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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 2005
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-9065
ECOLOGY AND ENVIRONMENT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0971022
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
368 Pleasant View Drive
Lancaster, New York 14086-1397
------------------------------ ----------
(Address of principal executive Zip code
offices)
(716) 684-8060
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At June 1, 2005, 2,423,269 shares of Registrant's Class A Common Stock
(par value $.01) and 1,643,045 shares of Class B Common Stock (par value $.01)
were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
Ecology and Environment, Inc.
Consolidated Balance Sheet
Unaudited
April 30, July 31,
2005 2004
------------ ------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,275,792 $ 4,240,333
Investment securities available for sale 145,942 143,647
Contract receivables, net 34,728,096 36,433,300
Deferred income taxes 5,029,240 5,029,233
Income tax receivable 1,293,527 ---
Other current assets 2,041,516 2,442,900
Assets of discontinued operations held
for sale 37,126 29,817
------------ ------------
Total current assets 46,551,239 48,319,230
Property, building and equipment, net 8,142,022 11,979,886
Other assets 2,127,036 2,204,510
------------ ------------
Total assets $56,820,297 $62,503,626
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 3,809,325 $ 6,070,266
Accrued payroll costs 3,549,150 4,611,097
Income taxes payable --- 363,114
Deferred revenue 344,145 739,679
Current portion of long-term debt and
capital lease obligations 264,116 266,597
Other accrued liabilities 10,134,757 8,495,677
Liabilities of discontinued operations held
for sale 296,204 293,048
------------ ------------
Total current liabilities 18,397,697 20,839,478
Deferred income taxes 48,676 107,960
Deferred revenue --- 454,540
Long-term debt and capital lease obligations 281,244 336,393
Minority interest 1,865,337 1,382,412
Commitments and contingencies (see note #11)
Shareholders' equity:
Preferred stock, par value $.01 per share
authorized - 2,000,000 shares; no shares
issued --- ---
Class A common stock, par value $.01 per
share; authorized - 6,000,000 shares;
issued - 2,514,235 and 2,501,985 shares 25,143 25,021
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,669,304 and 1,681,304 shares 16,693 16,813
Capital in excess of par value 17,624,479 17,592,444
Retained earnings 22,175,476 24,972,691
Accumulated other comprehensive income (2,434,189) (2,336,723)
Unearned compensation, net of tax (215,532) (193,282)
Treasury stock - Class A Common, 90,966 and
61,490 shares; Class B common, 26,259
and 26,259 shares, at cost (964,727) (694,121)
------------ ------------
Total shareholders' equity 36,227,343 39,382,843
------------ ------------
Total liabilities and shareholders' equity $56,820,297 $62,503,626
============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidate Statement of Income
Unaudited
Three months ended Year to Date
-------------------------- ---------------------------
April 30, May 1, April 30, May 1,
2005 2004 2005 2004
------------ ------------- ------------ ------------
Gross revenues $23,716,507 $29,227,360 $67,604,433 $83,955,114
Less: direct subcontract costs 4,680,029 4,562,104 11,995,345 16,051,638
------------ ------------ ------------ ------------
Net revenues 19,036,478 24,665,256 55,609,088 67,903,476
Cost of professional services and
other direct operating expenses 9,689,987 13,698,117 28,547,747 37,743,803
------------ ------------ ------------- ------------
Gross profit 9,346,491 10,967,139 27,061,341 30,159,673
Administrative and indirect operating
expenses 6,744,119 6,376,654 18,797,565 17,214,325
Marketing and related costs 2,544,595 2,531,436 7,467,177 6,984,771
Depreciation 315,151 384,646 1,189,302 1,183,203
Long-lived asset impairment loss 1,106,972 --- 2,750,972 ---
------------ ------------ ------------ ------------
Income(loss) from operations (1,364,346) 1,674,403 (3,143,675) 4,777,374
Interest expense (16,210) (32,559) (87,006) (102,188)
Interest income 9,982 23,628 32,295 108,412
Other income (expense) (171,318) 88,734 (431,367) 39,712
Net foreign currency exchange gain (loss) 29,652 (28,331) 37,200 158,978
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and minority interest (1,512,240) 1,725,875 (3,592,553) 4,982,288
Total income tax provision (benefit) (1,237,302) 489,193 (1,998,595) 1,743,388
------------ ------------ ------------ ------------
Net income (loss) from continuing operations
before minority interest (274,938) 1,236,682 (1,593,958) 3,238,900
Minority interest (42,272) (372,387) (402,000) (598,402)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations $ (317,210) $ 864,295 $(1,995,958) $ 2,640,498
Loss from discontinued operations (55,710) (79,367) (170,162) (281,258)
Income tax benefit on loss from discontinued
operations 26,570 22,994 62,279 110,816
------------ ------------ ------------ ------------
Net income (loss) $ (346,350) $ 807,922 $ (2,103,841) $ 2,470,056
============ ============ ============= ============
Net income (loss) per common share: basic
Continuing operations $ (0.08) $ 0.22 $ (0.50) $ 0.66
Discontinued operations (0.01) (0.01) (0.03) (0.04)
------------ ------------ ------------ ------------
Net income (loss) per common share: basic $ (0.09) $ 0.21 $ (0.53) $ 0.62
============ ============ ============ ============
Net income (loss) per common share: diluted
Continuing operations $ (0.08) $ 0.21 $ 0.50 $ 0.65
Discontinued operations (0.01) (0.01) (0.03) (0.04)
------------ ------------ ------------ ------------
Net income (loss) per common share: diluted $ (0.09) $ 0.20 $ (0.53) $ 0.61
============ ============ ============ ============
Weighted average common shares outstanding:
basic 3,956,246 3,982,278 3,968,250 3,983,591
============ ============ ============ ============
Weighted average common shares outstanding:
diluted 3,956,246 4,070,647 3,968,250 4,071,879
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
Unaudited
Nine months ended
------------------------------
April 30, May 1,
2005 2004
------------ ------------
Cash flows from operating activities:
Net income (loss) from continuing operations $(1,995,958) $ 2,640,498
Net loss from discontinued operations (l07,883) (170,442)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Impairment of long-lived assets 2,750,972 ---
Depreciation 1,189,302 1,183,203
Amortization 129,686 133,357
Gain on disposition of property and equipment 6,259 (5,476)
Minority interest 482,925 (313,612)
Provision for contract adjustments 144,255 649,255
(Increase) decrease in:
- contracts receivable, net 1,622,623 (4,492,312)
- other current assets 401,384 204,994
- income taxes receivable (1,293,527) ---
- deferred income taxes --- 952
- other non-current assets 77,474 2,030,127
- assets held for sale (7,309) 156,180
Increase (decrease) in:
- accounts payable (2,260,941) (1,865,898)
- accrued payroll costs (1,061,947) (700,683)
- income taxes payable (363,114) 42,247
- deferred revenue (850,074) (9,651,885)
- other accrued liabilities 1,639,080 4,032,513
- liabilities held for sale 3,156 (23,060)
----------- -----------
Net cash provided by (used in) operating
activities 506,363 (6,150,042)
----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property, building and equipment, gross (755,498) (1,382,515)
Disposal of property, building and equipment, gross 646,829 ---
Proceeds from sale of assets --- 3,889,300
Payment for the purchase of bond (2,311) (87,084)
----------- -----------
Net cash provided by (used in) investing activities (110,980) 2,429,701
----------- -----------
Cash flows provided by (used in) financing activities:
Dividends paid (693,374) (698,155)
Proceeds from debt 309,774 1,700,000
Repayment of debt (367,404) (1,952,382)
Net proceeds from issuance of common stock 1,812 15,938
Purchase of treasury stock (513,276) (94,716)
----------- -----------
Net cash used in financing activities (1,262,468) (1,029,315)
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (97,456) (l0l,237)
----------- -----------
Net decrease in cash and cash equivalents
from continuing operations (964,541) (4,850,893)
Cash and cash equivalents at beginning of period 4,240,333 6,577,390
----------- -----------
Cash and cash equivalents at end of period $3,275,792 $1,726,497
=========== ===========
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidated Statement of Changes in Shareholders' Equity
---------------------------------------
Common Stock
---------------------------------------
Class A Class B Capital in
------------------ ------------------- Excess of
Shares Amount Shares Amount Par Value
------------------ ------------------- ------------
Balance at July 31, 2003 2,469,071 $24,691 1,712,068 $17,121 $17,467,974
========= ======= ========== ======== ============
Net income --- $ --- --- $ --- $ ---
Foreign currency
translation reserve --- --- --- --- ---
Cash dividends paid
($.34 per share) --- --- --- --- ---
Unrealized investment
gain, net --- --- --- --- ---
Conversion of common stock
- B to A 30,674 308 (30,764) (308) ---
Repurchase of Class A
common stock --- --- --- --- ---
Stock options exercised 2,150 22 --- --- 15,916
Issuance of stock under
stock award plan, net --- --- --- --- 111,229
Amortization, net of tax --- --- --- --- ---
Forfeitures --- --- --- --- (2,675)
--------- ------- ---------- -------- ------------
Balance at July 31, 2004 2,501,985 $25,021 1,681,304 $16,813 $17,592,444
========= ======= ========== ======== ============
Net loss --- $ --- --- $ --- $ ---
Foreign currency
translation reserve --- --- --- --- ---
Cash dividends paid
($.17 per share) --- --- --- --- ---
Unrealized investment
gain, net --- --- --- --- ---
Conversion of common stock
- B to A 12,000 120 (12,000) (120) ---
Repurchase of Class A
common stock --- --- --- --- ---
Stock options exercised 250 2 --- --- 1,810
Issuance of stock under
stock award plan, net --- --- --- --- 38,230
Amortization, net of tax --- --- --- --- ---
Forfeitures --- --- --- --- (8,005)
--------- ------- ---------- --------- ------------
Balance at April 30, 2005
(unaudited) 2,514,235 $25,143 1,669,304 $16,693 $17,624,479
========= ======= ========== ======== ============
-----------------------------------------------------------------
Accumulated
Other Treasury Stock
Retained Comprehensive Unearned ----------------------
Earnings Income Compensation Shares Amount
------------ ------------- ------------ --------- ------------
Balance at July 31, 2003 23,967,504 $(2,111,830) $ (156,552) $109,772 $ (831,286)
=========== ============ =========== ========= ===========
Net income $ 2,401,317 $ --- --- $ --- $ ---
Foreign currency
translation reserve --- (134,017) --- --- ---
Cash dividends paid
($.34 per share) (1,396,130) --- --- --- ---
Unrealized investment
gain, net --- (90,876) --- --- ---
Conversion of common stock
- B to A --- --- --- --- ---
Repurchase of Class A
common stock --- --- --- 24,326 (221,275)
Stock options exercised --- --- --- --- ---
Issuance of stock under
stock award plan, net --- --- (214,445) (47,795) 367,333
Amortization, net of tax --- --- 177,715 --- ---
Forfeitures --- --- --- 1,446 (8,893)
------------ ------------- ----------- --------- -----------
Balance at July 31, 2004 $24,972,691 $ (2,336,723) $ (193,282) 87,749 $ (694,121)
============ ============= =========== ========= ===========
Net loss (2,103,841) $ --- --- $ --- $ ---
Foreign currency
translation reserve --- (97,456) --- --- ---
Cash dividends paid
($.17 per share) (693,374) --- --- --- ---
Unrealized investment
gain, net --- (10) --- --- ---
Conversion of common stock
- B to A --- --- --- --- ---
Repurchase of Class A
common stock --- --- --- 60,000 (513,276)
Stock options exercised --- --- --- ---
Issuance of stock under
stock award plan, net --- --- (158,388) (33,531) 265,230
Amortization, net of tax --- --- 129,686 --- ---
Forfeitures --- --- 6,452 3,007 (22,560)
----------- ------------- ---------- ---------- ------------
Balance at April 30, 2005 $22,175,476 $ (2,434,189) (215,532) 117,225 $ (964,727)
(unaudited) =========== ============= ========== ========== ============
ECOLOGY AND ENVIRONMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Operations and Basis of Presentation
- -----------------------------------------------
The consolidated financial statements included herein have been
prepared by Ecology and Environment, Inc., ("E & E" or the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of such information. All such adjustments are of a normal
recurring nature. Although E & E believes that the disclosures are
adequate to make the information presented not misleading, certain
information and footnote disclosures, including a description of
significant accounting policies normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted
pursuant to such rules and regulations. Therefore, these financial
statements should be read in conjunction with the financial statements
and the notes thereto included in E & E's 2004 Annual Report on Form
10-K filed with the Securities and Exchange Commission. The results
of operations for the nine months ended April 30, 2005 are not necessarily
indicative of the results for any subsequent period or the entire fiscal
year ending July 31, 2005.
1. Summary of significant accounting principles
--------------------------------------------
a. Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority owned subsidiaries. Also reflected
in the financial statements are the 50% ownership in two Chinese operating
joint ventures, Beijing Yi Yi Ecology and Engineering Co. Ltd. and The Tianjin
Green Engineering Company. These joint ventures are accounted for under the
equity method. All significant intercompany transactions and balances have
been eliminated. Certain amounts in the prior years' consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.
b. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results may differ from those estimates.
c. Revenue recognition
The majority of the Company's revenue is derived from environmental
consulting work, with the balance derived from sample analysis (E & E
Analytical Services Center) and aquaculture. The consulting revenue is
principally derived from the sale of labor hours. The consulting work is
performed under a mix of fixed price, cost-type, and time and material
contracts. Contracts are required from all customers. Revenue is
recognized as follows:
Contract Type Work Type Revenue Recognition Policy
- ------------------- ----------- ---------------------------------------
Fixed Price Consulting Percentage of completion based on
the ratio of total costs incurred
to date to total estimated costs.
Cost-type Consulting Costs as incurred. Fixed fee
portion is recognized using percentage
of completion determined by the
percentage of level of effort (LOE)
hours incurred to total LOE hours in
the respective contracts.
Time and Materials Consulting As incurred at contract rates.
Unit Price Laboratory/ Upon completion of reports (laboratory)
Aquaculture and payment from customers (aquaculture).
d. Translation of foreign currencies
The financial statements of foreign subsidiaries where the local
currency is the functional currency are translated into U.S. dollars using
exchange rates in effect at period end for assets and liabilities and average
exchange rates during each reporting period for results of operations.
Translation adjustments are deferred in accumulated other comprehensive
income.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency were the
U.S. Dollar. The remeasurement of local currencies into U.S. dollars creates
translation adjustments which are included in net income. There were no highly
inflationary economy translation adjustments for fiscal years 2004-2005.
e. Income Taxes
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. Although realization is not assured, management believes it is
more likely than not that the recorded net deferred tax assets will be
realized. Since in some cases management has utilized estimates, the amount
of the net deferred tax asset considered realizable could be reduced in the
near term. No provision has been made for United States income taxes
applicable to undistributed earnings of foreign subsidiaries as it is the
intention of the Company to indefinitely reinvest those earnings in the
operations of those entities.
f. Earnings per share
Basic EPS is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
g. Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 required
that long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the book value of the asset may not be
recoverable. The Company assesses recoverability of the carrying value of
the asset by estimating the future net cash flows (undiscounted) expected to
result from the asset, including eventual disposition. If the future net
cash flows are less than the carrying value of the asset, an impairment loss
is recorded equal to the difference between the asset's carrying value and
fair value. The Company recognized an impairment loss of $5,007,364
($3,010,005 net of tax) on its shrimp farm operations in FY 2003. An
impairment loss of $442,000 ($139,000 net of minority interest and tax) was
recognized in fiscal year 2004 for the long-term assets at the Company's fish
farm in Jordan. The impaired assets consist of buildings, improvements and
equipment which are continued to be held for use.
In January 2005, the Company recognized a $1.6 million impairment loss as
a result of its decision to close its Analytical Services Center (ASC) located
in Lancaster, New York. At that time, the impairment of the land and buildings
was determined based on the results of an independent appraisal and the
equipment values were determined by equipment offers the Company had received.
Operations continued beyond the end of the Company's second quarter ended
January 2005 and all backlog was completed by the end of February.
Consequently, at January 2005 the impairment loss was shown as from "continuing
operations" and the assets were classified as "held for use."
In April 2005, the Company has recorded an additional impairment loss on
its remaining ASC land and building assets in the amount of $1.1 million. This
was the results of information obtained from various commercial brokers in
April 2005 that provided the Company with additional information on current
market conditions affecting the value of the real estate. The reduced
valuation is based on the likelihood that the facility will not be sold to an
existing laboratory or research company, but will rather be sold as combination
office and warehouse space. The testing equipment was sold during the third
quarter. Although business operations have ceased at the ASC, the impairment
losses are shown in the accompanying financial statements at April 30, 2005 as
from "Continuing operations" due to the uncertainty that the assets can be sold
within one year under current market conditions.
2. Contract Receivables, Net
-------------------------
April 30, July 31,
2005 2004
------------ ------------
United States government
Billed $ 3,200,095 $ 2,781,554
Unbilled 3,065,569 4,761,344
------------ ------------
6,265,664 7,542,898
------------ ------------
Industrial customers and state
and municipal governments
Billed 26,580,476 27,300,992
Unbilled 4,586,188 5,169,931
------------ ------------
31,166,664 32,470,923
------------ ------------
Less allowance for contract
adjustments (2,704,232) (3,580,521)
------------ ------------
$34,728,096 $36,433,300
============ ============
United States government receivables arise from long-term U.S. government
prime contracts and subcontracts. Unbilled receivables result from revenues
which have been earned, but are not billed as of period-end. The above
unbilled balances are comprised of incurred costs plus fees not yet processed
and billed; and differences between year-to-date provisional billings and year-
to-date actual contract costs incurred and fees earned of approximately
$153,000 at April 30, 2005 and $465,000 at July 31, 2004. Management
anticipates that the April 30, 2005 unbilled receivables will be substantially
billed and collected within one year. Included in the balance of receivables
for industrial customers and state and municipal customers are receivables due
under the contracts in Saudi Arabia and Kuwait of $11.7 million and $16.2
million at April 30, 2005 and July 31, 2004, respectively. Within the above
billed balances are contractual retainages in the amount of approximately
$675,000 at April 30, 2005 and $544,000 at July 31, 2004. Management
anticipates that the April 30, 2005 retainage balance will be substantially
collected within one year. Included in other accrued liabilities is
an additional allowance for contract adjustments relating to potential cost
disallowances on amounts billed and collected in current and prior years'
projects of approximately $2.2 million at April 30, 2005 and July 31, 2004.
An allowance for contract adjustments is recorded for contract disputes and
government audits when the amounts are estimatable.
The contracts in Saudi Arabia are through the Company's majority owned
(66 2/3%) subsidiary, Ecology and Environment of Saudi Arabia Co., Ltd.
(EESAL). The company has an agreement with its minority shareholder to divide
any profits in EESAL from the current contracts equally, and to pay to the
minority shareholder a commission of 5% of the total contract values. The
commission and additional profit sharing covers on-going representation in the
Kingdom, logistical support including the negotiation and procurement of Saudi
national personnel, facilities, equipment, licenses, permits, and any other
support deemed necessary in the implementation and performance of the Saudi
contracts. As of April 30, 2005 the Company has incurred expense of $1,955,000
($120,000 for the first nine months of fiscal year 2005, $944,000 in fiscal
year 2004, $505,000 in fiscal year 2003 and $386,000 in fiscal year 2002) under
the terms of this commission agreement.
3. Line of Credit
--------------
The Company maintains an unsecured line of credit available for working
capital and letters of credit of $20 million with a bank at 1/2% below the
prevailing prime rate. A second line of credit has been established at another
bank for up to $13.5 million exclusively for letters of credit. At April 30,
2005 and July 31, 2004, respectively, the Company had letters of credit
outstanding totaling $2,353,846 and $8,765,752, respectively. The Company had
no outstanding borrowings for working capital at April 30, 2005 and July 31,
2004.
The Company is in compliance with all bank loan covenants at April 30,
2005.
4. Long-Term Debt and Capital Lease Obligations
--------------------------------------------
Debt inclusive of capital lease obligations at April 30, 2005 and
July 31, 2004 consist of the following:
April 30, July 31,
2004 2004
---------- ----------
Various bank loans and advances at interest rates
ranging from 10% to 14 1/2% $ 370,476 $ 381,587
Capital lease obligations at varying interest
rates averaging 12% 174,884 221,403
---------- ----------
545,360 602,990
Less: current portion of debt (200,145) (195,196)
current portion of lease obligations (63,971) (71,401)
---------- ----------
Long-term debt and capital lease obligations $ 281,244 $ 336,393
========== ==========
The aggregate maturities of long-term debt and capital lease obligations at
April 30, 2005 and July 31, 2004 are as follows:
April 30, July 31,
2005 2004
----------- ----------
FY 2005 $ 264,116 $ 266,597
FY 2006 44,215 70,482
FY 2007 39,430 38,643
FY 2008 40,535 39,700
FY 2009 41,709 40,822
Thereafter 115,355 146,746
---------- ----------
$ 545,360 $ 602,990
========== ==========
5. Stock Award Plan
----------------
Effective March 16, 1998, the Company adopted the Ecology and Environment,
Inc. 1998 Stock Award Plan (the "1998 Plan"). To supplement the 1998 Plan,
the 2003 Stock Award Plan (the "2003 Plan") was approved by the shareholders
at the annual meeting held in January 2004 (the 1998 Plan and the 2003 Plan
collectively referred to as the "Award Plan"). The 2003 Plan was approved
retroactive to October 16, 2003 and will terminate on October 15, 2008.
Under the Award Plan key employees (including officers) of the Company or
any of its present or future subsidiaries may be designated to received 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 Company stock at the time of the award. The Award Plan
authorizes the Company's board of directors to determine for what period of
time and under what circumstances awards can be forfeited.
The Company issued 33,531 shares in October 2004, 47,795 shares in fiscal
year 2004, and 38,712 shares in fiscal year 2003 pursuant to the Award Plan.
Unearned compensation is recorded at the time of issuance and is being
amortized over the vesting period.
6. Income Taxes
------------
The Company's tax benefit related to continuing operations for the nine
months ended April 30, 2005 reflects an additional benefit of $536,000 as a
result of a change in its estimated reserves for income tax audits. These
reserves were re-evaluated and a downward adjustment was made as a result of
the completion of Internal Revenue Service audits of the Company's fiscal
years 2002 and 2003 as reported to the Company in early May 2005.
7. Shareholders' Equity - Restrictive Agreement
--------------------------------------------
Messrs. Gerhard J. Neumaier, Frank B. Silvestro, Ronald L. Frank and
Gerald A. Strobel entered into a Stockholders' Agreement in 1970 which
governs the sale of an aggregate of 1,167,068 shares Class B Common Stock
owned by them and the former spouse of one of the individuals and the
children of the individuals. The agreement provides that prior to accepting
a bona fide offer to purchase all or any part of their shares, each party must
first allow the other members to the agreement the opportunity to acquire on
a pro rata basis, with right of over-allotment, all of such shares covered by
the offer on the same terms and conditions proposed by the offer.
8. Earnings Per Share
-------------------
The computation of basic earnings per share reconciled to diluted earnings
per share follows:
Three Months Ended Nine Months Ended
------------------------- -------------------------
4/30/05 5/1/04 4/30/05 5/1/04
------------------------- -------------------------
Income (loss) from continuing operations
available to common stockholders $ (317,210) $ 864,295 $(1,995,958) $2,640,498
Loss from discontinued operations
available to common stockholders (29,140) (56,373) (107,883) (170,442)
------------------------- -------------------------
Total income (loss) available to common
stockholders (346,350) 807,922 (2,103,841) 2,470,056
Weighted-average common shares outstanding
(basic) 3,956,246 3,982,278 3,968,250 3,983,591
Basic earnings per share:
Continuing operations $ (.08) $ .22 $ (.50) $ .66
Discontinued operations (.01) (.01) (.03) (.04)
------------------------- -------------------------
Total basic earnings per share $ (.09) $ .21 $ (.53) $ .62
Incremental shares from assumed conversion
of stock options and restricted stock
awards --- 88,369 --- 88,288
------------------------- -------------------------
Adjusted weighted-average common shares
outstanding 3,956,246 4,070,647 3,968,250 4,071,879
Diluted earnings per share:
Continuing operations $ (.08) $ .21 $ (.50) $ .65
Discontinued operations (.01) (.01) (.03) (.04)
------------------------- -------------------------
Total diluted earnings per share $ (.09) $ .20 $ (.53) $ .61
========================= =========================
In accordance with FAS 128, "Earnings Per Share", potential common
shares (i.e., stock options and stock awards) have not been included in
the denominator of the diluted per-share computations for the three and
nine months ended April 30, 2005, as inclusion of such would result in
an antidilutive per-share amount since the Company had a loss from
continuing operations.
If the Company 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 to be materially
different from their reported amounts.
9. 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 analytical segment recognized a pretax impairment loss
in the amount of $2.8 million for the nine months ended April 30, 2005 as a
result of its decision to close its Analytical Services Center (ASC) located
in Lancaster, N.Y. The fish farm located in Jordan produces tilapia fish
grown in a controlled environment for markets worldwide. The aquaculture
segment results for fiscal year 2003 includes an impairment loss of $5.0
million ($3.0 million net of tax) as a result of the Company's decision to
cease operations of its shrimp farm operations located in Costa Rica. The
assets are treated as "held for sale" in the accompanying financial statements
and the shrimp farm is still being actively marketed to potential buyers.
In fiscal year 2004, an impairment loss of $442,000 ($139,000 net of minority
interest and tax) was recognized for the long-term assets at the Company's
fish farm operations in Jordon.
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.
Reportable segments for the nine months ended April 30, 2005 are as follows:
Aquaculture
--------------------------
Consulting Analytical Continued Discontinued Elimination Total
----------- ------------ ------------ ------------- ------------- ------------
Net revenues from external
customers (1) $53,527,151 $ 2,006,586 $ 75,350 --- $ --- $55,609,088
Intersegment net revenues 668,663 --- --- --- (668,663) ---
----------- ------------ ------------ ------------- ------------- ------------
Total consolidated net revenues $54,195,815 $ 2,006,586 $ 75,350 $ --- $ (668,663) $55,609,088
=========== ============ ============ ============= ============= ============
Depreciation expense $ 867,273 $ 312,536 $ 9,493 $ --- $ --- $ 1,189,302
Segment profit (loss) before income
taxes and minority interest 252,358 (3,817,360) (27,551) (170,162) --- (3,762,715)
Segment assets 54,360,297 2,100,000 295,000 65,000 --- 56,820,297
Expenditures for long-lived assets 755,498 --- --- --- --- 755,498
Geographic Information:
Net Revenues Long-lived
(1)(2) Assets
------------ -----------
United States $45,632,088 $22,543,676
Foreign countries 9,977,000 597,000
(1) Net revenues of $25,896 from discontinued operations is excluded
from this table.
(2) Net revenues are attributed to countries based on the location of the
customers. Net revenues in foreign countries includes $2.2 million
in Saudi Arabia and $1.6 million in Kuwait.
Reportable segments for the nine months ended May 1, 2004 are as follows:
Aquaculture
--------------------------
Consulting Analytical Continued Discontinued Elimination Total
----------- ------------ ------------ ------------- ------------- ------------
Net revenues from external
customers (1) $63,792,552 $ 4,080,264 30,660 --- $ --- $67,903,476
Intersegment net revenues 716,608 --- --- --- (716,608) ---
----------- ------------ ------------ ------------- ------------- ------------
Total consolidated net revenues $64,509,160 $ 4,080,264 $ 30,660 $ --- $ (716,608) $67,903,476
=========== ============ ============ ============= ============= ============
Depreciation expense $ 730,568 $ 411,031 $ 41,604 $ --- $ --- $ 1,183,203
Segment profit (loss) before income
taxes and minority interest 5,857,656 (770,011) (105,357) (281,258) --- 4,701,030
Segment assets 59,610,029 9,366,000 515,000 49,000 --- 69,540,029
Expenditures for long-lived assets 1,309,687 72,828 --- --- --- 1,382,515
Geographic Information:
Net Revenues Long-lived
(1)(2) Assets
------------ -----------
United States $42,935,476 $26,194,586
Foreign countries 24,968,000 973,000
(1) Net revenues of $14,638 from discontinued operations is excluded
from this table.
(2) Net revenues are attributed to countries based on the location of the
customers. Net revenues in foreign countries includes $12.2 million
in Saudi Arabia and $8.9 million in Kuwait.
10. Acquisitions
------------
On May 3, 2004 the Company's sixty-percent owned subsidiary, Walsh
Environmental Scientists and Engineers, LLC (Walsh), acquired a sixty-percent
interest in Gustavson Associates, LLC (GAL). Walsh paid $150,000 for its
interest in GAL. GAL is an independent oil and minerals consultancy providing
services to banks, investors, government agencies and industrial clients around
the world. Walsh began consolidating the balance sheet and operating results
of GAL with its own since the date of acquisition. Walsh's consolidated
financial statements are consolidated with the Company's.
This acquisition has been accounted for under the purchase method with the
results of their operations consolidated with the Company's results of
operations from the acquisition date. No proforma statements have been
provided due to the relative insignificance of this transaction.
11. Commitments and Contingencies
-----------------------------
Certain contracts contain termination provisions under which the customer
may, without penalty, terminate the contracts upon written notice to the
Company. In the event of termination, the Company would be paid only
termination costs in accordance with the particular contract. Generally,
termination costs include unpaid costs incurred to date, earned fees and
any additional costs directly allocable to the termination.
One of the Company's majority owned subsidiaries is a co-defendant in a
lawsuit connected to work performed on a remediation project at a mine site.
The plaintiffs have filed for damages of approximately $35 million. The
subsidiary maintains a $6 million insurance policy applicable to this claim.
The insurance company is defending the claim. At this time the case is in the
beginning stages of discovery and the trial is not scheduled to begin until
November 2005. The subsidiary company intends to vigorously defend this case.
On January 8, 2005 a lawsuit was filed in New York State Supreme Court,
County of New York, by Othman Al-Rashed and Kuwaiti Engineering Group (KEG), as
Plaintiffs, against the Consortium of International Consultants, LLC (CIC) and
Safege Consulting Engineers (Safege), Index No. 600033-05. The Summons and
Complaint for this lawsuit was served on CIC's registered agent on February 23,
2005. CIC is a majority-owned subsidiary of the Company which entered into a
multi-year monitoring and assessment contract in Kuwait (the Project). The
Complaint alleges four claims: (1) a breach of contract claim against Safege
for $5,000,000, (2) a claim against CIC for agent fees and a management fees
totaling $7,000,000, (3) a further claim by KEG that Safege did not use the
services of KEG together with an additional claim for $10,000,000 of punitive
damages related thereto, and (4) a claim against CIC and Safege for an
accounting based upon the alleged damages claimed in the lawsuit. The Company
is not named as a defendant in the lawsuit. At this time, the Company
believes that the claims in this lawsuit are either without merit or are the
responsibility of Safege.
The Company is involved in other litigation arising in the normal course
of business. In the opinion of management, any adverse outcome to other
litigation arising in the normal course of business would not have a material
impact on the financial results of the Company.
12. Recent Accounting Pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
its final standard on accounting for share-based payments (SBP), FASB
Statement No. 123R (revised 2004), Share-Based Payment. The Statement
requires companies to expense the value of employee stock options and similar
awards. Under FAS 123R, SBP awards result in a cost that will be measured
at fair value on the awards' grant date, based on the estimated number of
awards that are expected to vest. Compensation cost for awards that vest
would not be reversed if the awards expire without being exercised. The
effective date for public companies is interim and annual periods beginning
after June 15, 2005, and applies to all outstanding and unvested SBP awards at
a company's adoption. Management does not anticipate that this Statement will
have a significant impact on the Company's financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
- -------------------------------
At April 30, 2005 the Company had a working capital balance of $28.2 million,
up $674,000 from the $27.5 million balance reported at July 31, 2004.
Cash and cash equivalents decreased $965,000 due to a $2.3 million decrease
in accounts payable, and primarily to a $1.1 million decrease in accrued
payroll, partially offset by a $1.6 million increase in other accrued
liabilities. As of April 30, 2005 the Company has receivables outstanding on
the Saudi and Kuwait contracts of $6.0 and $5.7 million, respectively. Net
advances on these contracts at April 30, 2005 are $344,000, which are backed
by letters of credit. These advances, shown as deferred revenue, have
decreased $396,000 due to work performed on these contracts during the first
nine months of fiscal year 2005. The Company recorded a tax benefit of
$536,000 during the third quarter of fiscal year 2005 as a result of the
completion of the 2002 and 2003 income tax audits. The Company had no
outstanding borrowings for working capital as of April 30, 2005.
The Company maintains an unsecured line of credit of $20.0 million with a
bank at 1/2% percent below the prevailing prime rate. A second line of credit
is available at another bank for up to $13.5 million, exclusively for letters
of credit. The Company has outstanding letters of credit (LOC's) at April 30,
2005 in the amount of $2.4 million. These LOC's were obtained to secure
advance payments and performance guarantees for contracts in the Middle East.
After LOC's and short-term borrowings there are no outstanding borrowings under
the lines of credit and there is $31.1 million of line still available at April
30, 2005. There are no significant additional working capital requirements
pending at April 30, 2005. The Company believes that cash flows from operations
and borrowings against the line of credit will be sufficient to cover all
working capital requirements for at least the next twelve months and the
foreseeable future.
Contractual Obligations
- -----------------------
Payments due by period
------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- ------------------------------- ----------- ----------- ----------- ---------- ---------
Long-Term Debt Obligations $ 370,476 $ 200,145 $ 34,810 $ 39,236 $ 96,285
Capital Lease Obligations 174,884 63,971 48,835 43,008 19,070
Operating Lease Obligations (1) 4,693,770 2,242,316 1,795,167 638,685 17,602
Other Liabilities (2) 344,145 344,145 --- --- ---
----------- ----------- ----------- --------- ---------
Total $5,583,275 $2,850,577 $1,878,812 $720,929 $132,957
=========== =========== =========== ========= =========
(1) Represents rents for office and warehouse facilities
(2) Consists of Deferred Revenue on the Saudi Arabia and Kuwait contracts
Results of Operations
- ---------------------
Net Revenue
- -----------
Fiscal Year 2005 vs. 2004
- -------------------------
Net revenues for the third quarter of fiscal year 2005 were $19.0 million, down
23% from the $24.7 million reported in the third quarter of fiscal year 2004.
Decreased net revenues from the Company's contracts in Saudi Arabia and
Kuwait accounted for the majority of this reduction. Net revenues from those
contracts decreased $6.2 million or 79% due to these contracts approaching
completion. Percentage of completion on contracts in the Middle East range
from 88% to 100% and it is anticipated that most of the contracts will be
substantially completed by the end of fiscal year 2005. Net revenues from
Department of Defense (DOD) clients decreased $1.1 million or 32% from the
$3.2 million reported in the third quarter of fiscal year 2004. The decrease
in DOD net revenues is attributable to reduced work levels on various United
States Army Corps of Engineers (USACE) contracts. Net revenues from the ASC
decreased as all remaining backlog was completed by the end of
February. E&E do Brasil, one of the Company's subsidiaries, reported an
increase of 236% or $500,000 in net revenues for the third quarter of
fiscal year 2005.
Walsh Environmental reported net revenues of $3.0 million during the third
quarter of fiscal year 2005, up 50% from the $2.0 million reported in the third
quarter of fiscal year 2004. The majority of this increase was due to the
consolidation of Gustavson Associates, acquired by Walsh Environmental
during the fourth quarter of fiscal year 2004. Gustavson Associates reported
net revenues of $643,000 during the third quarter of fiscal year 2005.
Fiscal Year 2004 vs. 2003
- -------------------------
Net revenues for the third quarter of fiscal year 2004 were $24.7 million,
compared to the $24.2 million reported in the third quarter of fiscal year
2003. The increase in net revenues for the third quarter was attributable
to an increase in work from the Company's contracts in Saudi Arabia and
Kuwait. Third quarter net revenues from the work in Saudi Arabia and Kuwait
increased 49% to $7.9 million. Offsetting this increase were decreases in
the Company's commercial and Department of Defense (DOD) sectors. The
Company reported commercial net revenues for the third quarter of fiscal
year 2004 of $1.7 million, down 63% from the $4.6 million reported in the
third quarter of fiscal year 2003. This decrease in commercial net
revenues is the result of the completion of a major pipeline project in
early fiscal year 2004. Net revenues reported for DOD clients were $3.2
million for the third quarter of fiscal year 2004, down 27% from the $4.4
million reported in the third quarter of fiscal year 2003. The decrease in
DOD net revenues is due primarily to a decrease of work with the Navy
Atlantic Division and at the Mountain Home AFB.
Income From Continuing Operations Before Income Taxes and Minority Interest
- ---------------------------------------------------------------------------
Fiscal Year 2005 vs. 2004
- ------------------------
The Company's loss from continuing operations before income taxes and
minority interest for the third quarter of fiscal year 2005 was $1.5 million
down from the $1.7 million of income reported in the third quarter of the
prior year. The decrease is due to the impairment loss, reduced net
revenues, increased administrative and indirect costs, and a $200,000 gain
from the sale of investment securities that the Company recorded during the
third quarter of the prior year. Administrative and indirect costs increased
$339,000 or 5% during the third quarter of fiscal year 2005. This increase
was attributable to reduced staff utilization, consolidation of Gustavson
Associates to Walsh Environmental, and the Company's on-going compliance
work in connection with the requirements of the Sarbanes-Oxley Act. The
Company incurred approximately $47,000 in costs associated with the
compliance work for the Sarbanes-Oxley Act during the third quarter of
fiscal year 2005 and $266,000 fiscal year 2005 to date.
Fiscal Year 2004 vs. 2003
- ------------------------
The Company's income from continuing operations before income taxes and
minority interest for the third quarter of fiscal year 2004 was $1.7 million,
down 11% from the $1.9 million reported in the third quarter of the prior
year. The Company has continued work on the Middle Eastern contracts in Saudi
Arabia and Kuwait, including a significant inflow of lab work from Kuwait for
the Company's Analytical Services Center (ASC) during the third quarter of
fiscal year 2004. The ASC reported an operating income of $133,000 for the
third quarter of fiscal year 2004 compared to operating income of $42,000 for
the third quarter of the prior year. Indirect expenses have increased as the
Company continues business development efforts in the homeland security and
international markets. The Company has increased the ASC marketing staff to
help broaden the commercial market for the ASC. During the third quarter of
fiscal year 2004, a gain of $200,000 was recorded on the sale of investment
securities.
Impairment Losses
- -----------------
In January 2005, the Company recognized a $1.6 million impairment loss as
a result of its decision to close the ASC. At that time, the impairment
of the land and buildings was determined based on the results of an
independent appraisal and the equipment values were determined by
equipment offers the Company has received. In April 2005, the Company
recorded an additional impairment loss on its remaining ASC land and
building assets in the amount of $1.1 million. This was the result of
information obtained from various commercial brokers that provided the
Company with additional information on current market conditions
affecting the value of the real estate. The reduced valuation is based
on the likelihood that the facility will not be sold to an existing
laboratory or research company, but will rather be sold as combination
office and warehouse space. The testing equipment was sold during the
third quarter. Although all business operations have ceased, the total
ASC impairment losses are shown in the accompanying financial statements
as from "continuing operations" due to the uncertainty that the assets
can be sold within one year under current market conditions.
Income Taxes
- ------------
The Company's tax benefit related to continuing operations for the three months
ended April 30, 2005 in the amount of $591,572 reflects an additional benefit of
$536,000 as a result of a change in its estimated reserves for income tax
audits. These reserves were re-evaluated and a downward adjustment was
made as a result of the completion of Internal Revenue Service audits of the
Company's fiscal years 2002 and 2003 as reported to the Company in early
May 2005.
American Jobs Creation Act of 2004
- ----------------------------------
In October 2004, Congress passed, and the President signed into law, the
American Jobs Creation Act of 2004 (the "Act"). Some key provisions of the act
affecting the Company are the repeal of the United States export tax incentive
known as the extraterritorial income exclusion (EIE) and the implementation of
a domestic manufacturing deduction. The Company is still assessing the
impact of the Act. The EIE is phased out over the calendar years 2005 and
2006 with an exemption for binding contracts with unrelated persons entered
into before September 18, 2003. These phase-out provisions will allow the
Company to maintain an EIE deduction of an undeterminable amount through
fiscal year 2007. The Company believes that it will accrue some benefits from
the domestic manufacturing deduction, although such benefits cannot be
quantified at this time. The domestic manufacturing deduction will be phased in
over a six-year period beginning with the Company's fiscal year 2005. The
Company is currently evaluating the impact of the repatriation provisions and
expects to complete this evaluation by the end of the current fiscal year. The
dollar amount of possible dividends being considered ranges from $0 to $2
million. The income tax effect would range from $0 to approximately $100,000.
As of April 30, 2005 and based on the tax laws in effect at that time, it is
the Company's intention to continue to indefinitely reinvest undistributed
foreign earnings and accordingly, no deferred tax liability has been recorded in
connection therewith.
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued its
final standard on accounting for share-based payments (SBP), FASB
Statement No. 123R (revised 2004), Share-Based Payment. The Statement
requires companies to expense the value of employee stock options and similar
awards. Under FAS 123R, SBP awards result in a cost that will be measured
at fair value on the awards' grant date, based on the estimated number of
awards that are expected to vest. Compensation cost for awards that vest
would not be reversed if the awards expire without being exercised. The
effective date for public companies is interim and annual periods beginning
after June 15, 2005, and applies to all outstanding and unvested SBP awards at
a company's adoption. Management does not anticipate that this Statement will
have a significant impact on the Company's financial statements.
Critical Accounting Policies and Use of Estimates
- -------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally
accepted in the United State of America. The preparation of these statements
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, allowance for doubtful accounts, inventories, income
taxes, impairment of long-lived assets and contingencies. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Management believes the following are its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
The Company maintains reserves for cost disallowances on its cost based
contracts as a result of government audits. The Company recently settled
fiscal years 1990 and 1991 for amounts within the anticipated range.
However, final rates have not been negotiated under these audits since 1992.
The Company has estimated its exposure based on completed audits, historical
experience and discussions with the government auditors. The Company recorded
an impairment loss on its shrimp farm operation in fiscal year 2003 and on its
Analytical Services Center in fiscal year 2005. An estimate of the fair
value of its assets was made based on external appraisals of the land and
buildings and internal estimates of the realizable value of the equipment.
The Company recorded an impairment loss on its fish farm operations in Jordan
in fiscal year 2004. An impairment was necessary due to the uncertainty that
the farm's estimated future net cash flows would be sufficient to recover the
carrying value of its long-lived assets. If these estimates or their related
assumptions change, the Company may be required to record additional
impairment losses or additional charges for disallowed costs on its government
contracts.
Changes in Corporate Entities
- -----------------------------
On May 3, 2004 the Company's sixty-percent owned subsidiary, Walsh
Environmental Scientists and Engineers, LLC (Walsh), acquired a sixty-
percent interest in Gustavson Associates, LLC (GAL). Walsh paid $150,000
for its interest in GAL. GAL is an independent oil and minerals consultancy
providing services to banks, investors, government agencies and industrial
clients around the world. Walsh obtained independent valuations to determine
opening balance sheet values. Walsh began consolidating the balance sheet
and operating results of GAL with its own since the date of acquisition.
Walsh's consolidated financial statements are consolidated with the Company's.
No proforma statements have been provided due to the relative insignificance
of this transaction.
On the 8th of January 2004, the Company entered into an agreement to grant a
forty-eight percent stake in its Brazilian subsidiary, Ecology and Environment
do Brasil, Ltda. (a limited partnership), to three new partners. The new
partners are responsible for the in-country marketing and operations of the
subsidiary. Any previous earnings, assets and liabilities remained with
Ecology and Environment, Inc. The new partners have contributed their business
contacts and talented staff from their old firm. The Company has provided an
eighty thousand dollar capital contribution to move the office operations from
Sao Paulo to Rio de Janeiro. Rio de Janeiro is where the Company believes it
will have a more strategic location to market its target clients.
During the second quarter of fiscal year 2005, the Company formed three new
subsidiaries as well as a new joint venture. These entities were formed for
the purpose of obtaining future work for the Company in the Middle East,
Russia, and the State of California. The new entities are as follows:
MiddleEast Environmental Consultants, LLC (MEC); E & E International, LLC;
E & E Environmental Services, LLC; and E & E Ward BMS Consulting Association
(Joint Venture). Only MEC was operational in the current quarter.
On January 20th a member of Walsh Unit holders LLC exercised his option to
purchase an additional 325 shares of Walsh Environmental Scientists and
Engineers, LLC at cost of $9,502. This caused the E & E, Inc. ownership
percentage in this company to drop by one half of a percent. There are
additional purchase options outstanding in the amount of $84,694 which will
expire on June 30, 2005. If these options are exercised, they could cause a
reduction in the ownership percentage of E & E, Inc. from 59.5% to 55%.
Inflation
- ---------
Inflation has not had a material impact on the Company's business because a
significant amount of the Company's contracts are either cost based or
contain commercial rates for services that are adjusted annually.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
The Company may have exposure to market risk for change in
interest rates, primarily related to its investments. The Company
does not have any derivative financial instruments included in its
investments. The Company invests only in instruments that meet high
credit quality standards. The Company is averse to principal loss and
ensures the safety and preservation of its invested funds by limited
default risk, market risk and reinvestment risk. As of April 30, 2005,
the Company's investments consisted of short-term commercial paper and
mutual funds.
The Company is currently documenting, evaluating, and testing its
internal controls in order to allow management to report on and attest to,
and its independent public accounting firm to attest to, the Company's
internal controls as of July 31, 2006, as required by Section 404 of the
Sarbanes-Oxley Act. The Company expects to devote substantial time and
expense in this endeavor during fiscal year 2005 and 2006. If
weaknesses in our existing information and control systems are discovered
that impede our ability to satisfy Sarbanes-Oxley reporting requirements,
the Company must successfully and timely implement improvements to those
systems. There is no assurance that the Company will be able to meet
these requirements.
Item 4. Controls and Procedures
-----------------------
Company management, with the participation of the chief executive
officer and chief financial officer, evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of April 30, 2005. In designing
and evaluating the Company's disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
their objectives, and management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Based on this evaluation, the Company's chief executive
officer and chief financial officer concluded that, as of April 30, 2005,
the Company's disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to its chief executive officer
and chief financial officer by others within those entities, particularly
during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information
required to be disclosed by the Company in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time period specified in the SEC's rules and forms.
There have been no significant changes in internal controls over financial
reporting during the period covered by this report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Certain contracts contain termination provisions under which the customer
may, without penalty, terminate the contracts upon written notice to the
Company. In the event of termination, the Company would be paid only
termination costs in accordance with the particular contract.
One of the Company's majority owned subsidiaries is a co-defendant in a
lawsuit connected to work performed on a remediation project at a mine site.
The plaintiffs have filed for damages of approximately $35 million. The
subsidiary maintains a $6 million insurance policy applicable to this claim.
The insurance company is defending the claim. At this time the case is in the
beginning states of discovery and the trial is not scheduled to begin until
November 2005. The subsidiary company intends to vigorously defend this case.
The Company is involved in other 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.
On January 8, 2005 a lawsuit was filed in New York State Supreme Court,
County of New York, by Othman Al-Rashed and Kuwaiti Engineering Group (KEG), as
Plaintiffs, against the Consortium of International Consultants, LLC (CIC) and
Safege Consulting Engineers (Safege), Index No. 600033-05. The Summons and
Complaint for this lawsuit was served on CIC's registered agent on February 23,
2005. CIC is a majority-owned subsidiary of the Company which entered into a
multi-year monitoring and assessment contract in Kuwait (the Project). The
Complaint alleges four claims: (1) a breach of contract claim against Safege
for $5,000,000, (2) a claim against CIC for agent fees and a management fees
totaling $7,000,000, (3) a further claim by KEG that Safege did not use the
services of KEG together with an additional claim for $10,000,000 of punitive
damages related thereto, and (4) a claim against CIC and Safege for an
accounting based upon the alleged damages claimed in the lawsuit. The Company
is not named as a defendant in the lawsuit. At this time, the Company
believes that the claims in this lawsuit are either without merit or are the
responsibility of Safege.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(e) Purchased Equity Securities. The following table summarizes the
Company's purchases of its common stock during the quarter ended April 30,
2005:
(1) The Company purchased 11,300 shares of its Class A common stock during
the third quarter of its fiscal year ended July 31, 2005 pursuant to a 200,000
share repurchase program approved at the October 26, 2000 Board of Directors
meeting. The purchases were made in open-market transactions.
Total
Number
of Shares Maximum Number
Purchased of Shares that
Average as Part of May Yet Be
Total Price Publicly Purchased
Number Paid Announced Under the
of Shares Per Plans or Plans or
Period Purchased Shares Programs (1) Programs
- -------------------- --------- ------ ------------ --------------
February 1, 2005 -
February 28, 2005 --- --- --- 30,834
March 1, 2004 -
March 31, 2005 --- --- --- 30,834
April 1, 2005 -
April 30, 2005 11,300 $7.19 11,300 19,534
--------- ------- ------------- --------------
Total 11,300 $7.19 11,300
========= ======= =============
Item 3. Defaults Upon Senior Securities
-------------------------------
The Registrant has no information for Item 3 that is required to be
presented.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Registrant has no information for Item 4 that is required to be
presented.
Item 5. Other Information
-----------------
The Registrant has no information for Item 5 that is required to be
presented.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Registrant did not file a Form 8-K during the third quarter ended
April 30, 2005.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECOLOGY AND ENVIRONMENT, INC.
Dated: June 14, 2005 /S/ RONALD L. FRANK
---------------------------------------
RONALD L. FRANK
EXECUTIVE VICE PRESIDENT, SECRETARY,
TREASURER AND CHIEF FINANCIAL OFFICER -
PRINCIPAL FINANCIAL OFFICER