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 February 28, 1999
[_] 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.
---------------------------------------------
(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
------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (410) 584-7000
-----------------
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 April 6, 1999, was 6,309,600.
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Page 1 of 25
<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 14
PART II - OTHER INFORMATION 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
(a) Exhibits
27 Financial Data Schedule 25
<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
February 28, August 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents........................$ 1,883,000 $ 1,782,600
Accounts receivable, net......................... 7,380,000 8,441,900
Costs and estimated earnings in excess of
Billings on uncompleted contracts.............. 7,564,500 6,394,900
Refundable income taxes.......................... 1,517,100 407,600
Prepaid expenses and other....................... 1,334,800 1,090,600
----------- -----------
Total Current Assets........................... 19,679,400 18,117,600
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment................ 13,303,100 13,106,900
Leasehold improvements........................... 3,652,300 3,675,600
----------- -----------
Total property and equipment, at cost............ 16,955,400 16,782,500
Less-Accumulated depreciation and amortization... (15,425,000) (15,001,400)
----------- -----------
Net Property and Equipment....................... 1,530,400 1,781,100
----------- -----------
OTHER ASSETS........................................ 3,669,000 3,576,200
----------- -----------
Total Assets............................. $24,878,800 $23,474,900
=========== ===========
The accompanying notes are an integral part of these balance sheets.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, August 31,
1999 1998
------------ ----------
CURRENT LIABILITIES:
Accounts payable................................$ 3,581,900 $ 4,494,300
Accrued expenses................................ 2,474,900 735,100
Accrued salaries, wages and benefits............ 2,280,100 2,270,800
Current portion of long-term debt............... 256,600 438,800
Billings in excess of costs and estimated
Earnings on uncompleted contracts............. 107,800 246,700
----------- -----------
Total Current Liabilities..................... 8,701,300 8,185,700
LONG-TERM DEBT, net of current portion............. 4,212,100 1,279,800
----------- -----------
Total Liabilities............................. 12,913,400 9,465,500
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,311,200
and 6,285,000 shares issued and outstanding... 63,200 62,900
Preferred stock, $.01 par value; 8,000,000
Shares authorized; none issued................ -- --
Capital in excess of par value..................... 11,082,800 11,049,300
Retained earnings.................................. 819,400 2,897,200
----------- -----------
Total Stockholders' Equity.................... 11,965,400 14,009,400
----------- -----------
Total Liabilities and Stockholders' Equity....$24,878,800 $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
<TABLE>
Three Months Ended Six Months Ended
February 28, February 28,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue...................................... $12,433,900 $14,418,100 $25,981,900 $30,611,400
Less - Subcontractor costs......................... (2,065,700) (2,597,300) (4,341,000) (6,085,900)
Less - Other direct project costs.................. (1,785,300) (1,200,900) (3,737,700) (3,184,300)
----------- ----------- ----------- -----------
Net revenue..................................... 8,582,900 10,619,900 17,903,200 21,341,200
----------- ----------- ----------- -----------
Operating costs and expenses:
Direct salaries and other operating............. 7,782,900 7,952,900 14,973,200 15,900,600
Sales, general and administrative............... 2,155,100 2,375,300 4,194,400 4,676,500
Restructuring................................... 2,132,600 -- 2,132,600 --
----------- ----------- ----------- -----------
Total operating expenses...................... 12,070,600 10,328,200 21,300,200 20,577,100
----------- ----------- ----------- -----------
(Loss) income from operations...................... (3,487,700) 291,700 (3,397,000) 764,100
Interest expense, net.............................. (46,000) (38,200) (78,900) (88,100)
----------- ----------- ----------- -----------
(Loss) income before income taxes.................. (3,533,700) 253,500 (3,475,900) 676,000
(Benefit from) provision for income taxes.......... (1,421,200) 132,200 (1,398,100) 270,400
----------- ----------- ----------- -----------
Net (loss) income.................................. $(2,112,500) $ 121,300 $(2,077,800) $ 405,600
=========== =========== =========== ===========
Basic (loss) earnings per share.................... $(0.33) $0.02 $(0.33) $0.07
Diluted (loss) earnings per share.................. $(0.33) $0.02 $(0.33) $0.06
===== ===== ====== =====
Weighted average shares outstanding................ 6,306,200 6,241,400 6,299,200 6,237,400
Effect of dilutive stock options................... -- 58,800 -- 20,000
Diluted weighted average shares outstanding........ 6,306,200 6,300,200 6,299,200 6,257,400
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
February 28,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net (loss) income...................................$(2,077,800) $ 405,600
Noncash expenses included in net income -
Depreciation and amortization..................... 423,600 592,000
Changes in operating assets and liabilities -
Decrease in accounts receivable, net.............. 1,061,900 3,056,700
(Increase) in costs and estimated earnings in
excess of billings on uncompleted contracts..... (1,169,600) (566,100)
(Increase) decrease in prepaid expenses and
other assets.................................... (337,000) 15,900
(Decrease) in accounts payable and accrued
expenses........................................ (272,800) (3,036,000)
Refunds of income taxes........................... -- 1,843,000
(Decrease) in billings in excess of costs
and estimated earnings on uncompleted
contracts....................................... (138,900) (438,100)
---------- ----------
Net cash (used for) from operating activities..... (2,510,600) 1,873,000
---------- ----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Purchase of equipment, net.......................... (172,900) (457,200)
---------- ----------
Net cash flows used for investing activities...... (172,900) (457,200)
---------- ----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net borrowings from (used for) revolving line
of credit......................................... 3,019,800 (1,644,700)
Proceeds from issuance of common stock.............. 33,800 34,800
Reduction of long-term debt and short-term
borrowings........................................ (269,700) (342,900)
---------- ----------
Net cash flows from financing activities.......... 2,783,900 (1,952,800)
---------- ----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 100,400 (537,000)
---------- ----------
CASH AND CASH EQUIVALENTS, beginning of period 1,782,600 2,333,300
---------- ----------
CASH AND CASH EQUIVALENTS, end of period...... $1,883,000 $1,796,300
========== ==========
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 SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
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.
As of March 31, 1999, the Company executed a letter of intent to sell its
Analytical Services segment to Severn Trent Laboratories, Inc. The transaction
is expected to close by April 30, 1999.
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.
Major Clients -
Various agencies of the federal government accounted for approximately 50% and
52% of the Company's (primarily Management Consulting Services) net revenue for
the six months ended February 28, 1999 and 1998, respectively. Additionally,
various agencies of the federal government accounted for approximately 41% of
the Company's accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts as of February 28, 1999. Four industrial
clients accounted for approximately 73% of the Analytical Services segment's
gross external client billings. For the six-month period ended February 28, 1999
and 1998, the Company's gross contracted backlog was approximately $44.9 million
($20.8 million net) and $46.7 million ($21.7 million net), 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
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 six months ended February 28, 1999 and 1998
was $109,200, and $122,700, respectively. For the same period, there was no
retirement of property and equipment in fiscal 1999 compared to $28,000 in the
first half of fiscal 1998.
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.
<PAGE>
<TABLE>
Three Months Ended Six Months Ended
February 28, February 28,
(in 000s) (in 000s)
Except Per Share Data Except Per Share Data
---------------------- ---------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
Gross Sales
<S> <C> <C> <C> <C>
Management Consulting Services (external) $11,505 $13,368 $24,324 $28,829
Management Consulting Services (internal) (630) (410) (1,709) (1,167)
------- ------- ------- -------
Total Management Consulting Svcs (gross) 10,875 12,958 22,615 27,662
------- ------- ------- -------
Analytical Services (external) 929 1,050 1,658 1,782
Analytical Services (internal) 630 410 1,709 1,167
------- ------- ------- -------
Total Analytical Services (gross) 1,559 1,460 3,367 2,949
------- ------- ------- -------
Total Company Gross Sales $12,434 $14,418 $25,982 $30,611
=============================================================================================
Net sales to unaffiliated customers
Management Consulting Services $ 7,596 $ 9,511 $15,686 $19,094
Analytical Service 987 1,109 2,217 2,247
------- ------- ------- -------
Total Company Net Sales $ 8,583 $10,620 $17,903 $21,341
=============================================================================================
Income (loss) from operations
Management Consulting Services $(3,246) $ 529 $(3,202) $ 1,035
Analytical Services (242) (237) (195) (271)
------- ------- ------- -------
Total Company Income from Operations $(3,488) $ 292 $(3,397) $ 764
=============================================================================================
Identifiable assets (net property and equipment)
Management Consulting Services $ 980 $ 1,061 $ 980 $ 1,061
Analytical Services 550 720 550 720
------- ------- ------- -------
Total Company Net Property and Equipment $ 1,530 $ 1,781 $ 1,530 $ 1,781
=============================================================================================
Net earnings (loss) per share
Basic
Management Consulting Services $(0.31) $ 0.04 $(0.31) $ 0.09
Analytical Services (0.02) (0.02) (0.02) (0.02)
------ ------ ------ ------
Total $(0.33) $ 0.02 $(0.33) $ 0.07
====== ====== ====== ======
Diluted
Management Consulting Services $(0.31) $ 0.04 $(0.31) $ 0.08
Analytical Services (0.02) (0.02) (0.02) (0.02)
------ ------ ------ ------
Total $(0.33) $ 0.02 $(0.33) $ 0.06
====== ====== ====== ======
============================================================================================
</TABLE>
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 or has obtained waivers on all covenants related to these
arrangements.
For the six months ended February 28, 1999 and 1998, the Company had no
short-term borrowings.
Long-term debt consists of the following:
February 28, August 31,
1999 1998
----------- ----------
Revolving credit facility payable to a commercial
Bank, interest charged at LIBOR plus 150, facility
expires September 2000 ............................. $4,212,100 $1,192,400
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....................... 256,600 418,300
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 ............................... -- 107,900
---------- ----------
Total long-term debt.................................. 4,468,700 1,718,600
Less-current portion ................................. (256,600) (438,800)
---------- ----------
Long-term portion .................................... $4,212,100 $1,279,800
========== ==========
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.
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 650,100
options are issued and outstanding as of February 28, 1999, having an average
exercise price of $2.49. Of the outstanding options, 400,000 are held by the
former 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 94,100 shares
remain authorized for distribution under the Purchase Plan as of February 28,
1999.
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 36,000 options, which were
outstanding as of February 28, 1999, ranged between $1.25 and $6.13, which
equaled the fair market value at the dates of grant. A total of 64,500 options
remain reserved for the Director Stock Option Plans as of February 28, 1999.
Note 7. RESTRUCTURING:
In February 1999, the Company implemented several cost cutting measures to
affect its long-term profitability objectives by aligning expenses more directly
with revenues. In connection with the restructuring, the Company incurred
charges of $2,132,600 during the fiscal 1999 second quarter primarily related to
severance agreements of several senior sales and executive staff. This
restructuring included a staff reduction of approximately 30 employees including
several officers and the President and Chief Executive Officer.
As of February 28, 1999, the Company had an accrual of $1,826,600 included as
other current liabilities in the accompanying consolidated balance sheets for
costs to be incurred in future periods.
Note 8. SUBSEQUENT EVENT
As of March 31, 1999, the Company executed a letter of intent to sell its EA
Laboratories division to Severn Trent Laboratories, Inc. This division, which
encompassed the Company's Analytical Services operating segment, is expected to
be sold for cash by April 30, 1999. Due to the timing of the events, estimates
on the gain or loss from the sale are not available at the time of the filing of
the second quarter 1999 interim financial statement.
The segment has annual revenues of approximately $6.4 million.
<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 February 28, 1999 (Consolidated)
Net revenue for the three months ended February 28, 1999 was $8,582,900, a
decrease of 19.2% from $10,619,900 for the same period in the prior fiscal year.
This decrease in net revenue is primarily due to lower contract volume across
all client sectors, except for net revenue from industrial clients which
increased approximately $575,000, or 5.5%. The lower contract volume is mainly
attributable to a decrease in volume with the federal government due to the
expiration of certain indefinite delivery/indefinite quantity contracts. Also
contributing to the decrease, in the prior year's second quarter, the Company
realized approximately $645,000 in additional contract net revenue on certain
landfill projects which had contract loss provisions in fiscal 1997.
Additionally, during the three months ended February 28, 1999, the Company wrote
off certain non-collectible prior period revenues, decreasing the quarter's net
revenue by approximately $500,000.
During the quarter, the Company addressed the fact that its sales and marketing
program was not generating increased sales in the private sector to replace
expiring federal contracts. As a result, although the Company was successful in
keeping operating costs steady from quarter to quarter, its overhead structure
was too large.
Direct salaries and other operating costs decreased 2.1% to $7,782,900 from
$7,952,900 for the three-month period ended February 28, 1999 and 1998,
respectively. This decrease is primarily due to less salary and benefit costs
from quarter to quarter. However, as a result of lower net revenue, direct
salaries and other operating costs as a percentage to net revenue increased to
90.7% for the three months ended February 28, 1999 compared to 74.9% for the
same period in 1998.
Sales, general and administrative costs decreased by 9.3% to $2,155,100 from
$2,375,300 for the three-month period ended February 28, 1999 and 1998,
respectively. The decrease is due to lower sales and marketing related costs
from quarter to quarter. However, as a result of lower net revenue, sales,
general and administrative costs as a percentage of net revenue, increased to
25.1% in the fiscal 1999 second quarter compared to 22.4% in the fiscal 1998
second quarter.
To address the Company's high overhead in relation to net revenue, in February
1999, the Company implemented several cost cutting measures to effect its
long-term profitability objectives by aligning expenses more directly with
revenue. In connection with the restructuring, the Company incurred charges of
$2,132,600 during the fiscal year 1999 second quarter. The one-time charge was
primarily related to the severance agreements of approximately 30 staff members
including several senior sales and executive staff.
As a result of the above factors, the Company incurred a loss from operations
for the three months ended February 28, 1999 of $3,487,700 or 40.6% of net
revenue compared to operating income of $291,700 or 2.7% of net revenue in the
prior fiscal period ended February 28, 1998. Interest expense, net, increased
$7,800 in the current quarter compared to the prior year. The net increase in
interest expense is due to a higher line of credit balance used to fund
operating activities.
The benefit from income taxes was $1,421,200 for the three months ended February
28, 1999, compared to a provision for income tax of $253,500 in the second
quarter of fiscal 1998. This represents effective rates of 40% and 52%,
respectively.
As a result of the above factors, the Company incurred a net loss for the three
months ended February 28, 1999 of $2,112,500 compared to net income of $121,300
in the second quarter of fiscal 1998.
Six Months Ended February 28, 1999 (Consolidated)
Net revenue for the six months ended February 28, 1999 was $17,903,200, a
decrease of 16.1% from $21,341,200 for the same period in the prior fiscal year.
This decrease in net revenue is primarily due to lower contract volume across
all client sectors. The lower contract volume is mainly attributable to a
decrease in volume with the federal government due to the expiration of certain
indefinite delivery/indefinite quantity contracts, and a $500,000 write-off of
certain non-collectible prior period revenue. Additionally impacting the
decrease, for the six months ended February 28, 1998, the Company realized
approximately $705,000 in additional contract net revenue on certain landfill
projects which had loss provisions in fiscal 1997.
During the quarter ended February 28, 1999, the Company addressed the fact that
its sales and marketing program was not generating increased sales in the
private sector to replace expiring federal contracts. As a result, although the
Company was successful in keeping operating costs steady from quarter to
quarter, its overhead structure was too large.
Direct salaries and other operating costs decreased 5.8% to $14,973,200 from
$15,900,600 for the six-month period ended February 28, 1999 and 1998,
respectively. This decrease is due to lower salaries and benefits from quarter
to quarter. However, as a result of lower net revenue, direct salaries and other
operating costs as a percentage to net revenue increased to 83.6% for the six
months ended February 28, 1999 compared to 74.5% for the same period in 1998.
Sales, general and administrative costs decreased by 10.3% to $4,194,400 from
$4,676,500 for the six-month period ended February 28, 1999 and 1998,
respectively. The decrease is due to lower sales and marketing related costs
from quarter to quarter. However, as a result of lower net revenue, sales,
general and administrative costs as a percentage of net revenue increased to
23.4% for the six months ended February 28, 1999, compared to 21.9% in the prior
year.
To address the Company's high overhead in relation to net revenue, in February
1999, the Company implemented several cost cutting measures to effect its
long-term profitability objectives by aligning expenses more directly with
revenues. In connection with the restructuring, the Company incurred charges of
$2,132,600 during the fiscal year 1999 second quarter. The one-time charge was
primarily related to the severance agreements of approximately 30 staff members
including several senior sales and executive staff.
As a result of the above factors, the loss from operations for the six months
ended February 28, 1999 was $3,397,000, or 19% of net revenue, compared to
income from operations of $764,100, or 3.6% of net revenue, in the prior fiscal
period ended February 28, 1998. Interest expense, net, decreased $9,200 in the
current six-month period compared to the prior year. The net decrease in
interest expense is primarily the result of decreasing long-term principal
balances, as well as interest payments attributable to a New York state tax
settlement made in the prior fiscal period.
For the six months ended February 28, 1999, the Company had a benefit from
income taxes of $1,398,100 compared to a provision for income taxes of $270,400
for the six-month period ended February 28, 1998. This represents effective
rates of 40% and 40%, respectively.
The net loss for the six months ended February 28, 1999 was $2,077,800, or 11.6%
of net revenue, compared to net income of $405,600, or 1.9%, for the six-month
period ended February 28, 1998.
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 February 28, 1999.
Management Consulting Services
Net sales for Management Consulting Services for the three months ended February
28, 1999 were $7,596,300, a decrease of 20.1% from $9,511,000 for the same
period in the prior fiscal year. This decrease is primarily due to lower sales
across all client sectors, except for a 5.5% growth with private industrial
clients. The lower contract volume is mainly attributable to a decrease in
volume with the federal government due to the expiration of certain indefinite
delivery/indefinite quantity contracts. Also contributing to the decrease, in
the prior year's second quarter, the segment realized approximately $645,000 in
additional contract net revenue on certain landfill projects which had contract
loss provisions in fiscal 1997. Additionally, during the three months ended
February 28, 1999 the Company wrote off approximately $500,000 of certain
non-collectible prior period revenues.
For the six months ended February 28, 1999, the Management Consulting Services
segment had a loss from operations of $3,202,400 or 20.4% of its net revenue
compared to a contribution of $1,035,100 or 5.4% in the prior year's second
quarter. This decrease in operating income is mainly attributable to the
$2,132,600 restructuring charge taken in the second quarter of fiscal 1999, as
well as a decrease in sales due to expiring federal contracts.
Analytical Services
Gross sales increased to $1,559,200 from $1,460,300 for the three months ended
February 28, 1999 and 1998, respectively. However, net sales for the same
periods decreased $122,300 to $986,600 from $1,108,900. The 6.8% increase in
gross sales 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 decreased $121,100, comparing the second quarter of fiscal year's 1999 and
1998. The overall decrease in net sales is due to the segment utilizing
temporary labor, as opposed to its own labor, to help in peak periods.
For the six months ended February 28, 1999, the Analytical Services segment had
a loss from operations of $194,600, or 8.8%, of its net revenue, compared to a
$271,000, or 12.1%, loss from operations for the same period in the prior fiscal
period. The $76,400 increase in operating income is due to increased sales
volume and reduced operating expenses. Operating expenses for the six months
ended February 28, 1999 were $2,411,700 or 94.6% of net revenue, compared to
$2,518,300 or 112.1% in the prior year's six-month period. The segment was able
to perform a higher volume of sales without increasing operating expenses
through the use of temporary labor to help in peak periods.
As of March 31, 1999, the Company executed a letter of intent to sell its EA
Laboratories division to Severn Trent Laboratories, Inc. This division, which
encompassed the Company's Analytical Services operating segment, is expected to
be sold for cash by April 30, 1999. Due to the timing of the events, estimates
on the gain or loss from the sale are not available at the time of the filing of
the second quarter 1999 interim financial statement.
Liquidity and Capital Resources
Cash and cash equivalents increased by $100,400 for the six months ended
February 28, 1999. The increase principally resulted from borrowings against the
Company's line of credit used for operating activities. Increased borrowings to
fund operating activities became necessary during the second quarter of fiscal
1999 as revenue began to decline due to multi-year federal contracts reaching
completion without being replaced by new contracts. As a result, the Company's
revenue was no longer capable of maintaining the current overhead structure of
the Company. To address this problem, the Company made several restructuring
moves to reduce annual operating expenses by approximately $3.5 million. The
restructuring included a staff reduction of approximately 30 employees including
several officers of the Company. Additionally, the Company executed a letter of
intent to sell its EA Laboratories division for cash. This transaction is
expected to close by April 30, 1999. Proceeds from the sale will be used to
decrease the line of credit balance and for future expansion purposes.
The Company's capital expenditures, consisting primarily of purchases of
equipment and leasehold improvements, were approximately $172,900 and $457,200
for the six months ended February 28, 1999 and 1998, respectively.
At February 28, 1999, the Company had outstanding long-term debt, including the
current portion, of $4,212,100. This represents a net increase of $2,932,300
from the $1,297,800 balance at August 31, 1998. The increase is the result of a
$3,019,700 increase in its revolving line of credit balance as described in the
previous paragraph, partially offset by net repayments of $269,600 for equipment
and computer loans.
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 indefinite
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. Phase III
is to carry out prescribed remediation schedules and details and perform final
testing of the major systems to ensure compliance.
Phase I - Identification. This phase was completed in the summer of 1998.
Phase II - Assessment.
Category Assessment
-------- ----------
Networking and Communications
- Computer servers Compliant with minor issues
- Network components Compliant with minor issues
- Software Compliant with minor issues
- Databases Not compliant
Desktop Computing Compliant with minor issues
<PAGE>
Major Applications
-(Financial Management, HR, Not reviewed; scheduled for
LIMS) replacement in FY99
EA Laboratories (Hardware
and system-level software) Not compliant
Non-Information Technology
- Phone switch Believed to be compliant - on-
going at branch locations
- Voice mail Not compliant
- Environmental systems Believed to be compliant - on-
going at branch locations
Phase III - Remediation/Replacement. The following summarizes remediation and
replacement for each category.
Category Required Action Status
-------- --------------- ------
Networking Communication
- Computer servers Replace Servers Completed
- Network components Upgrade Substantially completed;
two router upgrades
remaining; scheduled for
spring, 1999
- Software Upgrade Completed
- Databases Convert to compliant Not complete; scheduled
software for summer, 1999
Desktop Computing Standardize desktop Completed
computing environment
Address minor applications Ongoing through 1999
Major Applications Replace financial manage- Replacement on schedule;
ment system to be operational in
September, 1999
Replace Human Resources Replacement on schedule;
system to be operational in
spring, 1999
EA Laboratories LIMS TBD - Subject to letter
of intent to sell
division
Upgrade hardware and Tested and verified fix
system-level software upgrades; completion
to be determined
<PAGE>
Replace process control TBD - Subject to letter
systems of intent to sell
division
Non-IT
- Phone switches Complete branch assessment Ongoing, summer, 1999
- Voice mail To be determined --
- Environmental systems Complete branch assessment Ongoing, summer, 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 anticipate
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 contingency plan should compliance programs fail to be completed
successfully or n 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.
The Company will continue to contact each of its major vendors and utilities 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. 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.
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 4. Submission of Matters to a vote of Security Holders
At the Annual Meeting of Stockholders held on January 14, 1999, the following
proposals were adopted as indicated:
1. To elect six directors to serve until the next annual meeting and until their
successors are elected and qualified.
Director For Withheld
-------- --- --------
E. Cashman 5,684,653 197,840
D. Deieso 5,671,344 211,149
L. Jensen 5,685,577 197,083
R. Lamone 5,668,850 213,643
C. Miller 5,675,725 206,768
G. Radcliffe 5,675,466 207,027
2. To approve an increase in the number of shares of Common Stock reserved for
issuance under the 1995 Non-Employee Stock Option Plan.
For 4,046,918
Against 520,067
Abstain 19,703
Broker Non-Votes
3. To increase the number of shares of Common Stock reserved for issuance under
the Company's Amended and Restated Stock Option Plan.
For 4,107,502
Against 449,085
Abstain 29,921
Broker Non-Votes
4. To ratify and approve adoption of the Company's 1999 Long-Term Incentive
Plan.
For 4,155,125
Against 404,363
Abstain 27,020
Broker Non-Votes
5. To approve the appointment of Arthur Andersen LLP, as the independent public
accountants of the corporation.
For 5,822,580
Against 42,865
Abstain 15,048
Broker Non-Votes
Item 5. Other Information
During the second quarter of fiscal year 1999, the Company announced the
resignation of Donald A. Deieso, who had served as President and CEO for two
years. As a result of this action, EA's Chairman and founder, Loren D. Jensen
has been reappointed to the role of Chief Executive Officer.
Dr. Deieso, who had also served as a member of the EA Engineering, Science, and
Technology, Inc. Board of Directors, resigned from that position as well.
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)
April 14, 1999 By: /s/ Loren D. Jensen
- ----------------- -----------------------------------
(Signature)
Loren D. Jensen
-----------------------------------
Chairman of the Board and CEO
-----------------------------------
(Title)
April 14, 1999 By: /s/ Barbara L. Posner
- ----------------- -----------------------------------
(Signature)
Barbara L. Posner
-----------------------------------
Chief Financial Officer,
Chief Operating Officer
-----------------------------------
(Title)
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