<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 May 2, 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 June 1, 1998, 2,182,865 shares of Registrant's Class A Common Stock
(par value $.01) and 1,766,165 shares of Class B Common Stock (par value $.01)
were outstanding.
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<TABLE>
Ecology & Environment, Inc
Consolidated Balance Sheet
<CAPTION>
May 2, 1998
(Unaudited) July 31, 1997
------------- -------------
<S> <C> <C>
Assets
- ----------
Current assets:
Cash and cash equivalents $ 5,966,409 $ 3,714,898
Investment securities available for sale 7,599,174 7,086,035
Contract receivables, net 21,758,367 25,981,157
Other current assets 3,449,814 3,092,891
------------ ------------
Total current assets 38,773,764 39,874,981
Property, building and equipment, net 12,800,121 12,852,976
Other assets 890,234 796,416
------------ ------------
Total Assets $52,464,119 $53,524,373
============ ============
Liabilities and Shareholders' Equity
- ----------------------------------------
Current liabilities:
Accounts payable $2,010,755 $2,574,354
Accrued payroll costs 3,471,308 3,716,183
Other accrued liabilities 2,391,058 2,258,707
Income taxes payable --- 184,583
------------ ------------
Total current liabilities 7,873,121 8,733,827
Long-term debt 562,500 607,291
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 - 2,377,265 and 2,316,912 shares 23,773 23,169
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares;
issued - 1,792,724 and 1,853,077 shares 17,926 18,530
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 28,068,303 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 44,028,498 44,183,255
------------ ------------
Total liabilities and shareholders' equity $52,464,119 $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 Nine months ended
May 2, April 26, May 2, April 26,
1998 1997 1998 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Gross revenues $20,358,743 $17,601,155 $56,154,769 $51,273,018
Less: direct subcontract costs 4,703,409 2,501,745 10,458,290 8,503,387
------------ ------------ ----------- ------------
Net revenues 15,655,334 15,099,410 45,696,479 42,769,631
Operating costs and expenses:
Cost of professional services
and other direct operating
expenses 9,331,821 9,047,654 27,177,663 24,849,195
Administrative and indirect
operating expenses 3,959,227 4,021,054 11,472,253 11,126,800
Marketing and related costs 1,983,972 2,074,013 5,767,524 5,877,531
Depreciation 355,950 374,110 1.048,337 1,174,171
------------ ------------ ----------- ------------
Total operating costs & expenses 15,630,970 15,516,831 45,465,777 43,027,697
------------ ------------ ----------- ------------
Income (loss) from operations 24,364 (417,421) 230,702 (258,066)
Interest expense 34,049 19,290 63,375 50,914
Interest income 174,489 182,151 495,158 548,684
------------ ------------ ------------ -----------
Income (loss) before income taxes 164,804 (254,560) 622,485 239,704
Income tax provision (benefit):
Federal 55,151 (45,505) 205,900 113,493
State 20,515 (13,501) 73,849 26,920
Deferred (38,880) 12,369 (94,399) 64,957
------------ ------------ ------------ ------------
36,786 (46,637) 185,350 205,370
------------ ------------ ------------ ------------
Net Income (loss) $128,018 ($207,923) $477,135 $34,334
============ ============ ============ ============
Net income (loss) per common share:
Basic and Diluted $0.03 ($0.05) $0.12 $0.01
============ ============ ============ ============
Weighted average common shares
outstanding: Basic 3,949,330 3,949,330 3,949,330 3,958,640
============ ============ ============ ============
Diluted 3,962,631 3,953,090 3,961,840 3,962,449
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
Ecology & Environment, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
-------------------------
May 2, April 26,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 477,135 $ 34,334
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,048,337 1,174,171
Provision for contract adjustments 390,200 19,475
(Increase) decrease in:
- contracts receivable 3,832,590 819,980
- other current assets (356,923) 589,890
Increase (decrease) in:
- accounts payable (563,599) (2,055,585)
- accrued payroll costs (244,875) (1,002,770)
- other accrued liabilities 132,351 176,867
- income taxes payable (184,583) ---
Other, net (93,818) (44,334)
----------- -----------
Net cash provided by (used in) operating activities 4,436,815 (287,972)
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (995,482) (704,863)
Purchase of investment securities (513,139) (473,959)
Investment in China joint venture --- (148,396)
----------- -----------
Net cash used in investing activities (1,508,621) (1,327,218)
----------- -----------
Cash flows used in financing activities:
Dividends Paid (631,892) (632,901)
Repayment of long-term debt (44,791) (65,625)
Repurchase of common stock --- (175,000)
----------- -----------
Net cash used in financing activities (676,683) (873,526)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,251,511 (2,488,716)
Cash and cash equivalents at beginning of year 3,714,898 8,080,524
----------- -----------
Cash and cash equivalents at end of year $5,966,409 $5,591,808
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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 May 2, 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, 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 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
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contract adjustments accounts represents a reserve against possible
adjustments for fiscal years 1990 through 1998.
d. Income Taxes
The Company uses the liability method for its accounting for income
taxes. Under the liability method, a deferred tax liability or
asset is recognized for the tax consequences of all events that
have been recognized in the financial statements. The deferred tax
consequences of such events are equal to the expected amount of
taxes payable or refundable in future years, based upon tax laws
currently in effect.
2. Contract Receivables
Contract receivables are comprised of:
May 2, July 31,
1998 1997
------------ ------------
United States government
Billed $ 6,339,429 $ 7,959,278
Unbilled 6,410,931 8,214,653
------------ ------------
12,750,360 16,173,931
------------ ------------
Industrial customers and state
and municipal governments
Billed 5,160,980 6,608,240
Unbilled 4,832,501 4,103,110
------------ ------------
9,993,481 10,711,350
------------ ------------
Less allowance for contract
adjustments (985,474) (904,124)
------------ ------------
$21,758,367 $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
year-to-date provisional billings in excess of year-to-date actual
contract costs incurred and fees earned of $0 at May 2, 1998, and
$3,026,000 at July 31, 1997. Management anticipates that the May
2, 1998 unbilled receivables will be substantially billed and
collected in fiscal year 1998. Within the above billed balances
are contractual retainages in the amount of approximately
$1,723,000 at May 2, 1998 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 $2,192,000 at
May 2, 1998 and $2,028,000 at July 31, 1997.
<PAGE>
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 and is effective for
financial statements for both interim and annual periods ending
after December 15, 1997. SFAS No. 128 requires that all prior
period earnings per share data be restated to conform with the
provisions of the statement. SFAS No. 128 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.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity.
The computations of basic and diluted earnings per share follow:
Three months ended Nine months ended
May 2, April 26, May 2, April 26,
1998 1997 1998 1997
Income/(loss) available
to common stockholders $128,018 $(207,923) $477,135 $ 34,334
Weighted-average
shares outstanding 3,949,330 3,949,330 3,949,330 3,958,640
Basic earnings/(loss)
per share $0.03 $(0.05) $0.12 $0.01
Incremental shares from
assumed conversions of
stock options 13,301 3,760 12,510 3,809
Adjusted weighted-average
shares outstanding 3,962,631 3,953,090 3,961,840 3,962,449
Diluted earnings/(loss)
per share $0.03 $0.05 $0.12 $0.01
At May 2, 1998 there were 90,853 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 April 26, 1997 there were 127,582 stock options
outstanding with an exercise price ranging from $9.00 - $16.08 which
were not included.
<PAGE>
PART I - ITEM 2
_______________
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
___________________
As of May 2, 1998, the Company's working capital balance decreased $.2
million to $30.9 million as compared to $31.1 million at July 31, 1997. Net
contracts receivable decreased $4.2 million dueprincipally to the payment
of a few significant receivables with the United States federal government
and an overall improvement in the invoicing and collection of outstanding
receivables. Cash and cash equivalents increased $2.3 million mainly as a
result of the aforementioned decline in receivables, offset in large
measure by cash expenditures for investing and financing activities and
payments of accounts payable and accrued payroll costs. The Company's
accounts payable and accrued payroll costs decreased $.6 million and
$.2 million, respectively, due primarily to the timing of payments.
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 May 2, 1998 and none were
required during the third 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
May 2, 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 third quarter of fiscal year 1998 were $15.7
million, up 4% from the $15.1 million reported in the third quarter of
fiscal year 1997. The increase in net revenues was due primarily to an
increase in sales recognized from the Company's international clients. In
particular, the Company's Venezuelan subsidiary experienced substantial
sales growth as the firm continued to expand its business with oil industry
clients in South America. Also, the Company's third quarter of fiscal year
1998 net revenues with the United States Department of Defense (DOD) were
up slightly from like revenues generated in the third quarter of the prior
year.
Net income for the third quarter of fiscal year 1998 was $128,000, or
$.03 per share, up from the net loss of $208,000, or a loss of $.05 per
share, recorded in the third quarter of fiscal year 1997. The increase in
earnings was a result of the aforementioned increase in net revenues and
a reduction in the Company's indirect operating costs. Third quarter of
fiscal year 1998 indirect operating costs decreased by $150,000 versus the
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same quarter of last year and were 38% of net sales as compared to 40.3% of
net sales for the third quarter of fiscal year 1997. Also, in the third
quarter of fiscal year 1998 the organization did not record a tax provision
on the income from the Venezuelan subsidiary due to prior years' loss
carryforwards. Operating margins in the period realized from the Company's
Analytical Services Center continued to be adversely affected by pricing
pressures.
Overall net revenues for the nine months ending May 2, 1998 were
$45.7 million, up 7% from the $42.8 million recorded in the first nine
momths of fiscal year 1997. Net income for the current nine month period
was $477,000, or $.12 per share, up from the $34,000, or $.01 per share,
recognized in the first nine months of the previous year.
Year 2000 Compliance
____________________
The Company believes that updating its computer system to accommodate
issues that will arise as a result of reaching year 2000 will not have a
significant impact on any future results of the Company. The Company has
committed to purchase year 2000 compliant computer systems which will be
fully implemented before that date. The Company believes the cost of this
upgrade will be immaterial to the future operating results while providing
greater flexibility and functionality to many of the Company's operating
systems.
<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: June 12, 1998 By: /s/ Ronald L. Frank
Ronald L. Frank
Executive Vice President
Chief Financial Officer
(Principal Financial
Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> MAY-2-1998
<CASH> $5,966,409
<SECURITIES> $7,599,174
<RECEIVABLES> $21,758,367
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> $38,773,764
<PP&E> $12,800,121
<DEPRECIATION> 000
<TOTAL-ASSETS> $52,464,119
<CURRENT-LIABILITIES> $7,873,121
<BONDS> $562,500
<COMMON> $15,960,195
000
000
<OTHER-SE> $28,068,303
<TOTAL-LIABILITY-AND-EQUITY> $52,464,119
<SALES> $45,696,479
<TOTAL-REVENUES> $56,154,769
<CGS> 000
<TOTAL-COSTS> $45,465,777
<OTHER-EXPENSES> 000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> $63,375
<INCOME-PRETAX> $662,485
<INCOME-TAX> $185,350
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> $477,135
<EPS-PRIMARY> $0.12
<EPS-DILUTED> 000
</TABLE>
