<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act in 1934
For Quarter Ended November 1, 1997 Commission File #1-9065
ECOLOGY AND ENVIRONMENT, INC.
(Exact name of registrant as specified in its charter)
New York 16-0971022
(State or other jurisdiction (I.R.S. Employer Identification No.)
organization)
368 Pleasant View Drive
Lancaster, New York 14086
(Address of principal executive offices)
Registrant's telephone number, including area code: 716-684-8060
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 __________
At December 1, 1997, 2,130,802 shares of Registrant's Class A Common Stock
(par value $.01) and 1,816,028 shares of Class B Common Stock (par value $.01)
were outstanding.
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<TABLE>
ECOLOGY AND ENVIRONMENT, INC.
CONSOLIDATED BALANCE SHEET
<CAPTION>
November 1,
1997 July 31,
(Unaudited) 1997
------------ ------------
<S> <C> <C>
Assets
- --------
Current assets:
Cash and cash equivalents $ 5,878,157 $ 3,714,898
Investment securities available for sale 7,511,809 7,086,035
Contract receivables, net 24,676,707 25,981,157
Other current assets 3,308,516 3,092,891
------------ ------------
Total current assets 41,375,189 39,874,981
Property, building and equipment, net 12,851,068 12,852,976
Other assets 835,113 796,416
------------ ------------
Total assets $55,061,370 $53,524,373
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 3,018,430 $ 2,574,354
Accrued payroll costs 4,550,418 3,716,183
Other accrued liabilities 2,277,496 2,258,707
Income taxes payable 153,073 184,583
------------ ------------
Total current liabilities 9,999,417 8,733,827
Long-term debt 585,416 607,291
Shareholders' equity
Preferred stock, par value $.01 per share;
authorized - 2,000,000 shares; no shares
issued --- ---
Class A common stock, par value $.01 per
share; authorized - 6,000,000 shares;
issued - 2,320,702 and 2,316,912 shares 23,207 23,169
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares;
issued - 1,849,287 and 1,853,077 shares 18,492 18,530
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 28,516,342 28,223,060
Treasury stock - Class A common, 194,400
shares; Class B common, 26,259 shares,
at cost (1,672,940) (1,672,940)
------------ ------------
Total shareholders' equity 44,476,537 44,183,255
------------ ------------
Total liabilities and shareholders' equity $55,061,370 $53,524,373
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
ECOLOGY & ENVIRONMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
Three months ended
------------------
November 1, October 26,
1997 1996
------------ ------------
<S> <C> <C>
Gross revenues $19,373,352 $16,752,137
Less: direct subcontract costs 3,474,290 2,610,912
------------ ------------
Net revenues 15,899,062 14,141,255
------------ ------------
Operating costs and expenses:
Cost of professional services
and other direct operating
expenses 9,482,188 8,056,713
Administrative and indirect
operating expenses 3,822,692 3,647,381
Marketing and related costs 1,897,223 1,823,492
Depreciation 354,609 401,329
------------ ------------
Total operating costs and expenses 15,556,712 13,928,825
------------ ------------
Income from operations 342,350 212,400
Interest expense 14,898 15,996
Interest income 160,496 184,149
------------ ------------
Income before income taxes 487,948 380,553
------------ ------------
Income tax provision (benefit):
Federal 196,866 91,919
State 61,650 25,389
Deferred (63,850) 35,822
------------ ------------
194,666 153,130
------------ ------------
Net income $293,282 $227,423
============ ============
Net income per common share $0.07 $0.06
===== =====
Weighted average common shares outstanding 3,949,330 3,968,738
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
ECOLOGY AND ENVIRONMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Three months ended
--------------------------
November 1, October 26,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 293,282 $ 227,423
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 354,609 401,239
Provision (benefit) for contract adjustments 33,000 (33,675)
(Increase) decrease in:
- contracts receivable, net 1,271,450 (413,406)
- other current assets (215,625) 244,734
Increase (decrease) in:
- accounts payable 444,076 (738,760)
- accrued payroll costs 834,235 (1,028,385)
- other accrued liabilities 18,789 127,805
- income taxes payable (31,510) ---
Other, net (38,697) (2,752)
----------- ------------
Net cash provided by (used in) operating activities 2,963,609 (1,215,777)
----------- ------------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (352,701) (227,195)
Purchase of investment securities (425,774) (440,489)
----------- ------------
Net cash used in investing activities (778,475) (667,684)
----------- ------------
Cash flows used in financing activities:
Repayment of long-term debt (21,875) (21,875)
Repurchase of common stock --- (50,000)
----------- ------------
Net cash used in financing activities (21,875) (71,875)
----------- ------------
Net increase (decrease) in cash and cash equivalents 2,163,259 (1,955,336)
Cash and cash equivalents at beginning of period 3,714,898 8,080,524
----------- ------------
Cash and cash equivalents at end of period $5,878,157 $ 6,125,188
=========== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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ECOLOGY AND ENVIRONMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting principles
a. Consolidation
The consolidated financial statements include the accounts of Ecology and
Environment, Inc. (the Company) and its wholly-owned subsidiaries. Also
reflected in the financial statements is the Company's 66-2/3% ownership
in the assets of a nonoperating subsidiary, Ecology and Environment of
Saudi Arabia Ltd. (EESAL), and a 50% ownership in two Chinese operating
joint ventures, Beijing Yi Yi Ecology and Engineering Co. Ltd. and The
Tianjin Green Engineering Company. These joint ventures are accounted
for under the equity method. All significant intercompany transactions
and balances have been eliminated. The consolidated balance sheet at
November 1, 1997 and the accompanying consolidated statements of income
and of cash flows are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. The accompanying financial statements should be
reviewed in conjunction with the Company's fiscal year ended July 31,
1997 audited financial statements.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
c. Revenue Recognition
Substantial amounts of the Company's revenues are derived from
cost-plus-fee contracts using the percentage of completion method based
on costs incured plus the fee earned. The fees under certain government
contracts are determined in accordance with performance incentive
provisions. Such awards are recognized at the time the amounts can be
reasonably determined. Provisions for estimated contract adjustments
relating to cost based contracts have been deducted from gross revenues
in the accompanying consolidated statement of income. Such adjustments
typically arise as a result of interpretations of cost allowability under
cost based contracts. Revenues related to long-term government contracts
are subject to audit by an agency of the United States government.
Government audits have been completed through fiscal year 1989 and are
currently in process for fiscal years 1990 through 1992. The majority of
the balance in the allowance for contract adjustments accounts represents
a reserve against possible adjustments for fiscal years 1990 through
1998.
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d. Income Taxes
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
assets and liabilities. Although realization is not assured, management
believes it is more likely than not that the recorded net deferred tax
assets will be realized. Since in some cases management has utilized
estimates, the amount of the net deferred tax asset considered realizable
could be reduced in the near term.
e. Net income per common share
The computations of net income per common share are based upon the
weighted average of Class A and B common shares outstanding during each
period.
2. Contract Receivables
Contract receivables are
November 1, July 31,
1997 1997
------------ ------------
United States government
Billed $ 6,645,322 $ 7,959,278
Unbilled 8,553,621 8,214,653
------------ ------------
15,198,943 16,173,931
------------ ------------
Industrial customers and state
and municipal governments
Billed 5,498,398 6,608,240
Unbilled 4,916,490 4,103,110
------------ ------------
10,414,888 10,711,350
------------ ------------
Less allowance for contract
adjustments (937,124) (904,124)
------------ ------------
$24,676,707 $25,981,157
============ ============
United States government receivables arise from long-term U.S. government
prime contracts and subcontracts. Unbilled receivables result from
revenues which have been earned, but are not billed as of period-end.
The above unbilled balances are comprised of incurred costs plus fees not
yet processed and billed; and differences between year-to-date
provisional billings and year-to-date actual contract costs incurred and
fees earned of approximately $1,911,000 at November 1, 1997, and
$3,026,000 at July 31, 1997. Management anticipates that the November 1,
1997 unbilled receivables will be substantially billed and collected in
fiscal year 1998. Within the above billed balances are contractual
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retainages in the amount of approximately $1,527,000 at November 1, 1997
and $1,423,000 at July 31, 1997. Included in other accrued liabilities
is an additional allowance for contract adjustments relating to potential
cost disallowances on amounts billed and collected of approximately
$2,028,000 at both November 1, 1997 and July 31, 1997.
3. Earnings Per Share
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" was issued. SFAS No. 128 alters the
computation and presentation of reported earnings per share. The
statement is required to be adopted for the interim reporting period
ending in January 1998. Earlier application is not permitted. The
Company estimates that SFAS No. 128 will not have a material effect on
reported earnings per share.
<PAGE>
PART I - ITEM 2
_______________
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
___________________
As of November 1, 1997, the Company's working capital balance
increased $.2 million to $31.4 million as compared to $31.1 million at
July 31, 1997. Cash and cash equivalents increased $2.2 million primarily
due to a decrease in net contracts receivable. Net contracts
receivable decreased $1.3 million due principally to the delay in payment
of a significant receivable with the United States Environmental Protection
Agency (EPA) at July 31, 1997 that was subsequently paid in the first
quarter of fiscal year 1998. The Company's accrued payroll costs increased
$.8 million mainly due to the timing of the above reporting periods versus
the actual payment of the Company payroll. In June 1995, the Board of
Directors authorized the Company to repurchase up to 200,000 shares of its
Class A common stock on the open market. As of November 1, 1997, 196,900
shares had been repurchased.
The Company maintains an unsecured line of credit of $10.0 million
with a bank at the prevailing prime rate. There are no borrowings
outstanding under this line of credit at November 1, 1997 and none were
required during the first quarter of fiscal year 1998. The Company has
historically financed its activities through cash flows from operations.
Internally generated funds have been adequate to support the demands for
working capital, the purchase of new fixed assets and the payment of
dividends. There are no significant working capital requirements pending at
November 1, 1997. The Company's existing cash along with that generated by
future operations and the existing credit line is expected to be sufficient
to meet the Company's needs for the foreseeable future.
Results of Operations
_____________________
Net Revenues
____________
Net revenues for the first quarter of fiscal year 1998 were $15.9
million, up 12% from the $14.1 million reported in the first quarter of
fiscal year 1997. The increase in net revenues was due primarily to an
increase in sales recognized from the Company's federal government agency
clients. The growth in revenues derived from government agency clients is
the result of the federal funding to these agencies being firmly in place
following resolution of the past budget crisis. The aftermath of this
crisis had continued to hinder federal government agency funding in the
first quarter of fiscal year 1997. In particular, increased federal funding
resulted in a growth in sales from the Company's regional Superfund
Technical Assistance and Response Teams (START) contracts with the United
<PAGE>
States Environmental Protection Agency (EPA) and various United States
Department of Defense (DOD) clients. In September, 1997, the Company
received a subcontract entitled Response Action Contract (RAC) with the EPA
worth up to $71 million to provide architect and engineering services in
year Advisory and Assistance Support Contract with the U. S. Department of
The Company also recognized increased net revenues from various state
agency clients in the first quarter of fiscal year 1998 compared to the
same quarter last year. In particular, net revenues increased from state
agency clients in Florida, Texas and Illinois.
Net income for the first quarter of fiscal year 1998 was $293,000, or
$.07 per share, up 29% from the $227,000, or $.06 per share, reported in
the first quarter of fiscal year 1997. The increase in earnings was a
result of the aforementioned increase in net revenues and of the Company's
continued success in lowering indirect operating costs. The percentage of
the Company's indirect operating costs to net sales was 3% less in the
first quarter of fiscal year 1998 as compared to the same period last year.
Operating margins realized from the Company's Analytical Services Center in
the period continued to be adversely affected by pricing pressures.
<PAGE>
PART II - OTHER INFORMATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of l934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECOLOGY AND ENVIRONMENT, INC.
Date: December 15, 1997 By: /s/ Ronald L. Frank
Ronald L. Frank
Executive Vice President
Chief Financial Officer
(Principal Financial
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> NOV-1-1997
<CASH> $5,878,157
<SECURITIES> $7,511,809
<RECEIVABLES> $24,676,707
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> $41,375,189
<PP&E> $12,851,068
<DEPRECIATION> 000
<TOTAL-ASSETS> $55,061,370
<CURRENT-LIABILITIES> $9,999,417
<BONDS> $585,416
<COMMON> $15,960,645
000
000
<OTHER-SE> $28,516,342
<TOTAL-LIABILITY-AND-EQUITY> $55,061,370
<SALES> $15,899,062
<TOTAL-REVENUES> $19,373,352
<CGS> 000
<TOTAL-COSTS> $15,556,712
<OTHER-EXPENSES> 000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> $14,898
<INCOME-PRETAX> $487,948
<INCOME-TAX> $194,666
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> $293,282
<EPS-PRIMARY> $0.07
<EPS-DILUTED> 000
</TABLE>
