UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
Form 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended August 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to _______________
Commission File Number 0-15587
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-0991911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11019 McCormick Road, Hunt Valley, Maryland 21031
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code: (410) 584-7000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of October 29, 1999 was approximately
$2,629,000.
The number of shares outstanding of the Registrant's Common Stock as of October
29, 1999 was 6,332,515.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 1999 Annual Report to Stockholders are incorporated by
reference in Part II of this Report.
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
scheduled for January 13, 2000 are incorporated by reference in Part III of
this Report.
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EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC.
FORM 10-K/A
TABLE OF CONTENTS
Item Page
---- ---
PART I
1 Business 1
2 Properties 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
PART II
5 Market for the Registrant's Common Stock and Related Shareholder
Matters 9
6 Selected Financial Data 10
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
8 Financial Statements and Supplementary Data 17
9 Disagreements on Accounting and Financial Disclosure 40
PART III
10 Directors and Executive Officers of the Registrant 40
11 Executive Compensation 40
12 Security Ownership of Certain Beneficial Owners and Management 40
13 Certain Relationships and Related Transactions 40
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
Signatures 45
Exhibit Index 46
<PAGE>
PART I
ITEM 1. BUSINESS
General
EA Engineering, Science, and Technology, Inc., together with its wholly-owned
subsidiaries ("EA" or the "Company") is an international consulting firm
specializing in the fields of energy, the environment, and health and safety.
Through its network of more than 20 branch and satellite offices and its
international operations, EA provides scientific, engineering, economic, and
management solutions to government, industrial and utility clients. The goal of
the Company is to help management in industry and government improve their
performance and achieve their business and organizational objectives.
EA's organizational structure consists of the parent company, EA Engineering,
Science, and Technology, Inc.; its wholly-owned subsidiaries, EA International,
Inc. and EA Financial, Inc.; and EA Financial's wholly-owned subsidiaries, EA
Global, Inc. and EA de Mexico, S.A. de C.V.
The Company was founded and initially incorporated in Maryland in 1973; after a
name change, the Company was subsequently incorporated in Delaware in 1986. The
Company was initially engaged in environmental assessment and permitting related
to power plant siting and expansion. Since that time, the Company has responded
to market conditions and opportunities by expanding its services and client
base. EA provides its services through a network of offices located throughout
the United States, Mexico and Guam.
Historically, the demand for EA's services was driven largely by federal, state
and local environmental laws and regulations impacting the Company's clients. A
great deal of cleanup activity and progress has been generated as a result of
those laws and regulations; in 1996, the U.S. environmental market reported
revenues of $186 billion. However, as with all regulatory-driven businesses, the
industry and the Company's performance are inextricably linked to the pace and
intensity with which the regulations are written, promulgated, and enforced.
During the past several years the regulatory enforcement pace has slowed,
resulting in an increasingly competitive environmental market.
More recently, the demand for the Company's services has been stimulated by new,
more business-oriented factors, including the recognition that it is more
cost-effective to prevent pollution than to remediate it after discharge and the
success of market-based programs such as wetlands banking. Within these
incentive systems are a series of programs, such as emissions trading,
brownfields redevelopment, and wetlands banking, that provide a benefit to
clients and contribute to the overall enhancement of environmental quality.
Additionally, many clients now see environmental strategy as a method of
increasing global competitiveness and enhancing profitability. EA believes that
this strategic shift will stimulate opportunity for its business-oriented
consulting services in both the domestic and international markets.
In our role as an advocate and strategic resource to our clients, EA provides
the management perspective and technical skills to anticipate, identify, address
and resolve those energy, environmental, and health and safety issues affecting
business performance and profitability.
Matters Relating to the Accounting Irregularities
Accounting Irregularities
On February 4, 2000, the Company announced that during its normal review of aged
unbilled revenue, it had discovered accounting irregularities. As a result, the
Audit Committee of the Board of Directors (the "Audit Committee") authorized its
Associate General Counsel to perform an independent investigation (the "Company
Investigation") into these accounting irregularities. The Company's counsel
immediately engaged the forensic audit team of PricewaterhouseCoopers LLP, the
Company's current auditors, to assist in the Company Investigation into these
accounting irregularities.
On April 10, 2000, the Company announced that the Company Investigation was
complete. The Company Investigation isolated the restatements to fiscal years
1999 and 1998 and the quarterly periods in fiscal year 1998 through February
2000. The cumulative effect of the restatements would reduce earnings on a
pre-tax basis by $1.4 million. In the same
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announcement, the Company advised that Arthur Andersen LLP, who had served as
the Company's auditors through August 31, 1999, had notified the Company by
letter that its previously filed reports on the financial statements of the
Company for the years ended August 31, 1999 and 1998 should no longer be relied
upon. The Company then retained PricewaterhouseCoopers LLP to conduct the
financial audit and to assist in the restatement of earnings for the affected
accounting periods. The Company made adjustments to correct the misapplication
of generally accepted accounting principles resulting in improper revenue
recognition. This error involved recording fictitious revenue resulting from the
actions of individual(s) who are no longer employed by or associated with the
Company. The Company has restated its previously reported financial results for
fiscal years ended August 31, 1999 and 1998 and the quarterly financial results
for 1998, 1999 and the first two quarters of Fiscal 2000.
The restated net loss for fiscal year 1999 totaled $1,530,400 or $0.24 per
diluted share. Additionally, the restated net loss for fiscal year 1998 totaled
$240,100 or $0.04 per diluted share. The Company had originally reported a net
loss of $1,473,600 or $0.23 per diluted share and net income of $604,800 or
$0.10 per diluted share in fiscal years 1999 and 1998, respectively. The
cumulative after tax effect of the restatement for the two affected years is a
reduction in earnings of $901,700.
Management Consulting Services
EA provides management consulting services to clients in the areas of energy,
the environment, and health and safety. The Company's primary service areas are
Water Quality and Water Resources Management, Energy and Air Quality Management,
Ecotoxicology and Bioassessment, Natural Resource and Risk Management, Sediment
Management, Site Characterization and Remediation, Solid Waste Management,
In-Plant Services, Information Management Technology, and Strategic Planning of
Environmental Issues.
The multi-faceted nature of most environmental problems, however, requires an
interdisciplinary team of professionals to provide integrated solutions, and
strict classification by service area is not practical for most of the Company's
consulting practice. In providing its services, EA has developed certain
remedial and analytical technologies, planning and management services, and
processes for the mitigation and control of environmental damage and risks. In
addition, we assist clients in responding to issues raised by regulatory
agencies, community groups, and "interested" organizations. All of the service
areas are part of the vertically integrated capabilities the Company may offer
its clients.
The Company's services normally are performed by a team of scientists,
engineers, planners and economists and include a combination of the following:
o Consultation to determine the nature and scope of potential environmental,
energy, or health and safety problems.
o Development and implementation of solutions to identified environmental,
energy, or health and safety issues. o Economic analyses, database
development, strategic and tactical planning of environmental, energy, and
health and safety programs.
o On-site sampling, monitoring, and measurement of discharges and emissions. o
Evaluation of environmental or human health risks. o Preparation of reports for
regulatory agencies.
o Participation and representation of clients in public and regulatory hearings.
o Engineering certification of design specifications. o Design and
implementation of remedial action.
o Environmental program management and outsourced support.
The Company's contracts are generally undertaken on a time-and-materials,
fixed-price, or cost-plus-fixed-fee basis. Fixed-price contracts and certain
time-and-materials and cost-plus contracts with upset limits require EA to bear
the risk of cost overruns. Most of the Company's contracts provide that the
client may at any time cancel any portion of the work not yet performed.
The following table reflects the approximate percentage of consolidated net
revenue derived by contract type in each of the three years in the period ended
August 31, 1999:
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<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------- ---------------------------------------------------
1999 1998 1997
As Restated) (As Restated)
----------------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
Time-and-materials 37% 33% 34%
Fixed-price 41% 48 44
Cost-plus-fixed-fee 22 19 22
----------------------------- --- --- ---
100% 100% 100%
============================= === === ===
</TABLE>
During fiscal 1999, the majority of the Company's work continued to be from
fixed-price and time-and-materials contracts. The Company considers this to be
an industry trend whereby clients transfer additional risk to the prime
contractor and the Company transfers additional risk to its subcontractors, when
applicable.
In general, the Company's contracts vary in length from one month to ten years
and require performance of a particular project within the contractually
specified timeframe. Although the Company holds certain federal contracts with
options for longer durations, most of these contracts require annual renewals by
the client. A substantial portion of EA's contracts represent the provision of
separate services required from time to time by ongoing clients.
Clients
EA provides services to industrial, utility, and government clients both
directly and indirectly through work performed for architects/engineers,
engineer/contractors, law firms and financial institutions. The Company's goal
is to assist its clients in achieving their business and growth objectives as
cost-effectively and dependably as possible.
During fiscal 1999, the Company provided services to more than 400 industrial,
utility and government clients through more than 1,250 projects in the private
sector and 350 projects in the federal government sector. Although more private
sector projects were performed, the portion of net revenue provided by the
federal government was 54%, 50%, and 46% in fiscal years 1999, 1998 and 1997,
respectively. The Company believes that a diversified mix of business revenue
derived from each of its client sectors (federal government, state and local
governments, industry and utilities) will help ensure its continuing financial
success. As EA's mix of business varies by geographic location, the Company
implemented a regional organization structure in fiscal 1999 to support the
decentralization of its marketing and business development program. A regional
structure places business development and marketing resources directly within
proximity to regional clients where they are needed and further increases
concentration on operations. Under the regional structure, EA's operations
include the Northeast, Mid-Atlantic, Southeast, North Central, South Central and
West.
Although a significant portion of net revenue was derived from agencies of the
federal government, the Company's services are performed for many different
departments and in many different regions of the country, thereby reducing the
financial risks associated with delays or cancellation of any particular
contract. In management's opinion, the loss of any one of the Company's clients
other than a major government client within its major revenue-generating sectors
would not have a material effect on operations or profitability.
The following table reflects the approximate percentage of net revenue derived
from the Company's major client sectors for each of the three years in the
period ended August 31, 1999:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------- ----------------------------------------------------
1999 1998 1997
(As Restated) (As Restated)
-------------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Federal government 54% 50% 46%
Industrial and other private sector 36 37 42
Utilities 2 6 5
State and local government 8 7 7
------------------------------------- --- --- ---
100% 100% 100%
===================================== === === ===
</TABLE>
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Sales and Marketing
The Company markets its services from its headquarters in Hunt Valley, Maryland
and through its network of branch and satellite offices located in and around
major metropolitan cities across the United States. The Company employs a
variety of business development and marketing techniques, including one-on-one
client meetings and presentations, hosting and participating in industry
seminars, responding to formal requests for proposals, initiating direct-mail
programs, and establishing an ongoing public relations/technical article program
within industry trade journals.
A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of work to include follow-on complementary
activities and new activities and often refer us to their colleagues at other
locations. It is estimated that 41% of new awards in fiscal 1999 were due to
expanded scope of work at existing client locations. Additionally, the Company
has an active business development program to identify new clients that have not
yet engaged its services. In fiscal 1999, the Company was awarded approximately
$12 million, or 24%, from new clients. The Company often teams with other
consulting firms or provides its services as a subcontractor to larger
architect/engineer or engineer/contractor firms. The Company tracks prospective
business through an opportunity pipeline network.
Backlog
At August 31, 1999, the Company's total contract backlog was approximately $35.9
million compared to contract backlog of $43.4 million at August 31, 1998. The
decrease in total contract backlog is largely attributable to the Company
divesting its Analytical Services segment during fiscal 1999, which had annual
sales of approximately $7.0 million and certain federal contracts that were
completed in fiscal 1999. Because subcontractor and other direct project costs
can change significantly from project to project, the change in total contract
backlog is not necessarily a true indication of business trends. Accordingly,
the Company considers net backlog (total backlog less estimated subcontractor
and other project costs) as its primary measure of backlog. The Company's net
contract backlog was approximately $24.0 million at the end of fiscal 1999,
compared to approximately $22.2 million at the end of fiscal 1998. This $1.8
million increase is due to a greater percentage of backlog in the industrial
sector which generally has less subcontractor and other direct costs than
federal sector projects. The Company expects that approximately 80% of the
contract "fiscal" backlog will be completed during the fiscal year. The
Company's total contract backlog attributable to federal government contracts as
of August 31, 1999 was $21.8 million ($14.2 million, net), compared to $27.8
million ($13.5 million, net) a year earlier.
In addition to this contract backlog, at August 31, 1999, the Company held
indefinite delivery/indefinite quantity (ID/IQ) type contracts from various
clients, principally government agencies for up to $79 million compared to $217
million at August 31, 1998. The decrease is due to three large ID/IQ contracts
that were completed in FY99. The expiring contracts contributed approximately
$11.3 million, or 22%, of new awards and approximately $8.7 million in net
revenue, or 25%, in fiscal 1999. Although the completion of these ID/IQ
contracts is significant, the Company plans to keep awards and revenue steady in
fiscal 2000.* To achieve growth into fiscal 2000 and beyond, the Company has
made several investments in the international and domestic markets opening
offices in Miami and New York City, as well as expanding its Mexico operation in
fiscal 1999. In addition, the Company expanded in Texas by opening an office in
Houston in fiscal 1999 after winning a large basic ordering agreement with its
largest private sector client.
There can be no assurance, however, that work under any of these ID/IQ contracts
will be authorized or that work once authorized will not be cancelled.
Generally, these contracts provide for a fixed percentage of profit based on
estimated costs. In the event of cancellation, the Company is entitled to
recover its incurred costs and associated profit. Terminations and cancellations
of government contracts have not been material in the past. The level of backlog
may fluctuate during each year, and accordingly, the backlog at any point in
time does not necessarily reflect near-term anticipated operating results.
Reliance on major government contracts subjects the Company to risks associated
with public budgetary restrictions and uncertainties, discrepancies between
awarded contract amounts and actual revenues, and cancellation at the option of
the government. The Company attempts to mitigate these risks by staffing only to
meet reasonably anticipated average workloads, by using subcontractors to handle
peak workloads, and by obtaining termination benefit contract provisions.
Cancellation of any of the Company's major government contracts, however, could
have a material adverse effect on the Company.*
The Company also provides services on major long-term private sector contracts
under basic ordering agreements that provide for work on a task basis during any
particular year. For example, the Company was awarded a $3 million basic
ordering
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agreement with Exxon for sites near Houston, Texas, and was awarded an
open-ended national basic ordering agreement with Hertz. Upon receipt of related
authorizations, the work is included in contract backlog. Because such specific
authorizations are generally for periods considerably shorter than the duration
of the period the Company expects to perform services for a particular client,
management believes that its backlog figures are not necessarily indicative of
its future revenue.
Employees
As of August 31, 1999, the Company had approximately 370 full-time employees
compared to approximately 400 full-time employees at August 31, 1998. The
decrease in employees was a result of staff reductions made in the second
quarter as part of restructuring efforts and the sale of EA Laboratories in the
third quarter which had a staff of approximately 60. Adjusting to remove the
effects of the strategic staff reductions in fiscal 1999, the Company actually
increased in size by approximately 60 employees. Most of the Company's employees
are engaged in performing scientific, engineering, remediation and consulting
services; the remainder provides executive, administrative and other support
services. The Company also hires part-time or temporary personnel to meet the
requirements of a particular contract. EA's staff includes professional
engineers, biologists, chemists, geologists, industrial hygienists, public
health scientists, regulatory specialists, toxicologists, industrial planners,
computer scientists, and business managers.
The Company has invested in training and mentoring programs to promote a
"continuing learning" process within the firm. The Company has instituted
several programs including project manager training, sales management seminars
and technical development programs, and has an established professional career
path development program. Additionally, the Company offers a tuition
reimbursement program for all employees of the firm.
None of the Company's employees is represented by a union. The Company considers
its relationship with employees to be good.
Competition
Nationwide, the environmental industry employs more than one million people,
working at over 100,000 firms and generating revenues in excess of $186 billion.
The environmental engineering and consulting market continues to be highly
competitive and requires skilled and experienced professional, technical, and
management personnel. Today, the domestic market for environmental services can
be characterized as flat in revenue and income. Over the past several years, in
an effort to reduce costs and increase volume, the environmental industry
experienced an increase in merger and acquisition activity, resulting in several
mega-environmental firms with revenues greater than $500 million.
Typical projects, especially those in excess of $100,000, are bid on by numerous
firms. The principal competitive factors are client relationships, pricing,
reputation, and quality of services, expertise, and local presence.
Increasingly, multiple firms are deemed "technically qualified," leaving price
and established relationships to determine the winning bid.
EA believes that its favorable competitive factors are its multidisciplinary
capabilities, its reputation for quality of services, and its geographical
dispersion. In each market sector, EA competes with engineering and consulting
firms which are both larger and smaller than the Company, although management
believes no one firm currently dominates a significant portion of any of the
service areas either regionally or nationally.
Regulatory Matters
Environmental laws and regulations have been enacted by federal, state and local
governments in response to public pressure and scientific evidence identifying
adverse effects of public and business activity on the environment and human
health and safety. Historically, compliance with these laws and regulations was
the primary driver in creating demand for the Company's services and continues
to be a prime source of demand for EA's services. Among the dozens of federal
environmental statutes and regulations under which EA provides services are the
following, broad-based statutes:
The Safe Drinking Water Act (SDWA) of 1974, reauthorized in 1996. In addition to
its primary mission of protecting the nation's drinking water supplies through
the regulation of public water systems, the reauthorized Act expands watershed
protection, emphasizes the control of non-point sources of contamination, and
introduces a revolving funding program of nearly $9.6 billion through the year
2006. The reauthorized SDWA will have a strong impact on the Company's state and
local government clients, who are responsible for ensuring the quality and
quantity of their drinking water supplies.
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The Federal Water Pollution Control Act of 1972 (known as the Clean Water Act or
CWA) established a framework for controlling the discharge of pollutants to the
environment from public and private facilities. The Act centers on the National
Permit Discharge Elimination System (NPDES), which establishes controls over
discharges from regulated facilities, and includes provisions to control
stormwater, industrial runoff, and nonpoint sources of pollution. In addition,
the CWA establishes standards to manage ecological habitats, coastal regions,
watersheds and wetlands.
The Resource Conservation and Recovery Act of 1976 (RCRA) establishes
"cradle-to-grave" regulations affecting the generation, management and disposal
of hazardous waste. In addition, the Act regulates non-hazardous solid waste
generated by households, commercial and public facilities, and industrial
sources. Specific RCRA provisions focus on land disposal of hazardous waste,
underground and above-ground storage tanks, site remediation and groundwater
decontamination.
The Clean Air Act (CAA) Amendments of 1990, which was reauthorized in 1990,
established a series of programs to control airborne emissions from mobile and
stationary sources. The Act confirmed the goal of attaining National Ambient Air
Quality Standards (NAAQS) air quality levels throughout the U.S., requiring
"nonattainment" areas to establish compliance programs. The amendments target
nonattainment problems with a broad array on requirements, including additional
controls on industrial facilities, tighter emissions standards from motor
vehicles, and the use of alternative clean fuels.
The CAA Amendments of 1990 also established requirements for the EPA to adopt
Risk Management Program (RMP) requirements, affecting an estimated 64,000
facilities nationwide, handling toxic, flammable, and /or reactive chemicals.
These regulations were adopted in June 1996 and became effective June 1999. The
regulations address programs and procedures designed to prevent or minimize the
consequences of accidental releases of hazardous materials that could affect the
public or environment. Affected facilities will be required to develop RMP
programs and to share the results of that RMP, including their worst-case
scenario data, via the Internet.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA, or Superfund) and its subsequent reauthorizations seeks to address the
current consequences of past hazardous waste management practices. Any
organization that owns or owned a site on which hazardous materials are present,
or that operates or operated a facility generating or containing hazardous
materials, may be liable under CERCLA for cleanup responsibility.
The Brownfields Initiative was introduced by the Clinton Administration to
resolve the cleanup and liability issues associated with contaminated, often
abandoned, industrial and commercial facilities known as "brownfields." The
Initiative sought to encourage economic development and property reuse of
brownfields, which typically are located in urban areas, by resolving cleanup
and liability issues to owners, operators and prospective developers of such
sites. Most states and many local governments now have voluntary or mandatory
brownfields programs in place.
The Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991,
established funding for mass transportation and public transit programs;
introduced the Congestion Mitigation and Air Quality (CMAQ) program to provide
funding for non-attainment areas under the CAA to meet attainment deadlines; and
included funding for alternative-fuel transit buses. In 1998, ISTEA was
reauthorized as the Transportation Equity Act for the 21st Century (TEA-21).
TEA-21 earmarks $218 billion for highway and transit projects over the next six
year period, streamlining the environmental review process, promoting the use of
market-based incentives, and giving states the flexibility to use funds for
transportation projects that include reuse of brownfield sites.
The National Energy Policy Act (EPAct) of 1992 established the use of
energy-efficient technologies as a national priority for improvement of air
quality and set a goal of 30% displacement of petroleum fuels with alternative
fuels in vehicles by the year 2010. To that end, EPAct set a schedule by which
industrial sectors beginning with the federal government would be required to
purchase alternative-fueled vehicles.
In addition to the historic EA markets represented by these federal regulations,
two key factors have emerged to expand the Company's market opportunities. The
first factor centers on international environmental standards and regulations
including the International Standard Organization (ISO) 14000 series of
certifications, which commits participants to an approach of continuous
environmental improvement and exacting environmental performance standards, and
the Kyoto Accord, which the United States signed in December, 1997, thereby
committing to a reduction of greenhouse gas emissions to 1990. The second factor
stems from a strategic shift in approach by US environmental regulators
including the US Environmental Protection Agency. Illustrated by EPA's
"Common-Sense Initiative" and the Vice President's "Reinvention of Government,"
this new approach emphasizes market-based incentives, industry-specific
regulation,
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pollution prevention and voluntary responses by the regulated community. The
interest of a growing number of companies to move beyond compliance to a higher,
self-imposed standard of "sustainability" or "environmental stewardship"
introduces substantial new markets for EA's management consulting services.
The Fish and Wildlife Coordination Act (initially enacted 10 March 1934) relates
specifically to the requirement for coordination with resource agencies for all
federally funded projects. Consultation has become increasingly important over
recent years for numerous projects.
o State Departments of Natural Resources
o U.S. Army Corps of Engineers
o State Fish and Game Department
o U.S. Forest Service
o State Water Resources Control Boards
o National Marine Fisheries Service
o U.S. Fish and Wildlife Serve
o State Historical Preservation Offices
o Bureau of Land Management
o National Park Service
The Endangered Species Act (Public Law 93-205 and amendments) enacted in
December 1973, specifies the requirements for the protection of species
determined to be endangered by the U.S. Fish and Wildlife Service. Under the
requirements of the Act, any Federal actions or actions by entities receiving
Federal funds, must not jeopardize the continuing existence of endangered or
threatened plants or wildlife, nor result in the destruction or adverse
modification of critical habitat. Such projects must involve a review by the
Fish and Wildlife Service of existing conditions and a determination that no
known rare, threatened, or endangered species are involved in the project area
or, if such species are identified, that a specific set of consultations and
reviews by conducted.
The National Historic Preservation Act (NHPA) has established sets of Federal
policy and implementing regulations for the protection of America's cultural
environment that can come into conflict with the needs of a specific project.
Section 106 of the NHPA requires Federal agencies to consider the effects of
their actions on historic properties and seek comments from the Advisory Council
on Historic Preservation.
The Wild and Scenic Rivers Act of 1968 designated certain rivers to be of
national significance because they possess outstanding and remarkable scenic,
recreational, geologic, fish and wildlife, historic, cultural, and other similar
values. These rivers, according to the law, should be preserved in their
free-flowing conditions for the benefit and enjoyment of present and future
generations.
Insurance
The Company maintains a full range of insurance coverage including professional
liability insurance and pollution liability coverage. There can be no assurance
that the Company will not incur liability with respect to the professional
services it renders or that such liability, if incurred, will not have a
material adverse effect upon the Company. However, these insurance policies will
provide limited protection and defense up to their stated amounts.
EA has endeavored to protect itself through contractual indemnification from
clients when possible and by intensifying its existing quality control and
assurance, internal risk management, and health and safety programs. Generally,
indemnification is not available under the Company's government contracts. The
Company's quality control and assurance program includes a control function to
establish standards and procedures for performance and documentation of
performance of project tasks, and an assurance function to audit the control
function and to monitor compliance with procedures and quality standards. An
additional objective of this program has been to establish practices and
procedures
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to protect EA personnel from hazardous substances. This is accomplished through
a company-wide occupational safety and health monitoring program managed by
corporate health and safety professionals.
Equipment
The Company owns substantially all of the computer, monitoring, testing and
other equipment required to render its various consulting and testing services.
Additionally, the Company leases certain computer, office furniture, and other
equipment. Equipment and various other items the Company purchases on behalf of
clients are available from several suppliers and the Company is not dependent on
any one supplier.
Environmental and Other Considerations
The Company does not believe that its compliance with federal, state and local
laws and regulations relating to the protection of the environment will have any
material effect on its capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The Company's headquarters and Baltimore regional office are located in
approximately 76,100 square feet of leased space, of which approximately 4,200
square feet are being sublet. Leases for these facilities are with partnerships
whose members include the Chairman of the Board of EA and certain members of his
family.
The Company's primary branch and satellite offices in the United States are
located in:
<TABLE>
<CAPTION>
<S> <C> <C>
Baltimore, Maryland Boston, Massachusetts Lincoln, Nebraska
New Castle, Delaware San Francisco, California Dallas, Texas
New York, New York Sacramento, California Houston, Texas
Newburgh, New York Seattle, Washington Fairbanks, Alaska
Syracuse, New York Chicago, Illinois Honolulu, Hawaii
Iselin, New Jersey Oak Brook, Illinois Miami, Florida
Pittsburg, Pennsylvania
</TABLE>
In addition, the Company has established office locations in Mexico City, Mexico
and Yigo, Guam.
The Company leases office and storage facilities for each regional office.
Presently, the facilities are suitable, adequate, and generally utilized to
capacity.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of the Company, the disposition of
these matters will not have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended August 31, 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
On October 31, 1986, EA common stock began public trading in the
over-the-counter market under the symbol "EACO." The following table shows the
high and low closing sales price reported on the NASDAQ National Market Small
Cap Systems ("NASDAQ"). As of October 13, 1999, the Company's common stock began
trading on the NASDAQ Small Cap Market System. Such over-the-counter market
quotations, however, reflect inter-dealer prices, without retail markup,
markdown or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
Fiscal 1998: First Quarter $2.44 $1.88
Second Quarter 2.50 1.75
Third Quarter 4.00 2.25
Fourth Quarter 3.25 1.56
Fiscal 1999: First Quarter $2.00 $1.00
Second Quarter 1.50 1.00
Third Quarter 1.56 0.94
Fourth Quarter 1.38 1.00
</TABLE>
On October 29, 1999, the closing price of the common stock as reported by NASDAQ
was $0.656 per share. On that date, there were approximately 870 holders of
record.
To date the Company has not paid any cash dividends on its common stock and does
not anticipate paying such dividends in the foreseeable future.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the periods indicated have been derived from the
audited consolidated financial statements of the Company. In the quarter ended
May 31, 1999, the Company divested its Analytical Services segment. The selected
financial data for all these years have been adjusted to show only continuing
operations and does not reflect the Analytical Services segment. These data
should be read in conjunction with the consolidated financial statements and
notes thereto included in Item 8.
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
(As Restated)(As Restated)
-----------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operations data:
Total revenue $ 48,727 $ 52,237 $ 68,189 $ 80,933 $85,644
Net revenue 34,146 35,320 37,443 48,495 54,761
(Loss) income from continuing operations (2,228) (187) (6,863) 38 4,099
Net (loss) income from continuing operations (1,447) (178) (4,615) (124) 2,804
Basic (loss) earnings per share from
continuing operations $ (0.23) $ (0.03) $ (0.74) $ (0.02) $ 0.47
Diluted (loss) earnings per share from
continuing operations $ (0.23) $ (0.03) $ (0.74) $ (0.02) $ 0.45
Weighted average shares outstanding 6,312 6,255 6,206 6,138 5,998
Diluted weighted average shares
outstanding 6,312 6,255 6,206 6,138 6,174
Balance sheet data:
Working capital $ 9,331 $ 8,807 $ 10,323 $ 15,955 $17,663
Total assets 22,664 22,140 26,341 33,329 36,368
Short-term borrowings -- -- -- -- --
Long-term borrowings, net of
current portion 3,326 1,349 2,332 2,665 4,033
Stockholders' equity $ 11,616 $ 13,046 $ 13,097 $ 18,558 $18,880
</TABLE>
10
<PAGE>
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 on contracts, and the extent
to which the Company's employees are performing billable tasks as opposed to
engaging in preparing contract proposals, bids and other required non-billable
activities. Results of operations may also be affected to the extent that the
Company chooses not to reduce its professional staff during a period of reduced
demand for its services. Due to these factors, quarterly results of operations
are not necessarily indicative of the results of operations for longer periods.
The Company, in the course of providing its services, routinely subcontracts
such services as drilling, laboratory analyses, and other specialized services.
In addition, as described in the "General" section of Item 1, the use of teaming
partners for the performance of services similar to those of the Company, is
included in subcontracts. In accordance with industry practice and contract
terms that generally provide for the recovery of overhead costs, these costs are
passed directly through to clients and are included in total revenue. Because
subcontractor costs and direct charges can change significantly from project to
project, the change in total revenue is not necessarily a true indication of
business trends. Accordingly, the Company considers net revenue, which is total
revenue less subcontractor and other direct project costs, as its primary
measure of revenue.
On February 4, 2000, as a result of the discovery of accounting irregularities
related to unbilled revenue, the Audit Committee of the Company's Board of
Directors ("Audit Committee") initiated the Company Investigation into such
matters which has recently been completed. In June 2000, the Company restated
its financial results for fiscal years 1999 and 1998 and the quarterly periods
in fiscal year 1998 through February 2000. The financial information presented
here has been restated to incorporate all relevant information obtained from the
aforementioned investigation.
The Company made adjustments to correct the misapplication of generally accepted
accounting principles resulting in improper revenue recognition. This error
involved recording fictitious revenue resulting from the actions of
individual(s) who are no longer employed by or associated with the company.
The restated net loss for fiscal year 1999 totaled $1,530,400 or $0.24 per
diluted share. The Company originally reported a net loss of $1,473,600 or $0.23
per diluted share for fiscal year 1999.
Additionally, the restated net loss for fiscal year 1998 totaled $240,100 or
$0.04 per diluted share. The Company originally reported net income of $604,800
or $0.10 per diluted share in fiscal year 1998.
Results of Operations
The following table sets forth the percentage relationships of selected items in
the consolidated statement of operations to net revenue for the years indicated.
The table has been adjusted to show the relationship of continuing operations
for each year and does not include results of the discontinued Analytical
Services segment.
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------
1999 1998 1997
(As Restated) (As Restated)
------------------------------------------------ --------------- ------------- ------------
<S> <C> <C> <C>
Net revenue .................................. 100.0% 100.0% 100.0%
------- ------- -------
Operating expenses:
Direct salaries and other operating expenses 76.7 76.2 89.0
Sales, general and administrative .......... 23.6 25.0 21.3
Gain on "key employee" life insurance ...... -- (0.7) --
Restructuring charges ...................... 6.2 -- 8.0
------- ------- -------
Total operating expenses ................. 106.5 100.5 118.3
------- ------- -------
Loss from operations ......................... (6.5) (0.5) (18.3)
Interest expense, net ........................ (0.5) (0.4) (0.8)
------- ------- -------
Loss before income taxes ..................... (7.0) (0.9) (19.1)
Benefit for income taxes ..................... (2.8) (0.4) (6.8)
------- ------- -------
Net loss from continuing operations ...... (4.2)% (0.5)% (12.3)%
======= ======= =======
</TABLE>
Fiscal 1999 (As Restated) Compared to Fiscal 1998 (As Restated)
Net revenue from continuing operations in fiscal 1999 decreased 3.3% to
$34,146,900 from $35,319,900. This decrease in net revenue is primarily due to
lower contract volume with the federal government due to the completion of
certain indefinite delivery/indefinite quantity contracts. In addition to lower
contract volume, $500,000 of certain noncollectible prior period revenue was
written off in the second quarter of fiscal 1999. Additionally impacting the
decrease, in fiscal 1998 the Company realized approximately $676,700 in
additional contract net revenue on certain landfill projects which had loss
provisions in fiscal 1997.
Direct salaries and other operating costs of $26,199,400 slightly decreased for
the twelve months ended August 31, 1999 compared to $26,935,300 in the prior
fiscal period. However, as a result of lower net revenue, direct salaries and
other operating costs as a percentage of net revenue increased to 76.7% in
fiscal 1999 compared to 76.2% in fiscal 1998.
12
<PAGE>
Sales, general and administrative costs decreased 8.9% to $8,042,500, or 23.6%
of net revenue, in fiscal 1999 from $8,832,700, or 25.0% of net revenue, for the
twelve months ended August 31, 1998. The decrease is due to lower sales and
marketing related costs incurred as a result of strategic initiatives made in
fiscal 1999. These initiatives included a restructuring in the second quarter
reducing personnel and implementing a regional sales organization to support the
decentralization of its marketing and business development program.
In the prior period ended August 31, 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 a one-time
charge of $2,132,600 related primarily to severance agreements of 30 staff
members including several senior sales and executive staff.
As a result of the above factors, the loss from continuing operations for the
twelve months ended August 31, 1999 was $2,227,600, or 6.5% of net revenue,
compared to loss from continuing operations in the prior fiscal period of
$187,000, or 0.5% of net revenue. Interest expense, net, increased $58,800 in
fiscal 1999 compared to fiscal 1998 due to a higher line of credit balance used
to fund operating activity.
For the twelve months ended August 31, 1999, the Company had a benefit from
income taxes of $961,400 compared to a benefit from income taxes of $130,900 in
the prior fiscal year. This represents an effective rate of 40% in fiscal year
1999 and 42.4% in fiscal 1998.
The net loss from continuing operations for the fiscal year ended August 31,
1999 was $1,446,700, or 4.2% of net revenue, compared to a net loss from
continuing operations of $177,800, or 0.5% in the prior fiscal period.
For the twelve months ended August 31, 1999, the Company had a net loss from its
discontinued Analytical Services segment of $83,700. Included in this loss was a
net gain of $35,300 on the sale of the segment. The discontinued segment in the
prior fiscal period had a net loss of $62,300.
As a result of the above, the Company had an overall loss of $1,530,400 or 4.5%
of net revenue for the twelve months ended August 31, 1999, compared to a net
loss of $240,100, or 0.7%, in the prior fiscal period.
Fiscal 1998 (As Restated) Compared to Fiscal 1997
Net revenue from continuing operations during fiscal 1998 decreased 5.7% to
$35,319,900 from $37,442,800. The decrease in net revenue was due to lower than
anticipated sales in the industrial sector. Although sales and marketing efforts
targeted this market and won approximately 150 new clients, larger-volume
projects were not achieved as of the end of the fiscal 1998 period. Lower
industrial sector sales were offset by improved net sales in the federal, state
and local government, and utility sectors.
Direct salaries and other operating costs decreased 19.2% to $26,935,300 in 1998
from $33,344,200 in 1997, or 76.2% and 89.0% of net revenue, respectively. The
decreases were attributable to increased staff utilization and lower overall
non-labor operating costs. The Company maintained a utilization rate (time
charged to clients) of more than 95% for its technical staff and an overall
Company rate of 74%. Significant savings were also achieved by lowering
equipment and property lease costs by $1,900,000 in fiscal 1998 compared to
fiscal 1997. These savings were achieved by subletting unused facilities,
renegotiating existing leases, and changing to a different supplier for
computer-related items.
Sales, general and administrative costs increased 10.9% to $8,832,700 in 1998
from $7,961,100 in 1997, or 25.0% and 21.3% of net revenue, respectively. The
increase in cost was primarily related to additional investment in sales and
marketing expenses in fiscal 1998 compared to the prior year.
In the third quarter of fiscal 1998, the Company recorded a gain of $261,100,
which reduced its operating expenses. The gain was related to the increase in
the cash surrender value of "key employee" life insurance policies included on
the Company's balance sheet.
In the third quarter of fiscal 1997, the Company implemented a major
organizational realignment to reposition itself in the marketplace. In
connection with the restructuring, the Company incurred charges of $3,000,100
related to severance, planned reduction in office space, the suspension of the
implementation of a new project/financial system, and other related costs. This
restructuring included a staff reduction of 125 employees. During fiscal 1998,
the Company incurred $803,500 in operating related costs that were associated
with the FY97 restructuring and charged against the reserve instead of income.
As a result of the above factors, the loss from continuing operations in fiscal
1998 was $187,000, compared to a loss from continuing operations of $6,862,600
in the prior year. Interest expense, net, decreased to $121,700 from the prior
year's total of $287,100. This 57.6% decrease was attributed to lower interest
paid in connection with the Company's line of credit, reduction of certain
long-term debt principal balances, and the absence of an interest payment in
connection with a Maryland tax settlement in fiscal 1997.
For the twelve months ended August 31, 1998, the Company had a net loss from its
discontinued Analytical Services segment of $62,300 compared to a net loss of
$792,300 in fiscal 1997.
The net loss for the twelve months ended August 31, 1998, was $240,100, or 0.7%
of net revenue, compared to a net loss of $5,407,600, or 14.4% of net revenue
for the prior year.
Inflation
Because of its ability to generally pass through increased costs to its clients,
as well as the generally low levels of inflation, the Company believes that
inflation has not had a material impact on its operations.
13
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents (cash) increased by $112,800 in 1999, compared to a
decrease of $481,600 in 1998 and an increase of $1,023,200 in 1997. The increase
in 1999 principally resulted from the sale of the EA Laboratories division for
cash during the quarter ended May 31, 1999 and borrowings against the Company's
line of credit used for operating activities. During fiscal year 1999, the
Company used $3.5 million of cash for operating activities, principally as a
result of the 1999 net loss as well as increases in deferred taxes, accounts
receivable, and cost and estimated earnings in excess of billings on uncompleted
contracts, partially offset by the receipt of income tax refunds. 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 strategic initiatives 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. Proceeds from the sale of EA Laboratories, as
well as restructuring efforts, helped decrease the line of credit balance by
$885,900 from $4,212,100 as of February 28, 1999 to $3,326,200 as of August 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) of $487,300, $546,500 and $747,700 in
1999, 1998 and 1997, respectively, have been funded primarily from cash flows.
The Company maintains a bank credit arrangement with a regional bank consisting
of: (i) an $8,500,000 revolving line of credit secured by receivables; (ii) a
$500,000 term loan; and (iii) an equipment line of credit of $1,500,000. Of the
$8,500,000 revolving line of credit, $2,500,000 is available for acquisitions,
joint ventures and licensing agreements. Borrowings from the revolving line of
credit are limited to certain percentages of accounts receivable and costs and
estimated earnings in excess of billings (up to a maximum of $4,000,000). The
interest on all borrowings is LIBOR +250.
At August 31, 1999, the Company had outstanding long-term debt, including the
current portion, of $3,413,700, which represented an increase of $1,733,900 from
the August 31, 1998 balance of $1,679,800. The increase is the result of a
$2,064,800 increase in its revolving line of credit as described in the previous
paragraph, partially offset by net repayment of $330,900 for equipment and
computer loans. The Company had no short-term borrowings under its line of
credit at August 31, 1999 and 1998.
The Company's existing funds, cash from operations, and the available portion of
its $8,500,000 bank line of credit and $1,500,000 equipment line are expected to
be sufficient to meet the Company's present cash needs. The Company also
currently believes it has the ability to raise capital through placement of debt
and may pursue such options if the need arises to expand facilities, make
acquisitions or acquire equipment in conjunction with a review of the most
cost-effective means for the Company and its stockholders.
While the Company believes that there is sufficient demand for current operating
levels, there can be no assurance that this demand will exist or continue.
Although the Company has the ability to reduce its professional staff in periods
of reduced demand, it may choose not to make full reductions in such periods,
with resulting adverse effects on operations.
--------------------------
Year 2000 Readiness Disclosure
EA Engineering, Science, and Technology, Inc. ("EA" of the "Company") recognizes
the seriousness of the challenge businesses worldwide face as a result of the
Year 2000 problem. EA has had a formal, thorough and aggressive Year 2000
project since early 1998. As a result of these efforts, we believe that all of
our mission critical systems are Year 2000 compliant. We believe the measures
taken will minimize any impact on EA's ability to deliver services to our
clients or our financial performance. Based on the successful completion of our
Year 2000 compliance program, the Company does not foresee significant risks
associated with Year 2000 at this time.
A. Assessment and Remediation
During fiscal 1998, EA developed and implemented a three-phase program for Year
2000 compliance. Phase I identified those systems, hardware and software, that
posed a potential compliance risk for EA. EA completed all Phase I
14
<PAGE>
Assessment in mid-1998. Phase II assessed the business and financial impact of
these at-risk systems, established priorities to address these risk areas, and
proscribed remediation schedules and details. Phase II was completed during the
fall of 1998. Phase III carried out the prescribed remediation schedules and
performs final testing of the major systems to ensure compliance. Phase III
began in September of 1998 and concluded in November 1999. We believe that all
major systems, wide and local area networks, and desktop PCs are compliant at
this time.
B. Testing
EA has tested and will continue to test, the Year 2000 worthiness of each system
on an on-going basis. This compliance testing is comprised of three independent
assessments: first, a review all 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 audit and assessment, using third party auditing software and
independent consultants dedicated to Year 2000 compliance.
Testing has been completed on every EA system, including networks and
communications, major applications, desktop computers and applications, and
non-computer related systems.
C. Risks and Contingency Plans
We have developed thorough contingency plans to address events that may arise
within or outside of the company. The remainder of 1999 will be focused on
ensuring the readiness of these contingency plans and addressing any remaining,
presently unknown issues that may arise.
D. Third Party Vendors, Utilities and Customers
The fact that EA provides environmental consulting services, which are primarily
labor based, substantially minimizes its risk associated with potential Year
2000 problems with its internal systems and its 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 by its outside vendors.
EA has contacted each of its major vendors and clients to secure statements of
Year 2000 compliance. The vendors and clients who have responded to date have
assured EA of the adequacy and timeliness of their Year 2000 preparations.
Additionally EA has incorporated Year 2000 compliance clauses into its
subcontractor agreements since early 1999.
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.
E. Reasonably Likely "Worst-Case" Scenarios
Due to the magnitude and complexity of the Year 2000 problem, even the most
conscientious and diligent efforts cannot guarantee that every problem has been
found and remediated prior to January 1, 2000. EA believes that it has addressed
every Year 2000 problem known at this time. We are confident no significant Year
2000 issues remain and that we can address any as yet undiscovered Year 2000
problems quickly.
EA has gone to significant lengths to provide redundancy in each major system. A
failure in any single major system will not result in the cessation of normal
work processes. The failure of any single system will pose only a minimal risk.
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.
15
<PAGE>
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 of which
$30,000 has already been spent. 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.
Important assumptions and other important factors that could cause actual
results to differ materially from those in the forward-looking statements
include, but are not limited to the accounting irregularities discussed in the
explanatory Note 3 and their further impact, if any, on the Company's operations
and/or the Company's future profitability. 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.
-------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Financial Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ....................... 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1999 and 1998 19
Consolidated Statements of Operations for the years ended
August 31, 1999, 1998, and 1997 ....................... 21
Consolidated Statements of Changes in Stockholders' Equity
for the years ended August 31, 1999, 1998, and 1997 ... 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1999, 1998, and 1997 ....................... 23
Notes to Consolidated Financial Statements for the years
ended August 31, 1999, 1998, and 1997 ................. 24
</TABLE>
17
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
EA Engineering, Science, and Technology, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of EA
Engineering, Science, and Technology, Inc. and its subsidiaries as of August 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended August 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 3, the accompanying consolidated balance sheets as of
August 31, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended have
been restated.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
June 12, 2000
18
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, August 31,
1999 1998
(As Restated) (As Restated)
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 1,963,000 $ 1,850,200
Accounts receivable, net ...................... 8,679,600 7,479,100
Costs and estimated earnings in excess of
billings on uncompleted contracts ........... 5,176,000 4,279,100
Refundable income taxes ....................... -- 407,600
Prepaid expenses and other .................... 636,700 694,800
Deferred income taxes ......................... 597,800 373,300
Net assets of discontinued operations ......... -- 1,468,200
------------ ------------
Total Current Assets ........................ 17,053,100 16,552,300
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ............. 8,920,600 8,797,400
Leasehold improvements ........................ 1,031,700 984,600
------------ ------------
Total property and equipment, at cost ......... 9,952,300 9,782,000
Less--Accumulated depreciation and amortization (9,102,900) (8,719,100)
Net property and equipment of discontinued
operations ................................ -- 718,200
------------ ------------
Net Property and Equipment .................. 849,400 1,781,100
------------ ------------
OTHER ASSETS:
Deferred income taxes ......................... 3,451,000 2,659,500
Other Assets .................................. 1,310,500 1,147,300
------------ ------------
Total Other Assets: ......................... 4,761,500
3,806,800
------------ ------------
Total Assets ................................. $ 22,664,000 $ 22,140,200
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
19
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, August 31,
1999 1998
(As Restated) (As Restated)
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ............................ $ 3,555,300 $ 4,494,300
Accrued expenses ............................ 1,443,200 553,100
Accrued salaries, wages and benefits ........ 2,228,400 2,120,800
Current portion of long-term debt ........... 87,500 330,900
Billings in excess of costs and estimated
earnings on uncompleted contracts ......... 407,800 246,700
------------ ------------
Total Current Liabilities ................. 7,722,200 7,745,800
LONG-TERM DEBT, net of current portion ......... 3,326,200 1,348,900
------------ ------------
Total Liabilities ......................... 11,048,400 9,094,700
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,335,000
and 6,285,000 shares issued and outstanding 63,400 62,900
Preferred stock, $.01 par value; 8,000,000
shares authorized; none issued ............ -- --
Capital in excess of par value .............. 11,108,300 11,049,300
Notes receivable from stockholders .......... (78,000) (119,000)
Retained earnings ........................... 521,900 2,052,300
------------ ------------
Total Stockholders' Equity ................ 11,615,600 13,045,500
------------ ------------
Total Liabilities and Stockholders' Equity $ 22,664,000 $ 22,140,200
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
20
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31,
--------------------------------------------------
1999 1998 1997
(As Restated) (As Restated)
------------- ------------ ------------
<S> <C> <C> <C>
Total revenue .................................... $ 48,727,600 $ 52,237,400 $ 68,189,000
Less - Subcontractor costs ....................... (8,904,300) (11,003,000) (20,488,600)
Less - Other direct project costs ................ (5,676,400) (5,914,500) (10,257,600)
------------ ------------ ------------
Net revenue ................................ 34,146,900 35,319,900 37,442,800
------------ ------------ ------------
Operating costs and expenses:
Direct salaries and other operating .......... 26,199,400 26,935,300 33,344,200
Sales, general and administrative ............ 8,042,500 8,832,700 7,961,100
Gain on "key employee" life insurance ........ -- (261,100) --
Restructuring charges ........................ 2,132,600 -- 3,000,100
------------ ------------ ------------
Total operating expenses ................... 36,374,500 35,506,900 44,305,400
------------ ------------ ------------
Loss from continuing operations .................. (2,227,600) (187,000) (6,862,600)
------------ ------------ ------------
Interest expense ................................. (268,600) (220,500) (378,700)
Interest income .................................. 88,100 98,800 91,600
------------ ------------ ------------
Loss from continuing operations
before income taxes ............................ (2,408,100) (308,700) (7,149,700)
Benefit from income taxes ........................ (961,400) (130,900) (2,534,400)
------------ ------------ ------------
Net loss from continuing operations .............. (1,446,700) (177,800) (4,615,300)
------------ ------------ ------------
Discontinued operations
Loss from operations of discontinued
segment (net of tax) ...................... (119,000) (62,300) (792,300)
Gain on disposal of discontinued segment,
including operating losses during phase-out
period (net of tax) ....................... 35,300 -- --
------------ ------------ ------------
Net loss from discontinued operations ............ (83,700) (62,300) (792,300)
------------ ------------ ------------
Net loss ......................................... $ (1,530,400) $ (240,100) $ (5,407,600)
============ ============ ============
Loss per share - basic
Continuing operations ........................ $ (0.23) $ (0.03) $ (0.74)
Discontinued operations ...................... $ (0.01) (0.01) $ (0.13)
Gain on disposal of segment .................. -- -- --
------------ ------------ ------------
Net loss ..................................... $ (0.24) $ (0.04) $ (0.87)
============ ============ ============
Loss per share - diluted
Continuing operations ........................ $ (0.23) $ (0.03) $ (0.74)
Discontinued operations ...................... $ (0.01) (0.01) $ (0.13)
Gain on disposal of segment .................. -- -- --
------------ ------------ ------------
Net loss ..................................... $ (0.24) $ (0.04) $ (0.87)
============ ============ ============
Weighted average shares outstanding .............. 6,312,300 6,255,500 6,205,700
Effect of dilutive stock options ................. -- -- --
------------ ------------ ------------
Diluted weighted average shares outstanding ...... 6,312,300 6,255,500 6,205,700
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1999 (as restated), 1998 (as restated), and 1997
Common Common Capital in Notes Retained
Stock Shares Stock Excess of Receivable from Earnings Total
Par Value Stockholders
--------------------------------- -------------- ------------- -------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1996 ........ 6,175,000 $61,800 $10,796,300 -- $ 7,700,000 $ 18,558,100
Issuance of stock ............... 52,300 500 106,000 -- -- 106,500
Purchase of note receivable
from stockholders ............... -- -- -- (301,000) -- (301,000)
Writedown of notes receivable
from stockholders ............... -- -- -- 141,000 -- 141,000
Net loss ........................ -- -- -- -- (5,407,600) (5,407,600)
--------- ------- ----------- --------- ----------- ------------
Balance, August 31, 1997 ........ 6,227,300 62,300 10,902,300 (160,000) 2,292,400 13,097,000
Issuance of stock ............... 57,700 600 147,000 -- -- 147,600
Writedown of notes receivable
from stockholders ............... -- -- -- 41,000 -- 41,000
Net loss ........................ -- -- -- -- (240,100) (240,100)
--------- ------- ----------- --------- ----------- ------------
Balance, August 31, 1998 ........ 6,285,000 62,900 11,049,300 (119,000) 2,052,300 13,045,500
Issuance of stock ............... 50,000 500 59,000 -- -- 59,500
Writedown of notes receivable
from stockholders ............... -- -- -- 41,000 -- 41,000
Net loss ........................ -- -- -- -- (1,530,400) (1,530,400)
--------- ------- ----------- --------- ----------- ------------
Balance, August 31, 1999 ........ 6,335,000 $63,400 $11,108,300 $ (78,000) $ 521,900 $ 11,615,600
========= ======= =========== ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31,
-------------------------------------------------
1999 1998 1997
(As Restated) (As Restated)
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss ................................................... $(1,530,400) $ (240,100) $(5,407,600)
Noncash expenses included in net loss-
Depreciation ............................................. 418,800 1,162,200 1,427,100
Loss from operations of discontinued segment ............. 119,000 -- --
Writedown of notes receivable from stockholders .......... 41,000 41,000 141,000
Provision for losses on accounts receivable .............. 243,500 130,500 339,100
Loss (gain) on disposal of fixed assets .................. 48,000 (56,500) 3,000
Gain on disposal of discontinued segment ................. (35,300) -- --
Provision for restructuring .............................. 2,132,600 -- 3,000,100
Deferred income taxes .................................... (960,200) (128,900) (1,309,800)
Changes in operating assets and liabilities -
(Increase) decrease in accounts receivable ............... (1,444,000) 924,900 2,854,800
(Increase) decrease in costs and estimated
earnings in excess of billings on uncompleted contracts (896,900) 635,400 6,828,400
(Increase) decrease in prepaid expenses and other assets (105,100) (194,200) 455,700
Decrease in accounts payable and accrued expenses ........ (2,073,900) (2,433,500) (3,512,000)
Refundable income taxes .................................. 407,600 1,476,300 (1,883,900)
Increase (decrease) in billings in excess of
of costs and estimated earnings on
uncompleted contracts .................................. 161,100 (265,500) (685,500)
----------- ----------- -----------
Net cash flows (used for) from operating
activities .......................................... (3,474,200) 1,051,600 2,250,400
----------- ----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchase of equipment ...................................... (487,300) (546,500) (747,700)
Proceeds from sales of discontinued operations ............. 1,908,500 -- --
Proceeds from sale of fixed assets ......................... -- 58,000 44,100
----------- -----------
-----------
Net cash flows used for investing activities ............. 1,421,200 (488,500) (703,600)
----------- ----------- -----------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Net borrowings from revolving line of credit ............... 2,064,800 (566,300) 481,200
Proceeds from issuance of common stock ..................... 59,500 147,600 106,500
Reduction of long-term debt and short-term
borrowings ............................................... (330,900) (626,000) (810,300)
Issuance of notes receivable to stockholders ............... -- -- (301,000)
----------- ----------- -----------
Net cash flows from (used for) financing
activities ........................................... 1,793,400 (1,044,700) (523,600)
----------- ----------- -----------
CASH PROVIDED BY DISCONTINUED OPERATIONS: ..................... 372,400 -- --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................. 112,800 (481,600) 1,023,200
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 1,850,200 2,331,800 1,308,600
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 1,963,000 $ 1,850,200 $ 2,331,800
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1999 (as restated), 1998 (as restated), AND 1997
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation--
The accompanying consolidated financial statements present the accounts of EA
Engineering, Science, and Technology, Inc. (EA); its wholly-owned subsidiaries,
EA International, Inc. and EA Financial, Inc.; and EA Financial, Inc.'s
wholly-owned subsidiaries, EA Global, Inc. and EA de Mexico, S.A. de C.V. The
entities are collectively referred to herein as the "Company." All significant
intercompany transactions have been eliminated in consolidation.
On February 4, 2000, as a result of the discovery of accounting irregularities,
the Audit Committee of the Company's Board of Directors initiated the Company
Investigation into such matters which recently has been completed. In June 2000,
the Company restated its previously reported financial results for fiscal years
1999 and 1998 and the quarterly periods in fiscal year 1998 through February,
2000. The accompanying consolidated financial statements and notes thereto
incorporate all relevant information obtained from the investigation.
Accordingly, the restated consolidated financial statements presented herein are
the Company's primary historical financial statements for the periods presented.
See Note 3 for a reconciliation of the Company's financial position and results
of operations from financial statements previously filed prior to restatement,
to the restated financial statements, as presented in this Form 10-K/A.
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 remaining 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, 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 contracts are recognized currently as the work
is performed. Revenue on cost-plus-fixed fee contracts are recognized to the
extent of costs incurred plus a proportionate amount of the contracted fee.
Certain cost-plus-fixed fee contracts also include provisions for earning
performance based incentive fees. Provision for estimated losses on uncompleted
contracts, to the full extent of the loss, is made during the period in which
the Company first becomes aware that a loss on a contract is probable.
Contract costs and estimated earnings recognized in excess of amounts billed are
classified as current assets under "costs and estimated earnings in excess of
billings on uncompleted contracts." Billings in excess of contract costs and
estimated earnings are classified as current liabilities under "billings in
excess of costs and estimated earnings on uncompleted contracts."
Generally, contracts provide for the billing of costs incurred and estimated
fees on a monthly basis. Amounts included in "costs and estimated earnings in
excess of billings on uncompleted contracts" in the accompanying financial
statements will be billed within twelve months of the balance sheet date.
24
<PAGE>
Major Clients--
Various agencies of the federal government accounted for approximately 54%, 50%,
and 46% of the Company's net revenue for the years ended August 31, 1999, 1998,
and 1997, respectively. Additionally, various agencies of the federal government
accounted for approximately 40% and 45% of the Company's accounts receivable and
costs and estimated earnings in excess of billings on uncompleted contracts as
of August 31, 1999 and 1998, 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 fair 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. Depreciation expense for the fiscal years ended August 31, 1999, 1998 and
1997 was $631,800, $1,162,200 and $1,427,100, respectively.
Fair Value Information--
The carrying amounts of financial instruments, principally cash and cash
equivalents, accounts receivable and accounts payable, reported in the balance
sheets approximate their fair value, due to the relatively short maturity of
these instruments. The carrying amount of variable-rate long-term debt
approximates fair value.
Reclassifications--
Certain prior year balances, primarily related to discontinued operations, have
been reclassified to conform to current year presentation.
Risks and Uncertainties--
Reliance on major government contracts subjects the Company to risks associated
with public budgetary restrictions and uncertainties, discrepancies between
awarded contract amounts and actual revenues, and cancellation at the option of
the government. The Company attempts to mitigate these risks by staffing only to
meet reasonably anticipated average workloads, by using subcontractors to handle
peak workloads, and by obtaining termination benefit contract provisions.
Cancellation of any of the Company's major government contracts, however, could
have a material adverse effect on the Company.
Use of Estimates--
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from these estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
Supplemental Disclosures and Other Cash Flow Information--
Cash paid during the years ended August 31, 1999, 1998, and 1997 for interest,
was $268,600, $233,700, and $467,200, respectively. Retirements of property and
equipment for the same periods were $576,300 (which includes the net book value
of the Lab's PP&E sold), $28,000, and $897,200, respectively. Prior to fiscal
year 1999, the Company did not identify assets by segments; therefore, the
consolidated statement of cash flows prior to 1999 does not include asset
information by segment.
25
<PAGE>
Accounting for Income Taxes--
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities by applying
currently enacted statutory rates applicable to future years. Valuation
allowances are established when deferred tax assets are not currently assured of
realization.
Accounting Pronouncements--
In June 1998, the FASB issued Statement No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not hold derivatives and, as such, SFAS 133 will not have an
impact.
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 and equipment. The cash
transaction resulted in a net pretax gain of $58,800.
The income statements for the fiscal years 1999, 1998 and 1997 have been revised
to present the operating results of the discontinued segment separately.
Gross revenue of the Analytical Services segment for the twelve months ended
August 31, 1999, 1998 and 1997 were $4,298,900, $6,373,300 and $5,701,500,
respectively. These amounts are not included in the total revenue from
continuing operations in the accompanying income statement, but are reflected
within discontinued operations.
Current assets and liabilities of the Analytical Services segment disposed of
consisted of the following as of August 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Cash and net accounts receivable ........ $ 964,300
Costs and estimated earnings in excess of
billings on uncompleted contracts .... 739,300
Prepaid and other assets ................ 22,500
Current portion of long-term debt ....... (107,900)
Accrued expenses ........................ (150,000)
-----------
Net current assets .................. $ 1,468,200
===========
</TABLE>
Property and equipment of the Analytical Services segment disposed of consisted
of the following at August 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
Assets are shown at their expected net realizable value and current portion of
long-term debt at their face amount.
26
<PAGE>
Note 3. RESTATEMENT
As announced on February 4, 2000, the Company discovered accounting
irregularities related to unbilled revenue. The Audit Committee of the Company's
Board of Directors initiated the Company Investigation into such matters. As a
result of the findings of the Audit Committee and Company Investigation, the
Company has restated previously reported annual results for the fiscal years
ended August 31, 1999 and 1998 as set forth herein.
The Company made adjustments to correct the misapplication of generally accepted
accounting principles resulting in improper revenue recognition. This error was
a direct result of the recording of fictitious revenue.
The following statements of operations and balance sheets reconcile previously
reported and restated financial information.
27
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
------------------ ------------------ ------------------
Accounting
Adjustments August 31,
August 31, For 1999
1999 Irregularities As Restated
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents .................... $ 1,963,000 -- $ 1,963,000
Accounts receivable, net ..................... 8,679,600 -- 8,679,600
Costs and estimated earnings in excess
of billings on uncompleted contracts ..... 6,645,000 $(1,469,000) 5,176,000
Prepaid expenses and other ................... 636,700 -- 636,700
Deferred income taxes ........................ 597,800 -- 597,800
------------ ----------- ------------
Total Current Assets ...................... 18,522,100 (1,469,000) 17,053,100
------------ ----------- ------------
Property and Equipment, at cost:
Furniture, fixtures, and equipment ........... 8,920,600 -- 8,920,600
Leasehold improvements ....................... 1,031,700 -- 1,031,700
------------ ----------- ------------
Total property and equipment, at cost ..... 9,952,300 -- 9,952,300
Less-Accumulated depreciation and amortization (9,102,900) -- (9,102,900)
------------ ----------- ------------
Net Property and Equipment ................ 849,400 -- 849,400
------------ ----------- ------------
Other Assets:
Deferred income taxes ......................... 2,883,700 567,300 3,451,000
Other assets .................................. 1,310,500 -- 1,310,500
------------ ----------- ------------
Total Other Assets: ....................... 4,194,200 567,300 4,761,500
------------ ----------- ------------
Total Assets ............................. $ 23,565,700 $ (901,700) $ 22,664,000
============ =========== ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
28
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------
Accounting August 31,
August 31, Adjustment 1999
1999 For Irregularities As Restated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable ................................. $ 3,555,300 -- $ 3,555,300
Accrued expenses ................................. 1,443,200 -- 1,443,200
Accrued salaries, wages and benefits ............. 2,228,400 -- 2,228,400
Current portion of long-term debt ................ 87,500 -- 87,500
Billings in excess of costs and estimated earnings
on uncompleted contracts ...................... 407,800 -- 407,800
------------ --------- ------------
Total Current Liabilities ..................... 7,722,200 -- 7,722,200
------------ --------- ------------
Long-Term Debt, net of current portion .............. 3,326,200 -- 3,326,200
------------ --------- ------------
Total Liabilities ............................. 11,048,400 -- 11,048,400
------------ --------- ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,335,000
issued and outstanding ......................... 63,400 -- 63,400
Preferred stock, $.01 par value;
8,000,000 shares authorized; none issued ...... -- -- --
Capital in excess of par value ................... 11,108,300 -- 11,108,300
Notes receivable from stockholders ............... (78,000) -- (78,000)
Retained earnings ................................ 1,423,600 $(901,700) 521,900
------------ --------- ------------
Total Stockholders' Equity ..................... 12,517,300 (901,700) 11,615,600
------------ --------- ------------
Total Liabilities and Stockholders' Equity ...... $ 23,565,700 $(901,700) $ 22,664,000
============ ========= ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
29
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
------------------ ------------------ ------------------
Accounting August 31,
August 31, Adjustments 1999
1999 For As Restated
Irregularities
---------------------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Total revenue .................................................. $ 48,820,100 $(92,500) $ 48,727,600
Less - Subcontractor costs ..................................... (8,904,300) -- (8,904,300)
Less - Other direct project costs .............................. (5,676,400) -- (5,676,400)
------------ -------- ------------
Net revenue .............................................. 34,239,400 (92,500) 34,146,900
------------ -------- ------------
Operating costs and expenses:
Direct salaries and other operating ......................... 26,199,400 -- 26,199,400
Sales, general and administrative ........................... 8,042,500 -- 8,042,500
Gain on "key employee" life insurance ....................... -- -- --
Restructuring charges ....................................... 2,132,600 -- 2,132,600
------------ -------- ------------
Total operating expenses ................................. 36,374,500 -- 36,374,500
------------ -------- ------------
Loss from operations ........................................... (2,135,100) (92,500) (2,227,600)
Interest expense ............................................... (268,600) -- (268,600)
Interest income ................................................ 88,100 -- 88,100
------------ -------- ------------
Loss from continuing operations before income taxes ............ (2,315,600) (92,500) (2,408,100)
Benefit for income taxes ....................................... (925,700) (35,700) (961,400)
------------ -------- ------------
Net loss from continuing operations ............................ $ (1,389,900) $(56,800) $ (1,446,700)
============ ======== ============
Discontinued Operations
Loss from operations of discontinued segment (net of tax
benefit of $79,000) ....................................... (119,000) -- (119,000)
Gain on disposal of discontinued segment, including
operating losses during phase-out period (net of tax of
$23,200).................................................... 35,300 -- (35,300)
------------ -------- ------------
Net loss from discontinued operations .......................... (83,700) -- (83,700)
------------ -------- ------------
Net loss ....................................................... $ (1,473,600) $(56,800) $ (1,530,400)
============ ======== ============
Loss per share - basic
Continuing operations ....................................... (0.22) (0.01) (0.23)
Discontinued operations ..................................... (0.01) -- (0.01)
------------ -------- ------------
Net loss ....................................................... $ (0.23) $ (0.01) $ (0.24)
============ ======== ============
Loss per share - diluted
Continuing operations ....................................... (0.22) (0.01) (0.23)
Discontinued operations ..................................... (0.01) -- (0.01)
------------ -------- ------------
Net loss ....................................................... $ (0.23) $ (0.01) $ (0.24)
============ ======== ============
Weighted average shares outstanding ............................ 6,312,300 -- 6,312,300
Effect of dilutive stock options ............................... -- -- --
Diluted weighted average shares outstanding .................... 6,312,300 -- 6,312,300
============ ======== ============
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
------------------ ----------------- ------------------
Accounting
Adjustment August 31,
August 31, For 1998
1998 Irregularities As Restated
--------------------------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ........................................ $ 1,850,200 -- $ 1,850,200
Accounts receivable, net ......................................... 7,479,100 -- 7,479,100
Costs and estimated earnings in excess
of billings on uncompleted contracts ......................... 5,655,600 $(1,376,500) 4,279,100
Refundable income taxes .......................................... 407,600 -- 407,600
Prepaid expenses and other ....................................... 694,800 -- 694,800
Deferred income taxes ............................................ 373,300 -- 373,300
Net assets from discontinued operations .......................... 1,468,200 -- 1,468,200
------------ ----------- ------------
Total Current Assets .......................................... 17,928,800 (1,376,500) 16,552,300
------------ ----------- ------------
Property and Equipment, at cost:
Furniture, fixtures, and equipment ............................... 8,797,400 -- 8,797,400
Leasehold improvements ........................................... 984,600 -- 984,600
------------ ----------- ------------
Total property and equipment, at cost ......................... 9,782,000 -- 9,782,000
Less-Accumulated depreciation and amortization ................... (8,719,100) -- (8,719,100)
Net property and equipment from discontinued operations .......... 718,200 -- 718,200
------------ ----------- ------------
Net Property and Equipment .................................... 1,781,100 -- 1,781,100
------------ ----------- ------------
Other Assets:
Deferred income taxes ............................................ 2,127,900 531,600 2,659,500
Other assets ..................................................... 1,147,300 -- 1,147,300
------------ ----------- ------------
Total Other Assets: ........................................... 3,275,200 531,600 3,806,800
------------ ----------- ------------
Total Assets .................................................. $ 22,985,100 $ (844,900) $ 22,140,200
============ =========== ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
31
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------
Accounting August 31,
August 31, Adjustment 1998
1998 For Irregularities As Restated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable ................................. $ 4,494,300 -- $ 4,494,300
Accrued expenses ................................. 553,100 -- 553,100
Accrued salaries, wages and benefits ............. 2,120,800 -- 2,120,800
Current portion of long-term debt ................ 330,900 -- 330,900
Billings in excess of costs and estimated earnings
on uncompleted contracts ...................... 246,700 -- 246,700
----------- ---------- -----------
Total Current Liabilities ..................... 7,745,800 -- 7,745,800
Long-Term Debt, net of current portion .............. 1,348,900 -- 1,348,900
----------- ---------- -----------
Total Liabilities ............................. 9,094,700 -- 9,094,700
----------- ---------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; voting;
10,000,000 shares authorized; 6,285,000 shares
issued and outstanding ........................ 62,900 -- 62,900
Preferred stock, $.01 par value;
8,000,000 shares authorized; none issued ...... -- -- --
Capital in excess of par value ................... 11,049,300 -- 11,049,300
Notes receivable from stockholders ............... (119,000) -- (119,000)
Retained earnings ................................ 2,897,200 $(844,900) 2,052,300
----------- ---------- -----------
Total Stockholders' Equity .................... 13,890,400 (844,900) 13,045,500
----------- ---------- -----------
Total Liabilities and Stockholders' Equity .... $ 22,985,100 $(844,900) $ 22,140,200
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
32
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
----------------- ------------------ -----------------
Accounting
Adjustments August 31,
August 31, For 1998
1998 Irregularities As Restated
---------------- ------------------ -----------------
<S> <C> <C> <C>
Total revenue .................................................. $ 53,613,900 $(1,376,500) $ 52,237,400
Less - Subcontractor costs ..................................... (11,003,000) -- (11,003,000)
Less - Other direct project costs .............................. (5,914,500) -- (5,914,500)
------------ ----------- ------------
Net revenue ............................................... 36,696,400 (1,376,500) 35,319,900
------------ ----------- ------------
Operating costs and expenses:
Direct salaries and other operating ......................... 26,935,300 -- 26,935,300
Sales, general and administrative ........................... 8,832,700 -- 8,832,700
Gain on "key employee" life insurance ....................... (261,100) -- (261,100)
------------ ----------- ------------
Total operating expenses .................................. 35,506,900 -- 35,506,900
------------ ----------- ------------
Income (loss) from operations .................................. 1,189,500 (1,376,500) (187,000)
------------ ----------- ------------
Interest expense ............................................... (220,500) -- (220,500)
Interest income ................................................ 98,800 -- 98,800
------------ ----------- ------------
Income (loss) before income taxes .............................. 1,067,800 (1,376,500) (308,700)
------------ ----------- ------------
Benefit for income taxes ....................................... 400,700 (531,600) (130,900)
------------ ----------- ------------
Net income (loss) from continuing operations ................... 667,100 (844,900) (177,800)
------------ ----------- ------------
Discontinued Operations
Loss from operations of discontinued segment (net of tax) ... (62,300) -- (62,300)
Gain on disposal of discontinued segment, including
operating losses during phase-out period (net of tax) ...... -- -- --
------------ ----------- ------------
Net loss from discontinued operations .......................... (62,300) -- (62,300)
------------ ----------- ------------
Net (loss) income .............................................. $ 604,800 $ (844,900) $ (240,100)
============ =========== ============
Earnings per share - basic
Continuing operations ....................................... 0.11 (0.14) (0.03)
Discontinued operations ..................................... (0.01) -- (0.01)
Gain on disposal of segment ................................. -- --
------------ ----------- ------------
Net (loss) income .............................................. $ 0.10 $ (0.14) $ (0.04)
============ =========== ============
Earnings per share - diluted
Continuing operations ....................................... 0.11 (0.14) (0.03)
Discontinued operations ..................................... (0.01) -- (0.01)
Gain on disposal of segment ................................. -- --
------------ ----------- ------------
Net (loss) income .............................................. $ 0.10 $ (0.14) $ (0.04)
============ =========== ============
Weighted average shares outstanding ............................ 6,255,500 -- 6,255,500
Effect of dilutive stock options ............................... 91,100 (91,100) --
Diluted weighted average shares outstanding .................... 6,346,600 (91,100) 6,255,500
============ =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE>
Note 4. INCOME TAXES:
The benefit for income taxes includes current and deferred tax amounts
summarized as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1999 1998 1997
(As Restated) (As Restated)
-------------------- ---------------- -----------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal ............................................ $ (1,200) $ (43,500) $(1,659,500)
State .............................................. -- -- --
----------- ----------- -----------
(1,200) (43,500) (1,659,500)
----------- ----------- -----------
Deferred tax expense (benefit):
Federal ............................................ (863,600) (109,500) (1,309,800)
State .............................................. (152,400) (19,400) --
----------- ----------- -----------
(1,016,000) (128,900) (1,309,800)
----------- ----------- -----------
Benefit for income taxes .............................. $(1,017,200) $ (172,400) $(2,969,300)
=========== =========== ===========
</TABLE>
Total deferred tax assets and liabilities as of August 31, 1999 and 1998 and the
sources of the differences between the tax and financial reporting bases of the
Company's assets and liabilities which give rise to the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------------- ----------------------------------------
1999 1998
(As Restated) (As Restated)
<S> <C> <C>
Deferred tax assets:
Property and equipment ................................... $ 354,000 $1,031,300
Accrued expenses and reserves ............................ 764,900 493,900
Net operating loss and other carryforwards ............... 3,299,800 1,786,500
---------- ----------
4,418,700 3,311,700
---------- ----------
Deferred tax liabilities:
Prepaid expenses ......................................... 34,600 9,300
Miscellaneous ............................................ 335,300 269,600
---------- ----------
369,900 278,900
---------- ----------
Net deferred tax assets ................................... $4,048,800 $3,032,800
========== ==========
</TABLE>
The Company has net operating loss carryforwards at August 31, 1999 in the
amount of approximately $9,700,000 for federal purposes which expire beginning
2017. The ability of the Company to benefit from these carryforwards in the
future is dependent on the Company's ability to generate sufficient taxable
income prior to their expiration dates. Although realization of the net deferred
tax assets is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of net
deferred tax assets considered realizable, however could be reduced in the near
term based on changing conditions.
34
<PAGE>
Reconciliation of the statutory federal income tax rate and the effective income
tax rate is summarized as follows:
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------
1999 1998 1997
(As Restated) (As Restated)
-------------- ------------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate ........................ (34.0)% (34.0)% (34.0)%
State income tax, net of federal income tax effect ....... (5.3) (5.3) (5.3)
Other .................................................... (0.6) (3.1) 3.9
------ ------ ------
Effective income tax rate ................................ (39.9)% (42.4)% (35.4)%
====== ====== ======
</TABLE>
Note 5. ACCOUNTS RECEIVABLE:
Accounts receivable, excluding receivables from the disposed Analytical Segment,
consist of the following:
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Contract accounts receivable .................... $ 7,632,100 $ 6,390,900
Retainage by clients ............................ 1,082,400 1,315,600
----------- -----------
Total accounts receivable ....................... 8,714,500 7,706,500
Less-Allowance for doubtful accounts ............ (34,900) (227,400)
----------- -----------
Accounts receivable, net ........................ $ 8,679,600 $ 7,479,100
=========== ===========
</TABLE>
Retention balances are billable at contract completion or upon attainment of
other specified milestones. Consistent with industry practice, these receivables
are classified as current assets. Management anticipates that substantially all
retainages will be billed within one year.
Note 6. BANK FINANCING ARRANGEMENTS:
The Company maintains a credit arrangement with a regional bank consisting of:
(i) an $8,500,000 revolving line of credit secured by receivables; (ii) a
$500,000 Term Loan; and (iii) an equipment line of credit of $1,500,000. Of the
$8,500,000 revolving line of credit, $2,500,000 is available for acquisitions,
joint ventures and licensing agreements. 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). As of August 31, 1999, $2,733,800 was available under
the revolving line of credit. As of August 31, 1999 and 1998, there were no
borrowings under the Term Loan or equipment line of credit. The line of credit
is secured by substantially all the assets of the Company. Under the revolving
line of credit, the Company is required to comply with covenants which require
certain minimum ratios including debt service coverage, tangible net worth, and
liabilities to tangible net worth, and restrict the amount of annual capital
expenditures. During fiscal years 1999, 1998, and 1997, the Company was either
in compliance or had obtained waivers on all covenants related to these
arrangements.
35
<PAGE>
Short-term borrowings information resulting from the financing arrangements is
as follows:
<TABLE>
Year Ended August 31,
----------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance as of end of period ...... -- -- --
Maximum outstanding month-end
balance during the period ..... -- -- $ 3,615,300
Average outstanding month-end
balance during the period ..... -- -- 564,000
Weighted average interest rate
during the period ............. -- -- 11.5%
Interest rate at the end of period -- -- 11.5%
</TABLE>
The weighted average interest rate has been calculated based upon the actual
daily interest expense and the daily average balance outstanding. The Company
had no short-term borrowings after fiscal 1997. For the year ended August 31,
1997, the Company only maintained short-term borrowing balances during the
months of April through August.
<TABLE>
<CAPTION>
Year Ended August 31,
1999 1998
---------- ----------
<S> <C> <C>
Long-term debt consists of the following:
Revolving credit facility payable to commercial bank, interest charged at
LIBOR plus 250 basis points at August 31, 1999 and plus 200 at August
31, 1998, (6.85% and 7.66% at August 31, 1999 and 1998)
facility expires September 2001 $3,326,200 $1,261,400
Note payable to a commercial bank in equal monthly installments of $29,600,
which includes interest at 9.1%, through December
1999 collaterialized by certain computer equipment 87,500 418,400
---------- ----------
Total long-term debt 3,413,700 1,679,800
Less-current portion (87,500) (330,900)
---------- ----------
Long-term portion $3,326,200 $1,348,900
========== ==========
</TABLE>
The debt repayment schedule for the outstanding notes payable is as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending August 31,
--------------------------------- -----------
2000 $87,500
2001 3,326,200
--------------------------------- -----------
Total notes payable $3,413,700
================================= ===========
</TABLE>
The fair value of the Company's outstanding indebtedness approximated its
carrying value at August 31, 1999.
36
<PAGE>
Note 7. LEASE COMMITMENTS:
The Company's central office, regional offices, and certain furniture and
equipment are held under operating leases. These leases expire at various dates
through fiscal 2007, and certain leases call for annual proportionate increases
due to property taxes and certain other operating expenses. Lease expense
amounted to $5,732,900, $6,061,000, and $8,030,200, for the years ended August
31, 1999, 1998, and 1997, respectively. Lease expense included payments of
approximately $1,775,000, 1,900,400 and $2,016,500 for the years ended August
31, 1999, 1998, and 1997, respectively, to partnerships whose partners include
the Chairman of the Board of EA and certain members of his family for its
central office, and Loveton, Maryland, regional office and laboratory facility.
As part of the Analytical Services divestiture in April 1999, the Company ended
the lease of the laboratory's facilities. These payments include reimbursements
for pass-through taxes and operating expenses incurred by the lessor which
include local property taxes, janitorial and mechanical equipment maintenance,
and utility costs related to the operation of both office and laboratory leased
space. Management of the Company believes the terms and conditions of the
transactions between the Company and entities with which the Chairman is
affiliated, are at least as favorable to the Company as could have been obtained
from third parties and are in the best interest of the Company.
The minimum lease commitments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending August 31,
---------------------------------- ----------------
<S> <C>
2000 $ 3,048,900
2001 2,585,600
2002 2,168,700
2003 1,710,600
2004 1,613,100
2005 and thereafter 3,836,900
---------------------------------- ----------------
Total minimum payments $14,963,800
================================== ================
</TABLE>
Note 8. NET INCOME (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. The diluted
share base for the years ending August 31, 1999, 1998, and 1997 excludes
incremental shares of 600, 91,000, and 15,800, respectively, due to their
antidilutive effect as a result of the Company's loss from continuing operations
in each of the three years.
Note 9. PROFIT SHARING:
EA maintains a defined contribution plan in which all employees who are at least
21 years of age and have completed six months of credited service, 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. For the years ended August 31, 1999, 1998, and
1997, matching contributions to the plan made under the 401(k) provisions of the
plan, were $451,200, $472,100 and $534,900, respectively. Certain officers and
stockholders of the Company serve as trustees to the plan under appointment of
the Board of Directors.
37
<PAGE>
Note 10. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:
The Company maintains an Amended and Restated Stock Option Plan (the "Plan"),
which provides for the grant of nonqualified stock options and incentive stock
options to certain key employees and officers of the Company. The exercise price
of an option granted under the Plan may not be less than the fair market value
of the underlying shares of Common Stock on the date of the grant. A total of
729,600 options are issued and outstanding of the 1,448,147 reserved as of
August 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 (the "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 70,500 shares
remain authorized for distribution under the Purchase Plan as of August 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. A total of 36,000 options were outstanding as of August
31, 1999. A total of 64,500 options remain reserved for the Director Stock
Option Plans as of August 31, 1999
A summary of the status of activity in fiscal years 1999, 1998 and 1997 under
the Company's Employee Stock Option Plan and Non-Employee Director Stock Option
Plans (1993 and 1995) follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ------------------------
Shares Wgtd.Avg. Shares Wgtd.Avg. Shares Wgtd.Avg.
(000) Exer.Price (000) Exer.Price (000) Exer.Price
--------- ------------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 817 $2.44 616 $2.37 180 $4.13
Granted 135 1.17 273 2.65 506 2.10
Exercised -- -- (27) 2.45 -- --
Forfeited (186) 2.23 (45) 2.72 (70) 4.96
Expired -- -- -- -- -- --
--------- ------------- --------- ------------- --------- --------------
Outstanding at end of year 766 2.27 817 2.44 616 2.37
--------- ------------- --------- ------------- --------- --------------
Exercisable at year end 383 $2.45 269 $2.59 164 $2.99
Weighted Average Fair Value of Options
Granted $0.52 $1.35 $0.96
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at August 31, 1999 (shares in thousands).
<TABLE>
<CAPTION>
Weighted Average
Weighted Remaining
Range of exercise Average Contractual Life Weighted Average
prices Outstanding Exercise Price (in years) Exercisable Exercise Price
---------------------- ---------------- ----------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$1.031 - $1.94 218 $ 1.40 7.5 85 $ 1.61
$1.95 - $3.90 527 $ 2.44 6.6 277 $ 2.34
$3.95 - $11.75 21 $ 7.15 4.1 21 $ 7.15
------------------------------------------------------------------------
Total: 766 $ 2.27 383 $ 2.45
======================================================================================
</TABLE>
38
<PAGE>
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for plans been
determined consistent with FASB Statement No. 123, the Company's net loss and
loss per share would have changed to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
(As Restated) (As Restated)
-------------------------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net loss As Reported $(1,530,400) $(240,100) $(5,407,600)
Pro Forma (1,655,600) (331,700) (5,470,200)
Basic loss per share As Reported $ (0.24) $ (0.04) $ (0.87)
Pro Forma (0.26) (0.05) (0.88)
Diluted loss per share As Reported $ (0.24) $ (0.04) $ (0.87)
Pro Forma (0.26) (0.05) (0.88)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: Risk-free interest rates
ranging from 5.14% to 6.68%; expected volatility is 65% in 1999, and 63% in 1998
and 62% in 1997.
Note 11. COMPANY RESTRUCTURINGS:
On March 25, 1997 the Company implemented a major organizational realignment to
reposition itself in the marketplace. In connection with the restructuring, the
Company incurred charges of $3,000,100 during the fiscal 1997 third quarter
related to severance, planned reduction in office space, suspended
implementation of a new project/financial system, and other related costs. As of
August 31, 1999 and 1998, the Company had no accruals related to this
restructuring on its balance sheet.
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 August 31, 1999, the Company had an accrual of $476,400 included as other
current liabilities in the accompanying consolidated balance sheets for costs to
be incurred in future periods primarily related to severance costs.
Note 12. "KEY EMPLOYEE" LIFE INSURANCE
In April 1998, adjustments were made to the actual cash value of two "key
employee" life insurance policies for the Chairman of the Board, of which the
Company is the named beneficiary. Prior to April 1998, the policies had a cash
surrender value of $515,500, which was included in Other Assets on the Company's
balance sheet. In fiscal 1994, the asset value of the policies was originally
adjusted downward due to bankruptcy proceedings involving the original insurance
company. In April 1998, Phoenix Home Life Mutual Insurance Co., the successor
underwriter of the policies, confirmed that the cash surrender value of the
policies was $776,600. As a result, Other Assets was increased by $261,100, and
a one-time gain was recognized during the third quarter of fiscal 1998. As of
August 31, 1999, the policies had a cash surrender value of $817,200.
Note 13. RELATED PARTY TRANSACTIONS
At the request of its former primary lender and in order to maintain its
favorable relationship with that lender, the Company in December 1996 purchased
from this lender the secured loans of three former EA officers. These
interest-free demand loans, in the aggregate amount of $301,000, are secured by
pledges of the Company's common stock. The differential between the current fair
market value of the pledged stock and the amount of the loans is fully reserved
within the Company's balance sheet.
39
<PAGE>
Note 14. COMMITMENTS AND CONTINGENCIES
There are no material pending legal proceedings to which the Company is a party.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of the Company, the disposition of
these matters will not have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
Note 15. SUBSEQUENT EVENTS
On November 2, 1999, the Company announced that its Board of Directors
authorized management to purchase up to 500,000 shares of its common stock.
There is no assurance as to the actual number of shares that will be purchased
under the program and, in fact, the program can be suspended by the Board at any
time.
-------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant
Information on the Company's Directors is contained in the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders to be held on January 13,
2000, and such information is incorporated herein by reference.
(b) Executive Officers of the Registrant
Information on the Company's Executive Officers is contained in the Company's
Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on
January 13, 2000, and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on "Executive Compensation" is contained in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on January 13, 2000,
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on "Security Ownership of Certain Beneficial Owners and Management"
is contained in the Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on January 13, 2000, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on "Certain Relationships and Related Transactions" is contained in
the Company's Proxy Statement for its Annual Meeting of Stockholders to be held
January 13, 2000, and such information is incorporated herein by reference.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A. Financial Statements and Schedule II
------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. The following financial statements are included in Item 8 of
Part II of this report:
Report of Independent Public Accountants 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1999 and 1998 19
Consolidated Statements of Operations for the years ended
August 31, 1999, 1998, and 1997 21
Consolidated Statements of Changes in Stockholders' Equity
for the years ended August 31, 1999, 1998, and 1997 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1999, 1998, and 1997 23
Notes to Consolidated Financial Statements for the years
ended August 31, 1999, 1998, and 1997 24
2. The following financial statement schedule for the years ended
August 31, 1999, 1998, and 1997 is submitted herewith:
Report of Independent Public Accountants on Schedule 43
Schedule II - Valuation and Qualifying Accounts and Reserves 44
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed herewith unless otherwise indicated:
Exhibit
No. Description
------- --------------------------
3.1 Certificate of Incorporation of the Company.(1)
3.2 By-laws of the Company.(1)
4.1 Article SIXTH of the Company's Certificate of Incorporation.(1)
10.1 The Company's Profit Sharing Plan.(1)
10.2 The Company's Stock Option Plan.(2)
10.3 The Company's Employee Stock Purchase Plan.(3)
10.4 The 1993 Stock Incentive Plan.(4)
10.5 1993 Non-Employee Director Stock Option Plan.(5)
10.6 The Amended and Restated Stock Option Plan(5)
10.7 1995 Non-Employee Director Stock Option Plan(5)
10.8 Employment Agreement dated March 17, 1997, between the
Company and Donald A. Deieso.(6)
41
<PAGE>
10.9 Lease, dated August 6, 1997, between ARE Sparks Limited
Partnership, as landlord, and the Company as tenant.(7)
10.10 Lease, dated August 6, 1997, between Ecolair Limited
Partnership, as landlord, and the Company, as tenant.(7)
11.11 Lease, dated August 6, 1997, between Merrymack Limited
Partnership, as landlord, and the Company, as tenant.(7)
11.12 Loan Agreement, dated August 22, 1997, between the Company
and First National Bank of Maryland.(7)
13 1999 Annual Report to Stockholders.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, No. 33-8958, which was declared effective by the
Commission on October 31, 1986.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-8, File Number 0-15587 filed on October 15, 1990.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-K, File Number 0-15587 filed on November 28, 1990.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-8, File Number 0-15587 filed on March 3, 1994.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8, File Number 0-15587 filed on April 15, 1998.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q, File Number 0-15587 filed on April 18, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K,
File Number 0-15587 filed on November 17, 1997.
b. Reports on Form 8-K
- On February 4, 2000, the Company filed a Form 8-K relative to a
press release of the same date announcing that management had
discovered accounting irregularities related to unbilled revenue
which will cause the Company to restate earnings for prior years.
- The Company filed a report on Form 8-K dated April 10, 2000
reporting in Item 5 that the Company's investigation into the
accounting irregularities had been concluded; that Arthur Anderson
LLP, the Company's auditors through the end of the Company's 1999
Fiscal Year, advised that their reports for the affected fiscal
years 1998 and 1999 could not be relied upon; and that the Company
would be restating earnings for fiscal years 1998 and 1999.
- The Company filed a report on Form 8-K dated June 8, 2000 reporting
that the Company's common stock would continue to trade on Nasdaq
Smallcap Market under the symbol EACEC to signify that continued
trading is under exception to Nasdaq listing requirements and is
subject to satisfying certain conditions, specifically filing by
June 16, 2000 the Company's amended financial statements for 1998
and 1999 and satisfying Nasdaq's $1.00 minimum bid price requirement
by September 16, 2000.
42
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Stockholders of
EA Engineering, Science, and Technology, Inc.:
Our audit of the consolidated financial statements as of August 31, 1999 and
1998, and for each of the three years in the period ended August 31, 1999,
referred to in our report dated June 12, 2000, included in this Annual Report on
Form 10-K, also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
June 12, 2000
43
<PAGE>
<TABLE>
<CAPTION>
EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended August 31, 1999, 1998, and 1997
Allowance Balance at
for Doubtful Beginning Charged to Balance at
Accounts of Period Cost and Expense Write-offs End of Period
---------------------- -------------------- ------------------------ ------------------- --------------------
<S> <C> <C> <C> <C>
1999 $ 257,200 $ 243,500 $ 240,400 $ 260,300
1998 532,000 130,500 405,300 257,200
1997 1,612,200 339,100 1,419,300 532,000
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 16, 2000 By /s/ Loren D. Jensen
--------------------------------
Loren D. Jensen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Loren D. Jensen Chairman of the Board, President, and June 16, 2000
Loren D. Jensen Chief Executive Officer
/s/ Barbara L. Posner Chief Operating Officer and June 16, 2000
Barbara L. Posner Chief Financial Officer
/s/ Edmund J. Cashman, Jr. Director June 16, 2000
Edmund J. Cashman, Jr.
/s/ Rudolph P. Lamone Director June 16, 2000
Rudolph P. Lamone
/s/ Cleaveland D. Miller Director June 16, 2000
Cleaveland D. Miller
</TABLE>
45
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
--- ------------------------------------- --
3.1 Certificate of Incorporation of the Company. 41
3.2 By-laws of the Company. 41
4.1 Article SIXTH of the Company's Certificate of Incorporation. 41
10.1 The Company's Profit Sharing Plan. 41
10.2 The Company's Stock Option Plan. 41
10.3 The Company's Employee Stock Purchase Plan. 41
10.4 The 1993 Stock Incentive Plan. 41
10.5 1993 Non-Employee Director Stock Option Plan. 41
10.6 The Amended and Restated Stock Option Plan. 41
10.7 1995 Non-Employee Director Stock Option Plan. 41
10.8 Employment Agreement dated March 17, 1997, between the
Company and Donald A. Deieso. 41
10.9 Lease, dated August 6, 1997, between ARE Sparks Limited
Partnership, as Landlord, and the Company as tenant. 42
10.10 Lease, dated August 6, 1997, between Ecolair Limited
Partnership, as landlord, and the Company, as tenant. 42
10.11 Lease, dated August 6, 1997, between Merrymack Limited
Partnership, as landlord, and the Company, as tenant. 42
10.12 Loan Agreement, dated August 22, 1997, between the Company
and Allfirst Bank of Maryland. 42
13 1999 Annual Report to Stockholders.42
21 Subsidiaries of the Company. 42
27 Financial Data Schedule. 42
46
<PAGE>
