SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended January 29, 2000 Commission File #1-9065
ECOLOGY AND ENVIRONMENT, INC.
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(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
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(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 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 9, 2000, 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
Ecology and Environment, Inc.
Consolidated Balance Sheet
January 29, 2000
(Unaudited) July 31, 1999
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Assets
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Current assets:
Cash and cash equivalents $ 3,130,774 $ 5,209,882
Investment securities available for sale 3,888,315 5,468,620
Contract receivables, net 23,360,182 23,529,043
Deferred income taxes 1,639,355 1,565,144
Income taxes receivable 422,463 571,094
Other current assets 1,807,126 585,199
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Total current assets 34,248,215 36,928,982
Property, building and equipment, net 14,192,972 14,530,109
Deferred income taxes 341,328 313,182
Other assets 1,017,288 922,461
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Total assets $49,799,803 $52,694,735
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,883,461 $ 3,634,114
Accrued payroll costs 2,420,111 2,240,904
Other accrued liabilities 2,460,301 3,550,878
------------ ------------
Total current liabilities 6,763,873 9,425,896
Minority interest 235,343 211,651
Long-term debt 496,875 515,625
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 2,375,302 shares 23,752 23,752
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,794,987 and 1,794,987 shares 17,946 17,946
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 26,174,657 26,412,508
Teasury stock - Class A Common, 177,060 and
177,060 shares; Class B common, 26,259
shares, at cost (1,504,079) (1,504,079)
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Total shareholders' equity 42,303,712 42,541,563
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Total liabilities and shareholders' equity $49,799,803 $52,694,735
============ ============
The accompanying notes are an integral part of these financial statements.
Page 3 of 11
Ecology and Environment, Inc.
Consolidated Statement of Income
(Unaudited)
Six months ended
------------------------------
January 29, January 30,
2000 1999
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Gross revenues $40,696,732 $34,919,617
Less: direct subcontract costs 7,435,855 4,579,856
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Net revenues 33,260,877 30,339,761
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 19,454,979 17,818,021
Administrative and indirect operating
expenses 8,300,610 7,944,120
Marketing and related costs 4,234,208 3,697,311
Depreciation 699,669 649,537
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Total operating costs & expenses 32,689,466 30,108,989
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Income from operations 571,411 230,772
Interest expense (38,493) (31,765)
Interest income 262,574 351,452
Minority interest (23,692) ---
Net foreign currency exchange loss (7,847) (145,461)
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Income before income taxes 763,953 404,998
Income tax provision (benefit):
Federal 321,621 50,531
State 148,000 22,624
Deferred (102,357) 60,810
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Total income tax provision (benefit) 367,264 133,965
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Net income $396,689 $271,033
============ ============
Net income per common share: Basic and Diluted $0.10 $0.07
============ ============
Weighted average common shares outstanding:
Basic 3,966,608 3,960,720
============ ============
Weighted average common shares outstanding:
Diluted 3,966,608 3,969,510
============ ============
The accompanying notes are an integral part of these financial statements.
Page 4 of 11
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
------------------------------
January 29, January 30,
2000 1999
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Cash flows from operating activities:
Net income $ 396,689 $ 271,033
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 699,669 649,537
Gain on disposition of property and equipment 8,040 ---
Minority interest 23,692 ---
Provision for contract adjustments 193,000 21,250
(Increase) decrease in:
- contracts receivable, net (24,139) (1,021,930)
- other current assets (1,221,927) 326,390
- income taxes receivable 46,274 ---
- other non-current assets (94,827) (23,697)
Increase (decrease) in:
- accounts payable (1,750,654) (1,519,415)
- accrued payroll costs 179,207 16,173
- other accrued liabilities (1,090,577) 397,812
----------- -----------
Net cash used in operating activities (2,635,553) (900,847)
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Cash flows used in investing activities:
Purchase of property, building and equipment, net (225,234) (341,641)
Proceeds from sale of assets (145,337) ---
Payment for the purchase of bond (95,353) (117,256)
Proceeds from maturity of notes 500,658 ---
Proceeds from sale of investment securities 1,175,000 ---
Investment in subsidiaries --- 7,314
Investment in China joint ventures --- (20,601)
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Net cash provided by (used in)investing activities 1,209,734 (472,184)
----------- -----------
Cash flows used in financing activities:
Dividends paid (634,539) (633,675)
Repayment of long-term debt (18,750) (18,779)
----------- -----------
Net cash used in financing activities (653,289) (652,454)
----------- -----------
Net decrease in cash and cash equivalents (2,079,108) (2,025,485)
Cash and cash equivalents at beginning of period 5,209,882 6,627,164
----------- -----------
Cash and cash equivalents at end of period $3,130,774 $4,601,679
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 5 of 11
ECOLOGY AND ENVIRONMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting principles
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a. Consolidation
The consolidated financial statements include the accounts of Ecology and
Environment, Inc. (the Company) and its subsidiaries. Also reflected in
the financial statements is the Company's 66 2/3% ownership in the assets
of a nonoperating Company's 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 29, 2000
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.
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 futures tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. Although realization is not assured, management
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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 29, July 31,
2000 1999
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United States Government
Billed $6,536,380 $4,049,963
Unbilled 2,739,738 5,112,599
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9,276,118 9,162,562
Industrial customers and
state and municipal
governments
Billed 10,012,807 9,348,639
Unbilled 5,321,991 6,110,576
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15,334,798 15,459,215
Less allowance for contract
adjustments (1,250,734) (1,092,734)
------------ ------------
$23,360,182 $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
($96,349) at January 29, 2000 and $465,000 at July 31, 1999. Management
anticipates that the January 29, 2000 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
$1,717,874 and $1,914,000 at July 31, 1999. Included in other 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 January 29, 2000 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. 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.
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4. Acquisition
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In September 1999 the Company, through it's Chilean subsidiary, acquired a
50.1% stake in Gestion Ambiental Consultores, (GAC), a Chilean environmental
consulting firm for a cash payment of $400,000. GAC has expertise in
mining, steel manufacturing and energy resources. The following information
presents the pro forma consolidated results of operations as if the
acquisition had occurred on August 1, 1998. The pro forma amounts may not
be indicative of the results that actually would have been achieved had the
acquisition occurred as of August 1, 1998 and are not necessarily indicative
of future results.
Six Months Ended
January 30, 1999
(Unaudited)
------------------------
Net sales 30,725,794
Income before taxes 382,202
Net income 246,127
Net income per share $.06
5. 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
infrastructure 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 service and aquaculture
products are sold on the basis of product unit prices.
Page 8 of 11
Reportable segment data for the six months ended January 29, 2000 are as
follows:
Consulting Analytical Aquaculture Total
----------- ----------- ----------- -----------
Net revenues from external customers $30,918,303 $1,357,765 $246,926 $32,522,994
Intersegment revenues --- 737,883 --- 737,883
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Total consolidated net revenues $30,918,303 $2,095,648 $246,926 $33,260,877
Depreciation expense 455,565 188,787 55,317 699,669
Segment profit (loss) 1,104,709 (449,448) (83,850) 571,411
Segment Assets 38,360,489 8,233,000 3,206,314 49,799,803
Expenditures for long-lived assets 411,101 47,780 141,488 221,833
Geographic Information:
Net Long-lived
Revenues (1) Assets
------------ ------------
United States $30,624,877 $33,534,070
Foreign countries $2,636,000 $2,393,000
(1) Net revenues are attributed to countries based on the location of the
customers.
Reportable segment data for the six months ended January 30, 1999 are as
follows:
Consulting Analytical Total
----------- ----------- -----------
Net revenues from external customers $28,245,495 $1,029,186 $29,274,681
Intersegment net revenues --- 1,065,080 1,065,080
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Total consolidated net revenues $28,245,495 $2,094,266 $30,339,761
Depreciation expense 463,462 86,075 649,537
Segment profit (loss) 1,241,162 (1,010,440) 230,722
Segment Assets 44,857,735 7,837,000 52,694,735
Expenditures for long-lived assets 236,150 76,295 312,445
Geographic Information:
Net Long-lived
Revenues (1) Assets
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United States $27,075,761 $33,850,982
Foreign countries $3,264,000 $124,398
(1) Net revenues are attributed to countries based on the location of the
customers
Page 9 of 11
PART 1 - ITEM 2
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
- -------------------
As of January 29, 2000, the Company's working capital balance of $27.5
million was unchanged since July 31, 1999. Cash and cash equivalents
decreased $2.0 million due to a $2.7 million decrease in accounts payable
and accrued liabilities offset by $1.5 million received from the sale
of investment securities. Contracts receivable decreased slightly
despite increased gross revenues.
The Company maintains an unsecured line of credit of $10.0 million with
a bank at 1/2% below the prevaling prime rate. There are no borrowings
outstanding under this line of credit at January 29, 2000 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, investment securities and the
payment of dividends. There are no significant working capital
requirements pending at January 29, 2000. 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 2000 were $16.5 million,
up $1.4 million or 9% from the $15.1 million reported in the second quarter
of the prior year. The increase in net revenues was due primarily to
increased sales from contracts with the United States Department of
Defense as well as increased net revenues from private commercial clients.
Net income for the second quarter of fiscal year 2000 was $70,000 or $.02
per share, consistent with the $68,000 or $.02 per share reported in the
second quarter of fiscal year 1999. Improved operating margins realized
in the second quarter of FY 2000 compared to the prior year was offset by
a drop in interest income of approximately $80,000. Interest income has
declined as a result of the Company's investments in aquaculture and the
purchase of a controlling interest in a Chilean company. In addition,
net income was also reduced by losses from the Company's Venezuelan
subsidiary as that country experiences difficulties related to the
recent elections.
The Company continues to benefit from efficiency gains implemented in its
Analytical Services Center (ASC) operations. Despite flat revenues, the
operating loss in the ASC has been reduced by more than 50% compared to
the prior year.
Net revenues for the six months ending January 29, 2000 were $33.3 million,
an increase of 10% from the $30.3 million reported in the first half of
fiscal year 1999. Net income for the current six months was $397,000 or
$.10 per share, an increase of 46% from the prior year. The increased net
revenues are primarily due to increased work with the United States
Department of Defense and private commercial clients. The increased net
income is mainly attributable to the aforementioned efficiency improvements
in the ASC as well as improved margins in the Company's consulting business
due to the increased revenues.
Page 10 of 11
Impact of Year 2000
- -------------------
The Year 2000 issue concerns the ability of computer hardware and software
to distinguish between the year 1900 and the year 2000. An inability to make
this distinction could result in computer application failure. Prior to
the year 2000, the Company completed a detailed assessment of all its
information technology and non-information technology hardware and software
with regard to the Year 2000 issue. Information and non-information
technology hardware and software were inventoried and those not Year 2000
ready were identified, remediated (i.e., corrected or replaced) and tested
to ensure that they would, in fact, operate as desired according to Year
2000 requirements. The Company expensed aproximately $700,000 in connection
with remediating its systems. As a result of its Year 2000 readiness
efforts, the Company's mission critical information technology and non-
information technology systems successfully distinguished between the year
1900 and the year 2000 on January 1, 2000 without any mission critical
application failure. However, the Company will continue to monitor its
mission critical computer applications throughout the year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.
PART 2 - OTHER INFORMATION
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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, 1999 which is incorporated herein
by reference.
Item 2, Changes in Securities.
- ------------------------------
(a) Not Applicable.
(b) Not Applicable.
Item 3, 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 13, 2000.
(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. Cellino; 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, 2000
Page 11 of 11
was approved by the Registrant's shareholders in the following
manner: (i) the holders of Class A Common Stock voted as follows:
206,713.3 votes were cast in favor, 349.5 votes were cast against
this proposal and 398.2 votes abstained (representing 2,067,133
shares, 3,495 shares and 3,982 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: 1,237,155 votes were cast in favor,
- -0- votes cast against this proposal and -0- 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.
Item 6, Exhibits and Reports on Form 8-K.
- -----------------------------------------
Not Applicable.
Not Applicable.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, 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 13, 2000 By: /n/ Ronald L. Frank
-------------------------
Executive Vice President
Chief Financial Officer
(Principal Financial
Accounting Officer)