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 January 28, 2006
[ ] 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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At March 1, 2006, 2,421,800 shares of Registrant's Class A Common Stock
(par value $.01) and 1,639,706 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
January 28, July 31,
2006 2005
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents $ 6,747,146 $ 7,872,116
Investment securities available for sale 96,844 120,533
Contract receivables, net 35,360,883 30,044,340
Deferred income taxes 5,017,152 5,016,908
Other current assets 1,354,883 2,005,426
Assets of discontinued operations held
for sale 42,053 26,821
------------ ------------
Total current assets 48,618,961 45,086,144
Property, building and equipment, net 7,749,443 7,967,883
Deferred income taxes 1,044,524 1,044,524
Other assets 2,974,557 1,878,984
------------ ------------
Total assets $60,387,485 $55,977,535
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 5,372,097 $ 5,979,588
Accrued payroll costs 5,305,156 3,837,435
Income taxes payable 69,027 36,122
Deferred revenue 141,343 231,611
Current portion of long-term debt and
capital lease obligations 196,116 324,071
Other accrued liabilities 9,705,297 6,673,337
Liabilities of discontinued operations held
for sale 277,532 290,950
------------ ------------
Total current liabilities 21,066,568 17,373,114
Long-term debt and capital lease obligations 355,469 328,053
Minority interest 1,881,311 1,992,544
Commitments and contingencies (see note #9) --- ---
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 - 2,518,774 shares 25,188 25,143
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,665,965 shares 16,660 16,693
Capital in excess of par value 17,555,262 17,622,172
Retained earnings 22,686,329 22,002,059
Accumulated other comprehensive income (2,194,747) (2,236,051)
Unearned compensation, net of tax --- (158,993)
Treasury stock - Class A Common, 96,467 and
94,235 shares; Class B common, 26,259
and 26,259 shares, at cost (1,004,555) (987,199)
------------ ------------
Total shareholders' equity 37,084,137 36,283,824
------------ ------------
Total liabilities and shareholders' equity $60,387,485 $55,977,535
============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidated Statement of Income
(Unaudited)
Three months ended Year to Date
-------------------------- ---------------------------
January 28, January 29, January 28, January 29,
2006 2005 2006 2005
------------ ------------- ------------ ------------
Gross revenues $24,028,549 $21,171,630 $47,553,889 $43,887,926
Less: direct subcontract costs 4,175,450 3,757,432 7,425,931 7,315,316
------------ ------------ ------------ ------------
Net revenues 19,853,099 17,414,198 40,127,958 36,572,610
Cost of professional services and
other direct operating expenses 10,114,074 9,270,569 20,380,136 18,857,760
Gross profit 9,739,025 8,143,629 19,747,822 17,714,850
Administrative and indirect operating expenses 6,164,572 5,899,155 12,156,206 12,053,446
Marketing and related costs 1,991,074 2,345,548 4,176,994 4,922,582
Depreciation 283,832 454,610 534,847 874,151
Long-lived asset impairment loss --- 1,644,000 --- 1,644,000
------------ ------------ ------------ ------------
Income (loss) from operations 1,299,547 (2,199,684) 2,879,775 (1,779,329)
Interest expense (38,848) (30,005) (60,676) (70,796)
Interest income 55,042 7,926 97,404 22,313
Other income (194,928) (165,604) (359,455) (260,049)
Net foreign currency exchange gain 8,759 3,951 11,380 7,548
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and minority interest 1,129,572 (2,383,416) 2,568,428 (2,080,313)
Total income tax provision (benefit) 520,687 (789,217) 1,017,160 (761,293)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations
before minority interest 608,885 (1,594,199) 1,551,268 (1,319,020)
Minority interest 47,766 (136,409) (111,522) (359,728)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations $ 656,651 $(1,730,608) $ 1,439,746 $(1,678,748)
Loss from discontinued operations (50,953) (42,577) (111,012) (114,452)
Income tax benefit on loss from discontinued
operations 22,656 10,553 45,959 35,709
------------ ------------ ------------ ------------
Net income (loss) $ 628,354 $(1,762,632) $ 1,374,693 $(1,757,491)
============ ============ ============ ============
Net income (loss) per common share: basic
Continuing operations $ 0.16 $ (0.44) $ 0.36 $ (0.42)
Discontinued operations (0.01) (0.01) (0.02) (0.02)
------------ ------------ ------------ ------------
Net income (loss) per common share: basic $ 0.15 $ (0.45) $ 0.34 $ (0.44)
============ ============ ============ ============
Net income (loss) per common share: diluted
Continuing operations $ 0.16 $ (0.44) $ 0.36 $ (0.42)
Discontinued operations (0.01) (0.01) (0.02) (0.02)
------------ ------------ ------------ ------------
Net income (loss) per common share: diluted $ 0.15 $ (0.45) $ 0.34 $ (0.44)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 3,982,433 3,961,308 3,982,711 3,974,395
============ ============ ============ ============
Weighted average common shares outstanding:
Diluted 3,986,591 3,961,308 3,984,255 3,974,395
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
Unaudited
Six months ended
------------------------------
January 28, January 29,
2006 2005
------------ ------------
Cash flows from operating activities:
Net income $ 1,374,693 $(1,757,491)
Net loss from discontinued operations, net of tax (65,053) (78,743)
------------ ------------
Income (loss) from continuing operations 1,439,746 (1,678,748)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Impairment of long-lived assets --- 1,644,000
Depreciation 534,847 874,151
Amortization 70,074 97,151
Gain loss on disposition of property and equipment 5,554 6,237
Minority interest 316,411 447,797
Provision for contract adjustments 529,829 119,755
(Increase) decrease in:
- contracts receivable, net (5,846,372) 2,767,585
- other current assets 650,543 (65,982)
- other non-current assets (1,095,573) 183,805
Increase (decrease) in:
- accounts payable (607,491) (2,325,574)
- accrued payroll costs 1,467,721 (116,680)
- income taxes payable 32,905 247,840
- deferred revenue (90,268) (874,349)
- other accrued liabilities 3,031,960 802,757
----------- -----------
Net cash provided by operating activities 439,886 2,129,745
Net cash used in discontinued operating
activities (revised) (93,703) (100,700)
----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property, building and equipment, gross (321,961) (334,328)
Proceeds from maturity of investments 24,750 ---
Payment for the purchase of bond (1,671) (1,438)
----------- -----------
Net cash used in investing activities (298,882) (335,766)
----------- -----------
Cash flows provided by (used in) financing activities:
Dividends paid (690,423) (693,374)
Proceeds from debt 120,977 181,216
Repayment of debt (221,516) (208,971)
Distributions to minority partners (427,644) (109,970)
Net proceeds from issuance of common stock 8,700 1,812
Purchase of treasury stock (4,035) (432,686)
----------- -----------
Net cash used in financing activities (1,213,941) (1,261,973)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 41,670 5,188
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,124,970) 436,494
Cash and cash equivalents at beginning of period 7,872,116 4,240,333
----------- -----------
Cash and cash equivalents at end of period $6,747,146 $4,676,827
=========== ===========
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 Retained
Shares Amount Shares Amount Par Value Earnings
------------------ ------------------- ------------ ------------
Balance at July 31, 2004 2,501,985 $25,021 1,681,304 $16,813 $17,592,444 $24,972,691
========= ======= ========== ======== ============ ============
Net loss --- --- --- --- --- (1,586,540)
Foreign currency translation reserve --- --- --- --- --- ---
Cash dividends paid ($.34 per share) --- --- --- --- --- (1,384,092)
Unrealized investment gain, net --- --- --- --- --- ---
Conversion of common stock - B to A 12,000 120 (12,000) (120) --- ---
Repurchase of Class A common stock --- --- --- --- --- ---
Stock options exercised 250 2 --- --- 1,810 ---
Issuance of stock under stock award plan, net --- --- --- --- 38,230 ---
Amortization, net of tax --- --- --- --- --- ---
Forfeitures --- --- --- --- (10,312) ---
--------- ------- ---------- -------- ------------ ------------
Balance at July 31, 2005 2,514,235 $25,143 1,669,304 $16,693 $17,622,172 $22,002,059
========= ======= ========== ======== ============ ============
Accumulated
Other Treasury Stock
Comprehensive Unearned --------------------- Comprehensive
Income Compensation Shares Amount Income
------------- ------------- ---------- ---------- -------------
Balance at July 31, 2004 $ (2,336,723) $ (193,282) 87,749 $(694,121) $ 2,176,424
============= ============= ========== ========== =============
Net loss --- --- --- --- (1,586,540)
Foreign currency translation reserve 100,725 --- --- --- 100,725
Cash dividends paid ($.34 per share) --- --- --- --- ---
Unrealized investment gain, net (53) --- --- --- (53)
Conversion of common stock - B to A --- --- --- --- ---
Repurchase of Class A common stock --- --- 62,500 (530,057) ---
Stock options exercised --- --- --- --- ---
Issuance of stock under stock award plan, net --- (134,971) (33,531) 265,230 ---
Amortization, net of tax --- 164,717 --- --- ---
Forfeitures --- 4,543 3,776 (28,251) ---
------------- ------------- ---------- ---------- --------------
Balance at July 31, 2005 $ (2,236,051 $ (158,993) 120,494 $(987,199) $ (1,485,868)
============= ============= ========== ========== ==============
---------------------------------------
Common Stock
---------------------------------------
Class A Class B Capital in
------------------ ------------------- Excess of Retained
Shares Amount Shares Amount Par Value Earnings
------------------ ------------------- ------------ ------------
Net income --- --- --- --- --- 1,374,693
Reclassification due to adoption of FAS 123R --- --- --- --- (158,993) ---
Foreign currency translation reserve --- --- --- --- --- ---
Cash dividends paid ($.17 per share) --- --- --- --- --- (690,423)
Unrealized investment gain, net --- --- --- --- --- ---
Conversion of common stock - B to A 3,339 33 (3,339) (33) --- ---
Repurchase of Class A common stock --- --- --- --- --- ---
Stock options exercised 1,200 12 --- --- 8,688 ---
Amortization, net of tax --- --- --- --- 83,395 ---
Other --- --- --- --- --- ---
--------- ------- ---------- --------- ------------ ------------
Balance at January 28, 2006 2,518,774 $25,188 1,665,965 $16,660 $17,555,262 $22,686,329
========= ======= ========== ======== ============ ============
Accumulated
Other Treasury Stock
Comprehensive Unearned ------------------------ Comprehensive
Income Compensation Shares Amount Income
------------- ------------- ---------- ------------ -------------
Net income --- --- --- --- 1,374,693
Reclassification due to adoption of FAS 123R --- 158,993 --- --- ---
Foreign currency translation reserve 41,670 --- --- --- 41,670
Cash dividends paid ($.17 per share) --- --- --- --- ---
Unrealized investment gain, net (366) --- --- --- (366)
Conversion of common stock - B to A --- --- --- --- ---
Repurchase of Class A common stock --- --- 500 (4,035) ---
Stock options exercised --- --- --- --- ---
Amortization, net of tax --- --- --- --- ---
Other --- --- 1,732 (13,321) ---
------------- ------------ ---------- ------------ -------------
Balance at January 28, 2006 $ (2,194,747) $ --- 122,726 $(1,004,555) $ 1,415,997
============= ============= ========== ============ =============
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 2005 Annual Report on Form
10-K filed with the Securities and Exchange Commission. The results
of operations for the six months ended January 28, 2006 are not
necessarily indicative of the results for any subsequent period or the
entire fiscal year ending July 31, 2006.
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 is the 50% ownership in the Chinese operating
joint venture, The Tianjin Green Engineering Company. This joint venture is
accounted for under the equity method. All significant intercompany
transactions and balances have been eliminated.
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, in operation through January 2005) 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 2005-2006.
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. See Footnote No. 7.
g. Impairment of Long-Lived Assets
In January 2005, the Company recognized a $1.6 million impairment loss as
a result of its decision to close its Analytical Services Center (ASC) located
in Lancaster, New York. At that time, the impairment of the land and buildings
was determined based on the results of an independent appraisal and the
equipment values were determined by equipment offers the Company had received.
Operations continued beyond the end of the Company's second quarter ended
January 2005 and all backlog was completed by the end of February.
Consequently, at January 2005 the impairment loss was shown as from "continuing
operations" and the assets were classified as "held for use."
In April 2005, the Company recorded an additional impairment loss on
its remaining ASC land and building assets in the amount of $1.2 million. This
was the result of information obtained from various commercial brokers in
April 2005 that provided the Company with additional information on current
market conditions affecting the value of the real estate. The reduced
valuation is based on the likelihood that the facility will not be sold to an
existing laboratory or research company, but will rather be sold as combination
office and warehouse space. The testing equipment was sold during the third
quarter. Although business operations have ceased at the ASC, any impairment
losses are shown as from "continuing operations" due to the uncertainty that
the assets can be sold within one year under current market conditions.
h. Cash Flow Revision
The Company has revised its 2005 consolidated statement of cash flows to
separately disclose operating, investing and financing portions of cash flows
attributable to discontinued operations. The Company had previously reported
these as separate amounts with cash flows from continuing operations within
each category.
i. Cash and Cash Equivalents
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
$60,676 and $70,796 for the first six months of fiscal year 2006 and 2005,
respectively. Cash paid (net refund received) for income taxes amounted to
$681,685 and $(985,764) for the first six months of fiscal year 2006 and 2005,
respectively.
j. Adoption of FASB 123(R)
The Company adopted FAS 123(R), Share-Based Payment, effective August 1,
2005. The Statement requires companies to expense the value of employee stock
options and similar awards. Under FAS 123(R), 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 unearned stock compensation balance of $158,993 as of July 31,
2005, which was accounted for under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), was reclassified into
additional paid-in-capital upon adoption of SFAS 123(R). The impact on the
Company's financial statements was not material.
k. Reclassifications
Certain prior year amounts were reclassified to conform to the 2006
financial statement presentation.
2. Contract Receivables, Net
-------------------------
January 28, July 31,
2006 2005
------------ ------------
United States government
Billed $ 4,016,243 $ 2,418,683
Unbilled 3,540,162 3,801,977
------------ ------------
7,556,405 6,220,660
------------ ------------
Industrial customers and state
and municipal governments
Billed 24,623,979 22,065,280
Unbilled 7,012,167 5,348,293
------------ ------------
31,636,146 27,413,573
------------ ------------
Less allowance for contract
adjustments (3,831,668) (3,589,893)
------------ ------------
$35,360,883 $30,044,340
============ ============
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
$(362,511) at January 28, 2006 and $179,000 at July 31, 2005. Management
anticipates that the January 28, 2006 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 $10.4
million and $8.5 million at January 28, 2006 and July 31, 2005, respectively.
Within the above billed balances are contractual retainages in the amount of
approximately $630,000 at January 28, 2006 and $713,000 at July 31, 2005.
Management anticipates that the January 28, 2006 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
$1.4 million at January 28, 2006 and $1.2 million at July 31, 2005. Also
included in other accrued liabilities is a reclassification of billings in
excess of recognized revenues of approximately $2.3 million at January 28,
2006 and $1.8 million at July 31, 2005. 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 January 28, 2006 the Company has incurred expense of
$1,991,000 ($15,000 for the first six months of fiscal year 2006, $141,000
in fiscal year 2005, $944,000 in fiscal year 2004, $505,000 in fiscal year
2003 and $386,000 in fiscal year 2002 under the terms of this commission
agreement).
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 and is renewed
annually. At January 28, 2006 and July 31, 2005, respectively, the Company
had letters of credit outstanding totaling $2,277,500 and $2,373,602,
respectively. The Company had no outstanding borrowings for working capital
at January 28, 2006 and July 31, 2005.
The Company is in compliance with all bank loan covenants at January 28,
2006.
4. Long-Term Debt and Capital Lease Obligations
--------------------------------------------
Debt inclusive of capital lease obligations at January 28, 2006 and
July 31, 2005 consist of the following:
January 28, July 31,
2006 2005
---------- ----------
Various bank loans and advances at interest rates
ranging from 5% to 14 1/2% $ 362,184 $ 508,978
Capital lease obligations at varying interest
rates averaging 12% 189,401 143,146
---------- ----------
551,585 652,124
Less: current portion of debt (117,790) (255,298)
current portion of lease obligations (78,326) (68,773)
---------- ----------
Long-term debt and capital lease obligations $ 355,469 $ 328,053
========== ==========
The aggregate maturities of long-term debt and capital lease obligations at
January 28, 2006 are as follows:
January 28, 2006
----------------
February 2006 - January 2007 $ 196,116
February 2007 - January 2008 114,869
February 2008 - January 2009 99,233
February 2009 - January 2010 29,773
February 2010 - January 2011 23,246
Thereafter 88,348
---------
$ 551,585
=========
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 fiscal year 2005, 47,795 shares in
fiscal year 2004, and 38,712 shares in fiscal year 2003 pursuant to the Award
Plan. Compensation costs are recorded in accordance with FAS 123R at the time
of issuance and are being amortized over the vesting period.
6. 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 certain shares of common stock owned by them, the former
spouse of one of the individuals and some of their children. 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.
7. Earnings Per Share
-------------------
The computation of basic earnings per share reconciled to diluted earnings
per share follows:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
1/28/06 1/29/05 1/28/06 1/29/05
----------------------------- -----------------------------
Income (loss) from continuing operations
available to common stockholders $ 656,651 $(1,730,608) $ 1,439,746 $(1,678,748)
Loss from discontinued operations
available to common stockholders (28,297) (32,024) (65,053) (78,743)
----------------------------- -----------------------------
Total income (loss) available to common
stockholders 628,354 (1,762,632) 1,374,693 (1,757,491)
`
Weighted-average common shares outstanding
(basic) 3,982,433 3,961,308 3,982,711 3,974,395
Basic earnings (loss) per share:
Continuing operations $ .16 $ (.44) $ .36 $ (.42)
Discontinued operations (.01) (.01) (.02) (.02)
----------------------------- ------------------------------
Total basic earnings (loss) per share $ .15 $ (.45) $ .34 $ (.44)
Incremental shares from assumed conversion
of stock options and restricted stock
awards 4,158 --- 1,544 ---
----------------------------- ------------------------------
Adjusted weighted-average common shares
outstanding 3,986,591 3,961,308 3,984,255 3,974,395
Diluted earnings (loss) per share:
Continuing operations $ .16 $ (.44) $ .36 $ (.42)
Discontinued operations (.01) (.01) (.02) (.02)
----------------------------- ------------------------------
Total diluted earnings (loss) per share: $ .15 $ (.45) $ .15 $ (.44)
============================= ==============================
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 diuluted per-share computations for the three and six
months ended January 29, 2005, as inclusion of such would result in an
antidilutive per-share amount since the Company had a loss from continuing
operations.
8. 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 in fiscal year 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 in the Middle East. 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 were 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 six months ended January 28, 2006 are as follows:
Aquaculture
--------------------------
Consulting Analytical Continued Discontinued Elimination Total
----------- ----------- ------------ ------------ ------------ ------------
Total consolidated net revenues $40,093,110 $ - $ 34,848 $ - $ - $40,127,958
=========== =========== ============ ============ ============ ============
Depreciation expense $ 528,519 $ - $ 6,328 $ - $ - $ 534,847
Segment profit (loss) before income
taxes and minority interest $ 2,607,811 $ - $ (39,383) $ (111,012) $ - $ 2,457,416
Segment assets $57,970,485 $2,100,000 $ 275,000 $ 42,000 $ - $60,387,485
Expenditures for long-lived
assets, gross $ 321,961 $ - $ - $ - $ - $ 321,961
Geographic Information:
Net Long-Lived
Revenues (1) Assets - Gross
--------------- --------------
United States $34,968,958 $21,769,808
Foreign Countries 5,159,000 1,770,000
(1) Net revenues are attributed to countries based on the location of the
customers. Net revenues in foreign countries includes $1.2 million in Kuwait.
Reportable segments for the six months ended January 29, 2005 are as follows:
Aquaculture
--------------------------
Consulting Analytical Continued Discontinued Elimination Total
----------- ----------- ------------ ------------ ------------ ------------
Net revenues from external
customers $34,769,051 $ 1,752,635 $ 50,924 $ - $ - $36,572,610
Intersegment net revenues 527,711 - - - (527,711) -
----------- ----------- ------------ ----------- ------------ ------------
Total consolidated net revenues $35,296,762 $ 1,752,635 $ 50,924 $ - $ (527,711) $36,572,610
=========== ============ ============ ============ ============ ============
Depreciation expense $ 599,872 $ 267,950 $ 6,329 $ - $ - $ 874,151
Segment profit (loss) before income
taxes and minority interest (2) $ 540,007 $(2,613,822) $ (6,498) $ (114,452) $ - $(2,194,765)
Segment assets $52,925,836 $ 5,014,000 $ 170,000 $ 40,000 $ - $58,149,836
Expenditures for long-lived
assets, gross $ 329,747 $ 4,581 $ - $ - $ - $ 334,328
Geographic Information:
Net Long-Lived
Revenues (1) Assets - Gross
--------------- --------------
United States $30,108,610 $25,656,369
Foreign Countries 6,464,000 551,000
(1) 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.
(2) Segment loss for the Analytical segment includes a pretax impairment
loss of $1.6 million in long term assets.
9. Commitments and Contingencies
-----------------------------
Certain contracts contain termination provisions under which the customer
may, without penalty, terminate the contracts upon written notice to the
Company. In the event of termination, the Company would be paid only
termination costs in accordance with the particular contract. Generally,
termination costs include unpaid costs incurred to date, earned fees and
any additional costs directly allocable to the termination.
On or about October 28, 2005 several Plaintiffs filed an action in
District Court in the City and County of Boulder in Colorado, Case No.
05 CV 1008, against three named Defendants, one of which is Walsh
Environmental Scientists & Engineers, LLC (Walsh). Walsh is a majority-owned
subsidiary of the Company. The Company is not named as a Defendant. The
Plaintiffs' Complaint alleges claims of negligence, breach of contract and
trespass for unspecified damages against the Defendants resulting from a forest
fire that ignited from a fallen power line during a wind storm that took place
in Boulder County, Colorado in October 2003. Walsh's legal counsel has
received other communication from the Plaintiffs' attorneys, which indicates
that Plaintiffs may be seeking damages, in the aggregate, in excess of
$17,000,000.00. The Company's liability insurance extends to its subsidiaries.
Walsh believes the claims asserted against it are without merit and intends to
vigorously defend this lawsuit.
The Company is involved in other litigation arising in the normal course
of business. In the opinion of management, any adverse outcome to other
litigation arising in the normal course of business would not have a material
impact on the financial results of the Company.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
-------------------------------
Operating activities contributed $346,000 ($439,000 increase from continuing
operations and $93,000 decrease from discontinued operations) of cash during
the first six months of fiscal year 2006 compared to a source of $1.9 million
of cash reported in the prior year. The increased cash flow during the first
half of fiscal year 2006 was mainly attributable to changes in other current
assets, accrued payroll costs and other accrued liabilities. Other current
assets decreased $651,000, accrued payroll increased $1.5 million, and other
accrued liabilities increased $3.0 million. Accounts receivable increased due
to an increase in work volume during the first half of fiscal year 2006 as well
as a temporary slow down in collections. Other non-current assets increased
$1.1 million and accounts payable decreased $607,000 during the first half of
fiscal year 2006. The Company purchased $322,000 of new capital equipment
compared to depreciation charges of $535,000 during the first six months of
fiscal year 2006.
Financing activities consumed $1.2 million in cash during the first half of
fiscal year 2006. Dividends in the amount of $690,000 were paid in January
2006 due to a $.17 per share dividend approved by the Board of Directors.
Long-term debt and capital lease obligations decreased $101,000 mainly due
to the repayment of $134,000 in loans held by the Walsh Environmental
subsidiary, Walsh Peru. Distributions of $428,000 were made to minority
partners during the first six months of fiscal year 2006.
The Company maintains an unsecured line of credit of $20.0 million with a
bank at 1/2% below the prevailing prime rate. A second line of credit is
available at another bank for up to $13.5 million, exclusively for letters
of credit. The Company has outstanding letters of credit (LOC's) at
January 28, 2006 in the amount of $2.3 million. These LOC's were obtained
to secure advance payments and performance guarantees for contracts in the
Middle East. After LOC's, there are no outstanding borrowings under the
lines of credit and there is $31.2 million of line still available at
January 28, 2006. There are no significant additional working capital
requirements pending at January 28, 2006. 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 $ 362,184 $ 117,790 $ 110,904 $ 45,142 $ 88,348
Capital Lease Obligations 189,401 78,326 103,198 7,877 ---
Operating Lease Obligations (1) 4,259,830 1,799,286 1,838,454 590,319 31,772
Other Liabilities (2) 141,343 141,343 --- --- ---
------------------------------------------------------
Total $4,952,758 $2,136,745 $2,052,556 $643,338 $120,119
(1) Represents rents for office and warehouse facilities
(2) Consists of Deferred Revenue on the Kuwait contract
Results of Operations
---------------------
Net Revenue
-----------
Fiscal Year 2006 vs 2005
------------------------
Net revenues for the second quarter of fiscal year 2006 were $19.9 million,
up 14% from the $17.4 million reported in fiscal year 2005. The increase in
net revenues was attributable to increased work on projects in the Gulf Coast
associated with the relief efforts for hurricanes Katrina and Rita as well as
an increase in work at two of the Company's subsidiaries, Walsh Environmental
and E&E do Brasil. The Company reported net revenues from these Gulf Coast
contracts of $3.5 million during the second quarter of fiscal year 2006.
Walsh Environmental reported net revenues of $3.4 million during the second
quarter of fiscal year 2006, up 27% from the $2.6 million reported in the
prior year. The increase in Walsh is due to higher revenues from its
subsidiaries in Peru and Ecuador as well as Gustavson Associates. E&E do
Brasil reported net revenues of $721,000 during the second quarter of fiscal
year 2006, up 88% from the $383,000 reported in the prior year. Offsetting
these increases were decreases in net revenues from the contracts in Saudi
Arabia and Kuwait. These contracts in the Middle East decreased $1.2
million or 57%. The contracts in Saudi Arabia are 100% complete and the
contracts in Kuwait are approaching completion. Net revenues decreased
$642,000 during the second quarter of fiscal year 2006 due to the completion
of both the Company's Superfund Technical Assessment and Response Team (START)
contract in EPA Region III in June 2005 and EPA Region X in December 2005.
The remaining START contract in EPA Region IX was scheduled to end in December
2005, however the EPA extended work through the middle of April 2006. New
START contracts in EPA Regions IX and X were rebid in September 2005. The
Company was awarded the new START contract in EPA Region X in December 2005.
If all of the option years are exercised, the new START contract could total
$49 million over seven years. However, the Company was notified in February
2006 that it was unsuccessful in winning the new START contract in EPA
Region IX. The START Region IX contract contributed net revenues of $1.8
million during the first six months of fiscal year 2005 and $4.4 million in
fiscal year 2005. The Company closed its Analytical Services Center in
Lancaster, N.Y. during the second quarter of the fiscal year 2005. As a
result, ASC net revenues decreased $867,000 during the second quarter of
fiscal year 2006.
Fiscal Year 2005 vs 2004
------------------------
Net revenues for the second quarter of fiscal year 2005 were $17.4 million,
down 17% from the $21.0 million reported in the second 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 decreased
$4.3 million or 70% due to winding down activity on these contracts.
Percentage of completion on contracts in the Middle East range from 85% to 94%
and it is anticipated that most of the contracts will be substantially
completed by the end of fiscal year 2005. Net revenues from commercial clients
increased $860,000 or 43% from the $2.0 million reported in the second quarter
of fiscal year 2004. Net revenues from state clients increased $416,000 or 13%
from the $3.3 million reported in the second quarter of fiscal year 2004. Net
revenues from Department of Defense (DOD) clients decreased $606,000 or 21%
from the $2.9 million reported in the second 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. Walsh Environmental
reported net revenues of $2.6 million for the second quarter of fiscal year
2005, an increase of $885,000 from the $1.7 million reported in the second
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 $447,000 during the second quarter of fiscal year 2005.
Income From Continuing Operations Before Income Taxes and Minority Interest
---------------------------------------------------------------------------
Fiscal Year 2006 vs 2005
------------------------
The Company's income from continuing operations before income taxes and
minority interest for the second quarter of fiscal year 2006 was $1.1 million,
compared to the $2.4 million loss reported in the second quarter of the prior
year. This increase was due mainly to increased utilization and the closing
and impairment of the Analytical Services Center (ASC) in January 2005. The
increase in utilization is mainly attributable an increase in work performed
on contracts associated with the relief efforts for hurricanes Katrina and
Rita. Work on these contracts is scheduled to continue at a reduced rate
through the end of April 2006. Though this will curtail the hurricane response
effort, new issues may arise due to damage to wetlands and other coastal area
impacts. The Company is aggressively marketing these opportunities. With net
revenues and utilization increasing during the quarter, management continued
to control indirect costs and maintain them at a level consistent with the
second quarter of fiscal year 2005. The Company's decision to close the ASC
resulted in a total net loss of $1.6 million or $.39 per share in the second
quarter of fiscal year 2005.
Fiscal Year 2005 vs 2004
------------------------
The Company's loss from continuing operations before income taxes and minority
interest for the second quarter of fiscal year 2005 was $2.4 million, down from
the $1.9 million of income reported in the second quarter of the prior year.
This decrease was mainly attributable to reduced net revenues during the second
quarter of fiscal year 2005 along with the Company's decision to close its
Analytical Services Center (ASC) in Lancaster, N.Y. which resulted in a pretax
impairment loss of $1.6 million. This impairment was recognized on the value
of the facility as well as the analytical equipment used therein. The
impairment was precipitated by the Company's decision to close the operation
rather than to sustain further losses while attempting to sell the segment as
an on-going business. Continued losses incurred in this segment as a result of
market price deterioration and a reduced emphasis by the Federal government on
analytical laboratory testing were the basis for this decision. The ASC
reported an operating loss of $614,000 for the second quarter of fiscal year
2005. Remaining backlog was completed and testing at the ASC ceased as of
February 18, 2005. The majority of the staff was laid off as of that date.
Severance costs and other miscellaneous closing costs are estimated to be in
the range of $100,000-$200,000 and were expensed as incurred. Administrative
and indirect costs increased $729,000 or 14% during the second quarter of
fiscal year 2005. This increase was attributable to reduced staff utilization,
$152,000 increase in expenses from E & E do Brasil due to a larger office space
and administrative staff, 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
$100,000 in costs associated with the compliance work for the Sarbanes-Oxley
Act during the second quarter of fiscal year 2005. Gustavson Associates,
acquired by Walsh Environmental in May of fiscal year 2004, reported $144,000
in administrative and indirect costs during the quarter.
Impairment Losses
-----------------
In January 2005, the Company recognized a $1.6 million impairment loss as a
result of its decision to close the ASC. At that time, the impairment of
the land and buildings was determined based on the results of an independent
appraisal and the equipment values were determined by equipment offers the
Company had received. The impairment was precipitated by the Company's
decision to close the operation rather than to sustain further losses while
attempting to sell the segment as an on-going business. Continued losses
incurred in this segment as a result of market price deterioration and a
reduced emphasis by the Federal government on analytical laboratory testing
was the basis for this decision. In April 2005, the Company recorded an
additional impairment loss on its remaining ASC land and building assets
in the amount of $1.2 million. This was the result of meetings with various
commercial brokers that provided the Company with additional information on
current market conditions affecting the value of the real estate. The
reduced valuation is based on the likelihood that the facility will not be
sold to an existing laboratory or research company, but will rather be sold
as combination office and warehouse space. The testing equipment was sold
during the third quarter. Although all business operations have ceased, the
total ASC impairment losses are shown in the accompanying financial
statements as from "continuing operations" due to the uncertainty that the
assets can be sold within one year under current market conditions.
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 EIE is phased out
over the calendar years 2005 and 2006 with an exemption for binding
contracts with unrelated persons entered into before September 18, 2003.
These phase-out provisions will allow the Company to maintain an EIE
deduction of an undeterminable amount through fiscal year 2007. The
Company believes that it will accrue some benefits from the domestic
manufacturing deduction, although such benefits are not expected to be
material. The domestic manufacturing deduction will be phased in over a
six-year period beginning with the Company's fiscal year 2005. The Company
has completed its evaluation of the repatriation provisions under the Act
and has determined that no dividends will be repatriated under the terms
of the Act.
Recent Accounting Pronouncements
--------------------------------
The Company adopted FAS 123(R), Share-Based Payment, effective August 1, 2005.
The Statement requires companies to expense the value of employee stock
options and similar awards. Under FAS 123(R), 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 unearned stock compensation balance of $158,993 as of July 31,
2005, which was accounted for under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), was reclassified into
additional paid-in-capital upon adoption of SFAS 123(R). The impact on the
Company's financial statements was not material.
Critical Accounting Policies and Use of Estimates
-------------------------------------------------
Management's discussion and analysis of financial condition and results
of operations discusses the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United State of America. The preparation of these statements
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates and judgments, including those related
to revenue recognition, allowance for doubtful accounts, inventories,
income taxes, impairment of long-lived assets and contingencies.
Management bases its estimates and judgments on historical experience and
on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following accounting policies involve its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. The Company maintains reserves for cost disallowances
on its cost based contracts as a result of government audits. The Company
recently settled fiscal years 1990 thru 1994 for amounts within the anticipated
range. However, final rates have not been negotiated under these audits since
1994. 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 January 8, 2004 the Company entered into an agreement to grant a forty-eight
percent stake in its Brazilian subsidiary, Ecology and Environment do Brasil,
Ltda. (a limited partnership), to three new partners. The new partners are
responsible for the in-country marketing and operations of the subsidiary.
Any previous earnings, assets and liabilities remained with Ecology and
Environment, Inc. The new partners have contributed their business contacts
and staff from their old firm. The Company has provided an $80,000 capital
contribution to move the office operations from Sao Paulo to Rio de Janeiro.
Rio de Janeiro is where the Company believes it will have a more strategic
location to market its target clients. During fiscal year 2005, two of the
local partners entered into an agreement to purchase the other local
partner's shares. This purchase is expected to be completed in fiscal
year 2006 and it is not expected to significantly impact the operations
of the Brazilian subsidiary.
During the second quarter of fiscal year 2005, the Company formed three
new subsidiaries as well as a new joint venture. These entities were
formed for the purpose of obtaining future work for the Company in the
Middle East, Russia, and the State of California. The new entities are as
follows: MiddleEast Environmental Consultants, LLC (MEC); E & E
International, LLC; E & E Environmental Services, LLC; and E & E Ward
BMS Consulting Association (Joint Venture). As of January 28, 2006, only
MEC and E & E Ward BMS Consulting Association were operational.
In June 2005, the Company signed an agreement to sell its 50% ownership in
Beijing YiYi Ecology and Environment Engineering Co., LTD to an existing
partner for $240,000. This transaction resulted in a loss of $72,000 and
was recorded in the accompanying results of operations for fiscal year 2005.
During fiscal year 2005, members of Walsh Unit Holders LLC exercised their
options to purchase an additional 1,146 shares of Walsh Environmental
Scientists and Engineers, LLC at a cost of $30,360. This caused the E&E, Inc.
ownership percentage in this company to drop by 1.7%. There are no additional
purchase options outstanding as they expired on June 30, 2005. This caused a
reduction in the ownership percentage of E&E, Inc. from 60% to 58.3%.
Inflation
---------
Inflation has not had a material impact on the Company's business because a
significant amount of the Company's contracts are either cost based or contain
commercial rates for services that are adjusted annually.
ITEM 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 January 28,
2006, the Company's investments consisted of short-term commercial paper and
mutual funds. The Company does not expect any material loss with respect to
its investments.
The Company is currently documenting, evaluating, and testing its internal
controls in order to allow management to report on and attest to, and its
independent public accounting firm to attest to, the Company's internal
controls as of July 31, 2007, as required by Section 404 of the Sarbanes-
Oxley Act. The Company devoted substantial time and expense to this endeavor
during fiscal year 2005 and expects to spend additional management time on
this in fiscal year 2006 and 2007. If weaknesses in our existing information
and control systems are discovered that impede our ability to satisfy Sarbanes-
Oxley reporting requirements, the Company must successfully and timely
implement improvements to those systems. There is no assurance that the
Company will be able to meet these requirements.
Item 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 January 28, 2006. 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 October 29, 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. Generally,
termination costs include unpaid costs incurred to date, earned fees and
any additional costs directly allocable to the termination.
On or about October 28, 2005 several Plaintiffs filed an action in
District Court in the City and County of Boulder in Colorado, Case No.
05 CV 1008, against three named Defendants, one of which is Walsh
Environmental Scientists & Engineers, LLC (Walsh). Walsh is a majority-owned
subsidiary of the Company. The Company is not named as a Defendant. The
Plaintiffs' Complaint alleges claims of negligence, breach of contract and
trespass for unspecified damages against the Defendants resulting from a forest
fire that ignited from a fallen power line during a wind storm that took place
in Boulder County, Colorado in October 2003. Walsh's legal counsel has
received other communication from the Plaintiffs' attorneys, which indicates
that Plaintiffs may be seeking damages, in the aggregate, in excess of
$17,000,000.00. The Company's liability insurance extends to its subsidiaries.
Walsh believes the claims asserted against it are without merit and intends to
vigorously defend this lawsuit.
The Company is involved in other litigation arising in the normal course
of business. In the opinion of management, any adverse outcome to other
litigation arising in the normal course of business would not have a material
impact on the financial results of the Company.
ITEM 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 January 28,
2006:
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
-------------------- --------- ------ ------------ --------------
December 2005 500 $8.00 500 16,534
--------- ------ ------------ --------------
500 $8.00 500 16,534
Total ========= ====== ============ ==============
(1) The Company purchased 500 shares of its Class A common stock during
the second quarter of its fiscal year ended July 31, 2006, pursuant to a
200,000 share repurchase program approved at the October 26, 2000 Board of
Directors meeting. Purchases were made in open-market transactions.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
The Registrant has no information for Item 3 that is required to be
presented.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders of the Registrant was held on
January 19, 2006.
(b) At such meeting, the following persons were elected as directors by
the holders of Class A Common Stock: Timothy Butler and Ross M. Cellino; and
the following directors by the holders of Class B Common Stock: Gerhard J.
Neumaier, Ronald L. Frank, Frank B. Silvestro, Gerald A. Strobel, Gerard A.
Gallagher, Jr. and Harvey J. Gross.
(c) With respect to each Director nominee, the following votes were cast:
(i) Class A Directors
For Withheld Abstain
--------- -------- -------
Ross M. Cellino 1,897,121 238,637 -0-
Timothy Butler 2,125,260 10,498 -0-
(ii) Class B Directors
For Withheld Abstain
--------- -------- -------
Gerhard J. Neumaier 1,340,107 -0- -0-
Ronald L. Frank 1,340,107 -0- -0-
Frank B. Silvestro 1,340,107 -0- -0-
Gerald A. Strobel 1,340,107 -0- -0-
Gerard A. Gallagher, Jr. 1,340,107 -0- -0-
Harvey J. Gross 1,340,107 -0- -0-
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 second quarter ended
January 28, 2006.
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: March 14, 2006 /s/ RONALD L. FRANK
---------------------------------------
RONALD L. FRANK
EXECUTIVE VICE PRESIDENT, SECRETARY,
TREASURER AND CHIEF FINANCIAL OFFICER -
PRINCIPAL FINANCIAL OFFICER