SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
For the quarterly period ended August 31, 1998 or
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 0-16169
HARDING LAWSON ASSOCIATES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0132062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7655 Redwood Boulevard
Novato, California 94945
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 892-0821
Indicate by check mark whether the registrant (1) has filed all reports required
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
At October 9, 1998 the registrant had issued and outstanding an aggregate of
4,832,321 shares of its common stock.
<PAGE>
INDEX
HARDING LAWSON ASSOCIATES GROUP, INC.
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1998 (Unaudited) and May 31, 1998.....................3
Condensed Consolidated Statements of Income -
Three Months Ended August 31, 1998
and August 31, 1997 (Unaudited)..................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1998 and
August 31, 1997 (Unaudited)......................................5
Notes to Condensed Consolidated Financial Statements
August 31, 1998 (Unaudited)......................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................12
SIGNATURES .................................................................13
INDEX TO EXHIBITS ...........................................................14
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
August 31, 1998 May 31, 1998
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,250 $15,118
Accounts receivable 34,053 28,976
Unbilled work in progress 13,156 13,863
Less allowances for receivables and unbilled work (1,972) (1,836)
Prepaid expenses 2,018 1,196
Deferred income taxes 2,371 2,708
- ----------------------------------------------------------------------------------------------------------
Total current assets 58,876 60,025
- ----------------------------------------------------------------------------------------------------------
Equipment 25,350 24,892
Less accumulated depreciation (20,198) (19,571)
- -----------------------------------------------------------------------------------------------------------
Net equipment 5,152 5,321
- ----------------------------------------------------------------------------------------------------------
Deposits and other assets 11,167 11,272
- ----------------------------------------------------------------------------------------------------------
Total assets $75,195 $76,618
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,841 $ 6,381
Accrued expenses 4,455 5,350
Accrued compensation 6,243 7,794
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,876 5,352
Income taxes payable 831 468
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 24,246 25,345
- ----------------------------------------------------------------------------------------------------------
Other liabilities 1,198 1,084
- ----------------------------------------------------------------------------------------------------------
Total liabilities 25,444 26,429
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Minority interest in subsidiaries 407 401
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock--$.01 par value;
authorized shares 1,000,000;
issued and outstanding--none
Common stock--$.01 par value; authorized shares 10,000,000;
issued and outstanding--4,882,321 and 5,009,018 at
August 31, 1998 and May 31, 1998, respectively 49 50
Additional paid-in capital 17,555 18,891
Retained earnings 32,072 31,059
Foreign currency translation adjustment (332) (212)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 49,344 49,788
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $75,195 $76,618
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended August 31,
1998 1997
<S> <C> <C>
Gross revenue $39,443 $31,818
Less: Cost of outside services 11,762 10,137
- ----------------------------------------------------------------------------------------------------------
Net revenue 27,681 21,681
- ----------------------------------------------------------------------------------------------------------
Costs and expenses:
Payroll and benefits 18,933 14,592
General expenses 7,102 5,762
- ----------------------------------------------------------------------------------------------------------
Total costs and expenses 26,035 20,354
- ----------------------------------------------------------------------------------------------------------
Operating income 1,646 1,327
Interest in loss of unconsolidated subsidiaries --- (50)
Interest income, net 113 264
- ----------------------------------------------------------------------------------------------------------
Income before income taxes
and minority interest 1,759 1,541
Provision for income taxes 740 645
Minority interests 6 (24)
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,013 $ 920
==========================================================================================================
Basic net income per share $ 0.21 $ 0.19
==========================================================================================================
Shares used in computing basic net income per share 4,896 4,887
==========================================================================================================
Diluted net income per share $ 0.20 $ 0.19
==========================================================================================================
Shares used in computing diluted net income per share 4,999 4,928
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARDING LAWSON ASSOCIATES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended August 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,013 $ 920
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 829 625
Net increase in current assets (4,719) (237)
Net decrease in current liability (267) (2,105)
Other, net 157 (110)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN
OPERATING ACTIVITIES (2,987) (907)
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment, net (528) (251)
Investment in acquisition (63) (197)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES (591) (448)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of stock 201 37
Repurchase of common stock (2,371) (80)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,170) (43)
- -----------------------------------------------------------------------------------------------------------
Effect of foreign currency translation (120) ---
- ----------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,868) (1,398)
Cash and cash equivalents at
beginning of period 15,118 24,464
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,250 $23,066
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
HARDING LAWSON ASSOCIATES GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
August 31, 1998
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
without audit by Harding Lawson Associates Group, Inc. (the "Company") in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to the rules of the Securities and Exchange Commission
for Form 10-Q. Certain information and footnotes required by generally accepted
accounting principles for complete financial statements have been omitted. It is
the opinion of management that all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments are of a normal
and recurring nature. For further information, refer to the audited financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1998. Reclassification of certain balances for
the fiscal year ended May 31, 1998 have been made to conform to the August 31,
1998 presentation.
NOTE 2: COMMITMENTS AND CONTINGENCIES
The Company is currently subject to certain claims and lawsuits arising in the
ordinary course of its business. In the opinion of management, adequate
provision has been made for all known liabilities that are currently expected to
result from these claims and lawsuits, and in the aggregate such claims are not
expected to have a material effect on the financial position of the Company. The
estimates used in establishing these provisions could differ from actual
results. Should these provisions change significantly, the effect on operations
for any quarterly or annual reporting period could be material.
<PAGE>
NOTE 3: ACQUISITIONS
On May 8, 1998 the Company acquired all outstanding shares of ABB Environmental
Services, Inc., a consulting and engineering firm, from ABB Services, Inc. Total
consideration of $12.0 million, excluding transaction costs, was paid entirely
in cash. The acquisition was accounted for using the purchase method and
accordingly the purchase price was allocated to the assets and liabilities
acquired based upon their fair market value. The excess of purchase price of the
acquisition over the fair market value of the net assets acquired was recorded
as goodwill. The goodwill will be amortized on a straight-line basis over 20
years.
The net purchase price was allocated as follows (in thousands):
Working capital, net $ 5,670
Equipment 1,114
Other assets 116
Goodwill 5,450
-------
Purchase price, net of cash received $12,350
=======
The following table presents summarized unaudited pro forma operating results
assuming that the Company had acquired ABB Environmental Services, Inc. on June
1, 1997 (in thousands except per share data):
- --------------------------------------------------------------------------------
Three months ended
August 31,1997
- --------------------------------------------------------------------------------
Net revenue $31,003
Income before income taxes 2,340
Net income 1,392
Basic net income per share $ 0.28
Shares used in computing basic net income per share 4,887
Diluted net income per share $ 0.28
Shares used in computing diluted net income per share 4,928
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
- ---------------------------------------------------------
The statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. The forward-looking
statements include those regarding the level of future purchases of fixed
assets, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, the possibility of the
Company's making acquisitions during the next 12 to 18 months and the impact of
becoming year 2000 compliant. Forward-looking statements involve numerous risks
and uncertainties that could cause actual results to differ materially,
including, but not limited to, the possibilities that the demand for the
Company's services may decline as a result of possible changes in general and
industry specific economic conditions and the effects of competitive services
and pricing; one or more current or future claims made against the Company may
result in substantial liabilities; the Company's inability to find and close
acquisitions; and such other risks and uncertainties as are described in reports
and other documents filed by the Company from time to time with the Securities
and Exchange Commission.
Results of Operations
- ---------------------
(In thousands, except share data)
The following table sets forth for the periods indicated, (i) the percentage
that certain items in the condensed consolidated income statements of the
Company bear to net revenues, and (ii) the percentage increase (decrease) in
dollar amount of such items from year to year.
<TABLE>
<CAPTION>
Percentage of
Net Revenue
For Three Months Percentage
Ended August 31, Increase/(Decrease)
Three Months
1998 1997 1998 vs. 1997
---- ---- -------------
<S> <C> <C> <C>
Net revenue 100% 100.0% 27.7%
Costs and expenses
Payroll and benefits 68.4 67.3 29.7
General expenses 25.6 26.6 23.2
Operating income/margin 6.0 6.1 24.1
Interest income, net, and interest in loss
of unconsolidated subsidiaries .4 1.0 (47.2)
Income before income taxes and minority interest 6.4 7.1 14.2
Provision for income taxes and minority interest 2.7 3.0 20.2
Net income 3.7 4.1 10.1
</TABLE>
<PAGE>
First Quarter Comparison for Fiscal Years 1999 and 1998
- -------------------------------------------------------
Net revenue for the fiscal quarter ended August 31, 1998 totaled $27,681, an
increase of 27.7 percent from net revenue of $21,681 for the first quarter of
the prior fiscal year. The increase in net revenue for the quarter ended August
31, 1998 was attributable to the acquisition of ABB Environmental Services, Inc.
(ABB ES). Net revenue would have been 10.7 percent lower than the first quarter
of the prior year had the acquisition of ABB ES occurred on June 1, 1997. The
decline in net revenue for ABB ES was 21 percent compared with the prior year
due primarily to the wind down of a large federal project. Excluding the
acquisition, net revenue was 6 percent lower than the same period in the prior
year. This decline reflects a 24 percent decrease in public sector net revenue,
and a 12 percent decline in international net revenue, partially offset by an 11
percent increase in net revenue from domestic industrial sector clients. The
decrease in public sector net revenue was largely due to a 33 percent decrease
in state and local net revenue while net revenue from federal contracts declined
15 percent. The decrease in the pre-acquisition domestic net revenue was due to
lower demand for the Company's services while prices were essentially unchanged
compared to the same period in fiscal 1998. Net revenue from international
operations for the fiscal quarter ended August 31, 1998 was $1,151 or four
percent of total net revenue compared to $1,314 or six percent of total net
revenue in the same quarter of the prior fiscal year.
A significant portion of the services provided by the Company to its public
sector clients are performed under a relatively small number of larger contracts
compared to private sector clients. Similar to situations that have occurred in
the past few years, some of these public sector contracts will be substantially
completed during fiscal 1999 and 2000. The Company has been awarded certain
contracts that potentially could offset revenue that will be lost under nearly
completed contracts. However, if the Company is unsuccessful in realizing the
full potential of these contracts or winning new contracts, or if funding delays
are experienced on previously awarded federal contracts, a material decline in
revenue could result.
Operating income for the first quarter of fiscal 1999 was $1,646, an increase of
24 percent from $1,327 for the same period in fiscal 1998. Operating margin
decreased to 6.0 percent of net revenue in the current quarter compared with 6.1
percent in the first quarter of fiscal 1998. Excluding the operational results
from the acquisition, operating income would have decreased by $727 from the
prior year with a resulting margin of 3.0 percent. The decrease in
pre-acquisition operating income and margin excluding the effect of the
acquisition was due primarily to the lower net revenue discussed above,
partially offset by a decrease in both payroll and general expenses.
Net interest income for the first quarter of fiscal 1999 was $113 compared to
net interest income of $264. Net interest income was lower primarily due to the
Company's decreased cash position that resulted in lower balances of invested
cash. The decrease in cash was due primarily to cash utilized in the acquisition
and, to a lesser extent, the repurchase of common stock by the Company compared
to the prior fiscal year.
The effective tax rate was 42.1 percent for the first quarter of fiscal 1999 and
was 41.9 percent in the first quarter of the prior year.
Net income for the quarter was $1,013 compared with $920 in the first quarter of
1998, an increase of 10 percent. Basic earnings per share were $0.21 on
4,890,000 weighted average basic shares outstanding compared to $0.19 per share
on 4,887,000 basic weighted average shares outstanding in the same period last
year. Diluted net income per share was $0.20 on 4,999,000 diluted weighted
average shares outstanding compared to $0.19 per share on 4,928,000 diluted
weighted average shares outstanding in the same period last year.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
For the three months ended August 31, 1998, net cash used in operations was
$2,987 compared to net cash used in operations of $907 for the same period last
year. The increase in cash used in operations was primarily due to an increase
in days sales outstanding in the Company's receivables in the current fiscal
year compared to a year ago.
The Company made capital expenditures of $528 in the first three months of
fiscal 1999 compared to capital expenditures of $251 in the first three months
of the prior year. The increase in equipment purchases is related to the
purchase of new mainframe computer equipment and network servers as part of a
planned upgrade of the Company's financial systems. The Company anticipates its
capital expenditures, excluding acquisitions, for the current fiscal year will
be approximately the same as those made in the prior fiscal year. The Company
made payments of $63 related to the May 1998 acquisition compared with payments
made in the prior fiscal year of $197 related to additional purchase
consideration for an acquisition completed in May of fiscal 1994.
At August 31, 1998, the Company had cash on hand and cash equivalents of $9,250.
The Company has a $20 million revolving credit line agreement that expires in
November 1999. At August 31, 1998 and 1997, the Company had no borrowings
outstanding under its line of credit leaving $20 million available to the
Company. Borrowings were available to the Company at a rate of 5.6 percent at
August 31, 1998 and 5.7 percent at May 31, 1998.
On March 7, 1996 the Board of Directors of the Company approved a Common Stock
Repurchase Program that authorized the Company to purchase up to a maximum of
500,000 shares of stock on the open market for the purpose of funding the
Company's various employee stock programs. The Company repurchased 260,000
shares during the quarter ended August 31, 1998 for an average price of $9.12.
In the same period of the prior fiscal year the Company repurchased 10,500
shares at a price of $7.63. These purchases effectively completed the share
repurchase program as authorized. On September 25, 1998 the Board authorized
management to repurchase up to 500,000 shares over the next four years.
The Company is a consulting engineering services firm engaged in providing
environmental, infrastructure, geotechnical and construction related services,
and encounters potential liability including claims for errors and omissions
resulting from design or construction defects, construction cost overruns or
environmental or other damage in the normal course of business. The Company is a
party to lawsuits and is aware of potential exposure related to certain claims.
In the opinion of management, adequate provision has been made for all known
liabilities that are currently expected to result from these matters and in the
aggregate such claims are not expected to have a material impact on the
financial position and liquidity of the Company. Currently, the Company is
provided a $10 million per occurrence, $15 million aggregate contractor's
operations and professional services insurance policy through an unrelated,
rated carrier. The Company also maintains a general liability insurance policy
with an unrelated, rated carrier.
The Company believes that its available cash and cash equivalents, as well as
cash generated from operations and its available credit line, will be sufficient
to meet the Company's cash requirements for the balance of the fiscal year. The
Company intends to actively continue its search for acquisitions to expand its
geographical representation and enhance its technical capabilities. The Company
expects to utilize a portion of its liquidity over the next 12 to 18 months for
capital expenditures, including acquisitions and investments in aligned
businesses.
<PAGE>
Year 2000 Compliance
- --------------------
Computer systems and software have historically been coded to accept only two
digit entries for the year in the date code. These two digit codes must accept a
four-digit code in order to insure that systems do not confuse the year 2000
with the year 1900 and either shutdown or perform incorrect calculations as a
result of the problem.
The Company has completed several tasks related to the year 2000 compliance
issue and is on schedule to complete the remaining tasks prior to December 31,
1999. Included in the year 2000 program is an inventory of the Company's
hardware and software. The Company is completing this inventory and assessment
of the year 2000 problem relative to each piece of hardware and software. The
Company anticipates completion of an upgrade to year 2000 compliant accounting
and management software during the current fiscal year. Other upgrades of
equipment and software are currently scheduled as part of normal business
operations. The Company is also examining issues related to the operation of
each of its offices, such as phone and security systems. Each office is being
evaluated individually and upgrades to hardware and software are being addressed
as they are encountered. The Company considers risk in this area to be minimal.
Contingency plans will be developed in regard to year 2000 compliance if the
Company determines that compliance is not likely to occur.
The Company has undertaken an analysis of its vendors and suppliers to determine
potential areas of risk with regard to their failure to achieve year 2000
compliance, and is preparing an assessment document to be sent to the
appropriate vendors to assess the impact of the year 2000 problem as it relates
to third party goods and services. The Company is also inventorying software and
equipment that the Company has supplied under contracts or relationships with
its clients and is in the process of discussing with them possible year 2000
issues. Contingency plans will also be developed as appropriate to deal with any
potential problems that may be identified.
The costs associated with the year 2000 compliance issue have not been material
and generally fall within normally anticipated operating and capital spending.
The Company currently estimates the costs of becoming year 2000 compliant will
not be material to the financial position of the Company. Although the Company
does not currently anticipate the costs of year 2000 compliance to be material,
it cannot ensure year 2000 compliance by third parties. The Company cannot
predict with accuracy at this time the extent to which our vendors and clients
will become compliant. In the event that the Company's vendors and/or clients
fail to become year 2000 compliant, the resulting effects on the Company's
financial position could be adversely affected.
<PAGE>
HARDING LAWSON ASSOCIATES GROUP, INC.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are furnished along with this
Form 10-Q Quarterly Report for the period ended
August 31, 1998:
Exhibit No. 11 Computation of Net Income Per Share
Exhibit No. 27 Financial Data Schedule
b. Reports on Form 8-K
Subsequent to the end of the quarter, the Company
filed a Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARDING LAWSON ASSOCIATES GROUP, INC.
Date: October 9, 1998 /s/ Gregory A. Thornton
Gregory A. Thornton
President, Chief Executive Officer,
and Chief Financial Officer
(Principal Executive and Accounting Officer)
<PAGE>
HARDING LAWSON ASSOCIATES GROUP, INC.
EXHIBIT INDEX
Exhibit No.
11 Computation of Net Income Per Share
27 Financial Data Schedule
<TABLE>
<CAPTION>
Exhibit No. 11
HARDING LAWSON ASSOCIATES GROUP, INC.
Computation of Net Income Per Share
(In thousands, except per share data)
(Unaudited)
Three Months Ended August 31,
1998 1997
<S> <C> <C>
Weighted average basic shares outstanding 4,896 4,887
Net effect of dilutive stock options
based on the treasury stock method. 103 41
TOTAL 4,999 4,928
==========================================================================================================
Net income $1,013 $ 920
==========================================================================================================
Basic net income per share $ 0.21 $0.19
==========================================================================================================
Diluted net income per share $ 0.20 $0.19
==========================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 9250
<SECURITIES> 0
<RECEIVABLES> 47209
<ALLOWANCES> 1972
<INVENTORY> 0
<CURRENT-ASSETS> 58876
<PP&E> 25350
<DEPRECIATION> 20198
<TOTAL-ASSETS> 75195
<CURRENT-LIABILITIES> 24246
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 49295
<TOTAL-LIABILITY-AND-EQUITY> 75195
<SALES> 0
<TOTAL-REVENUES> 39443
<CGS> 0
<TOTAL-COSTS> 11762
<OTHER-EXPENSES> 26035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 1759
<INCOME-TAX> 740
<INCOME-CONTINUING> 1013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1013
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
</TABLE>
