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 May 31, 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
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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 July 9, 1999, was 6,325,663.
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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 5
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
May 31, August 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents........................ $ 1,930,500 $ 1,781,100
Accounts receivable, net......................... 7,202,000 7,479,100
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. 7,391,300 5,655,600
Refundable income taxes.......................... 80,000 407,600
Prepaid expenses and other....................... 1,113,000 1,068,100
Net assets from discontinued operations.......... 763,600 1,468,200
----------- -----------
Total Current Assets........................... 18,480,400 17,859,700
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment................ 8,868,900 8,797,400
Leasehold improvements........................... 1,027,200 984,600
----------- -----------
Total property and equipment, at cost............ 9,896,100 9,782,000
Less-Accumulated depreciation and amortization... (9,017,000) (8,719,100)
Net property and equipment of discontinued
operations.................................... -- 718,200
----------- -----------
Net Property and Equipment....................... 879,100 1,781,100
----------- -----------
OTHER ASSETS........................................ 4,868,400 3,576,200
----------- -----------
Total Assets..................................... $24,227,900 $23,217,000
=========== ===========
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
May 31, August 31,
1999 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable................................ $ 3,283,400 $ 4,494,300
Accrued expenses................................ 2,246,200 735,100
Accrued salaries, wages and benefits............ 2,437,400 2,120,800
Current portion of long-term debt............... 173,000 330,900
Billings in excess of costs and estimated
Earnings on uncompleted contracts............. 364,000 246,700
----------- -----------
Total Current Liabilities..................... 8,504,000 7,927,800
LONG-TERM DEBT, net of current portion............. 3,456,900 1,279,800
----------- -----------
Total Liabilities............................. 11,960,900 9,207,600
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,323,200
and 6,285,000 shares issued and outstanding... 63,300 62,900
Preferred stock, $.01 par value; 8,000,000
Shares authorized; none issued................ -- --
Capital in excess of par value..................... 11,095,500 11,049,300
Retained earnings.................................. 1,108,200 2,897,200
----------- -----------
Total Stockholders' Equity.................... 12,267,000 14,009,400
----------- -----------
Total Liabilities and Stockholders' Equity.... $24,227,900 $23,217,000
=========== ===========
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 Nine Months Ended
May 31, May 31,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenue...........................................$12,349,000 $12,641,400 $34,963,700 $40,303,700
Less - Subcontractor costs.............................. (2,043,300) (2,126,700) (6,051,700) (7,978,200)
Less - Other direct project costs....................... (1,118,300) (1,406,000) (4,038,500) (4,122,900)
----------- ---------- ----------- ----------
Net revenue.......................................... 9,187,400 9,108,700 24,873,500 28,202,600
----------- ---------- ----------- ----------
Operating costs and expenses:
Direct salaries and other operating................. 6,746,400 6,443,600 19,307,900 19,825,900
Sales, general and administrative................... 1,941,900 2,439,300 6,136,300 7,115,800
Gain on "key employee" life insurance............... -- (261,100) -- (261,100)
Restructuring....................................... -- -- 2,132,600 --
----------- ---------- ----------- ----------
Total operating expenses.......................... 8,688,300 8,621,800 27,576,800 26,680,600
----------- ---------- ----------- ----------
Income (loss) from operations.......................... 499,100 486,900 (2,703,300) 1,522,000
Interest expense, net.................................. (64,400) (21,700) (139,600) (93,200)
----------- ---------- ----------- ----------
Income (loss) from continuing operations
before income taxes.............................. 434,700 465,200 (2,842,900) 1,428,800
Provision for (benefit from) income taxes.............. 181,200 188,800 (1,137,600) 574,200
----------- ---------- ----------- ----------
Net income (loss) from continuing operations........... 253,500 276,400 (1,705,300) 854,600
=========== ========== =========== ==========
Discontinued operations
Income (loss) from operations of discontinued
segment (net of tax)............................. -- 36,100 (119,000) (136,500)
Gain on disposal of EA Labs, including operating
losses during phase-out period (net of tax)...... 35,300 -- 35,300 --
---------- ---------- ----------- ----------
Net income (loss) from discontinued operations......... 35,300 36,100 (83,700) (136,500)
========== ========== =========== ==========
Net income (loss)...................................... $ 288,800 $ 312,500 $(1,789,000) $ 718,100
========== ========== =========== ==========
Earnings per share - basic
Continued operations................................ $0.04 $0.04 $(0.27) $0.14
Discontinued operations............................. -- 0.01 (0.01) (0.02)
Gain on disposal of segment......................... 0.01 -- -- --
Net income.......................................... 0.05 0.05 (0.28) 0.11
Earnings per share - diluted
Continued operations................................ $0.04 $0.04 $(0.27) $0.13
Discontinued operations............................. -- 0.01 (0.01) (0.02)
Gain on disposal of segment......................... 0.01 -- -- --
Net income.......................................... 0.05 0.05 (0.28) 0.11
Weighted average shares outstanding.................... 6,319,000 6,264,800 6,305,900 6,246,600
Effect of dilutive stock options....................... 600 252,500 700 105,700
Diluted weighted average shares outstanding............ 6,319,600 6,517,300 6,306,600 6,352,300
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
May 31,
-------------------------
1999 1998
----------- -----------
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net (loss) income.................................. $(1,789,000) $ 718,100
Noncash expenses included in net income -
Depreciation and amortization.................... 532,000 888,100
Changes in operating assets and liabilities -
Decrease in accounts receivable, net............. 277,100 1,316,700
Decrease in net assets of discontinued
operations..................................... 1,422,800 --
(Increase) in costs and estimated earnings in
excess of billings on uncompleted contracts.... (1,735,700) (1,497,500)
(Increase) decrease in prepaid expenses and
other assets................................... (1,009,500) 66,000
Increase (decrease) in accounts payable and
accrued expenses............................... 616,800 (2,893,900)
Refunds of income taxes.......................... -- 1,868,300
Increase (decrease) in billings in excess of
of costs and estimated earnings on
uncompleted contracts.......................... 117,300 (386,500)
----------- -----------
Net cash (used for) from operating activities.... (1,568,200) 79,300
----------- -----------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Purchase of equipment, net......................... (348,200) (498,800)
----------- -----------
Net cash flows used for investing activities..... (348,200) (498,800)
----------- -----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net borrowings from (used for) revolving line
of credit........................................ 2,264,600 216,400
Proceeds from issuance of common stock............. 46,600 128,200
Reduction of long-term debt and short-term
borrowings....................................... (245,400) (483,600)
----------- -----------
Net cash flows from financing activities......... 2,065,800 (139,000)
----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 149,400 (558,500)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period....... 1,781,100 2,333,300
----------- -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 1,930,500 $ 1,774,800
=========== ===========
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 NINE MONTHS ENDED MAY 31, 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. (EA Financial); and the
wholly-owned subsidiaries of EA Financial, 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.
As of April 30, 1999, the Company sold its Analytical Services segment to Severn
Trent Laboratories, Inc. All financial statements for the periods shown have
been restated to reflect only the Management Consulting Services segment in
continued operations.
Segment Information -
Historically, the Company was organized around two operating segments. However,
in the quarter ended May 31, 1999, the Company divested its Analytical Services
segment. The primary segment is Management Consulting Services, provided through
a network of offices throughout the United States, Mexico and Guam.
Revenue Recognition -
The Company is an international consulting firm specializing in the fields of
energy, the environment, and health and safety. 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 accounts for contract revenues and costs under fixed-price contracts
using the percentage-of-completion method. The percentage of completion is
determined using the "cost-to-cost" method for each contract cost component.
Under this method, direct labor and other contract costs incurred to date are
compared to periodically revised estimates of the total of each contract cost
component at contract completion to determine the percentage of revenues to be
recognized. Revenues from time-and-material and cost-plus-fixed-fee contracts
are recognized currently as the work is performed. Provision for estimated
losses on uncompleted contracts, to the full extent of the loss, is made during
the period in which the Company first becomes aware that a loss on a contract is
probable.
Contract costs and estimated earnings recognized in excess of amounts billed are
classified as current assets under "costs and estimated earnings in excess of
billings on uncompleted contracts." Billings in excess of contract costs and
estimated earnings are classified as current liabilities under "billings in
excess of costs and estimated earnings on uncompleted contracts."
Generally, contracts provide for the billing of costs incurred and estimated
fees on a monthly basis. Amounts included in "costs and estimated earnings in
excess of billings on uncompleted contracts" in the accompanying financial
statements will be billed within twelve months of the balance sheet date.
Major Clients -
Various agencies of the federal government accounted for approximately 44% and
51% of the Company's net revenue from continued operations for the nine months
ended May 31, 1999 and 1998, respectively. Additionally, various agencies of the
federal government accounted for approximately 40% of the Company's accounts
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts as of May 31, 1999. For the nine-month period ended May 31, 1999 and
1998, the Company's net contracted backlog was approximately $23.9 million and
$21.8 million, respectively. Various agencies of the federal government account
for approximately 55% of net contracted backlog for each period.
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 nine months ended May 31, 1999 and 1998 was
$196,000, and $171,000, respectively. Retirements of property and equipment for
the same period were $562,400 and $28,000, respectively. Fiscal year 1999
retirements were assets of the Analytical Services segment.
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. For the nine months ended May 31, 1999, the Company
estimates a benefit from income taxes of approximately $1,197,300 due to
restructuring costs recorded in the second quarter of fiscal 1999. This benefit
has been recorded in Other Assets in the accompanying balance sheets.
Note 2. DISPOSAL OF ANALYTICAL SERVICES SEGMENT
On April 30, 1999, the Company completed the cash sale of the EA Laboratories
division to Severn Trent Laboratories, Inc. The assets of the analytical
sampling segment sold consisted primarily of an inventory of supplies, the
balance of costs and estimated earnings in excess of billings on uncompleted
contracts as of the transaction date, and property, plant and equipment. The
cash transaction resulted in a net pretax gain of $58,800.
Operating results of the Analytical Services segment for the six months ended
February 28, 1999 are shown separately in the accompanying income statements.
The income statement for the three months and nine months ended May 31, 1998 has
been restated, and operating results of the discontinued segment are also shown
separately.
Gross revenue of the Analytical Services segment for the nine months ended May
31, 1999 and 1998 were $4,298,900 and $4,616,600, respectively. These amounts
are not included in the accompanying income statement's total revenue from
continuing operations, but are reflected within discontinued operations.
Current assets and liabilities of the Analytical Services segment disposed of
consisted of the following:
May 31, August 31,
1999 1998
-------- ---------
Cash and net accounts receivable.......... $763,600 $ 964,200
Costs and estimated earnings in excess
of billings on uncompleted contracts..... -- 739,400
Prepaids and other assets................. -- 22,500
Current portion of long-term debt......... -- (107,900)
Accrued expenses.......................... -- (150,000)
-------- ----------
Net current assets.................... $763,600 $1,468,200
======== ==========
Property and equipment of the Analytical Services segment disposed of consisted
of the following:
May 31, August 31,
1999 1998
--------- ----------
Furniture, fixtures and equipment............ -- $ 4,309,500
Leasehold improvements....................... -- 2,691,000
Accumulated depreciation and amortization.... -- (6,282,300)
--------- -----------
Net property and equipment................ -- $ 718,200
========= ===========
Assets are shown at their expected net realizable value and current portion of
long-term debt at their face amount.
<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 nine months ended May 31, 1999 and 1998, the Company had no short-term
borrowings.
Long-term debt consists of the following:
May 31, August 31,
1999 1998
----------- ----------
Revolving credit facility payable to a commercial
Bank, interest charged at LIBOR plus 150 at
May 31, 1999 and plus 200 at August 31, 1998,
facility expires September 2000 ................. $3,456,900 $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............ 173,000 418,300
---------- ----------
Total long-term debt .............................. 3,629,900 1,610,700
Less-current portion .............................. (173,000) (330,900)
---------- ----------
Long-term portion ................................. $3,456,900 $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 730,100
options are issued and outstanding as of May 31, 1999, having an average
exercise price of $2.28. 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 90% of
current market value at the time of purchase. The Company pays all
administrative expenses related to employee purchases. A total of 82,100 shares
remain authorized for distribution under the Purchase Plan as of May 31, 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 May 31, 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 May 31, 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.
As of May 31, 1999, the Company had an accrual of $1,186,800 included as other
current liabilities in the accompanying consolidated balance sheets for costs to
be incurred in future periods.
<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 May 31, 1999 (Consolidated)
Net revenue from continued operations for the three months ended May 31, 1999
was $9,187,400, compared to $9,108,700 for the same period in the prior fiscal
year. Net revenue remained steady despite a decrease in volume with the federal
government due to the expiration of certain indefinite delivery/indefinite
quantity contracts. To offset the federal sector decline, the Company was
successful in increasing revenue in the industrial sector.
Direct salaries and other operating costs increased 4.7% to $6,746,400 or 73.4%
of net revenue from $6,443,600 or 70.7% for the three-month period ended May 31,
1999 and 1998, respectively. This increase is primarily due to higher than
normal self-insurance health claims and the timing of other insurance related
expenses from quarter to quarter.
Sales, general and administrative costs decreased by 20.4% to $1,941,900, or
21.1% of net revenue, from $2,439,300, or 26.8% of net revenue, for the
three-month period ended May 31, 1999 and 1998, respectively. The decrease is
due to lower sales and marketing related costs from quarter to quarter. This
decrease is directly the result of the $2,132,600 restructuring charge taken in
the second quarter ended February 28, 1999 to more closely align expenses with
revenues.
In the third quarter of fiscal 1998, the Company recorded a gain of $261,100,
reducing its operating expenses. The gain was related to the increase in the
cash surrender value of "key employee" life insurance policies included in the
Company's balance sheet.
As a result of the above factors, the Company incurred a gain from continued
operations for the three months ended May 31, 1999 of $499,100 or 5.4% of net
revenue compared to operating income of $486,900 or 5.3% of net revenue in the
prior fiscal period ended May 31, 1998. Interest expense, net, increased $42,700
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 and
restructuring activities.
The provision for income taxes was $181,200 for the three months ended May 31,
1999, compared to a provision for income tax of $188,800 in the third quarter of
fiscal 1998. This represents an effective rate of 42%.
As a result of the above factors, the Company incurred a net gain from continued
operations for the three months ended May 31, 1999 of $253,500 compared to net
income of $276,400 in the third quarter of fiscal 1998.
The Company recorded a net gain of $35,300 on the disposal of its Analytical
Services segment for the three months ended May 31, 1999. The discontinued
segment provided net income of $36,100 in the prior year's third quarter ended
May 31, 1998.
As a result of the above factors, the Company incurred a net overall gain of
$288,800, or 3.1% of net revenue, for the three months ended May 31, 1999
compared to $312,500 or 3.4% for the third quarter of fiscal 1998.
Nine Months Ended May 31, 1999 (Consolidated)
Net revenue from continued operations for the nine months ended May 31, 1999 was
$24,873,500, a decrease of 11.8% from $28,202,600 for the same period in the
prior fiscal year. This decrease in net revenue is primarily due to lower
contract volume across most client sectors, partially offset by a 16% increase
in the industrial sector. 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 made in the second quarter of
fiscal 1999. Additionally impacting the decrease, for the nine months ended May
31, 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. The actions resulted in a
one-time restructuring charge of $2,132,600 primarily related to severance
agreements for approximately 30 sales and marketing staff members, including
several senior executives.
Direct salaries and other operating costs decreased 2.6% to $19,307,900 from
$19,825,900 for the nine-month period ended May 31, 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 77.6% for the nine months
ended May 31, 1999 compared to 70.3% for the same period in 1998.
Sales, general and administrative costs decreased by 13.8% to $6,136,300 from
$7,115,800 for the nine-month period ended May 31, 1999 and 1998, respectively.
The decrease is due to lower sales and marketing related costs. However, as a
result of lower net revenue, sales, general and administrative costs as a
percentage of net revenue 24.7% for the nine months ended May 31, 1999, compared
to 25.2% in the prior year.
In the third quarter of fiscal 1998, the Company recorded a gain of $261,100,
reducing its operating expenses. The gain was related to the increase in the
cash surrender value of "key employee" life insurance policies included in the
Company's balance sheet.
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 continued operations for the
nine months ended May 31, 1999 was $1,705,300, or 6.9% of net revenue, compared
to income from operations of $854,600, or 3% of net revenue, in the prior fiscal
period ended May 31, 1998. Interest expense, net, increased $46,400 in the
current nine-month period 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.
For the nine months ended May 31, 1999, the Company had a benefit from income
taxes of $1,137,600 compared to a provision for income taxes of $574,200 for the
nine-month period ended May 31, 1998. This represents an effective rate of 40%.
The net loss from continued operations for the nine months ended May 31, 1999
was $1,705,300, or 6.9% of net revenue, compared to net income of $854,600, or
3.0%, for the nine-month period ended May 31, 1998.
For the nine-month period ended May 31, 1999, the Company had a $83,700 net loss
from its discontinued Analytical Services segment, compared to a $136,500 net
loss from this segment for the nine months ended May 31, 1998. Included in the
net $83,700 loss is a $35,300 gain on the disposal during the third quarter
ended May 31, 1999.
As a result of the above factors, the Company incurred a net overall loss of
$1,789,000, or 7.2% of net revenue, for the nine months ended May 31, 1999,
compared to a net overall gain of $718,100, or 2.5% of net revenue, for the
prior year's nine-month period.
Liquidity and Capital Resources
Cash and cash equivalents increased by $149,400 for the nine months ended May
31, 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 year 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 sold its EA Laboratories division for cash
during the quarter ended May 31, 1999. Proceeds from the sale, as well as
restructuring efforts, helped decrease the line of credit balance by $755,200
from $4,212,100 as of February 28, 1999 to $3,456,900 as of May 31, 1999. The
Company anticipates a further reduction in its line of credit balance during the
next several quarters, as revenues exceed operating expenses and restructuring
commitments end.*
The Company's capital expenditures, consisting primarily of purchases of
equipment and leasehold improvements, were approximately $348,200 and $498,800
for the nine months ended May 31, 1999 and 1998, respectively. Included in the
current fiscal year capital expenditures is $193,600 in implementation costs
related to the Company's upcoming project accounting system that is expected to
be completed in the first quarter of fiscal 2000.
At May 31, 1999, the Company had outstanding long-term debt, including the
current portion, of $3,629,900. This represents a net increase of $2,019,200
from the $1,610,700 balance at August 31, 1998. The increase is the result of a
$2,264,500 increase in its revolving line of credit balance as described in the
previous paragraph, partially offset by net repayments of $245,300 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
Major Applications
-(Financial Management, Not reviewed; scheduled for
Human Resources) replacement in FY99
Non-Information Technology
- Phone switch Believed to be compliant at Cor-
porate and Baltimore locations;
ongoing at branch locations
- Voice mail Believed to be compliant at all
locations
- Environmental systems Believed to be compliant; ongoing
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 Completed
- 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
summer, 1999
Non-IT
- Phone switches Complete branch assessment Ongoing, summer, 1999
- Voice mail No action required --
- 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 $50,000. 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 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)
July 14, 1999 By: /s/ Loren D. Jensen
- ----------------- --------------------------------
(Signature)
Loren D. Jensen
-------------------------------
Chairman of the Board and CEO
-------------------------------
(Title)
July 14, 1999 By: /s/ Barbara L. Posner
- --------------- -------------------------------
(Signature)
Barbara L. Posner
-------------------------------
Chief Financial Officer,
Chief Operating Officer
-------------------------------
(Title)
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