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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 October 31, 1998 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, 1998, 2,185,442 shares of Registrant's Class A Common Stock
(par value $.01) and 1,775,028 shares of Class B Common Stock (par value
$.01 were outstanding.
<PAGE>
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<TABLE>
Ecology and Environment, Inc.
Consolidated Balance Sheet
<CAPTION>
October 31, 1998
(Unaudited) July 31, 1998
---------------- -------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 5,651,658 $ 6,627,164
Investment securities available for sale 7,823,323 7,773,585
Contract receivables, net 22,214,753 21,480,584
Deferred income taxes 1,997,890 1,976,922
Income taxes receivable 290,492 356,641
Other current assets 1,003,359 855,109
------------ ------------
Total current assets 38,981,475 39,070,005
Property, building and equipment, net 12,808,313 12,856,938
Deferred income taxes 268,728 268,728
Other assets 897,117 880,464
------------ ------------
Total assets $52,955,633 $53,076,135
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,608,157 $ 3,253,204
Accrued payroll costs 4,291,397 3,175,498
Other accrued liabilities 2,791,748 2,594,419
------------ ------------
Total current liabilities 8,691,302 9,023,121
Long-term debt 550,140 553,125
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 - 2,369,002 and 2,364,302 shares 23,690 23,643
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,801,287 and 1,805,987 shares 18,009 18,056
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 27,638,962 27,424,660
Teasury stock - Class A Common, 183,560 and
194,400 shares; Class B common, 26,259
shares, at cost (1,557,906) (1,557,906)
------------ ------------
Total shareholders' equity 43,714,191 43,499,889
------------ ------------
Total liabilities and shareholders' equity $52,955,633 $53,076,135
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
Ecology and Environment, Inc.
Consolidate Statement of Income
(Unaudited)
<CAPTION>
Three months ended
------------------------------
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Gross revenues $16,927,330 $19,373,352
Less: direct subcontract costs 1,690,672 3,474,290
------------ ------------
Net revenues 15,236,658 15,899,062
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 8,868,033 9,482,188
Administrative and indirect operating
expenses 3,935,128 3,822,692
Marketing and related costs 1,875,677 1,897,223
Depreciation 338,738 354,609
------------ ------------
Total operating costs & expenses 15,017,576 15,556,712
------------ ------------
Income from operations 219,082 342,350
Interest (expense) (18,387) (14,898)
Interest income 168,821 160,496
------------ ------------
Income before income taxes 369,516 487,948
Income tax provision (benefit):
Federal 109,485 196,866
State 35,766 61,650
Deferred 20,969 (63,850)
------------ ------------
166,220 194,666
------------ ------------
Net income $203,296 $293,282
============ ============
Net income per common share: Basic and Diluted $0.05 $0.07
============ ============
Weighted average common shares outstanding:
Basic 3,960,720 3,949,330
============ ============
Diluted 3,969,868 3,951,790
============ ============
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
------------------------------
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 203,296 $ 293,282
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 338,738 354,609
Provision for contract adjustments 21,000 33,000
(Increase) decrease in:
- contracts receivable, net (755,169) 1,271,450
- other current assets (103,069) (215,625)
Increase (decrease ) in:
- accounts payable (1,645,047) 444,076
- accrued payroll costs 1,115,899 834,235
- other accrued liabilities 197,329 18,789
- income taxes payable --- (31,510)
Other, net (16,653) (34,197)
----------- -----------
Net cash provided by (used in) operating activities (643,676) 2,968,109
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (274,619) (352,701)
Purchase of investment securities (49,738) (425,774)
Investment in subsidiaries 7,314 ---
Investment in China joint ventures (11,802) (4,500)
----------- -----------
Net cash used in investing activities (328,845) (782,975)
----------- -----------
Cash flows used in financing activities:
Repayment of long-term debt (2,985) (21,875)
----------- -----------
Net cash used in financing activities (2,985) (21,875)
----------- -----------
Net increase (decrease) in cash and cash equivalents (975,506) 2,163,259
Cash and caash equivalents at beginning of period 6,627,164 3,714,898
----------- -----------
Cash and cash equivalents at end of period $5,651,658 $5,878,157
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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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
transactionsand balances have been eliminated. The consolidated
balance sheet at October 31, 1998 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, 1998 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 incurred 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 new
contract adjustments accounts represents a reserve against possible
adjustments for fiscal years 1990 through 1999.
<PAGE>
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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. No provision has been made for United States income
taxes applicable to undistributed earnings of foreign subsidiaries
as it is the intention of the Company to indefinitely reinvest
those earnings in the operations of those entities.
2. Contract Receivables, Net
-------------------------
Contract receivables are comprised of:
October 31, July 31,
1998 1998
------------ ------------
United States government
Billed $ 3,271,798 $ 6,368,873
Unbilled 6,800,641 6,597,802
------------ ------------
10,072,439 12,966,675
------------ ------------
Industrial customers and state
and municipal governments
Billed 6,958,189 5,490,908
Unbilled 5,995,874 3,959,750
------------ ------------
12,954,063 9,450,658
------------ ------------
Less allowance for contract
adjustments (811,749) (936,749)
------------ ------------
$22,214,753 $21,480,584
============ ============
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 provisional billings in excess of year-to-date actual
contract costs incurred and fees earned of $783,000 at October 31,
1998, and $0 at July 31, 1998. Management anticipates that the
October 31, 1998 unbilled receivables will be substantially billed
and collected in fiscal year 1999. Within the above billed
balances are contractual retainages in the amount of approximately
$1,858,426 at July 31, 1998 and $1,801,249 at July 31, 1998.
Included in other accrued liabilities is an additional allowance
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for contract adjustments relating to potential cost disallowances
on amounts billed and collected of approximately $2,429,000 at
October 31, 1998 and $2,283,000 at July 31, 1998.
3. Earnings Per Share
-------------------
All earnings per share amounts reflect the implementation of
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. SFAS No. 128 establishes new standards for
computing and presenting earnings per share ("EPS") and requires
that all prior period earnings per share data be restated to
conform with the provisions of the statement. SFAS No. 128 also
requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
The computation of basic earnings per share reconciled to diluted
earnings share follows:
Three months ended
----------------------------
October 31, November 1,
1998 1997
----------- -----------
Income available to
common stockholders $203,296 $293,282
Weighted-average
shares outstanding 3,960,720 3,949,330
Basic earnings per share $0.05 $0.07
Incremental shares from
assumed conversions of
stock options 9,148 2,460
Adjusted weighted-average
shares outstanding 3,969,868 3,951,790
Diluted earnings per share $0.05 $0.07
At October 31, 1998 there were 82,246 stock options outstanding with
an exercise price ranging from $12.38 - $16.08 which were not
included in the above calculation because to do so would have been
antidilutive to the calculation. At November 1, 1998 there were
126,165 stock options outstanding with an exercise price ranging from
$9.00 - $16.08 which were not included.
<PAGE>
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PART I - ITEM 2
- ---------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
- -------------------
As of October 31, 1998, the Company's working capital balance of
$30.3 million was unchanged since the reporting period ending July 31,
1998. Accounts payable decreased $1.6 million primarily due to the timing
of payments and the payment of a few significant subcontractor invoices
subsequent to July 31, 1998. Accrued payroll increased $1.1 million mainly
as a result of the timing of payments. Cash and cash equivalents decreased
$1.0 million due principally to a $.7 million increase in net contract
receivables.
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 October 31, 1998 and none were
required during the first quarter of fiscal year 1999. 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 investment securities
and the payment of dividends. There are no significant working capital
requirements pending at October 31, 1998. 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 for the first quarter of fiscal year 1999 were $15.2
million, down from the $15.9 million reported in the first quarter of the
prior year. The decrease in net revenues was due primarily to a decrease
in sales recognized from the Company's United States Department of Defense
(DOD) agency clients. The Company did, however, realize increased net
revenues in the first quarter of fiscal year 1999 versus the same period
last year from its five regional Superfund Technical Assistance Teams
(START) contracts with United States Environmental Protection Agency (EPA),
international clients and private domestic customers. However, the first
quarter increase in these net revenues could not offset the aforementioned
decline in DOD net sales.
Net income for the first quarter of fiscal year 1999 was $203,000, or
$.05 per share, down from the $293,000, or $.07 per share, recorded in
the same period of the prior year. The decrease in earnings was due
primarily to the decrease in DOD net sales. Also, during the first quarter
of this year the Company incurred an operating loss in its Analytical
Services Center (ASC) which was a major factor for the lower earnings in
the quarter.
Year 2000 Compliance
- --------------------
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result, in
less than two years, computer systems and/or software used by many
companies in a wide variety of applications will experience operating
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difficulties unless they are modified or upgraded to adequately process
information involving, related to or dependent upon the century change.
The Company has completed its companywide assessment of operating and
information systems which are sensitive to a potential Year 2000 problem.
Most of the systems currently in use were found to be compliant. The
Company's internal financial systems software and its sample tracking
software utilized at its Analytical Services Center are not Year 2000
compliant and are currently being replaced. The financial systems software
has been upgraded and implemented effective August 1, 1998 while the
alternative packages of the new compliant sample tracking software are
currently being evaluated and scheduled to be upgraded and replace by June
1999.
The cost of the Company's Year 2000 compliance upgrade is being funded
from current operations and is not expected to have a material adverse
effect on the Company's business, financial position or results of
operations. The Company estimates the total cost of the upgrade to be
between $500,000 -$700,000. Although the Company does not account for
internal costs for Year 2000 compliance, the estimate includes $150,000 -
$200,000 as an estimate of internal labor costs in the information
systems group. Total estimated expenditures to date are approximately
$400,000. The fact that the Company offers labor oriented services
minimizes its risk associated with potential Year 2000 problems from 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.
There can be no guarantee that the Company's customers, particularly
the U.S. Government, will successfully complete a Year 2000 upgrade on a
timely basis. Because a majority of the Company's business is contracted
with various federal government agencies, a failure by the U.S. Government
to achieve Year 2000 compliance could have significant adverse effects on
the Company's future business, financial operations and results of
operations.
Based on the progress the Company has made to date in addressing its
Year 2000 issues and the Company's timeline for completing its compliance
program, the Company does not foresee significant risks associated with
these efforts at this time. Since the Company has adopted a plan to
address these issues in a timely manner, it has not developed a
comprehensive contingency plan should these issues fail to be completed
successfully or in their entirety. However, if the Company identifies
significant risks or is unable to meet its anticipated timeline, the
Company will develop contingency plans as deemed necessary at that time.
Portions of the narrative set forth in this Financial Condition and
and Results of Operations, which are not historical in nature, are forward
looking statements, based upon current expectations, all of which are
subject to risk and uncertainties, and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company does not assume the obligation to update any forward looking
statements, whether as a result of new information, future events or
otherwise.
<PAGE>
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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, 1998 By: /s/ Ronald L. Frank
-------------------------
Ronald L. Frank
Executive Vice President
Chief Financial Officer
(Principal Financial
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> $5,651,658
<SECURITIES> $7,823,323
<RECEIVABLES> $22,214,753
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> $38,981,475
<PP&E> $12,808,313
<DEPRECIATION> 000
<TOTAL-ASSETS> $52,955,633
<CURRENT-LIABILITIES> $8,691,302
<BONDS> $550,140
<COMMON> $16,075,499
000
000
<OTHER-SE> $27,638,962
<TOTAL-LIABILITY-AND-EQUITY> $52,955,633
<SALES> $15,236,658
<TOTAL-REVENUES> $16,927,330
<CGS> 000
<TOTAL-COSTS> $15,017,576
<OTHER-EXPENSES> 000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> $18,387
<INCOME-PRETAX> $369,516
<INCOME-TAX> $166,220
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> $203,296
<EPS-PRIMARY> $0.05
<EPS-DILUTED> 000
</TABLE>
