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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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F O R M 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
or
[ ] TRANSITION REPORT REQUIRED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
Commission file number 1-9065
Ecology and Environment, Inc.
(Exact name of registrant as specified in its charter)
NEW YORK 16-0971022
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)Identification No.)
368 Pleasant View Drive, Lancaster, New York 14086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (716) 684-8060
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Class A Common Stock, American Stock Exchange, Inc.
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form
10-K or any amendments to this Form 10-K.
Exhibit Index on Page 43
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As of September 30, 1998, 2,185,692 shares of the registrant's Class
A Common Stock, $.01 par value (the "Class A Common Stock") were
outstanding, and the aggregate market value (based on the closing price as
quoted by the American Stock Exchange on September 30, 1998) of the Class A
Common Stock held by nonaffiliates of the registrant was approximately
$21,071,154. As of the same date, 1,775,028 shares of the registrant's
Class B Common Stock, $.01 par value ("Class B Common Stock") were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form S-1, as
amended by Amendment Nos. 1 and 2 (Registration No. 33-11543) as well as
portions of the Company's Form 10-K for Fiscal Years ending July 31, 1988,
July 31, 1990, July 31, 1994 and July 31, 1997 are incorporated by
reference in Part IV of this Form 10-K.
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TABLE OF CONTENTS
INDEX
PART I
Page
Item 1. BUSINESS 4
General 4
START Contracts 4
Task Order Contracts 5
Hazardous Material Services 5
Environmental Consulting Services 5
Analytical Laboratory Services 7
Regulatory Background 7
Potential Liability and Insurance 9
Market and Customers 9
Backlog 9
Competition 10
Employees 10
Item 2. PROPERTIES 10
Item 3. LEGAL PROCEEDINGS 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
Item 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES 36
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 37
Item 11. EXECUTIVE COMPENSATION 38
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS 41
SECURITY OWNERSHIP OF MANAGEMENT 42
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44
PART IV EXHIBITS, FINANCIAL STATEMENTS
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PART I
Item 1. BUSINESS
General
Ecology and Environment, Inc. ("EEI" or the "Company") is a broad based
environmental consulting and testing firm whose underlying philosophy is to
provide professional services worldwide so that sustainable economic and
human development may proceed with minimum negative impact on the
environment. The Company offers a broad range of environmental consulting
services including: environmental audits; environmental impact
assessments; terrestrial, aquatic and marine surveys; air quality
management and air toxics pollution control; environmental engineering;
noise pollution evaluations; wastewater analyses; water pollution control;
industrial hygiene and occupational health studies; archaeological and
cultural resource studies; environmental infrastructure planning, air,
water and groundwater monitoring and analytical laboratory services.
The Company employs over 75 separate disciplines embracing the
physical, biological, social and health sciences. The Company was
incorporated in February, 1970. Its principal offices are located at 368
Pleasant View Drive, Lancaster, New York and its telephone number is
716-684-8060.
START Contracts
In December 1995, the United States Environmental Protection Agency
("EPA")awarded the Company five (5) regional Superfund Technical Assessment
and Response Teams ("START") superfund contracts to provide technical
expertise in support of its hazardous waste spill response, removal and
prevention programs in the midwestern and western United States. The
Company is required to provide round the clock assistance to the EPA at
spill sites within the midwestern and western United States and, in certain
instances, may be required to respond to an emergency in other areas of the
country.
The START contracts are level of effort and cost plus fixed fee
contracts. The EPA has estimated that a certain number of labor hours are
necessary to fulfill the requirements of the contracts, and has agreed to
compensate the Company for maintaining an available work force to fulfill
those hour requirements. All of the contracts contain a base fee amount
which is fixed in the contract.
The total contract value of the five (5) START contracts, if the EPA
exercises all options within each of them, is $216 million. The base value
of the five (5) START contracts over five years is approximately $93.0
million. The Company, as of July 31, 1998, has realized total net revenues
of approximately $60.5 million under these contracts. As of July 31, 1998
the EPA had exercised 54 options totaling approximately $14.6 million in
net revenues under the START contracts. There are 502 remaining options
that have not been exercised by the EPA as of July 31, 1998. The agency
could exercise any number of these options before the contracts expire in
December 2000.
The START contracts each have a term of five (5) years. However, they
contain termination provisions under which the EPA may, without penalty,
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terminate the contract upon written notice to the Company. In the event of
termination, the Company would be paid only termination costs in accordance
with the contract.
Task Order Contracts
The Company has numerous task order contracts with state and federal
governmental agencies which contain indefinite order quantities or option
periods ranging from two to ten years. The maximum potential gross
revenues included in these contracts is approximately $349.0 million.
Hazardous Material Services
Introduction. EEI has conducted hazardous waste site evaluations
throughout the United States. In conducting these site evaluations, the
Company provides site investigation (e.g., geophysical surveys, monitoring
well installation, and sample collection and analysis), engineering design,
and operation and maintenance for a wide range of industrial and
governmental clients. In providing such services, the Company inventories
and collects sample materials on site and then evaluates waste management
practices, potential off-site impacts and liability concerns. EEI then
recommends and designs clean up programs and assists in the implementation
and monitoring of those clean up programs.
Field Investigation. The Company's field investigation services
primarily involve the development of work plans, health and safety plans
and quality assurance and quality control plans to govern field
investigations and conduct such field investigations to define the nature
and extent of contaminants at a site.
Engineering Services. After field investigation services have been
completed and the necessary approvals obtained, the Company's engineering
specialists develop plans and specifications for remedial clean up
activities. This work includes the development of methods and standard
operating procedures to assess contamination problems, and to identify,
develop and design appropriate pollution control schemes. Alternative
clean up strategies are evaluated and conceptual engineering approaches are
formulated. The Company also provides supervision of actual cleanup or
remedial construction work performed by other contractors.
Environmental Consulting Services
The Company's staff includes various individuals with advanced degrees
representing over 75 scientific and engineering disciplines which relate to
the identification, quantification, analysis, and remediation of hazards to
the environment. The Company has rendered consulting services to
industrial and government clients in the following areas:
Hazard and Risk Analysis. EEI has provided analyses of the hazards and
risks of energy transportation to facility designers, contractors, and
operators for over fifteen years. The Company has developed a proprietary
hazardous material exposure model which determines the impact of potential
energy facility accidents on a plant and its employees, as well as on the
people and property in the surrounding community. EEI's hazard and risk
analyses have considered such factors as the physics of brittle fractures,
flammable vapor clouds, cryogenic liquid release and containment, thermal
radiation effects, and replacement and rerouting strategies. In addition,
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the Company provides risk analysis for hazardous and toxic material spills
and releases as required under CERCLA and RCRA. These analyses have
evaluated human and ecological risks posed by contaminants in rural and
urban settings, and coastal, riverain, wetland and upland environments
throughout the United States.
Underground Storage Tank Management. The 1984 amendments to RCRA
created special provisions for the regulation of underground storage tanks.
Extensive federal regulations were promulgated in late 1988 which include
notification provisions, strict requirements for tank design and
installation, leak detection and monitoring and financial responsibility.
The Company's staff includes various individuals experienced in
hydrogeology, engineering and the evaluation of tank facilities for
existing and potential leakage. EEI's services also include analyzing the
corrosive potential of underground tanks, monitoring adjacent ground water,
performing soil gas monitoring or other geophysical procedures requiring
the use of drilling equipment, and establishing monitoring programs to
verify the effectiveness of mitigative programs and the status of properly
functioning tanks. EEI also designs tank removal, replacement and
monitoring programs.
Environmental Assessments. In response to the requirements of NEPA and
other state environmental laws, EEI has provided environmental evaluation
services to both the government and the private sector for more than 27
years. As part of the environmental evaluation process, EEI assists
clients in evaluating and developing methods to avoid or mitigate the
potential environmental impacts of a proposed project and to help ensure
that the project complies with regulatory requirements. EEI's services
include air and water quality analysis, terrestrial and aquatic biological
surveys, threatened and endangered species surveys and wetland
delineations, social economic studies, transportation analyses and land use
planning.
Archeological Surveys. The National Historic Preservation Act (1966),
Executive Order 11593 (1971), and NEPA require that developers of certain
projects requiring federal funding, licensing, or approval consider the
potential adverse effects of their projects on cultural resources. In
accordance with these regulations, EEI's archaeologists conduct documentary
background research and field investigations to determine the presence of
cultural resources within proposed project areas and design plans to
mitigate adverse impacts on the resources prior to project development.
Emergency Spill Response Management. The Company has developed a
twenty-four hour emergency spill response subscription program for
industrial clients. This program generally consists of the development of
a clean up plan and supervision of the clean up and disposal operations.
These functions are generally performed by dispatching a response team to
the site. The team is supported by personnel from the Company's corporate
response center. EEI's emergency preparedness and response programs are
enhanced by the use of proprietary hazard exposure models. The Company's
analytical laboratory is used to assist in the chemical identification
process.
International Services. The Company has broadened its client base to
include many international clients through the use of joint ventures and
partnerships. The Company believes that its international market offers
unique opportunities not found domestically.
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Analytical Laboratory Services
The Company provides analytical testing services to industrial and
government customers who require accurate measurements to identify and
monitor existing hazardous waste sites. The laboratory analyzes waste,
soil, sediment, air tissue and potable and non-potable water using state of
the art computer controlled instrumentation. The Company also is certified
to perform environmental testing services for some branches of the U.S.
military and a number of state agencies.
Regulatory Background
The United States Congress and most State Legislatures have enacted a
series of laws to prevent and correct environmental problems. These laws
and their implementing regulations help to create the demand for the multi-
disciplinary consulting services offered by the Company. The principal
federal legislation and corresponding regulatory programs which affect the
Company's business are as follows:
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY
ACT OF 1980, AS AMENDED ("CERCLA", "Superfund" or the "Superfund Act").
CERCLA is a remedial statute which generally authorizes the Federal
government to order responsible parties to study and clean up inactive
hazardous substance disposal sites, or, to itself undertake and fund such
activities. This legislation has four basic provisions: (i) creation of
an information gathering and analysis program; (ii) grant of federal
authority to respond to emergencies associated with contamination by
hazardous substances, and to clean up sites contaminated with hazardous
substances; (iii) imposition of joint, several, and strict liability on
persons connected with the treatment or disposal of hazardous substances
which results in a release or threatened release into the environment; and
(iv) creation of a Federally managed trust fund to pay for the clean up and
restoration of sites contaminated with hazardous substances when voluntary
clean-up by responsible parties cannot be accomplished. It is uncertain
when CERCLA will be reauthorized in order to replenish the trust fund, or
what form it will take, given the debate in Congress over the imposition of
joint and strict liability, and the call for stronger clean-up standards.
However, the trust fund is expected to support projects into the first
quarter of the government's fiscal year 2000.
THE RESOURCE CONSERVATION AND RECOVERY ACT of 1976 ("RCRA"). RCRA
generally provides "cradle to grave" coverage of hazardous wastes. It
seeks to achieve this goal by imposing performance, testing and record
keeping requirements on persons who generate, transport, treat, store, or
dispose of hazardous wastes. The Company assists hazardous waste
generators in the storage, transportation and disposal of wastes; prepares
permit applications and engineering designs for treatment, storage and
disposal facilities; designs and oversees underground storage tank
installations and removals; performs corrective measure studies and
remedial oversight at RCRA regulated facilities; and performs RCRA
compliance audits.
TOXIC SUBSTANCE CONTROL ACT OF 1976 ("TSCA"). TSCA authorizes the EPA
to gather information on the risks posed to public health and the
environment by chemicals and to regulate the manufacture, use and disposal
of chemical substances. The 1986 amendments to TSCA and its implementing
regulations require school systems to inspect their buildings for asbestos,
Page 8 of 49
determine where asbestos containing materials pose hazards to humans and
abate those hazards. Regarding PCBs specifically, amendments to TSCA
regulations dated December 21, 1989 established comprehensive record
keeping requirements for persons engaged in PCB transportation, storage and
disposal activities. Amendments effective August 28, 1998 add regulatory
provisions authorizing certain uses of PCBs; specifying additional
alternatives for the cleanup and disposal of PCBs; establishing procedures
for determining PCB concentration; establishing standards and procedures
for decontamination; and updating several marking, recordkeeping, and
reporting requirements. The Company's principal work under TSCA involves
field sampling, site reconnaissance, development of remedial programs and
supervision of construction activities at sites involving PCB
contamination. The Company also conducts asbestos surveys and
investigations.
THE NATIONAL ENVIRONMENTAL POLICY ACT ("NEPA"). NEPA generally
requires that a detailed environmental impact statement ("EIS") be prepared
for every major federal action significantly affecting the quality of the
human environment. With limited exceptions, all federal agencies are
subject to NEPA. A number of states have EIS requirements similar to NEPA.
The Company frequently engages in NEPA related projects (or state
equivalent) for both public and private clients.
CLEAN AIR ACT. In 1990, comprehensive changes were made to the Clean
Air Act which has fundamentally redefined the regulation of air
pollutants. The Clean Air Act Amendments of 1990 have created a flurry of
federal and state regulatory initiatives and industry responses which
require the development of detailed inventories and risk management plans,
as well as the acquisition of facility wide, rather than source specific,
air permits. Complementary changes have also been integrated into the RCRA
Boilers and Industrial Furnace ("BIF") regulatory programs calling for
upgraded air emission controls, more rigorous permit conditions and the
acquisition of permits and/or significant permit modifications. The
Company assists public and private clients in the development of air
permitting strategies and the preparation of permit applications. EEI also
prepares the technical studies and engineering documents (e.g., air
modeling, risk analysis, design drawings) necessary to support permit
applications.
Other. The Company's operations are also influenced by other federal
and state laws protecting the environment: e.g. the Clean Water Act
("CWA"), the Atomic Energy Act ("AEO"), the Oil Pollution Act of 1990
("OPA"), the Safe Drinking Water Act and comparable state statutory and
regulatory programs. Examples of services provided as a result of these
laws include waste water and storm water discharge permitting pursuant to
the CWA, and the development of spill prevention control and countermeasure
plans for major oil storage facilities pursuant to OPA.
Related laws such as the Occupational Safety and Health Act, which
regulates exposures of employees to toxic chemicals and other physical
agents in the workplace, also have a significant impact on EEI operations.
An example is the process safety regulation issued by the occupational
Safety and Health Administration ("OSHA") which requires safety and hazard
analysis and accidental release contingency planning activity to be
performed if certain chemicals are used in the work place.
Page 9 of 49
Potential Liability and Insurance
The Company's contracts with the EPA require it to maintain certain
insurance, including comprehensive general liability insurance for bodily
injury, death or loss of or damage to property. In addition, many of the
Company's other contracts require the Company to indemnify its clients for
claims, damages or losses for personal injury or property damage relating
to the Company's negligent performance of its duties unless such injury or
damage is the result of the client's negligence or willful acts.
Currently, the Company is able to provide insurance coverage to meet the
requirements of its contracts, however, certain pollution exclusions apply.
Since February 1990, the Company has been able to purchase an errors and
omissions insurance policy that covers its asbestos and environmental
consulting services, including legal liability for pollution conditions
resulting therefrom. The policy is a claims made policy, with limits of
$10.0 million for each claim and $10.0 million in the aggregate with a
$500,000 deductible for contracts entered into subsequent to November,
1994; for contracts entered into between February, 1990 and November, 1994,
the limits are $2.0 million for each claim and $2 million in the aggregate
with a $250,000 deductible. The Company's general liability insurance
policy provides coverage in the amount of $2.0 million per occurrence and
$3.0 million in the aggregate; an excess liability policy of $10.0 million
is also maintained with respect to its general liability coverage. In
addition, EEI has a special endorsement to its general liability insurance
policy up to $1.0 million for damages to third parties for bodily injury or
property damage resulting from sudden or accidental releases. Where
possible, the Company requires that its clients cross-indemnify it for
asserted claims. There can be no assurance, however, that any such
agreement, together with the Company's general liability insurance and
errors and omissions coverage will be sufficient to protect the Company
against any asserted claim.
Market and Customers
A substantial portion of the Company's revenues are currently derived
from the federal government under Superfund-related activities, including
the EPA, U.S. Department of Defense ("DOD")and U.S. Department of Energy
("DOE") contracts. The balance of the Company's revenues originate from
state and local governments, domestic industrial clients, and private and
governmental international clients.
Backlog
The Company's firm backlog of uncompleted projects and maximum
potential gross revenues from indefinite quantity task order contracts, at
July 31, 1998 and 1997 were as follows:
(Millions of $)
Fiscal Year Fiscal Year
Ended 7/31/98 Ended 7/31/97
Total Firm Backlog 103.4 124.6
Anticipated Completion of Firm
Backlog in Next Twelve Months 53.8 52.2
Maximum Potential Gross Revenues
from Task Order Contracts 349.0 351.0
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The above figures include $94 million of potential revenue backlog
attributable to the options under the START contracts. This backlog
includes a substantial amount of work to be performed under contracts which
contain termination provisions under which the contract can be terminated
without penalty upon written notice to the Company. The likelihood of
obtaining the full value of the task order contracts cannot be determined
at this time.
Competition
EEI is subject to competition with respect to each of the services
that it provides. No entity, including the Company, currently dominates
the environmental services industry and the Company does not believe that
one organization has the capability to serve the entire market. Some of
its competitors are larger and have greater financial resources than the
Company while others may be more specialized in certain areas. EEI
competes primarily on the basis of its reputation, quality of service,
expertise, and price.
Employees
As of July 31, 1998, the Company had over 800 employees. The
Company's ability to remain competitive will depend largely upon its
ability to recruit and retain qualified personnel. None of the Company's
employees is represented by a labor organization and employee relations are
good.
Item 2. PROPERTIES
The Company's headquarters (60,000 square feet) is located in
Lancaster, New York, a suburb of Buffalo. The Company's laboratory and
warehouse facility in Lancaster, New York consists of two buildings'
totaling approximately 50,000 square feet. The Company also leases office
and storage facilities at twenty (20) regional offices, with terms which
generally coincide with the duration of the Company's contracts in those
areas.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is named a defendant in legal actions
arising out of the normal course of business. The Company is not a party
to any pending legal proceeding the resolution of which the management of
the Company believes will have a material adverse effect on the Company's
results of operations or financial condition or to any other pending legal
proceedings other than ordinary, routine litigation incidental to its
business. The Company maintains liability insurance against risks arising
out of the normal course of business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Principal Market or Markets. The Company's Class A Common Stock
is traded on the American Stock Exchange. There is no separate market for
the Company's Class B Common Stock.
The following table represents the range of high and low prices of
the Company's Class A Common Stock as reported by the American Stock
Exchange for the periods indicated.
Fiscal 1997 High Low
First Quarter
(commencing August 1, 1996 - 8-7/8 7
October 26, 1996)
Second Quarter
(commencing October 27, 1996 - 9-5/8 7-1/2
January 26, 1997)
Third Quarter
(commencing January 26, 1997 - 9-5/8 7-7/16
April 26, 1997)
Fourth Quarter
(commencing April, 27, 1997 - 8-3/4 7-1/2
July 31, 1997)
Fiscal 1998 High Low
First Quarter
(commencing August 1, 1997 - 11-1/8 8-9/16
November 1, 1997)
Second Quarter
(commencing November 2, 1997 - 12 10-1/2
January 31, 1998)
Third Quarter
(commencing February 1, 1998 - 11-1/2 10-3/16
May 2, 1998)
Fourth Quarter
(commencing May 3, 1998 - 11-1/8 9-7/16
July 31, 1998)
(b) Approximate Number of Holders of Class A Common Stock. As of
September 30, 1998, 2,185,692 shares of the Company's Class A Common Stock
were outstanding and the number of holders of record of the Company's Class
A Common Stock at that date was 426. The Company estimates that it has a
significantly greater number of Class A Common Stock shareholders because a
substantial number of the Company's shares are held in street name. As of
the same date, there were 1,775,028 shares of the Company's Class B Common
Stock outstanding and the number of holders of record of the Class B Common
Stock at that date was 73.
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(c) Dividend. In each of the fiscal years ended July 31, 1997 and
1998, the Company declared cash dividends of $.32 per share of common
stock. The amount, if any, of future dividends remains within the
discretion of the Company's Board of Directors and will depend upon the
Company' s future earnings, financial condition and requirements and other
factors as determined by the Board of Directors.
In July 1994, the Company's board of directors declared a 5% stock
dividend to both Class A and Class B shareholders of record as of August l,
1994 to be distributed on or before August 30, 1994. All financial data
included in this annual report with respect to net income per common share,
weighted average common shares outstanding, stock prices and stock options
have been restated to reflect the impact of the declaration of the 5% stock
dividend.
The Company's Certificate of Incorporation provides that any cash or
property dividend paid on Class A Common Stock must be at least equal to
the cash or property dividend paid on Class B Common Stock on a per share
basis.
Page 13 of 49
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended July 31,
1998 1997 1996 1995 1994
(In thousand, except per share amounts)
Operating data:
Gross revenues $75,088 $70,802 $69,823 $91,512 $99,559
Net revenues $61,552 $58,994 $61,569 $77,715 $86,334
Income(loss) from
operations $ 287 $ (142) $ 1,511 $ 2,974 $ 7,256
Income before income
taxes $ 757 $ 478 $ 2,087 $ 3,552 $ 7,645
Net income before
cumulative effect of
accounting change $ 471 $ 113 $ 1,160 $ 2,154 $ 4,670
Cumulative effect of
accounting change $ - $ - $ - $ - $ (118)
Net income $ 471 $ 113 $ 1,160 $ 2,154 $ 4,552
Net income before
cumulative effect of
accounting change
per common share $ .12 $ .03 $ .29 $ .52 $ 1.13
Cumulative effect of
accounting change per
common share $ - $ - $ - $ - $ (.03)
Net income per
common share
Basic and Diluted $ .12 $ .03 $ .29 $ .52 $ 1.10
Cash dividends declared
per common share $ .32 $ .32 $ .32 $ .32 $ .29
Weighted average common
shares outstanding:
Basic 3,950,422 3,956,313 4,039,369 4,136,929 4,138,121
Diluted 3,963,075 3,960,413 4,043,469 4,136,929 4,138,121
Page 14 of 49
As of July 31,
19981997199619951994
(In thousands, except per share amounts)
Balance sheet data:
Working capital $30,316 $31,141 $31,993 $32,662 $32,061
Total assets $53,076 $53,524 $55,575 $59,476 $62,157
Long-term debt $ 553 $ 607 $ 695 $ 782 $ 1,345
Shareholders' equity $43,500 $44,183 $45,468 $46,907 $46,158
Book value per share:
basic $ 11.01 $ 11.17 $ 11.26 $ 11.34 $ 11.15
diluted $ 11.00 $ 11.16 $ 11.25 $ 11.34 $ 11.15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
As of July 31, 1998, the Company's working capital balance was
decreased $.8 million to $30.3 million as compared to $31.1 million at July
31, 1997. Net contracts receivable decreased $4.5 million due principally
to the payment of a few significant receivables with the United States
federal government and an overall improvement in the invoicing and
collection of outstanding receivables. Cash and cash equivalents increased
$2.9 million mainly as a result of the aforementioned decline in
receivables, offset in large measure by cash expenditures for investing and
financing activities and payments of accrued payroll costs. The Company's
investment securities available for sale increased $.7 million. Its
accounts payable increased $.7 million while accrued payroll decreased $.5
million due primarily to the timing of payments.
The Company maintains an unsecured line of credit of $10.0 million
with a bank at the prevailing prime rate. There are no borrowings
outstanding under this line of credit at July 31, 1998 and none were
required during fiscal year 1998. The Company has historically financed
its activities through cash flows from operations. Internally generated
funds have been adequate to support the demands for working capital, the
purchase of new fixed assets and investment securities and the payment of
dividends. There are no significant working capital requirements pending
at July 31, 1998. The Company's existing cash along with that generated by
future operations and the existing credit line is expected to be sufficient
to meet the Company's needs for the foreseeable future.
Results of Operations
Net Revenues
Net revenues for fiscal year 1998 were $61.5 million, up 4% from the
$59.0 million reported in fiscal year 1997. The increase in net revenues
was due primarily to an increase in sales recognized from the Company's
international clients and the United States federal government. In
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particular, the Company experienced substantial sales growth from its
subsidiary in Venezuela as that firm's net revenue nearly tripled versus
last year as a result of continued growth with both governmental and
domestic oil industry clients in South America. The Company also realized
increased revenues in fiscal year 1998 from its START contracts with the
EPA and various contracts with the DOD as these federal agencies issued an
increased volume of work orders as compared to fiscal 1997.
The Company recently continued its business expansion in the federal
government market. In September, 1998 the Company was awarded a five-year
environmental services contract with the United States Air Force Reserve
Command worth up to $20.0 million. This contract is a task order contract
and therefore the Company is not guaranteed any portion of the $20.0
million in work.
Net revenues for fiscal year 1997 were $59.0 million, down 4% from
the $61.6 million reported in fiscal year 1996. The decrease in net
revenues for fiscal year 1997 was due in large measure to a lack of funding
early in fiscal year 1997 following the federal government budget crisis
the previous year.
Income Before Income Taxes
The Company's income before income taxes for fiscal year 1998 was
$757,000 up from the $478,000 recorded in the previous year. This increase
was primarily attributable to the aforementioned increase in net revenues.
The Company also continued its success in stabilizing indirect operating
costs as its percentage of these costs to net sales was slightly lower than
the same ratio in fiscal year 1997. Operating margins relating to the
Company's Analytical Services Center ("ASC") partially offset the above
favorable impacts on income before income taxes. The operating loss
derived from the ASC in fiscal year 1998 increased over the prior year as
the result of continued pricing pressures.
Income before income taxes for fiscal year 1997 was $478,000 as
compared to $2.1 million recorded in the fiscal year 1996. This decrease
was primarily attributable to lower operating margins recognized from the
Company's START contracts with the EPA versus the margins realized from
their predecessor Technical Assistance Teams ("TAT") contact during fiscal
year 1996.
Income Taxes
The effective income tax rate for fiscal year 1998 was 37.8% as
compared to 76.3% for fiscal year 1997. The decrease in the effective rate
is primarily the result of an additional one-time expense recognition in
fiscal year 1997 to reduce tax refunds receivable associated with foreign
operations. This was partially offset by a decrease in tax exempt interest
as a percentage of income.
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 two
years, 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.
Page 16 of 49
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 material 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.
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
significant risks or is unable to meet its anticipated timeline, the
Company will develop contingency plans as deemed necessary at that time.
Forward Looking Statements
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 17 of 49
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Ecology and Environment, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)1. and 2. on this Form 10-K present fairly, in
all material respects, the financial position of Ecology and Environment,
Inc. and its subsidiaries at July 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the
period ended July 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Buffalo, New York
October 1, 1998
Page 18 of 49
Ecology and Environment, Inc.
Consolidated Balance Sheet
July 31,
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents $ 6,627,164 $ 3,714,898
Investment securities available for sale 7,773,585 7,086,035
Contract receivables, net 21,480,584 25,981,157
Deferred income taxes 1,976,922 1,961,672
Income taxes receivable 356,641 ---
Other current assets 855,109 971,127
------------ ------------
Total current assets 39,070,005 39,714,489
Property, bulding and equipment, net 12,856,938 12,852,976
Deferred income taxes 268,728 160,092
Other assets 880,464 796,416
------------ ------------
Total assets $53,076,135 $53,524,373
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,253,204 $ 2,574,354
Accrued payroll costs 3,175,498 3,716,183
Other accrued liabilities 2,594,419 2,258,707
Income taxes payable --- 184,583
------------ ------------
Total current liabilities 9,023,121 8,733,827
Long-term debt 553,125 607,291
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized-2,000,000 shares; no shares
issued --- ---
Class A common stock, par value $.01 per
share; authorized-6,000,000 shares;
issued-2,364,302 and 2,316,912 shares 23,643 23,169
Class B common stock, par value $01 per
share; azuthorized-10,000,000 shares;
issued-1,805,987 and 1,853,077 shares 18,056 18,530
Capital in excess of par value 17,591,436 17,591,436
Retained earnings 27,424,660 28,223,060
Treasury stock - Class A common, 183,310
and 194,400 shares; Class B common,
26,259 shares, at cost (1,557,906) (1,672,940)
------------ ------------
Total shareholders' equity 43,499,889 44,183,255
------------ ------------
Total liabilities and shareholders' equity $53,076,135 $53,524,373
=========== ============
The accompanying notes are an integral part of these financial statements.
Page 19 of 49
Ecology and Environment, Inc.
Consolidated Statement of Income
Year ended July 31
1998 1997 1996
---- ---- ----
Gross Revenues
Less: direct subcontract costs $75,088,864 $70,801,535 $69,822,996
Net revenues 13,537,007 11,808,025 8,254,471
------------ ------------ ------------
61,551,857 58,993,510 61,568,525
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 36,223,266 34,798,097 33,846,706
Administrative and indirect operating
expenses 15,695,000 14,644,185 15,751,749
Marketing and related costs 7,880,921 8,107,698 8,724,445
Depreciation 1,465,904 1,585,562 1,734,442
------------ ------------ ------------
Total operating costs & expenses 61,265,091 59,135,542 60,057,342
------------ ------------ -----------
Income (loss) from operations 286,766 (142,032) 1,511,183
Interest (expense) (113,775) (65,994) (70,445)
Interest income 659,550 697,315 769,617
Net foreign exchange loss (75,668) (11,735) (123,506)
------------ ------------ ------------
Income before income taxes 756,873 477,554 2,086,849
Income tax provision (benefit):
Federal 311,387 449,690 624,766
State 96,250 192,180 128,806
Deferred (121,467) (277,387) 173,070
------------ ------------ ------------
286,170 364,483 926,642
------------ ------------ ------------
Net income $470,703 $113,071 $1,160,207
============ ============ ============
Net income per common share: Basic and Diluted $0.12 $0.03 $0.29
============ ============ ============
Weighted average common shares outstanding:
Basic 3,949,359 3,956,236 4,039,369
============ ============ ============
Diluted 3,952,827 3,958,714 4,041,985
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 20 of 49
Ecology and Environment, Inc.
Consolidated Statement of Changes in Shareholders' Equity
Class A Class B Capital in
Common Stock Common Stock excess of Retained Treasury stock
Shares Amount Shares Amount par value earnings Shares Amount
------------------ ------------------ ----------- ----------- ------ -----------
Balance at July 31, 1995 2,280,176 $22,801 1,884,575 $18,846 $17,562,587 $29,491,719 42,559 $ (189,425)
Net income --- --- --- --- --- $ 1,160,207 --- ---
Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,296,926) --- ---
Conversion of Class B common stock
to Class A common stock 19,333 $ 194 (19,333) $ (194) --- --- --- ---
Repurchase of Class A common stock --- --- --- --- --- --- 152,700 $(1,308,515)
Issuance of stock under incentive
option plan 5,238 $ 52 --- --- $ 28,849 --- --- ---
Unrealized investment loss, net --- --- --- --- --- $ (22,648) --- ---
--------- ------- --------- ------- ----------- ------------ ------- ------------
Balance at July 31, 1996 2,304,747 $23,047 1,865,242 $18,652 $17,591,436 $29,332,352 195,259 $(1,497,940)
========= ======= ========= ======= =========== ============ ======= ============
Net income --- --- --- --- --- $ 113,071 --- ---
Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,265,174) --- ---
Conversion of Class B common stock
to Class A common stock 12,165 $ 122 (12,165) $ (122) --- --- --- ---
Repurchase of Class A common stock --- --- --- --- --- --- 25,400 $ (175,000)
Unrealized investment gain, net --- --- --- --- --- $ 42,811 --- ---
--------- ------- --------- ------- ----------- ----------- ------- -----------
Balance at July 31, 1997 2,316,912 $23,169 1,853,077 $18,530 $17,591,436 $28,223,060 220,659 $(1,672,940)
========= ======= ========= ======= =========== =========== ======= ============
Net income --- --- --- --- --- $ 470,703 --- ---
Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,265,480) --- ---
Conversion of Class B common stock
to Class A common stock 47,390 $ 474 (47,090) $ (474) --- --- --- ---
Unrealized investment loss, net --- --- --- --- --- $ (3,623) --- ---
Issuance of stock under stock
award plan --- --- --- --- --- --- (11,090) $ 115,034
--------- ------- --------- ------- ----------- ----------- -------- ------------
Balance at July 31, 1998 2,364,302 $23,643 1,805,987 $18,056 $17,591,436 $27,424,660 209,569 $ (1,557,906)
========= ======= ========= ======= =========== ===============================
The accompanying notes are an integral part of these financial statements.
Page 21 of 49
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
Year ended July 31,
1998 1997 1996
----------- ---------- ----------
Cash flows from operating activities:
Net income $ 470,703 $ 113,071 $1,160,207
Adjustments to reconcile net income to net cash
provided by (usesd in) operating activities:
Depreciation 1,465,904 1,585,562 1,734,442
(Gain) loss on disposition of property and equipment --- (1,225) 5,739
Gain on sale of investment securities --- --- (1,534)
Net foreign exchange loss 75,668 11,735 123,506
Provision (benefit) for contract adjustments 661,925 112,925 (137,589)
(Increase) decrease in:
- contracts receivable, net 3,838,648 (2,398,046) 1,165,608
- other current assets (364,509) 5,107 545,643
Increase (decrease) in:
- accounts payable 678,850 (560,508) (1,355,221)
- accrued payroll costs (540,685) (404,081) (307,935)
- other accrued liabilities 335,712 101,151 (685,856)
- income taxes payable (184,583) 184,583 ---
Other, net (62,411) 47,870 9,991
----------- ----------- -----------
Net cash provided by (used in) operating activities 6,375,222 (1,201,856) 2,257,001
----------- ----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (1,543,118) (977,046) (915,270)
Proceeds from sale of assets --- 1,225 12,597
Purchase of investment securities (3,052,854) (1,210,761) (2,438,326)
Proceeds from maturity of investment securities 136,972 498,882 570,423
Investment in China venture (21,637) (148,396) ---
----------- ----------- -----------
Net cash used in investing activities (2,258,344) (1,636,096) (1,170,576)
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Dividends paid (1,265,480) (1,265,174) (1,296,926)
Repayment of long-term debt (54,166) (87,500) (87,500)
Net proceeds from issuance of common stock 115,034 --- 28,901
Repurchase of common stock --- (175,000) (1,308,515)
----------- ----------- -----------
Net cash used in financing activities (1,204,612) (1,527,674) (2,664,040)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,912,266 (4,365,626) (1,577,615)
Cash and cash equivalents at beginning of period 3,714,898 8,080,524 9,658,139
----------- ----------- -----------
Cash and cash equivalents at end of period $6,627,164 $3,714,898 $8,080,524
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Page 22 of 49
ECOLOGY AND ENVIRONMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
Ecology and Environment, Inc. (the Company) is an environmental
consulting and testing firm whose underlying philosophy is to provide
a broad range of environmental consulting services worldwide so that
sustainable economic and human development may proceed with minimum
negative impact on the environment. These services include
environmental audits and impact assessments, hazardous material site
evaluations and response programs, water and groundwater monitoring,
laboratory analyses, environmental infrastructure planning and many
other projects provided by the Company's multidisciplinary
professional staff. Gross revenues reflected in the Company's
consolidated statement of income represent services rendered for which
the Company maintains a primary contractual relationship with its
customers. Included in gross revenues are certain services outside
the Company's normal operations which the Company has elected to
subcontract to other contractors. The costs relative to such
subcontract services are deducted from gross revenues to derive net
revenues.
During fiscal years ended July 31, 1998, 1997 and 1996, the percentage
of total net revenues derived from contracts exclusively with the
United States Environmental Protection Agency (EPA) were 48%, 47% and
48%, respectively. The Company's Superfund Technical Assessment and
Response Team (START) contracts accounted for the majority of the EPA
net revenue in fiscal years 1997 and 1998. The percentage of net
revenues derived from contracts with the United States Department of
Defense (DOD) were 18%, 18% and 20% for fiscal years ended July 31,
1998, 1997 and 1996, respectively.
2. Summary of significant accounting principles
a.Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Also reflected in the
financial statements are 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. Certain amounts in the prior years' consolidated
financial statements and notes have been reclassified to conform
with the current year presentation.
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
Page 23 of 49
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
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 represent a reserve against possible adjustments for
fiscal years 1990 through 1998.
d.Investment securities
Investment securities have been classified as available for sale
and are stated at estimated fair value. Unrealized gains or losses
related to investment securities available for sale are reflected
in retained earnings, net of applicable income taxes in the
consolidated balance sheet and statement of changes in
shareholders' equity. Realized gains and losses on the sale of
investment securities are determined using the specific
identification method.
e.Property, building and equipment, depreciation and amortization
Property, building and equipment are stated at cost. Office
furniture and all equipment are depreciated on the straight-line
method for book purposes, excluding computer equipment which is
depreciated on the accelerated method for book purposes, and on
accelerated methods for tax purposes over the estimated useful
lives of the assets (three to seven years). The headquarters
building is depreciated on the straight line method for both book
and tax purposes over an estimated useful life of 32 years. Its
components are depreciated over their estimated useful lives
ranging from 7 to 15 years. The analytical services center
building and warehouse is depreciated on the straight line method
over an estimated useful life of 40 years for both book and tax
purposes. Leasehold improvements are amortized for book purposes
over the terms of the leases or the estimated useful lives of the
assets, whichever is shorter, and over approximately 30 years for
tax purposes. Expenditures for maintenance and repairs are charged
Page 24 of 49
to expense as incurred. Expenditures for improvements are
capitalized. When property or equipment is retired or sold, any
gain or loss on the transaction is reflected in the current year's
earnings.
f.Fair value of financial instruments
The carrying amount of cash and cash equivalents contracts
receivable and accounts payable at July 31, 1998 approximates fair
value because of the short maturity of those instruments. The
amortized cost and estimated fair value of investment securities
available for sale are fully described in Note 4. Long-term debt
consists of third party borrowings by the Company. Based on the
Company's assessment of the current financial market and
corresponding risks associated with the debt, management believes
that the carrying amount of long-term debt at July 31, 1998
approximates fair value.
g.Translation of foreign currencies
The financial statements of foreign subsidiaries where the local
currency is the functional currency are translated into U.S.
dollars using exchange rates in effect at period end for assets and
liabilities and average exchange rates during each reporting period
for results of operations. Adjustments resulting from translation
of financial statements did not materially impact the financial
statements for fiscal years 1998, 1997 and 1996.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency
were the U.S. dollar. The remeasurement of local currencies into
U.S. dollars creates translation adjustments which are included in
net income and amounted to $75,668, $11,735 and $123,506 for fiscal
years 1998, 1997 and 1996, respectively.
h.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.
i.Pension costs
The Company has a non-contributory defined contribution plan
providing deferred benefits for substantially all of the Company's
employees. Additionally, in fiscal year 1995, the Company
Page 25 of 49
implemented a supplemental defined benefit and contribution plan to
provide deferred benefits for senior executives of the Company.
Benefits under the defined benefit plan are based on years of
service and average compensation. The annual expense of the
Company's defined contribution plan is based on a percentage of
eligible wages as authorized by the Company's Board of Directors.
Accrued benefits under the defined benefit plan are funded in
accordance with the minimum funding requirements of the Employee
Retirement Income Security Act. Benefits under the defined
contribution plan are funded as accrued.
In September 1995, the Company made the decision to terminate the
defined benefit plan. This plan was fully settled by December
1996. In July 1996, the Company made the decision to terminate the
supplemental defined benefit plan for senior executives. This plan
was fully settled in December 1996. These events did not
materially impact the financial results for fiscal year 1998.
The Company does not offer any benefits that would result in a
liability under either SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" or SFAS No. 112
"Employers' Accounting for Post employment Benefits."
j.Stock based compensation
The Company has elected to continue measuring compensation costs
for employee stock based compensation arrangements using the method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" as permitted by SFAS No. 123 "Accounting for Stock Based
Compensation." In accordance with APB Opinion No. 25, compensation
expense is not recognized for stock option awards to employees
under the Company's stock option plan since the exercise price of
options granted is equal to or greater than the market price of the
underlying stock at the date of grant.
k.Earnings per share
The Company has adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings per Share," which modifies the way
in which earnings per share ("EPS") is calculated. Accordingly, all
prior period EPS data 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.
3. Cash and cash equivalents
The Company's policy is to invest cash in excess of operating
requirements in income-producing short-term investments. At July 31,
1998 and 1997, short-term investments consist of commercial paper and
money market funds and are carried at cost. Short-term investments
amounted to approximately $5,287,000 and $3,081,000 at July 31, 1998
Page 26 of 49
and 1997, respectively, and are reflected in cash and cash equivalents
in the accompanying consolidated balance sheet and statement of cash
flows.
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Cash paid for interest
amounted to $113,775, $65,994, and $70,445 in fiscal years 1998, 1997
and 1996, respectively. Cash paid for income taxes amounted to
$886,820, $95,322 and $442,000 in fiscal years 1998, 1997 and 1996,
respectively.
4. Investment securities
The amortized cost and estimated fair values of investment securities were
as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gaines losses value
--------- ---------- ---------- ---------
July 31, 1998
Investment securities
available for sale:
Mutual funds $3,667,930 $30,617 $ 419 $3,698,128
Municipal notes and bonds 2,656,147 11,636 2,326 2,665,457
Corporate note 285,000 --- --- 285,000
Federal agency obligations 1,125,000 --- --- 1,125,000
---------- ------- ------ ----------
$7,734,077 $42,253 $2,745 $7,773,585
========== ======= ====== ==========
July 31, 1997
Investment securities
available for sale:
Mutual funds $2,565,155 $29,759 $ 330 $2,594,584
Municipal notes and bonds 2,079,920 13,527 1,694 2,091,753
Corporate note 400,000 --- --- 400,000
U.S. treasury interest -
only strips 998,224 2,860 --- 1,001,084
Federal agency obligations 997,189 1,425 --- 998,614
---------- ------- ------ ----------
$7,040,488 $47,571 $2,024 $7,086,035
========== ======= ====== ==========
Page 27 of 49
The amortized cost and estimated fair value of debt securities available
for sale by contractual maturity as of July 31, 1998 were as follows:
Estimated Amortized
fair value cost
---------- ----------
Due in one year or less $1,326,539 $1,328,515
Due after one year through five years 913,106 902,044
Due after five years through ten years 385,812 385,588
Due after ten years 1,450,000 1,450,000
---------- ----------
$4,075,457 $4,066,147
Mutual funds available for sale 3,698,128 3,667,930
---------- ----------
$7,773,585 $7,734,077
========== ==========
Proceeds, gross realized gains and losses from the sale of investment
securities were $136,972, $0 and $0, respectively, in fiscal year
1998, $498,882, $0 and $0, respectively, in fiscal year 1997 and
$570,423, $1,567 and $33, respectively, in fiscal year 1996. The
unrealized investment securities gain and unrealized investment
securities loss, net of applicable income taxes, at July 31, 1998 and
1997 of $23,706 and $27,329, respectively, are reflected in retained
earnings in the consolidated balance sheet.
5. Contract receivables, net
July 31,
1998 1997
---- ----
United States government -
Billed $ 6,368,873 $ 7,959,278
Unbilled 6,597,802 8,214,653
------------ ------------
12,966,675 16,173,931
------------ ------------
Industrial customers and state
and municipal governments -
Billed 5,490,908 6,608,240
Unbilled 3,959,750 4,103,110
------------ ------------
9,450,658 10,711,350
------------ ------------
Less allowance for contract
adjustments (936,749) (904,124)
------------ ------------
$21,480,584 $25,981,157
============ ============
United States government receivables arise from long-term U.S.
government prime contracts and subcontracts. Unbilled receivables
result from revenues which have been earned, but are not billed as of
period-end. The above unbilled balances are comprised of incurred
Page 29 of 49
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 approximately $0 at July 31, 1998
and $3,026,000 at July 31, 1997. Unbilled contracts receivable are
reduced by billings in excess of costs incurred of $1,801,249 at July
31, 1998 and $1,282,000 at July 31, 1997. Management anticipates that
the July 31, 1998 unbilled receivables will be substantially billed
and collected in fiscal 1999. Within the above billed balances are
contractual retainages in the amount of approximately $1,801,249 at
July 31, 1998 and $1,423,000 at July 31, 1997. Management anticipates
that the July 31, 1998 retainage balance will be substantially
collected in fiscal year 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 $2,283,000 at
July 31, 1998 and $2,028,000 at July 31, 1997.
6. Property, building and equipment, net
July 31,
1998 1997
Land $ 528,320 $ 528,320
Buildings 13,171,764 12,951,063
Laboratory and other equipment 6,188,113 5,971,802
Data processing equipment 7,588,012 6,958,399
Office furniture and equipment 4,697,079 4,295,285
Leasehold improvements and other 1,413,352 1,406.800
------------ ------------
33,586,640 32,111,669
Less accumulated depreciation
and amortization (20,729,702) (19,258,693)
------------ ------------
$12,856,938 $12,852,976
============ ============
6. Line of credit
The Company has an unsecured $10,000,000 line of credit available
which is subject to annual renewal and which bears interest at the
prime rate. No borrowings on the line of credit were outstanding at
July 31, 1998 and 1997 and none were required during fiscal years 1997
and 1996. At July 31, 1998 and 1997, the Company had letters of
credit totaling $1,471,520 and $1,003,974, respectively, secured by
this line of credit.
7. Long-term debt
During fiscal year 1988, the Company obtained industrial revenue bond
capital lease financing in the amount of $1,000,000 to finance a
portion of the cost of the newly constructed corporate headquarters.
The lease is collateralized by a portion of the land and the corporate
headquarters building in an amount equal to the bond. The bond is
payable in equal monthly principal installments of $4,167 through 2008
and bears interest at the borrower's base rate which approximates
prime (8.5% at July 31, 1998). The balance outstanding on this bond
Page 29 of 49
at July 31, 1998 and 1997 was $16,667 and $66,666, respectively. The
current portion of long-term debt at July 31, 1998 in the amount of $54,166
is included in other accrued liabilities in the accompanying consolidated
balance sheet.
During fiscal year 1994, the Company obtained industrial revenue bond
capital lease financing in the amount of $750,000 to finance a portion of
the cost of the newly constructed analytical services facility. The lease
is collateralized by a portion of the land and the analytical services
facility building in an amount equal to the bond. The bond is payable in
equal monthly principal installments of $3,125 through 2014 and bears
interest at the borrower's base rate which approximates prime (8.50% at
July 31, 1998). In addition, the Company must meet certain financial ratio
covenants relating to current assets to current liabilities and debt to
tangible net worth. At July 31, 1998, the Company was in compliance with
all financial ratio covenants. The balance outstanding on this bond at
July 31, 1998 and 1997 was $590,625 and $628,125, respectively.
9. Income taxes
Earnings before provision for income taxes consisted of:
1998 1997 1996
---- ---- ----
U.S. $570,435 $547,358 $2,101,163
Foreign 186,438 (69,804) (14,314)
-------- --------- -----------
$756,873 $477,554 $2,086,849
======== ========= ===========
The provision for income taxes differs from the federal statutory rate
due to the following:
Fiscal year
1998 1997 1996
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 6.0 18.0 5.3
Foreign operations (1.3) 20.3 2.7
Other (.9) 3.9 2.4
----- ----- -----
37.8% 76.2% 44.4%
===== ===== =====
Page 30 of 49
Deferred tax assets (liabilities) included in other current assets were
comprised of the following:
July 31,
1998 1997
Allowance for contract adjustments $1,384,297 $1,260,735
Accrued vacation and compensatory time 681,868 817,138
Property, building and equipment 251,104 245,400
Other 100,312 64,819
----------- -----------
Gross deferred tax assets 2,417,581 2,388,092
State income taxes (169,519) (169,144)
Other ( 2,415) (97,184)
----------- -----------
Gross deferred tax liabilities (171,934) ($266,328)
----------- -----------
Net current deferred tax asset $2,245,647 $2,121,764
=========== ===========
The Company has not recorded income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations. Undistributed earnings amounted to approximately
$123,000 at July 31, 1998. If earnings of such foreign subsidiaries
were not reinvested, a deferred tax liability before applicable
foreign tax credits, of approximately $41,820 would have been
required. In addition, foreign withholding taxes would be imposed on
actual distributions.
10. Shareholders' equity
a. Stock dividend
On July 1, 1994, the Board of Directors declared a 5% stock dividend
on the Company's Class A and Class B common stock distributed on
August 30, 1994 to shareholders of record on August 1, 1994. As of
July 31, 1994, an amount equal to the fair value of the common stock
distributed was transferred from retained earnings to the common stock
and capital in excess of par value accounts. All data with respect to
net income per common share, weighted average common shares
outstanding, stock prices and stock options has been retroactively
adjusted to reflect the stock dividend.
b. Class A and Class B common stock
The relative rights, preferences and limitations of the Company's
Class A and Class B common stock can be summarized as follows: Holders
of Class A shares are entitled to elect 25% of the Board of Directors
so long as the number of outstanding Class A shares is at least 10% of
the combined total number of outstanding Class A and Class B common
shares. Holders of Class A common shares have one-tenth the voting
power of Class B common shares with respect to most other matters.
In addition, Class A shares are eligible to receive dividends in
excess of (and not less than) those paid to holders of Class B shares.
Page 31 of 49
Holders of Class B shares have the option to convert at any time, each
share of Class B common stock into one share of Class A common stock.
Upon sale or transfer, shares of Class B common stock will
automatically convert into an equal number of shares of Class A common
stock, except that sales or transfers of Class B common stock to an
existing holder of Class B common stock or to an immediate family
member will not cause such shares to automatically convert into Class
A common stock.
c. Incentive stock compensation
Under the Company's incentive stock option plan (the "plan"), key
employees, including officers of the Company, may be granted options
to purchase shares of Class A Common stock at an option price of at
least 100% of the shares' fair market value at the date of grant.
Shares become exercisable after a minimum holding period of five years
from the date of grant and expire after a period of ten years from the
date of grant. A total of 209,390 shares were authorized for granting
under the plan. The plan was terminated in March of 1996.
No options were granted during fiscal years 1998 and 1997. During
fiscal year 1996, 37,250 shares were granted at a price of $7.25 per
share. No options were exercised during fiscal years 1998 and 1997.
Exercised options during fiscal year 1996 amounted to 5,238 at an
exercise price of $5.65 per share. Cancelled options during the three
year period ended July 31, 1998 amounted to 8,864, 22,848 and 23,955,
respectively, at a weighted average exercise price of $11.75, $11.71
and $12.41, respectively. Expired options were 21,830, 0 and 425 for
fiscal years 1998, 1997 and 1996, respectively, at a weighted average
exercise price of $13.09, $0 and $5.65 per share, respectively.
Options outstanding at the end of the four year period ended July 31,
1998 were 129,166, 159,965, 182,813 and 175,181, respectively, at a
weighted average exercise price of $11.12, $11.44, $11.48 and $12.31,
respectively. Of the options outstanding for the three year period
ended July 31, 1998, 69,646, 79,086, 90,710, respectively, are
currently exercisable at a weighted average exercise price of $13.06,
$13.27 and $13.22, respectively. At July 31, 1998, 60,248 options
have an exercise price between $7.25 and $10.48, with a weighted
average exercise price and weighted average contracted life of $8.42
and 6.17 years, respectively. Of these options, 14,798 are currently
exercisable at an exercise price of $10.47. Additionally, at July 31,
1998, 68,918 options have an exercise price between $12.38 and $16.08
with a weighted average exercise price and weighted average
contractual life of $13.47 and 3.66 years, respectively. Of those
options, 54,848 are currently exercisable at a weighted average
exercise price of $13.81.
Effective March 16, 1998, the Company adopted the Ecology and
Environment, Inc. 1998 Stock Award Plan (the "Award Plan") under which
key employees (including officers) of the Company or any or all of its
present or future subsidiaries may be designated to receive awards of
Class A common stock of the Company as a bonus for services rendered
to the Company or its subsidiaries, without payment therefore, based
upon the fair market value of the common stock at the time of the
award.
Page 32 of 49
The Company has reserved for issuance as awards under the Award Plan
an aggregate of 12,000 shares of Class A Common stock of the Company,
which shall be solely treasury shares. As of July 31, 1998, awards
for 11,090 shares of Class A common stock have been granted at a
weighted-average fair value of $9.81 per share.
The Company estimates that if they elected to measure compensation
cost for employee stock based compensation arrangements under SFAS No.
123 it would not have caused net income and earnings per share for
fiscal years 1998 and 1997 to be materially different from their
reported amounts.
11. Lease commitments
The Company rents certain office facilities and equipment under
noncancelable operating leases. The Company also rents certain
facilities for servicing project sites over the term of the related
long-term government contracts. These contracts provide for
reimbursement of any remaining rental commitments under such lease
agreements in the event that the government terminates the contract.
At July 31, 1998, future minimum rental commitments, net of estimated
amounts allocable to government contracts with rental cost
reimbursement clauses, were as follows:
Fiscal year Gross Reimbursable Net
----------- ----- ------------ ---
1999 1,998,485 1,012,628 985,857
2000 1,773,180 999,655 773,525
2001 949,643 458,758 490,885
2002 205,628 --- 205,628
2003 36,308 --- 36,308
Gross rental expense under the above lease commitments for 1998, 1997,
and 1996 was $2,050,157, $2,098,520, and $1,951,645, respectively.
12. Pension plans
a.Defined benefit plan
The Company's pension expense associated with this plan for fiscal
years ended July 31, 1998, 1997, and 1996 was $0, $0, and
$1,110,500, respectively. The increase in expense in fiscal year
1996 is attributable mainly to the curtailment and partial
settlement of this plan in accordance with SFAS No. 88 "Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and Termination Benefits." There was no pension
expense for fiscal years 1998 and 1997 and no accrued pension
liabililty (asset) at July 31, 1998 as the plan was fully settled
by December 1996.
Page 33 of 49
Pension cost of this plan includes the following cost components:
July 31,
1996
----
Service cost -
benefits earned during the period $ 65,000
Interest costs on projected benefit
obligation 258,200
Actual return on plan assets (201,900)
Net amortization and deferral (160,500)
Curtailment and Settlement Cost 1,149,600
-----------
Net periodic pension cost $1,110,500
===========
Data relating to the funding position of this plan were as follows:
July 31,
1996
----
Actuarial present value of:
Vested benefit obligation $ 942,186
Nonvested benefit obligation ---
----------
Projected benefit obligation 942,186
Plan assets at fair value 131,725
----------
Net accrued pension liability $810,461
==========
The discount rate used in determining the actuarial present value of the
above benefit obligations was 6.72% for fiscal year 1996.
b.Defined contribution plan
Contributions to the defined contribution plan are discretionary and
determined annually by the Board of Directors. The total expense under
the plan for fiscal years 1998, 1997, and 1996 was $1,339,468, $1,209,412
and $985,198, respectively.
13. 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.
Page 34 of 49
The computation of basic earnings per share reconciled to diluted earnings
per share follows:
Fiscal Year
1998 1997 1996
Income available
to common stockholders $470,703 $ 113,071 $1,160,207
Weighted-average common
shares outstanding (basic) 3,949,359 3,956,236 4,039,369
Basic earnings
per share $0.12 $0.03 $0.29
Incremental shares from
assumed conversions of
stock options 3,469 2,478 2,616
Adjusted weighted-average
common shares outstanding 3,952,827 3,958,714 4,041,985
Diluted earnings
per share $0.12 $0.03 $0.29
At July 31, 1998 there were 69,646 stock options outstanding with an exercise
price ranging from $12.38 - $16.08 which were not included in the above
calculations due to their antidilutive nature. At July 31, 1997 there were
126,165 stock options outstanding with an exercise price ranging from $9.00 -
$16.08 which were not included. At July 31, 1996 there were 104,610 stock
options outstanding with an exercise price ranging from $9.00 - $16.08 which
were not included.
14. Contingencies
Certain contracts with the EPA contain termination provisions under which the
EPA may, without penalty, terminate the contracts upon written notice to the
Company. In the event of termination, the Company would be paid only
termination costs in accordance with the particular contract.
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, any adverse outcome to this
litigation would not have a material impact on the financial results of the
Company.
Page 35 of 49
ECOLOGY AND ENVIRONMENT, INC.
SCHEDULE VIII
Allowance for Doubtful Accounts
Years Ended July 31, 1998, 1997, and 1996
Balance at Charged to Balance
Beginning Cost and at End
Year Ended of Period Expense Deduction of Year
July 31, l998 $2,931,940 $ 661,925 $ 374,300 $3,219,565
July 31, 1997 $2,839,675 $ 112,925 $ 20,660 $2,931,940
July 31, 1996 $3,123,709 $ (137,589) $ 146,445 $2,839,675
Page 36 of 49
Selected quarterly financial data (Unaudited)
(In thousands, except per share information)
1998 First Second Third Fourth
- -----------------------------------------------------------------------------
Gross revenues $19,373 $16,423 $20,359 $18,858
Net revenues 15,899 14,142 15,656 15,779
Income (loss) from operations 342 (136) 25 (20)
Income before income taxes 488 10 165 94
Net income (loss) 293 56 128 (6)
Net income per common share:
basic and diluted $ 0.07 $ 0.02 $ 0.03 $ ---
Cash dividends declared per common
share: basic and diluted $ --- $ 0.16 $ --- $ 0.16
1997 First Second Third Fourth
- -----------------------------------------------------------------------------
Gross revenues $16,752 $16,920 $17,601 $19,517
Net revenues 14,141 13,530 15,099 16,212
Income (loss) from operations 212 (53) (417) 104
Income before income taxes 381 114 (255) 238
Net income (loss) 227 15 (208) 79
Net income per common share:
basic and diluted $ 0.06 $ --- $ 0.05 $ 0.02
Cash dividends declared per common
share: basic and diluted $ --- $ 0.16 $ --- $ 0.16
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Page 37 of 49
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
Directors and executive officers of the Company.
Name Age Position
- ---- --- --------
Gerhard J. Neumaier 61 President and Director
Frank B. Silvestro 61 Executive Vice President and Director
Gerald A. Strobel 58 Executive Vice President of Technical
Services and Director
Ronald L. Frank 60 Executive Vice President of Finance,
Secretary, Treasurer and Director
Gerard A. Gallagher, Jr. 67 Senior Vice President of Special
Projects and Director
Roger J. Gray 57 Senior Vice President
Laurence M. Brickman 54 Senior Vice President
Harvey J. Gross 70 Director
Ralph Bookbinder 67 Director
Ross M. Cellino 66 Director
Each Director is elected to hold office until the next annual meeting
of shareholders and until his successor is elected and qualified.
Executive officers are elected annually and serve at the discretion of the
Board of Directors.
Mr. Neumaier is a founder of the Company and has served as the
President and a Director since its inception in 1970. Mr. Neumaier has a
B.M.E. in engineering and a M.A. in physics.
Mr. Silvestro is a founder of the Company and has served as a Vice
President and a Director since its inception in 1970. In August 1986, he
became Executive Vice President. Mr. Silvestro has a B.A. in physics and
an M.A. in biophysics.
Mr. Strobel is a founder of the Company and has served as a Vice
President and a Director since its inception in 1970. In August 1986, he
became Executive Vice President of Technical Services. Mr. Strobel is a
registered Professional Engineer with a B.S. in civil engineering and a
M.S. in sanitary engineering.
Mr. Frank is a founder of the Company and has served as Secretary,
Treasurer, Vice President of Finance and a Director since its inception in
1970. In August 1986, he became Executive Vice President of Finance. Mr.
Frank has a B.S. in engineering and a M.S. in biophysics.
Page 38 of 49
Mr. Gallagher joined the Company in 1972. In March 1979, he became a
Vice President of Special Projects and in February, 1986 he became a
Director. Mr. Gallagher is in charge of quality assurance for hazardous
substance projects. In August 1986, he became a Senior Vice President of
Special Projects. Mr. Gallagher has a B.S. in physics.
Mr. Gray joined the Company in 1970 as an engineer. In 1980, he
became Vice President and in August 1986 he became a Senior Vice President.
Mr. Gray holds a B.S. in engineering.
Mr. Brickman joined the Company in 1971. He became Vice President in
April 1988 and became a Senior Vice President in August, 1994. Mr.
Brickman has a B.S., M.S. and Ph.D. in biology.
Mr. Gross has been a Director of the Company since its inception in
1970. Mr. Gross is an independent insurance broker and a capital financing
consultant.
Mr. Bookbinder has been a Director of the Company since its inception
in 1970. Mr. Bookbinder is a retired stockbroker.
Mr. Cellino has been a Director of the Company since its inception in
1970. Mr. Cellino is an attorney and counselor-at-law retired from private
practice.
Item 11. EXECUTIVE COMPENSATION
There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal
years ended July 31, 1996, 1997 and 1998 of those persons who were at July
31, 1998 (i) the chief executive officer and (ii) the four other most
highly compensated executive officers with annual salary and bonus for the
fiscal year ended July 31, 1998 in excess of $100,000. In this report, the
five persons named in the table below are referred to as the "Named
Executives".
Page 39 of 49
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- ---------------------------------------
STOCK INCENTIVE LONG-TERM ALL
NAME AND FISCAL OPTIONS COMPENSATION OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) OTHER (SHARES) PAYOUTS (2)
- ------------------------- ------ ------- --------- ----- --------------- ----------- -----
Gerhard J. Neumaier 1998 $219,952 -0- -0- -0- -0- 14,127
President and Director 1997 $219,952 -0- -0- -0- -0- 12,000
1996 $216,632 -0- -0- -0- -0- 7,611
Frank B. Silvestro 1998 $199,967 -0- -0- -0- -0- 12,965
Executive VP and Director 1997 $199,967 -0- -0- -0- -0- 10,925
1996 $196,949 -0- -0- -0- -0- 6,841
Ronald L. Frank 1998 $199,967 -0- -0- -0- -0- 12,965
Executive Vice President 1997 $199,967 -0- -0- -0- -0- 10,925
of Finance, Secretary 1996 $196,949 -0- -0- -0- -0- 6,841
Treasurer and Director
Gerald A. Strobel 1998 $199,967 -0- -0- -0- -0- 12,965
Executive Vice President 1997 $199,967 -0- -0- -0- -0- 10,925
of Technical Services 1996 $196,949 -0- -0- -0- -0- 6,841
and Director
Gerard A. Gallagher, Jr. 1998 $172,060 -0- -0- -0- -0- 11,323
Senior Vice President 1997 $177,134 -0- -0- -0- -0- 9,695
of Special Projects and 1996 $174,226 -0- -0- -0- -0- 5,938
Director
(1) Amounts earned for bonus compensation determined by the Board of Directors.
(2) Represents group term life insurance premiums, contributions made by the Company to its Defined
Contribution Plan and Defined Contribution Plan SERP accruals on behalf of each of the Named Executives.
Page 40 of 49
None of the Company's executive officers have employment agreements.
Directors who are not employees of the Company are paid an annual fee of
$20,826 payable quarterly.
Compensation Pursuant to Plans
Pension Plan. In September 1995, the Company decided to terminate
its Defined Benefit Pension Plan (the "Pension Plan"). The termination of
the Pension Plan was settled by December 1996.
Defined Contribution Plan. The Company maintains a Defined
Contribution Plan ("the DC Plan") which is qualified under the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code") pursuant to
which the Company contributes an amount not in excess of 15% of the
aggregate compensation of all employees who participate in the DC Plan.
All employees, including the executive officers identified under "Executive
Compensation", are eligible to participate in the plan, provided that they
have attained age 21 and completed one year of employment with at least
1,000 hours of service. The amounts contributed to the plan by the Company
are allocated to participants based on a ratio of each participant's points
to total points of all participants determined as follows: one point per
$1,000 of compensation plus two points per year of service completed prior
to August 1, 1979, and one point for each year of service completed after
August 1, 1979.
Supplemental Retirement Plan. In April 1994, the Board of Directors
of the Company, in response to changes in the tax code, voted to establish
a Supplemental Executive Retirement Plan ("SERP") for purposes of providing
retirement benefits to employees including officers of the Company whose
retirement benefits under the DC Plan are reduced as a result of the
$150,000 compensation limitation imposed by the tax code change. This plan
is a non-qualified plan which provides benefits that would have been lost
from the DC Plan due to the imposition of the compensation restriction.
Stock Award Plan
Effective March 16, 1998, the Company adopted the Ecology and
Environment, Inc. 1998 Stock Award Plan (the "Award Plan") under which key
employees (including officers) of the Company or any or all of its present
or future subsidiaries may be designated to receive awards of Class A
common stock of the Company as a bonus for services rendered to the Company
or its subsidiaries, without payment therefor, based upon the fair market
value of the common stock at the time of the award.
The Company has reserved for issuance as awards under the Award Plan
an aggregate of 12,000 shares of Class A common stock of the Company, which
shall be solely treasury shares. The Board of Directors of the Company
administers the plan and has authority to determine the employees to whom
awards are to be granted, the number shares covered by each award, whether
or not the awards are subject to forfeiture or restriction on sale, resale
or other disposition of the shares acquired under the award and any other
understandings or conditions as to the award recipient's continued
employment.
The Award Plan is not a qualified plan under Section 401(a) of the
Internal Revenue Code. The plan permits grants of the award for a period
Page 41 of 49
of five (5) years from the date of adoption. As of July 31, 1998, awards
for 11,090 shares of Class A common stock have been granted. The named
Executive Officers found in the Summary Compensation Table have not been
granted any awards pursuant to the Award Plan.
Incentive Stock Option Plan
In February 1986, the Company adopted an Incentive Stock Option Plan
(the "Option Plan") under which key employees, including officers, of the
Company may be granted options to purchase up to an aggregate of 209,390
shares of Class A Common Stock at an option price of at least 100% of the
fair market value of the shares on the date the options were granted. The
Option Plan was terminated in March 1996, and no further options may be
granted under the Option Plan. As of July 31, 1998, there were options
outstanding for the purchase of 129,166 shares of Class A Common Stock,
69,646 of which were vested.
The named Executive Officers found in the Summary Compensation Table
have not been granted any options pursuant to the Option Plan.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year ended July 31, 1998, Ronald L. Frank failed to
file on a timely basis one report, showing one transaction.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of September 30, 1998, the number
of outstanding shares of Class A Common Stock and Class B Common Stock of
the Company beneficially owned by each person known by the Company to be
the beneficial owner of more than 5 percent of the then outstanding shares
of Common Stock:
Class A Common Stock Class B Common Stock
-------------------- --------------------
Nature and Percent Nature and
Amount of of Amount of
Beneficial Class As Beneficial Percent
Ownership Adjusted Ownership of
Name and Address(1) (2)(3) (4) (2)(3) Class
- -------------------- ---------- -------- ---------- -------
Gerhard J. Neumaier* 346,944 13.7% 345,894 19.4%
Frank B. Silvestro* 288,937 11.7% 288,937 16.3%
Ronald L. Frank* 258,976 10.6% 252,394 14.2%
Gerald A. Strobel* 262,296 10.7% 262,296 14.8%
Franklin Resources,
Inc. 370,000 16.9% 0 0
The Cameron Baird
Foundation (4) 410,600 18.8% 0 0
* See Footnotes in next table
Page 42 of 49
1) The address for Gerhard J. Neumaier, Frank B. Silvestro, Ronald L.
Frank and Gerald A. Strobel is c/o Ecology and Environment, Inc., 368
Pleasant View Drive, Lancaster, New York 14086, unless otherwise indicated.
The address for Franklin Resources, Inc. is 777 Mariners Island Blvd., P.
O. Box 7777, San Mateo, California 94403-7777. The address for The Cameron
Baird Foundation is Box 564, Hamburg, NY 14075.
(2) Each named individual or corporation are deemed to be the beneficial
owners of securities that may be acquired within 60 days through the
exercise of exchange or conversion rights. The shares of Class A Common
Stock issuable upon conversion by any such shareholder are not included in
calculating the number of shares or percentage of Class A Common Stock
beneficially owned by any other shareholder.
(3) There are 2,185,692 shares of Class A Common Stock issued and
outstanding and 1,775,028 shares of Class B Common Stock issued and
outstanding as of September 30, 1998. The figures in the "as adjusted"
columns are based upon these totals and except as set forth in the
preceding sentence, upon the assumptions described in footnote 2 above.
(4) Includes 10,000 shares owned by Brent D. Baird.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Class A Common Stock and Class B
Common Stock as of September 30, 1998, by (i) each Director of the Company
and (ii) all Directors and officers of the Company as a group.
Class A Common Stock Class B Common Stock
--------------------- --------------------
Nature and Percent Nature and
Amount of of Amount of
Beneficial Class As Beneficial Percent
Ownership Adjusted Ownership of
Name(1) (2)(3) (4) (2)(3) Class
- ---------------------------- ---------- -------- ---------- -------
Gerhard J. Neumaier (5) (13) 346,944 13.7% 345,894 19.4%
Frank B. Silvestro (13) 288,937 11.7% 288,937 16.3%
Ronald L. Frank (6) (13) 258,976 10.6% 252,394 14.2%
Gerald A. Strobel (7) (13) 262,296 10.7% 262,296 14.8%
Harvey J. Gross (8) 80,047 3.5% 80,047 4.5%
Gerard A. Gallagher, Jr. 71,641 3.5% 71,300 4.2%
Ralph Bookbinder (9) 16,050 * 16,050 *
Ross M. Cellino (10) 13,206 * 1,050 *
Directors and officers
Group (11)(12) 1,356,105 38.6% 1,331,557 75.0%
(10 individuals)
* Less than 0.1%
Page 43 of 49
(1) The address of each of the above shareholders is c/o Ecology and
Environment, Inc., 368 Pleasant View Drive, Lancaster, New York
14086.
(2) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or
shared voting power (including the power to vote or direct the vote)
or sole or shared investment power (including the power to dispose or
direct the disposition) with respect to a security whether through
any contract, arrangement, understanding, relationship or otherwise.
Unless otherwise indicated, the shareholders identified in this table
have sole voting and investment power of the shares beneficially
owned by them.
(3) Each named person and all Directors and officers as a group are
deemed to be the beneficial owners of securities that may be acquired
within 60 days through the exercise of exchange or conversion rights.
The shares of Class A Common Stock issuable upon conversion by any
such shareholder are not included in calculating the number of shares
or percentage of Class A Common Stock beneficially owned by any other
shareholder. Moreover, the table gives effect to only 2,571 shares
of Class A Common Stock of the total 69,646 shares of Class A Common
Stock that may be issued pursuant to the Company's Incentive Stock
Option Plan, which may be purchased within the next 60 days pursuant
to vested options granted to one officer.
(4) There are 2,185,692 shares of Class A Common Stock issued and
outstanding and 1,775,028 shares of Class B Common Stock issued and
outstanding as of September 30, 1998. The figure in the "as
adjusted" columns are based upon these totals and except as set forth
in the preceding sentence, upon the assumptions described in
footnotes 2 and 3 above.
(5) Includes 525 shares of Class A Common Stock owned by Mr. Neumaier's
spouse, as to which he disclaims beneficial ownership. Includes 525
shares of Class A Common Stock owned by Mr. Neumaier's Individual
Retirement Account. Does not include any shares of Class A Common
Stock or Class B Common Stock held by Mr. Neumaier's adult children.
(6) Includes 8,850 shares of Class B Common Stock owned by one of Mr.
Frank's children and 5,067 shares of Class A Common Stock owned by
one of Mr. Frank's children as to which he disclaims beneficial
ownership. Does not include any shares of Class A Common Stock or
Class B Common Stock held by Mr. Frank's other adult children.
Includes 36,625 Shares of Class B Common Stock owned by Mr. Frank's
former spouse as to which he disclaims beneficial ownership except
for the right to vote the shares which he retains pursuant to an
agreement with his former spouse. Includes 515 shares of Class A
Common Stock owned by Mr. Frank's individual retirement account.
(7) Includes 45,726 shares of Class B Common Stock owned in equal amounts
by Mr. Strobel's three children (Mr. Strobel holds 15,171 shares as
custodian for these children), as to which he disclaims beneficial
ownership.
Page 44 of 49
(8) Includes an aggregate of 21,047 shares of Class B Common Stock owned
by two trusts created by Mr. Gross of which he and his spouse are the
sole beneficiaries during their lifetimes.
(9) Includes 1,050 shares of Class B Common Stock and 150 shares of Class
A Common Stock owned by Mr. Bookbinder's spouse as to which he
disclaims beneficial ownership.
(10) Includes 10,396 shares of Class A Common Stock owned by Mr. Cellino's
spouse, as to which shares he disclaims beneficial ownership; also
includes 1,655 shares of Class A Common Stock owned by Mr. Cellino's
Individual Retirement Account.
(11) Does not include 49,932 shares (19,475 shares of Class A Common Stock
and 30,457 shares of Class B Common Stock) owned by the Company's
Defined Contribution Plan of which Messrs. Gerhard J. Neumaier,
Frank, Silvestro and Strobel constitute four of the five trustees of
each Plan.
(12) Includes 892 shares of Class A Common Stock which may be issued upon
exercise of a stock option granted to one officer in July 1990,
pursuant to the Company's Incentive Stock Option Plan; includes 892
shares of Class A Common Stock which may be issued upon exercise of a
stock option granted to one officer on September 2, 1991 pursuant to
the Company's Incentive Stock Option Plan; includes 787 shares of
Class A Common Stock which may be issued upon the exercise of a stock
option granted to one officer on November 2, 1992 pursuant to the
Company's Incentive Stock Option Plan; does not include 630 shares
of Class A Common Stock which may be issued upon the exercise of a
stock option granted to one officer on April 2, 1994 pursuant to the
Company's Incentive Stock Option Plan; does not include 600 shares of
Class A Common Stock which may be issued upon the exercise of a stock
option granted to one officer on December 2, 1994 pursuant to the
Company's Incentive Stock Option Plan; does not include 2,400 shares
of Class A Common Stock which may be issued upon the exercise of
stock options granted to two (2) officers on December 12, 1995
pursuant to the Company's Incentive Stock Option Plan.
(13) Subject to the terms of the Restrictive Agreement. See "Security
Ownership of Certain Beneficial Owners-Restrictive Agreement".
Restrictive Agreement
Messrs. Gerhard J. Neumaier, Silvestro, Frank, and Strobel entered
into a Stockholders' Agreement in 1970 which governs the sale of an
aggregate of 1,267,818 shares Class B Common Stock owned by them, the
former spouse of one of the individuals and the children of the
individuals. The spouse of one of the individuals and the children of the
individuals. The agreement provides that prior to accepting a bona fide
offer to purchase all or any part of their shares, each party must first
allow the other members to the agreement the opportunity to acquire on a
pro rata basis, with right of over-allotment, all of such shares covered by
the offer on the same terms and conditions proposed by the offer.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
Page 45 of 49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS
------------------------------
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Accountants 17
Consolidated Balance Sheet -
July 31, 1998 and 1997 18
Consolidated Statement of Income
for the fiscal years ended
July 31, 1998, 1997 and 1996 19
Consolidated Statement of Changes in
Shareholders' Equity for the fiscal years
ended July 31, 1998, 1997 and 1996 20
Consolidated Statement of Cash Flows for
the fiscal years ended July 31, 1998,
1997 and 1996 21
Notes to Consolidated Financial Statements 22
2. Financial Statement Schedule
Schedule VIII - Allowance for
Doubtful Accounts 35
All other schedules are omitted because they are not applicable, or
the required information is shown in the consolidated financial statements
or notes thereto.
3. Exhibits
Exhibit No.Description
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of
Incorporation filed on March 23, 1970 (1)
3.3 Certificate of Amendment of Certificate of
Incorporation filed on January 19, 1982 (1)
3.4 Certificate of Amendment of Certificate of
Incorporation filed on January 29, 1987 (1)
3.5 Certificate of Amendment of Certificate of
Incorporation filed on February 10, 1987 (1)
Page 46 of 49
3.6 Restated By-Laws adopted on July 30, 1986 by Board
of Directors (1)
3.7 Certificate of Change Under Section 805-A of the
Business Corporation Law filed August 18, 1988 (2)
3.8 Certificate of Amendment of Certificate of
Incorporation filed January 15, 1988 (2)
4.1 Specimen Class A Common Stock Certificate (1)
4.2 Specimen Class B Common Stock Certificate (1)
10.1 Stockholders' Agreement among Gerhard J. Neumaier,
Ronald L. Frank, Frank B. Silvestro and Gerald A.
Strobel dated May 12, 1970 (1)
10.4 Ecology and Environment, Inc. Defined Contribution
Plan Agreement dated July 25, 1980 as amended on
April 28, 1981 and July 21, 1983 and restated
effective August 1, 1984 (1)
21.5 Schedule of Subsidiaries as of July 31, 1997 (3)
23.0 Consent of Independent Accountants (4)
FOOTNOTES
(1) Filed as exhibits to the Company's
Registration Statement on Form S-1, as
amended by Amendment Nos. 1 and 2,
(Registration No. 33-11543), and
incorporated herein by reference.
(2) Filed as exhibits to the Company's Form 10-K
for Fiscal Year Ending July 31, 1988, and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form
10-K for Fiscal Year ending July 31, 1997,
and incorporated herein by reference.
(4) Filed herewith.
(b) Reports on Form 8-K
Registrant has not filed any reports on Form 8-K during the fourth
quarter ended July 31, 1998.
Page 47 of 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ECOLOGY AND ENVIRONMENT, INC. has duly
caused this Annual Report to be signed on its behalf by the undersigned
hereunto duly authorized:
Dated: October 29, 1998 ECOLOGY AND ENVIRONMENT, INC.
By: /s/ Gerhard J. Neumaier
Gerhard J. Neumaier, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated:
Signature Title Date
- ------------------------ --------------------- ----------------
/s/ Gerhard J. Neumaier President October 29, 1998
Gerhard J. Neumaier (Chief Executive
Officer)
/s/ Frank B. Silvestro Executive October 29, 1998
Frank B. Silvestro Vice-President
/s/ Gerald A. Strobel Executive October 29, 1998
Gerald A. Strobel Vice-President
/s/ Ronald L. Frank Secretary, October 29, 1998
Ronald L. Frank Treasurer, Executive
Vice-President of
Finance
(Principal Financial
and Accounting Officer)
/s/ Gerard A. Gallagher, Jr. Senior Vice President October 29, 1998
Gerard A. Gallagher, Jr. of Special Projects
and Director
/s/ Ralph Bookbinder Director October 29, 1998
Ralph Bookbinder
/s/ Harvey J. Gross Director October 29, 1998
Harvey J. Gross
/s/ Ross M. Cellino Director October 29, 1998
Ross M. Cellino
Page 48 of 49
Exhibit Index
Exhibit 23 Consent of Independent Accountants
Page 49 of 49
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-41998 and 333-30085) of Ecology and
Environment, Inc. of our report dated October 27, 1998, appearing on page
17 of this Form 10-K. We also consent to the reference to us under the
heading "Experts" in such Registration Statement (33-41998).
PricewaterhouseCoopers LLP
Buffalo, New York
October 27, 1998