-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUTNgUwL/zR6smAwW/BOxpZe3bs6to1gFfL9AAhgcDN6Pd83AzHP0W0BD89kfxQ+ XOVmEJhutEgyFVq19V+ZDA== 0000809933-99-000007.txt : 19991101 0000809933-99-000007.hdr.sgml : 19991101 ACCESSION NUMBER: 0000809933-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECOLOGY & ENVIRONMENT INC CENTRAL INDEX KEY: 0000809933 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 160971022 STATE OF INCORPORATION: NY FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09065 FILM NUMBER: 99736958 BUSINESS ADDRESS: STREET 1: 368 PLEASANTVIEW DR CITY: LANCASTER STATE: NY ZIP: 14086 BUSINESS PHONE: 7166848060 MAIL ADDRESS: STREET 1: 368 PLEASANTVIEW DRIVE CITY: LANCASTER STATE: NY ZIP: 14086 10-K 1 FORM 10-K FOR THE PERIOD ENDING JULY 31, 1999 Page 1 of 53 SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- F O R M 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, 1999 or [ ] TRANSITION REPORT REQUIRED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________. Commission file number: 1-9065 Ecology and Environment, Inc. (Exact name of registrant as specified in its charter) NEW YORK 16-0971022 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 368 Pleasant View Drive, Lancaster, New York 14086 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (716) 684-8060 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------------ ------------------------------------ Class A Common Stock, American Stock Exchange, Inc. par value $.01 per share Securities registered pursuant to Section 12(g) of the Act. None ---------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendments to this Form 10-K. ______ Exhibit Index on Page 43 Page 2 of 53 As of September 30, 1999, 2,197,142 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, 1999) of the Class A Common Stock held by nonaffiliates of the registrant was approximately $9,633,151. As of the same date, 1,768,728 shares of the registrant's Class B Common Stock, $.01 par value ("Class B Common Stock") were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Registration Statement on Form S-1, as amended by Amendment Nos. 1 and 2 (Registration No. 33-11543) as well as portions of the Company's Form 10-K for Fiscal Years ending July 31, 1988, 1990, 1994 and 1997 are incorporated by reference in Part IV of this Form 10-K. Page 3 of 53 TABLE OF CONTENTS INDEX PART I Page Item 1. BUSINESS 4 General 4 START Contracts 4 Task Order Contracts 5 Hazardous Material Services 5 Environmental Consulting Services 5 Analytical Laboratory Services 6 Aquaculture 7 Regulatory Background 7 Potential Liability and Insurance 9 Market and Customers 10 Backlog 10 Competition 10 Employees 10 Item 2. PROPERTIES 11 Item 3. LEGAL PROCEEDINGS 11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 12 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 37 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 38 Item 11. EXECUTIVE COMPENSATION 39 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 42 SECURITY OWNERSHIP OF MANAGEMENT 43 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS 47 Page 4 of 53 PART I Item 1. BUSINESS General Ecology and Environment, Inc. ("EEI" or the "Company") is a broad based environmental consulting and testing firm whose underlying philosophy is to provide professional services worldwide so that sustainable economic and human development may proceed with minimum negative impact on the environment. The Company offers a broad range of environmental consulting services including: environmental audits; environmental impact assessments; terrestrial, aquatic and marine surveys; air quality management and air toxics pollution control; environmental engineering; noise pollution evaluations; wastewater analyses; water pollution control; industrial hygiene and occupational health studies; archaeological and cultural resource studies; environmental infrastructure planning, air, water and groundwater monitoring and analytical laboratory services. The Company employs over 75 separate disciplines embracing the physical, biological, social and health sciences. The Company was incorporated in February, 1970. Its principal offices are located at 368 Pleasant View Drive, Lancaster, New York and its telephone number is 716-684-8060. START Contracts In December 1995, the United States Environmental Protection Agency ("EPA")awarded the Company five (5) regional Superfund Technical Assessment and Response Teams ("START") superfund contracts to provide technical expertise in support of its hazardous waste spill response, removal and prevention programs in the midwestern and western United States. The Company is required to provide round the clock assistance to the EPA at spill sites within the midwestern and western United States and, in certain instances, may be required to respond to an emergency in other areas of the country. The START contracts are level of effort and cost plus fixed fee contracts. The EPA has estimated that a certain number of labor hours are necessary to fulfill the requirements of the contracts, and has agreed to compensate the Company for maintaining an available work force to fulfill those hour requirements. All of the contracts contain a base fee amount which is fixed in the contract. The total contract value of the five (5) START contracts, if the EPA exercises all options within each of them, is $216 million. The base value of the five (5) START contracts over five years is approximately $93.0 million. The Company, as of July 31, 1999, has realized total net revenues of approximately $90.8 million under these contracts. As of July 31, 1999 the EPA had exercised 93 options totaling approximately $22.2 million in net revenues under the START contracts. There are 463 remaining options that have not been exercised by the EPA as of July 31, 1999. The agency could exercise any number of these options before the contracts expire in December 2000. The START contracts each have a term of five (5) years. However, they contain termination provisions under which the EPA may, without penalty, Page 5 of 53 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. 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 $335.0 million. Hazardous Material Services Introduction. EEI has conducted hazardous waste site evaluations throughout the United States. In conducting these site evaluations, the Company provides site investigation (e.g., geophysical surveys, monitoring well installation, and sample collection and analysis), engineering design, and operation and maintenance for a wide range of industrial and governmental clients. In providing such services, the Company inventories and collects sample materials on site and then evaluates waste management practices, potential off-site impacts and liability concerns. EEI then recommends and designs clean up programs and assists in the implementation and monitoring of those clean up programs. Field Investigation. The Company's field investigation services primarily involve the development of work plans, health and safety plans and quality assurance and quality control plans to govern field investigations and conduct such field investigations to define the nature and extent of contaminants at a site. Engineering Services. After field investigation services have been completed and the necessary approvals obtained, the Company's engineering specialists develop plans and specifications for remedial clean up activities. This work includes the development of methods and standard operating procedures to assess contamination problems, and to identify, develop and design appropriate pollution control schemes. Alternative clean up strategies are evaluated and conceptual engineering approaches are formulated. The Company also provides supervision of actual cleanup or remedial construction work performed by other contractors. Environmental Consulting Services The Company's staff includes various individuals with advanced degrees representing over 75 scientific and engineering disciplines which relate to the identification, quantification, analysis, and remediation of hazards to the environment. The Company has rendered consulting services to industrial and government clients in the following areas: Hazard and Risk Analysis. EEI has provided analyses of the hazards and risks of energy transportation to facility designers, contractors, and operators for over fifteen years. The Company has developed a proprietary hazardous material exposure model which determines the impact of potential energy facility accidents on a plant and its employees, as well as on the people and property in the surrounding community. EEI's hazard and risk analyses have considered such factors as the physics of brittle fractures, flammable vapor clouds, cryogenic liquid release and containment, thermal radiation effects, and replacement and rerouting strategies. In addition, Page 6 of 53 the Company provides risk analysis for hazardous and toxic material spills and releases as required under CERCLA and RCRA. These analyses have evaluated human and ecological risks posed by contaminants in rural and urban settings, and coastal, riverain, wetland and upland environments throughout the United States. Underground Storage Tank Management. The 1984 amendments to RCRA created special provisions for the regulation of underground storage tanks. Extensive federal regulations were promulgated in late 1988 which include notification provisions, strict requirements for tank design and installation, leak detection and monitoring and financial responsibility. The Company's staff includes various individuals experienced in hydrogeology, engineering and the evaluation of tank facilities for existing and potential leakage. EEI's services also include analyzing the corrosive potential of underground tanks, monitoring adjacent ground water, performing soil gas monitoring or other geophysical procedures requiring the use of drilling equipment, and establishing monitoring programs to verify the effectiveness of mitigative programs and the status of properly functioning tanks. EEI also designs tank removal, replacement and monitoring programs. Environmental Assessments. In response to 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 27 years. As part of the environmental evaluation process, EEI assists clients in evaluating and developing methods to avoid or mitigate the potential environmental impacts of a proposed project and to help ensure that the project complies with regulatory requirements. EEI's services include air and water quality analysis, terrestrial and aquatic biological surveys, threatened and endangered species surveys and wetland delineations, social economic studies, transportation analyses and land use planning. Archeological Surveys. The National Historic Preservation Act (1966), Executive Order 11593 (1971), and NEPA require that developers of certain projects requiring federal funding, licensing, or approval consider the potential adverse effects of their projects on cultural resources. In accordance with these regulations, EEI's archaeologists conduct documentary background research and field investigations to determine the presence of cultural resources within proposed project areas and design plans to mitigate adverse impacts on the resources prior to project development. International Services. The Company has broadened its client base to include many international clients through the use of joint ventures and partnerships. Analytical Laboratory Services The Company provides analytical testing services to industrial and government customers who require accurate measurements to identify and monitor existing hazardous waste sites. The laboratory analyzes waste, soil, sediment, air tissue and potable and non-potable water using state of the art computer controlled instrumentation. The Company also is certified to perform environmental testing services for some branches of the U.S. military and a number of state agencies. Page 7 of 53 Aquaculture On July 30, 1999, the Company acquired 90% of the assets of an aquaculture shrimp facility 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 plans to leverage its in-house expertise to take advantage of the demand for cash crops such as shrimp created as a result of the decline in worldwide fisheries. 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 President recently signed into law legislation transferring funds into the Hazardous Substances Superfund with disbursements available after September 1, 2000. This emphasizes the priority that the federal government has placed upon the future of the clean up of hazardous waste sites throughout the nation. THE RESOURCE CONSERVATION AND RECOVERY ACT of 1976 ("RCRA"). RCRA generally provides "cradle to grave" coverage of hazardous wastes. It seeks to achieve this goal by imposing performance, testing and record keeping requirements on persons who generate, transport, treat, store, or dispose of hazardous wastes. The Company assists hazardous waste generators in the storage, transportation and disposal of wastes; prepares permit applications and engineering designs for treatment, storage and disposal facilities; designs and oversees underground storage tank installations and removals; performs corrective measure studies and remedial oversight at RCRA regulated facilities; and performs RCRA compliance audits. TOXIC SUBSTANCE CONTROL ACT OF 1976 ("TSCA"). TSCA authorizes the EPA to gather information on the risks posed to public health and the environment by chemicals and to regulate the manufacture, use and disposal of chemical substances. The 1986 amendments to TSCA and its implementing regulations require school systems to inspect their buildings for asbestos, determine where asbestos containing materials pose hazards to humans and abate those hazards. Regarding PCBs specifically, amendments to TSCA Page 8 of 53 regulations dated December 21, 1989 established comprehensive record keeping requirements for persons engaged in PCB transportation, storage and disposal activities. Amendments effective August 28, 1998 add regulatory provisions authorizing certain uses of PCBs; specifying additional alternatives for the cleanup and disposal of PCBs; establishing procedures for determining PCB concentration; establishing standards and procedures for decontamination; and updating several marking, recordkeeping, and reporting requirements. The Company's principal work under TSCA involves field sampling, site reconnaissance, development of remedial programs and supervision of construction activities at sites involving PCB contamination. The Company also conducts asbestos surveys and investigations. THE NATIONAL ENVIRONMENTAL POLICY ACT ("NEPA"). NEPA generally requires that a detailed environmental impact statement ("EIS") be prepared for every major federal action significantly affecting the quality of the human environment. With limited exceptions, all federal agencies are subject to NEPA. 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 has fundamentally redefined the regulation of air pollutants. The Clean Air Act Amendments of 1990 have created a flurry of federal and state regulatory initiatives and industry responses which require the development of detailed inventories and risk management plans, as well as the acquisition of facility wide, rather than source specific, air permits. Complementary changes have also been integrated into the RCRA Boilers and Industrial Furnace ("BIF") regulatory programs calling for upgraded air emission controls, more rigorous permit conditions and the acquisition of permits and/or significant permit modifications. The Company assists public and private clients in the development of air permitting strategies and the preparation of permit applications. EEI also prepares the technical studies and engineering documents (e.g., air modeling, risk analysis, design drawings) necessary to support permit applications. SAFE DRINKING WATER AND CLEAN WATER ACTS. 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 others goals. Ecology and Environment, Inc. assists public and private clients in developing and establishing pollution prevention programs, assisting clients in monitoring ground, waste and stormwater systems, and help clients with water permitting and compliance issues. FOOD QUALITY PROTECTION ACT OF 1996. The Food Quality Protection Act of 1996 amended the Federal Insecticide, Fungicide, and Rodenticide Acts, and established new health based safety standards with respect to pesticide residues in and on foodstuffs. E & E, Inc. services in this area include the testing of food products, establishing methodologies for more effectively detecting residues, verifying legal uses of pesticides through food, water, or soil samples, and developing and determining the Page 9 of 53 feasibility of alternatives to current agricultural practices that limit the use of pesticides. 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 E & E, Inc. services provided 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 U.S. 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 with the EPA require it to maintain certain insurance, including comprehensive general liability insurance for bodily injury, death or loss of or damage to property. In addition, many of the Company's other contracts require the Company to indemnify its clients for claims, damages or losses for personal injury or property damage relating to the Company's performance of its duties unless such injury or damage is the result of the client's negligence or willful acts. Currently, the Company is able to provide insurance coverage to meet the requirements of its contracts, however, certain pollution exclusions apply. 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 for contracts entered into subsequent to November, 1994; for contracts entered into between February, 1990 and November, 1994, the limits are $2.0 million for each claim and $2 million in the aggregate with a $250,000 deductible. The Company's general liability insurance policy provides coverage in the amount of $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. In addition, EEI has a special endorsement to its general liability insurance policy up to $3.0 million for damages to third parties for bodily injury or property damage resulting from sudden or accidental releases. Where possible, the Company requires that its clients cross-indemnify it for asserted claims. There can be no assurance, however, that any such agreement, together with the Company's general liability insurance and errors and omissions coverage will be sufficient to protect the Company against any asserted claim. Page 10 of 53 Market and Customers A substantial portion of the Company's revenues are currently derived from the federal government under Superfund-related activities, including the EPA, U.S. Department of Defense ("DOD")and U.S. Department of Energy ("DOE") contracts. The balance of the Company's revenues originate from state and local governments, domestic industrial clients, and private and governmental international clients. Backlog The Company's firm backlog of uncompleted projects and maximum potential gross revenues from indefinite task order contracts, at July 31, 1999 and 1998 were as follows: (Millions of $) Fiscal Year Fiscal Year Ended 7/31/99 Ended 7/31/98 ------------- ------------- Total Firm Backlog $79.7 $103.4 Anticipated Completion of Firm Backlog in Next Twelve Months 50.5 53.8 Maximum Potential Gross Revenues from Task Order Contracts 335.0 349.0 The above figures include $86 million of potential revenue backlog attributable to the options under the START contracts. This backlog includes a substantial amount of work to be performed under contracts which contain termination provisions under which the contract can be terminated without penalty upon written notice to the Company. The likelihood of obtaining the full value of the task order contracts cannot be determined at this time. Competition EEI is subject to competition with respect to each of the services that it provides. No entity, including the Company, currently dominates the environmental services industry and the Company does not believe that one organization has the capability to serve the entire market. Some of its competitors are larger and have greater financial resources than the Company while others may be more specialized in certain areas. EEI competes primarily on the basis of its reputation, quality of service, expertise, and price. Employees As of July 31, 1999, the Company had over 800 employees. The Company's ability to remain competitive will depend largely upon its ability to recruit and retain qualified personnel. None of the Company's employees is represented by a labor organization and employee relations are good. Page 11 of 53 Item 2. PROPERTIES The Company's headquarters (60,000 square feet) is located in Lancaster, New York, a suburb of Buffalo. The Company's laboratory and warehouse facility in Lancaster, New York consists of two buildings' totaling approximately 50,000 square feet. The Company also leases office and storage facilities at twenty-three (23) regional offices, with terms which generally coincide with the duration of the Company's contracts in those areas. Item 3. LEGAL PROCEEDINGS From time to time, the Company is named a defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding the resolution of which the management of the Company believes will have a material adverse effect on the Company's results of operations or financial condition or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Page 12 of 53 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Principal Market or Markets. The Company's Class A Common Stock is traded on the American Stock Exchange. There is no separate market for the Company's Class B Common Stock. The following table represents the range of high and low prices of the Company's Class A Common Stock as reported by the American Stock Exchange for the periods indicated. Fiscal 1998 High Low - ----------- ------ ------ First Quarter (commencing August 1, 1997 - 11-1/8 8-9/16 November 1, 1997) Second Quarter (commencing November 2, 1997 - 12 10-1/2 January 31, 1998) Third Quarter (commencing February 1, 1998 - 11-1/2 10-3/16 May 2, 1998) Fourth Quarter (commencing May 3, 1998 - 11-1/8 9-7/16 July 31, 1998) Fiscal 1999 High Low - ----------- ------ ------- First Quarter (commencing August 1, 1998 - 9-5/8 9-1/8 October 31, 1998) Second Quarter (commencing November 1, 1998 - 9-1/4 8-1/2 January 30, 1999) Third Quarter (commencing January 31, 1999 - 8-7/8 6-7/8 May 1, 1999) Fourth Quarter (commencing May 2, 1999 - 7 6-5/8 July 31, 1999) (b) Approximate Number of Holders of Class A Common Stock. As of September 30, 1999, 2,197,142 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 414. The Company estimates that it has a significantly greater number of Class A Common Stock shareholders because a Page 13 of 53 substantial number of the Company's shares are held in street name. As of the same date, there were 1,768,728 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 74. (c) Dividend. In each of the fiscal years ended July 31, 1998 and 1999, the Company declared and paid cash dividends of $.32 per share of common stock. The amount, if any, of future dividends remains within the discretion of the Company's Board of Directors and will depend upon the Company' s future earnings, financial condition and requirements and other factors as determined by the Board of Directors. 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. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ------------------------------------ Year Ended July 31, 1999 1998 1997 1996 1995 --------------------------------------------------- (In thousands, except per share amounts) Operating data: Gross revenues $75,411 $75,088 $70,802 $69,823 $91,512 Net revenues $63,349 $61,552 $58,994 $61,569 $77,715 Income(loss) from operations $ 53 $ 287 $ (142) $ 1,511 $ 2,974 Income before income taxes $ 483 $ 757 $ 478 $ 2,087 $ 3,552 Net income $ 299 $ 471 $ 113 $ 1,160 $ 2,154 Net income per common share Basic and Diluted $ .08 $ .12 $ .03 $ .29 $ .52 Cash dividends declared per common share $ .32 $ .32 $ .32 $ .32 $ .32 Weighted average common shares outstanding: Basic 3,957,825 3,949,359 3,956,236 4,039,369 4,136,929 Diluted 3,957,825 3,952,827 3,958,714 4,041,985 4,136,929 Page 14 of 53 As of July 31, 1999 1998 1997 1996 1995 --------------------------------------------------- (In thousands, except per share amounts) Balance sheet data: Working capital $27,503 $30,316 $31,141 $31,993 $32,662 Total assets $52,695 $53,076 $53,524 $55,575 $59,476 Long-term debt $ 516 $ 553 $ 607 $ 695 $ 782 Shareholders' equity $42,542 $43,500 $44,183 $45,468 $46,907 Book value per share: basic $ 10.75 $ 11.01 $ 11.17 $ 11.26 $ 11.34 diluted $ 10.75 $ 11.00 $ 11.16 $ 11.25 $ 11.34 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition At July 31, 1999 the Company had a working capital balance of $27.5 million, a $2.5 million decrease from the balance at July 31, 1998. Cash, cash equivalents and investment securities available for sale decreased $3.7 million as a result of the investment in the aquaculture facility, purchase of equipment and the payment of dividends. Contract receivables increased approximately $1.0 million consistent with the increase in net revenues. The Company maintains an unsecured line of credit of $10.0 million with a bank at the prevailing prime rate. There are no borrowings outstanding under this line of credit at July 31, 1999 and none were required during fiscal year 1999. The Company has historically financed its activities through cash flows from operations. Internally generated funds have been adequate to support the demands for working capital, the purchase of new fixed assets and investment securities and the payment of dividends. There are no significant working capital requirements pending at July 31, 1999. The Company's existing cash along with that generated by future operations and the existing credit line is expected to be sufficient to meet the Company's needs for the foreseeable future. Results of Operations Net Revenues Net revenues for fiscal year 1999 were $63.3 million, up 3% from the $61.5 million reported in fiscal year 1998. The increase in net revenues was attributable to increases in revenues from the Company's contracts with the United States Environmental Protection Agency (EPA) and the Company's international subsidiaries of 16% and 37%, respectively. The Company Page 15 of 53 experienced decreases in net revenues for its Analytical Services Center (ASC) and other consulting business of 7% and 10%, respectively. The increased net revenue from the EPA was primarily due to the five regional United States Superfund Assistance and Response Teams (START) contracts while the increased net revenue from the Company's international subsidiaries was due to continued success in marketing the energy industry clients. Net revenues for fiscal year 1999 were favorably impacted by a reversal of an allowance for contract adjustments related to reserves previously set up for government audit disallowances covering fiscal years 1990 and 1991. The settlement of the audit issues in those years resulted in a reduction of reserves in the amount of $538,000. Net revenues for fiscal year 1998 were $61.5 million, up 4% from the $59.0 million reported in fiscal year 1997. The increase was due to revenue gains from international clients, the START contracts and Department of Defense (DOD) customers. Income Before Income Taxes The Company's income before income taxes (IBT) for fiscal year 1999 was $482,000, down 36% from the $757,000 reported in fiscal year 1998. IBT was negatively impacted by the reduction in net revenues experienced in the Company's ASC and other consulting business as well as an increase in administrative and indirect operating expenses. The ASC losses increased 7% over the prior year while IBT for the remainder of the consulting business fell 9.5%. During fiscal year 1999, the Company completed the installation of a new laboratory information handling system at the ASC designed to increase efficiencies in production and has reduced operating costs in the ASC by approximately $800,000 on an annualized basis. Although some benefit of these cost reductions impacted the fourth quarter of fiscal year 1999, the full benefit of these cost reductions will be realized in fiscal year 2000. The Company's income before income taxes for fiscal year 1998 was $757,000, an increase of 58% over the $478,000 recorded in the prior year. This increase was primarily attributable to the increase in net revenues. These gains were offset by increasing losses in the Company's ASC as those operating losses amounted to $1.7 million, an increase of $.8 million over fiscal year 1997. Income Taxes The effective income tax rate for fiscal year 1999 was 38% as compared to 37.8 for fiscal year 1998. Year 2000 Compliance Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in less than one year computer systems and/or software used by many companies in a wide variety of applications will experience operating difficulties unless they are Page 16 of 53 modified or upgraded to adequately process information involving, related to or dependent upon the century change. The Company has completed its companywide assessment of operating and information systems which are sensitive to a potential Year 2000 ("Y2K") problem. Most of the systems currently in use were found to be compliant. The Company's internal financial systems software and its sample tracking software utilized at its Analytical Services Center were not Year 2000 compliant and have been replaced. The financial systems software was upgraded and implemented effective August 1, 1998 while the new compliant sample tracking software was upgraded and replaced in July 1999. The cost of the Company's Year 2000 compliance upgrade was funded from current operations and did not have a material adverse effect on the Company's business, financial position or results of operations. The Company estimates the total cost of the upgrade was approximately $700,000 including $200,000- $250,000 for internal labor costs. The fact that the Company offers labor oriented services minimizes its risk associated with potential Year 2000 problems from its suppliers. The Company maintains a broad base of vendors and suppliers and believes there is little risk to its ongoing operations from Year 2000 problems by its outside vendors. There can be no guarantee that the Company's customers, particularly the U.S. Government, will successfully complete a Year 2000 upgrade on a timely basis. A failure by the U.S. Government to achieve Year 2000 compliance could have significant adverse effects on the Company's future business, financial operations and results of operations. The Company has been advised through contacts at the Agency that its largest customer, the U.S. Environmental Protection Agency, has achieved Y2K compliance for all of its mission critical systems. The Company conducts business in many overseas markets, although no individual market represents a material risk. The Company is unaware of the state of Y2K readiness in any individual overseas market. Based on the progress the Company has made to date in addressing its Year 2000 issues, the Company does not foresee significant risks associated with these efforts at this time. Since the Company adopted a plan to address these issues in a timely manner, it has not developed a comprehensive contingency plan. Portions of the narrative set forth in this Financial Condition and Results of Operations, which are not historical in nature, are forward looking statements, based upon current expectations, all of which are subject to risk and uncertainties, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company does not assume the obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Page 17 of 53 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants To the Board of Directors and Shareholders of Ecology and Environment, Inc. In our opinion, the consolidated financial statements listed in the index appearing under item 14(a)1 and 2 on this Form 10-K present fairly, in all material respects, the financial position of Ecology and Environment, Inc. and its subsidiaries at July 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Buffalo, New York October 8, 1999 Page 18 of 53 Ecology and Environment, Inc. Consolidated Balance Sheet
July 31, -------------------------- 1999 1998 ---- ---- Assets Current assets: Cash and cash equivalents $ 5,209,882 $ 6,627,164 Investment securities available for sale 5,468,620 7,773,585 Contract receivables, net 23,529,043 22,583,963 Deferred income taxes 1,565,144 1,976,922 Income taxes receivable 571,094 356,641 Other current assets 585,199 855,109 ------------ ------------ Total current assets 36,928,982 40,173,384 Property, building and equipment, net 14,530,109 12,856,938 Deferred income taxes 313,182 268,728 Other assets 922,461 880,464 ------------ ------------ Total assets $52,694,735 $54,179,514 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 3,634,114 $ 3,253,204 Accrued payroll costs 2,240,904 3,175,498 Other accrued liabilities 3,550,878 3,697,798 ------------ ------------ Total current liabilities 9,425,896 10,126,500 Minority Interest in Aquaculture Facility 211,651 --- Long-term debt 515,625 553,125 Shareholders' equity: Preferred stock, par value $.01 per share; authorized-2,000,000 shares; no shares issued --- --- Class A common stock, par value $.01 per share; authorized-6,000,000 shares; issued-2,375,302 and 2,364,302 shares 23,752 23,643 Class B common stock, par value $.01 per share; authorized-10,000,000 shares; issued-1,794,987 and 1,805,987 shares 17,946 18,056 Capital in excess of par value 17,591,436 17,591,436 Retained earnings 26,412,508 27,424,660 Treasury stock - Class A common, 177,060 and 183,310 shares; Class B common, 26,259 shares, at cost (1,504,079) (1,557,906) ------------ ------------ Total shareholders' equity 42,541,563 43,499,889 ------------ ------------ Total liabilities and shareholders' equity $52,694,735 $54,179,514 =========== ============ The accompanying notes are an integral part of these financial statements.
Page 19 of 53 Ecology and Environment, Inc. Consolidated Statement of Income
Year ended July 31, ------------------------------------------- 1999 1998 1997 ---- ---- ---- Gross Revenues $75,411,105 $75,088,864 $70,801,535 Less: direct subcontract costs 12,062,477 13,537,007 11,808,025 ------------ ------------ ------------ Net revenues 63,348,628 61,551,857 58,993,510 Operating costs and expenses: Cost of professional services and other direct operating expenses 37,047,642 36,223,266 34,798,097 Administrative and indirect operating expenses 16,720,659 15,695,000 14,644,185 Marketing and related costs 8,132,525 7,880,921 8,107,698 Depreciation 1,394,766 1,465,904 1,585,562 ------------ ------------ ------------ Total operating costs & expenses 63,295,592 61,265,091 59,135,542 ------------ ------------ ----------- Income (loss) from operations 53,036 286,766 (142,032) Interest expense (65,722) (113,775) (65,994) Interest income 663,446 659,550 697,315 Net foreign currency exchange (167,958) (75,668) (11,735) ------------ ------------ ------------ Income before income taxes 482,803 756,873 477,554 Income tax provision (benefit): Federal (247,011) 311,387 449,690 State 65,000 96,250 192,180 Deferred 365,344 (121,467) (277,387) ------------ ------------ ------------ 183,333 286,170 364,483 ------------ ------------ ------------ Net income $299,470 $470,703 $113,071 ============ ============ ============ Net income per common share: Basic and Diluted $0.08 $0.12 $0.03 ============ ============ ============ Weighted average common shares outstanding: Basic 3,957,825 3,949,359 3,956,236 ============ ============ ============ Diluted 3,957,825 3,952,827 3,958,714 ============ ============ ============ The accompanying notes are an integral part of these financial statements.
Page 20 of 53 Ecology and Environment, Inc. Consolidated Statement of Changes in Shareholders' Equity
Class A Class B Capital in Common Stock Common Stock excess of Retained Treasury stock Shares Amount Shares Amount par value earnings Shares Amount ------------------ ------------------ ----------- ----------- ------ ----------- Balance at July 31, 1996 2,304,747 $23,047 1,865,242 $18,652 $17,591,436 $29,332,352 195,259 $ (1,497,940) Net income --- --- --- --- --- $ 113,071 --- --- Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,265,174) --- --- Conversion of Class B common stock to Class A common stock 12,165 $ 122 (12,165) $ (122) --- --- --- --- Repurchase of Class A common stock --- --- --- --- --- --- 25,400 $ (175,000) Unrealized investment gain, net --- --- --- --- --- $ 42,811 --- --- --------- ------- --------- ------- ----------- ----------- ------- ------------ Balance at July 31, 1997 2,316,912 $23,169 1,853,077 $18,530 $17,591,436 $28,223,060 220,659 $ (1,672,940) ========= ======= ========= ======= =========== =========== ======= ============= Net income --- --- --- --- --- $ 470,703 --- --- Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,265,480) --- --- Conversion of Class B common stock to Class A common stock 47,390 $ 474 (47,090) $ (474) --- --- --- --- Unrealized investment loss, net --- --- --- --- --- $ (3,623) --- --- Issuance of stock under stock award plan --- --- --- --- --- --- (11,090) $ 115,034 --------- ------- --------- ------- ----------- ----------- -------- ------------- Balance at July 31, 1998 2,364,302 $23,643 1,805,987 $18,056 $17,591,436 $27,424,660 209,569 $(1,557,906) ========= ======= ========= ======= =========== =========== ========= ============= Net income --- --- --- --- --- $ 299,470 --- --- Cash dividends paid ($.32 per share) --- --- --- --- --- $(1,268,598) --- --- Conversion of Class B common stock to Class A common stock 11,000 $ 110 (11,000) $ (110) --- --- --- --- Unrealized investment loss, net --- --- --- --- --- $ (43,024) --- --- Repurchase of Class A common stock --- --- --- --- --- --- 2,500 $ (13,458) Issuance of stock under stock award plan --- --- --- --- --- --- (8,750) $ 67,285 --------- ------- --------- ------- ----------- ------------ -------- ------------ Balance at July 31, 1999 2,375,302 $23,753 1,794,987 $17,946 $17,591,436 $26,412,508 203,319 $(1,504,079) ========= ======= ========= ======= =========== ============ ======== ============ The accompanying notes are an integral part of these financial statements.
Page 21 of 53 Ecology and Environment, Inc. Consolidated Statement of Cash Flows
Year ended July 31, 1999 1998 1997 ----------- ---------- ---------- Cash flows from operating activities: Net income $ 287,661 $ 470,703 $ 113,071 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,394,766 1,465,904 1,585,562 (Gain) loss on disposition of property and equipment 15,767 --- (1,225) Minority interest in Aquaculture Facility 211,651 --- --- Net foreign exchange loss 167,958 75,668 11,735 Provision for contract adjustments 606,875 661,925 112,925 (Increase) decrease in: - contracts receivable, net (1,712,993) 2,735,269 (2,398,046) - other current assets 267,059 (364,509) 5,107 - income taxes receivable 181,554 --- --- - other non-current assets (41,997) (62,411) 47,870 Increase (decrease) in: - accounts payable 389,818 678,850 (560,508) - accrued payroll costs (934,594) (540,685) (404,081) - other accrued liabilities (144,830) 1,439,091 101,151 - income taxes payable --- (184,583) 184,583 ----------- ----------- ----------- Net cash provided by (used in) operating activities 688,694 6,375,222 (1,201,856) ----------- ----------- ----------- Cash flows used in investing activities: Purchase of property, building and equipment, net (3,215,322) (1,543,118) (977,046) Proceeds from sale of assets 128,359 --- 1,225 Payment for the purchase of bond (693,914) (3,052,854) (1,210,761) Proceeds from maturity of notes 1,685,000 2,222,293 200,000 Proceeds from sale of investment securities 1,242,172 136,972 498,882 Investment in China Joint Venture --- (21,637) (148,396) ----------- ----------- ----------- Net cash used in investing activities (853,705) (2,182,676) (1,624,361) ----------- ----------- ----------- Cash flows used in financing activities: Dividends paid (1,268,598) (1,265,480) (1,265,174) Repayment of long-term debt (37,500) (54,166) (87,500) Net proceeds from issuance of common stock 67,285 115,034 --- Purchase of Treasury Stock (13,458) --- (175,000) ----------- ----------- ----------- Net cash used in financing activities (1,252,271) (1,204,612) (1,527,674) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,417,282) 3,050,345 (4,401,761) Cash and cash equivalents at beginning of period 6,627,164 3,714,898 8,080,524 ----------- ----------- ----------- Cash and cash equivalents at end of period $5,209,882 $6,765,243 $3,678,763 =========== =========== =========== The accompanying notes are an integral part of these financial statements.
Page 22 of 53 ECOLOGY AND ENVIRONMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business Ecology and Environment, Inc. (the Company) is an environmental consulting and testing firm whose underlying philosophy is to provide a broad range of environmental consulting services worldwide so that sustainable economic and human development may proceed with minimum negative impact on the environment. These services include environmental audits and impact assessments, hazardous material site evaluations and response programs, water and groundwater monitoring, laboratory analyses, environmental infrastructure planning and many other projects provided by the Company's multidisciplinary professional staff. Gross revenues reflected in the Company's consolidated statement of income represent services rendered for which the Company maintains a primary contractual relationship with its customers. Included in gross revenues are certain services outside the Company's normal operations which the Company has elected to subcontract to other contractors. The costs relative to such subcontract services are deducted from gross revenues to derive net revenues. During fiscal years ended July 31, 1999, 1998 and 1997, the percentage of total net revenues derived from contracts exclusively with the United States Environmental Protection Agency (EPA) were 52%, 48% and 47%, 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 11%, 18% and 18% for fiscal years ended July 31, 1999, 1998 and 1997, respectively. 2. Summary of Significant Accounting Principles a. Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Also reflected in the financial statements are the Company's 66-2/3% ownership in the assets of a nonoperating subsidiary, Ecology and Environment of Saudi Arabia Ltd. (EESAL) and a 50% ownership in two Chinese operating joint ventures, Beijing Yi Yi Ecology and Engineering Co. Ltd. and the Tianjin Green Engineering Company. These joint ventures are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated. Certain amounts in the prior years' consolidated financial statements and notes have been reclassified to conform with the current year presentation. On July 30, 1999, the Company acquired 90% of the assets of Langostinos del Pacifica, S.A., an aquaculture shrimp facility in Costa Rica for the sum of $1.89 million. This investment is consolidated in the Company's balance sheet at July 31, 1999 with the respective 10% minority interest. No operating activity occurred during fiscal 1999. Page 23 of 53 b. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. c. Revenue recognition Substantial amounts of the Company's revenues are derived from cost-plus-fee contracts using the percentage of completion method based on costs incurred plus the fee earned. The fees under certain government contracts are determined in accordance with performance incentive provisions. Such awards are recognized at the time the amounts can be reasonably determined. Provisions for estimated contract adjustments relating to cost based contracts have been deducted from gross revenues in the accompanying consolidated statement of income. These provisions are estimated and accrued annually based on government sales volume. Such adjustments typically arise as a result of interpretations of cost allowability under cost based contracts. Revenues related to long-term government contracts are subject to audit by an agency of the United States government. Government audits have been completed through fiscal year 1991 and are currently in process for fiscal years 1992 and 1993. The majority of the balance in the allowance for contract adjustments accounts represent a reserve against possible adjustments for fiscal years 1992 through 1999. Reductions in the provision for contract adjustments in the amount of $538,000 have been included in fiscal year 1999 sales reflecting settlements of questioned costs in fiscal years 1990 and 1991. d. Investment securities Investment securities have been classified as available for sale and are stated at estimated fair value. Unrealized gains or losses related to investment securities available for sale are reflected in retained earnings, net of applicable income taxes in the consolidated balance sheet and statement of changes in shareholders' equity. Realized gains and losses on the sale of investment securities are determined using the specific identification method. e. Property, building and equipment, depreciation and amortization Property, building and equipment are stated at cost. Office furniture and all equipment are depreciated on the straight-line method for book purposes, excluding computer equipment which is depreciated on the accelerated method for book purposes, and on accelerated methods for tax purposes over the estimated useful lives of the assets (three to seven years). The headquarters building is depreciated on the straight line method for both book and tax purposes over an estimated useful life of 32 years. Its Page 24 of 53 components are depreciated over their estimated useful lives ranging from 7 to 15 years. The analytical services center building and warehouse is depreciated on the straight line method over an estimated useful life of 40 years for both book and tax purposes. Leasehold improvements are amortized for book purposes over the terms of the leases or the estimated useful lives of the assets, whichever is shorter, and over approximately 30 years for tax purposes. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for improvements are capitalized. When property or equipment is retired or sold, any gain or loss on the transaction is reflected in the current year's earnings. f. Fair value of financial instruments The carrying amount of cash and cash equivalents, contracts receivable and accounts payable at July 31, 1999 approximates fair value because of the short maturity of those instruments. The amortized cost and estimated fair value of investment securities available for sale are fully described in Note 4. Long-term debt consists of third party borrowings by the Company. Based on the Company's assessment of the current financial market and corresponding risks associated with the debt, management believes that the carrying amount of long-term debt at July 31, 1999 approximates fair value. g. Translation of foreign currencies The financial statements of foreign subsidiaries where the local currency is the functional currency are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from translation of financial statements did not materially impact the financial statements for fiscal years 1999, 1998 and 1997. The financial statements of foreign subsidiaries located in highly inflationary economies are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments which are included in net income and amounted to $167,958, $75,668 and $11,735 for fiscal years 1999, 1998 and 1997, respectively. h. Income taxes The Company follows the asset and liability approach to account for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Although realization is not assured, management believes it is more likely than not that the recorded net deferred tax assets will be realized. Since in some cases management has utilized estimates, the amount of the net deferred tax asset considered realizable could be reduced in the near term. No provision has been made for United States income taxes applicable to undistributed earnings of foreign subsidiaries Page 25 of 53 as it is the intention of the Company to indefinitely reinvest those earnings in the operations of those entities. i. Pension costs During 1999, the Company adopted the provisions of Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), "Employers' Disclosure About Pensions and Other Post-Retirement Benefits." Adoption of SFAS No. 132 did not affect the Company's results of operations or financial position. 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." j. Stock based compensation The Company has elected to continue measuring compensation costs for employee stock based compensation arrangements using the method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted by SFAS No. 123 "Accounting for Stock Based Compensation." In accordance with APB Opinion No. 25, compensation expense is not recognized for stock option awards to employees under the Company's stock option plan since the exercise price of options granted is equal to or greater than the market price of the underlying stock at the date of grant. k. Earnings per share In 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share," which modifies the way in which earnings per share ("EPS") is calculated. Accordingly, all prior period EPS data (1997) presented has been restated. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. l. Comprehensive Income In 1999, the Company adopted FASB Statement No. 130 ("SFAS No. 130"), "Reporting 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 Page 26 of 53 non-owner sources." Under this statement, 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. The adoption of SFAS No. 130 had no material impact on the Company's results of operations or its financial position. As part of the adoption of SFAS No. 130, the financial statements presented for the periods prior to 1999 were reclassified to reflect application of the new provisions. The adoption had no material impact on those years either. m. Segment reporting In 1999, the Company adopted FASB Statement No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach 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. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. 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, 1999 and 1998, short-term investments consist of commercial paper and money market funds and are carried at cost. Short-term investments amounted to approximately $3,479,000 and $5,287,000 at July 31, 1999 and 1998, 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 $65,722, $113,775 and $65,994 in fiscal years 1999, 1998 and 1997, respectively. Cash paid for income taxes amounted to -0-, $886,820, $95,322 in fiscal years 1999, 1998 and 1997, respectively. Page 27 of 53 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, 1999 ------------- Investment securities available for sale: Mutual funds $3,800,411 $ 5,581 $37,780 $3,768,212 Municipal notes and bonds 1,024,750 --- --- 1,024,750 Corporate note 175,000 --- --- 175,000 Federal agency obligations 500,658 --- --- 500,968 ---------- ------- --------- ---------- $5,500,819 $ 5,581 $37,780 $5,468,620 ========== ======= ========= ========== July 31, 1998 ------------- Investment securities available for sale: Mutual funds $3,667,930 $30,617 $ 419 $3,698,128 Municipal notes and bonds 2,656,147 11,636 2,326 2,665,457 Corporate note 285,000 --- --- 285,000 Federal agency obligations 1,125,000 --- --- 1,125,000 ---------- ------- ------- ---------- $7,734,077 $42,253 $2,745 $7,773,585 ========== ======= ======= ========== The amortized cost and estimated fair value of debt securities available for sale by contractual maturity as of July 31, 1999 were as follows: Estimated Amortized fair value cost ----------- ----------- Due in one year or less $ 500,658 $ 500,658 Due after one year through five years --- --- Due after five years through ten years 199,750 199,750 Due after ten years 1,000,000 1,000,000 ---------- ---------- $1,700,408 $1,700,408 Mutual funds available for sale 3,768,212 3,800,411 ---------- ---------- $5,468,620 $5,500,819 ========== ========== Page 28 of 53 Proceeds, gross realized gains and losses from the sale of investment securities were $1,242,172, $2,300 and $0, respectively, in fiscal year 1999, $136,972, $0 and $0, respectively, in fiscal year 1998 and $498,882, $0 and $0, respectively, in fiscal year 1997. The unrealized investment securities gain and unrealized investment securities loss, net of applicable income taxes, at July 31, 1999 and 1998 of $(19,318) and $23,706, respectively, are reflected in retained earnings in the consolidated balance sheet. 5. Contract Receivables, net July 31, -------- 1999 1998 ------------ ------------ United States government - Billed $ 4,049,963 $ 6,368,873 Unbilled 5,112,599 6,597,802 ------------ ------------ 9,162,562 12,966,675 ------------ ------------ Industrial customers and state and municipal governments - Billed 9,348,639 5,490,908 Unbilled 6,110,576 5,063,129 ------------ ------------ 15,459,215 10,554,037 ------------ ------------ Less allowance for contract adjustments (1,092,734) (936,749) ------------ ------------ $23,529,043 $22,583,963 ============ ============ 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 $465,000 at July 31, 1999 and $0 at July 31, 1998. Unbilled contracts receivable are reduced by billings in excess of costs incurred of $1,415,000 at July 31, 1999 and $1,801,249 at July 31, 1998. Management anticipates that the July 31, 1999 unbilled receivables will be substantially billed and collected in fiscal 2000. Within the above billed balances are contractual retainages in the amount of approximately $1,914,000 at July 31, 1999 and $1,801,249 at July 31, 1998. Management anticipates that the July 31, 1999 retainage balance will be substantially collected in fiscal year 2000. Included in other accrued liabilities is an additional allowance for contract adjustments relating to potential cost disallowances on amounts billed and collected in current and prior years' projects of approximately $1,876,000 at Page 29 of 53 July 31, 1999 and $2,283,000 at July 31, 1998. An allowance for contract adjustments is recorded for contract disputes and government audits when the amounts are determinable. 6. Property, Building and Equipment, net July 31, -------- 1999 1998 ------------ ------------ Land $ 1,103,490 $ 528,320 Land improvements 1,159,514 --- Buildings 13,354,130 13,171,764 Laboratory and other equipment 6,600,017 6,188,113 Data processing equipment 7,093,465 7,588,012 Office furniture and equipment 4,781,779 4,697,079 Leasehold improvements and other 1,423,574 1,413,352 ----------- ----------- 35,515,969 33,586,640 Less accumulated depreciation and amortization (20,985,860) (20,729,702) ------------ ------------ $14,530,109 $12,856,938 ============ ============ 7. Line of Credit The Company has an unsecured $10,000,000 line of credit available which is subject to annual renewal and which bears interest at the prime rate. No borrowings on the line of credit were outstanding at July 31, 1999 and 1998 and none were required during fiscal years 1998 and 1997. At July 31, 1999 and 1998, the Company had letters of credit totaling $1,425,610 and $1,471,520, respectively, secured by this line of credit. 8. Long-term Debt During fiscal year 1994, the Company obtained industrial revenue bond capital lease financing in the amount of $750,000 to finance a portion of the cost of the newly constructed analytical services facility. The lease is collateralized by a portion of the land and the analytical services facility building in an amount equal to the bond. The bond is payable in equal monthly principal installments of $3,125 through 2014 and bears interest at the borrower's base rate which approximates prime (8.25% at July 31, 1999). In addition, the Company must meet certain financial ratio covenants relating to current assets to current liabilities and debt to tangible net worth. At July 31, 1999, the Company was in compliance with all financial ratio covenants. The balance outstanding on this bond at July 31, 1999 and 1998 was $553,125 and $590,625, respectively. Page 30 of 53 9. Income Taxes Earnings before provision for income taxes consisted of: 1999 1998 1997 -------- -------- --------- U.S. $307,079 $570,435 $547,358 Foreign 175,724 186,438 (69,804) -------- --------- ---------- $482,803 $756,873 $477,554 ======== ========= ========== The provision for income taxes differs from the federal statutory rate due to the following: Fiscal year ----------- 1999 1998 1997 ------ ------ ------ Federal tax 34.0% 34.0% 34.0% State taxes, net of federal benefit 10.8 6.0 18.0 Permanent differences Meals & entertainment/other 12.6 10.1 16.5 Tax exempt interest -18.0 -9.7 -12.3 Foreign operations (1997 includes reversal (1.7) (1.3) 20.3 of fed benefit recognized in p/yrs. for foreign losses) Other/rounding 0.2 -1.4 -0.3 ------ ------ ------ Total Provision 37.9% 37.8% 76.2% ====== ====== ====== Deferred tax assets (liabilities) included in other current assets were comprised of the following: July 31, -------- 1999 1998 ---------- ---------- Allowance for contract adjustments $1,104,344 $1,384,297 Accrued vacation and compensatory time 513,952 681,868 Property, building and equipment 255,692 251,104 Other 250,107 100,312 ----------- ----------- Gross deferred tax assets 2,124,095 2,417,581 State income taxes (164,850) (169,519) Other (80,919) (2,415) ----------- ----------- Gross deferred tax liabilities (245,769) (171,934) ----------- ----------- Net current deferred tax asset $1,878,326 $2,245,647 =========== =========== Page 31 of 53 The Company has not recorded income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. At July 31, 1999, these amounts, net of applicable foreign tax credits, were not material. 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 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, may be granted options to purchase shares of Class A Common stock at an option price of at least 100% of the shares' fair market value at the date of grant. Shares become exercisable after a minimum holding period of five years from the date of grant and expire after a period of ten years from the date of grant. A total of 209,390 shares were authorized for granting under the plan. The plan was terminated in March of 1996. No options were exercised during fiscal years 1999, 1998 and 1997. Cancelled options during the three year period ended July 31, 1999 amounted to 5,822, 8,969 and 22,848, respectively, at a weighted average exercise price of $10.14, $11.77 and $11.71, respectively. Expired options were 14,588, 21,830 and 0 for fiscal years 1999, 1998 and 1997, respectively, at a weighted average exercise price of $10.47, $13.09 and $0 per share, respectively. Options outstanding at the end of the four year period ended July 31, 1999 were 108,756, 129,166 and 159,965, respectively, at a weighted average exercise price of $11.25, $11.12 and $11.44, respectively. Of the options outstanding for the three year period ended July 31, 1999, 66,556, 69,646 and 79,086, respectively, are currently exercisable at a weighted average exercise price of $13.48, $13.06 and $13.27, respectively. At July 31, 1999, 42,200 options have an exercise price between $7.25 and $10.48, with a weighted average exercise price and weighted average contracted life of $7.74 and 6.86 years, respectively. At July 31, 1999, Page 32 of 53 66,556 options have an exercise price between $12.38 and $16.08 with a weighted average exercise price and weighted average contractural life of $13.48 and 2.64 years, respectively. Of those options, 66,556 are currently exercisable at a weighted average exercise price of $11.00. The Company estimates that if they elected to measure compensation cost for employee stock based compensation arrangements under SFAS No. 123, it would not have caused net income and earnings per share for fiscal years 1999 and 1997 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 "Award Plan") under which 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 Company originally reserved for issuance as awards under the Award Plan an aggregate of 12,000 shares of Class A Common stock of the Company, which shall be solely treasury shares. In March 1999 the number of shares reserved was increased to 22,000. In Fiscal Year 1999, 8,750 shares were issued at a weighted average fair value of $7.69 per share. In Fiscal Year 1998, awards for 11,090 shares of Class A common stock had been granted at a weighted average fair value of $9.81 per share. The Company estimates that if they elected to measure compensation cost for employee stock based compensation arrangements under SFAS No. 123 it would not have caused net income and earnings per share for fiscal years 1999 and 1998 to be materially different from their reported amounts. 11. Lease Commitments The Company rents certain office facilities and equipment under noncancelable operating leases. The Company also rents certain facilities for servicing project sites over the term of the related long-term government contracts. These contracts provide for reimbursement of any remaining rental commitments under such lease agreements in the event that the government terminates the contract. At July 31, 1999, future minimum rental commitments, net of estimated amounts allocable to government contracts with rental cost reimbursement clauses, were as follows: Page 33 of 53 Fiscal year Gross Reimbursable Net ----------- ---------- ------------ ------- 2000 2,037,142 1,054,642 982,500 2001 1,183,094 483,001 700,093 2002 330,553 1,239 329,314 2003 215,743 --- 215,743 2004 188,334 --- 188,334 Gross rental expense under the above lease commitments for 1999, 1998, and 1997 was $2,259,390, $2,050,157, and $2,098,520, respectively. 12. Defined Contribution Plans Contributions to the supplemental defined contribution plans are discretionary and determined annually by the Board of Directors. The total expense under the supplemental plan for fiscal years 1999, 1998, and 1997 was $1,472,426, $1,339,468 and $1,209,412, respectively. 13. Earnings Per Share All earnings per share amounts reflect the implementation of SFAS No. 128, Earnings Per Share. SFAS No. 128 established new standards for computing EPS and requires that all prior period earnings per share data be restated to conform with the provisions of the statement. SFAS No. 128 also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The computation of basic earnings per share reconciled to diluted earnings per share follows: Fiscal Year ----------- 1999 1998 1997 --------- --------- ---------- Income available to common stockholders $ 299,470 $ 470,703 $ 113,071 Weighted-average common shares outstanding (basic) 3,957,825 3,949,359 3,956,236 Basic earnings per share $0.08 $0.12 $0.03 Incremental shares from assumed conversions of stock options --- 3,469 2,478 Adjusted weighted-average common shares outstanding 3,957,825 3,952,827 3,958,714 Diluted earnings per share $0.08 $0.12 $0.03 Page 34 of 53 At July 31, 1999, there were 108,756 stock options outstanding with an exercise price ranging from $7.25 to $16.08 which were not included in the above calculations due to their antidilutive nature. At July 31, 1998, there were 69,646 stock options outstanding with an exercise price ranging from $12.38 - $16.08 which were not included. At July 31, 1997 there were 126,165 stock options outstanding with an exercise price ranging from $9.00 - $16.08 which were not included. 14. Contingencies Certain contracts with the EPA contain termination provisions under which the EPA may, without penalty, terminate the contracts upon written notice to the Company. In the event of termination, the Company would be paid only termination costs in accordance with the particular contract. The Company is involved in litigation arising in the normal course of business. In the opinion of management, any adverse outcome to this litigation would not have a material impact on the financial results of the Company. 15. Segment Reporting Ecology and Environment, Inc. has three reportable segments: consulting services, analytical laboratory services, and aquaculture. The consulting services segment provides broad based environmental services encompassing audits and impact assessments, surveys, air and water quality management, environmental engineering, environmental infrastructure planning, and industrial hygiene and occupational health studies to a world wide base of customers. The analytical laboratory provides analytical testing services to industrial and governmental clients for the analysis of waste, soil and sediment samples. The shrimp aquaculture facility, located in Costa Rica, was purchased on July 30, 1999. Consequently, there was virtually no reportable segment activity for fiscal year 1999. This facility will produce shrimp grown in a controlled environment for markets worldwide. The Company evaluates segment performance and allocates resources based on operating profit before interest income/expense and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intercompany sales from the analytical services segment to the consulting segment are recorded at market selling price, intercompany profits are eliminated. The Company's reportable segments are separate and distinct business units that offer different products. Consulting services are sold on the basis of time charges while analytical services and aquaculture products are sold on the basis of product unit prices. Page 35 of 53 Reportable segment data for the fiscal year ended July 31, 1999 is as follows:
Consulting Analytical Aquaculture Total ----------- ----------- ----------- ----------- Net revenues from external customers $59,167,613 $2,040,934 --- $61,208,547 Intersegment revenues --- 2,140,081 --- 2,140,081 ----------- ---------- ----------- ----------- Total consolidated net revenues $59,167,613 $4,181,015 --- $63,348,628 =========== =========== =========== =========== Depreciation expense 1,015,166 379,600 --- 1,394,766 Segment profit (loss) 1,963,956 (1,910,920) --- 53,036 Segment Assets 43,539,235 7,039,000 2,116,500 52,694,735 Expenditures for long-lived assets 886,370 212,452 2,116,500 3,215,322
Geographic Information: Net Long-lived Revenues (1) Assets ------------ ------------ United States $57,340,628 $33,282,307 Foreign countries $6,008,000 $117,162 (1) Net revenues are attributed to countries based on the location of the customers. Reportable segments for the fiscal year ended July 31, 1998 are as follows: Consulting Analytical Total ----------- ----------- ----------- Net revenues from external customers $57,052,529 $ 1,367,744 $58,420,273 Intersegment net revenues --- 3,131,584 3,131,584 ----------- ----------- ----------- Total consolidated net revenues $57,052,529 $4,499,328 $61,551,857 =========== ========== =========== Depreciation expense 984,251 481,653 1,465,904 Segment profit (loss) 2,061,550 (1,774,784) 286,766 Segment Assets 46,768,514 7,411,000 54,179,514 Expenditures for long-lived assets 1,326,110 141,340 1,467,450 Geographic Information: Net Long-lived Revenues (1) Assets ------------- ------------ United States $56,050,857 $33,449,866 Foreign countries 5,501,000 136,774 (1) Net revenues are attributed to countries based on the location of the customers. Page 36 of 53 Fiscal year ended July 31, 1997: Consulting Analytical Total ---------- ---------- ----------- Net revenues from external customers $54,140,825 $2,365,314 $56,506,139 Intersegment net revenues --- 2,487,371 2,487,371 ----------- ---------- ----------- $54,140,825 $4,852,685 $58,993,510 =========== ========== =========== Depreciation expense 1,133,469 452,093 1,585,562 Segment profit (loss) 741,634 (883,666) (142,032) Segment Assets 46,244,373 7,280,000 53,524,373 Expenditures for long-lived assets 852,209 113,102 965,311 Geographic Information: Net Long-lived Revenues (1) Assets ------------- ----------- United States $53,818,510 $32,005,018 Foreign countries 5,175,000 106,651 (1) Net revenues are attributed to countries based on the location of the customers. The disclosure of significant customers is included in note number one to the consolidated financial statements. Page 37 of 53 ECOLOGY AND ENVIRONMENT, INC. SCHEDULE VIII Allowance for Doubtful Accounts Years Ended July 31, 1999, 1998, and 1997 Balance at Charged to Balance Beginning Cost and at End Year Ended of Period Expense Deduction of Year ------------- ---------- ----------- --------- ---------- July 31, 1999 $3,219,565 $ 606,875 $ 858,200 $2,968,240 July 31, l998 $2,931,940 $ 661,925 $ 374,300 $3,219,565 July 31, 1997 $2,839,675 $ 112,925 $ 20,660 $2,931,940 Selected quarterly financial data (Unaudited) - --------------------------------------------- (In thousands, except per share information) 1999 First Second Third Fourth - ----------------------------------------------------------------------------- Gross revenues $16,927 $17,992 $20,802 $19,690 Net revenues 15,237 15,103 16,789 16,220 Income (loss) from operations 219 12 (162) (16) Income before income taxes 370 35 (47) 125 Net income (loss) 203 68 13 15 Net income per common share: basic and diluted $ 0.05 $ .02 $ .003 $ .004 Cash dividends declared per common share: basic and diluted $ --- $ 0.16 $ --- $ 0.16 1998 First Second Third Fourth - ----------------------------------------------------------------------------- Gross revenues $19,373 $16,423 $20,359 $18,858 Net revenues 15,899 14,142 15,656 15,779 Income (loss) from operations 342 (136) 25 (20) Income before income taxes 488 10 165 94 Net income (loss) 293 56 128 (6) Net income per common share: basic and diluted $ 0.07 $ 0.02 $ 0.03 $ --- Cash dividends declared per common share: basic and diluted $ --- $ 0.16 $ --- $ 0.16 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. Page 37 of 53 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 62 President and Director Frank B. Silvestro 62 Executive Vice President and Director Gerald A. Strobel 59 Executive Vice President of Technical Services and Director Ronald L. Frank 61 Executive Vice President of Finance, Secretary, Treasurer and Director Gerard A. Gallagher, Jr. 68 Senior Vice President of Special Projects and Director Roger J. Gray 58 Senior Vice President Laurence M. Brickman 55 Senior Vice President Harvey J. Gross 71 Director Ralph Bookbinder 68 Director Ross M. Cellino 67 Director Brent D. Baird 60 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. Page 39 of 53 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. Gray joined the Company in 1970 as an engineer. In 1980, he became Vice President and in August 1986 he became a Senior Vice President. Mr. Gray holds a B.S. in engineering. Mr. Brickman joined the Company in 1971. He became Vice President in April 1988 and became a Senior Vice President in August, 1994. Mr. Brickman has a B.S., M.S. and Ph.D. in biology. Mr. Gross has been a Director of the Company since its inception in 1970. Mr. Gross is an independent insurance broker and a capital financing consultant. Mr. Bookbinder was a Director of the Company from its inception in 1970. His term ended on January 14, 1999. Mr. Bookbinder is a retired stockbroker. Mr. Cellino has been a Director of the Company since its inception in 1970. Mr. Cellino is an attorney and counselor-at-law retired from private practice. Mr. Baird was elected as a Director in January 1999. From 1970 through January 1984, Mr. Baird was a partner and from February 1984 until January 1, 1992, was a limited partner of Truber, Collins & Co., Buffalo, New York, a member firm of the New York Stock Exchange, Inc. Mr. Baird is currently a private investor. He is also a director of Oglabay Norton Company, Todd Shipyards Corporation, Exolon-ESK Company, Merchants Group, Inc., Barrister Information Systems Corporation and First Carolina Investors, Inc. 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, 1997, 1998 and 1999 of those persons who were at July 31, 1999 (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, 1999 in excess of $100,000. In this report, the five persons named in the table below are referred to as the "Named Executives." Page 40 of 53
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------- ------------------------------------- STOCK INCENTIVE LONG-TERM ALL NAME AND FISCAL OPTIONS COMPENSATION OTHER PRINCIPAL POSITION YEAR SALARY BONUS (1) OTHER (SHARES) PAYOUTS (2) - ------------------------ ------ -------- -------- ----- --------------- ------------ ------ Gerhard J. Neumaier 1999 $228,750 -0- -0- -0- -0- 13,731 President and Director 1998 $219,952 -0- -0- -0- -0- 14,127 1997 $219,952 -0- -0- -0- -0- 12,000 Frank B. Silvestro 1999 $207,844 -0- -0- -0- -0- 12,535 Executive VP and Director 1998 $199,967 -0- -0- -0- -0- 12,965 1997 $199,967 -0- -0- -0- -0- 10,925 Ronald L. Frank 1999 $207,964 -0- -0- -0- -0- 12,542 Executive Vice President 1998 $199,967 -0- -0- -0- -0- 12,965 of Finance, Secretary 1997 $199,967 -0- -0- -0- -0- 10,925 Treasurer and Director Gerald A. Strobel 1999 $207,964 -0- -0- -0- -0- 12,542 Executive Vice President 1998 $199,967 -0- -0- -0- -0- 12,965 of Technical Services 1997 $199,967 -0- -0- -0- -0- 10,925 and Director Gerard A. Gallagher, Jr. 1999 $180,048 -0- -0- -0- -0- 10,855 Senior Vice President 1998 $172,060 -0- -0- -0- -0- 11,323 of Special Projects and 1997 $177,134 -0- -0- -0- -0- 9,695 Director (1) Amounts earned for bonus compensation determined by the Board of Directors. (2) Represents group term life insurance premiums, contributions made by the Company to its Defined Contribution Plan and Defined Contribution Plan SERP accruals on behalf of each of the Named Executives.
Page 41 of 53 None of the Company's executive officers have employment agreements. Directors who are not employees of the Company are paid an annual fee of $21,660 payable quarterly. Compensation Pursuant to Plans Pension Plan. In September 1995, the Company decided to terminate its Defined Benefit Pension Plan (the "Pension Plan"). The termination of the Pension Plan was settled by December 1996. Defined Contribution Plan. The Company maintains a Defined Contribution Plan ("the DC Plan") which is qualified under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") pursuant to which the Company contributes an amount not in excess of 15% of the aggregate compensation of all employees who participate in the DC Plan. All employees, including the executive officers identified under "Executive Compensation", are eligible to participate in the plan, provided that they have attained age 21 and completed one year of employment with at least 1,000 hours of service. The amounts contributed to the plan by the Company are allocated to participants based on a ratio of each participant's points to total points of all participants determined as follows: one point per $1,000 of compensation plus two points per year of service completed prior to August 1, 1979, and one point for each year of service completed after August 1, 1979. Supplemental Retirement Plan. In April 1994, the Board of Directors of the Company, in response to changes in the tax code, voted to establish a Supplemental Executive Retirement Plan ("SERP") for purposes of providing retirement benefits to employees including officers of the Company whose retirement benefits under the DC Plan are reduced as a result of the $150,000 compensation limitation imposed by the tax code change. This plan is a non-qualified plan which provides benefits that would have been lost from the DC Plan due to the imposition of the compensation restriction. Stock Award Plan Effective March 16, 1998, the Company adopted the Ecology and Environment, Inc. 1998 Stock Award Plan (the "Award Plan") under which key employees (including officers) of the Company or any or all of its present or future subsidiaries may be designated to receive awards of Class A common stock of the Company as a bonus for services rendered to the Company or its subsidiaries, without payment therefor, based upon the fair market value of the common stock at the time of the award. The Company originally reserved for issuance as awards under the Award Plan an aggregate of 100,000 shares of Class A common stock of the Company, which shall be solely treasury shares. In March 1999 the number of shares reserved was increased to 22,000. The Board of Directors of the Company administers the plan and has authority to determine the employees to whom awards are to be granted, the number shares covered by each award, whether or not the awards are subject to forfeiture or restriction on sale, resale or other disposition of the shares acquired under the award and any other understandings or conditions as to the award recipient's continued employment. The Award Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code. The plan permits grants of the award for a period Page 42 of 53 of five (5) years from the date of adoption. As of July 31, 1999, awards for 19,340 shares of Class A common stock have been granted. The named Executive Officers found in the Summary Compensation Table have not been granted any awards pursuant to the Award Plan. Incentive Stock Option Plan In February 1986, the Company adopted an Incentive Stock Option Plan (the "Option Plan") under which key employees, including officers, of the Company may be granted options to purchase up to an aggregate of 209,390 shares of Class A Common Stock at an option price of at least 100% of the fair market value of the shares on the date the options were granted. The Option Plan was terminated in March 1996, and no further options may be granted under the Option Plan. As of July 31, 1999, there were options outstanding for the purchase of 108,756 shares of Class A Common Stock, 66,556 of which were vested. The named Executive Officers found in the Summary Compensation Table have not been granted any options pursuant to the Option Plan. Section 16(a) Beneficial Ownership Reporting Compliance During the fiscal year ended July 31, 1999, Gerhard J. Neumaier failed to file on a timely basis one report, showing one transaction. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth, as of September 30, 1999, the number of outstanding shares of Class A Common Stock and Class B Common Stock of the Company beneficially owned by each person known by the Company to be the beneficial owner of more than 5 percent of the then outstanding shares of Common Stock: Class A Common Stock Class B Common Stock ---------------------- -------------------- Nature and Percent Nature and Amount of of Amount of Beneficial Class As Beneficial Percent Ownership Adjusted Ownership of Name and Address(1) (2)(3) (4) (2)(3) Class - ----------------------- ---------- -------- ---------- ------- Gerhard J. Neumaier* 347,707 13.7% 345,894 19.6% Frank B. Silvestro* 288,937 11.6% 288,937 16.3% Ronald L. Frank* 255,776 10.5% 252,394 14.9% Gerald A. Strobel* 262,296 10.7% 262,296 14.8% Franklin Resources, Inc. 370,000 16.89% 0 0 First Carolina Investors, Inc. 425,000 19.3% 0 0 The Cameron Baird Foundation 250,000 11.4% 0 0 * See Footnotes in next table Page 43 of 53 1) The address for Gerhard J. Neumaier, Frank B. Silvestro, Ronald L. Frank and Gerald A. Strobel is c/o Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York 14086, unless otherwise indicated. The address for Franklin Resources, Inc. is 777 Mariners Island Blvd., P. O. Box 7777, San Mateo, California 94403-7777. The address for The Cameron Baird Foundation is c/o Kavinoky & Cook, 120 Delaware Avenue, Buffalo, New York 14202. The address for First Carolina Investors, Inc. is 1130 East Third Street, Suite 400, Charlotte, North Carolina 28204. (2) Each named individual or corporation are deemed to be the beneficial owners of securities that may be acquired within 60 days through the exercise of exchange or conversion rights. The shares of Class A Common Stock issuable upon conversion by any such shareholder are not included in calculating the number of shares or percentage of Class A Common Stock beneficially owned by any other shareholder. (3) There are 2,197,142 shares of Class A Common Stock issued and outstanding and 1,768,728 shares of Class B Common Stock issued and outstanding as of September 30, 1999. 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. 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, 1999, 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) (14) 347,707 13.7% 345,894 19.6% Frank B. Silvestro (14) 288,937 11.6% 288,937 16.3% Ronald L. Frank (6) (14) 255,776 10.5% 247,094 17.0% Gerald A. Strobel (7) (14) 262,296 10.7% 262,296 14.8% Harvey J. Gross (8) 80,047 3.5% 80,047 4.5% Gerard A. Gallagher, Jr. 71,641 3.2% 71,300 4.2% Ross M. Cellino (9) 14,006 * 1,050 * Brent D. Baird (11) 435,000 19.8% -0- -0- Directors and officers Group (11)(12) 1,774,998 50.6% 1,310,107 74.1% (10 individuals) * Less than 0.1% - --------------------------------------------------------------------------------------
Page 44 of 53 1. The address of each of the above shareholders, other than Brent D. Baird, is c/o Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York 14086. The address for Brent D. Baird is 1350 One M & T Plaza, Buffalo, New York 14203. 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 3,201 shares of Class A Common Stock of the total 66,556 shares of Class A Common Stock that may be issued pursuant to the Company's Incentive Stock Option Plan, which may be purchased within the next 60 days pursuant to vested options granted to one officer. 4. There are 2,197,142 shares of Class A Common Stock issued and outstanding and 1,768,728 shares of Class B Common Stock issued and outstanding as of September 30, 1999. The figure in the "as adjusted" columns are based upon these totals and except as set forth in the preceding sentence, upon the assumptions described in footnotes 2 and 3 above. 5. Includes 525 shares of Class A Common Stock owned by Mr. Neumaier's spouse, as to which he disclaims beneficial ownership. Includes 525 shares of Class A Common Stock owned by Mr. Neumaier's Individual Retirement Account. Does not include any shares of Class A Common Stock or Class B Common Stock held by Mr. Neumaier's adult children. Includes 1,288 shares of Class A Common Stock owned by a Partnership in which Mr. Neumaier is a general partner. 6. Includes 8,850 shares of Class B Common Stock owned by one of Mr. Frank's children and 6,167 shares of Class A Common Stock owned by one of Mr. Frank's children as to which he disclaims beneficial ownership. Does not include any shares of Class A Common Stock or Class B Common Stock held by Mr. Frank's other adult children. Includes 36,625 Shares of Class B Common Stock owned by Mr. Frank's former spouse as to which he disclaims beneficial ownership except for the right to vote the shares which he retains pursuant to an agreement with his former spouse. Includes 515 shares of Class A Common Stock owned by Mr. Frank's individual retirement account. 7. Includes 45,726 shares of Class B Common Stock owned in equal amounts by Mr. Strobel's three children (Mr. Strobel holds 15,171 shares as custodian for these children), as to which he disclaims beneficial ownership. Page 45 of 53 8. Includes an aggregate of 21,047 shares of Class B Common Stock owned by two trusts created by Mr. Gross of which he and his spouse are the sole beneficiaries during their lifetimes. 9. Includes 1,050 shares of Class B Common Stock and 150 shares of Class A Common Stock owned by Mr. Bookbinder's spouse as to which he disclaims beneficial ownership. 10. Includes 10,396 shares of Class A Common Stock owned by Mr. Cellino's spouse, as to which shares he disclaims beneficial ownership; also includes 2,455 shares of Class A Common Stock owned by Mr. Cellino's Individual Retirement Account. 11. Includes 425,000 shares of Class A Common Stock owned by First Carolina Investors, Inc. of which Mr. Baird is a shareholder, director and Chief Executive Officer. It does not include 250,000 shares owned by the Cameron Baird Foundation. 12. Does not include 49,932 shares (19,475 shares of Class A Common Stock and 30,457 shares of Class B Common Stock) owned by the Company's Defined Contribution Plan of which Messrs. Gerhard J. Neumaier, Frank, Silvestro and Strobel constitute four of the five trustees of each Plan. 13. Includes 892 shares of Class A Common Stock which may be issued upon exercise of a stock option granted to one officer in July 1990, pursuant to the Company's Incentive Stock Option Plan; includes 892 shares of Class A Common Stock which may be issued upon exercise of a stock option granted to one officer on September 2, 1991 pursuant to the Company's Incentive Stock Option Plan; includes 787 shares of Class A Common Stock which may be issued upon the exercise of a stock option granted to one officer on November 2, 1992 pursuant to the Company's Incentive Stock Option Plan; includes 630 shares of Class A Common Stock which may be issued upon the exercise of a stock option granted to one officer on April 2, 1994 pursuant to the Company's Incentive Stock Option Plan; does not include 600 shares of Class A Common Stock which may be issued upon the exercise of a stock option granted to one officer on December 2, 1994 pursuant to the Company's Incentive Stock Option Plan; does not include 2,400 shares of Class A Common Stock which may be issued upon the exercise of stock options granted to two (2) officers on December 12, 1995 pursuant to the Company's Incentive Stock Option Plan. 14. 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 1,251,818 shares Class B Common Stock owned by them, the former spouse of one of the individuals and the children of the individuals. The spouse of one of the individuals and the children of the individuals. The agreement provides that prior to accepting a bona fide offer to purchase all or any part of their shares, each party must first allow the other members to the agreement the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions proposed by the offer. Page 46 of 53 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. Page 47 of 53 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS (a) 1. Financial Statements Page -------------------- ---- Report of Independent Accountants 17 Consolidated Balance Sheet - July 31, 1999 and 1998 18 Consolidated Statement of Income for the fiscal years ended July 31, 1999, 1998 and 1997 19 Consolidated Statement of Changes in Shareholders' Equity for the fiscal years ended July 31, 1999, 1998 and 1997 20 Consolidated Statement of Cash Flows for the fiscal years ended July 31, 1999, 1998 and 1997 21 Notes to Consolidated Financial Statements 22 2. Financial Statement Schedule Schedule VIII - Allowance for Doubtful Accounts 37 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) Page 48 of 53 3.7 Certificate of Change Under Section 805-A of the Business Corporation Law filed August 18, 1988 (2) 3.8 Certificate of Amendment of Certificate of Incorporation filed January 15, 1988 (2) 4.1 Specimen Class A Common Stock Certificate (1) 4.2 Specimen Class B Common Stock Certificate (1) 10.1 Stockholders' Agreement among Gerhard J. Neumaier, Ronald L. Frank, Frank B. Silvestro and Gerald A. Strobel dated May 12, 1970 (1) 10.4 Ecology and Environment, Inc. Defined Contribution Plan Agreement dated July 25, 1980 as amended on April 28, 1981 and July 21, 1983 and restated effective August 1, 1984 (1) 21.5 Schedule of Subsidiaries as of July 31, 1999 (3) 23.0 Consent of Independent Accountants (3) FOOTNOTES (1) Filed as exhibits to the Company's Registration Statement on Form S-1, as amended by Amendment Nos. 1 and 2, (Registration No. 33-11543), and incorporated herein by reference. (2) Filed as exhibits to the Company's Form 10-K for Fiscal Year Ending July 31, 1988, and incorporated herein by reference. (3) Filed herewith. (a) Reports on Form 8-K Registrant has not filed any reports on Form 8-K during the fourth quarter ended July 31, 1999. Page 49 of 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ECOLOGY AND ENVIRONMENT, INC. has duly caused this Annual Report to be signed on its behalf by the undersigned hereunto duly authorized: Dated: October 29, 1999 ECOLOGY AND ENVIRONMENT, INC. By: /s/ Gerhard J. Neumaier ------------------------------- Gerhard J. Neumaier, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ Gerhard J. Neumaier President October 29, 1999 Gerhard J. Neumaier (Chief Executive Officer) /s/ Frank B. Silvestro Executive October 29, 1999 Frank B. Silvestro Vice-President /s/ Gerald A. Strobel Executive October 29, 1999 Gerald A. Strobel Vice-President /s/ Ronald L. Frank Secretary, October 29, 1999 Ronald L. Frank Treasurer, Executive Vice-President of Finance (Principal Financial and Accounting Officer) /s/ Gerard A. Gallagher, Jr. Senior Vice October 29, 1999 Gerard A. Gallagher, Jr. President of Special Projects and Director /s/ Harvey J. Gross Director October 29, 1999 Harvey J. Gross /s/ Ross M. Cellino Director October 29, 1999 Ross M. Cellino /s/ Brent D. Baird Director October 29, 1999 Brent D. Baird Page 50 of 53 Exhibit Index - ------------- Exhibit 21.5 List of Subsidiaries Exhibit 23 Consent of Independent Accountants Page 51 of 53 Exhibit 21.5 SCHEDULE OF SUBSIDIARIES AS OF JULY 31, 1999 Subsidiaries of Ecology and Environment, Inc. (the "Company") as of July 31, 1999. Percentage of Capital Stock of Subsidiary Owned by the Company ------------- 1. Ecology and Environment Engineering, Inc. 100% (a Colorado corporation) 2. E & E Drilling and Testing Co., Inc. 100% (a New York corporation) 3. Ecology and Environment, Limited 100% (a limited company formed under the laws of the Republic of Ireland) 4. E & E Budapest Kft. 100% (a corporation formed under the laws of Hungary) 5. E & E Umwelt - Beratung GmbH, Leipzig 100% (a corporation formed under the laws of Germany) 6. Ecology and Environment de Mexico S.A.de C.V. 100% (a corporation formed under the laws of Mexico) 7. Ecology and Environment, S.A. 55% (a corporation formed under the laws of Venezuela) 8. Ecology and Environment Eurasia 100% (a corporation formed under the laws of the Russian Republic) 9. ecology and environment do brasil ltda. 100% (a corporation formed under the laws of Brazil) 10. Ecology and Environment of Saudi Arabia 66 2/3% Company, Ltd. (a limited liability company formed under the laws of the Saudi Arabia) 11. Ecology & Environment South America, Inc. 100% (a corporation formed under the laws of the Cayman Islands) Page 52 of 53 12. Ecology & Environment International 100% Services, Inc. (a Delaware Corporation) 13. Fruitas Marinas Del Mar S.A. 90% (a corporation formed under the laws of Costa Rica) 14. Ecology & Environment de Chile, S.A. 100% (a corporation formed under the laws of Chile) 15. Gestion Ambiental Consultores S.A. 50.1% (a corporation formed under the laws of Chile) Page 53 of 53 EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-41998 and 333-30085) of Ecology and Environment, Inc. of our report dated October 8, 1999, appearing on page 17 of this Form 10-K. We also consent to the reference to us under the heading "Experts" in such Registration Statement (33-41998). PricewaterhouseCoopers LLP Buffalo, New York October 27, 1999 EX-27 2 ART. 5 FDS FOR FISCAL YEAR 1999 10-K
5 1,000 12-MOS JUL-31-1999 AUG-01-1998 JUL-31-1999 5,210 5,469 23,529 0 0 36,929 14,530 0 52,695 9,426 516 16,129 0 0 26,413 52,695 63,349 75,411 0 63,296 0 0 66 483 183 0 0 0 0 299 .08 .08
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