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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 January 30, 1999 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 March 1, 1999, 2,191,742 shares of Registrant's Class A Common Stock
(par value $.01) and 1,768,728 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>
January 30, 1999
(Unaudited) July 31, 1998
---------------- -------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,601,679 $ 6,627,164
Investment securities available for sale 7,890,841 7,773,585
Contract receivables, net 22,481,264 21,480,584
Deferred income taxes 1,958,048 1,976,922
Income taxes receivable 406,230 356,641
Other current assets 498,004 855,109
------------ ------------
Total current assets 37,836,066 39,070,005
Property, building and equipment, net 12,560,048 12,856,938
Deferred income taxes 268,728 268,728
Other assets 917,448 880,464
------------ ------------
Total assets $51,582,290 $53,076,135
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,733,789 $ 3,253,204
Accrued payroll costs 3,191,671 3,175,498
Other accrued liabilities 2,974,231 2,594,419
------------ ------------
Total current liabilities 7,899,691 9,023,121
Long-term debt 534,346 553,125
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 - 2,372,002 and 2,364,302 shares 23,720 23,643
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,798,287 and 1,805,987 shares 17,979 18,056
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 27,073,024 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 43,148,253 43,499,889
------------ ------------
Total liabilities and shareholders' equity $51,582,290 $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 Six months ended
--------------------------- ---------------------------
January 30, January 31, January 30, January 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenues $17,992,287 $16,422,674 $34,919,617 $35,796,026
Less: direct subcontract costs 2,889,184 2,280,591 4,579,856 5,754,881
------------ ------------ ------------ ------------
Net revenues 15,103,103 14,142,083 30,339,761 30,041,145
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 8,949,988 8,363,654 17,818,021 17,845,842
Administrative and indirect operating
expenses 4,008,992 3,690,334 7,944,120 7,513,026
Marketing and related costs 1,821,634 1,886,329 3,697,311 3,783,552
Depreciation 310,799 337,778 649,537 692,387
------------ ------------ ------------ ------------
Total operating costs & expenses 15,091,413 14,278,095 30,108,989 29,834,807
------------ ------------ ------------ ------------
Income (loss) from operations 11,690 (136,012) 230,772 206,338
Interest (expense) (13,378) (14,428) (31,765) (29,326)
Interest income 182,631 160,173 351,452 320,669
Net foreign currency exchange gain (loss) (145,461) --- (145,461) ---
------------ ------------ ------------ ------------
Income before income taxes 35,482 9,733 404,998 497,681
Income tax provision (benefit):
Federal (58,954) (46,117) 50,531 150,749
State 39,841 (8,316) 60,810 53,334
Deferred (13,142) 8,331 22,624 (55,519)
------------ ------------ ------------ ------------
(32,255) (46,102) 133,965 148,564
------------ ------------ ------------ ------------
Net income $67,737 $55,835 $271,033 $349,117
============ ============ ============ ============
Net income per common share: Basic and Diluted $0.02 $0.02 $0.07 $0.09
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 3,960,720 3,949,330 3,960,720 3,949,330
============ ============ ============ ============
Diluted 3,969,151 3,964,888 3,969,510 3,961,435
============ ============ ============ ============
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>
Six months ended
------------------------------
January 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 271,033 $ 349,117
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 649,537 692,387
Provision for contract adjustments 21,250 192,000
(Increase) decrease in:
- contracts receivable, net (1,021,930) 4,757,078
- other current assets 326,390 (374,291)
Increase (decrease ) in:
- accounts payable (1,519,415) (1,190,621)
- accrued payroll costs 16,173 (568,630)
- other accrued liabilities 379,812 141,885
- income taxes payable --- (184,583)
Other, net (23,697) (19,674)
----------- -----------
Net cash provided by (used in) operating activities (900,847) 3,794,668
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (341,641) (828,714)
Purchase of investment securities (117,256) (469,785)
Investment in subsidiaries 7,314 ---
Investment in China joint ventures (20,601) ---
----------- -----------
Net cash used in investing activities (472,184) (1,298,499)
----------- -----------
Cash flows used in financing activities:
Dividends Paid (633,675) (631,892)
Repayment of long-term debt (18,779) (35,416)
----------- -----------
Net cash used in financing activities (652,454) (667,308)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,025,485) 1,828,861
Cash and cash equivalents at beginning of period 6,627,164 3,714,898
----------- -----------
Cash and cash equivalents at end of period $4,601,679 $5,543,759
=========== ===========
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 transactions
and balances have been eliminated. The consolidated balance sheet
at January 30, 1999 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
contract adjustments accounts represents a reserve against possible
adjustments for fiscal years 1990 through 1999.
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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:
January 30, July 31,
1999 1998
------------ ------------
United States government
Billed $ 4,590,839 $ 6,368,873
Unbilled 4,809,782 6,597,802
------------ ------------
9,400,621 12,966,675
------------ ------------
Industrial customers and state
and municipal governments
Billed 6,992,184 5,490,908
Unbilled 6,800,708 3,959,750
------------ ------------
13,792,892 9,450,658
------------ ------------
Less allowance for contract
adjustments (712,249) (936,749)
------------ ------------
$22,481,264 $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 actual contract costs incurred and fees earned of
$704,000 at January 30, 1999, and $0 at July 31, 1998. Management
anticipates that the January 30, 1999 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 $2,020,017 at January 30, 1999 and $1,801,249 at
July 31, 1998. Included in other accrued liabilities is an
additional allowance for contract adjustments relating to potential
<PAGE>
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cost disallowances on amounts billed and collected of approximately
$2,529,000 at January 30, 1999 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 and diluted earnings per share follow:
Three months ended Six months ended
-------------------- ------------------
Jan. 30, Jan. 31, Jan. 30, Jan. 31,
1999 1998 1999 1998
--------- --------- --------- ---------
Income available to
Common stockholders $67,737 $55,835 $271,033 $349,117
Weighted-average
Shares outstanding 3,960,720 3,949,330 3,960,720 3,949,330
Basic earnings per share $0.02 $0.02 $0.07 $0.09
Incremental shares from
assumed conversions of
stock options 8,431 15,558 8,790 12,105
Adjusted weighted-average
Shares outstanding 3,969,151 3,964,888 3,969,510 3,961,435
Diluted earnings per share $0.02 $0.02 $0.07 $0.09
At January 30, 1999 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 January 31, 1998 there were
90,853 stock options outstanding with an exercise price ranging from
$12.38 - $16.08 which were not included.
Page 8 of 12
PART I - ITEM 2
---------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
-------------------
As of January 30, 1999, the Company's working capital balance of $29.9
million was unchanged since the reporting period ending July 31, 1998.
Cash and cash equivalents decreased $2.0 million due to a $1.5 million
decrease in accounts payable, a $1.0 million increase in net contract
receivables and cash expenditures for investing and financing activities.
These cash outlays were partially offset by cash generated from
operations. The aforementioned decrease in accounts payable was primarily
due to the timing of payments and the payment of a few significant
subcontractor invoices subsequent to July 31, 1998.
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 January 30, 1999 and none were required
during the first half 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 January 30, 1999. 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 second quarter of fiscal year 1999 were $15.1
million, up approximately 7% from the $14.1 million reported in the second
quarter of the prior year. The increase in net revenues was due primarily
to an increase in sales recognized from the Company's five regional United
States Superfund Technical Assistance and Response Teams (START)
contracts with the United States Environmental Protection Agency (EPA).
Revenues generated from the remainder of the Company's consulting business
were steady.
Net income for the second quarter of fiscal year 1999 was $68,000, or
$.02 per share, up slightly from the $56,000, or $.02 per share, recorded
in the same period of the prior year. The slight increase in earnings was
due primarily to the increase in the Company's START contracts net
revenues. However, much of this positive effect on net income was offset
by continuing operating losses suffered by the Company's Analytical
Services Center (ASC). The Company has instituted corrective measures,
including a new laboratory information system, designed to improve
efficiencies in the ASC. The improvements will be in place by June 1999.
Also, relating to its consulting business, during the second quarter of
fiscal year 1999 the Company incurred $145,000 of foreign currency exchange
losses due to foreign currency devaluations in several overseas markets
where E & E has consulting contracts.
Overall net revenues for the six month's ending January 30, 1999 were
$30.3 million, up slightly from the $30.0 million recorded in the first
half of fiscal year 1998. Net income for the current six month period was
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$271,000, or $.07 per share, down from the $349,000, or $.09 per share,
recognized in the fist six months of the previous year. Net income for
the first half of fiscal year 1999 was adversely affected by the
aforementioned foreign currency exchange losses and increased operating
losses in the ASC.
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 one year, computer systems and/or software used by many
companies in a wide variety of applications will experience operating
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 replaced 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 materially 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
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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
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
---------------------------
Item 1, Legal Proceedings.
--------------------------
The Registrant has previously reported information for Item 1 that
is required to be presented in Item 3 of its Annual Report on Form 10-K
for its fiscal year ended July 31, 1998 which is incorporated herein by
reference.
Item 2, Changes in Securities.
------------------------------
(a) Not Applicable.
(b) Not Applicable.
Item 2, Defaults Upon Senior Securities.
----------------------------------------
The Registrant has no information for Item 3 that is required to be
presented.
Item 4, Submission of Matters to a Vote of Security Holders.
------------------------------------------------------------
(a) The Annual Meeting of Shareholders of the Registrant was held on
January 14, 1999.
(b) At such meeting, the following persons were elected as directors
by the holders of Class A Common Stock: Brent D. Baird and Ross M. Celino;
and the following directors by the holders of Class B Common Stock:
Gerhard J. Neumaier, Ronald L. Frank, Frank B. Silvestro, Gerald A.
Strobel, Gerard A. Gallagher, Jr. and Harvey J. Gross.
(c) A proposal appointing the accounting firm of PricewaterhouseCoopers
LLP as the Registrant's independent public accountant for its fiscal year
ending July 31, 1999 was approved by the Registrant's shareholders in the
following manner: (i) the holders of Class A common Stock voted as follows:
201,868.9 votes were cast in favor, 169.6 votes were cast against this
proposal and 295.1 votes abstained (representing 2,018,689 shares, and 1,696
shares and 2,951 shares voted respectively, each share of Class A Common
Stock being entitled to 1/10 of 1 vote per share for this proposal); and (ii)
the holders of Class B Common Stock voted as follows: 1,442,642 votes were
cast in favor, 118,000 votes cast against this proposal and 727 votes
abstained (each share of Class B Common Stock being entitled to one vote per
share for this proposal).
(d) Not Applicable.
Item 5, Other Information
-------------------------
The Registrant has no information for Item 5 required to be presented.
<PAGE>
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Item 6, Exhibits and Reports on Form 8-K
-------------------------------------------
(a) Not Applicable
(b) Not Applicable
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: March 11, 1999 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> JAN-30-1999
<CASH> $4,601,679
<SECURITIES> $7,890,841
<RECEIVABLES> $22,481,264
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> $37,836,066
<PP&E> $12,560,048
<DEPRECIATION> 000
<TOTAL-ASSETS> $51,582,290
<CURRENT-LIABILITIES> $7,899,691
<BONDS> $534,346
<COMMON> $16,075,229
000
000
<OTHER-SE> $27,073,024
<TOTAL-LIABILITY-AND-EQUITY> $51,582,290
<SALES> $30,339,761
<TOTAL-REVENUES> $34,919,617
<CGS> 000
<TOTAL-COSTS> $30,108,989
<OTHER-EXPENSES> 000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> $31,765
<INCOME-PRETAX> $404,998
<INCOME-TAX> $133,965
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> $271,033
<EPS-PRIMARY> $0.07
<EPS-DILUTED> $0.07
</TABLE>
