
10-31-1996 PROMISSORY NOTE Page 5
(Continued)
any other action deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the modification
is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE.
BORROWER:
A Engineering, Science, and Technology, Inc.
By: (SEAL)
Joseph A. Spadaro, Executive Vice President-Chief Financial Officer
<PAGE>
SIGNET BANK
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C>
$10,000,000.00 10-31-1996 01-31-1998 0124843566 000 EAEngine 17548
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
Borrower: EA Engineering Science and Technology, Inc. Lender: SIGNET BANK
11019 McCormick Road SIGNET TOWER
Hunt Valley, MD 21031 7 St. Paul Street
Baltimore, MD 21202
</TABLE>
LOAN TYPE. This is a Variable Rate (1.500% over per annum rate of interest
determined by Lender to equal the offered rate on 30 day Eurodollar deposits
which appear on the display designated as Page Libor on the Reuters Monitor
Money Rates Service, making an initial rate of 6.953%), Revolving Line of Credit
Loan to a Corporation for $10,000,000.00 due on January 31, 1998, made under the
Maryland Interest and Usury Law.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
Personal, Family, or Household Purposes or Personal
Investment.
X Business (including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: Finance Borrower's
accounts receivable and work in process.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $10,000,000.00 as follows:
Undisbursed Funds: $10,000,000.00
Note Principal: $10,000,000.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED OCTOBER 28.1996.
BORROWER:
EA Engineering, Science, and Technology, Inc.
By: (SEAL)
Joseph A. Spadaro, Executive Vice President-Chief Financial Officer
<PAGE>
SIGNET BANK
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C>
$10,000,000.00 10-31-1996 01-31-1998 0124843566 000 EAEngine 17548
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
Borrower: EA Engineering Science and Technology, Inc. Lender: SIGNET BANK
11019 McCormick Road SIGNET TOWER
Hunt Valley, MD 21031 7 St. Paul Street
Baltimore, MD 21202
</TABLE>
I, the undersigned Secretary or Assistant Secretary of EA Engineering Science
and Technology, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Maryland
as a corporation for profit, with its principal office at 11019 McCormick Road,
Hunt Valley, MD 21031, and is duly authorized to transact business in the State
of Maryland.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on November 7, 1996, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
<S> <C>
Joseph A. Spadaro Executive Vice President, Chief Financial Officer
Loren D. Jensen President, Chief Executive Officer
</TABLE>
acting for and on behalf of the Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from SIGNET BANK (Lender), on
such terms as may be agreed upon between the Corporation and Lender, such
sum or sums of money as in their judgment should be borrowed, without
limitation.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporation to Lender, and also to execute and deliver to Lender one
or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accommodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness
of the Corporation to Lender at any time owing, however the same may be
evidenced, any property now or hereafter belonging to the Corporation or in
which the Corporation now or hereafter may have an interest, including
without limitation all real property and all personal property (tangible or
intangible) of the
<PAGE>
10-31-1996 CORPORATE RESOLUTION TO BORROW Page 2
(Continued)
Corporation. Such property may be mortgaged, pledged, transferred,
endorsed, hypothecated, or encumbered at the time such loans are obtained
or such indebtedness is incurred, or at any other time or times, and may be
either in addition to or in lieu of any property theretofore mortgaged,
pledged, transferred, endorsed, hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
they may in their discretion deem reasonably necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or
to cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions. The following
person or persons currently are authorized to request advances and
authorize payments under the line of credit until Lender receives written
notice of revocation of their authority:
Joseph A. Spadaro, Executive Vice President.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s) or (e)
change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever.
<PAGE>
10-31-1996 CORPORATE RESOLUTION TO BORROW Page 3
(Continued)
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed the seal of the
Corporation on October 31, 1996 and attest that the signatures set opposite the
names listed above are their genuine signatures.
CERTIFIED TO AND ATTESTED TO:
X Stephen J. Hammalian
CORPORATE
SEAL
NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
Exhibit 13 Annual Report to Stockholders
COST EFFECTIVE ENVIRONMENTAL PROBLEM SOLVING
The photograph on the cover of this annual report is the work of James J. Gift,
one of EA's many talented employees. The near field of the photograph shows a
tidal pool at slack tide. It was taken at Ruby Beach on the Olympic Peninsula in
the state of Washington.
ABOUT EA
EA Engineering, Science, and Technology, Inc., traded on the NASDAQ National
Market (Symbol: EACO) is an international firm with capabilities to address all
facets of environmental issues from biological, ecological and natural resource
studies, through permitting, site investigation, risk assessment, remedial
design, remedial construction, and site restoration. In addition, EA has
in-house analytical, toxicological and biological laboratories as well as
expertise in alternative fuels and energy issues.
The Company comprises more than 700 engineers, scientists, construction and
support personnel, distributed in a network of over 20 offices in North America.
Since its founding 23 years ago, EA has earned a reputation as an organization
providing high quality, program management and services for a wide range of
multidisciplinary environmental and energy projects.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended August 31,
1996 1995 1994 1993 1992
- --------------------------------------------- ------------ ------------- ------------ ------------ -------------
(in thousands, except per share amounts)
------------- ------------ ------------ -------------
<S> <C>
Operations data:
Total revenue $88,308 $92,365 $76,873 $61,126 $52,915
Net revenue(1) 64,354 72,471 63,748 52,941 45,411
Income (loss) from operations (444) 4,141 3,305 2,111 (2,058)
Net income (loss) (580) 2,227 1,823 1,004 (1,876)
Net income (loss) per share(2) $(0.09) $0.36 $0.30 $0.17 $(0.34)
Weighted average number of shares
outstanding(2) 6,138 6,171 6,089 5,888 5,542
Balance sheet data:
Working capital $15,955 $17,889 $14,317 $12,146 $ 8,041
Total assets 33,329 36,368 31,575 28,471 28,990
Short-term borrowings -- -- -- -- 6,393
Long-term debt 2,665 4,033 4,798 5,034 2,483
Stockholders' equity $18,558 $18,880 $15,177 $12,721 $11,542
</TABLE>
(1) Net revenue represents total revenue less subcontractor costs.
(2) Results have been restated to reflect the two 3 for 2 stock splits, each
effected in the form of a 50% stock dividend issued on Febuary 23, 1994
and July 5, 1994.
<PAGE>
(PHOTO)
Loren D. Jensen, Ph.D.
Chairman of the Board, President, and Chief Executive Officer
Dear Fellow Shareholder:
The year ended August 31, 1996 was certainly one of the most challenging
twelve-month periods in memory for those of us at EA Engineering, Science, and
Technology, Inc. In this year's report to shareholders, I would like share my
outlook on the state of our industry and outline some of the internal management
actions which we have taken to improve our business performance during this
period of substantial change in the environmental services industry.
STATE OF THE INDUSTRY
As most shareholders know, environmental regulations such as the Resource
Conservation and Recovery Act, the Clean Water Act, Superfund, the Clean Air,
and a number of other major legislative environmental initiatives have been
major driving forces behind industry growth. However, these mandates have come
under severe and focused legislative debate in the last several years, with the
expressed intent by some interests in Congress to either dismantle or severely
alter them. The delays and postponement of reauthorization bills associated with
environmental legislation have caused considerable uncertainty in the regulated
industrial community, as well as in governmental agencies, including the
Department of Defense and the Department of Energy. Existing regulatory and
enforcement activities have slowed down considerably at both federal and state
levels and, as a result, private clients and governmental agencies have reduced
work scope, delayed and, in some instances, postponed continuing environmental
clean-up programs.
The Congressional budget battles of 1995 and 1996 have only added to the
problems of our industry causing recisions of previously approved and funded
clean-up programs at government owned facilities. Continuing budget reductions
in nearly all federal agencies, including EPA, have resulted in significant
staff reductions, slowdowns and major delays in regulatory enforcement and
decision making, with the result that nearly every segment of our industry-
environmental assessments, engineering design, remedial construction, and
natural restoration of contaminated sites-has been affected. This situation has
produced a surplus of professional staff and, in some market sectors, fierce
competition among environmental firms for contracts. As a result, client rates
for our skilled, trained, and educated professionals have been falling, while
the industry grapples to maintain professional staff capabilities.
EA DURING FISCAL 1996
The slowing of client authorizations and regulatory inaction led to a decline in
revenue and an erosion of profitability for EA in the latest fiscal year,
despite our efforts to increase revenue and to reduce overhead. During the year,
our work force was reduced by over 100 full-time positions, about 12%. Efforts
to lower fixed operating costs resulted in closing or size reductions of several
regional offices. While we were able to reduce the workforce, the remaining
staff also had fewer billable hours than necessary to cover the costs of
providing services and maintaining our capabilities. Expense reductions were not
sufficient to offset fixed operating costs, despite the sharp reductions in this
category.
In the face of these awesome challenges, EA remained focused on providing
clients with outstanding
<PAGE>
service and value. We aggressively pursued business development efforts to new
and existing clients, increased marketing and sales efforts, and in spite of
fierce competition, successfully added new clients to our roster. We rebuilt and
expanded our marketing and sales group in the private sector area, resulting in
a net increase in non-federal revenues to 47% of net revenue in 1996 from 35% in
1995. Behind this dramatic achievement is a unique combination of scientific,
engineering, laboratory, and remediation construction services provided by EA
and our ability to integrate these services to the benefit of our clients. And,
in fiscal 1996, our laboratory, which launched an aggressive sales effort over a
year and a half ago, experienced improved market penetration. During the year,
about 35% of our laboratory work was generated through direct sales to clients,
up from 12% a year ago.
EA GOING FORWARD
It is noteworthy that our clients are increasingly demanding Strategic
Environmental Consulting in order to manage their financial exposures arising
from ecological and human health issues. This area of our business has been
growing significantly, reflecting the continuing efforts of both industrial and
governmental clients to make the best economic decisions, as well as reduce
waste volumes through process engineering changes and cost-effective waste
disposal practices other than through more expensive clean-up activities.
During the most recent year, we also capitalized on the growing market for
redevelopment and clean up of municipal solid waste disposal sites. Successes
last year included a $3.3 million domestic waste landfill capping contract at
the Kennedy Space Center in Florida, where EA has been the prime contractor for
the remedial construction and capping for NASA. We also recently announced
several similar projects totaling $7.5 million in the Mid-Atlantic and
Northeast.
In addition to remedial construction and management capabilities, the nation's
management of solid waste at both domestic and hazardous waste industrial
residues involves assessment and engineering design skills which have been EA's
strength over the years. Last year's experience in this area provided us with
the technical basis and credibility to expand our remedial construction business
which now includes renovation of existing solid waste landfills.
This experience further provides us with the opportunity to expand our business
into new and developing market sectors, such as those arising from brownfields
legislation wherein the maximum financial liability of new and existing land
owners is pre-determined at a specified amount, depending on certain variables.
Such brownfields legislation reflects the growing recognition by legislators and
regulatory officials that contaminated industrial property can be appropriately
assessed for contamination hazards, and individual site clean-up standards and
costs can be defined. This type of reconciliation, which assures adequate
protection of both natural resources and community human health exposures, is a
sound and practical approach that can help this country's older industrialized
cities clean up and then economically redevelop industrial land to the benefit
of business, employment, and tax base expansion. EA intends to play a role in
brownfields efforts since, as one of the nation's leaders, helping clients
conserve and restore our nation's greenfields, we have the requisite technical
knowledge, experience, and skills.
We expect to continue to benefit from work assignments in military base cleanup,
restoration, and closure activities. We strongly believe that the Company's
significant backlog will continue to translate into growing individual project
work authorizations as the Department of Defense agencies move through the
regulatory disposition of contaminated military sites.
<PAGE>
The breadth of EA's integrated technical skills and site experience from
front-end investigatory and analytical assignments through engineering design
and into remedial construction and site restoration is, we believe, a
significant asset which provides real value-added benefits to client
organizations faced with environmental staff downsizing and outsourcing.
We believe firmly that EA must be able to compete and succeed in the growing
international markets of the world, especially in those regions we have targeted
for growth-Latin America and Asia. Over the last two years, the Company has
established offices and intensified business development efforts in Mexico City,
Mexico, and Shanghai, China, in order to take advantage of growing opportunities
in those two countries. Prospects for EA in the international arena look bright,
and we have had recent success in winning work with existing and new clients in
both nations. Our strategy has been to provide services in these markets both
from our U.S. based professional staff, as well as through locally based staff
and strategic partners. We also plan to offer innovative technology transfer and
project financing for our customers in developing countries.
OUTLOOK
I am extremely confident about the future of EA. Reauthorizations of previous
water, air, and land clean-up legislation and the development of innovative,
environmentally safe brownfields legislation should help our nation conserve
undeveloped natural resources and reduce the need to industrialize farmland,
while at the same time, increase the markets for EA's services.
Over the past year and a half, we have made a number of important changes in the
leadership and management structure of EA which are intended to improve our
success in winning new work and in deriving higher profitability from existing
projects. Further changes are anticipated during fiscal 1997. Expansion of
business development activities in both the government and private sectors will
continue and should bring us success in backlog expansion. We remain committed
to further building our global profile through enhanced marketing and sales
efforts involving a dedicated force of seasoned and technically grounded
professionals.
We will continue to focus on market segments which provide EA with the greatest
opportunities for growth. We will reduce or eliminate marginal operations. We
will continue to expand our staff size in our most profitable segments and
contract in others, intensifying our business development efforts, attacking
overhead costs, and sharpening our project management control systems in order
to restore profitability. As the Company's largest shareholder, I am completely
committed to these strategies.
I look forward to reviewing the events of fiscal year 1996 and discussing the
Company's outlook for 1997 and beyond at the Annual Shareholders Meeting on
January 15, 1997.
Sincerely,
(Signature of Loren D. Jensen, Ph.D.)
Loren D. Jensen, Ph.D.
Chairman, President, and
Chief Executive Officer
November 1996
<PAGE>
(PHOTO - ENVIRONMENTAL SCENE)
Joseph A. Spadaro, CPA
Executive Vice President, Chief Financial Officer,
Treasurer, and Assistant Secretary
Fiscal 1996 will be remembered as one of the most unusual and difficult years in
the history of EA and the environmental services industry. Each quarter brought
its share of optimism and disappointment, for which the overall financial result
was a net loss.
In last year's annual report we discussed the difficulties encountered in the
fourth quarter of fiscal 1995. While these problems continued into fiscal 1996,
the improvement in the first quarter fiscal 1996 profitability gave us reason to
expect that the results of our cost cutting were making a meaningful difference.
The second quarter, however, dealt the entire industry a series of new and
unusual events. After reporting 14 consecutive profitable quarters, the shutdown
of the federal government, federal budget authorization difficulties, and one of
the worst winters ever lead to one of the worst quarterly losses in our history.
The continuation of the slowdown in federal authorizations into the third
quarter severely impacted the industry, creating additional competitive pricing
pressures in all client sectors. Nevertheless, EA produced a small third quarter
profit. We expected that the fourth quarter would show further improvement, but
the on-going pricing pressures from industry over-capacity and cost overruns on
certain contracts created a fourth quarter loss.
While fiscal 1996 was our first loss since 1992, there are a number of important
differences. We now have a much more solid financial condition, backlog
continues at high levels, and we have an expanded marketing presence in both the
private and government sectors. We expect to face a difficult and highly
competitive market in fiscal 1997, but we believe that EA has a solid base of
support for improvement through our diversified and expanding client base,
experienced management, and a 23-year history of responding to changing market
conditions.
Results of Operations
Fiscal 1996 ended with a net loss of approximately $580,000, or $0.09 per share,
compared to fiscal 1995 net income of $2.2 million, or $0.36 per share. Much of
the loss is attributable to the 11% decline in net revenue to $64.4 million in
fiscal 1996 from $72.5 the prior year. Each of our major service areas
encountered difficulties during the year, and all were negatively impacted
significantly during the second quarter.
EA has responded to the decline in operating results by reducing expenses and
increasing marketing activity. Direct sales and other operating costs were
reduced through staff reductions, cost control measures, and closing of several
small offices. Since much of the decline in net revenue was a result of
interruptions in client authorizations, we were unable to reduce costs
commensurate with the decrease. Furthermore, we recognized the need to increase
our investment in business development, including the pursuit of international
opportunities. Overall, however, as of August 31, 1996, EA had about 720 staff,
a reduction from last year-end of about 100 staff, many of whom were in overhead
positions. In addition to staff reductions, we have achieved cost reductions
through aggressive procurement of lower-cost providers of employee benefits,
administrative and insurance, computer and telecommunications services, and
corporate insurance programs. These efforts resulted in a 27% decrease in
general and administrative costs for fiscal 1996. G&A now is about 5.2% of net
revenue, down from 6.4% a year
<PAGE>
earlier.
We have also continued our focus on cash management. The result is a 17%
decrease in interest expense for fiscal 1996 which was achieved through a
combination of actions-the reduction in our long-term debt, renegotiation of
interest ratios on this debt, and changes in our line of credit financing
structure. Gains in this area were partially offset by requirements to pay much
of our subcontractor costs (which increased over 20%) in advance of EA client
payments, a standard industry practice.
Financial Conditions
EA's balance sheet remains strong. Although working capital at fiscal 1996
year-end was down, the current ratio of 2.3 was equal to that of fiscal 1995
year-end. The working capital reduction was largely due to our use of cash to
reduce long-term debt and purchase equipment. EA's debt-to-equity ratio improved
and remains at a very low level-only 14% of equity.
In fiscal 1996, we experienced an increase in our billing and collection cycle
to 98 days in fiscal 1996 from 96 days in fiscal 1995. While accounts receivable
decreased, unbilled receivables increased, again due to our inability to submit
certain client billings until formal authorizations for contract claims are
released.
Stockholders' equity decreased about 2% to $18.6 million or $3.01 per share in
fiscal 1996 from $18.9 million, or $3.10 per share in fiscal 1995. The decrease
in the combination of EA's net loss partially offset by employee participation
in the Employee Stock Purchase Plan, and the exercise of stock options.
Awards and Backlog
As of August 31, 1996, our net contracted backlog (defined as total backlog less
estimated subcontractor costs) was approximately $53 million, equal to that of
the prior year-end. We were able to maintain this level through our investments
in business development, with particularly encouraging results from our private
sector efforts. We expect that approximately 80% of the fiscal 1996 net backlog
will be completed in fiscal 1997. Historically, private sector projects start
out at lower authorization levels than federal projects, but usually have
shorter completion dates, thus showing lower backlog amounts. Ultimately,
private sector projects can add significantly to net revenue and typically are
more profitable than state and federal projects.
In fiscal 1996, EA's private sector clients contributed about one-third of net
revenue, an increase of 27% over fiscal 1995. In addition to the contracted net
backlog, EA also holds indefinite delivery/indefinite quantity (ID/IQ) type
contracts with a net value of up to $197 million compared to $228 million a year
ago. If the ID/IQ contracts were fully authorized, the Company's net backlog
would be approximately $250 million or 11% lower than the net backlog of about
$281 million at the end of fiscal 1995. While the total backlog is slightly
lower, the decline is partly attributable to fewer large government
opportunities resulting from stalled reauthorizations of environmental policies
as well as increased competition for these opportunities. EA was successfully
maximized opportunities with existing ID/IQs, receiving almost $55 million in
task orders.
<PAGE>
(PIE CHARTS)
<TABLE>
<S> <C>
Net Revenue by Client Sector Net Revenue by Client Sector
1996 Total Amount $64 Million 1995 Total Amount $72 Million
25% Industrial & Other Private Sector 23% Industrial & Other Private Sector
6% Utilities 7% Utilities
8% State & Local Governments 6% State & Local Governments
61% Federal Government 64% Federal Government
</TABLE>
(BAR CHART DEPICTING BACKLOG APPEARS HERE)
The following table summarizes the Company's backlog as of August 31, 1996 and
1995:
Net Gross
1996 1995 1996 1995
August 31,
Contracted backlog 53 53 64 67
ID/IQ 197 228 341 394
--- --- --- ---
Total backlog 250 281 405 461
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
1996 1995
- --------------------------------------------------------------------- ------------------- ------------------
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,308,600 $ 3,813,900
Accounts receivable, net 12,692,700 14,858,100
Costs and estimated earnings in excess
of billings on uncompleted contracts 12,482,200 10,735,000
Prepaid expenses and other 1,576,900 1,711,300
- --------------------------------------------------------------------- ------------------- ------------------
Total Current Assets 28,060,400 31,118,300
- --------------------------------------------------------------------- ------------------- ------------------
Property and Equipment, at cost
Furniture, fixtures, and equipment 12,784,500 14,403,800
Leasehold improvements 3,677,800 3,652,400
------------------- ------------------
16,462,300 18,056,200
Less-Accumulated depreciation and amortization (13,337,400) (14,255,900)
- --------------------------------------------------------------------- ------------------- ------------------
Net Property and Equipment 3,124,900 3,800,300
- --------------------------------------------------------------------- ------------------- ------------------
Other Assets 2,143,200 1,449,200
- --------------------------------------------------------------------- ------------------- ------------------
Total Assets $33,328,500 $36,367,800
===================================================================== =================== ==================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31,
1996 1995
- -------------------------------------------------------------------------- ------------------- -----------------
<S> <C>
Current Liabilities:
Accounts payable $ 6,061,000 $ 5,960,800
Accrued expenses 1,019,200 856,500
Accrued salaries, wages and benefits 3,183,400 4,595,700
Income taxes payable -- 227,600
Current portion of long-term debt 644,600 765,500
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,197,700 1,049,300
Total Current Liabilities 12,105,900 13,455,400
- -------------------------------------------------------------------------- ------------------- -----------------
Long-Term Debt, net of current portion 2,664,500 4,032,700
- -------------------------------------------------------------------------- ------------------- -----------------
Total Liabilities 14,770,400 17,488,100
- -------------------------------------------------------------------------- ------------------- -----------------
Commitments
- -------------------------------------------------------------------------- ------------------- -----------------
Stockholders' Equity
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,175,000 61,800 60,900
and 6,091,900 shares issued and outstanding
Preferred stock, $.01 par value;
8,000,000 shares authorized; none issued -- --
Capital in excess of par value 10,796,300 10,538,700
Retained earnings 7,700,000 8,280,100
- -------------------------------------------------------------------------- ------------------- -----------------
Total Stockholders' Equity 18,558,100 18,879,700
- -------------------------------------------------------------------------- ------------------- -----------------
Total Liabilities and Stockholders' Equity $33,328,500 $36,367,800
========================================================================== =================== =================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31,
1996 1995 1994
- ------------------------------------------------- ------------------------ ----------------- -----------------
<S> <C>
Total revenue $ 88,307,800 $92,364,900 $76,872,800
Less - Subcontractor costs (23,954,100) (19,893,500) (13,124,700)
- ------------------------------------------------- ------------------------ ----------------- -----------------
Net revenue 64,353,700 72,471,400 63,748,100
- ------------------------------------------------- ------------------------ ----------------- -----------------
Operating expenses:
Direct salaries and other operating 61,430,200 63,694,800 55,995,000
General and administrative 3,367,100 4,635,900 4,447,900
- ------------------------------------------------- ------------------------ ----------------- -----------------
Total operating expenses 64,797,300 68,330,700 60,442,900
- ------------------------------------------------- ------------------------ ----------------- -----------------
Income (loss) from operations (443,600) 4,140,700 3,305,200
- ------------------------------------------------- ------------------------ ----------------- -----------------
Interest expense (464,900) (522,800) (403,900)
Interest income 107,400 94,600 136,600
- ------------------------------------------------- ------------------------ ----------------- -----------------
Income (loss) before income taxes (801,100) 3,712,500 3,037,900
- ------------------------------------------------- ------------------------ ----------------- -----------------
(Benefit from) provision for income taxes (221,000) 1,485,100 1,215,300
- ------------------------------------------------- ------------------------ ----------------- -----------------
Net income (loss) $(580,100) $2,227,400 $1,822,600
================================================= ======================== ================= =================
Net income (loss) per share $(0.09) $0.36 $0.30
================================================= ======================== ================= =================
Weighted average shares outstanding 6,138,100 6,170,700 6,088,700
================================================= ======================== ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
- ------------------------------------------- ----------------- ----------------- ------------------ -----------------
<S> <C>
Balance, August 31, 1993 $56,500 $8,434,100 $4,230,100 $12,720,700
Issuance of Stock 1,200 464,700 -- 465,900
Tax Benefit from Stock Options
Exercised -- 167,300 -- 167,300
Net Income -- -- 1,822,600 1,822,600
- ------------------------------------------- ----------------- ----------------- ------------------ -----------------
Balance, August 31, 1994 57,700 9,066,100 6,052,700 15,176,500
Issuance of Stock 3,200 821,700 -- 824,900
Tax Benefit from Stock Options
Exercised -- 650,900 -- 650,900
Net Income -- -- 2,227,400 2,227,400
- ------------------------------------------- ----------------- ----------------- ------------------ -----------------
Balance, August 31, 1995 60,900 10,538,700 8,280,100 18,879,700
Issuance of Stock 900 233,000 -- 233,900
Tax Benefit from Stock Options
Exercised -- 24,600 -- 24,600
Net Loss -- -- (580,100) (580,100)
- ------------------------------------------- ----------------- ----------------- ------------------ -----------------
Balance, August 31, 1996 $61,800 $10,796,300 $7,700,000 $18,558,100
=========================================== ================= ================= ================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31,
1996 1995 1994
- -------------------------------------------------------------- ------------------ ---------------- ----------------
<S> <C>
Cash Flows From (Used For) Operating Activities:
Net income (loss) $ (580,100) $2,227,400 $1,822,600
Noncash expenses included in net income (loss)-
Depreciation and amortization 1,683,900 1,633,100 1,453,400
Deferred (benefit from) provision for income taxes (198,300) (418,200) 170,200
Current (benefit from) provision for income taxes (22,700) 1,903,300 1,045,100
Net (increase) decrease in noncash assets -
Accounts receivable, net 2,165,400 (2,714,300) (2,433,200)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,747,200) (2,747,600) (65,600)
Prepaid expenses and other assets (110,800) 179,400 (702,800)
Net increase (decrease) in nondebt liabilities -
Accounts payable and accrued expenses (1,149,400) 1,702,700 435,400
Refunds of income taxes 14,700 50,200 11,000
Payments of income taxes (445,500) (955,500) (1,202,500)
Billings in excess of costs and estimated earnings
on uncompleted contracts 148,400 47,100 520,000
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Net cash flows from (used for) operating activities (241,600) 907,600 1,053,600
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Cash Flows From (Used For) Financing Activities:
Proceeds from issuance of common stock 233,900 824,900 465,900
Reduction of long-term debt (4,489,100) (839,900) (725,900)
Proceeds from issuance of long-term debt 3,000,000 -- 725,000
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Net cash flows from (used for) financing activities (1,255,200) (15,000) 465,000
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Cash Flows Used For Investing Activities:
Purchase of property and equipment, net (1,008,500) (1,067,200) (1,579,700)
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Net cash flows used for investing activities (1,008,500) (1,067,200) (1,579,700)
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Net Decrease in Cash and Cash Equivalents (2,505,300) (174,600) (61,100)
Cash and Cash Equivalents, beginning of year 3,813,900 3,988,500 4,049,600
- -------------------------------------------------------------- ------------------ ---------------- ----------------
Cash and Cash Equivalents, end of year $1,308,600 $3,813,900 $3,988,500
============================================================== ================== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements present the accounts of EA
Engineering, Science, and Technology, Inc. (EA) and its wholly-owned subsidiary,
EA Financial, Inc., and its wholly-owned subsidiaries, EA Global, Inc. and EA
Engineering, Science, and Technology de Mexico, S.A. de C.V. During fiscal 1995,
EA Remediation Technologies, Inc., formerly a wholly-owned subsidiary, was
merged into EA. The entities are collectively referred to herein as the
"Company." All significant intercompany transactions have been eliminated in
consolidation.
Revenue Recognition
The Company is a multidisciplinary environmental services organization providing
a wide range of consulting, engineering, remediation, and analytical services.
These services are generally performed under time and material, fixed price, and
cost plus fixed fee contracts which vary in length from one month to ten years.
The Company accounts for contract revenues and costs under fixed price contracts
using the percentageof-completion method. The percentage-of-completion is
determined using the "cost-to-cost" method for each contract cost component.
Under this method, direct labor and other contract costs incurred to date are
compared to periodically revised estimates of the total of each contract cost
component at contract completion to determine the percentage of revenues to be
recognized. Revenues from time and material and cost plus fixed fee contracts
are recognized currently as the work is performed. Provision for estimated
losses on uncompleted contracts, to the full extent of the loss, is made during
the period in which the Company first becomes aware that a loss on a contract is
probable.
Contract costs and estimated earnings recognized in excess of amounts billed are
classified as current assets under "costs and estimated earnings in excess of
billings on uncompleted contracts." Billings in excess of contract costs and
estimated earnings are classified as current liabilities under "billings in
excess of costs and estimated earnings on uncompleted contracts."
Generally, contracts provide for the billing of costs incurred and estimated
fees on a monthly basis. Amounts included in "costs and estimated earnings in
excess of billings on uncompleted contracts" in the accompanying financial
statements will be billed within twelve months of the balance sheet date.
Major Clients
Various agencies of the federal government accounted for approximately 53%, 64%,
and 61% of the Company's net revenue for the years ended August 31, 1996, 1995,
and 1994, respectively. Additionally, various agencies of the federal government
accounted for approximately 48% and 65% of the
<PAGE>
Company's accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts as of August 31, 1996 and 1995, respectively.
Cash and Cash Equivalents
Cash equivalents consist of money market instruments with a purchased original
maturity of three months or less, stated at cost, which approximates market.
Property and Equipment
Property and equipment are depreciated using the straight-line method over their
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized over the shorter of the estimated useful life or the term of the
lease.
Segment Information
The Company operates within one industry segment, providing a wide range of
consulting, engineering, remediation, and analytical services.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
Risks and Uncertainties
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.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from these estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
Supplemental Disclosures of Cash Flow Information
Cash paid during the years ended August 31, 1996, 1995, and 1994 for interest,
was $474,200, $521,700, and $400,600, respectively. Retirements of property and
equipment for the same periods were $2,602,400, $46,300, and $148,600,
respectively. The noncash tax benefit attributable to the exercise of
non-qualified stock options was $24,600, $650,900, and $167,300 for the years
ended August 31, 1996, 1995, and 1994, respectively.
<PAGE>
Accounting for Income Taxes
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes as of September 1, 1993. The
effect of the provisions have been implemented prospectively and were not
material to the financial statements as of September 1, 1993 or to the operating
results for the year ended August 31, 1994.
Deferred income taxes are recorded to reflect the tax consequences on future
years for differences between the tax basis of assets and liabilities and their
financial reporting amounts.
New Authoritative Standards Not Yet Implemented
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This statement is effective
for fiscal years beginning after December 15, 1995. The Company does not
anticipate that the adoption of this statement will have a material impact on
its consolidated financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation." This statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages, but does not require, all entities to adopt that
method of accounting for all of their employee stock compensation plans.
Entities electing not to make the change in accounting method must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The accounting and disclosure
requirements of this statement are effective for fiscal years that begin after
December 15, 1995. The Company has not yet determined whether or not it will
adopt the fair value based method of accounting defined in this statement.
Note 2. INCOME TAXES:
The (benefit from) provision for income taxes includes current and deferred tax
amounts summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
Year Ended August 31,
- ---------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------- --------------- ----------------
<S> <C>
Current tax expense (benefit):
Federal $ (18,400) $1,602,400 $ 879,900
State (4,300) 300,900 165,200
- ----------------------------------------------------------------------- --------------- ----------------
(22,700) 1,903,300 1,045,100
- ----------------------------------------------------------------------- --------------- ----------------
Deferred tax expense (benefit):
Federal (160,600) (352,100) 92,300
State (37,700) (66,100) 77,900
- ----------------------------------------------------------------------- --------------- ----------------
(198,300) (418,200) 170,200
- ----------------------------------------------------------------------- --------------- ----------------
Provision for (benefit from) income taxes $(221,000) $1,485,100 $ 1,215,300
======================================================================= =============== ================
</TABLE>
Total deferred tax assets and liabilities as of August 31, 1996 and 1995 and the
sources of the differences between the tax and financial reporting basis of the
Company's assets and liabilities which give rise to the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
- ---------------------------------------------------------- ----------------------------------
1996 1995
- ---------------------------------------------------------- ---------------- ----------------
<S> <C>
Deferred tax assets:
Property and equipment $ 694,200 $ 492,700
Accrued expenses and reserves 962,800 1,028,800
Miscellaneous 46,700 --
- ---------------------------------------------------------- ---------------- ----------------
$1,703,700 $1,521,500
========================================================== ================ ================
Deferred tax liabilities:
Prepaid expenses $ 109,700 $ 90,800
Miscellaneous -- 35,000
- ---------------------------------------------------------- ---------------- ----------------
$ 109,700 $ 125,800
========================================================== ================ ================
</TABLE>
The net deferred tax assets of $1,594,000 and $1,395,700 as of August 31, 1996
and 1995 are included to the extent appropriate in Prepaid expenses and other
and Other assets in the accompanying consolidated balance sheets.
<PAGE>
Reconciliation of the statutory federal income tax rate and the effective income
tax rate is summarized as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
- ---------------------------------------------------------------- ----------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------- ------------- --------------- ---------------
<S> <C>
Statutory federal income tax (benefit) rate 34.0% 34.0% 34.0%
State income tax, net of federal income tax effect 5.3 5.3 5.3
Non-recognition of future benefit from foreign loss (4.8) -- --
Other (6.9) 0.7 0.7
- ---------------------------------------------------------------- ------------- --------------- ---------------
Effective income tax rate 27.6% 40.0% 40.0%
================================================================ ============= =============== ===============
</TABLE>
Note 3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
Year Ended August 31,
- ----------------------------------------------------- --------------------------------------
1996 1995
- ----------------------------------------------------- ----------------- -------------------
<S> <C>
Contract accounts receivable $12,931,600 $14,881,600
Retainage by clients 1,373,300 1,362,200
- ----------------------------------------------------- ----------------- -------------------
Total accounts receivable 14,304,900 16,243,800
Less-Allowance for doubtful accounts (1,612,200) (1,385,700)
- ----------------------------------------------------- ----------------- -------------------
Accounts receivable, net $12,692,700 $14,858,100
===================================================== ================= ===================
</TABLE>
Management anticipates that substantially all retainages will be billed within
one year.
Note 4. BANK FINANCING ARRANGEMENTS:
The Company renegotiated its line of credit arrangement with a commercial bank
during the fiscal year. In connection with the renegotiation, the Company's
borrowing facility was extended through and a due date of January 31, 1998 was
established. The facility allows for borrowings up to $10 million, a decrease
from $12.5 million. Borrowings under the extended two-year facility are limited
to a percentage of certain accounts receivable and costs and estimated earnings
in excess of billings on uncompleted contracts. The agreement became effective
June 1, 1996. During fiscal years 1996, 1995, and 1994, the Company was either
in compliance or has obtained waivers on all covenants related to these
arrangements.
<PAGE>
Short-term borrowings information resulting from the financing arrangements is
as follows:
<TABLE>
<CAPTION>
9 Months Ended
May 31, Year Ended August 31,
---------------------- -----------------------------------
1996 1995 1994
- -------------------------------------------------------- ---------------------- ---------------- ------------------
<S> <C>
Balance as of end of period $ -- $ -- $ --
Maximum amount outstanding during the period 5,490,900 3,711,300 3,889,000
Average outstanding month-end balance during
the period 598,800 293,600 273,200
Weighted average interest rate during the period 8.4% 8.6% 6.4%
Interest rate at the end of the period 8.3% 8.8% 7.3%
======================================================== ====================== ================ ==================
</TABLE>
The weighted average interest rate has been calculated based upon the actual
daily interest expense and the daily average balance outstanding.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
- ------------------------------------------------------------------------------ -----------------------------------
1996 1995
- ------------------------------------------------------------------------------ ---------------- -----------------
<S> <C>
Revolving credit facility payable to commercial bank, interest charged at LIBOR
plus 150 or LIBOR plus 200, depending
certain financial covenants, facility expires January 1998 $2,276,400 $ --
Note payable to a commercial bank payable in monthly
installments of interest only; interest at prime or LIBOR plus 150 basis
points through January 1997, repaid in
connection with revolving credit facility refinancing -- 3,000,000
Notes payable to a commercial bank payable in equal
monthly installments of $43,650, plus interest at 250 points above LIBOR
through November 1998, and $21,400 plus interest at 250 points above LIBOR
thereafter until November 1999, secured by leasehold improvements and certain
of EA's analytical
laboratory equipment 1,032,700 1,435,700
Other -- 362,500
- ------------------------------------------------------------------------------ ---------------- -----------------
Total long-term debt 3,309,100 4,798,200
Less-current portion (644,600) (765,500)
- ------------------------------------------------------------------------------ ---------------- -----------------
Long-term portion $2,664,500 $4,032,700
============================================================================== ================ =================
</TABLE>
Note 5. LEASE COMMITMENTS:
<PAGE>
The Company's central office, laboratory facilities, regional offices, and
certain furniture and equipment are held under operating leases. These leases
expire at various dates through fiscal 2004, and certain leases call for annual
proportionate increases due to property taxes and certain other operating
expenses. Rent expense amounted to $8,912,300, $8,469,300, and $6,817,400, for
the years ended August 31, 1996, 1995, and 1994, respectively. Rent expense
included payments of approximately $2,054,900, $1,985,300, and $1,886,100 for
years ended August 31, 1996, 1995, and 1994, respectively, to partnerships
consisting of the Chairman of EA and certain members of his family for its
central office and certain regional offices and laboratory facilities. These
payments include reimbursement for operating expenses incurred by the lessor
such as property taxes, maintenance, and utility costs related to the operation
of the facilities.
The minimum lease commitments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending
August 31,
- ---------------------------------------------------------------- -------------------
<S> <C>
1997............................................................ $ 5,481,900
1998............................................................ 4,374,200
1999............................................................ 3,137,600
2000............................................................ 2,151,600
2001 ........................................................... 1,508,500
2002 and thereafter............................................. 1,775,400
================================================================ ===================
Total minimum payments.......................................... $18,429,200
================================================================ ===================
</TABLE>
Note 6. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period, and
have been adjusted retroactively to reflect two 3 for 2 stock splits, effected
in the form of 50% stock dividends, wherein 1 additional share of stock was
issued on February 23, 1994 and July 5, 1994, for each 2 shares outstanding as
of the record dates of February 8, 1994 and June 28, 1994, respectively. Common
stock equivalents are calculated using the treasury stock method. All
disclosures with regard to the shares of common stock have been adjusted to
reflect these stock splits.
Note 7. PROFIT SHARING AND INCENTIVE PLANS:
EA maintains a defined contribution plan covering all employees who are at least
21 years of age and have completed one year of credited service, as defined by
the plan. The plan provides for discretionary employer contributions for each
fiscal year, in amounts determined annually by the Board of Directors. The plan
also includes a 401(k) provision, allowing for Company matching contributions.
For the years ended August 31, 1996, 1995, and 1994, contributions to the plan,
including matching contributions made under the 401(k) provisions of the plan,
were $729,200, $710,400, and $519,300, respectively. Certain officers and
stockholders of the Company serve as trustees to the plan, as appointed by the
Board of Directors.
Note 8. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
<PAGE>
The Company maintains a Stock Option Plan (the Plan), which provides for the
grant of nonqualified stock options and incentive stock options to certain key
employees and officers of the Company. The exercise price of an option granted
under the Plan may not be less than the fair market value of the underlying
shares of Common Stock on the date of the grant. A total of 147,082 options are
issued and outstanding as of August 31, 1996 having an average exercise price of
$4.49. There are 425,530 options available for issuance as of August 31, 1996.
The Company maintains an Employee Stock Purchase Plan to provide eligible
employees with the opportunity to purchase shares of the Company's Common Stock
through voluntary payroll deductions. Under the Plan, eligible employees may
purchase shares through monthly payroll deductions at 95% of current market
value at the time of purchase. The Company pays all administrative expenses
related to employee purchases. A total of 210,125 shares remain authorized for
distribution under the Plan as of August 31, 1996.
The Company maintains two Non-Employee Director Stock Option Plans (1993 and
1995) which provide for the granting of nonqualified stock options to its three
non-employee directors. The exercise price of the 30,000 options, which were
outstanding as of August 31, 1996 ranged between $2.45 and $6.13, which equaled
the fair market value at the dates of grant. A total of 38,500 options remain
reserved for the Director Stock Option Plans as of August 31, 1996.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
EA Engineering, Science, and Technology, Inc.:
We have audited the accompanying consolidated balance sheets of EA Engineering,
Science, and Technology, Inc. (a Delaware corporation) and subsidiaries as of
August 31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended August 31, 1996. 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 financial position of EA Engineering, Science, and
Technology, Inc. and subsidiaries as of August 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
October 2, 1996
<PAGE>
DIRECTORS AND OFFICERS
Directors
Edmund J. Cashman, Jr.*
Senior Executive Vice President and Director, Legg Mason, Inc.; Senior
Executive Vice President of Legg Mason Wood Walker, Incorporated;
Director of Worldwide Value Fund, Inc.
Loren D. Jensen, Ph.D.
Chairman of the Board and Chief Executive Officer of the Company
Rudolph P. Lamone, Ph.D.*
Chairman of the Board, Michael D. Dingman Center for Entrepreneurship,
University of Maryland
College of Business and Management
George G. Radcliffe*
Retired Chairman of the Board, The Baltimore Life Insurance Company;
Trustee Emeritus of The Johns Hopkins University; Director of The
Baltimore Life Insurance Company, Life of Maryland, Inc.
*Audit and Compensation Committee Member
Officers
Loren D. Jensen, Ph.D.
Chairman, President, and Chief Executive Officer
Joseph A. Spadaro, CPA
Executive Vice President, Treasurer, Assistant Secretary,
and Chief Financial Officer
Stephen J. Hammalian, Ph.D.
Executive Vice President and Secretary
Charles R. Flynn, Ph.D., P.H.
Senior Vice President
James J. Gift, Ph.D.
Senior Vice President
Gerald J. Lauer, Ph.D.
Senior Vice President
David S. Santoro, P.E., L.S.
Senior Vice President
Robert G. Tardiff, Ph.D., ATS
Senior Vice President
Thomas J. Timbario, P.E.
Senior Vice President
H. Lee Becker, P.E.
Vice President
B. Fritts Golden
Vice President
Reza Karimi, Ph.D.
Vice President
Gloria D. McCleary, P.E.
Vice President
James F. Morrow, P.E.
Vice President
Robert P. Newman, P.E., DEE
Vice President
<PAGE>
Robert M. Owens, P.E.
Vice President
Stockholder Information
Independent Public Accountants
Arthur Andersen LLP
Baltimore, Maryland
Legal Counsel
Semmes, Bowen & Semmes
Baltimore, Maryland
Registrar and Transfer Agent
ChaseMellon Shareholder Services
Pittsburgh, Pennsylvania
Investor Relations
The Foristall Company
New York, New York
Common Stock Listing
NASDAQ Symbol: EACO
Annual Meeting
The Annual Meeting of the Stockholders will be held on January 15, 1997 at 9:00
a.m. (EST) at the Company's General Offices in Hunt Valley, Maryland.
SEC Form 10-K
A copy of the Company's annual report filed with the Securities and Exchange
Commission Form 10-K for the year ended August 31, 1996 is available. Please
direct your request to the Chief Financial Officer, Joseph A. Spadaro.
General Offices
EA Engineering, Science, and Technology, Inc.
11019 McCormick Road
Hunt Valley, Maryland 21031
(410) 584-7000
http://www.eaest.com/.
Subsidiaries
EA Engineering, Science, and
Technology de Mexico, S.A. de C.V.
Londres #190, Suite 308
Col. Juarez
Mexico, D.F. 06600
EA Financial, Inc.
<PAGE>
900 Market Street, Suite 200
Wilmington, Delaware 19801
EA Global, Inc.
11019 McCormick Road
Hunt Valley, Maryland 21031
Marketing for the Registrant's Common Equity and Related Stockholder Matters
On October 31, 1986, EA common stock began public trading in the
over-the-counter market under the symbol "EACO." The following table shows the
high and low closing sales price reported on the NASDAQ National Market System.
Such over-the-counter market quotations, however, reflect interdealer prices,
without retail markup, markdown, or commission and may not necessarily represent
actual transactions. These prices are adjusted to reflect EA's two 3 for 2
splits, each effected in the form of a 50% stock dividend on January 25, 1994
and June 14, 1994.
High Low
Fiscal 1994:
First Quarter 5.89 3.78
Second Quarter 9.26 5.22
Third Quarter 12.33 6.33
Fourth Quarter 12.50 8.75
Fiscal 1995:
First Quarter 10.25 6.75
Second Quarter 8.75 5.50
Third Quarter 7.25 5.25
Fourth Quarter 6.00 4.00
Fiscal 1996:
First Quarter 5.25 3.75
Second Quarter 4.13 3.50
Third Quarter 4.00 2.88
Fourth Quarter 3.50 2.25
<PAGE>
WEST
Seattle
155 108th Avenue NE, Suite 400
Bellevue, WA 98004
Phone: (206) 451-7400
Fax: (206) 451-7800
Contact: James F. Morrow, P.E.
Sacramento
3841 N. Freeway Blvd., Suite 145
Sacramento, CA 95834
Phone: (916) 924-7450
Fax: (916) 924-7460
Contact: Michael P. Stuhr, P.E.
San Francisco
3468 Mt. Diablo Blvd., Suite B-100
Lafayette, CA 94549
Phone: (510) 283-7077
Fax: (510) 283-3894
Contact: B. Fritts Golden, AICP
Anchorage
4401 Business Park Blvd., Suite 26
Anchorage, AK 99503
Phone: (907) 561-3730
Fax: (907) 561-3731
Contact: William W. Kakel, P.E.
Fairbanks
3540 International Way
Fairbanks, AK 99701
Phone: (907) 456-4751
Fax: (907) 456-1740
Contact: David E. Beistel
Honolulu
Hawaii Kai Corporate Plaza
6600 Kalanianaole Hwy., Suite 200
Honolulu, HI 96825
Phone: (808) 396-1066
Fax: (808) 396-1039
Contact: Joel J. Lazzeri
CENTRAL
Chicago
444 Lake Cook Road, Suite 18
Deerfield, IL 60015
Phone: (847) 945-8010
<PAGE>
Fax: (847) 945-0296
Contact: Gregory L. Seegert
Lincoln
121 South 13th St., Suite 701
Lincoln, NE 68508
Phone: (402) 476-3766
Fax: (402) 476-7825
Contact: H. Lee Becker, P.E.
Dallas
1420 Valwood Pky., Suite 170
Carrollton, TX 75006
Phone: (972) 484-1420
Fax: (972) 247-7220
Contact: Charles J. Place, P.G.
San Antonio
7330 San Pedro., Suite 536
San Antonio, TX 78216
Phone: (210) 344-3067
Fax: (210) 344-2962
Contact: Brian R. Mosley, P.G.
Mexico
EA Engineering, Science, and Technology
de Mexico, S.A. de C.V.
Londres #190, Suite 308
Col. Juarez, Mexico, D.F. 06600
Phone: 011-525-525-5036
Fax: 011-525-525-5036
Contact: L. Alejandro Guillen, P.E.
EAST
Boston
Sharon Commerce Center
2 Commercial St., Suite 106
Sharon, MA 02067
Phone: (617) 784-1767
Fax: (617) 784-4539
Contact: Robert S. Palermo, Dr.S.
New York
3 Washington Center
Newburgh, NY 12550
Phone: (914) 565-8100
Fax: (914) 565-8203
Contact: Kenneth C. Wiswall, P.E.
<PAGE>
Syracuse
115 Twin Oaks Drive
Syracuse, NY 13206
Phone: (315) 431-4610
Fax: (315) 431-4280
Contact: Thomas W. Porter
Berkeley Heights
Two Oak Way
Berkeley Heights, NJ 07922
Phone: (908) 665-2440
Fax: (908) 665-2464
Contact: William R. Colvin, P.G.
Delaware
New Castle Corporate Commons
92 Read's Way, Suite 109
New Castle, DE 19720
Phone: (302) 325-3560
Fax: (302) 325-3648
Contact: Scott H. Simon
Washington, D.C.
8401 Colesville Road
Suite 500, Box 21
Silver Spring, MD 20910
Phone: (301) 565-4216
Fax: (301) 587-4752
Contact: Robert G. Tardiff, Ph.D.
Pensacola
8800 University Pky., Suite C-1
Pensacola, FL 32514
Phone: (904) 479-7905
Fax: (904) 479-7851
Contact: Melvin R. Joplin
MARYLAND
Corporate Headquarters
11019 McCormick Road
Hunt Valley, MD 21031
Phone: (410) 584-7000
Fax: (410) 771-1625
Contact: Stephen E. Storms, Ph.D.
Baltimore
15 Loveton Circle
Sparks, MD 21152
Phone: (410) 771-4950
Fax: (410) 771-4204
<PAGE>
Contact: Gloria D. McCleary, P.E.
EA Laboratories
19 Loveton Circle
Sparks, MD 21152
Phone: (410) 771-4920
Fax: (410) 771-4407
Contact: Reza A. Karimi, Ph.D.
EA Global, Inc.
11019 McCormick Road
Hunt Valley, MD 21031
Contact: Stephen J. Hammalian, Ph.D.
Subsidiaries
EA Engineering, Science, and
Technology de Mexico, S.A. de C.V.
Londres #190, Suite 308
Col. Juarez
Mexico, D.F. 06600
EA Financial, Inc.
900 Market Street, Suite 200
Wilmington, Delaware 19801
EA Global, Inc.
11019 McCormick Road
Hunt Valley, Maryland 21031
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 1,308,600
<SECURITIES> 0
<RECEIVABLES> 12,692,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,060,400
<PP&E> 16,462,300
<DEPRECIATION> 13,337,400
<TOTAL-ASSETS> 33,328,500
<CURRENT-LIABILITIES> 12,105,900
<BONDS> 0
<COMMON> 61,800
0
0
<OTHER-SE> 18,496,300
<TOTAL-LIABILITY-AND-EQUITY> 33,328,500
<SALES> 64,353,700
<TOTAL-REVENUES> 88,307,800
<CGS> 64,797,300
<TOTAL-COSTS> 88,751,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,500
<INCOME-PRETAX> (801,100)
<INCOME-TAX> (221,100)
<INCOME-CONTINUING> (508,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (580,100)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
