General
Ecology
and Environment, Inc. ("EEI" or the "Company") is a broad based environmental
consulting firm whose underlying philosophy is to provide professional services
worldwide so that sustainable economic and human development may proceed with
minimum negative impact on the environment. The Company offers a broad range
of
environmental consulting services including: environmental audits; environmental
impact assessments; terrestrial, aquatic and marine surveys; air quality
management and air toxics pollution control; environmental engineering; noise
pollution evaluations; wastewater analyses; water pollution control; industrial
hygiene and occupational health studies; archaeological and cultural resource
studies; environmental infrastructure planning; air, water and groundwater
monitoring.
The
Company employs over 75 separate disciplines embracing the physical, biological,
social and health sciences. The Company was incorporated in February 1970.
Its
principal offices are located at 368 Pleasant View Drive, Lancaster, New York
and its telephone number is 716-684-8060.
START
Contracts
In
December 2005, the United States Environmental Protection Agency (EPA) awarded
the Company a contract known as START III to provide continuing support to
the
EPA Region 10. This is a combination time and materials/cost plus contract
with
a base term of three years plus options for an additional four years. Total
maximum value is $49 million over the seven years. As of July 31, 2007 the
Company has recognized revenue of approximately $7.3 million under this
contract. This contract contains termination provisions under which the EPA
may,
without penalty, terminate the contract upon written notice to the Company.
In
the event of termination, the Company would be paid only termination costs
in
accordance with the contract. The Company has never had a contract terminated
by
the EPA.
Saudi
Arabia/Kuwait Contracts
The
Company has provided assistance to the Kingdom of Saudi Arabia and the State
of
Kuwait since 1995 in support of environmental damage claims filed by these
countries with the United Nations Compensation Commission (UNCC) resulting
from
Iraqi aggression during the 1991 Gulf War. On October 30, 2001, the Company
through its majority-owned Saudi subsidiary secured a significant expansion
of
an existing contract with Saudi Arabia (2001 Oversight Contract) and through
a
majority-owned domestic subsidiary entered into three new contracts with Kuwait.
The contract for work with Saudi Arabia provided for the oversight and
supervision of the implementation of monitoring and assessment studies to
determine the extent of damage to marine, coastal and terrestrial resources.
The
contracts for work with Kuwait provided for conducting terrestrial and coastal
monitoring and assessment studies as well as the establishment and operation
of
an environmental laboratory in Kuwait. The contracts in Saudi Arabia were a
combination of time and material and fixed price and totaled $41.4 million
of
expected net revenues. The contracts in Kuwait were comprised of
three fixed price contracts for approximately $29.0 million of net revenues,
along with a time and materials laboratory portion. The Company, as of July
31,
2006, completed the work in Saudi Arabia and recognized net aggregate revenues
of approximately $39.0 million. The contracts in Kuwait are substantially
complete with only minor amounts of laboratory work continuing through December
2007. The Company has recognized net revenues of $ 31.0 million as of July
31,
2007.
Task
Order Contracts
The
Company has numerous task order contracts with state and federal governmental
agencies which contain indefinite order quantities and/or option periods ranging
from two to ten years. The maximum potential revenues included in these
contracts is approximately $169.4 million. Work done under task orders run
the
full range of services provided by EEI.
Environmental
Consulting Services
The
Company’s staff is comprised of individuals with advanced degrees representing
over 75 scientific and engineering disciplines working together in
multidisciplinary teams to provide innovative, turnkey solutions. EEI’s staff
includes engineers; geologists, hydrologists, and other physical scientists;
environmental and urban planners; and specialists in the life, health, and
social sciences. The Company has rendered consulting services to
commercial and government clients in a variety of service sectors, such as
the
following:
Energy
New
technology and increasing demand and accountability for more sustainable use
of
resources presents complex challenges to energy developers and providers. To
keep pace with escalating energy needs worldwide, EEI supports all phases of
energy development by conducting critical feature/fatal flaw analyses,
environmental impact assessments, feasibility and siting studies, permitting,
and due diligence audits. In response to monetary, environmental, and
social costs of energy on the rise, the Company promotes use of clean energy
technologies in an age where energy infrastructure development is critical
to
world economic growth and improving quality of life.
EEI
has
provided the pipeline industry with environmental support for nearly 35
years. The Company’s extensive experience includes route selection;
field support and survey, such as wetland delineation and endangered species
surveys; regulatory compliance and permit support, including preparation of
erosion control plans for submission to state agencies, Section 10 and Section
404 permits for submission to the United States Army Corps Engineers, and
Federal Energy Regulatory Commission (FERC) 7(c) filings; and preparation of
environmental monitoring and restoration plans, including development of quality
assurance specifications.
The
need
to incorporate environmental and social considerations into the planning,
design, construction, and operation of offshore energy infrastructure is
paramount considering the expanding use of marine locations for energy
production/transportation and the use conflict and impacts on critical resources
such as marine mammals, commercial and recreational fisheries, seafood safety,
water quality, and other recreational uses. EEI supports projects involving
oil
and gas exploration and production; subsea pipelines; deepwater oil ports;
liquefied natural gas (LNG) import terminals; and, most recently, projects
involving components of offshore wind, wave, current, and tidal power subsea
electrical transmission. The Company prepares third-party EISs/EIAs,
Deepwater Port applications, and FERC ERs; performs siting/feasibility studies,
plankton surveys, marine mammal acoustic impact modeling, dredging impact
studies, coastal zone consistency evaluations, risk assessments, and marine
vessel traffic studies; and develops and implements comprehensive plans for
stakeholder engagement/outreach.
The
worldwide desire to develop alternative energy has sparked explosive growth
in
the wind energy market. Although wind power is widely regarded as a low impact,
renewable energy source, public concerns over land use, visual quality, noise,
and biological impacts sometimes emerge, and environmental impacts must be
addressed to obtain permits. EEI attends to these concerns by
providing strategic consulting in all facets of environmental permitting and
compliance; environmental evaluation; T/E species, avian, and bat surveys;
visual resources, noise aesthetics, archaeological, and land use
studies. The Company’s civil engineering support services include
design of structure foundations and roadways and coordination for gathering
line
placement, substation, and transmission line requirements. In
addition, the Company recognizes that public outreach efforts are an important
component of any wind power project; therefore, maintains in-house public
relations experts and graphic artists, who work as an integrated team to design
outreach programs geared toward landowners and officials.
The
ability to address CO
2
impacts is one of the most critical and
difficult environmental issues facing our power-generation clients today. EEI
assists its clients to navigate the deregulated power industry and expedite
the
permitting process with a thorough understanding of the environmental and
regulatory requirements (federal and state) associated with carbon capture
and
sequestration (CCS), including geologic investigation, deep well
construction, power plant and pipeline siting and construction, and
long-term CO
2
storage. The Company recently completed a
CCS feasibility study to determine potential for geological sequestration of
carbon dioxide from a coal-fired power plant in western Kentucky. At
the Radford Army Ammunition Plant in Virginia, EEI conducted Phase I and II
environmental assessments for a potential coal gasification plant
site. The Company also recently supported development of an
application to DOE for grant funding by preparing an air permit “roadmap” and
community assessment for four potential coal/petroleum coke gasification sites
in four states where gasification technology would be utilized to displace
natural gas use.
Natural
Resource Management/Restoration
EEI’s
approach to restoration design focuses on mimicking natural systems in form,
function, and process—developing practical strategies for sustainable design and
uplift. The Company conceives and designs environmental restoration
projects that restore affected habitat through the efficient and innovative
integration of biological and engineering solutions. EEI assists its clients
meet their goals through the application of restoration measures to mine
reclamation, contaminated sediment remediation, land development strategies,
recreational planning, comprehensive watershed planning, and threatened and
endangered species protection.
Green
Programs
EEI
seeks
to take actions against greenhouse gases (GHGs), global warming, and climate
change, both within our internal operations and throughout our line of
associated services. The Company’s environmental sustainability
services and green programs include an array of offerings to increase
eco-efficiency and environmental performance while reducing operating costs.
EEI
offers knowledge-based consulting services to assist its clients establish
an
environmental focus and incorporate green elements into their company’s culture.
The Company’s approach to addressing these issues applies to a variety of
organizations, including corporations, government agencies, colleges and
universities, school districts, offices buildings, healthcare facilities,
military bases, hotels, high-end homes, retail stores, and the tourism
industry.
One
of
the chief sources of GHG emissions is vehicular traffic. EEI’s innovative
Web-based rideshare application reduces automobile dependency and promotes
use
of alternative transportation. The program was designed by EEI to encourage
carpooling as a method of improving air quality, reducing traffic congestion,
and conserving fuel. GreenRide helps users find carpool partners by
searching for other users who live nearby and have similar schedules and
commuting needs. In the past year, the service has seen a jump in
sales of over 367 percent, serving a total population of over 30 million
commuters, and resulting in a yearly emission savings of more than 15,000 tons
of CO
2
. It has
been purchased in 15 states by transit agencies, metropolitan planning
organizations, large employers, and campuses to offer ride-matching services
to
more than 30 million people nationwide. EEI received a 2007 Diamond
Award from the American Council of Engineering Companies for its implementation
of GreenRide for the Fort Collins, Colorado, SmartTrips Carpooling
Program.
The
Company provides consulting services to builders and developers relating to
understanding environmental sustainability concepts within the context of an
office building, school, hospital, or college university
setting. Saving energy and natural resources is a critical issue from
an operational-cost standpoint, and is often just as important in terms of
maintaining a positive public image. EEI supports the United States Green
Building Council’s Leadership in Energy and Environmental Design (LEED™)
programs for New Construction (NC) and Existing Buildings (EB) by offering
LEED
certification application assistance and green building project planning and
consulting. The Company’s energy consultants develop methods for
incorporating sustainable practices into daily operations, helping building
managers track progress, quantify reduction in energy usage and solid waste,
improve indoor air quality and landscape ecology, and develop programs for
composting/recycling and transportation. EEI’s Green Building Program
typically saves clients between 10 to 30 percent on energy and related costs
each year—savings that will more than pay for the cost of the program and the
positive environmental impacts that result.
GreenMeter,
EEI’s new dynamic energy-tracking and management system, is designed for
schools, businesses, universities, and commercial buildings and offers a unique,
easy-to-use approach to collecting, storing, and displaying near real-time
energy consumption. The application is coupled with analysis and
solutions, helping to further decrease a building’s costs associated with energy
consumption.
Planning
·
|
Environmental
Planning and Assessment
|
EEI
has
provided environmental evaluation services to both the government and the
private sector for more than 35 years, helping clients to meet the requirements
of the National Environmental Policy Act (NEPA) and other state environmental
laws. The Company evaluates and develops methods to avoid or mitigate
potential environmental impacts of a proposed project and to help ensure that
the project complies with regulatory requirements. EEI’s services
include air and water quality analysis, terrestrial and aquatic biological
surveys, threatened and endangered species surveys and wetland delineations,
social economic studies, transportation analyses and land use
planning. In addition, the Company’s stakeholder engagement/public
participation capabilities and resources ensure project success through
completion.
·
|
Military
Master Planning
|
In
response to the advances seen in military master planning under taken by the
Department of Defense (DoD) over the past few years, EEI has developed a team
of
experienced professionals in the areas of real property master planning,
military programming, geospatial data and systems support, database management,
and water resources planning. Through the Company’s experience
with
modern
military facility planning, EEI develops technologically advanced military
master planning tools by leveraging the latest in GIS and IT
technology. The Company assists DoD installations reduce their
environmental footprint while sustaining mission requirements and maintaining
positives relationships with the surrounding communities.
Emergency
Planning and Management
Recent
events around the world involving terrorism and bioterrorism have raised the
concern for public health and safety as well as environmental
protection. EEI provides logistical support, emergency
response/management services, and comprehensive planning and to support
businesses and state, county, and municipal governments in all phases of
incident management, including preparedness, mitigation, response, and
recovery. In providing these multifaceted services, the Company
determines local vulnerabilities/hazards, the in-place resources/assets to
address those hazards, and the thoroughness and shortcomings of existing
emergency management plans—all in the context of applicable state and federal
laws and regulations. EEI draws upon its understanding of and
real-life experience using guidelines such as the National Response Plan (NRP),
National Incident Management System (NIMS), Homeland Security Exercise and
Evaluation Program (HSEEP), and Hospital Emergency Incident Command System
(HEICS) to support businesses, state government agencies, and communities in
their emergency planning/preparedness and response activities.
Hazardous
Material Services
EEI
has
conducted hazardous waste site evaluations throughout the United States,
providing site investigation, engineering design, and operation and maintenance
for a wide range of industrial and governmental clients. The Company inventories
and collects sample materials on site and then evaluates waste management
practices, potential off-site impacts, and liability concerns. EEI
then designs, implements, and monitors associated cleanup programs. The
Company’s field investigation services primarily involve the development of work
plans, health and safety plans, and quality assurance/quality control plans
to
govern and conduct field investigations to define the nature and extent of
contaminants at a site.
After field investigation services have
been completed and the necessary approvals obtained, the Company’s engineering
specialists develop plans and specifications for remedial cleanup
activities. This work includes development of methods and standard
operating procedures to assess contamination problems; and to identify, develop,
and design appropriate pollution-control schemes. Alternative cleanup
strategies are evaluated and conceptual engineering approaches are
formulated. The Company also provides supervision of actual cleanup
or remedial construction work performed by other contractors.
International
With
over
30 years’ experience providing the above-listed services on a worldwide level,
the Company now has partners in over 30 countries and has completed more than
35,000 major environmental assignments in over 83 countries worldwide. With
an
understanding of cultural, political, economic, operational, and legal factors
that influence the solution to a given environmental problem, EEI aids
international governments and lending institutions in their efforts to advance
institutional systems for environmental management. The Company has completed
assignments involving environmental assessment; management and financial
planning; institutional strengthening and standards development; water supply
and development; wastewater treatment; and solid waste project construction
supervision. More recently, issues of public health, sustainability,
and social and economic development have been added to that
portfolio.
Analytical
Laboratory Services
The
Company owns a facility in Lancaster, New York where its analytical testing
laboratory was located. The Company discontinued its analytical testing
operations during fiscal year 2005 and has recognized impairment losses of
$2.8
million under continuing operations. The Company is currently occupying
approximately one third of the laboratory space while it is marketed for sale.
See Item 2, Properties, Item 7, Management Discussion and Analysis, and
Note 18 in the Notes to Consolidated Financial Statements.
Aquaculture
The
Company owned an aquaculture shrimp facility (Frutas Marinas, S.A.) in the
province of Puntarenas on the Pacific coast of Costa Rica. The facility included
400 hectares of land of which 193 hectares was shrimp aquaculture ponds. The
Company discontinued the operation in July 2003 and recognized an impairment
loss in discontinued operations in fiscal year 2003. The remaining assets of
the
shrimp farm were classified as assets of discontinued operations held for sale.
The remaining assets were sold in January 2007 for $2.5 million in
cash. See Item 7, Management Discussion and Analysis.
The
Company also owns the assets of a fish farm located in Jordan. The farm is
located on the banks of the Jordan River 120 kilometers north of Amman. The
assets were purchased in July 2001 through a newly formed entity, American
Arab
Aquaculture Company (AMARACO), of which EEI owns 51%. AMARACO has invested
approximately $500,000 to upgrade the farm's infrastructure, production
methods, and species selection.
Segment
Reporting
The
Company has three reportable segments: consulting services, analytical
laboratory services, and aquaculture. Refer to the Company's financial
statements for fiscal year 2007 contained in Item 8 hereof for additional
pertinent information on the Company's segments.
Regulatory
Background
The
United States Congress and most State Legislatures have enacted a series of
laws
to prevent and correct environmental problems. These laws and their implementing
regulations help to create the demand for the multi-disciplinary consulting
services offered by the Company. The principal federal legislation and
corresponding regulatory programs which affect the Company's business are as
follows:
·
|
The
National Environmental Policy Act
("NEPA")
|
NEPA
generally requires that a detailed environmental impact statement ("EIS") be
prepared for every major federal action significantly affecting the quality
of
the human environment. With limited exceptions, all federal agencies are subject
to NEPA. Most states have EIS requirements similar to NEPA. The Company
frequently engages in NEPA related projects (or state equivalent) for both
public and private clients.
·
|
The
Comprehensive Environmental Response, Compensation, And Liability
Act Of
1980, As Amended ("CERCLA", "Superfund" or the "Superfund
Act")
|
CERCLA
is
a remedial statute which generally authorizes the Federal government to order
responsible parties to study and clean up inactive hazardous substance disposal
sites, or, to itself undertake and fund such activities. This legislation has
four basic provisions: (i) creation of an information gathering and analysis
program; (ii) grant of federal authority to respond to emergencies associated
with contamination by hazardous substances, and to clean up sites contaminated
with hazardous substances; (iii) imposition of joint, several, and strict
liability on persons connected with the treatment or disposal of hazardous
substances which results in a release or threatened release into the
environment; and (iv) creation of a Federally managed trust fund to pay for
the
clean up and restoration of sites contaminated with hazardous substances when
voluntary clean-up by responsible parties cannot be accomplished.
·
|
The
Resource Conservation And Recovery Act Of 1976
("RCRA")
|
RCRA
generally provides "cradle to grave" coverage of hazardous wastes. It seeks
to
achieve this goal by imposing performance, testing and record keeping
requirements on persons who generate, transport, treat, store, or dispose of
hazardous wastes. The Company assists hazardous waste generators in the storage,
transportation and disposal of wastes; prepares permit applications and
engineering designs for treatment, storage and disposal facilities; designs
and
oversees underground storage tank installations and removals; performs
corrective measure studies and remedial oversight at RCRA regulated facilities;
and performs RCRA compliance audits.
·
|
Toxic
Substance Control Act Of 1976
("TSCA")
|
TSCA
authorizes the EPA to gather information on the risks posed to public health
and
the environment by chemicals and to regulate the manufacturing, use and disposal
of chemical substances. The 1986 amendments to TSCA and its implementing
regulations require school systems to inspect their buildings for asbestos,
determine where asbestos containing materials pose hazards to humans and abate
those hazards. Regarding PCBs specifically, amendments to TSCA regulations
dated
December 21, 1989 established comprehensive record keeping requirements for
persons engaged in PCB transportation, storage and disposal activities.
Amendments added regulatory provisions authorizing certain uses of PCBs;
specifying additional alternatives for the cleanup and disposal of PCBs;
establishing procedures for determining PCB concentration; establishing
standards and procedures for decontamination; and updating several marking,
record keeping, and reporting requirements. The Company's principal work under
TSCA involves field sampling, site reconnaissance, development of remedial
programs and supervision of construction activities at sites involving PCB
contamination.
In
1990,
comprehensive changes were made to the Clean Air Act which fundamentally
redefined the regulation of air pollutants. The Clean Air Act Amendments of
1990
created a flurry of federal and state regulatory initiatives and industry
responses which require the development of detailed inventories and risk
management plans, as well as the acquisition of facility wide, rather than
source
specific,
air permits. Complementary changes have also been integrated into the RCRA
Boilers and Industrial Furnace ("BIF") regulatory programs calling for upgraded
air emission controls, more rigorous permit conditions and the acquisition
of
permits and/or significant permit modifications. The Company assists public
and
private clients in the development of air permitting strategies and the
preparation of permit applications. EEI also prepares the technical studies
and
engineering documents (e.g., air modeling, risk analysis, design drawings)
necessary to support permit applications.
·
|
Safe
Drinking Water And Clean Water Acts
("SDWA")
|
The
SDWA
of 1996 and regulatory changes under the Clean Water Act (CWA) work together
in
order to ensure that the public is provided with safe drinking and recreational
waters by utilizing watershed approaches and applying similar principles (Total
Maximum Daily Load, National Pollution Discharge Elimination System, Source
Water Assessment Program, Storm Water Program). Thus, they supplement and help
one another more effectively reach each other's goals. The Company assists
public and private clients in developing and establishing pollution prevention
programs, assisting clients in monitoring ground, waste and stormwater systems,
and helping clients with water permitting and compliance issues.
The
Company's operations are also influenced by other federal, state, and
international laws and regulations protecting the environment. In the U.S.
market, other regulatory rules and provisions that influence Company operations,
in addition to those discussed above, are the Atomic Energy Act (AEA), and
the
Oil Pollution Control Act (OPA). Examples of services provided by the Company
as
a result of these laws include the development of spill prevention control
and
emergency prevention procedures, as well as countermeasure plans for various
facilities potentially affecting human health and the environment. Related
laws
such as the Occupational Safety and Health Act, which regulates exposures of
employees to toxic chemicals and other physical agents in the workplace, also
have a significant impact on EEI operations. An example is the process safety
regulation issued by the Occupational Safety and Health Administration ("OSHA")
which requires safety and hazard analysis and accidental release contingency
planning activity to be performed if certain chemicals are used in the work
place.
Internationally,
since many overseas markets remain "undeveloped" when compared with that of
the
United States and other Western countries, the Company's expanding operations
in
these markets are primarily influenced by environmental laws focusing on
infrastructure, development, and planning related activities.
Potential
Liability and Insurance
The
Company's contracts generally require it to maintain certain insurance coverages
and to indemnify its clients for claims, damages or losses for personal injury
or property damage relating to the Company's performance of its duties unless
such injury or damage is the result of the client's negligence or willful acts.
Currently, the Company is able to provide insurance coverage to meet the
requirements of its contracts, however, certain pollution exclusions apply.
Historically, the Company has been able to purchase an errors and omissions
insurance policy that covers its environmental consulting services, including
legal liability for pollution conditions resulting therefrom. The policy is
a
claims made policy, with limits of $10.0 million for each claim and $10.0
million in the aggregate with a $500,000 deductible. The Company's general
liability insurance policy provides coverage in the amount of $3.0 million
per
occurrence and $3.0 million in the aggregate; an excess liability policy of
$10.0 million is also maintained with respect to its general liability coverage.
Where possible, the Company requires that its clients cross-indemnify it for
asserted claims. There can be no assurance, however, that any such agreement,
together with the Company's general liability insurance and errors and omissions
coverage will be sufficient to protect the Company against any asserted
claim.
Market
and Customers
The
Company's revenues originate from federal, state and local governments, domestic
private clients, and private and governmental international
clients.
The
Company's worldwide marketing efforts are conducted by its marketing group
located at its headquarters, its regional offices, and its international
subsidiaries. EEI markets its services to existing and potential governmental,
industrial and engineering clients. The
Company
closely monitors government contract procurements and responds to requests
for
proposals requiring services provided by the Company. The marketing group also
monitors government regulation and other events that may generate new business
by requiring governments and industrial firms to respond to new regulatory
actions. The marketing group is supported by EEI's technical staff which is
responsible for preparing technical proposals that are customarily delivered
with the Company's bid for a project. The Company participates in industrial
trade shows and professional seminars relating to its business.
Backlog
The
Company's firm backlog of uncompleted projects and maximum potential revenues
from indefinite task order contracts, at July 31, 2007 and 2006 were as
follows:
|
|
(Millions
of $)
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
|
|
|
|
|
|
Total
firm backlog
|
|
$
|
53.4
|
|
|
$
|
48.3
|
|
Anticipated
completion of firm backlog in next twelve months
|
|
|
28.5
|
|
|
|
24.1
|
|
Maximum
potential gross revenues from task order contracts
|
|
|
169.4
|
|
|
|
136.0
|
|
This
backlog includes a substantial amount of work to be performed under contracts
which contain termination provisions under which the contract can be terminated
without penalty upon written notice to the Company. The likelihood of obtaining
the full value of the task order contracts cannot be determined at this
time.
Competition
EEI
is
subject to competition with respect to each of the services that it provides.
No
entity, including the Company, currently dominates the environmental services
industry and the Company does not believe that one organization has the
capability to serve the entire market. Some of its competitors are larger and
have greater financial resources than the Company while others may be more
specialized in certain areas. EEI competes primarily on the basis of its
reputation, quality of service, expertise, and price.
Employees
As
of
July 31, 2007, the Company, including subsidiaries, had approximately 870
employees. The majority of the employees hold bachelor's degrees and/or advanced
degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural
and transportation engineering, biology, geology, hydrogeology, ecology, urban
and regional planning and oceanography. The Company's ability to remain
competitive will depend largely upon its ability to recruit and retain qualified
personnel. None of the Company's employees are represented by a labor
organization and employee relations are good.
Corporate
Governance/American Stock Exchange Rules
The
Company’s shares of Class A Common Stock are listed on the AMEX. AMEX has
required all of its listing companies to certify that they comply with the
AMEX’s corporate governance rules (CG Rules). The Company has certified to the
AMEX that it is in compliance with CG Rules except for those CG Rules relating
to the composition of and adoption of a nominating committee and the composition
of the compensation committee relating to the Company’s Board of Directors. For
these items, the Company has relied upon the “controlled company” exception
found in the AMEX CG Rules. A “controlled company” is a listing company where
more than 50 percent of the voting power of the listing company is in the
control of a group. The Company believes that a group, consisting of Messrs.
Neumaier, Silvestro, Frank and Strobel and members of their families, now holds
more than 50 percent of the voting power of the Company and that, therefore,
the
Company is a “controlled company” for purposes of the AMEX CG
Rules.
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer and
controller, as well as all other employees and the directors of the Company.
The
code of ethics, which the Company calls its Code of Business Conduct and Ethics,
is posted on the Company’s website at www.ene.com, as well as on the Company’s
internal website which is available to all Company employees. If the Company
makes any substantive amendments to, or grants a waiver (including an implicit
waiver) from, a provision of its code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer
or
controller, and that relates to any element of the code of ethics definition
enumerated in Item 406(b) of Regulation S-K, the Company will disclose the
nature of such amendment or waiver in a current report on Form 8-K.
In
addition to other information referenced in this report, the Company is subject
to a number of specific risks outlined below. If any of these events occur,
the
Company's business, financial condition, profitability and the market price
of
its Class A Common Stock could be materially affected.
Changes
in environmental laws and
regulations could reduce demand for the Company’s services
.
Most
of
the Company’s business is driven by laws and regulations related to the
protection of the environment. Any relaxation or repeal of these laws, or
changes in governmental policies regarding the funding or enforcement of these
laws, would have an adverse impact on the Company’s revenues. Also, reduced
spending by governments may increase competition within our industry which
may
directly affect future revenue and profits.
As
a
government contractor, the Company is subject to a number of procurement laws
and regulations, as well as government agency audits. Any violation of these
laws could result in economic harm to the Company’s operations
.
The
Company must comply with federal, state, and foreign laws relating to the
procurement and administration of government contracts. Such laws include
the FAR, the Truth in Negotiations Act (TINA), the Cost Accounting Standards
(CAS), and the Service Contract Act (SCA). These laws impact how the Company
does business with government clients and can increase the cost of doing
business. Government agencies such as the Environmental Protection Agency Office
of Inspector General, as well as numerous state agencies routinely audit
government contractors and their performance under specific contracts to
determine if a contractor’s cost structure is compliant with applicable laws and
regulations. They may question the incurrence of certain costs based on the
FAR
and CAS and disallow those costs on their contracts. These audits may
occur several years after payment for services has been received. Historically,
the Company has been able to successfully defend against the disallowance of
any
significant costs. However, there is no assurance that future audits will not
result in the material disallowances for costs incurred in the future. Such
material disallowances could negatively affect revenue, profits and cash
flow.
The
Company depends on federal, state and foreign government work for a significant
portion of its revenues. The Company’s inability to win or renew government
contracts during procurement cycles could significantly reduce Company
profits
.
Revenues
from all government contracts (federal, state and municipal)
represented approximately 50% of total revenues for fiscal years 2005
through 2007. Consequently, an inability to win or renew government contracts
would adversely affect operations and significantly reduce profits. Government
contracts are typically awarded through a highly regulated procurement
process. In addition, some government contracts are awarded to multiple
competitors, causing increased competition and downward pricing pressure. This
may lead to increased pressure to control costs. If the Company cannot reduce
or
control costs on these contracts, losses may occur.
The
Company must be able to accurately estimate and control contract costs to
prevent losses on contracts
.
The
Company must control direct contract costs in order to maintain positive profit
margins. There are three basic types of contracts with the Company’s clients:
cost plus, fixed price, and time and materials. Under cost plus contracts,
which
may be subject to various types of ceilings, the Company is reimbursed for
allowable costs plus a negotiated profit. If costs exceed ceilings or are
otherwise deemed unallowable under provisions of the contract or regulations,
the Company will not be reimbursed for all of its costs. Under fixed price
contracts, the Company is paid a fixed price regardless of the actual costs
incurred. Consequently, a profit is realized on fixed price contracts only
if
the Company is able to control costs and avoid overruns. Under time and material
contracts, the Company is paid for its direct labor hours at fixed rates plus
reimbursement of allocable other direct costs. Profitability on contracts is
dependant on a consistently high utilization of staff and the Company’s ability
to control its overhead costs.
A
failure to attract and retain key employees could impair the Company’s ability
to provide quality service to clients
.
The
Company provides professional and technical services and is dependant on its
ability to attract, retain and train its professional employees to conduct
its
business and perform its obligations to insure success. It may be difficult
to
attract and retain qualified expertise within timeframes demanded by clients.
Senior managements’ experience is essential to the success of any company and
our ability to retain such talent is crucial to the profitability of the
Company. Further, the loss of key management personnel could adversely affect
the Company's ability to develop and pursue its business
strategies.
Actual
results could differ from the estimates and assumptions used to prepare
financial statements, which may reduce or eliminate
profits
.
To
prepare financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions as of
the
date of the financial statements, which affect the reported values of assets
and
liabilities and revenues and expenses and disclosures of contingent assets
and
liabilities. Areas requiring significant estimates by management
include:
- the
application of the percentage of completion method of accounting and revenue
recognition on contracts
- provisions
for uncollectible receivables and contract reserves
- provisions
for income taxes and related valuation reserves
- accruals
for estimated liabilities, including litigation reserves
The
use of percentage of completion method of accounting could result in a reduction
or reversal of previously recorded revenues and profits
.
A portion
of the Company’s revenues and profits are measured and recognized using the
percentage of completion method of accounting which is discussed further in
Note
2 of the Consolidated Financial Statements. The use of this method results
in
the recognition of revenues and profits ratably over the life of a contract.
The
effect of revisions to revenues and estimated costs is recorded when the amounts
are known or can be reasonably estimated. Such revisions could occur in any
period and their effects could be material. Although the Company has
historically been able to make reasonably accurate estimates of work progress,
the uncertainties inherent in the estimating process make it possible for actual
costs to vary from estimates in a material amount, including reductions or
reversals of previously recorded revenues and profits.
International
operations are subject to a number of risks
.
The
Company has operations in more than 30 countries around the world and has
derived approximately 19%, 16% and 26% of revenue from international operations
for the fiscal years 2007, 2006 and 2005, respectively. International operations
are subject to a number of risks, including:
- greater
risk of uncollectible accounts and longer collection cycles;
- currency
fluctuations;
- logistical
and communication challenges;
- exposure
to liability under the Foreign Corrupt Practices Act;
- lack
of developed legal systems to enforce contractual rights;
- general
economic and political conditions in foreign markets;
- civil
disturbance, unrest or violence;
- general
difficulties in staffing international operations with highly professional
personnel.
These
and
other risks associated with international operations could harm our overall
operations and significantly reduce our future revenues.
Failure
to complete a project timely or failure to meet a required performance standard
on a project could cause the Company to incur a loss which may affect overall
profitability
.
Completion
dates and performance standards may be important requirements to a client on
a
given project. If the Company is unable to complete a project within specified
deadlines or fails to meet performance criteria set forth by a client,
additional costs may be incurred by the Company or the client may hold the
Company responsible for costs they incur to rectify the problem. The uncertainty
involved in the timing of certain projects could also negatively affect the
Company’s staff utilization, causing a drop in efficiency and reduced
profits.
The
Company's services could expose it to significant liability not covered by
insurance
.
The
services provided by the Company expose it to significant risks of professional
and other liabilities. In addition, the Company sometimes assumes liability
by
contract under indemnification provisions. We are unable to predict the total
amount of such potential liabilities. The Company has obtained insurance to
cover potential risks and liabilities. However, insurance may be inadequate
or
unavailable in the future to protect the Company for such liabilities and
risks.
Management's
voting rights could block or discourage a change in control
.
The
current senior officers of the Company own in excess of 70% of the Class B
Common Stock which has one vote per share while the Class A Common Stock has
one-tenth of a vote per share. Therefore, current management could block a
change in control. This ability could adversely affect the value of the Class
A
Common Stock.