UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended November 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
From the transition period to
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Commission File Number 0-15587
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 52-0991911
- ------------------------------------------- ----------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer ID Number
or Organization)
11019 McCormick Road, Hunt Valley, Maryland 21031
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (410) 584-7000
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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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on January 8, 1999, was 6,299,300.
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Page 1 of 22
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION 3
Item 1 Financial Statements 3
Consolidated Balance Sheets - Assets 4
Consolidated Balance Sheets - Liabilities and
Stockholders' Equity 5
Consolidated Statements of Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II - OTHER INFORMATION 20
Item 6 Exhibits and Reports on Form 8-K 20
(a) Exhibits
27 Financial Data Schedule 22
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements included herein for EA Engineering,
Science, and Technology, Inc. and its subsidiaries (the "Company") have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. In management's opinion, the interim
financial data presented includes all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation. Certain
information and footnote disclosures, normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that the disclosures are adequate to
understand the information presented. Operating results and cash flows for the
interim period are not necessarily indicative of the results that may be
expected for the full fiscal year. These consolidated financial statements
should be read in conjunction with the Company's August 31, 1998 consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, August 31,
1998 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents........................ $ 1,861,200 $ 1,782,600
Accounts receivable, net......................... 7,346,900 8,441,900
Costs and estimated earnings in excess of
Billings on uncompleted contracts.............. 8,396,800 6,394,900
Refundable income taxes.......................... 407,600 407,600
Prepaid expenses and other....................... 1,267,500 1,090,600
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Total Current Assets........................... 19,280,000 18,117,600
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PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment................ 13,313,000 13,106,900
Leasehold improvements........................... 3,663,900 3,675,600
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Total property and equipment, at cost............ 16,976,900 16,782,500
Less-Accumulated depreciation and amortization... (15,254,900) (15,001,400)
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Net Property and Equipment....................... 1,722,000 1,781,100
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OTHER ASSETS........................................ 3,619,900 3,576,200
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Total Assets..................................... $24,621,900 $23,474,900
=========== ===========
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
November 30, August 31,
1998 1998
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CURRENT LIABILITIES:
Accounts payable............................ $ 4,470,100 $ 4,494,300
Accrued expenses............................ 710,900 735,100
Accrued salaries, wages and benefits........ 2,792,500 2,270,800
Current portion of long-term debt........... 382,100 438,800
Billings in excess of costs and estimated
Earnings on uncompleted contracts......... 122,100 246,700
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Total Current Liabilities................. 8,477,700 8,185,700
LONG-TERM DEBT, net of current portion......... 2,084,600 1,279,800
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Total Liabilities......................... 10,562,300 9,465,500
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,296,700
and 6,285,000 shares issued and outstandin 63,000 62,900
Preferred stock, $.01 par value; 8,000,000
Shares authorized; none issued............ -- --
Capital in excess of par value................. 11,064,700 11,049,300
Retained earnings.............................. 2,931,900 2,897,200
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$24,621,900 $23,474,900
=========== ===========
The accompanying notes are an integral part of these balance sheets.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
November 30,
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1998 1997
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Total revenue................................ $13,548,000 $16,193,300
Less - Subcontractor costs................... (2,275,300) (3,488,600)
Less - Other direct project costs............ (1,952,400) (1,983,400)
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Net revenue............................... 9,320,300 10,721,300
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Operating costs and expenses:
Direct salaries and other operating....... 7,190,300 7,947,700
Sales, general and administrative......... 2,039,300 2,301,200
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Total operating expenses................ 9,229,600 10,248,900
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Income from operations....................... 90,700 472,400
Interest expense............................. (48,500) (65,400)
Interest income.............................. 15,600 15,500
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Income before income taxes................... 57,800 422,500
Provision for income taxes................... 23,100 138,200
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Net income................................... $ 34,700 $ 284,300
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Basic earnings per share..................... $0.01 $0.05
Diluted earnings per share................... $0.01 $0.05
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Weighted average shares outstanding.......... 6,292,300 6,233,400
Effect of dilutive stock options............. 300 21,700
Diluted weighted average shares outstanding.. 6,292,600 6,255,100
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
November 30,
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1998 1997
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CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net income........................................ $ 34,700 $ 284,300
Noncash expenses included in net income
Depreciation and amortization................... 253,500 293,200
Changes in operating assets and liabilities -
Decrease in accounts receivable, net............ 1,095,000 886,000
(Increase) in costs and estimated earnings in
excess of billings on uncompleted contracts... (2,001,900) (869,400)
(Increase) decrease in prepaid expenses and
other assets.................................. (220,600) 32,700
Increase (decrease) in accounts payable and
Accrued expenses.............................. 473,300 (1,277,800)
(Decrease) increase in billings in excess of
costs and estimated earnings on uncompleted
contracts..................................... (124,600) 19,500
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Net cash used for operating activities.......... (490,600) (631,500)
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CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Purchase of equipment, net........................ (194,400) (157,800)
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Net cash flows used for investing activities.... (194,400) (157,800)
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CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net borrowings from revolving line of credit...... 892,300 301,600
Proceeds from issuance of common stock............ 15,500 18,000
Reduction of long-term debt and short-term
borrowings...................................... (144,200) (204,000)
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Net cash flows from financing activities........ 763,600 115,600
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NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 78,600 (673,700)
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CASH AND CASH EQUIVALENTS, beginning of period....... 1,782,600 2,333,300
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CASH AND CASH EQUIVALENTS, end of period............. $ 1,861,200 $ 1,659,600
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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 THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
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); its wholly-owned subsidiaries,
EA International, Inc. and EA Financial, Inc.; and EA Financial, Inc.'s
wholly-owned subsidiaries, EA Global, Inc. and EA de Mexico, S.A. de C.V. The
entities are collectively referred to herein as the "Company." All significant
intercompany transactions have been eliminated in consolidation.
Segment Information -
The Company is organized around two operating segments. The primary segment is
Management Consulting Services, provided through a network of offices throughout
the United States, Mexico and Guam; and Analytical Services provided through its
laboratory facility located in Maryland.
Revenue Recognition -
The Company is an international consulting firm specializing in the fields of
energy, the environment, health and safety, and analytical services. These
services are generally performed under time-and-material, fixed-price, and
cost-plus-fixed-fee contracts. Task orders from these contracts vary in length
from one month to two years.
The Company's Management Consulting Services segment 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. The majority of the Analytical Services
segment contracts are on a fixed-unit priced basis. Revenue for fixed-unit
priced contracts is recognized currently as sample units are processed.
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.
<PAGE>
Major Clients -
Various agencies of the federal government accounted for approximately 53% and
50% of the Company's (primarily Management Consulting Services) net revenue for
the three months ended November 30, 1998 and 1997, respectively. Additionally,
various agencies of the federal government accounted for approximately 48% of
the Company's accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts as of November 30, 1998. Three industrial
clients accounted for approximately 33% of the Analytical Services segment's
gross sales and 78% of its external client billings. No material changes to the
Company's gross and net contracted backlog amounts have occurred through the
first quarter ended November 30, 1998.
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
value.
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.
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 for interest during the three months ended November 30, 1998 and 1997
was $45,800, and $48,900, respectively. For the three months ended November 30,
1998, there were no retirements of property and equipment compared to $28,000 in
the prior year's first quarter.
<PAGE>
Accounting for Income Taxes -
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.
Note 2. SEGMENT FINANCIAL INFORMATION
The following table provides selected quarterly information, as reviewed by the
Company's management in making decisions about allocating reserves to each
segment and assessing its performance.
Three Months Ended
November 30,
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1998 1997
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Gross Sales
Management Consulting Services (external) $12,818,600 $15,461,300
Management Consulting Services (internal) (1,078,600) (756,800)
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Total Management Consulting Services (gross) 11,740,000 14,704,500
Analytical Services (external) 729,400 732,000
Analytical Services (internal) 1,078,600 756,800
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Total Analytical Services (gross) 1,808,000 1,488,800
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Total Company Gross Sales $13,548,000 $16,193,300
===============================================================================
Net sales to unaffiliated customers
Management Consulting Services $ 8,089,800 $ 9,582,900
Analytical Services 1,230,500 1,138,400
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Total Company Net Sales $ 9,320,300 $10,721,300
===============================================================================
Income (loss) from operations
Management Consulting Services $ 43,400 $ 506,500
Analytical Services 47,300 (34,100)
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Total Company Income from Operations $ 90,700 $ 472,400
===============================================================================
Identifiable assets (net property and equipment)
Management Consulting Services $ 1,099,400 $ 1,447,300
Analytical Services 622,600 814,100
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Total Company Net Property and Equipment $ 1,722,000 $ 2,261,400
================================================================================
Note: Sales are considered external when a segment directly enters into a
contract with a client. Internal sales are generated by the use of the Company's
Analytical Services required by external clients of Management Consulting
Services. Internal sales are duplicated within each segment and are eliminated
through intercompany adjustments.
<PAGE>
Note 3. BANK FINANCING ARRANGEMENTS
The Company maintains an $8.5 million revolving line of credit and a $1.5
million equipment line of credit arrangement with a commercial bank. Borrowings
under the revolving line of credit are limited to a percentage of certain
accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts (up to a maximum of $4,000,000). The Company is in
compliance on all covenants related to these arrangements.
For the three months ended November 30, 1998 and 1997, the Company had no
short-term borrowings.
Long-term debt consists of the following:
November 30,
------------------------
1998 1997
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Revolving credit facility payable to a commercial
Bank, interest charged at LIBOR plus 150, facility
expires September 2000 .............................. $2,084,600 $2,129,300
Note payable to a commercial bank payable in equal
monthly installments of $29,600, which includes
interest at 9.1%, through December 1999 secured
by certain computer equipment........................ 338,400 647,500
Note payable to a commercial bank payable in equal
monthly installments of $43,651 through December
1997. Thereafter, $21,429, plus interest charged
at LIBOR plus 150 through January 1999; secured by
leasehold improvements and certain analytical
laboratory equipment................................. 43,700 300,800
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Total long-term debt................................... 2,466,700 3,077,600
Less-current portion................................... (382,100) (639,200)
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Long-term portion...................................... $2,084,600 $2,438,400
========== ==========
Note 4. EARNINGS (LOSS) PER SHARE:
In accordance with Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per Share," basic earnings (loss) per share is based on the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings (loss) per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents are calculated using the treasury stock method.
Note 5. PROFIT SHARING:
EA maintains a defined contribution plan in which all employees who are at least
21 years of age, as defined by the plan, are eligible to participate. 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.
<PAGE>
Note 6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
The Company maintains an Amended and Restated Stock Option 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 808,600
options are issued and outstanding as of November 30, 1998, having an average
exercise price of $2.42. Of the outstanding options, 400,000 are held by the
President and CEO. The exercise price of the 400,000 shares ranges between $2.25
and $3.67, which was equal to the market value on the dates of grant.
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 Purchase 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 108,800 shares
remain authorized for distribution under the Purchase Plan as of November 30,
1998.
The Company maintains two Non-Employee Director Stock Option Plans (1993 and
1995) which provide for the granting of nonqualified stock options to its
non-employee directors. The exercise price of the 17,000 options, which were
outstanding as of November 30, 1998, ranged between $2.03 and $6.13, which
equaled the fair market value at the dates of grant. A total of 33,500 options
remain reserved for the Director Stock Option Plans as of November 30, 1998.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
Item 2. 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 of contracts, and the extent
to which the Company's employees are performing billable tasks as opposed to
engaging in preparing contract proposals 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, 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 and other direct project costs, as its primary measure of revenue.
RESULTS OF OPERATIONS
Three Months Ended November 30, 1998 (Consolidated)
Net revenue for the three months ended November 30, 1998 was $9,320,300 a
decrease of 13.1% from $10,721,300 for the same period in the prior fiscal
period. This decrease in net revenue is due to expected lower contract volume
across all client sectors, except for state and local government, which
increased 36%. The lower contract volume is attributable to a temporary lag in
new orders and difficulty in recruiting key technical staff further reduced net
revenue. The slowdown in new orders is attributable to the Company's planned
shift away from low-margin services, and shift toward higher margin consulting
services.
Direct salaries and other operating costs decreased 9.4% to $7,190,300 from
$7,947,700 for the three-month period ended November 30, 1998 and 1997,
respectively. However, as a result of lower net revenue, direct salaries and
other operating costs as a percentage to net revenue increased to 77.1% for the
three months ended November 30, 1998 compared to 74.1% for the same period in
1997. The overall decrease is due to lower salaries and benefits and lower
overall operating costs from quarter to quarter.
Sales, general and administrative costs decreased by 11.4% to $2,039,300 from
$2,301,200 or 21.9% and 21.5% of net revenue for the three-month period ended
November 30, 1998 and 1997, respectively. The decrease is due to lower sales and
marketing related costs from quarter to quarter. The lower costs are
attributable to staff reduction, increased utilization of the Company's National
Technical Directors on client projects, and greater controls on business travel.
<PAGE>
As a result of the above factors, income from operations for the three months
ended November 30, 1998 was $90,700 or 1.0% of net revenue down from $472,400 or
4.4% of net revenue in the prior fiscal period ended November 30, 1997. Interest
expense, net, decreased $17,000 in the current quarter compared to the prior
year. The net decrease in interest expense is primarily the result of decreasing
long-term principal balances.
The provision for income taxes was $23,100 and $138,200 for the three months
ended November 30, 1998 and 1997, respectively. This represents effective rates
of 40.0% and 32.7%, respectively. The difference in effective tax rates is
attributable to increases in certain permanent differences between financial and
income tax reporting. It is the opinion of management that these recorded
benefits are more likely than not to be realized.
Net income for the three months ended November 30, 1998 and 1997 decreased to
$34,700 from $284,300, representing 0.4% and 2.7% of net revenue, respectively.
ANALYSIS BY SEGMENT
The following section discusses the revenue and operating results of the
Company's two major operating segments - Management Consulting Services and
Analytical Services for the three months ended November 30, 1998.
Management Consulting Services
Net sales for Management Consulting Services for the three months ended November
30, 1998 were $8,089,800, a decrease of 15.6% from $9,582,900 for the same
period in the prior fiscal period. This decrease is due to expected lower sales
across all client sectors, except for the state and local government. The lower
contract volume is attributable to a temporary lag in new orders as the segment
shifts to higher-end consulting*, as well as difficulty in filling key technical
positions within the segment.
The Management Consulting Services segment had income from operations of $43,400
or 0.5% of its net revenue for the three months ended November 30, 1998 compared
to a contribution of $506,500 or 5.3% in the prior year's first quarter. This
decrease in operating income is directly attributable to the decrease in sales,
offset by a reduction in operating expenses.
Analytical Services
Net sales increased to $1,230,500 from $1,138,400 for the three months ended
November 30, 1998 and 1997, respectively. The 8.1% increase is due to internally
generated sales from the Management Consulting Services segment. Specifically, a
large volume of samples was performed under one of the Management Consulting
Service segment's indefinite delivery/indefinite quantity contracts with the
federal government. External sales remained flat comparing the first quarter of
fiscal year's 1999 and 1998.
The Analytical Services segment had income from operations of $47,300, or 3.8%,
of its net revenue for the three month period ended November 30, 1998, compared
to a $34,100 loss from operations for the same period in the prior fiscal
period. The $81,400 increase in operating income is due to increased sales
volume, while keeping operating expenses consistent with the prior year.
Operating expenses for the three months ended November 30, 1998 were $1,183,200
or 94.7% of net revenue, compared to $1,172,500 or 103.0% in the prior year's
first quarter. The segment was able to perform a higher volume of sales without
<PAGE>
increasing operating expenses through the use of temporary labor to help in peak
periods. Temporary labor costs were approximately $148,000 in the current period
compared to $52,000 for the three months ended November 30, 1997.
Liquidity and Capital Resources
Cash and cash equivalents increased by $78,600 for the three months ended
November 30, 1998. The increase principally resulted from borrowings against the
Company's line of credit used for operating activities, the investment in
capital equipment, and the reduction of long-term debt.
The Company's capital expenditures, consisting primarily of purchases of
equipment and leasehold improvements, were approximately $194,400 and $157,800
for the three months ended November 30, 1998 and 1997, respectively.
At November 30, 1998, the Company had outstanding long-term debt, including the
current portion, of $2,466,700. This represents a net increase of $748,100 from
the $1,718,600 balance at August 31, 1998. The increase is the result of a
$892,300 increase in its revolving line of credit balance, partially offset by
net repayments of $144,200 for equipment and computer loans. Compared to the
prior year's first quarter ended November 30, 1997, the Company has managed to
reduce its long-term debt, including the current portion by $610,900. This
decrease is mainly attributable to $566,200 in net repayments for equipment and
computer loans and a $44,700 decrease in its revolving line of credit balance.
The Company's existing funds, cash from operations, and the available portion of
its $8,500,000 revolving line and $1,500,000 equipment line of credit
arrangements are expected to be sufficient to meet the Company's present and
immediately foreseeable cash needs.* The Company also has access to certain
capital equipment financing arrangements through various equipment suppliers.
While the Company believes that there is sufficient market demand to absorb the
additional contracting capacity resulting from its various indefinate delivery/
indefinite quantity contracts, there can be no assurance that this demand will,
in fact, materialize.* 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.
YEAR 2000 READINESS DISCLOSURE
EA Engineering, Science, and Technology, Inc. ("EA" or the "Company") recognizes
the seriousness of the challenge businesses worldwide face as a result of the
Year 2000 problem. EA formally began to address its own Year 2000 status in
early 1998. The Company believes the measures it has already taken, together
with those planned for 1999, will minimize any impact the Year 2000 problem may
have on EA's ability to deliver services to its clients, financial performance
or results of operations.
Definitions
During fiscal 1998, EA developed a three-phase program for Year 2000 compliance.
Phase I identified those systems, hardware and software that posed a compliance
risk for EA. Phase II assessed the business and financial impact of these
at-risk systems; established priorities to address these risk areas; and
prescribed remediation schedules and details. Phase III is the final testing of
the major systems to ensure compliance.
<PAGE>
Assessment
EA's information technology infrastructure can be broadly categorized into the
following major systems: networking and communication systems, desktop
computing, major application systems, EA Laboratory, non-information technology
(non-IT) and other miscellaneous systems.
The Company's Phase I assessment identified several critical elements of EA's
networking and communications infrastructure that are potentially vulnerable to
Year 2000 issues. These elements include various types of computer servers and
network routers. Additionally, various software components require new revision
to ensure compliance. Numerous databases and database access programs are
currently believed to be non-compliant.
EA's desktop computing environment is comprised predominantly of Compaq desktop
computer systems, IBM notebooks, the Microsoft Windows 95 operating system and
numerous versions and variations of commercially available software. The
majority of the desktop computer systems, notebooks and operating system
software with applicable Y2K patches, is currently believed to be Year 2000
compliant. EA leases all of its computer hardware and consequently replaces all
equipment on a three-year schedule. The Company believes this rotation should
minimize any Year 2000 problems in this area. Desktop application software
varies greatly in its ability to accurately process Year 2000 information.
It is currently believed that the Company's major applications, including its
financial management, human resources, and laboratory (LIMS) systems are not
Year 2000 compliant. However, a full assessment was not completed on these
systems because they are scheduled for replacement in the upcoming fiscal
period. These systems are being replaced to improve their performance and
functionality. Replacement of these systems was not accelerated due to the Year
2000 issue.
EA's laboratory is comprised of many different models of Hewlett-Packard
laboratory equipment. As part of the EA Laboratories' maintenance agreement with
Hewlett-Packard (HP), the manufacturer completed an independent review of the
labs' hardware and software systems in November 1998. This review, which was
conducted at no cost to EA Laboratories, determined that the laboratory hardware
and system-level software are currently noncompliant; however, it has been
determined that minor upgrades will result in compliance (see "Remediation/
Replacement" below).
The Company is currently assessing the Year 2000 readiness of its non-IT and
other miscellaneous systems including phone switches, voice mail systems,
environmental controls systems, and the like. Phone switches in most branch
offices have been tested and found to be compliant. The environmental control
systems in the Company's headquarters and Baltimore offices have been tested and
found to be compliant. Other reviews are scheduled to be completed by the third
quarter of calendar year 1999.
Remediation / Replacement
Networking and Communications Systems - In early calendar 1998, EA restructured
its network topology. The Company currently believes that this redefinition will
significantly upgrade EA's overall communications capabilities, improving
reliability and performance, and that it will be Year 2000 compliant. This
upgrade will be accomplished through the replacement of all critical system
components that have potential Year 2000 problems. Two of four critical field
<PAGE>
systems have already been replaced. The remaining two will be completed by the
spring of 1999. The upgrading of the EA corporate headquarters' systems is
underway and will be completed during the first quarter of calendar 1999. EA has
selected MCI Worldcom as its communications services provider. MCI Worldcom has
advised EA that it is fully Year 2000 compliant.
Coincident with the hardware upgrades, EA is upgrading its database capabilities
to be Year 2000 compliant. The database capabilities are presently expected to
be in place during the first quarter of calendar 1999. EA has retained a
consultant to convert all applicable databases to compliant software. These
database conversions will continue through the first three quarters of calendar
1999.
Desktop Computing - To address EA's desktop software computing environment, EA
standardized on the Microsoft Office Suite of application products in the second
quarter of fiscal 1998. The MS Office product is not fully compliant. Any
remaining non-compliant applications are being addressed on a project-by-project
basis. We presently anticipate this process will be completed in the third
quarter of calendar 1999.
Major Applications - The Company began the process of implementing a new
financial management system in December 1998. The new financial management
system is expected to be fully operational by the fall of 1999. The Company has
also selected a human resources system. The implementation of both the human
resources system and LIMS are expected to begin in January 1999. The human
resources system is expected to be completed in the second quarter of calendar
year 1999. The implementation of the LIMS, including increased functionality and
capabilities, is expected to be completed in the fourth quarter of calendar year
1999. The LIMS application software is expected to be in use by the second
quarter of calendar year 1999.
EA Laboratories - As part of its assessment of hardware and system-level
software, the Company learned that minor upgrades would result in compliance.
These upgrades were installed in a test system and found to work correctly. All
systems will be upgraded accordingly by summer 1999.
Non-IT and Miscellaneous Systems - Should Year 2000 upgrades be required for
these systems, they will be performed during the first half of 1999.
Testing
EA has tested and will continue to test, the Year 2000 worthiness of each
upgraded system, as it is installed. In each case, e.g., desktop systems,
networks, major systems, etc., this compliance testing is comprised of three
independent assessments: first, review of the product manufacturer's Year 2000
compliance testing certifications and results--no product is selected unless it
has been identified by the manufacturer to have passed a comprehensive battery
of Year 2000 tests; second, testing of these products prior to installation;
third, independent assessment, where appropriate, by outside consultants or
subcontractors.
Risks and Contingency Plans
Based on the progress the Company has made toward Year 2000 compliance during
1998, together with its plans for 1999, the Company does not foresee significant
risks associated with these efforts at this time. Since EA has adopted a plan to
address these issues in a timely manner, it has not developed a comprehensive
<PAGE>
contingency plan should compliance programs fail to be completed successfully or
in their entirety. The Company regularly monitors its progress in achieving Year
2000 compliance. Should the Company identify any significant risk of
non-compliance, it will develop appropriate contingency plans on a timely basis.
Third-Party Vendors, Utilities and Customers
The fact that EA provides environmental consulting services, which are primarily
labor-based, substantially minimizes the risks associated with potential Year
2000 problems with its internal systems and suppliers. The Company maintains a
broad base of vendors and suppliers and believes there is little risk to its
ongoing operations from Year 2000 problems encountered by its outside vendors.
EA will be contacting each of its major vendors and utilities early in calendar
1999 to inquire into each system's Year 2000 compliance. The Company cannot
fully assess the degree to which its customers, particularly the U.S.
Government, will successfully complete a Year 2000 upgrade on a timely basis.
Because a significant portion of the Company's business is from contracts with
various federal government agencies, a failure by the U.S. Government to achieve
Year 2000 compliance could have a significant adverse effect on the Company's
future business, financial operations and results of operations.
Reasonably Likely "Worst-Case" Scenarios
EA has gone to significant lengths to provide redundancy in each major system.
For example, four independent communication paths have been defined between EA's
branch offices and its headquarters location. Any of these paths will provide
data access to the systems required to continue normal business operations. A
failure in any single major system, therefore, should not result in the
cessation of normal work processes.
For the reasons stated above, EA does not presently anticipate that the Year
2000 phenomenon will cause any significant disruption to its business, financial
operations or results of operations. However, if the Company's customers or
subcontractors fail to prepare adequately for Year 2000, there could be numerous
and significant effects on EA. For example, subcontractors may not be able to
obtain or deliver needed data; EA employees might be unable to perform work,
resulting in a loss of revenue; payments may fail to arrive on time. Any or all
of these contingencies could, under certain circumstances, result in a
substantial and material impact on EA's financial performance.
Costs to Address Year 2000 Issues
The Company has not incurred, and presently believes that it will not likely
incur, material costs in connection with effectuating Year 2000 compliance. This
is because replacement of major applications was previously planned to improve
performance and functionality requirements. These replacements were not
accelerated due to Year 2000 issues; as such the costs of these systems are part
of the Company's capital budget. The Company currently estimates the cost of
remediating its software and non-IT systems at approximately $30,000; upgrades
to non-compliant Hewlett-Packard software in EA Laboratories is presently
estimated to be approximately $8,000. The Company does not separately track the
internal costs for the Y2K project; such costs are principally the related
payroll costs for its Information Systems group.
<PAGE>
Forward-Looking Statements
The foregoing contains "forward-looking information" within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by an asterisk (*) or by such forward-looking
terminology as "may," "will," "believe," "anticipate," "expect," or similar
words or variations thereof. Such forward-looking statements involve significant
risks and uncertainties, including, among other things, risks associated with
(1) substantial reliance on government contracts, public budgetary restrictions
and uncertainties, discrepancies between awarded contract amounts and actual
revenues, and cancellation of contracts at the option of the government, (2)
timing and award of contracts, (3) timing and performance of contracts, and (4)
successful bidding of government and non-government contracts in a very
competitive environment. IN EACH CASE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
SUCH FORWARD-LOOKING STATEMENTS. Other important factors that the Company
believes may cause actual results to differ materially from such forward-looking
statements are discussed throughout this Report and in the Company's other
filings with the Securities and Exchange Commission. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes indicate that any such results or events (expressed
or implied) will not be realized.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EA Engineering, Science, and
Technology, Inc. & Subsidiaries
-------------------------------
(Registrant)
January 13, 1999 By: /s/ Donald A. Deieso
- ----------------- -----------------------------------
(Signature)
Donald A. Deieso
-----------------------------------
President and Chief Executive Officer
-----------------------------------
(Title)
January 13, 1999 By: /s/ Barbara L. Posner
- ----------------- -----------------------------------
(Signature)
Barbara L. Posner
-----------------------------------
Senior Vice President,
Finance and Administration
(Principal Financial Officer)
-----------------------------------
(Title)
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