10-Q 1 thirdquarter10q.txt UNITED STATES 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 May 31, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. From the transition period ________ 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 (I.R.S. Employer of Incorporation or Organization) ID Number) 11019 McCormick Road, Hunt Valley, Maryland 21031 ------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (410) 584-7000 ----------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days ___ Yes [X] ___ NO [_] APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of the Registrant's Common Stock, $.01 par value, outstanding on July 20, 2001 was 5,842,652. EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES INDEX

2 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements included herein for EA Engineering, Science, and Technology, Inc. and its subsidiaries (the "Company") have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In management's opinion, the interim financial data presented include all adjustments considered necessary for a fair presentation. Certain information and footnote disclosures, normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. Operating results and cash flows for the interim period are not necessarily indicative of the results that may be expected for the full fiscal year. Accordingly, these consolidated financial statements should be read in conjunction with the Company's August 31, 2000 consolidated financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K filed November 15, 2000. 3 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying notes are an integral part of these balance sheets. 4 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these balance sheets. 5 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements. 6 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements. 7 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000 Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying consolidated financial statements present the accounts of EA Engineering, Science, and Technology, Inc. (EA); its wholly-owned subsidiaries, EA International, Inc. and EA Financial, Inc. (EA Financial); and the wholly-owned subsidiaries of EA Financial, EA Global, Inc. and EA de Mexico, S.A. de C.V. The entities are collectively referred to herein as the "Company." All significant intercompany transactions have been eliminated in consolidation. Reclassifications - Certain prior year balances have been reclassified to conform to current year presentation. Note 2. EMPLOYEE STOCK PURCHASE PLAN The Company maintains an Employee Stock Purchase Plan (the "Plan") to provide eligible employees with the opportunity to purchase shares of the Company's Common Stock through voluntary payroll deductions. Under the 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. During the quarter and nine months ended May 31, 2001, 9,310 and 28,432 shares, respectively, were purchased under this Plan. A total of 84,516 shares remain authorized for distribution under the Plan as of May 31, 2001. Note 3. STOCK PURCHASE 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. During the three and nine month periods ended May 31, 2001, the Company purchased 0 and 105,900 shares, respectively, of common stock under this plan. The Company has purchased these shares, at cost, which are presented as Treasury Stock in the consolidated balance sheet. On December 26, 2000, the Company made the final purchase under this plan, resulting in a total repurchase of shares in the amount of 499,100. Note 4. CHANGES IN ESTIMATES During the quarter ended May 31, 2001, the Company recorded a provision of approximately $300,000, required for certain projects in the Company's West operating region. Note 5. INCOME TAXES The effective income tax rate for the three months ended May 31, 2001 and 2000 was 31% and 40%, respectively. In addition, for the nine month periods ended May 31, 2001 and 2000, the effective tax rate was 28% and 40%, respectively. The change in effective income tax rates reflects the impact of certain expenses, that are not deductible for income tax purposes, from pre-tax operating results. The Company has received proposed assessments for approximately $750,000 from the state of Hawaii that could result in an additional tax liability associated with the years 1993 through 1998. The Company disagrees with the proposed assessment and Management and its tax counsel are of the opinion that the issues making up the tax liability proposed by the state of Hawaii are either not factually or legally supportable. In addition, management is of the opinion that any additional tax liability that might ultimately result from the resolution of this state issue would not have a material adverse effect on the Company's consolidated financial condition, results of operations, cash flows or liquidity. 8 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES ITEM 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's results of operations are significantly affected by the timing of the award of contracts, the timing of performance of contracts, and the extent to which the Company's employees are performing billable tasks as opposed to engaging in preparing contract proposals and other required non-billable activities. Results of operations may also be affected to the extent that the Company chooses not to reduce its professional staff during a period of reduced demand for its services. Due to these factors, quarterly results of operations are not necessarily indicative of the results of operations for longer periods. The Company, in the course of providing its services, routinely subcontracts such services as drilling, certain laboratory analyses, and other specialized services. In addition, the use of teaming partners for the performance of services similar to those of the Company, is included in subcontracts. In accordance with industry practice and contract terms that generally provide for the recovery of overhead costs, these costs are passed directly through to clients and are included in total revenue. Because subcontractor costs and direct charges can change significantly from project to project, the change in total revenue is not necessarily a true indication of business trends. Accordingly, the Company considers net revenue, which is total revenue less subcontractor and other direct project costs, as its primary measure of revenue. On September 18, 2000, the Company announced that it's Board of Directors had retained investment bankers Legg Mason Wood Walker, Inc. and TechKNOWLEDGEy Strategic Group to explore strategic alternatives that may be available to the Company to maximize shareholder value, including but not limited to, the sale of the Company or business combination with another company. The Company continues to explore its strategic alternatives. RESULTS OF OPERATIONS Three Months Ended May 31, 2001 Versus Three Months Ended May 31, 2000 Net revenue for the three months ended May 31, 2001 was $8,028,200 a decrease compared to $9,038,700 for the same period in the prior fiscal year. This decrease of 11.2% in net revenue reflects lower contract volume across most regional operations, principally due to delays in the initiation and execution of several large Federal contracts. One of these contracts has subsequently been initiated on June 30, 2001 and is expected to commence work in the Company's fourth quarter. Additionally, net revenue was negatively impacted by the recognition of provisions on certain projects, totaling approximately $300,000, required for the Company's West operating region. This decrease in net revenue was partially offset by a 6.7% increase in the Mid-Atlantic region, the Company's largest operation. Direct salaries and other operating costs for the three months ended May 31, 2001 decreased 5.2% to $6,753,700 or 84.1% of net revenue from $7,122,800 or 78.8% of net revenue, for the three month period ended May 31, 2000. Direct labor decreased $210,000 due to a decrease in the average quarterly technical headcount by 14 positions from fiscal 2000 to fiscal 2001, predominantly in the South Central and West region. The total average headcount for the quarter decreased 23 positions in fiscal 2001 compared to fiscal 2000, which resulted in lower overhead costs to the Company, but as noted above, also decreased net revenue. Sales, general and administrative costs for the three months ended May 31, 2001 decreased by 0.8% to $1,772,300, or 22.1% of net revenue, from $1,786,400 or 19.8% of net revenue, for the three month period ended May 31, 2000. This decrease is directly related to the decrease in the Corporate headcount. The reduction in Corporate cost during the quarter was partially offset by certain non-recurring expenses relating to the Company's strategic alternatives. The benefit from income taxes was $177,400 for the three months ended May 31, 2001 compared to a provision of $25,000 in the third quarter of fiscal 2000. This represents an effective tax rate of 31% and 40% respectively for each fiscal year. The effective tax rate for the three months ended May 31, 2001 is lower than the prior year due to the impact of certain expenses that are not deductible for income tax purposes. As a result of the above factors, the Company incurred a net loss of $400,300 or 5.0% of net revenue, for the third quarter ended May 31, 2001 compared to net income of $37,900, or 0.4%, in the third quarter of fiscal 2000. 9 Nine Months Ended May 31, 2001 Versus Nine Months Ended May 31, 2000 Net revenue for the nine months ended May 31, 2001 was $25,296,800, a decrease of 4.6% compared to $26,519,700 for the same period in the prior fiscal year. The year-to-date decrease in net revenue primarily occurred in the Company's fiscal third quarter and reflects lower contract volume in most of the Company's regional operations, partially offset by a 13% increase in the net revenue in the Mid-Atlantic region, the Company's largest operation. The lower volume is principally due to delays in the initiation and execution of several large Federal contracts. One of these contracts has subsequently been initiated on June 30, 2001 and is expected to commence work in the Company's fourth quarter. Additionally, year-to-date net revenue was negatively impacted by the recognition of provisions on certain projects, totaling approximately $300,000, required for the Company's West regional operations. Direct salaries and other operating costs decreased 0.1% to $20,549,900 or 81.2% of net revenue from $20,575,600, or 77.6% of net revenue for the nine month periods ended May 31, 2001 and May 31, 2000, respectively. The year-to-date direct salaries decreased $110,000 due to the lower average technical headcount, mainly in the South Central and West regions. The average technical headcount decreased 6 positions in fiscal 2001 from fiscal 2000, which resulted in lower overhead costs to the Company, but as noted above, also decreased net revenue. Sales, general and administrative costs decreased by 5.6% to $4,943,400, or 19.5% of net revenue, from $5,237,400 or 19.7% of net revenue, for the nine-month periods ended May 31, 2001 and May 31, 2000, respectively. This decrease is due to the decrease in total Corporate headcount. The Corporate cost cutting initiatives were partially offset by certain non-recurring expenses related to the Company's strategic alternatives. The benefit from income taxes was $125,400 and the provision for income taxes was $216,000 for the nine months ended May 31, 2001 and May 31, 2000, respectively. This represents an effective tax rate of 28% and 40% respectively for each fiscal year. The effective tax rate for the nine months ended May 31, 2001 is lower than the prior year due to the impact of certain expenses that are not deductible for income tax purposes. As a result of the above factors, the Company incurred a net loss of $322,600 and net income of $323,700, or 1.3% and 1.2% of net revenue, for the nine months ended May 31, 2001 and May 31, 2000, respectively. Liquidity and Capital Resources Cash and cash equivalents decreased by $113,200 for the nine months ended May 31, 2001. The decrease was primarily due to cash generated from operating activities of $587,800, partially offset by net cash flows used in investing activities of $329,300 and net cash flows used in financing activities of $371,700. The net borrowings from the revolving line of credit decreased $230,000. The Company's capital expenditures, consisting primarily of purchases of equipment, were approximately $355,800 for the nine months ended May 31, 2001. The Company anticipates the level of capital expenditures for the remainder of fiscal year 2001 to remain fairly consistent with the level in the first nine months ended May 31, 2001 and to be financed by cash generated from operations or through capital leases. At May 31, 2001, the Company had outstanding long-term debt relating to the revolving line of credit of $3,256,100. This represents a net decrease of $230,000 from the $3,486,100 balance at August 31, 2000. The Company's existing funds, cash from operations, and the available portion of its $7,000,000 revolving line and $1,500,000 equipment line of credit arrangements are expected to be sufficient to meet the Company's present and immediately foreseeable cash needs.* The Company also has access to certain capital equipment financing arrangements through various equipment suppliers. 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 the quarter ended May 31, 2001, the Company was either in compliance or received an amendment on certain covenants related to these arrangements. While the Company believes that there is sufficient market demand to absorb the additional contracting capacity resulting from its various indefinite delivery/indefinite quantity contracts, there can be no assurance that this demand will, in fact, materialize.* Although the Company has the ability to reduce its professional staff in periods of reduced demand, it may choose not to make full reductions in such periods, with resulting adverse effects on operations. 10 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 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. 11 EA ENGINEERING, SCIENCE, AND TECHNOLOGY, INC. & SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 12 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EA Engineering, Science, and Technology, Inc. & Subsidiaries ------------------------------- (Registrant) July 23, 2001 By: /s/ Loren D. Jensen -------------- -------------------------------- (Signature) Loren D. Jensen -------------------------------- Chairman of the Board, President and CEO -------------------------------- (Title) July 23, 2001 By: /s/ Barbara L. Posner -------------- -------------------------------- (Signature) Barbara L. Posner -------------------------------- Chief Financial Officer and Chief Operating Officer -------------------------------- (Title)

EA ENGINEERING SCIENCE & TECHNOLOGY INC 10-Q