Page 1 of 11
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 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 December 1, 1999, 2,197,142 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 11
<TABLE>
Ecology and Environment, Inc.
Consolidated Balance Sheet
(Unaudited)
<CAPTION>
October 30, 1999 July 31, 1999
---------------- -------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,636,857 $ 5,209,882
Investment securities available for sale 4,507,827 5,468,620
Contract receivables, net 24,785,251 23,529,043
Deferred income taxes 1,397,501 1,565,144
Income taxes receivable 489,907 571,094
Other current assets 1,018,759 585,199
------------ ------------
Total current assets 36,836,102 36,928,982
Property, building and equipment, net 14,316,793 14,530,109
Deferred income taxes 341,328 313,182
Other assets 1,355,836 922,461
------------ ------------
Total assets $52,850,059 $52,694,735
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 3,376,070 $ 3,634,114
Accrued payroll costs 3,808,857 2,240,904
Other accrued liabilities 2,086,268 3,550,878
------------ ------------
Total current liabilities 9,271,195 9,425,896
Income Tax Payable 17,471 17,471
Minority Interest in Aquaculture Facility 208,224 211,651
Long-term debt 502,564 515,625
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 - 2,375,302 and 2,364,302 shares 23,752 23,752
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,794,987 and 1,805,987 shares 17,946 17,946
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 26,739,021 26,412,508
Teasury stock - Class A Common, 177,060 and
183,310 shares; Class B common, 26,259
shares, at cost (1,504,079) (1,504,079)
------------ ------------
Total shareholders' equity 42,868,076 42,541,563
------------ ------------
Total liabilities and shareholders' equity $52,850,059 $52,694,735
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
Page 3 of 11
<TABLE>
Ecology and Environment, Inc.
Consolidate Statement of Income
(Unaudited)
<CAPTION>
Three months ended
------------------------------
October 30, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Gross revenues $20,171,316 $16,927,330
Less: direct subcontract costs 3,400,313 1,690,672
------------ ------------
Net revenues 16,771,003 15,236,658
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 9,683,888 8,868,033
Administrative and indirect operating
expenses 4,211,293 3,935,128
Marketing and related costs 2,129,272 1,875,677
Depreciation 347,243 338,738
------------ ------------
Total operating costs & expenses 16,371,696 15,017,576
------------ ------------
Income from operations 399,307 219,082
Interest (expense) (23,035) (18,387)
Interest income 160,012 168,821
Minority Interest 3,427 ---
Net foreign currency exchange gain 1,402 ---
------------ ------------
Income before income taxes 541,113 369,516
Income tax provision (benefit):
Federal 211,611 109,485
State 119,870 35,766
Deferred (116,881) 20,969
------------ ------------
214,600 166,220
------------ ------------
Net income $326,513 $203,296
============ ============
Net income per common share: Basic and Diluted $0.08 $0.05
============ ============
Weighted average common shares outstanding:
Basic 3,967,347 3,960,720
============ ============
Diluted 3,967,347 3,969,868
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
Page 4 of 11
<TABLE>
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<CAPTION>
Three months ended
------------------------------
October 30, October 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 326,513 $ 203,296
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 347,243 338,738
Loss on disposition of property and equipment 31,030 ---
Minority Interest in Aquaculture Facility (3,427) ---
Provision for contract adjustments 103,000 21,000
(Increase) decrease in:
- contracts receivable, net (1,359,208) (755,169)
- other current assets (433,560) (103,069)
- income taxes receivable 220,684 ---
- other non-current assets (433,375) (16,653)
Increase (decrease) in:
- accounts payable (258,044) (1,645,047)
- accrued payroll costs 1,567,953 1,115,899
- other accrued liabilities (1,464,610) 197,329
----------- -----------
Net cash used in operating activities (1,355,801) (643,676)
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (118,531) (274,619)
Proceeds from sale of assets (46,425) ---
Payment for the purchase of bond (39,207) (49,738)
Proceeds from sale of investment securities 1,000,000 ---
Investment in subsidiaries --- 7,314
Investment in China joint ventures --- (11,802)
----------- -----------
Net cash provided by (used in)investing activities 795,837 (328,845)
----------- -----------
Cash flows used in financing activities:
Repayment of long-term debt (13,061) (2,985)
----------- -----------
Net cash used in financing activities (13,061) (2,985)
----------- -----------
Net decrease in cash and cash equivalents (573,025) (975,506)
Cash and cash equivalents at beginning of period 5,209,882 6,627,164
----------- -----------
Cash and cash equivalents at end of period $4,636,857 $5,651,658
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
Page 5 of 11
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 October 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, 1999 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 1991 and are currently in process for fiscal years 1992
through 1994. The majority of the balance in the allowance for
contract adjustments accounts represents a reserve against possible
adjustments for fiscal years 1992 through 1999.
Page 6 of 11
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 30, July 31,
1999 1999
------------ ------------
United States government
Billed $ 5,302,633 $ 4,049,963
Unbilled 5,291,654 5,112,599
------------ ------------
10,594,287 9,162,562
------------ ------------
Industrial customers and state
and municipal governments
Billed 9,311,315 9,348,639
Unbilled 6,025,383 6,110,576
------------ ------------
15,336,698 15,459,215
------------ ------------
Less allowance for contract
adjustments (1,145,734) (1,092,734)
------------ ------------
$24,785,251 $23,529,043
============ ============
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
($133,855) at October 30, 1999 and $465,000 at July 31, 1999.
Management anticipates that the October 30, 1999 unbilled
receivables will be substantially billed and collected in fiscal
year 2000. Within the above billed balances are contractual
retainages in the amount of approximately $1,658,527 at
October 30, 1999 and $1,914,000 at July 31, 1999. Included in other
Page 7 of 11
accrued liabilities is an additional allowance for contract
adjustments relating to potential cost disallowances on amounts
billed and collected in current and prior years' projects of
approximately $1,876,000 at October 30, 1999 and July 31, 1999.
3. Earnings Per Share
-------------------
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings per Share," which
modifies the way in which earnings per share ("EPS") is calculated.
Accordingly, all prior period EPS data (1997) presented has been
restated. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that would 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 Company.
4. Segment Reporting
-----------------
Ecology and Environment, Inc. has three reportable segments: consulting
services, analytical laboratory services, and aquaculture. The
consulting services segment provides broad based environmental services
encompassing audits and impact assessments, surveys, air and water
quality management, environmental engineering, environmental infrastruc-
ture planning, and industrial hygiene and occupational health studies to
a world wide base of customers. The analytical laboratory provides
analytical testing services to industrial and governmental clients for
the analysis of waste, soil and sediment samples. The shrimp aquaculture
facility, located in Costa Rica, was purchased on July 30, 1999.
Consequently, there was virtually no reportable segment activity for
fiscal year 1999. This facility will produce shrimp grown in a controlled
environment for markets worldwide.
The Company evaluates segment performance and allocates resources based on
operating profit before interest income/expense and income taxes. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intercompany
sales from the analytical services segment to the consulting segment are
recorded at market selling price, intercompany profits are eliminated.
The Company's reportable segments are separate and distinct business units
that offer different products. Consulting services are sold on the basis
of time charges while analytical services and aquaculture products are
sold on the basis of product unit prices.
Page 8 of 11
Reportable segment data for the three months ended October 30, 1999 is as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Consulting Analytical Aquaculture Total
----------- ----------- ----------- -----------
Net revenues from external customers $15,653,485 $ 685,166 --- $16,338,651
Intersegment revenues --- 432,352 --- 432,352
----------- ---------- ----------- -----------
Total consolidated net revenues $15,653,485 $1,117,518 --- $16,771,003
=========== =========== =========== ===========
Depreciation expense 230,347 94,792 22,104 347,243
Segment profit (loss) 608,471 (174,894) (34,270) 399,307
Segment Assets 43,234,614 7,176,000 2,439,445 52,850,059
Expenditures for long-lived assets 68,950 3,677 36,132 108,759
</TABLE>
Geographic Information:
Net Long-lived
Revenues (1) Assets
------------ ------------
United States $15,507,003 $33,400,535
Foreign countries $1,264,000 $2,264,002
(1) Net revenues are attributed to countries based on the location of the
customers.
Reportable segments for the three months ended October 31, 1998 are as
follows:
Consulting Analytical Total
----------- ----------- -----------
Net revenues from external customers $14,014,688 $ 608,921 $14,623,609
Intersegment net revenues --- 613,049 613,049
----------- ----------- -----------
Total consolidated net revenues $14,014,688 $1,221,970 $15,236,658
=========== ========== ===========
Depreciation expense 247,212 91,526 338,738
Segment profit (loss) 541,580 (322,498) 219,082
Segment Assets 45,608,633 7,347,000 52,955,633
Expenditures for long-lived assets 300,344 76,295 224,049
Geographic Information:
Net Long-lived
Revenues (1) Assets
------------- ------------
United States $13,929,658 $33,774,400
Foreign countries 1,307,000 112,584
(1) Net revenues are attributed to countries based on the location of the
customers.
Page 9 of 11
PART 1 - ITEM 2
- ----------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
- -------------------
As of October 30, 1999, the Company's working capital balance of $27.5
million was unchanged since July 31, 1999. Cash and cash equivalents
decreased $.5 million due to a $1.3 million increase in contracts
receivable offset by $1.0 million received from the sale of investment
securities. The increase in contracts receivable was 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 October 30, 1999 and none were required during
the fiscal quarter. 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 30,
1999. The Company's exiting 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 2000 were $16.8 million,
up $1.6 million or 10% from the $15.2 million reported in the first quarter
of the prior year. The increase in net revenues was due primarily to
increased sales from contracts with the United States Environmental
Protection Agency (EPA) as well as increased net revenues from the United
States Department of Defense (DOD).
Net income for the first quarter of fiscal year 2000 was $327,000 or $.08
per share, an increase of 61% from the $203,000 or $.05 per share reported
in the first quarter of fiscal year 1999. The increase in earnings was
primarily due to significant improvement in the Company's Analytical
Services Center (ASC) operation. The ASC operating losses were reduced by
45% from the first quarter of the prior year as a result of efficiency
gains realized from the Company's new laboratory information handling
system installed in fiscal year 1999 as well as reduced operating costs in
the ASC. The Company reduced its ASC operating costs by $800,000 on an
annualized basis in fiscal 1999 and these reduced costs are now benefitting
current operations. In addition, increased net revenues from the START
contracts and DOD clients resulted in increased staff utilization and
improved margins in the Company's consulting business.
Year 2000 Compliance
- --------------------
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, computer systems
Page 10 of 11
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 ("Y2K")
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 were not Year 2000
compliant and have been replaced. The financial systems software was
upgraded and implemented effective August 1, 1998 while the new compliant
sample tracking software was upgraded and replaced in July 1999.
The cost of the Company's Year 2000 compliance upgrade was funded from
current operations and did not 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 was approximately $700,000
including $200,000-$250,000 for internal labor costs.
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. 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. The Company has been
advised 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. The Company conducts business in many overseas
markets, although no individual market represents a material risk. The
Company is unaware of the state of Y2K readiness in any individual overseas
market.
Based on the progress the Company has made to date in addressing its Year
2000 issues, the Company does not foresee significant risks associated with
these efforts at this time. Since the Company adopted a plan to address
these issues in a timely manner, it has not developed a comprehensive
contingency plan.
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 11
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, 1999 By: /s/ Ronald L. Frank
-------------------------
Ronald L. Frank
Executive Vice President
Chief Financial Officer
(Principal Financial
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 4,637
<SECURITIES> 4,508
<RECEIVABLES> 24,785
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,836
<PP&E> 14,317
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,850
<CURRENT-LIABILITIES> 9,271
<BONDS> 503
<COMMON> 16,129
0
0
<OTHER-SE> 26,739
<TOTAL-LIABILITY-AND-EQUITY> 52,850
<SALES> 16,771
<TOTAL-REVENUES> 20,171
<CGS> 0
<TOTAL-COSTS> 16,372
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 541
<INCOME-TAX> 327
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
