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, 1996 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, 1996 the registrant had issued and outstanding an aggregate of 4,986,960 shares of its common stock. INDEX HARDING LAWSON ASSOCIATES GROUP, INC. Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - August 31, 1996 (Unaudited) and May 31, 1996............................3 Condensed Consolidated Statements of Income - Three Months Ended August 31, 1996 and August 31, 1995 (Unaudited).........................................4 Condensed Consolidated Statements of Cash Flows - Three Months Ended August 31, 1996 and August 31, 1995 (Unaudited).............................................5 Notes to Condensed Consolidated Financial Statements August 31, 1996 (Unaudited).............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K..............................10 SIGNATURES..................................................................11 INDEX TO EXHIBITS...........................................................12 -2- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HARDING LAWSON ASSOCIATES GROUP, INC. Condensed Consolidated Balance Sheets (In thousands, except share data) August 31, 1996 May 31, 1996 - ------------------------------------------------------------------------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $16,133 $19,012 Accounts receivable 26,096 24,080 Unbilled work in progress 8,646 4,903 Less allowances for receivables and unbilled work (1,404) (1,476) Prepaid expenses 2,057 1,304 Deferred income taxes 1,387 1,474 - --------------------------------------------------------------------------- Total current assets 52,915 49,297 - --------------------------------------------------------------------------- Equipment 21,537 21,021 Less accumulated depreciation (17,126) (16,677) - ---------------------------------------------------------------------------- Net equipment 4,411 4,344 - --------------------------------------------------------------------------- Deposits and other assets 6,692 6,723 - --------------------------------------------------------------------------- Total assets $64,018 $60,364 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,015 $ 2,754 Accrued expenses 4,735 5,936 Accrued compensation 5,210 5,086 Income taxes payable 205 --- - --------------------------------------------------------------------------- Total current liabilities 16,165 13,776 - --------------------------------------------------------------------------- Other liabilities 2,241 1,983 - --------------------------------------------------------------------------- Total liabilities 18,406 15,759 - --------------------------------------------------------------------------- Commitments and Contingencies --- --- Minority interest in subsidiaries 303 248 - --------------------------------------------------------------------------- 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-- 4,986,960 and 4,845,207 at August 31, 1996 and May 31, 1996, respectively 50 48 Additional paid-in capital 18,866 18,142 Retained earnings 26,393 26,167 - --------------------------------------------------------------------------- Total shareholders' equity 45,309 44,357 - --------------------------------------------------------------------------- Total liabilities and shareholders' equity $64,018 $60,364 =========================================================================== The accompanying notes are an integral part of these financial statements. -3- HARDING LAWSON ASSOCIATES GROUP, INC. Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) Three Months Ended August 31, 1996 1995 Gross revenue $30,944 $31,748 Less: Cost of outside services 9,965 9,040 - ---------------------------------------------------------------------------- Net revenue 20,979 22,708 - ---------------------------------------------------------------------------- Costs and expenses: Payroll and benefits 14,787 15,310 General expenses 5,888 6,042 - ---------------------------------------------------------------------------- Total costs and expenses 20,675 21,352 - ---------------------------------------------------------------------------- Operating income 304 1,356 Interest in loss of unconsolidated subsidiary (53) --- Interest income, net 184 176 - ---------------------------------------------------------------------------- Income before provision for income taxes and minority interest 435 1,532 Provision for income taxes 205 602 Minority interest 4 (5) - ---------------------------------------------------------------------------- Net income $ 226 $ 935 ============================================================================ Net income per common share $ 0.05 $ 0.19 ============================================================================ Shares used in per share calculation 4,920 4,804 ============================================================================ The accompanying notes are an integral part of these financial statements. -4- HARDING LAWSON ASSOCIATES GROUP, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended August 31, 1996 1995 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 226 $ 935 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 624 606 Net increase in current assets (6,486) (837) Net increase (decrease) in current liabilities 3,054 (788) Other, net 305 146 - -------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,277) 62 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of equipment, net (649) (457) - -------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (649) (457) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from sale of stock 58 --- Principal payments on capital lease obligations (11) --- - -------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 47 --- - -------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,879) (395) Cash and cash equivalents at beginning of period 19,012 12,648 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,133 $12,253 ================================================================================ The accompanying notes are an integral part of these financial statements. -5- HARDING LAWSON ASSOCIATES GROUP, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) August 31, 1996 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, 1996. Reclassification of certain balances for the fiscal year ended May 31, 1996 have been made to conform to the August 31, 1996 presentation. NOTE 2: COMMITMENTS AND CONTINGENCIES On May 19, 1995, the Company filed a lawsuit in Texas State Court, Harris County, Texas, entitled Harding Lawson Associates, Inc., a wholly owned subsidiary of Harding Associates, Inc. vs. Bailey Site Settlors Committee, an unincorporated association, seeking collection of approximately $1.0 million in fees billed for engineering services performed. On June 21, 1995, lawsuits were filed against the Company in Federal District Court, Jefferson County, Texas, and in Texas State Court, Orange County, Texas, entitled Bailey Site Settlors Committee vs. Harding Lawson Associates. The suits seek monetary damages in the amount of $7.9 million for alleged breach of contract and negligence in the performance of certain engineering services. The suits filed in Jefferson and Orange counties have been dismissed or stayed. Subsequently, a counterclaim containing similar allegations was filed against the Company in the Harris County suit. The Company believes it has meritorious defenses to these allegations. The Company is currently subject to certain other 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. -6- HARDING LAWSON ASSOCIATES GROUP, INC. 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 cost controls and reductions, the possible impact of current and future claims against the Company based upon negligence and other theories of liability and the possibility of the Company's making acquisitions during the next 12 to 18 months. 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; 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. Percentage of Net Revenue For Three Months Percentage Ended August 31, Increase/(Decrease) 1996 1995 ---- ---- Net revenue 100.0% 100.0% (7.6)% Costs and expenses Payroll and benefits 70.4 67.4 (3.4) General expenses 28.1 26.6 (2.6) Operating income/margin 1.5 6.0 (77.6) Interest income, net and interest in loss of unconsolidated subsidiary 0.6 0.7 (25.5) Income before income taxes and minority interest 2.1 6.7 (71.6) Provision for income taxes 1.0 2.6 (65.9) Net income 1.1 4.1 (75.8) First Quarter Comparison for Fiscal Years 1996 and 1995 Net revenue for the fiscal quarter ended August 31, 1996 totaled $20,979, a decrease of 7.6 percent from net revenue of $22,708 for the first quarter of the prior fiscal year. The decline in net revenue for the quarter ended August 31, 1996 was primarily due to a 24 percent decline in federal net revenue, partially offset by a 50 percent increase in international net revenue. Excluding international, the decrease in net revenue was due to lower demand for the Company's services while prices were essentially unchanged compared to the same period in the prior fiscal year. Sales of services to all public sector clients decreased by approximately 14 percent from the same period in the prior year. Overall, net revenue from public sector clients accounted for 43 percent of -7- total net revenue compared to 47 percent in the prior year. Net revenue from domestic industrial sector clients, while improved from the prior fiscal quarter, was 3 percent lower than in the first quarter of the prior fiscal year. International net revenue for the fiscal quarter ended August 31, 1996 was $1,607 or 8 percent of total net revenue compared to $1,074 or 5 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 industrial sector clients. During fiscal 1997, certain of these public sector contracts will be substantially completed. The Company has been awarded certain contracts that potentially could offset revenue which has and 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 these or previously awarded federal contracts, a material decline in revenue could result. Further, management believes that the outlook for the industrial sector is uncertain and will continue to be strongly influenced by general economic conditions and any congressional action on pending environmental regulations. Operating income amounted to $304, a decrease of 77.6 percent from $1,356 for the same period in fiscal 1996. Operating margin decreased to 1.5 percent of net revenue in the current quarter compared to 6.0 percent in the first quarter of fiscal 1996. While the Company continued to lower its operating costs, such reductions were not sufficient to offset the effect of lower net revenue discussed above. Management is continuing its efforts to better align the Company's cost structure with current revenue levels. Interest income for the first quarter of fiscal 1997 was $194 before interest expense of $10 compared to interest income of $177 before interest expense of $1 for the first quarter of the prior fiscal year. Net interest income was higher due to the Company's increased cash position which resulted in higher balances of invested cash, and to a lesser extent, improved interest rates. At the end of the prior fiscal year, the Company invested in the start-up of a limited liability company, Integrated Software Systems, LLC which specializes in software for the mining industry. The minority position in this entity is accounted for using the equity method. The Company's portion of the first quarter loss for this investment was $53. The effective tax rate was 47.2 percent for the first quarter of fiscal 1997 and was 39.3 percent in the first quarter of the prior year. The effective tax rate in fiscal 1997 reflects the impact of losses from the start-up of certain international operations for which no tax benefit has been realized. Net income for the quarter was $226 compared with $935 in the first quarter of 1996, a decrease of 75.8 percent. Earnings per share were $0.05 on 4,920,000 weighted average shares outstanding compared to $0.19 per share on 4,804,000 weighted average shares outstanding in the same period last year. Liquidity and Capital Resources For the three months ended August 31, 1996, net cash used in operations was $2,277 compared to net cash provided by operations of $62 for the same period last year. The increase in cash used in operations was primarily due to an increase in the Company's receivables partially offset by an increase in trade payables in the current fiscal year. The increase in receivables primarily reflects a significant increase in first quarter fiscal 1997 gross revenue over the prior fiscal quarter compared to the prior year when gross revenue was relatively flat from the fourth to first quarter. The Company made capital expenditures of $649 in the first three months of fiscal 1997 compared to capital expenditures of $457 in the first three months of the prior year. The Company anticipates that its capital expenditures, excluding acquisitions, for the current fiscal year will be approximately the same as those incurred in the prior fiscal year. -8- 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 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. The Company is provided a $5 million per occurrence professional liability policy and a $5 million per occurrence contractor's pollution insurance policy through an unrelated, rated carrier. The Company also maintains general liability insurance policy with an unrelated, rated carrier. At August 31, 1996, the Company had cash on hand and cash equivalents of $16,133. The Company has a $20 million revolving credit line agreement which expires in October 1997. At August 31, 1996 and 1995, 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 5.4 percent at August 31, 1996, and at 5.4 percent at May 31, 1996. The Company is in compliance with all covenants pertaining to the credit line agreement. The Board of Directors' of the Company has approved a Common Stock Repurchase Program that authorizes the Company to purchase up to a maximum of 500,000 shares of stock on the open market from time to time over the next 18 months, for the purpose of funding the Company's various employee stock programs. To date, no repurchases have been made under this authorization. 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. -9- 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, 1996: Exhibit No. 11 Computation of Per Share Earnings Exhibit No. 27 Financial Data Schedule b. Reports on Form 8-K None -10- 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: 10-11-96 /s/ Donald L. Schreuder Donald L. Schreuder President and Chief Executive Officer (Principal Executive Officer) Date: 10-11-96 /s/ Gregory A. Thornton Gregory A. Thornton Vice President and Chief Financial Officer (Principal Accounting Officer) -11- HARDING LAWSON ASSOCIATES GROUP, INC. EXHIBIT INDEX Exhibit No. 11 Computation of Per Share Earnings 27 Financial Data Schedule -12-