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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 May 1, 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 May 1, 1999, 2,199,542 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 2 of 12
<TABLE>
Ecology and Environment, Inc.
Consolidated Balance Sheet
<CAPTION>
May 1, 1999
(Unaudited) July 31, 1998
------------- -------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,929,573 $ 6,627,164
Investment securities available for sale 7,881,205 7,773,585
Contract receivables, net 25,052,873 21,480,584
Deferred income taxes 1,995,978 1,976,922
Income taxes receivable 509,885 356,641
Other current assets 593,004 855,109
------------ ------------
Total current assets 39,962,518 39,070,005
Property, building and equipment, net 12,444,060 12,856,938
Deferred income taxes 268,728 268,728
Other assets 926,409 880,464
------------ ------------
Total assets $53,601,715 $53,076,135
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 2,466,825 $ 3,253,204
Accrued payroll costs 4,119,243 3,175,498
Other accrued liabilities 3,334,815 2,594,419
------------ ------------
Total current liabilities 9,920,883 9,023,121
Long-term debt 525,000 553,125
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 - 2,384,052 and 2,364,302 shares 23,761 23,643
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,794,987 and 1,805,987 shares 17,937 18,056
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 27,085,854 27,424,660
Treasury stock - Class A common, 184,510 and
194,400 shares; Class B common, 26,259
shares, at cost (1,563,156) (1,557,906)
------------ ------------
Total shareholders' equity 43,155,832 43,499,889
------------ ------------
Total liabilities and shareholders' equity $53,601,715 $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 Nine months ended
-------------------------- -------------------------
May 1, May 2, May 1, May 2,
1999 1998 1999 1998
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Gross revenues $20,802,482 $20,358,743 $55,722,099 $56,154,769
Less: direct subcontract costs 4,013,257 4,703,409 8,593,113 10,458,290
------------ ------------ ------------ ------------
Net revenues 16,789,225 15,655,334 47,128,986 45,696,479
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 9,809,164 9,331,821 27,627,185 27,177,663
Administrative and indirect
operating expenses 4,567,092 3,959,227 12,511,212 11,472,253
Marketing and related costs 2,194,018 1,983,972 5,891,329 5,767,524
Depreciation 381,105 355,950 1,030,642 1,048,337
------------ ------------ ------------ ------------
Total operating costs & expenses 16,951,379 15,630,970 47,060,368 45,465,777
------------ ------------ ------------ ------------
Income (loss) from operations (162,154) 24,364 68,618 230,702
Interest (expense) (22,957) (34,049) (54,722) (63,375)
Interest income 149,887 174,489 501,339 495,158
Net foreign currency exchange gain (loss) (12,080) --- (157,541) ---
------------ ------------ ------------ ------------
Income before income taxes (47,304) 164,804 357,694 662,485
Income tax provision (benefit):
Federal (15,598) 55,151 34,933 205,900
State (37,928) 20,515 22,882 73,849
Deferred (6,608) (38,880) 16,016 (94,399)
------------ ------------ ------------ ------------
(60,134) 36,786 73,831 185,350
------------ ------------ ------------ ------------
Net income $12,830 $128,018 $283,863 $477,135
============ ============ ============ ============
Net income per common share:
Basic and Diluted $0.003 $0.03 $0.07 $0.12
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 3,964,370 3,949,330 3,963,070 3,949,330
============ ============ ============ ============
Diluted 3,969,848 3,962,631 3,970,756 3,961,840
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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<TABLE>
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
-----------------------------
May 1, May 2,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 283,863 $ 477,135
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,030,642 1,048,337
Interest earned on available for sale securities (169,652) (124,595)
Provision for contract adjustments 9,200 390,200
(Increase) decrease in:
- contracts receivable, net (3,581,489) 3,832,590
- other current assets 262,105 (356,923)
- income taxes receivable (172,300) ---
Increase (decrease ) in:
- accounts payable (786,379) (563,599)
- accrued payroll costs 973,745 (244,875)
- other accrued liabilities 740,396 132,351
- income taxes payable --- (184,583)
Other, net (34,938) (93,818)
----------- -----------
Net cash provided by (used in) operating activities (1,474,807) 4,312,220
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (617,765) (995,482)
Payment for the purchase of bond (500,658) (1,500,000)
Proceeds from maturity of notes 562,689 1,111,456
----------- -----------
Net cash used in investing activities (555,734) (1,384,026)
----------- -----------
Cash flows used in financing activities:
Dividends Paid (633,675) (631,892)
Purchase of Treasury Stock (5,250) ---
Repayment of long-term debt (28,125) (44,791)
----------- -----------
Net cash used in financing activities (667,050) (676,683)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,697,591) 2,251,511
Cash and cash equivalents at beginning of period 6,627,164 3,714,898
----------- -----------
Cash and cash equivalents at end of period $3,929,573 $5,966,409
=========== ===========
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 May 1, 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-fixed fee contracts using the percentage of completion
method based on costs incurred plus the fee earned. 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 1994. The majority of the balance in the allowance for
contract adjustments accounts represents a reserve against possible
adjustments for fiscal years 1990 through 1999.
Page 6 of 12
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:
May 1, July 31,
1999 1998
------------ ------------
United States government
Billed $ 4,750,179 $ 6,368,873
Unbilled 5,279,739 6,597,802
------------ ------------
10,029,918 12,966,675
------------ ------------
Industrial customers and state
and municipal governments
Billed 9,407,438 5,490,908
Unbilled 6,270,466 3,959,750
------------ ------------
15,677,904 9,450,658
------------ ------------
Less allowance for contract
adjustments (654,949) (936,749)
------------ ------------
$25,052,873 $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
$733,000 at May 1, 1999, and $0 at July 31, 1998. Management
anticipates that the May 1, 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 $1,930,817 at May 1, 1999 and $1,801,249 at
July 31, 1998. Included in other accrued liabilities is an
additional allowance for contract adjustments relating to potential
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cost disallowances on government contracts on amounts billed and
collected of approximately $2,529,000 at May 1, 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 Nine months ended
-------------------- ------------------
May 1, May 2, May 1, May 2,
1999 1998 1999 1998
--------- --------- --------- ---------
Income available to
Common stockholders $12,830 $128,018 $283,863 $477,135
Weighted-average
Shares outstanding 3,964,370 3,949,330 3,963,070 3,949,330
Basic earnings per share $0.003 $0.03 $0.07 $0.12
Incremental shares from
assumed conversions of
stock options 5,478 13,301 7,686 12,510
Adjusted weighted-average
Shares outstanding 3,969,848 3,962,631 3,970,756 3,961,840
Diluted earnings per share $0.003 $0.03 $0.07 $0.12
At May 1, 1999, there were 94,546 stock options outstanding with an
exercise price ranging from $9.00 - $16.08 which were not included in
the above calculation because to do so would have been antidilutive to
the calculation. At May 2, 1998, there were 90,853 stock options
outstanding with an exercise price ranging from $12.38 - $16.08 which
were also not included for the same reason.
Page 8 of 12
PART I - ITEM 2
---------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
-------------------
As of May 1, 1999, the Company's working capital balance of $30.0 million
was unchanged since the reporting period ending July 31, 1998. Cash and
cash equivalents decreased $2.6 million due to a $3.2 million increase in
accounts receivable offset by a $.5 million increase in current
liabilities. The aforementioned increase in accounts receivable was
primarily due to increased revenues.
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 1, 1999 and none were required during
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 May 1, 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 third quarter of fiscal year 1999 were $16.8 million,
up approximately 7% from the $15.7 million reported in the third quarter of
the prior year. The increase in net revenues was due primarily to a 28%
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).
Net income for the third quarter of fiscal year 1999 was $13,000, or $.003
per share, down from the $128,000, or $.03 per share, recorded in the same
period of the prior year. The decrease in earnings was due to 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 Summer 1999. Also, reduced revenues
in the remainder of the Company's consulting business resulted in reduced
margins.
Overall net revenues for the nine month's ending May 1, 1999 were $47.1
million, up from the $45.7 million recorded in the same period of fiscal
year 1998. Net income for the current nine month period was $284,000, or
$.07 per share, down from the $477,000, or $.12 per share, recognized in
the first nine months of the previous year. Net income year to date has
been adversely affected by the reduced consulting revenues and increased
operating losses in the ASC.
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
Page 9 of 12
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
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
months 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
--------------------
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. There are no other significant IT and non-IT systems affected
by this issue.
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 $500,000. The fact that
Page 10 of 12
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 for subcontracts, equipment
and supplies 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 a
broad range of federal government agencies, a failure by any one of the
U.S. Government agencies to achieve Year 2000 compliance would probably not
result in significant adverse effects on the Company's future business,
financial operations and results of operations. The Company has determined
through contacts at the Agency, that its largest customer, the U.S.
Environmental Protection Agency, has achieved Y2K compliance for all of its
mission critical systems.
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 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 11 of 12
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 12 of 12
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: June 15, 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> MAY-01-1999
<CASH> $3,929,573
<SECURITIES> $7,881,205
<RECEIVABLES> $25,052,873
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> $39,962,518
<PP&E> $12,444,060
<DEPRECIATION> 000
<TOTAL-ASSETS> $53,601,715
<CURRENT-LIABILITIES> $9,920,883
<BONDS> $525,000
<COMMON> $16,069,978
000
000
<OTHER-SE> $27,085,854
<TOTAL-LIABILITY-AND-EQUITY> $53,601,715
<SALES> $47,128,986
<TOTAL-REVENUES> $55,722,099
<CGS> 000
<TOTAL-COSTS> $47,060,368
<OTHER-EXPENSES> 000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> $54,722
<INCOME-PRETAX> $357,694
<INCOME-TAX> $73,831
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> $283,863
<EPS-BASIC> $0.07
<EPS-DILUTED> $0.07
</TABLE>
