10-K 1 rivers1.txt ECOLOGY AND ENVIRONMENT, INC. 2005 10-K UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2005 or [ ] TRANSITION REPORT 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 14086-1397 -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (716) 684-8060 ---------------------------------------------------- (Registrant's telephone number, including area code) 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) Page 2 of 49 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Act). Yes [ ] No [X] Exhibit Index on Page 47 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of September 30, 2005, 2,420,000 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, 2005) of the Class A Common Stock held by non-affiliates of the registrant was approximately $19,844,000. As of the same date, 1,643,045 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 ended July 31, 2003 and 2004 are incorporated by reference in Part IV of this Form 10-K. Page 3 of 49 TABLE OF CONTENTS ----------------- Page PART I ---- ------ Item 1. BUSINESS General 4 START Contracts 4 Saudi Arabia / Kuwait Contracts 4 Task Order Contracts 5 Environmental Consulting Services 5 Analytical Laboratory Services 7 Aquaculture 7 Segment Reporting 7 Regulatory Background 7 Potential Liability and Insurance 8 Market and Customers 9 Backlog 9 Competition 9 Employees 9 Item 2. PROPERTIES 9 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 11 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18 Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 40 Item 9A. CONTROLS AND PROCEDURES 40 Item 9B. OTHER INFORMATION 40 PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 41 Item 11. EXECUTIVE COMPENSATION 42 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS 43 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 46 PART IV ------- Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES 47 Page 4 of 47 PART 1 ------ Item 1. BUSINESS General ------- Ecology and Environment, Inc. ("EEI" or the "Company") is a broad based environmental consulting 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. 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 2000, the United States Environmental Protection Agency ("EPA") awarded the Company three (3) regional Superfund Technical Assessment and Response Teams ("START") contracts to provide technical expertise in support of its hazardous waste spill response, removal and prevention programs in the eastern and western United States. The Company is required to provide round the clock assistance to the EPA at spill sites within the eastern 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 a combination of fixed price and cost plus fixed fee contracts. The total value of the three (3) START contracts, if the EPA exercises all options within each of them, was approximately $89 million. The base value of the three (3) START contracts over their five year term was approximately $26.0 million. The eastern contract ended in June 2005 and resulted in total net revenues of approximately $10.3 million. The EPA can exercise options covering additional increased quantities for the two remaining western contracts which expire in December 2005. An extension for up to three additional months has been exercised on one of the remaining contracts. Both of the remaining START contracts were rebid in September 2005 and the EPA anticipates award announcements during E&E's second quarter of fiscal year 2006. The Company, as of July 31, 2005, has realized total net revenues of approximately $36.4 million under these remaining two contracts. These contracts contain termination provisions under which the EPA may, without penalty, 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. The Company has never had a contract terminated by the EPA. Saudi Arabia/Kuwait Contracts ----------------------------- The Company has provided assistance to the Kingdom of Saudi Arabia and the State of Kuwait since 1995 in support of environmental damage claims filed by these countries with the United Nations Compensation Commission (UNCC) resulting from Iraqi aggression during the 1991 Gulf War. On October 30, 2001, the Company through its majority-owned Saudi subsidiary secured a significant expansion of an existing contract with Saudi Arabia (2001 Oversight Contract) and through a majority-owned domestic subsidiary entered into three new contracts with Kuwait. The contract for work with Saudi Arabia provides for the oversight and supervision of the implementation of monitoring and assessment studies to determine the extent of damage to marine, coastal and terrestrial resources. The contracts for work with Kuwait provide for conducting terrestrial and coastal monitoring and assessment studies as well as the establishment and operation of an environmental laboratory in Kuwait. The 2001 Oversight Contract with Saudi Arabia was a time and materials contract for approximately $22.8 million of net revenue and covered a 30 month period ended April 30, 2004. The three fixed price contracts with Kuwait are for a period of five years and total approximately $29 million of expected net revenues. However, the laboratory fixed price contract in Kuwait contains a time and materials portion that could yield an additional $4.0 million of net revenue. On September 21, 2002, the Company's majority-owned Saudi subsidiary secured a second contract in Saudi Arabia. This contract is a $19 million fixed price agreement for a five-year period with the Kingdom of Saudi Arabia for the Implementation of the Public Health Claim Studies. These studies will support the Kingdom's claims to be filed with the UNCC. In June 2004, E&E signed an additional contract with the Kingdom of Saudi Arabia in the amount of $2.4 million for fifth installment preplanning work, bringing the total contract work in Saudi Arabia to a total of $44.2 million of expected revenues ($41.4 of net revenues). The Company, as of July 31, 2005, has recognized net aggregate revenues of approximately $39.0 and $26.6 million from the Saudi and Kuwait contracts, respectively, and the contracts in Saudi Arabia are substantially complete. The contracts in Saudi Arabia are through the Company's majority owned (66 2/3%) subsidiary Ecology and Environment of Saudi Arabia Co., LTD. (EESAL). The Company has an agreement with the other minority shareholder of EESAL to divide any profits in EESAL from the current contracts equally, and to pay to the minority shareholder a commission of 5% of the total contract values. The commission and Page 4 of 49 additional profit sharing covers on-going representation in the Kingdom, logistical support including the negotiation and procurement of Saudi national personnel, facilities, equipment, licenses, permits, and any other support deemed necessary in the implementation and performance of the Saudi contracts. As of July 31, 2005 the Company has incurred expense of $1,976,000 ($141,000 in fiscal year 2005, $944,000 in fiscal year 2004, $505,000 in fiscal year 2003 and $386,000 in fiscal year 2002) under the terms of this commission agreement. These contracts in Saudi Arabia and Kuwait contain termination provisions under which the government contracting for the work may, without penalty, terminate the contract. In the event of termination, the Company's subsidiary would be paid only termination costs in accordance with each of the contracts. Termination costs include revenue earned up to the date of termination and reasonable costs of repatriation of employees. The Company has never had a contract terminated by Saudi Arabia or Kuwait. Deferred revenue balance at July 31, 2005 represents net advances received under the Kuwait contract. The Company has received $12.4 million of advances under the Kuwait contracts of which $232,000 is still remaining. Deferred revenue is recognized as earned over the respective contract periods. Task Order Contracts -------------------- The Company has numerous task order contracts with state and federal governmental agencies which contain indefinite order quantities and/or option periods ranging from two to ten years. The maximum potential gross revenues included in these contracts is approximately $141.6 million. This figure includes $3.8 million of work under the two remaining START contracts expiring in December 2005. Work done under task orders run the full range of services provided by EEI from risk management plans; to air quality control; to groundwater monitoring; to hazardous materials (HAZMAT) response plans; to solid waste management; and to strategic information management and database support. Environmental Consulting Services --------------------------------- The Company's staff includes individuals with advanced degrees representing over 75 scientific and engineering disciplines that relate to the identification, quantification, analysis, and remediation of hazards to the environment. The Company has rendered consulting services to commercial and government clients in a variety of service sectors, such as the following: 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 cleanup programs and assists in the implementation and monitoring of those cleanup 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 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 cleanup 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 cleanup 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. Homeland Protection / Emergency Response ---------------------------------------- Around the world, recent events involving terrorism and bioterrorism have raised the concern for public health and safety as well as environmental protection. EEI's Homeland Protection Services include logistics support, emergency response, and comprehensive planning and preparedness offered to both governmental and private industry clients. EEI has extensive experience as to local vulnerabilities, assets and existing emergency response plans, in addition to the state and federal laws and regulations that affect emergency response plans. EEI supports all phases of incident management-preparedness, mitigation, response and recovery. For the past 30 years, EEI has assisted its clients in preparing for potential disasters, both man-made and natural. The Company has assessed potential threats, evaluated resources, developed response plans, trained personnel and conducted exercises. In addition, the Company has responded to thousands of emergencies and has monitored and has managed the restoration of the environment after incidents. EEI has provided science and environmental engineering expertise at high- profile disasters and incidents including large oil spills in United States waterbodies; dioxin contamination in the Midwest; Anthrax threats in the United States in 2002; the 1991 Gulf War oil fires in Kuwait; Page 6 of 49 and the September 11, 2001 terrorist attacks. In addition to emergency response, the Company also provides critical training to first responders in nuclear, biological, and chemical/counter-terrorism and in HAZMAT identification, response and remediation; develops standard operating procedures for health and safety at hazardous sites; assesses sites and potential for danger; and develops prevention/preparedness/outreach activities. Pipelines --------- EEI has provided the pipeline industry with full-service environmental support for more than 30 years. The Company's extensive experience includes route selection; field support and survey, such as wetland delineation and endangered species surveys; regulatory compliance and permit support, including preparation of erosion control plans for submission to state agencies, Section 10 and Section 404 permits for submission to the United States Army Corps Engineers, and Federal Energy Regulatory Commission 7(c) filings; and preparation of environmental monitoring and restoration plans, including development of quality assurance specifications. The Company has developed and implemented work plans for contamination assessment, Phase I and II sampling, and supports clients for Phase III remediation. Power ----- With the deregulation of certain sectors of the power industry and the electrical supply shortage of 2001, there is a rapidly increasing demand for new power plants. Companies that can quickly permit new power generation capacity are poised to reap the benefits of the power market's remarkable revitalization, both domestically and abroad. EEI has specialized in providing comprehensive environmental services for the power industry since the Company's inception. The Company has experience with licensing requirements and processes worldwide and conducts comprehensive site selection programs which include assessment of engineering constraints such as the location and availability of fuel and cooling water as well as grid interconnection and transmission issues; and assessment of environmental issues such as air quality, water quality, terrestrial and aquatic vegetation and wildlife, and cultural heritage. For existing energy facilities, EEI has completed over 100 due diligence audits. The Company also helps power companies meet the daily regulatory requirements for power generation and/or transmission. Liquefied Natural Gas (LNG) --------------------------- The increased domestic demand for clean burning natural gas combined with acceleration of worldwide development of stranded gas reserves, has increased the need for new and expanded LNG export and import facilities. Project developers rely on EEI for essential environmental support services, because of the Company's extensive experience in addressing key siting, environmental permitting, engineering, safety, and regulatory elements associated with planning, design and operation of LNG liquefaction and regasification facilities. EEI has conducted environmental and safety studies for LNG facilities in the United States, Canada, Bahamas, Norway, Trinidad, and Indonesia. The studies have involved analyses of oceanographic, navigational, and meteorological conditions to determine whether access by LNG tankers would be feasible and safe, and whether operation of the facilities would be uninterrupted. In addition, EEI has studied the compatibility of LNG facilities with the present and projected uses of waterways and adjacent lands, the potential risks to the general public near prospective sites, and the potential effects of facility construction and operation on terrestrial and aquatic ecosystems. Environmental Assessments ------------------------- In response to requirements of the National Environmental Policy Act (NEPA) and other state environmental laws, EEI has provided environmental evaluation services to both the government and the private sector for more than 30 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. Wetlands -------- EEI has assisted clients with various projects involving wetland delineations, environmental impact assessments, impact minimizations, and mitigation during large construction or habitat restoration projects. The Company's experts continuously study and apply innovative ecosystem management techniques to expand their understanding of the complex biochemical, physical, and ecological interactions that exist in wetlands. EEI has experience in using wetlands to remediate chlorinated hydrocarbon contamination. In 1998, the Company constructed a full-scale pilot wetland to assess the feasibility and effectiveness of treating a major chlorinated plume with a treatment wetland. International ------------- EEI has over 20 years experience in international work. The Company now has partners in over 30 countries and has completed over 15,000 major environmental assignments in over 67 countries worldwide. Assignments completed are in fields such as environmental assessment; management and financial planning; institutional strengthening and standards development; water supply and development; wastewater Page 7 of 49 treatment; and solid waste project construction supervision. The Company also has extensive experience working with environmental development contracts funded by international lending institutions such as the Asian Development Bank and the World Bank. For the fiscal years ending July 31, 2005, 2004 and 2003 the net aggregate revenues from international work amounted to $13.4 million, $33.7 million and $30.3 million, respectively. Analytical Laboratory Services ------------------------------ The Company owns a facility in Lancaster, New York where its analytical testing laboratory was located. The Company discontinued its analytical testing operations during fiscal year 2005 and has recognized impairment losses of $2.8 million under continuing operations. See Item 2, Properties, Item 7, Management Discussion and Analysis, and Note 21 in the Notes to Consolidated Financial Statements. Aquaculture ----------- The Company owns an aquaculture shrimp facility (Frutas Marinas, S.R.L.) in the province of Puntarenas on the Pacific coast of Costa Rica. The facility includes 400 hectares of land of which 193 hectares is shrimp aquaculture ponds. The Company decided to discontinue the operation in July 2003 and has recognized an impairment loss in discontinued operations in fiscal year 2003. The remaining assets of the shrimp farm are currently classified as assets of discontinued operations held for sale. See Item 7, Management Discussion and Analysis and Note 20 in the Notes to Consolidated Financial Statements. The Company also owns the assets of a fish farm located in Jordan. The farm is located on the banks of the Jordan River 120 kilometers north of Amman. The assets were purchased in July 2001 through a newly formed entity, American Arab Aquaculture Company (AMARACO), of which EEI owns 51%. AMARACO has invested approximately $500,000 to upgrade the farm's infrastructure, production methods, and species selection. The Company recognized an impairment loss of $442,000 ($139,000 net of minority interest and taxes) in fiscal year 2004 for the long-lived assets of AMARACO. See Item 7, Management Discussion and Analysis, and Note 20 in the Notes to Consolidated Financial Statements. Segment Reporting ----------------- The Company has three reportable segments: consulting services, analytical laboratory services, and aquaculture. Refer to the Company's financial statements for fiscal year 2005 contained in Item 8 hereof for additional pertinent information on the Company's segments. 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. 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. Page 8 of 49 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 manufacturing, use and disposal of chemical substances. The 1986 amendments to TSCA and its implementing regulations require school systems to inspect their buildings for asbestos, 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, record keeping, 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 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. Most 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 fundamentally redefined the regulation of air pollutants. The Clean Air Act Amendments of 1990 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. Safe Drinking Water And Clean Water Acts ("SDWA") ------------------------------------------------- The SDWA of 1996 and recent regulatory changes under the Clean Water Act (CWA) work together in order to ensure that the public is provided with safe drinking and recreational waters by utilizing watershed approaches and applying similar principles (Total Maximum Daily Load, National Pollution Discharge Elimination System, Source Water Assessment Program, Storm Water Program). Thus, they supplement and help one another more effectively reach each other's goals. The Company assists public and private clients in developing and establishing pollution prevention programs, assisting clients in monitoring ground, waste and stormwater systems, and helping clients with water permitting and compliance issues. Other ----- The Company's operations are also influenced by other federal, state, and international laws and regulations protecting the environment. In the U.S. market, other regulatory rules and provisions that influence Company operations, in addition to those discussed above, are the Atomic Energy Act (AEA), and the Oil Pollution Control Act (OPA). Examples of services provided by the Company as a result of these laws include the development of spill prevention control and emergency prevention procedures, as well as countermeasure plans for various facilities potentially affecting human health and the environment. 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. Internationally, since many overseas markets remain "undeveloped" when compared with that of the United States and other Western countries, the Company's expanding operations in these markets are primarily influenced by environmental laws focusing on infrastructure, development, and planning related activities. Potential Liability and Insurance --------------------------------- The Company's contracts generally require it to maintain certain insurance coverages and to indemnify its clients for claims, damages or losses for personal injury or property damage relating to the Company's 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, Page 9 of 49 however, certain pollution exclusions apply. Historically, the Company has been able to purchase an errors and omissions insurance policy that covers its 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. The Company's general liability insurance policy provides coverage in the amount of $3.0 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. 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 -------------------- The Company's revenues originate from federal, state and local governments, domestic private clients, and private and governmental international clients. The Company's worldwide marketing efforts are conducted by its marketing group located at its headquarters, its regional offices, and its international subsidiaries. EEI markets its services to existing and potential governmental, industrial and engineering clients. The Company closely monitors government contract procurements and responds to requests for proposals requiring services provided by the Company. The marketing group also monitors government regulation and other events that may generate new business by requiring governments and industrial firms to respond to new regulatory actions. The marketing group is supported by EEI's technical staff which is responsible for preparing technical proposals that are customarily delivered with the Company's bid for a project. The Company participates in industrial trade shows and professional seminars relating to its business. Backlog ------- The Company's firm backlog of uncompleted projects and maximum potential gross revenues from indefinite task order contracts, at July 31, 2005 and 2004 were as follows: (Millions of $) Fiscal Year Fiscal Year Ended 7/31/05 Ended 7/31/04 ------------- ------------- Total firm backlog $ 43.2 $ 40.5 Anticipated completion of firm backlog in next twelve months 33.5 23.3 Maximum potential gross revenues from task order contracts 141.6 178.3 The above maximum figures for fiscal year 2005 and 2004 include potential revenue backlog attributable to the options under the START contracts of $3.8 million and $52.0 million, respectively. 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, 2005, the Company, including subsidiaries, had approximately 700 employees. The majority of the employees hold bachelor's degrees and/or advanced degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural and transportation engineering, biology, geology, hydrogeology, ecology, urban and regional planning and oceanography. 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 are 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 warehouse facility and its former laboratory in Lancaster, New York consists of two buildings totaling approximately 35,000 square feet (see Analytical Page 10 of 49 Laboratory Services section of Item 1, Business). This facility is currently held for sale. The Company also leases office and storage facilities at twenty one (21) regional offices in the United States, with terms which generally coincide with the duration of the Company's contracts in those areas. The Company's subsidiaries also own the shrimp and fish farms described in the Aquaculture section of Item 1, Business. The shrimp farm property in Costa Rica is currently held for sale. 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. On January 8, 2005 Othman Al-Rashed and Kuwaiti Engineering Group (KEG) filed a lawsuit in New York State Supreme Court, County of New York, as Plaintiffs, against the Consortium of International Consultants, LLC (CIC) and Safege Consulting Engineers (Safege) as Defendants which legal proceeding was described in Park II, Item 1, Legal Proceedings of the Company's Quarterly Report for the quarterly period ended April 30, 2005 on Form 10-Q. The Plaintiff served an Amended Complaint on the Defendants in July 2005. CIC is a majority-owned subsidiary of the Company, which entered into a multi-year monitoring and assessment contract in Kuwait (the Project). As a result of the amended complaint, the Company is not named as a defendant in the lawsuit and CIC is only named as a nominal party against which the Plaintiffs are not seeking relief. The Amended Complaint alleges claims against Defendant Safege in connection with the Project and seeks damages of $5,000,000 for a breach of contract claim and a further claim by KEG against Safege for $10,000,000 of punitive damages. The Company believes that the claims in this lawsuit are either without merit or are the sole responsibility of Safege. One of the Company's majority owned subsidiaries was a co-defendant in a lawsuit connected to work performed on a remediation project at a mine site. The plaintiffs filed for damages of approximately $35 million. The Company believes these claims were without merit. The insurance companies for all of the co-defendants resolved that lawsuit. The subsidiary company has recently received a demand for payment of additional claims, not yet filed, related to the above-mentioned work. The subsidiary company has insurance for such claims, if ever filed, and intends to put forth a vigorous defense should such claims be actually filed. The Company is involved in other litigation arising in the normal course of business. In the opinion of management, any adverse outcome to other litigation arising in the normal course of business would not have a material impact on the financial results of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Page 11 of 49 PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (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 2005 ----------- High Low ------ ----- First Quarter (commencing August 1, 2004 - October 30, 2004) $9.75 $8.80 Second Quarter (commencing October 31, 2004 - January 29, 2005) 9.00 7.65 Third Quarter (commencing January 30, 2005 - April 30, 2005) 8.00 6.00 Fourth Quarter (commencing May 1, 2005 - July 31, 2005) 7.00 6.22 FISCAL 2004 ----------- High Low ------ ----- First Quarter (commencing August 1, 2003 - November 1, 2003) $11.25 $9.40 Second Quarter (commencing November 2, 2003 - January 31, 2004) 10.29 9.40 Third Quarter (commencing February 1, 2004 - May 1, 2004) 11.52 9.75 Fourth Quarter (commencing May 2, 2004 - July 31, 2004) 10.59 8.63 Approximate Number of Holders of Class A Common Stock. As of September 30, 2005, 2,420,000 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 433. 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 1,643,045 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 64. Dividends. In the fiscal years ended July 31, 2004 and 2005 the Company declared and paid two cash dividends totaling $.34 per year, 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. 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. Equity Compensation Plan Information as of July 31, 2005:
Number of securities Weighted average Number of to be issued upon exercise price securities exercise of of outstanding remaining outstanding options, options, warrants available for Plan category warrants and rights and rights future issuance ------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders: 1986 Incentive Stock Option Plan 10,400 $7.25 - 2003 Stock Award Plan - - 118,674 Equity compensation plans not approved by security holders: Page 12 of 49 1998 Stock Award Plan - - - ------------------------------------------------------------ Total 10,400 - 118,674
Refer to Note 10 to Consolidated Financial Statements set forth in Part IV of this Annual Report on Form 10-K for more information on the Equity Compensation Plans. (b) Not Applicable (c) Purchased Equity Securities. The following table summarizes the Company's purchases of its common stock during the fiscal year ended July 31, 2005.
Total Number of Shares Purchased Maximum Number as Part of of Shares that May Total Number Average Publicly Yet Be Purchased of Shares Price Paid Announced Plans Under the Period Purchased per Share of Programs (1) Plans or Programs ----------------------------------------------------------------------------------------------------- August 1, 2004 - July 31, 2005 62,500 $8.45 62,500 17,034
(1) The Company purchased 2,500 shares of its Class A common stock during the fourth quarter of its fiscal year ended July 31, 2005 pursuant to a 200,000 share repurchase program approved at the Board of Directors meeting held in January 2004. The purchases were made in open-market transactions. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The financial statements presented below have been reclassified to give retroactive effect to the FY 2003 discontinuance of the Company's shrimp farm operations. See note No. 20 to the Notes to Consolidated Financial Statements for additional information.
Year Ended July 31, ------------------- 2005 2004 2003 2002 2001 --------------------------------------------------------- (In thousands, except per share amounts) Operating data: -------------- Gross revenues $91,351 $110,623 $ 116,214 $85,862 $75,411 Net revenues 74,461 89,501 87,771 73,408 73,148 Income (loss) from operations (1,951) 5,994 7,679 5,017 4,472 Income (loss) from continuing operations before income taxes and minority interest (2,618) 6,000 7,421 5,146 4,850 Net income (loss) from continuing operations $1,424) $ 2,632 $ 3,790 $ 3,125 $ 2,558 Net loss from discontinued operations (163) (231) (4,992) (1,716) (663) Net income (loss) -------------------------------------------------------- $(1,587) $ 2,401 $ (1,202) $ 1,409 $ 1,895 Net income (loss) per common share: basic Continuing operations $ (0.36) $ 0.66 $ 0.95 $ 0.77 $ 0.62 Discontinued operations (0.04) (0.06) (1.25) (0.42) (0.16) --------------------------------------------------------- Net income (loss) per common share: basic $ (0.40) $ 0.60 $ (0.30) $ 0.35 $ 0.46 Page 13 of 49 Net income (loss) per common share: diluted Continuing operations $ (0.36) $ 0.65 $ 0.94 $ 0.77 $ 0.62 Discontinued operations (0.04) (0.06) (1.23) (0.42) (0.16) --------------------------------------------------------- Net income (loss) per common share: diluted $ (0.40) $ 0.59 $ (0.29) $ 0.35 $ 0.46 Cash dividends declared per common share Basic and Diluted $ 0.34 $ 0.34 $ 0.33 $ 0.32 $ 0.32 Weighted average common shares outstanding: Basic 3,962,699 3,985,716 3,996,796 4,069,848 4,103,740 Diluted 3,962,699 4,041,242 4,050,385 4,072,694 4,103,740
Year Ended July 31, ------------------- 2005 2004 2003 2002 2001 -------------------------------------------------------- (In thousands, except per share amounts) Balance sheet data: ----------------- Working capital $27,713 $27,480 $27,479 $30,268 $24,019 Total assets 55,978 62,504 76,382 74,471 57,686 Long-term debt 328 336 137 - 40 Shareholders' equity 36,284 39,383 38,378 41,294 42,338 Book value per share: Basic $9.16 $9.88 $9.60 $10.15 $10.31 Diluted $9.16 $9.75 $9.48 $10.14 $10.31
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources ------------------------------- Operating activities generated positive cash flow of $5.6 million in fiscal year 2005 compared to a use of $650,000 of cash in the prior year. A reduction in accounts receivable of $5.9 million contributed to the increased cash flow mainly due to a slow down of work in the Middle East and collections on accounts receivable. Accounts Payable, accrued payroll costs, and other accrued liabilities all contributed to uses of cash due mainly to reduced sales and the payment of prior year bonuses. The Company purchased $246,000 of new capital equipment compared to depreciation charges of $1.5 million. Borrowings contributed $748,000 of cash while dividends, debt repayments, and stock buybacks consumed $2.6 million of cash. The Company maintains an unsecured line of credit of $20.0 million with a bank at 1/2% below the prevailing prime rate. A second line of credit is available at another bank for up to $13.5 million, exclusively for letters of credit. The Company has outstanding letters of credit (LOC's) at July 31, 2005 in the amount of $2.4 million. These LOC's were obtained to secure advance payments and performance guarantees for contracts in the Middle East. After LOC's, there are no outstanding borrowings under the lines of credit and there is $31.1 million of line still available at July 31, 2005. There are no significant additional working capital requirements pending at July 31, 2005. The Company believes that cash flows from operations and borrowings against the line of credit will be sufficient to cover all working capital requirements for fiscal year 2006. Page 14 of 49 Contractual Obligations -----------------------
Payments due by period --------------------------------------------------------- Less than 1-3 3-5 More than Contractual Obligations Total 1 year years years 5 years --------------------------------------------------------------------------------------- Long-Term Debt Obligations $ 508,978 $ 255,298 $ 109,724 $ 43,811 $100,145 Capital Lease Obligations 143,146 68,773 65,756 8,617 - Operating Lease Obligations (1) 4,711,313 2,298,209 1,727,600 597,626 87,878 Other Liabilities (2) 231,611 231,611 - - - --------------------------------------------------------------------------------------- Total $5,595,048 $2,853,891 $1,903,080 $650,054 $188,023 ======================================================
(1) Represents rents for office and warehouse facilities (2) Consists of Deferred Revenue on the Kuwait contract Results of Operations --------------------- Net Revenue ----------- Fiscal Year 2005 vs 2004 Net revenues for the fiscal year ended July 31, 2005 were $74.5 million, down 17% from the $89.5 million reported in fiscal year 2004. The decrease was attributable to the closing of the Company's Analytical Services Center (ASC) and a drop in work performed on the contracts in Saudi Arabia and Kuwait as they approach completion. The contracts in the Middle East are substantially finished and range from 93% to 100% complete. The net revenues in Saudi Arabia decreased from $16.9 million in fiscal year 2004 to $2.7 million in fiscal year 2005, while the net revenues in Kuwait decreased from $10.0 million in fiscal year 2004 to $3.5 million in fiscal year 2005. The Company closed its Analytical Services Center in Lancaster, N.Y. during the second quarter of the fiscal year 2005. As a result, ASC net revenues decreased $3.0 million for fiscal year 2005 and $1.0 million during the fourth quarter. Net revenues from U.S. Department of Defense (DOD) clients decreased $2.2 million or 18% from the $12.4 million reported in fiscal year 2004. The decrease in DOD net revenues is attributable to reduced work levels on various United States Army Corps of Engineers (USACE) and United States Air Force contracts. Net revenues from commercial clients increased $1.2 million or 14% from the $8.6 million reported in fiscal year 2004. The increase in commercial net revenues is attributable to increased activity on various LNG contracts. Net revenues from state clients increased $2.3 million or 16% from the $14.9 million reported in fiscal year 2004. The increase in state net revenues is attributable to increased work levels on contracts in Florida, Oregon and New York. The Company reported increased net revenues in Walsh Environmental, E&E do Brasil, and Gestion Ambiental Consultores (GAC), three of its subsidiaries. Net revenues from these subsidiaries increased $2.9 million, $1.5 million, and $624,000, respectively, for fiscal year 2005. The increase in Walsh is due to higher revenues from its subsidiary in Peru and the full year consolidation of Gustavson Associates. Net revenues from the three Superfund Technical Assessment and Response Team (START) contracts remained flat at approximately $10.0 million compared to fiscal year 2004. The Company's START contract in EPA Region 3 ended in June 2005 and the two remaining START contracts are scheduled to end in December 2005, although an extension for up to three additional months has been exercised on one of the remaining contracts. Both of the remaining START contracts were rebid in September 2005 and the EPA anticipates award announcements during E&E's second quarter of fiscal year 2006. The decrease in net revenues for the fourth quarter of fiscal year 2005 was attributable to the winding down of the contracts in Saudi Arabia and Kuwait and the closing of the ASC. Net revenues from the contracts in the Middle East decreased $4.9 million or 87% as these contracts near completion. Offsetting these decreases was an increase in net revenues from Walsh Environmental, E&E do Brasil, and GAC. Net revenues from these subsidiaries increased $661,000, $361,000, and $340,000, respectively, for the fourth quarter of fiscal year 2005. Net revenues from state clients for the fourth quarter of fiscal year 2005 increased $1.0 million or 28% from the $3.7 million reported in the fourth quarter of fiscal year 2004. The increase in state net revenues is attributable to increased work levels on contracts in Florida and New York. Fiscal Year 2004 vs 2003 Net revenues for the fiscal year ended July 31, 2004 were $89.5 million, up 2% from the $87.8 million reported in fiscal year 2003. The Company's contracts in Saudi Arabia accounted for the majority of the annual increase. The work in Saudi Arabia increased 11.4 million to $16.9 million. The Company also signed a $2.4 million contract for fifth installment preplanning work during the fourth quarter of fiscal year 2004. Net revenues reported for Commercial clients were $8.6 million, down 38% from the $13.8 million reported in fiscal year 2003. This was Page 15 of 49 attributable to the completion of a major contract in the energy industry. Net revenues reported for DOD clients were $12.4 million for fiscal year 2004, down 19% from the $15.2 million reported in fiscal year 2003 due to reduction in funding for environmental projects in the Company's fourth quarter for laboratory services and fieldwork. One of the Company's majority owned subsidiaries, Walsh Environmental, reported net revenues of $8.3 million for fiscal year 2004, an increase of $1.1 million from the $7.2 million reported in fiscal year 2003. The majority of this increase was due to the consolidation of Gustavson Associates, acquired by Walsh Environmental during the fourth quarter of fiscal year 2004. Gustavson Associates reported net revenues of $527,000 during the fourth quarter of fiscal year 2004. Net revenues for the fourth quarter of fiscal year 2004 were $21.6 million, down 12% from the $24.5 million reported in fiscal year 2003. The decrease in fourth quarter net revenues was attributable to a drop in net revenues from various commercial, state and DOD clients. Net revenues reported for Commercial clients during the fourth quarter of fiscal year 2004 were $2.3 million, down 26% from the $3.1 million reported in the fourth quarter of fiscal year 2003. DOD clients reported net revenues of $2.8 million for the fourth quarter of fiscal year 2004, down 28% from the $3.9 million reported in prior year. Net revenues reported for various State clients during the fourth quarter of fiscal year 2004 were $3.7 million, down $516,000 from the $4.2 million reported in the fourth quarter of fiscal year 2003. Walsh Environmental reported an increase in fourth quarter net revenues of $667,000 due to the consolidation of Gustavson Associates. The Company's Analytical Services Center (ASC) reported net revenues of $5.0 million for fiscal year 2004 and $1.0 million in the fourth quarter, a 47% decrease in net revenues for the fourth quarter and a total decrease of 14% for the fiscal year. The ASC's decreased volume in the fourth quarter is attributable to a significant drop in samples received for environmental projects due to funding cutbacks by the DOD for environmental field operations as a result of the Iraq war. The Company had taken steps at the end of fiscal year 2004 and in the first quarter of fiscal year 2005 to downsize its laboratory operation to reflect current market conditions through reductions in staff by approximately 40% and is aggressively seeking reductions in other costs by soliciting lower price suppliers. Income From Continuing Operations Before Income Taxes and Minority Interest --------------------------------------------------------------------------- Fiscal Year 2005 vs 2004 The Company's loss from continuing operations before income taxes and minority interest for fiscal year 2005 was $2.6 million, down 144% from the $6.0 million of income reported in the prior year. The decrease in income from continuing operations for the fiscal year was attributable to the Company's ASC impairment loss, reduced net revenues, increased administrative and indirect costs, and a $200,000 gain from the sale of investment securities that the Company recorded during the prior year. The Company recognized a cumulative pre-tax impairment at its ASC facility of $2.8 million during fiscal year 2005. This impairment is shown as continuing operations. Administrative and indirect costs increased $1.6 million or 7% during fiscal year 2005. This increase was attributable to the consolidation of Gustavson Associates to Walsh Environmental, an increase in the administrative staff and office space in E&E do Brasil, and the Company's on-going compliance work in connection with the requirements of the Sarbanes-Oxley Act. The Company incurred approximately $300,000 in costs associated with the compliance work for the Sarbanes-Oxley Act during fiscal year 2005. The Company's income from continuing operations before income taxes and minority interest for the fourth quarter of fiscal year 2005 was $975,000, compared to the $1.0 million of income reported in the fourth quarter of the prior year. Despite a 12% drop in net revenues, the percentage return on income from continuing operations before income taxes and minority interest for the fourth quarter of fiscal year 2005 decreased only slightly (after adjusting for the impairment loss at the fish farm of $442,000 in fiscal year 2004) due to the Company's efforts to control costs and maximize employee utilization. E & E, Inc.'s employee utilization increased 6% during the fourth quarter of fiscal year 2005, compared to the fourth quarter of the prior year. Marketing and related costs decreased $435,000 during the fourth quarter of fiscal year 2005 as a result of the closing of the ASC and efforts to control internal costs. The Company recognized an impairment loss of $442,000 ($139,000 net of minority interest and taxes) during the fourth quarter of fiscal year 2004 for the long-lived assets at its fish farm operation, American Arab Aquaculture Company (AMARACO), located in Jordan. Fiscal Year 2004 vs 2003 The Company's income from continuing operations before income taxes and minority interest for fiscal year 2004 was $6.0 million, down 19% from the $7.4 million reported in the prior year. This reduction was mainly attributable to the reduction in higher margin commercial work and the impairment of the long-lived assets of the Company's fish farm operations located in Jordan. The Company continued to work on the Middle Eastern contracts in Saudi Arabia and Kuwait. However, the marine and coastal and terrestrial studies portion of the work in Kuwait was 90% complete as of July 31, 2004. The environmental laboratory operation in Kuwait was expected to continue. The current contract work in Saudi Arabia was approximately 85% complete and should be substantially completed in fiscal year 2005. The ASC reported an operating loss of $1.4 million for fiscal year 2004 compared to operating loss of $132,000 for the prior year. A decrease in samples from Kuwait and various state clients have accounted for the decrease in operating income. Marketing and related costs have increased 12% as the Company continues to increase business development efforts in the homeland security and international markets while also increasing the ASC marketing staff to help broaden the commercial market base for the ASC. During fiscal year 2004, a gain of Page 16 of 49 $200,000 was recorded on the sale of investment securities and $300,000 of foreign currency exchange gains were realized mainly due to the contracts in Kuwait. The Company's income from continuing operations before income taxes and minority interest for the fourth quarter of fiscal year 2004 was $1.0 million, down 47% from the $1.9 million reported in the fourth quarter of the prior year. The ASC reported an operating loss of $609,000 for the fourth quarter of fiscal year 2004 compared to operating profit of $32,000 for the fourth quarter of the prior year. A significant decrease in lab work from the Kuwait and various state contracts accounted for the ASC's decrease in operating income for the fourth quarter of fiscal year 2004. The reduction in higher margin commercial work also contributed to the reduced earnings in the fourth quarter. Indirect expenses have increased as the Company continues business development efforts in the homeland security and international markets. The Company has recognized an impairment loss of $442,000 ($139,000 net of minority interest and taxes) in fiscal year 2004 for the long-lived assets at its fish farm operations, American Arab Aquaculture Company (AMARACO), located in Jordan. The Company reports results of this fish farm operation under its Aquaculture Segment. The Company has determined that an impairment loss is necessary due to the uncertainty that AMARACO will generate future net cash flows sufficient to recover the carrying value of its long-lived assets. AMARACO was initially purchased in July 2001 and has not generated operating income to date. The future operation of the farm is predicated on an agreement with the Company's partners for an additional capital infusion in the range of $300,000 for working capital. Due to the current uncertainty regarding this agreement and its impact on the future viability of the farm, the Company has recognized an impairment loss on the buildings, improvements and equipment which will continue to be held for use. This impairment loss is included in income (loss) from continuing operations. Impairment Losses ----------------- In January 2005, the Company recognized a $1.6 million impairment loss as a result of its decision to close the ASC. At that time, the impairment of the land and buildings was determined based on the results of an independent appraisal and the equipment values were determined by equipment offers the Company had received. The impairment was precipitated by the Company's decision to close the operation rather than to sustain further losses while attempting to sell the segment as an on-going business. Continued losses incurred in this segment as a result of market price deterioration and a reduced emphasis by the Federal government on analytical laboratory testing was the basis for this decision. In April 2005, the company recorded an additional impairment loss on its remaining ASC land and building assets in the amount of $1.2 million. This was the result of meetings with various commercial brokers that provided the Company with additional information on current market conditions affecting the value of the real estate. The reduced valuation is based on the likelihood that the facility will not be sold to an existing laboratory or research company, but will rather be sold as combination office and warehouse space. The testing equipment was sold during the third quarter. Although all business operations have ceased, the total ASC impairment losses are shown in the accompanying financial statements as from "continuing operations" due to the uncertainty that the assets can be sold within one year under current market conditions. Income Taxes ------------ The Company's tax benefit related to continuing operations for the fiscal year ended July 31, 2005 in the amount of $1.8 million reflects an additional benefit of $660,000 as a result of a change in its estimated reserves for income tax audits. These reserves were re-evaluated and a downward adjustment was made to accommodate the close-out of Internal Revenue service audits of the Company's fiscal years 2001, 2002 and 2003 as reported to the Company during fiscal year 2005. American Jobs Creation Act of 2004 ---------------------------------- In October 2004, Congress passed, and the President signed into law, the American Jobs Creation Act of 2004 (the "Act"). Some key provisions of the act affecting the Company are the repeal of the United States export tax incentive known as the extraterritorial income exclusion (EIE) and the implementation of a domestic manufacturing deduction. The Company is still assessing the impact of the Act. The EIE is phased out over the calendar years 2005 and 2006 with an exemption for binding contracts with unrelated persons entered into before September 18, 2003. These phase-out provisions will allow the Company to maintain an EIE deduction of an undeterminable amount through fiscal year 2007. The Company believes that it will accrue some benefits from the domestic manufacturing deduction, although such benefits are not expected to be material. The domestic manufacturing deduction will be phased in over a six-year period beginning with the Company's fiscal year 2005. The Company is currently evaluating the impact of the repatriation provisions and expects to complete this evaluation by the end of the 2006 fiscal year. The dollar amount of possible dividends being considered ranges from $0 to $400,000 and the related income tax effect would range from $0 to approximately $80,000. Page 17 of 49 Recent Accounting Pronouncements -------------------------------- In December 2004, the Financial Accounting Standards Board (FASB) issued its final standard on accounting for share-based payments (SBP), FASB Statement No. 123R (revised 2004), Share-Based Payment. The Statement requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised. The effective date for public companies is interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested SBP awards at a company's adoption. Management does not anticipate that this Statement will have a significant impact on the Company's financial statements. Critical Accounting Policies and Use of Estimates ------------------------------------------------- Management's discussion and analysis of financial condition and results of operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United State of America. The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, inventories, income taxes, impairment of long-lived assets and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following accounting policies involve its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company maintains reserves for cost disallowances on its cost based contracts as a result of government audits. The Company recently settled fiscal years 1990 thru 1992 for amounts within the anticipated range. However, final rates have not been negotiated under these audits since 1992. The Company has estimated its exposure based on completed audits, historical experience and discussions with the government auditors. The Company recorded an impairment loss on its shrimp farm operation in fiscal year 2003 and on its Analytical Services Center in fiscal year 2005. An estimate of the fair value of its assets was made based on external appraisals of the land and buildings and internal estimates of the realizable value of the equipment. The Company recorded an impairment loss on its fish farm operations in Jordan in fiscal year 2004. An impairment was necessary due to the uncertainty that the farm's estimated future net cash flows would be sufficient to recover the carrying value of its long-lived assets. If these estimates or their related assumptions change, the Company may be required to record additional impairment losses or additional charges for disallowed costs on its government contracts. Changes in Corporate Entities ----------------------------- On May 3, 2004 the Company's sixty-percent owned subsidiary, Walsh Environmental Scientists and Engineers, LLC (Walsh), acquired a sixty- percent interest in Gustavson Associates, LLC (GAL). Walsh paid $150,000 for its interest in GAL. GAL is an independent oil and minerals consultancy providing services to banks, investors, government agencies and industrial clients around the world. Walsh obtained independent valuations to determine opening balance sheet values. Walsh began consolidating the balance sheet and operating results of GAL with its own since the date of acquisition. Walsh's consolidated financial statements are consolidated with the Company's. No proforma statements have been provided due to the relative insignificance of this transaction. On January 8, 2004 the Company entered into an agreement to grant a forty eight percent stake in its Brazilian subsidiary, Ecology and Environment do Brasil, Ltda. (a limited partnership), to three new partners. The new partners are responsible for the in-country marketing and operations of the subsidiary. Any previous earnings, assets and liabilities remained with Ecology and Environment, Inc. The new partners have contributed their business contacts and staff from their old firm. The Company has provided an $80,000 capital contribution to move the office operations from Sao Paulo to Rio de Janeiro. Rio de Janeiro is where the Company believes it will have a more strategic location to market its target clients. During fiscal year 2005, two of the local partners entered into an agreement to purchase the other local partner's shares. This purchase is expected to be completed in fiscal year 2006 and it is not expected to significantly impact the operations of the Brazilian subsidiary. During the second quarter of fiscal year 2005, the Company formed three new subsidiaries as well as a new joint venture. These entities were formed for the purpose of obtaining future work for the Company in the Middle East, Russia, and the State of California. The new entities are as follows: MiddleEast Environmental Consultants, LLC (MEC); E & E International, LLC; E & E Environmental Services, LLC; and E & E Ward BMS Consulting Association (Joint Venture). As of July 31, 2005, only MEC was operational. Page 18 of 49 In June 2005, the Company signed an agreement to sell its 50% ownership in Beijing YiYi Ecology and Environment Engineering Co. , LTD to an existing partner for $240,000. This transaction results in a loss of $72,000 and has been recorded in the accompanying results of operations for fiscal year 2005. During the fiscal year, members of Walsh Unit Holders LLC exercised their options to purchase an additional 1,146 shares of Walsh Environmental Scientists and Engineers, LLC at a cost of $30,360. This caused the E&E, Inc ownership percentage in this company to drop by 1.7%. There are no additional purchase options outstanding as they expired on June 30, 2005. This caused a reduction in the ownership percentage of E & E, Inc. from 60% to 58.3%. Inflation --------- Inflation has not had a material impact on the Company's business because a significant amount of the Company's contracts are either cost based or contain commercial rates for services that are adjusted annually. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company may have exposure to market risk for change in interest rates, primarily related to its investments. The Company does not have any derivative financial instruments included in its investments. The Company invests only in instruments that meet high credit quality standards. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limited default risk, market risk and reinvestment risk. As of July 31, 2005, the Company's investments consisted of short- term commercial paper and mutual funds. The Company does not expect any material loss with respect to its investments. The Company is currently documenting, evaluating, and testing its internal controls in order to allow management to report on and attest to, and its' independent public accounting firm to attest to, the Company's internal controls as of July 31, 2007, as required by Section 404 of the Sarbanes- Oxley Act. The Company has devoted substantial time and expense in this endeavor during fiscal year 2005 and expects to spend additional management time on this in fiscal year 2006 and 2007. If weaknesses in our existing information and control systems are discovered that impede our ability to satisfy Sarbanes-Oxley reporting requirements, the Company must successfully and timely implement improvements to those systems. There is no assurance that the Company will be able to meet these requirements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reports of Independent Registered Public Accounting Firms --------------------------------------------------------- To the Board of Directors and Shareholders of Ecology and Environment, Inc. We have audited the accompanying consolidated balance sheet of Ecology and Environment, Inc. and its subsidiaries as of July 31, 2005, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. In addition, our audit included the financial statement schedule for the year ended July 31, 2005 included in the index at Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ecology and Environment, Inc. and its subsidiaries as of July 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial Page 19 of 49 statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Schneider Downs & Co., Inc. --------------------------- Schneider Downs & Co., Inc. Pittsburgh, Pennsylvania October 26, 2005 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 15(a)(1) present fairly, in all material respects, the financial position of Ecology and Environment, Inc. and its subsidiaries at July 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the two years ended July 31, 2004 listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 our opinion. /s/ PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP Buffalo, New York October 28, 2004 Page 20 of 49
Ecology and Environment, Inc. Consolidated Balance Sheets July 31, July 31, 2005 2004 ---- ---- Assets ------ Current assets: Cash and cash equivalents $ 7,872,116 $ 4,240,333 Investment securities available for sale 120,533 143,647 Contract receivables, net 30,044,340 36,433,300 Deferred income taxes 5,016,908 5,029,233 Other current assets 2,005,426 2,442,900 Assets of discontinued operations held for sale 26,821 29,817 ------------ ------------ Total current assets 45,086,144 48,319,230 Property, building and equipment, net 7,967,883 11,979,886 Deferred income taxes 1,044,524 - Other assets 1,878,984 2,204,510 ------------ ------------ Total assets $55,977,535 $62,503,626 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 5,979,588 $ 6,070,266 Accrued payroll costs 3,837,435 4,611,097 Income taxes payable 36,122 363,114 Deferred revenue 231,611 739,679 Current portion of long-term debt and capital lease obligations 324,071 266,597 Other accrued liabilities 6,673,337 8,495,677 Liabilities of discontinued operations held for sale 290,950 293,048 ------------ ------------ Total current liabilities 17,373,114 20,839,478 Deferred income taxes - 107,960 Deferred revenue - 454,540 Long-term debt and capital lease obligations 328,053 336,393 Minority Interest 1,992,544 1,382,412 Commitments and contingencies (see note #15) - - 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-2,514,235 and 2,501,985 shares 25,143 25,021 Class B common stock, par value $.01 per share; authorized-10,000,000 shares; issued-1,669,304 and 1,681,304 shares 16,693 16,813 Capital in excess of par value 17,622,172 17,592,444 Retained earnings 22,002,059 24,972,691 Accumulated other comprehensive income (2,236,051) (2,336,723) Unearned compensation, net of tax (158,993) (193,282) Treasury stock - Class A common, 94,235 and 61,490 shares; Class B common, 26,259 and 26,259 shares, at cost (987,199) (694,121) ------------ ------------ Total shareholders' equity 36,283,824 39,382,843 ------------ ------------ Total liabilities and shareholders' equity $55,977,535 $62,503,626 ============ ============ The accompanying notes are an integral part of these financial statements.
Page 21 of 49
Ecology and Environment, Inc. Consolidated Statements of Income Year ended July 31, -------------------------------------------- 2005 2004 2003 ---- ---- ---- Gross Revenues $91,350,613 $110,623,427 $116,214,080 Less: direct subcontract costs 16,890,103 21,122,904 28,443,277 ------------ ------------- ------------- Net revenues 74,460,510 89,500,523 87,770,803 Cost of professional services and other direct operating expenses 38,015,428 49,017,290 48,103,641 ------------ ------------- ------------- Gross profit 36,445,082 40,483,233 39,667,162 Administrative and indirect operating expenses 24,404,071 22,797,003 22,041,153 Marketing and related costs 9,740,387 9,693,137 8,620,867 Depreciation 1,501,035 1,606,769 1,326,116 Long-lived asset impairment loss 2,750,972 442,374 - ------------ ------------- ------------- Income (loss) from operations (1,951,383) 5,943,950 7,679,026 Interest expense (122,342) (138,550) (155,517) Interest income 42,267 123,943 213,269 Other expense (641,143) (233,981) (326,012) Net foreign currency exchange gain 54,868 305,044 10,157 ------------ ------------- ------------- Income (loss) from continuing operations before income taxes and minority interest (2,617,733) 6,000,406 7,420,923 Income tax provision (benefit) (1,824,647) 1,955,594 2,318,953 ------------ ------------- ------------- Net income (loss) from continuing operations before minority interest (793,086) 4,044,812 5,101,970 Minority interest (630,963) (1,412,197) (1,312,139) ------------ ------------- ------------- Net income (loss) from continuing operations (1,424,049) 2,632,615 3,789,831 Loss from discontinued operations (236,635) (354,550) (8,303,739) Income tax benefit on loss from discontinued operations 74,144 123,252 3,311,953 ------------ ------------- ------------- Net income (loss) $(1,586,540) $ 2,401,317 $ (1,201,955) ============ ============= ============= Net income (loss) per common share: basic Continuing operations $ (0.36) $ 0.66 $ 0.95 Discontinued operations (0.04) (0.06) (1.25) ------------ ------------- ------------- Net income (loss) per common share: basic $ (0.40) $ 0.60 $ (0.30) ============ ============= ============= Net income (loss) per common share: diluted Continuing operations $ (0.36) $ 0.65 $ 0.94 Discontinued operations (0.04) (0.06) (1.23) ------------ ------------- ------------- Net income (loss) per common share: diluted $ (0.40) $ 0.59 $ (0.29) ============ ============= ============= Weighted average common shares outstanding: basic 3,962,699 3,985,716 3,996,796 ============ ============= ============= Weighted average common shares outstanding: diluted 3,962,699 4,041,242 4,050,385 ============ ============= ============= The accompanying notes are an integral part of these financial statements.
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Ecology and Environment, Inc. Consolidated Statements of Cash Flows Year ended July 31, ---------------------------------------- 2005 2004 2003 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) from continuing operations $(1,424,049) $ 2,632,615 $ 3,789,831 Net loss from discontinued operations (162,491) (231,298) (4,991,786) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Impairment of long-lived assets 2,750,972 442,374 - Depreciation 1,501,035 1,606,769 1,577,597 Amortization 299,220 379,913 366,747 Gain on disposition of property and equipment 6,286 6,804 1,930 Minority interest 610,132 (86,603) (250,413) Provision for contract adjustments 467,954 627,028 1,751,913 (Increase) decrease in: - contracts receivable, net 5,921,006 3,632,008 (9,723,911) - other current assets 437,474 1,074,383 1,627,145 - income taxes receivable - - 312,977 - deferred income taxes (1,140,159) 378,078 (2,670,786) - other non-current assets 325,526 1,699,402 731,386 - assets held for sale 2,996 175,728 (205,545) Increase (decrease) in: - accounts payable (90,678) (257,123) 403,393 - accrued payroll costs (773,662) (261,052) 512,847 - income taxes payable (326,992) (787,450) 884,153 - deferred revenue (962,608) (10,017,031) (1,699,559) - other accrued liabilities (1,822,340) (1,652,177) 2,150,757 - liabilities held for sale (2,098) (17,330) 310,378 ------------ ------------ ------------ Net cash provided by (used in) operating activities 5,617,524 (654,962) (5,120,946) ------------ ------------ ------------ Cash flows provided by (used in) investing activities: Acquisitions - (150,000) - Purchase of property, building and equipment, gross (246,290) (1,697,088) (1,818,886) Proceeds from sale of investments - 3,899,300 - Proceeds from maturity of investments 26,136 - - Writedown of discontinued operations fixed assets, net - - 5,029,307 Payment for the purchase of bond (3,109) (86,501) (168,891) ----------- ------------ ------------ Net cash provided by (used in) investing activities (223,263) 1,965,711 3,041,530 ----------- ------------ ------------ Cash flows provided by (used in) financing activities: Dividends paid (1,384,092) (1,396,130) (1,401,117) Proceeds from debt 747,863 465,904 2,515,312 Repayment of debt (698,729) (2,378,226) - Net proceeds from issuance of common stock 1,812 15,938 3,625 Purchase of treasury stock (530,057) (221,275) (242,337) ----------- ------------ ------------ Net cash provided by (used in) financing activities (1,863,203) (3,513,789) 875,483 ----------- ------------ ------------ Effects of exchange rate changes on cash and cash equivalents 100,725 (134,017) (447,711) ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 3,631,783 (2,337,057) (1,651,644) Cash and cash equivalents at beginning of period 4,240,333 6,577,390 8,229,034 ----------- ------------ ------------ Cash and cash equivalents at end of period $ 7,872,116 $ 4,240,333 $ 6,577,390 ============ ============ ============ The accompanying notes are an integral part of these financial statements.
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Ecology and Environment, Inc. Consolidated Statements of Changes in Shareholders' Equity Common Stock --------------------------------------- Class A Class B Capital in --------------------------------------- excess of Retained Shares Amount Shares Amount par value earnings ------------------ ------------------ ------------ ------------ Balance at July 31, 2002 2,468,571 $24,686 1,712,068 $17,121 $17,372,444 $26,570,576 Net loss - - - - - (1,201,955) Foreign currency translation reserve - - - - - - Cash dividends paid ($.33 per share) - - - - - (1,356,227) Unrealized investment gain, net - - - - - - GAC dividends - - - - - (44,890) Repurchase of Class A common stock - - - - - - Stock options 500 5 - - 3,620 - Issuance of stock under stock award plan, net - - - - 60,003 - Amortization, net of tax - - - - - - Forfeitures - - - - 31,907 - ------------------------------------------------------------------ Balance at July 31, 2003 2,469,071 $24,691 1,712,068 $17,121 $17,467,974 $23,967,504 ==================================================================
Accumulated Other Treasury Stock Comprehensive Unearned ---------------------- Comprehensive Income Compensation Shares Amount Income ------------- ------------ ---------------------- ------------- Balance at July 31, 2002 $(1,661,265) $ (222,921) 108,976 $(806,401) Net loss - - - - $(1,201,955) Foreign currency translation reserve (447,711) - - - (447,711) Cash dividends paid ($.33 per share) - - - - - Unrealized investment gain, net (2,854) - - - (2,854) GAC dividends - - - - Repurchase of Class A common stock - - 39,508 (242,337) - Stock options - - - - - Issuance of stock under stock award plan, net - (255,184) (38,712) 286,469 - Amortization, net of tax - 307,373 - - - Forfeitures - 14,180 - (69,017) - ------------------------------------------------------------------------ Balance at July 31, 2003 $(2,111,830) $ (156,552) 109,772 $(831,286) $(1,652,520) ========================================================================
Common Stock --------------------------------------- Class A Class B Capital in --------------------------------------- excess of Retained Shares Amount Shares Amount par value earnings ------------------ ------------------ ------------ ------------ Net income - - - - - 2,401,317 Foreign currency translation reserve - - - - - - Cash dividends paid ($.34 per share) - - - - - (1,396,130) Unrealized investment gain, net - - - - - - Conversion of common stock - B to A 30,764 308 (30,764) (308) - - Repurchase of Class A common stock - - - - - - Stock options exercised 2,150 22 - - 15,916 - Issuance of stock under stock award plan, net - - - - 111,229 - Amortization, net of tax - - - - - - Forfeitures - - - - (2,675) - ------------------------------------------------------------------ Balance at July 31, 2004 2,501,985 $25,021 1,681,304 $16,813 $17,592,444 $24,972,691 ==================================================================
Accumulated Other Treasury Stock Comprehensive Unearned ----------------------- Comprehensive Income Compensation Shares Amount Income ------------- ------------ ----------------------- ------------- Net income - - - - $ 2,401,317 Foreign currency translation reserve (134,017) - - - (134,017) Cash dividends paid ($.34 per share) - - - - - Unrealized investment gain, net (90,876) - - - (90,876) Conversion of common stock - B to A - - - Repurchase of Class A common stock - - 24,326 (221,275) - Stock options exercised - - - - - Issuance of stock under stock award plan, net - (214,445) (47,795) 367,333 - Amortization, net of tax - 177,715 - - - Forfeitures - - 1,446 (8,893) - -------------------------------------------------------- ------------- Balance at July 31, 2004 $(2,336,723) $ (193,282) 87,749 $(694,121) $ 2,176,424 ======================================================== =============
Common Stock --------------------------------------- Class A Class B Capital in --------------------------------------- excess of Retained Shares Amount Shares Amount par value earnings ------------------ ------------------ ------------ ------------ Net loss - - - - - (1,586,540) Foreign currency translation reserve - - - - - - Cash dividends paid ($.34 per share) - - - - - (1,384,092) Unrealized investment gain, net - - - - - - Conversion of common stock - B to A 12,000 120 (12,000) (120) - - Repurchase of Class A common stock - - - - - - Stock options exercised 250 2 - - 1,810 - Issuance of stock under stock award plan, net - - - - 38,230 - Amortization, net of tax - - - - - - Forfeitures - - - - (10,312) - ------------------------------------------------------------------ Balance at July 31, 2005 2,514,235 $25,143 1,669,304 $16,693 $17,622,172 $22,002,059 ==================================================================
Accumulated Other Treasury Stock Comprehensive Unearned ---------------------- Comprehensive Income Compensation Shares Amount Income ------------- ------------ ---------------------- ------------- Net loss - - - - $(1,586,540) Foreign currency translation reserve 100,725 - - - 100,725 Cash dividends paid ($.34 per share) - - - - - Unrealized investment gain, net (53) - - - (53) Conversion of common stock - B to A - - - - - Repurchase of Class A common stock - - 62,500 (530,057) - Stock options exercised - - - - - Issuance of stock under stock award plan, net - (134,971) (33,531) 265,230 - Amortization, net of tax - 164,717 - - - Forfeitures - 4,543 3,776 (28,251) - ------------------------------------------------------------------------ Balance at July 31, 2005 $(2,236,051) $ (158,993) 120,494 $(987,199) $(1,485,868) ========================================================================
Page 24 of 49 ECOLOGY AND ENVIRONMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Operations and Basis of Presentation ----------------------------------------------- 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, 2005, 2004 and 2003, the percentages of total net revenues derived from contracts exclusively with the United States Environmental Protection Agency (EPA) were 14%, 12% and 16%, respectively. The Company's Superfund Technical Assessment and Response Team (START) contracts accounted for the majority of the EPA net revenue. The percentage of net revenues derived from contracts with the United States Department of Defense (DOD) were 14%, 14% and 17% for fiscal years ended July 31, 2005, 2004 and 2003, respectively. The contracts in Saudi Arabia provided net revenues of 4%, 19% and 13% for fiscal years ended July 31, 2005, 2004 and 2003, respectively. The contracts in Kuwait accounted for 5%, 11% and 11% of total net revenues for fiscal years ended July 31, 2005, 2004 and 2003, respectively. 2. Summary of Significant Accounting Policies ------------------------------------------ a. Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned subsidiaries. Also reflected in the financial statements are the 50% ownership in two Chinese operating joint ventures, Beijing YiYi 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 amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. c. Reclassifications Certain prior year amounts were reclassified to conform to the 2005 financial statement presentation. d. Revenue recognition The majority of the Company's revenue is derived from environmental consulting work, with the balance derived from sample analysis (E & E Analytical Services Center) and aquaculture. The consulting revenue is principally derived from the sale of labor hours. The consulting work is performed under a mix of fixed price, cost-type, and time and material contracts. Contracts are required from all customers. Revenue is recognized as follows:
Contract Type Work Type Revenue Recognition Policy -------------------------------------------------------------------------- Fixed Price Consulting Percentage of completion based on the ratio of total costs incurred to date to total estimated costs Cost-type Consulting Costs as incurred. Fixed fee portion is recognized using percentage of completion determined by the percentage of Page 25 of 49 level of effort (LOE) hours incurred to total LOE hours in the respective contracts Time and Materials Consulting As incurred at contract rates. Unit Price Laboratory/ Upon completion of reports (laboratory) and upon delivery Aquaculture and payment from customers (aquaculture).
Substantially all of the Company's cost-type work is with federal governmental agencies and, as such, is subject to audits after contract completion. Provisions for adjustments to the revenue accrued under these cost-type contracts are provided for on an annual basis based on past settlement history. Government audits have been completed through fiscal year 2001 and are currently in process for fiscal year 2002. However, final rates have not been negotiated under these audits since 1992. The majority of the balance in the allowance for contract adjustments accounts represents a reserve against possible adjustments for the fiscal years 1992-2005. Deferred revenue balances of $232,000 and $1.2 million at July 31, 2005 and 2004, respectively, represent net advances received under the Saudi and Kuwait contracts. Those advances are amortized against future progress billings over the respective contract periods. e. 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 accumulated other comprehensive income, net of applicable income taxes in the consolidated balance sheet and statement of changes in shareholders' equity. The cost of securities sold is based on the specific identification method. f. 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. Expenditures for maintenance and repairs are charged 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. g. Fair value of financial instruments The carrying amount of cash and cash equivalents, contracts receivable and accounts payable at July 31, 2005 and 2004 approximate fair value. The amortized cost and estimated fair value of investment securities available for sale are fully described in Note 4. Long-term debt consists of capitalized equipment leases. 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, 2005 and July 31, 2004 approximates fair value. h. 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. Translation adjustments are deferred in accumulated other comprehensive income. 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. There were no highly inflationary economy translation adjustments for fiscal years 2003 - 2005. i. 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 Page 26 of 49 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. j. Pension costs The Company has a non-contributory defined contribution plan providing deferred benefits for substantially all of the Company's employees. The Company also has a supplemental defined contribution plan to provide deferred benefits for senior executives of the Company. The annual expense of the Company's supplemental defined contribution plan is based on a percentage of eligible wages as authorized by the Company's Board of Directors. Benefits under this plan are funded as accrued. 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." k. 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. The Company estimates that if it 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 2003 - 2005 to be materially different from their reported amounts. l. Earnings per share 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. See Footnote No. 14. m. Comprehensive Income Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." The term "comprehensive income" is used to describe the total net earnings plus other comprehensive income. For the Company, other comprehensive income includes currency translation adjustments on foreign subsidiaries and unrealized gains or losses on available-for-sale securities. n. Segment reporting Management designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. Ecology and Environment, Inc. has three reportable segments which are differentiated by product line: consulting services, analytical laboratory services, and aquaculture. The consulting services segment provides broad based environmental service encompassing audits and impact assessments, surveys, air and water quality management, environmental engineering, environmental infrastructure planning, and industrial hygiene and occupational health studies to a worldwide base of customers. The analytical laboratory provides analytical testing services to industrial and governmental clients for the analysis of waste, soil and sediment samples. o. Impairment of Long-Lived Assets The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 required that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows (undiscounted) expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. The Company recognized an impairment loss of $5,007,364 ($3,010,005 net of tax) on its shrimp farm operations in FY 2003. An impairment loss of $442,000 ($139,000 net of minority interest and tax) was recognized in fiscal year 2004 for the long-term assets at the Company's fish farm in Jordan. The impaired assets consist of Page 27 of 49 buildings, improvements and equipment which are continued to be held for use. In January 2005, the Company recognized a $1.6 million impairment loss as a result of its decision to close its Analytical Services Center (ASC) located in Lancaster, New York. At that time, the impairment of the land and buildings was determined based on the results of an independent appraisal and the equipment values were determined by equipment offers the Company had received. Operations continued beyond the end of the Company's second quarter ended January 2005 and all backlog was completed by the end of February. Consequently, at January 2005 the impairment loss was shown as from continuing operations and the assets were classified as held for use. In April 2005, the Company recorded an additional impairment loss on its remaining ASC land and building assets in the amount of $1.2 million. This was the result of information obtained from various commercial brokers in April 2005 that provided the Company with additional information on current market conditions affecting the value of the real estate. The reduced valuation is based on the likelihood that the facility will not be sold to an existing laboratory or research company, but will rather be sold as combination office and warehouse space. The testing equipment was sold during the third quarter. Although business operations have ceased at the ASC, the impairment losses are shown in the accompanying financial statements at July 31, 2005 as from continuing operations due to the uncertainty that the remaining assets can by sold within one year under current market conditions. p. American Jobs Creation Act of 2004 In October 2004, Congress passed, and the President signed into law, the American Jobs Creation Act of 2004 (the "Act"). Some key provisions of the act affecting the Company are the repeal of the United States export tax incentive known as the extraterritorial income exclusion (EIE) and the implementation of a domestic manufacturing deduction. The Company is still assessing the impact of the Act. The EIE is phased out over the calendar years 2005 and 2006 with an exemption for binding contracts with unrelated persons entered into before September 18, 2003. These phase-out provisions will allow the Company to maintain an EIE deduction of an undeterminable amount through fiscal year 2007. The Company believes that it will accrue some benefits from the domestic manufacturing deduction, although such benefits are not expected to be material. The domestic manufacturing deduction will be phased in over a six-year period beginning with the Company's fiscal year 2005. The Company is currently evaluating the impact of the repatriation provisions and expects to complete this evaluation by the end of the 2006 fiscal year. The dollar amount of possible dividends being considered ranges from $0 to $400,000 and the related income tax effect would range from $0 to approximately $80,000. 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, 2005 and 2004, short-term investments consist of commercial paper and money market funds and are carried at cost. Short-term investments amounted to approximately $52,000 and $51,000 at July 31, 2005 and 2004, 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 $122,342, $138,550 and $155,517 in fiscal years 2005, 2004 and 2003, respectively. Cash paid for income taxes amounted to $896,525, $2,321,379 and $761,309 in fiscal years 2005, 2004 and 2003, 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 gains losses value ---------- ----------- ----------- --------- July 31, 2005 ------------- Investment securities available for sale: Mutual funds $ 89,359 $ 6,424 $ --- $ 95,783 Municipal notes and bonds 24,750 --- --- 24,750 ---------- ------- --------- ---------- $ 114,109 $ 6,424 $ --- $ 120,533 ========== ======= ========= ========== Page 28 of 49 July 31, 2004 ------------- Investment securities available for sale: Mutual funds $ 86,250 $ 6,511 $ --- $ 92,761 Municipal notes and bonds 50,886 --- --- 50,886 ---------- ------- ------- ---------- $ 137,136 $ 6,511 $ --- $ 143,647 ========== ======= ======= ==========
The amortized cost and estimated fair value of debt securities available for sale by contractual maturity as of July 31, 2005 were as follows: Estimated Amortized fair value cost ----------- ----------- Due in one year or less $ 24,750 $ 24,750 Mutual funds available for sale 95,783 89,359 ---------- ---------- $ 120,533 $ 114,109 ========== ========== During fiscal year 2004, the Company sold mutual funds valuing $3,899,300. There were no sales of investment securities recorded in fiscal years 2005 and 2003. The unrealized investment securities gain, net of applicable income taxes, at July 31, 2005 and 2004 of $6,449 and $6,501, respectively, are reflected in accumulated other comprehensive income in the consolidated balance sheet. 5. Contract Receivables, net ------------------------- July 31, -------- 2005 2004 ------------ ------------ United States government - Billed $ 2,418,683 $ 2,781,554 Unbilled 3,801,977 4,761,344 ------------ ------------ 6,220,660 7,542,898 ------------ ------------ Industrial customers and state and municipal governments - Billed 22,065,280 27,300,992 Unbilled 5,348,293 5,169,931 ------------ ------------ 27,413,573 32,470,923 ------------ ------------ Less allowance for contract adjustments (3,589,893) (3,580,521) ------------ ------------ $30,044,340 $36,433,300 ============ ============ United States government receivables arise from long-term U.S. government prime contracts and subcontracts. Unbilled receivables result from revenues which have been earned, but are not billed as of period-end. The above unbilled balances are comprised of incurred costs plus fees not yet processed and billed; and differences between year-to-date provisional billings and year-to-date actual contract costs incurred and fees earned of approximately $179,000 at July 31, 2005 and $465,000 at July 31, 2004. Management anticipates that the July 31, 2005 unbilled receivables will be substantially billed and collected in fiscal year 2006. Included in the balance of receivables for industrial customers and state and municipal customers are receivables due under the contracts in Saudi Arabia and Kuwait of $8.5 million and $16.2 million at July 31, 2005 and 2004, respectively. Within the above billed balances are contractual retainages in the amount of approximately $713,000 at July 31, 2005 and $544,000 at July 31, 2004. Management anticipates that the July 31, 2005 retainage balance will be substantially collected in fiscal year 2006. Included in other accrued liabilities is an additional allowance for contract adjustments relating to potential cost disallowances on amounts billed and collected in current and prior years' projects of approximately $1.2 million at July 31, 2005 and $2.2 million at July 31, 2004. Also included in other accrued liabilities is a reclassification of billings in excess of recognized revenues of approximately $1.8 million at July 31, 2005 and $2.4 million at July 31, 2004. An allowance for contract adjustments is recorded for contract disputes and government audits when the amounts are estimatable. Page 29 of 49 The contracts in Saudi Arabia are through the Company's majority owned (66 2/3%) subsidiary Ecology and Environment of Saudi Arabia Co., LTD. (EESAL). The Company has an agreement with its minority shareholder to divide any profits in EESAL from the current contracts equally, and to pay to the minority shareholder a commission of 5% of the total contract values. The commission and additional profit sharing covers on-going representation in the Kingdom, logistical support including the negotiation and procurement of Saudi national personnel, facilities, equipment, licenses, permits, and any other support deemed necessary in the implementation and performance of the Saudi contracts. As of July 31, 2005, the Company has incurred expense of $1,976,000 ($141,000 in fiscal year 2005, $944,000 in fiscal year 2004, $505,000 in fiscal year 2003 and $386,000 in fiscal year 2002) under the terms of this commission agreement. 6. Property, Building and Equipment, net ------------------------------------- July 31, -------- 2005 2004 ------------ ------------ Land $ 543,051 $ 659,911 Buildings 11,099,757 13,486,875 Laboratory and other equipment 2,802,880 4,823,633 Information technology equipment 5,281,679 4,920,604 Office furniture and equipment 2,140,598 2,076,588 Leasehold improvements and other 1,302,449 1,194,191 ----------- ----------- $23,170,414 $27,161,802 Less accumulated depreciation and amortization (15,202,531) (15,181,916) ------------ ------------ $ 7,967,883 $11,979,886 ============ ============ 7. Line of Credit -------------- The Company maintains an unsecured line of credit available for working capital and letters of credit of $20 million with a bank at one-half percent below the prevailing prime rate. A second line of credit has been established at another bank for up to $13.5 million exclusively for letters of credit and is renewed annually. At July 31, 2005 and 2004, respectively, the Company had letters of credit outstanding totaling $2,373,602 and $8,765,752, respectively. At July 31, 2005 and 2004, there were no borrowings for working capital against the line of credit. The Company is in compliance with all bank loan covenants at July 31, 2005. 8. Debt and Capital Lease Obligations ---------------------------------- Debt inclusive of capital lease obligations at July 31 consists of the following:
FY 2005 FY 2004 ------------------------ Various bank loans and advances at interest rates ranging from 5% to 14 1/2% $508,978 $381,587 Capital lease obligations at varying interest rates averaging 12% 143,146 221,403 ------------------------ 652,124 602,990 Less: current portion of debt (255,298) (195,196) current portion of lease obligations (68,773) (71,401) ------------------------ Long-term debt and capital lease obligations $328,053 $336,393 ========================
Page 30 of 49 The aggregate maturities of long-term debt and capital lease obligations at July 31, 2005 are as follows: Amount -------- FY 2006 $324,071 FY 2007 87,337 FY 2008 88,143 FY 2009 29,867 FY 2010 22,561 Thereafter l00,145 ---------- $652,124 ========== 9. Income Taxes ------------ Income from continuing operations, net of minority interests, before provision (benefit) for income taxes consists of: Earnings before provision (benefit) for income taxes consisted of: Fiscal Year ----------- 2005 2004 2003 ------------ ---------- --------- U.S. $(3,534,726) $4,319,267 $5,517,312 Foreign 286,030 268,942 591,472 ----------- ----------- ---------- $(3,248,696) $4,588,209 $6,108,784 =========== =========== ========== The income tax provision (benefit) from continuing operations, net of minority interests, consists of the following: Fiscal Year ----------- 2005 2004 2003 ------------ ----------- ---------- Current: Federal $ (828,582) $ 692,639 $ 1,873,956 State 103,991 113,136 201,199 Foreign 169,443 909,812 938,040 ------------ ----------- ---------- $ (555,148) $1,715,587 $ 3,013,195 ------------ ----------- ----------- Deferred: Federal $(1,074,049) $ 189,779 $ (640,628) State (195,450) 50,228 (53,614) ------------ ----------- ----------- $(1,269,499) $ 240,007 $ (694,242) ------------ ----------- ----------- $(1,824,647) $1,955,594 $2,318,953 ============ ========== =========== The provision (benefit) for income taxes on income (loss) from continuing operations, net of minority interests, differs from the federal statutory rate due to the following: Page 31 of 49 Fiscal year ----------- 2005 2004 2003 ------ ------ ------ Federal tax (34.0%) 34.0% 34.0% State taxes, net 1.2% 3.4% 1.6% Tax exempt interest 0.0% (0.6%) (0.8%) Foreign operations 3.3% 12.9% 8.6% Extraterritorial income tax (3.4%) (7.7%) (5.4%) Re-evaluation of tax contingencies (20.3%) 0.0% 0.0% Other (3.0%) 0.6% 0.0% ------ ------ ------ Total (56.2%) 42.6% 38.0% ======= ======= ======= Deferred tax assets (liabilities) are comprised of the following: Fiscal Year ----------- 2005 2004 ---------- ----------- Contract and other reserves $2,879,672 $2,743,218 Discontinued operations 1,784,013 1,924,841 Fixed assets and intangibles 913,784 - Accrued compensation 669,224 394,830 Unearned stock compensation 102,576 127,893 Other 114,041 434,127 ----------- ----------- Gross deferred tax assets $6,463,310 $5,624,909 State income taxes (320,297) (258,831) Investment in foreign subsidiary (81,581) - Other - (444,805) ----------- ----------- Gross deferred tax liabilities (401,878) (703,636) ----------- ----------- Net deferred tax asset $6,061,432 $4,921,273 =========== =========== The Company has recorded a deferred tax liability related to undistributed earnings of its foreign subsidiaries in Chile as it is the Company's intention to repatriate such earnings in the future. The Company has not recorded income taxes applicable to undistributed earnings of all other foreign subsidiaries that are indefinitely reinvested in those operations. At July 31, 2005, these amounts relate primarily to operations in Saudi Arabia of approximately $1,330,000. The Company's tax benefit related to continuing operations for the fiscal year ended July 31, 2005 reflects an additional benefit of $660,000 as a result of a change in its estimated contingent tax liabilities for income tax audits. These contingent liabilities were re-evaluated and a downward adjustment was made as a result of the completion of Internal Revenue Service audits of the Company's fiscal years 2001, 2002, and 2003 as reported to the Company in early May 2005. 10. Shareholders' Equity -------------------- a. 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 Page 32 of 49 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. 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. b. Incentive stock compensation Under the Company's incentive stock option plan (the "plan"), key employees, including officers of the Company, were 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 granted under the plan. The plan was terminated in March of 1996. Activity under the plan is as follows: Options outstanding at July 31, 2002 at a weighted average price at $10.11 per share 47,414 Exercised shares at $7.25 per share 500 Cancelled shares at $12.16 per share 11,574 Expired shares at $10.37 per share 1,950 Options outstanding at July 31, 2003 at a weighted average price of $9.28 per share 33,390 Exercised shares 2,150 Cancelled shares at $7.25 per share 500 Expired shares at $12.38 per share 10,290 Options outstanding at July 31, 2004 at a weighted average price of $7.96 per share 20,450 Exercised shares at $7.25 per share 250 Cancelled shares 1,700 Expired shares at $9.00 per share 8,100 Options outstanding at July 31, 2005 at a weighted average price of $7.25 per share 10,400 The 10,400 options outstanding at July 31, 2005, have an exercise price of $7.25 per share and a contractual life of .4 years. The Company estimates that if it 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 2003 - 2005 to be materially different from their reported amounts. c. Stock Award Plan Effective March 16, 1998, the Company adopted the Ecology and Environment, Inc. 1998 Stock Award Plan (the "1998 Plan"). To supplement the 1998 Plan the 2003 Stock Award Plan (the "2003 Plan") was approved by the shareholders at the annual meeting held in January 2004 (the 1998 Plan and the 2003 Plan collectively referred to as the "Award Plan"). The 2003 Plan was approved retroactive to October 16, 2003 and will terminate on October 15, 2008. Under the Award Plan key employees (including officers) of the Company or any 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. The Award Plan authorizes the Company's board of directors to determine for what period of time and under what circumstances awards can be forfeited. Page 33 of 49 Company issued 33,531 shares in October 2004, 47,795 shares in fiscal year 2004, and 38,712 shares in fiscal year 2003 pursuant to the Award Plan. Unearned compensation is recorded at the time of issuance and is being amortized over the vesting period. 11. Shareholders' Equity - Restrictive Agreement -------------------------------------------- Messrs. Gerhard J. Neumaier, Frank B. Silvestro, Ronald L. Frank and Gerald A. Strobel entered into a Stockholders' Agreement in 1970 which governs the sale of an aggregate of 1,167,068 shares Class B Common Stock owned by them and the former 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. 12. Lease Commitments ----------------- The Company rents certain office facilities and equipment under non -cancelable 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, 2005, 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 ----------- ---------- ------------ --------- 2006 $2,298,209 $373,402 $1,924,807 2007 1,040,377 12,747 1,027,630 2008 687,223 6,526 680,697 2009 381,029 738 380,291 2010 216,597 - 216,597 Thereafter 87,878 - 87,878 Gross rental expense under the above lease commitments for 2005, 2004, and 2003 was $3,004,917, $2,975,352 and $2,866,604, respectively. 13. Defined Contribution Plans -------------------------- Contributions to the defined contribution plan and supplemental retirement plan are discretionary and determined annually by the Board of Directors. The total expense under the plans for fiscal years 2005, 2004, and 2003 was $1,250,000, $1,451,419 and $1,359,740, respectively. 14. Earnings Per Share ----------------- The computation of basic earnings per share reconciled to diluted earnings per share follows:
Fiscal Year ----------- 2005 2004 2003 ---- ---- ---- Income (loss) from continuing operations available to common stockholders $(1,424,049) $2,632,615 $ 3,789,831 Loss from discontinued operations available to common stockholders (162,491) (231,298) (4,991,786) ------------ ----------- ------------ Income (loss) available to common stockholders $(1,586,540) $2,401,317 $(1,201,955) Weighted-average common shares outstanding (basic) 3,962,699 3,985,716 3,996,796 Basic earnings (loss) per share: Continued operations $ (.36) $ .66 $ .95 Discontinued operations (.04) (.06) (1.25) ------------ ------------ ------------ Page 34 of 49 Basic earnings (loss) per share $ (.40) $ .60 $ (.30) Incremental shares from assumed conversions of stock options and restricted stock awards - 55,526 53,589 ------------ ------------ ------------ Adjusted weighted-average common shares outstanding 3,962,699 4,041,242 4,050,385 Diluted earnings (loss) per share: Continued operations $ (.36) $ .65 $ .94 Discontinued operations (.04) (.06) (1.23) ------------ ------------ ------------- Diluted earnings (loss) per share $ (.40) $ .59 $ (.29)
July 31, 2005 and July 31, 2004, there were 10,400 and 20,450 stock options outstanding with an exercise price ranging from $7.25 to $9.00, which was not included in the above calculations due to their antidilutive nature. 15. Commitments and Contingencies ----------------------------- Certain contracts contain termination provisions under which the customer 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. Generally, termination costs include unpaid costs incurred to date, earned fees and any additional costs directly allocable to the termination. On January 8, 2005 Othman Al-Rashed and Kuwaiti Engineering Group (KEG) filed a lawsuit in New York State Supreme Court, County of New York, as Plaintiffs, against the Consortium of International Consultants, LLC (CIC) and Safege Consulting Engineers (Safege) as Defendants which legal proceeding was described in Part II, Item 1, Legal Proceedings of the Company's Quarterly Report for the quarterly period ended April 30, 2005 on Form 10-Q. The Plaintiff served an Amended Complaint on the Defendants in July 2005. CIC is a majority-owned subsidiary of the Company, which entered into a multi-year monitoring and assessment contract in Kuwait (the Project). As a result of the amended complaint, the Company is not named as a defendant in the lawsuit and CIC is only named as a nominal party against which the Plaintiffs are not seeking relief. The Amended Complaint alleges claims against Defendant Safege in connection with the Project and seeks damages of $5,000,000 for a breach of contract claim and a further claim by KEG against Safege for $10,000,000 of punitive damages. The Company believes that the claims in this lawsuit are either without merit or are the sole responsibility of Safege. One of the Company's majority owned subsidiaries was a co-defendant in a lawsuit connected to work performed on a remediation project at a mine site. The plaintiffs filed for damages of approximately $35 million. The Company believes these claims were without merit. The insurance companies for all of the co-defendants resolved that lawsuit. The subsidiary company has recently received a demand for payment of additional claims, not yet filed, related to the above-mentioned work. The subsidiary company has insurance for such claims, if ever filed, and intends to put forth a vigorous defense should such claims be actually filed. The Company is involved in other litigation arising in the normal course of business. In the opinion of management, any adverse outcome to other litigation arising in the normal course of business would not have a material impact on the financial results of the Company. 16. Recent Accounting Pronouncements -------------------------------- In December 2004, the Financial Accounting Standards Board (FASB) issued its final standard on accounting for share-based payments (SBP), FASB Statement No. 123R (revised 2004), Share-Based Payment. The Statement requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest would not be reversed if the awards expire without being exercised. The effective date for public companies is interim and annual periods beginning after June 15, 2005, and applies to all outstanding and invested SBP awards at a company's adoption. Management does not anticipate that this Statement will have a significant impact on the Company's financial statements. 17. Acquisitions ------------ On May 3, 2004 the Company's sixty-percent owned subsidiary, Walsh Environmental Scientists and Engineers, LLC (Walsh), acquired a sixty- percent interest in Gustavson Associates, LLC (GAL). Walsh paid $150,000 for its interest in GAL. GAL is an independent oil and Page 35 of 49 minerals consultancy providing services to banks, investors, government agencies and industrial clients around the world. Walsh began consolidating the balance sheet and operating results of GAL with its own since the date of acquisition. Walsh's consolidated financial statements are consolidated with the Company's. This acquisition has been accounted for under the purchase method with the results of their operations consolidated with the Company's results of operations from the acquisition date. No proforma statements have been provided due to the relative insignificance of this transaction. 18. Transfer of Ownership/Dispositions ---------------------------------- On January 8, 2004 the company entered into an agreement to grant a forty-eight percent stake in its Brazilian subsidiary, Ecology and Environment do Brasil, Ltda. (a limited partnership), to three new partners. The new partners are responsible for the in-country marketing and operations of the subsidiary. Any previous earnings, assets and liabilities remained with Ecology and Environment, Inc. The new partners have contributed their business contacts and staff from their old firm. The Company has provided an $80,000 capital contribution to move the office operations from Sao Paulo to Rio de Janeiro. Rio de Janeiro is where the company believes it will have a more strategic location to market its target clients. During fiscal year 2005, two of the local partners entered into an agreement to purchase the other local partner's shares. This purchase is expected to be completed in fiscal year 2006 and it is not expected to significantly impact the operations of the Brazilian subsidiary. During the fiscal year, members of Walsh Unit Holders LLC exercised their options to purchase an additional 1,146 shares of Walsh Environmental Scientists and Engineers, LLC at a cost of $30,360. This caused the E&E, Inc ownership percentage in this company to drop by 1.7%. There are no additional purchase options outstanding as they expired on June 30, 2005. This caused a reduction in the ownership percentage of E&E, Inc. from 60% to 58.3%. In June 2005, the Company signed an agreement to sell its 50% ownership in Beijing YiYi Ecology and Environment Engineering Co., LTD to an existing partner for $240,000. This transaction results in a loss of $72,000 and has been recorded in the accompanying results of operations for fiscal year 2005. 19. Goodwill -------- In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. Statement No. 142 discusses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition and also how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Beginning on August 1, 2001 with the adoption of Statement No. 142, goodwill existing on July 31, 2001, is no longer being amortized. Rather the goodwill is subject to an annual assessment for impairment. During fiscal year 2005, this test did not result in any charges. The adoption of SFAS No. 142 did not have a material impact on the Company's financial statements. 20. Shrimp Farm - Discontinued Operations ------------------------------------- During the fourth quarter of fiscal year 2003, the Company made the decision to discontinue its shrimp farm operation, Frutas Marinas S.R.L. The farm had failed to achieve planned production estimates. Operations management was unable to control repeated outbreaks of disease, primarily White Spot Syndrome Virus, resulting in repeated operating losses for the last three years and depressed selling prices for shrimp. The Company made the decision to terminate operations at its Board of Directors' meeting in July 2003 and is committed to sell the assets. In accordance with Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviewed the assets of Frutas Marinas S.R.L. to determine the extent of the impairment loss in the carrying value of the assets. The Company reports results of operations for the shrimp farm under its Aquaculture Segment. The Company is committed to marketing the sale of its farm for its highest and best value. The Company has estimated the fair value of its assets primarily based on external appraisals of the property and buildings for general farm use due to anticipated difficulty in selling the property as a shrimp farm operation because of lack of a profitable operating history. As a result, the Company has recognized an impairment loss of $5,007,364. Page 36 of 49 Operating results for the discontinued Frutas Marinas S.R.L. are as follows:
FY 2005 FY 2004 FY 2003 ----------------------------------------- Net revenues $ 25,736 $ - $ 1,262,021 Operating loss before income tax benefit (236,635) (354,550) (3,296,375) Provision for income tax benefit 74,144 123,252 1,314,594 ----------------------------------------- Loss from operations of discontinued shrimp farm business (162,491) (231,298) (1,981,781) Impairment loss on discontinued shrimp farm business (net of tax benefit of $1,997,359) - - (3,010,005) ----------------------------------------- Loss on discontinued operations $(162,491) $(231,298) $(4,991,786) =========================================
21. Impairment of Long-Lived Assets ------------------------------- The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 required that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows (undiscounted) expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. The Company recognized an impairment loss of $5,007,364 $3,010,005 net of tax) on its shrimp farm operations in FY 2003. An impairment loss of $442,000 ($139,000 net of minority interest and tax) was recognized in fiscal year 2004 for the long-term assets at the Company's fish farm in Jordan. The impaired assets consist of buildings, improvements and equipment which are continued to be held for use. In January 2005, the Company recognized a $1.6 million impairment loss as a result of its decision to close its Analytical Services Center (ASC) located in Lancaster, New York. At that time, the impairment of the land and buildings was determined based on the results of an independent appraisal and the equipment values were determined by equipment offers the Company had received. The impairment was precipitated by the Company's decision to close the operation rather than to sustain further losses while attempting to sell the segment as an on-going business. Continued losses incurred in this segment as a result of market price deterioration and a reduced emphasis by the Federal government on analytical laboratory testing was the basis for this decision. Operations continued beyond the end of the Company's second quarter ended January 2005 and all backlog was completed by the end of February. Consequently, at January 2005 the impairment loss was shown as from continuing operations and the assets were classified as held for use. In April 2005, the Company recorded an additional impairment loss on its remaining ASC land and building assets in the amount of $1.2 million. This was the result of information obtained from various commercial brokers in April 2005 that provided the Company with additional information on current market conditions affecting the value of the real estate. The reduced valuation is based on the likelihood that the facility will not be sold to an existing laboratory or research company, but will rather be sold as combination office and warehouse space. The testing equipment was sold during the third quarter. Although business operations have ceased at the ASC, the impairment losses are shown in the accompanying financial statements at July 31, 2005 as from continuing operations due to the uncertainty that the assets can be sold within one year under current market conditions. 22. Segment Reporting ----------------- Ecology and Environment, Inc. has three reportable segments: consulting services, analytical laboratory services, and aquaculture. The consulting services segment provides broad based environmental service encompassing audits and impact assessments, surveys, air and water quality management, environmental engineering, environmental infrastructure planning, and industrial hygiene and occupational health studies to a worldwide base of customers. The analytical laboratory provides analytical testing services to industrial and governmental clients for the analysis of waste, soil and sediment samples. The analytical segment recognized a pretax impairment loss in the amount of $2.8 million in fiscal year 2005 as a result of its decision to close the ASC located in Lancaster, N.Y. The fish farm located in Jordan produces tilapia fish grown in a controlled environment for markets worldwide. The aquaculture segment results for fiscal year 2003 includes an impairment loss of $5.0 million ($3.0 million net of tax) as a result of the Company's decision to cease operations of its shrimp farm operations located in Costa Rica. The assets of the shrimp farm are treated as held for sale in the accompanying financial statements and the shrimp farm in still being actively marketed to potential buyers. In fiscal year 2004, an impairment loss of $442,000 ($139,000 net of minority interest and tax) was recognized for the long-term assets at the Company's fish farm operations in Jordon. Page 37 of 49 The Company evaluates segment performance and allocates resources based on operating profit before interest income/expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intercompany sales from the analytical services segment to the consulting segment are recorded at market selling price, intercompany profits are eliminated. The Company's reportable segments are separate and distinct business units that offer different products. Consulting services are sold on the bases of time charges while analytical service and aquaculture products are sold on the basis of product unit prices. Reportable segments for the fiscal year ended July 31, 2005 are as follows:
Aquaculture -------------------------- Consulting Analytical Continued Discontinued Elimination Total ----------- ----------- ------------ ------------ ------------ ------------ Net revenues from external customers (1) $72,327,559 $ 2,005,782 $ 127,169 $ - $ - $74,460,510 Intersegment net revenues 668,663 - - - (668,663) - ----------- ----------- ------------ ----------- ------------ ------------ Consolidated net revenues $72,996,222 $ 2,005,782 $ 127,169 $ - $ (668,663) $74,460,510 =========== ============ ============ ============ ============ ============ Depreciation expense $ 1,169,572 $ 318,806 $ 12,657 $ - $ - $ 1,501,035 Segment profit (loss) before taxes and minority interest $ 1,279,209 $(3,888,153) $ (8,789) $ (236,635) $ - $(2,854,368) Segment assets $53,536,535 $ 2,100,000 $ 314,000 $ 27,000 $ - $55,977,535 Expenditures for long-lived assets - gross $ 246,290 $ - $ - $ - $ - $ 246,290
Geographic Information:
Net Long-Lived Revenues (1)(2) Assets - Gross --------------- -------------- United States $61,058,510 $22,651,414 Foreign Countries 13,402,000 519,000
(1) Net revenue of $27,536 from discontinued operations is excluded from this table. (2) Net revenues are attributed to countries based on the location of the customers. Net revenues in foreign countries include $2.7 million in Saudi Arabia and $3.5 million in Kuwait. Reportable segments for the fiscal year ended July 31, 2004 are as follows:
Aquaculture -------------------------- Consulting Analytical Continued Discontinued Elimination Total ----------- ----------- ------------ ------------ ------------- ------------ Net revenues from external customers (1) $84,464,323 $ 5,002,770 $ 33,430 $ - $ - $89,500,523 Intersegment net revenues 995,510 - - - (995,510) - ----------- ----------- ------------ ----------- ------------ ------------ Consolidated net revenues $85,459,833 $ 5,002,770 $ 33,430 $ - $ (995,510) $89,500,523 =========== ============ ============ ============ ============ ============ Depreciation expense $ 1,006,661 $ 544,636 $ 55,472 $ - $ - $ 1,606,769 Segment profit (loss) before taxes and minority interest $ 7,976,832 $(1,378,988) $ (597,438) $ (354,550) $ - $ 5,645,856 Segment assets $54,992,626 $ 7,447,000 $ 34,000 $ 30,000 $ - $62,503,626 Expenditures for long-lived assets - gross $ 1,624,260 $ 72,828 $ - $ - $ - $ 1,697,088
Geographic Information:
Net Long-Lived Revenues (1)(2) Assets - Gross --------------- -------------- United States $55,729,523 $26,687,802 Foreign Countries 33,771,000 474,000
(1) Net revenue of $13,641 from discontinued operations is excluded from this table (sale of remaining inventories and miscellaneous supplies). (2) Net revenues are attributed to countries based on the location of the customers. Net revenues in foreign countries include $16.6 million in Saudi Arabia and $10.0 million in Kuwait. Page 39 of 49 Reportable segments for the fiscal year ended July 31, 2003 are as follows:
Aquaculture -------------------------- Consulting Analytical Continued Discontinued Elimination Total ----------- ----------- ------------ ------------ ------------- ------------ Net revenues from external customers (1) $84,682,327 $ 5,800,341 $ 6,894 $ - $ - $90,489,562 Intersegment net revenues 1,769,667 - - - (1,769,667) - ----------- ----------- ------------ ----------- ------------ ------------ Consolidated net revenues $86,451,994 $ 5,800,341 $ 6,894 $ - $(1,769,667) $90,489,562 =========== ============ ============ ============ ============ ============ Depreciation expense (1) $ 954,642 $ 316,002 $ 55,472 $ - $ - $ 1,326,116 Segment profit (loss) before taxes and minority interest $ 7,727,645 $ (132,400) $ (174,322) $(8,303,739) $ - $ (882,816) Segment assets $67,676,533 $ 7,878,000 $ 621,000 $ 206,000 $ - $76,381,533 Expenditures for long-lived assets - gross $ 1,238,166 $ 580,720 $ - $ - $ - $ 1,818,886
Geographic Information:
Net Long-Lived Revenues (1)(2) Assets - Gross --------------- -------------- United States $60,169,562 $25,347,086 Foreign Countries 30,320,000 778,000
(1) Net revenue of $1,262,021 and depreciation expense of $251,481 from discontinued operations is excluded from this table. (2) Net revenues are attributed to countries based on the location of the customers. Net revenues in foreign countries include $11.4 million in Saudi Arabia and $9.8 in Kuwait. ECOLOGY AND ENVIRONMENT, INC. SCHEDULE II Allowance for Doubtful Accounts and Other Reserves Years Ended July 31, 2005, 2004, and 2003 Balance at Charged to Balance Beginning Cost and at End Year Ended of Period Expense Deduction of Year ------------- ---------- ----------- --------- ---------- July 31, 2005 $5,752,596 $ 467,954 $ 600,417 $5,620,133 July 31, 2004 5,853,983 627,028 728,415 5,752,596 July 31, 2003 4,837,852 1,751,913 735,782 5,853,983 Page 39 of 49 Selected quarterly financial data (unaudited) --------------------------------------------- (In thousands, except per share information)
2005 First Second Third Fourth ------------------------------------------------------- --------------------------------------------------- Gross revenues $ 22,716 $ 21,172 $ 23,717 $ 23,746 Net revenues 19,158 17,414 19,036 18,852 Gross profit 9,571 8,144 9,346 9,384 Income (loss) from operation 420 (2,200) (1,364) 1,193 Income (loss) from continuing operations before income taxes and minority interest 303 (2,383) (1,512) 974 Net income (loss) from continuing operations 52 (1,731) (317) 572 Net loss from discontinued operations (47) (32) (29) (54) -------------------------------------------------- Net income (loss) $ 5 $ (1,763) $ (346) $ 518 Net income (loss) per common share: basic Continuing operations $ .01 $ (.44) $ (.08) $ .15 Discontinued operations (.01) (.01) (.01) (.01) -------------------------------------------------- Net income (loss) per common share: basic $ - $ (.45) $ (.09) $ .14 Net income (loss) per common share: diluted Continuing operations $ .01 $ (.44) $ (.08) $ .15 Discontinued operations (.01) (.01) (.01) (.01) -------------------------------------------------- Net income (loss) per common share: diluted $ - $ (.45) $ (.09) $ .14
2004 First Second Third Fourth ------------------------------------------------------- --------------------------------------------------- Gross revenues $ 26,942 $ 27,785 $ 29,227 $ 26,668 Net revenues 22,257 20,981 24,665 21,597 Gross profit 9,619 9,574 10,967 10,323 Income (loss) from operation 1,311 1,792 1,674 1,167 Income (loss) from continuing operations before income taxes and minority interest 1,401 1,855 1,726 1,018 Net income (loss) from continuing operations 759 1,017 864 (8) Net loss from discontinued operations (63) (51) (56) (61) --------------------------------------------------- Net income (loss) $ 696 $ 966 $ 808 $ (69) Net income (loss) per common share: basic Continuing operations $ .19 $ .25 $ .21 $ .00 Discontinued operations (.02) (.01) (.01) (.02) --------------------------------------------------- Net income (loss) per common share: basic $ .17 $ .24 $ .20 $ (.02) Net income (loss) per common share: diluted Continuing operations $ .19 $ .25 $ .21 $ .00 Discontinued operations (.02) (.01) (.01) (.02) --------------------------------------------------- Net income (loss) per common share: diluted $ .17 $ .24 $ .20 $ (.02)
Page 40 of 49
2003 First Second Third Fourth ------------------------------------------------------- ---------------------------------------------------- Gross revenues $ 21,883 $ 29,692 $ 33,339 $ 31,300 Net revenues 19,051 20,812 23,438 24,469 Gross profit 9,101 9,595 10,013 10,958 Income (loss) from operation 1,990 1,640 1,948 2,100 Income (loss) from continuing operations before income taxes and minority interest 1,965 1,658 1,868 1,930 Net income (loss) from continuing operations 1,044 877 998 871 Net loss from discontinued operations (491) (446) (410) (3,645) --------------------------------------------------- Net income (loss) $ 553 $ 431 $ 588 $ (2,774) Net income (loss) per common share: basic Continuing operations $ .26 $ .22 $ .24 $ .23 Discontinued operations (.12) (.11) (.10) (.92) --------------------------------------------------- Net income (loss) per common share: basic $ .14 $ .11 $ .14 $ (.69) Net income (loss) per common share: diluted Continuing operations $ .26 $ .22 $ .24 $ .22 Discontinued operations (.12) (.11) (.10) (.90) --------------------------------------------------- Net income (loss) per common share: diluted $ .14 $ .11 $ .14 $ (.68)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None to report. Item 9A. CONTROLS AND PROCEDURES Company management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act) as of July 31, 2005. In designing and evaluating the Company's disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that, as of July 31, 2005, the Company's disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to its chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. There have been no significant changes in internal controls over financial reporting during the period covered by this report. Item 9B. OTHER INFORMATION None to report. Page 41 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 68 President and Director Frank B. Silvestro 68 Executive Vice President and Director Gerald A. Strobel 65 Executive Vice President of Technical Services and Director Ronald L. Frank 67 Executive Vice President of Finance, Secretary, Treasurer and Director Gerard A. Gallagher, Jr. 74 Director Roger J. Gray 65 Senior Vice President Laurence M. Brickman 61 Senior Vice President Harvey J. Gross 77 Director Ross M. Cellino 72 Director Timothy Butler 64 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. 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. Gallagher retired as an officer of the Company in February 2001. 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. Page 42 of 49 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. Mr. Butler was appointed as a Director representing Class A shareholders by the remaining members of the Board of Directors of the Company on September 5, 2003 to fill the vacancy left by the resignation of Brent Baird until the next annual meeting of shareholders. Mr. Butler is a retired bank executive with 38 years of experience as a senior bank officer concentrating in business lending and finance. The Board of Directors has designated that Mr. Butler is the audit committee financial expert serving on its audit committee. Mr. Butler is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act Regulations. The Company has a separately-designated standing audit committee established in accordance with section 3 (a) 58 (A) of the Securities Exchange Act of 1934 and the American Stock Exchange Requirements. The members of the audit committee are Timothy Butler, Ross M. Cellino, and Harvey J. Gross. The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, as well as all other employees and the directors of the Company. The code of ethics, which the Company calls its Code of Business Conduct and Ethics, was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended July 31, 2004 and posted on the Company's website at www.ene.com. If the Company makes any substantive amendments to, or grants a waiver (including an implicit waiver) from, a provision of its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, the Company will disclose the nature of such amendment or waiver in a current report on Form 8-K. 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, 2003, 2004 and 2005 of those persons who were at July 31, 2005 (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, 2005 in excess of $100,000. In this report, the five persons named in the table below are referred to as the "Named Executives."
SUMMARY COMPENSATION TABLE -------------------------- ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------- ------------------------------------- STOCK INCENTIVE RESTRICTED LONG-TERM ALL NAME AND FISCAL OPTIONS STOCK COMPENSATION OTHER PRINCIPAL POSITION YEAR SALARY BONUS (1) OTHER (SHARES) AWARDS (3) PAYOUTS (2) ------------------------ ------ -------- -------- ----- ---------- ---------- ------------ ------ Gerhard J. Neumaier 2005 $286,847 -0- -0- -0- -0- -0- $14,962 President and Director 2004 $278,897 $30,000 -0- -0- -0- -0- $16,035 2003 $260,653 $32,500 -0- -0- -0- -0- $15,207 Frank B. Silvestro 2005 $261,436 -0- -0- -0- -0- -0- $13,638 Executive Vice President 2004 $253,730 $30,000 -0- -0- -0- -0- $14,724 and Director 2003 $236,968 $32,500 -0- -0- -0- -0- $13,973 Ronald L. Frank 2005 $247,359 $ -0- -0- -0- -0- -0- $12,934 Executive Vice President 2004 $253,730 $30,000 -0- -0- -0- -0- $14,724 of Finance, Secretary, 2003 $236,968 $32,500 -0- -0- -0- -0- $13,973 Treasurer and Director Gerald A. Strobel 2005 $261,436 $ -0- -0- -0- -0- -0- $13,638 Executive Vice President 2004 $253,730 $30,000 -0- -0- -0- -0- $14,724 of Technical Services 2003 $236,968 $32,500 -0- -0- -0- -0- $13,973 and Director Roger J. Gray* 2005 $203,531 $ -0- -0- -0- -0- -0- $10,618 Senior Vice President 2004 $196,382 $ -0- -0- -0- -0- -0- $10,235 2003 $211,330 $76,626 -0- -0- -0- -0- $14,841
Page 43 of 49 (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. (3) As of July 31, 2004, there were 500 shares of the Company's Class A Common Stock which was restricted stock issued pursuant to the Company's Stock Award Plan issued to Roger Gray having a value of $4,525 as of July 31, 2004. For the period beginning November 2001 through June 30, 2003, Mr. Gray was on an assignment in Saudi Arabia as Project Manager of the Company's work there. The Board of Directors has approved a special cost of living adjustment and completion bonus for Mr. Gray amounting to approximately 40% of base salary earned annually. None of the Company's executive officers have employment agreements. Directors who are not employees of the Company are paid an annual fee of $27,537 payable quarterly. Compensation Pursuant to Plans ------------------------------ 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 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 "1998 Plan"). To supplement the 1998 Plan the 2003 Stock Award Plan (the "2003 Plan") was approved by the shareholders at the annual meeting held in January 2004 (the 1998 Plan and the 2003 Plan collectively referred to as the "Award Plan"). The 2003 Plan was approved retroactive to October 16, 2003 and will terminate on October 15, 2008. Under the Award Plan key employees (including officers) of the Company or any 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. The Award Plan authorizes the Company's board of directors to determine for what period of time and under what circumstances awards can be forfeited. 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 of five (5) years from the date of adoption. As of July 31, 2005, awards for 246,507 shares of Class A common stock have been granted under both plans. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS The following table sets forth, as of September 30, 2005, 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: Page 44 of 49 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* 359,911 13.9% 345,894 21.1% Frank B. Silvestro* 276,937 10.3% 276,937 16.9% Ronald L. Frank* 212,959 8.1% 199,544 12.1% Gerald A. Strobel* 208,578 7.9% 208,578 12.9% Franklin Resources, Inc. 215,000 8.9% - - Wedbush, Inc. (4) 203,200 8.4% - - * See Footnotes in next table (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 One Franklin Parkway, Building 920, San Mateo, California 94403. The address for Wedbush, Inc. is 1000 Wiltshire Blvd., Los Angeles, CA 90017-2459 and the address for Edward W. Wedbush and Wedbush Morgan Securities is P.O. Box 30014, Los Angeles, CA 90030-0014. (2) Each named individual or corporation is 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 2,420,000 shares of Class A Common Stock issued and outstanding and 1,643,045 shares of Class B Common Stock issued and outstanding as of September 30, 2005. 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 87,000 shares owned by Edward W. Wedbush and 1,200 shares owned by Wedbush Morgan Securities, Inc. 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, 2005, 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) 359,911 13.0% 345,894 21.1% Frank B. Silvestro* (13) 276,937 10.3% 276,937 16.9% Ronald L. Frank* (6) (13) 212,959 8.1% 199,544 12.1% Gerald A. Strobel (7) (13) 208,578 7.9% 208,578 12.9% Harvey J. Gross (8) 80,047 3.2% 80,047 4.9% Gerard A. Gallagher, Jr. 61,641 2.5% 61,300 3.7% Ross M. Cellino (9) 16,111 * 1,050 * Roger Gray (10) 11,016 * 5,662 * Timothy Butler 1,600 * -0- -0- Directors and Officers Group (11)(12) 1,244,978 34.5% 1,186,939 72.2% (10 individuals)
* Less than 0.1% Page 45 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 3,000 shares of Class A Common Stock of the total 10,400 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 two officers. 4. There are 2,420,000 shares of Class A Common Stock issued and outstanding and 1,643,045 shares of Class B Common Stock issued and outstanding as of September 30, 2005. 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 5,525 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. Includes 7,967 shares of Class A Common Stock owned by a Partnership in which Mr. Neumaier is a general partner. 6. Includes 18,625 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 2,515 shares of Class A Common Stock owned by Mr. Frank's individual retirement account and 4,900 shares of Class A Common Stock owned by Mr. Frank's 401(k) plan account. 7. Includes 1,008 shares of Class B Common Stock held in equal amounts by Mr. Strobel as custodian for his three children, as to which he disclaims beneficial ownership. 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 10,396 shares of Class A Common Stock owned by Mr. Cellino's spouse, as to which shares he disclaims beneficial ownership; also includes 4,555 shares of Class A Common Stock owned by Mr. Cellino's Individual Retirement Account. Includes 5 shares of Class A Common Stock owned by a limited partnership in which Mr. Cellino is a general partner. 10. Includes 1,200 shares of Class A Common Stock which may be issued upon exercise of a stock option granted on December 12, 1995 pursuant to the Company's Incentive Stock Option Plan. 11. Does not include 81,007 shares (45,550 shares of Class A Common Stock and 35,457 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 1,200 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. Includes 1,200 shares of Class A Common Stock which may be issued upon the exercise of stock options granted to one officer 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 1,167,068 shares Class B Common Stock owned by them, the former 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. Page 46 of 49 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Executive Officers and Directors, and persons who beneficially own more than ten percent (10%) of the Company's stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Executive Officers, Directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the Company's Executive Officers and Directors, the Company believes that during the fiscal year ending July 31, 2005 all Section 16(a) filing requirements applicable to its Executive Officers, Directors and greater than ten percent (10%) beneficial owners were complied with by such persons except that Mr. Brickman and Mr. Gray each filed one late report that each reflected a single transaction (the award of 884 and 221 shares, respectively, of the Company's Class A Common Stock under the Company's Stock Award Plan) and Mr. Neumaier filed one late report that reflected four transactions for the open market purchase of 5,300 shares of the Company's Class A Common Stock and three separate late reports that reflected a total of four separate transactions for the open market purchase of a total of 4,400 shares of the Company's Class A Common Stock. All of the share purchase transactions reported by Mr. Neumaier in the late reports were purchases of the Company's Class A Common Stock by a general partnership in which he has a one-third (1/3) interest. These reports were promptly filed upon discovery that such reports were not filed on time. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES During the fiscal years ended July 31, 2005 and 2004, Schneider Downs & Co., Inc. (SD) and PricewaterhouseCoopers, LLP (PwC) provided audit and non-audit services to the Company. The Audit Committee meets with the Company's independent registered accounting firm to approve the annual scope of accounting services to be performed, including all audit, audit-related, and non-audit services, and the related fee estimates. The Audit Committee also meets with our independent registered accounting firm, on a quarterly basis, following completion of their quarterly reviews and annual audit before our earnings announcements, to review the results of their work. As appropriate, management and our independent registered accounting firm update the Audit Committee with material changes to any service engagement and related fee estimates as compared to amounts previously approved. Under its charter, the Audit Committee has the authority and responsibility to review and approve, in advance, any audit and proposed permissible non-audit services to be provided to the Company by its independent registered public accounting firm. Set forth below are the aggregate fees billed for these services for the last two fiscal years. FY 2005 FY 2004 --------- --------- Audit Fees $174,800 $172,000 Audit Related Services 61,000 34,500 Tax Services - - All Other Fees - 5,300 --------- --------- Grand Total $235,800 $211,800 ========= ========= Audit Fees: The aggregate fees accrued for professional services rendered for the audit of the Company's financial statements for the fiscal years ended July 31, 2005 and 2004 and for the reviews of the financial statements included in the Company's quarterly reports on Form 10-Q for the fiscal years ended July 31, 2005 and 2004 were $174,800 and $172,000, respectively. Audit Related Fees: The aggregate fees billed by SD or PwC for services rendered to the Company for 401(k), pension plan audits and indirect rate audits for the years ended July 31, 2005 and 2004 were $61,000 and $34,500, respectively. Tax Services: No tax consulting or compliance services were provided by SD or PwC in fiscal years 2005 and 2004. All Other Fees: The Company was billed $5,300 by PwC in fiscal year 2004 related to review of SEC comment letters. Page 47 of 49 PART IV ------- Item 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES ----------------------------------------- (a) 1. Financial Statements Page -------------------- ---- Report of Independent Registered Public Accounting Firm 18 Consolidated Balance Sheets - July 31, 2005 and 2004 20 Consolidated Statements of Income for the fiscal years ended July 31, 2005, 2004 and 2003 21 Consolidated Statements of Cash Flows for the fiscal years ended July 31, 2005, 2004 and 2003 22 Consolidated Statements of Changes in Shareholders Equity for the fiscal years ended July 31, 2005, 2004 and 2003 23 Notes to Consolidated Financial Statements 24 2. Financial Statement Schedule ---------------------------- Schedule II - Allowance for Doubtful Accounts and Other Reserves 38 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) 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) Page 48 of 49 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) 10.5 Summary of Ecology and Environment Discretionary Performance Plan (3) 10.6 1998 Ecology and Environment, Inc. Stock Award Plan and Amendments (3) 10.7 2003 Ecology and Environment, Inc. Stock Award Plan (4) 14.1 Code of Ethics (4) 21.5 Schedule of Subsidiaries as of July 31, 2005 (5) 23.1 Consent of Independent Registered Public Accounting Firm - Schneider Downs & Co., Inc. (5) 23.2 Consent of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP (5) 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5) 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5) 32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5) 32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5) 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, 2002, and incorporated herein by reference. (3) Filed as exhibits to the Company's 10-K for the Fiscal Year Ending July 31, 2003, and incorporated herein by reference. (4) Filed as exhibits to the Company's 10-K for the Fiscal Year Ending July 31, 2004, and incorporated herein by reference. (5) Filed herewith. Page 49 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 28, 2005 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 (CHIEF EXECUTIVE October 28, 2005 ---------------------------- OFFICER) GERHARD J. NEUMAIER /s/ FRANK B. SILVESTRO EXECUTIVE VICE PRESIDENT October 28, 2005 ---------------------------- FRANK B. SILVESTRO /s/ GERALD A. STROBEL EXECUTIVE VICE PRESIDENT October 28, 2005 ---------------------------- GERALD A. STROBEL /s/ RONALD L. FRANK SECRETARY, TREASURER, October 28, 2005 ---------------------------- EXECUTIVE VICE PRESIDENT RONALD L. FRANK OF FINANCE (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ GERARD A. GALLAGHER, JR. DIRECTOR October 28, 2005 ---------------------------- GERARD A. GALLAGHER, JR. /s/ HARVEY J. GROSS DIRECTOR October 28, 2005 ---------------------------- HARVEY J. GROSS /s/ ROSS M. CELLINO DIRECTOR October 28, 2005 ---------------------------- ROSS M. CELLINO /s/ TIMOTHY BUTLER DIRECTOR October 28, 2005 ---------------------------- TIMOTHY BUTLER 91