Item 1.
Financial Statements
We reduce
our accounts receivable and costs and accrued earnings in excess of billings on
contracts in process by establishing an allowance for amounts that, in the
future, may become uncollectible or unrealizable, respectively. We determine our
estimated allowance for uncollectible amounts based on management’s judgments
regarding our operating performance related to the adequacy of the services
performed, the status of change orders and claims, our experience settling
change orders and claims and the financial condition of our clients, which may
be dependent on the type of client and current economic conditions that the
client may be subject to.
Change
orders can occur when changes in scope are made after project work has begun,
and can be initiated by either the Company or its clients. Claims are amounts in
excess of the agreed contract price which the Company seeks to recover from a
client for customer delays and / or errors or unapproved change orders that are
in dispute. Costs related to change orders and claims are recognized as
incurred. Revenues are recognized on change orders (including profit) when it is
probable
that the change order will be approved and the amount can be reasonably
estimated. Revenue on claims is not recognized until the claim is approved by
the customer.
All bid
and proposal and other pre-contract costs are expensed as incurred. Out of
pocket expenses such as travel, meals, field supplies, and other costs billed
direct to contracts are included in both revenues and cost of professional
services.
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 2007-2008.
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.
Income
tax expense includes U.S. and international income taxes, determined using an
estimate of the Company’s annual effective tax rate. A deferred tax
liability is recognized for all taxable temporary differences, and a deferred
tax asset is recognized for all deductible temporary differences and net
operating loss carryforwards.
The
Company has significant deferred tax assets, resulting principally from contract
reserves, fixed assets and domestic net operating loss carryforwards
(“NOLs”). As required by FAS 109, “Accounting for Income Taxes” the
Company periodically evaluates the likelihood of realization of deferred tax
assets, and has determined that no valuation allowance is presently
necessary.
In July
of 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48 (FIN 48), an interpretation of FAS 109. FIN 48 clarifies the
accounting for uncertainty in income taxes and reduces the diversity in current
practice associated with the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return by defining a
“more-likely-than-not” threshold regarding the sustainability of the
position. The Company adopted FIN 48 beginning August 1,
2007. See Footnote No. 12.
|
f.
|
Earnings
Per Share (EPS)
|
Basic EPS
is computed by dividing continuing and discontinued operating 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.
8.
g.
|
Impairment
of Long-Lived Assets
|
The
Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be recoverable.
The Company assesses recoverability of the carrying value of the asset by
estimating the future net cash flows (undiscounted) expected to result from the
asset, including eventual disposition. If the future net cash flows are less
than the carrying value of the asset, an impairment loss is recorded equal to
the difference between the asset's carrying value and fair
value.
h.
|
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 was approximately $85,000 and
$67,000 for the first six months of fiscal year 2008 and 2007, respectively.
Cash paid for income taxes was approximately $924,000 and $1.3 million
for the first six months of fiscal year 2008 and 2007, respectively.
Additionally in the first quarter of fiscal year 2008, Gustavson Associates LLC
purchased from minority unit holder, Prospect Resources, their remaining 50
ownership units. Prospect was paid $466,708 for its units with 25% of
the amount paid in cash, and the assumption of a $350,000 three year
note with a six percent annualized interest rate.
During
the first quarter of fiscal year 2008, additional goodwill of $256,000 was
recorded as a result of the purchase of additional shares of Gustavson
Associates LLC. The total goodwill of approximately $1.1 million
is subject to an annual assessment for impairment.
2.
|
Contract
Receivables, net
|
|
|
January 26,
2008
|
|
|
July
31,
2007
|
|
|
|
|
|
|
|
|
United
States government -
|
|
|
|
|
|
|
Billed
|
|
$
|
2,866,026
|
|
|
$
|
2,905,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,136,381
|
|
|
|
7,101,019
|
|
|
|
|
|
|
|
|
|
|
Industrial
customers and state and municipal governments -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled
|
|
|
8,267,138
|
|
|
|
6,885,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for doubtful accounts and contract
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $30,000 at January 26,
2008 and $202,000 at July 31, 2007. Management anticipates that the
January 26, 2008 unbilled receivables will be substantially billed and collected
within one year. Within the above billed balances are contractual
retainages in the amount of approximately $279,000 at January 26, 2008 and
$409,000 at July 31, 2007. Management anticipates that the January 26, 2008
retainage balance will be substantially collected within one year. Included
in the balance of receivables for industrial customers and state and municipal
customers are receivables, net of subcontract costs, due under the contracts in
Saudi Arabia and Kuwait of $6.2 million at January 26, 2008 and July 31,
2007.
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 $4.0 million and $3.9 million
at January 26, 2008 and July 31, 2007, respectively. Also included in other
accrued liabilities is a reclassification of billings in excess of recognized
revenues of approximately $3.0 million at January 26, 2008 and $4.0 million at
July 31, 2007. An allowance for contract adjustments is recorded for contract
disputes and government audits when the amounts are estimatable.
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 is available at another bank for up to $13.5
million exclusively for letters of credit and is renewed annually. There were
two additional lines of credit established during fiscal year 2007. The Company
established one for up to $5.0 million exclusively for letters of credit. An
additional line of credit was established at Walsh Environmental for up to
$750,000 exclusively for working capital and letters of credit. At January 26,
2008 and July 31, 2007, the Company had letters of credit outstanding totaling
approximately $1.2 million and $1.3 million, respectively. After
letters of credit, there are no outstanding borrowings under the lines of credit
and there is $38.0 million of line still available at January 26, 2008. The
Company had no outstanding borrowings for working capital at January 26, 2008
and July 31, 2007.
The
Company is in compliance with all bank loan covenants at January 26,
2008.
4.
|
Long-Term
Debt and Capital Lease
Obligations
|
Debt
inclusive of capital lease obligations at January 26, 2008 and July 31, 2007
consists of the following:
|
|
January
26, 2008
|
|
|
July
31,
2007
|
|
|
|
|
|
|
|
|
Various
bank loans and advances at interest rates ranging from 5% to
14%
|
|
|
|
|
|
|
|
|
Capital
lease obligations at varying interest rates averaging 11%
|
|
|
178,687
|
|
|
|
241,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current
portion of debt and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations
|
|
|
|
|
|
|
|
|
The
aggregate maturities of long-term debt and capital lease obligations at January
26, 2008 are as follows:
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Feb
2009 – Jan 2010
|
|
|
248,836
|
|
|
|
|
|
|
Feb
2011 – Jan 2012
|
|
|
36,191
|
|
|
|
|
|
|
Thereafter
|
|
|
45,334
|
|
|
|
|
|
|
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 41,094 shares valued at $495,183 in October 2007 pursuant to
the Award Plan. These awards issued have a three year vesting
period. The "pool" of excess tax benefits accumulated in Capital in
Excess of Par Value at January 26, 2008 and July 31, 2007 was approximately
$122,000 and $88,000, respectively. Total gross compensation expense
is recognized over the vesting period. Unrecognized compensation expense
recorded against capital in excess of par value was approximately $674,000 and
$349,000 at January 26, 2008 and July 31, 2007, respectively.
Class
A and Class B common stock
The
relative rights, preferences and limitations of the Company's Class A and Class
B common stock can be summarized as follows: Holders of Class A shares are
entitled to elect 25% of the Board of Directors so long as the number of
outstanding Class A shares is at least 10% of the combined total number of
outstanding Class A and Class B common shares. Holders of Class A common shares
have one-tenth the voting power of Class B common shares with respect to most
other matters.
In
addition, Class A shares are eligible to receive dividends in excess of (and not
less than) those paid to holders of Class B shares. Holders of Class B shares
have the option to convert at any time, each share of Class B common stock into
one share of Class A common stock. Upon sale or transfer, shares of Class B
common stock will automatically convert into an equal number of shares of Class
A common stock, except that sales or transfers of Class B common stock to an
existing holder of Class B common stock or to an immediate family member
will not cause such shares to automatically convert into Class A common
stock.
7.
|
Shareholders'
Equity - Restrictive
Agreement
|
Messrs.
Gerhard J. Neumaier, Frank B. Silvestro, Ronald L. Frank and Gerald A. Strobel
entered into a Stockholders' Agreement in 1970 which governs the sale of 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.
The
computation of basic earnings per share reconciled to diluted earnings per share
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
January
26,
2008
|
|
|
January
27,
2007
|
|
|
January
26,
2008
|
|
|
January
27,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations available to
common
stockholders
|
|
$
|
130,555
|
|
|
$
|
618,611
|
|
|
$
|
631,129
|
|
|
$
|
1,374,138
|
|
Income
from discontinued operations available
to common
stockholders
|
|
|
---
|
|
|
|
603,400
|
|
|
|
---
|
|
|
|
568,554
|
|
Total
income available to common stockholders
|
|
|
130,555
|
|
|
|
1,222,011
|
|
|
|
631,129
|
|
|
|
1,942,692
|
|
Weighted-average
common shares outstanding (basic)
|
|
|
4,164,570
|
|
|
|
4,216,466
|
|
|
|
4,164,570
|
|
|
|
4,217,672
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.03
|
|
|
$
|
.15
|
|
|
$
|
.15
|
|
|
$
|
.33
|
|
Discontinued
operations
|
|
|
---
|
|
|
|
.14
|
|
|
|
---
|
|
|
|
.13
|
|
Total
basic earnings per share
|
|
$
|
.03
|
|
|
$
|
.29
|
|
|
$
|
.15
|
|
|
$
|
.46
|
|
Incremental
shares from assumed conversions of
stock options and restricted
stock awards
|
|
|
36,792
|
|
|
|
39,899
|
|
|
|
56,728
|
|
|
|
39,302
|
|
Adjusted
weighted-average common shares outstanding
|
|
|
4,201,362
|
|
|
|
4,256,365
|
|
|
|
4,221,298
|
|
|
|
4,256,974
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
.03
|
|
|
$
|
.15
|
|
|
$
|
.15
|
|
|
$
|
.32
|
|
Discontinued
operations
|
|
|
---
|
|
|
|
.14
|
|
|
|
---
|
|
|
|
.13
|
|
Total
diluted earnings per share
|
|
$
|
.03
|
|
|
$
|
.29
|
|
|
$
|
.15
|
|
|
$
|
.45
|
|
After
consideration of all the rights and privileges of the Class A and Class B
stockholders discussed in Note 6, in particular the right of the holders of the
Class B common stock to elect no less than 75% of the Board of Directors making
it highly unlikely that the Company will pay a dividend on Class A common stock
in excess of Class B common stock, the Company allocates undistributed earnings
between the classes on a one-to-one basis when computing earnings per share. As
a result, basic and fully diluted earnings per Class A and Class B share are
equal amounts.
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 provided analytical testing services to industrial and governmental
clients for the analysis of waste, soil and sediment samples. The fish farm
located in Jordan produces tilapia fish grown in a controlled environment for
markets in the Middle East. The analytical laboratory was closed in fiscal year
2005.
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 26, 2008 are as follows
:
|
|
|
|
|
|
|
|
Aquaculture
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Analytical
|
|
|
Continued
|
|
|
Discontinued
|
|
|
Elimination
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss) before income taxes
and
minority interest
|
|
$
|
2,178,877
|
|
|
$
|
---
|
|
|
$
|
(17,085
|
)
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
2,161,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for long-lived assets
|
|
$
|
537,362
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
537,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Countries
|
|
|
9,501,000
|
|
|
|
2,361,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Revenue
is attributed to countries based on the location of the customers.
Reportable segments for
the six months ended January 27, 2007 are as follows
:
|
|
|
|
|
|
|
|
Aquaculture
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Analytical
|
|
|
Continued
|
|
|
Discontinued
|
|
|
Elimination
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss) before income taxes
and
minority interest
|
|
$
|
3,311,178
|
|
|
$
|
---
|
|
|
$
|
(19,081
|
)
|
|
$
|
985,797
|
|
|
$
|
---
|
|
|
$
|
4,277,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for long-lived assets
|
|
|
580,594
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
580,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information:
|
|
|
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Foreign
Countries
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8,728,000
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1,899,000
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(1) Revenue
is attributed to countries based on the location of the customers.
10.
|
Commitments
and Contingencies
|
From time
to time, the Company is named defendant in legal actions arising out of the
normal course of business. The Company is not a party to any pending legal
proceeding the resolution of which the management of the Company believes will
have a material adverse effect on the Company’s results of operations, financial
condition, cash flows, or to any other pending legal proceedings other than
ordinary, routine litigation incidental to its business. The Company maintains
liability insurance against risks arising out of the normal course of
business.
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.
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.
11.
|
Recent
Accounting Pronouncements
|
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurement” (FAS
157), which established a framework for measuring fair value under generally
accepted accounting principles and expands disclosure about fair value
measurements. FAS 157 is effective for financial statements issued
with fiscal years beginning after November 15, 2007. The Company is
assessing the impact that the adoption of FAS 157 may have on its financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (FAS 159). The fair value option
established by FAS 159 permits entities to choose to measure eligible items at
fair value at specified election dates. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. FAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The
Company is assessing the impact that the adoption of FAS 159 may have on
its financial statements.
In
December 2007, the FASB issued SFAS No. 160
,
"Noncontrolling Interests
in Consolidated Financial Statements - An amendment of ARB No. 51."
This statement amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the noncontrolling interest. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008 (that is, for the fiscal year ending July 31, 2010 for
the Company). Earlier adoption is prohibited. The Company is currently assessing
the effect SFAS No. 160 will have on its financial
statements.
12.
|
Adoption
of Accounting Principles – Accounting for Uncertainty in Income
Taxes
|
During
the first quarter of fiscal year 2008, the Company adopted the FASB
Interpretation No. 48 “Uncertainty in Income Taxes” (FIN 48). FIN 48
applies to all tax positions and clarifies the recognition of tax benefits in
the financial statements by providing a two-step approach to recognition and
measurement. The first step involves assessing whether the tax
position is more likely than not to be sustained upon examination based on the
technical merits. The second step involves measurement of the amount
to recognize. Tax positions that meet the more likely than not
threshold are measured at the largest amount of tax benefit greater than 50%
likely of being realized upon ultimate finalization with tax
authorities.
The
Company recorded a decrease to retained earnings as of August 1, 2007 of
$2,845,845 as a cumulative effect of a change in accounting principle for the
adoption of FIN 48 with corresponding increases to the liability for uncertain
tax positions of $2,744,396, the non-current deferred tax asset of $1,116,079,
and the liability for interest and penalties associated with uncertain tax
positions of $1,205,667. The Company also decreased the current deferred tax
assets of $67,869 and minority interest liability of $56,008. At
August 1, 2007, E & E had approximately $2,523,443 of gross
unrecognized tax benefits that if recognized, would favorably affect the
effective income tax rate in future periods. At January 26,
2008, the liability for uncertain tax positions and associated interest and
penalties are classified as noncurrent liabilities.
During
the three and six months ended January 26, 2008, the Company did
not recognize an additional liability with respect to the reassessment
of uncertain tax positions. However, the Company reclassified
$242,000 that was originally classified in error as income taxes payable to
accrued interest and penalties. For the three months ended
January 26, 2008, the Company recorded an additional liability for interest and
penalties associated with uncertain tax positions of
$146,000.
The
Company’s majority owned subsidiary, the Consortium of International Contracts
LLC (CIC) entered into three Environmental Services Agreements (ESA’s) with a
public authority of the State of Kuwait which were funded by the United Nations
Compensation Commission (UNCC). CIC’s work connected with the ESA’s
began in fiscal 2002 and extended into fiscal year 2007. The ESA’s
between the client, the Public Authority for Assessment of Compensation for
Damages Resulting from Iraqi Aggression (PAAC), and CIC were signed in January
of 2002. These ESAs contemplated the receipt of a tax exemption order
from Kuwait’s Ministry of Finance declaring that the income generated by CIC,
and in turn the Company, to the extent that the Company performed work for CIC
under the ESA’s would be exempt from Kuwait income tax. The ESAs also
provide that CIC would be entitled to be reimbursed by PAAC for Kuwait income
tax costs, if any, as finally determined. CIC was given written
notice in May 2002 by PAAC that the tax exemption order contemplated in the ESAs
had officially been granted by the Ministry of Finance and that CIC would not be
required to obtain a tax clearance certificate. In fiscal year 2007,
CIC received notification from PAAC that it should file Kuwait income tax
returns, notwithstanding the earlier May 2002 notification letter to the
contrary, with the Ministry of Finance in order to facilitate the closure and
final payments under the ESAs. Upon notification from PAAC in fiscal
year 2007, the Company evaluated their position under the related guidance of
FAS 5 “Accounting for Contingencies” and concluded a reasonable estimate could
not be identified. While the Company evaluated the likelihood of the
probability of success of its tax exempt status, a reasonable estimate of the
tax liability of the contracts could not be made due to the subjective nature of
the Kuwait tax system on foreign companies. In addition, the Company
considered, and still maintains that any additional tax liability would be
offset by an obligation for reimbursement from its client PAAC for any income
taxes, penalties and interest.
Under the
new guidance for uncertain tax positions, the Company does not believe that the
tax exempt order claimed by PAAC to have been received, will meet the more
likely than not threshold to obtain benefit, and has therefore accrued a
cumulative impact of adoption related to the Kuwait income taxes. The
Company has continued its assertion of a contractual obligation for
reimbursement from PAAC should any tax liability be agreed to with the Kuwait
Ministry of Finance, however the assessment of this reimbursement is not
permitted under FIN 48. E & E’s management believes
that, given the ESA’s provisions, providing for reimbursement of any Kuwait
income taxes, this liability recorded for estimated income taxes in Kuwait, may
lead to volatility in the Company’s future reported earnings when the Company’s
actual exposure is settled.
The
Company files numerous consolidated and separate income tax returns in the U.S.
federal jurisdiction and in many state and foreign jurisdictions. The Company
has substantially concluded all U.S. federal income tax matters for years
through fiscal 2006. The Company’s tax matters for the fiscal years 2007 and
2008 remain subject to examination by the Internal Revenue Service. The
Company’s New York State tax matters have been concluded for years through
fiscal 2005. The Company’s tax matters in other material jurisdictions remain
subject to examination by the respective state, local, and foreign tax
jurisdiction authorities. No waivers have been executed that would extend the
period subject to examination beyond the period prescribed by
statute.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in administrative and indirect operating
expenses. For the three and six months ended January 26, 2008,
E & E incurred interest and penalties of approximately $146,000
and $253,000, respectively.
It is
reasonably possible that the liability associated with our unrecognized tax
benefits will increase or decrease within the next twelve months. These changes
will most likely be the result of the Kuwait tax matter described above. At this
time, an estimate of the range of the reasonably possible outcomes cannot be
made.
The
estimated effective tax rate for fiscal year 2008 is 28.8%, up from the 2.3%
reported for fiscal year 2007. This is due mainly to tax benefits
recognized on the write-off of the investment in Venezuela and a reduction in
the Company’s estimated tax liabilities as a result of the completion of audits
in fiscal year 2007.
13.
|
Other
Accrued Liabilities
|
|
|
January
26,
2008
|
|
|
July
31,
2007
|
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Allowance
for contract adjustments
|
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Billings
in excess of revenue
|
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|
3,047,435
|
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3,995,645
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Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity
and Capital Resources
Operating
activities provided $149,000 of cash during the first six months of fiscal year
2008.
Accounts payable
decreased $3.7 million during the first six months of fiscal year 2008
attributable to the payment of outstanding payables due to the strong cash
position of the Company and a decrease in subcontract costs within the parent
company. Accrued payroll costs decreased $728,000 during fiscal year
2008 mainly due to the payment of corporate bonuses to eligible employees
and the timing of the issuance of paychecks to parent company
employees. Other accrued liabilities decreased $1.2 million during
the first six months of fiscal year 2008 mainly due to a decrease in billings in
excess over revenue. Offsetting these were sources of cash from
contracts receivables, income taxes payable and minority
interest. Contracts receivable decreased $2.7 million and income
taxes payable increased $1.0 million during the first six months of fiscal year
2008.
The
Company purchased $537,000 of new capital equipment compared to depreciation
charges of $727,000 during the first six months of fiscal year
2008.
Financing
activities consumed $1.5 million of cash during the first six months of fiscal
year 2008. The Company paid dividends in the amount of $769,000 or
$.18 per share and $571,000 in distributions to minority partners during the
first six month of fiscal year 2008.
Long-term debt and
capital lease obligations decreased $209,000 mainly due to repayment of loans
and capital leases held by the Walsh Environmental subsidiary, Walsh
Peru.
The
Company maintains an unsecured line of credit of $20.0 million with a bank at ½%
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. There were two additional lines of credit established during
fiscal year 2007, The Company established one for up to $5.0 million exclusively
for letters of credit. Another line of credit was established at Walsh
Environmental for up to $750,000 exclusively for working capital and letters of
credit. The Company has outstanding letters of credit (LOC’s) at
January 26, 2008 in the amount of $1.2 million. These LOC’s were
obtained to secure advance payments and performance guarantees, primarily for
contracts in the Middle East. After LOC’s, there are no outstanding
borrowings under the lines of credit and there is $38.0 million of line still
available at January 26, 2008. There are no significant additional
working capital requirements pending at January 26, 2008. 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.
Results
of Operations
Revenue
Fiscal
Year 2008 vs 2007
Revenues
for the second quarter of fiscal year 2008 were consistent with the revenues
reported for the prior year. Revenues from the Company’s majority
owned subsidiary Walsh Environmental were $6.5 million for the second quarter of
fiscal year 2008, an increase of $1.0 million from the $5.5 million reported in
the second quarter of fiscal year 2007. The increase in Walsh
Environmental revenues was mainly attributable to increased activity in the
environmental remediation and asbestos markets. Revenues from state
clients of the parent company were $6.2 million, up $800,000 from the $5.4
million reported in the prior year. The increase in state revenue was
mainly attributable to an increase in work levels on contracts in Florida and
Washington. Offsetting these increases were decreases in work at the
parent company in the commercial and federal government
sectors. Revenue from commercial clients of the parent company was
$3.6 million during the second quarter of fiscal year 2008, a decrease $1.0
million from the $4.6 million reported in the prior year. Revenue
from federal government clients was $3.9 million during the second quarter of
fiscal year 2008, a decrease $700,000 from the $4.6 million reported in the
prior year. The decrease in federal government revenue was mainly due
to decreased activity on United States Department of Defense
contracts.
Revenue
for the six months of fiscal year 2008 was $49.8 million, an increase of $1.5
million from the $48.3 million reported in the first six months of the prior
year. The increase was mainly attributable to increases in work
performed by state clients at the parent company and by EEI’s majority owned
subsidiaries Walsh Environmental and E&E do Brasil. Revenues from
state clients of the parent company were $12.7 million, up $2.1 million from the
$10.6 million reported in the prior year. The increase in state
revenue was mainly attributable to an increase in work levels on contracts in
New York and Washington. Revenues from Walsh Environmental were $13.2
million for the first six months of fiscal year 2008, an increase of 19% from
the $11.1 million reported in the first six months of fiscal year
2007. The increase in Walsh Environmental revenues was mainly
attributable to increased activity in the environmental remediation and asbestos
markets. Revenues from E&E do Brasil were $3.2 million for the
first six months of fiscal year 2008, an increase of $1.1 million or 52% over
the prior year due mainly to increased work in the public and private power
industries. Offsetting these increases for the first six months of
fiscal year 2008 were reduced revenues in the parent company from work performed
on contracts with various commercial and federal government
clients. Revenue from commercial clients of the parent company were
$7.8 million during the first six months of fiscal year 2008, a decrease $2.2
million from the $10.0 million reported in the prior year. Revenue
from federal government clients of the parent company were $7.5 million during
the first six months of fiscal year 2008, a decrease $1.1 million from the $8.6
million reported in the first six month of fiscal year 2007.
Fiscal
Year 2007 vs 2006
The
Company had a solid second quarter of fiscal year 2007 as it reported net
revenues of $24.1 million, consistent with the $24.0 million reported in the
second quarter of fiscal year 2006. Revenues were held steady despite
the strong comparables in the prior year which included $4.1 million of
hurricane work in the Gulf Coast, $.9 million of work on the Region 9 START
contract which ended in fiscal year 2006 and $.8 million of work on the
Company’s contract in Kuwait as it neared completion. Although the
relief efforts on hurricane Katrina and Rita are complete, the Company continues
to work in the Gulf Coast Region on projects to restore the wetlands that were
damaged by the hurricanes. Walsh Environmental reported revenues of
$5.5 million during the second quarter of fiscal year 2007, up 34% from the $4.1
million reported in the prior year as a result of higher revenues from its
energy, mining and transportation sectors. During the second quarter
of fiscal year 2007, revenues from state clients increased $616,000 from the
$4.8 million reported during the second quarter of the prior
year. The increase in state revenues was mainly attributable to
increased work levels on contracts in New York and Illinois.
The
Company reported revenue of $48.3 million for the first six months of fiscal
year 2007, an increase of $700,000 from the $47.6 million reported in the prior
year. Work performed on the contracts associated with the relief
efforts of hurricanes Katrina and Rita decreased $5.0 million during the first
six months of fiscal year 2007. Work performed on the Company’s
contracts in Kuwait decreased $1.5 or 68% from the prior year. At the
end of the second quarter of fiscal year 2007, the contracts in Kuwait are
substantially complete. An additional decrease of $1.1 million in
fiscal year 2007 is attributable to the completion of the Region 9 START
contract in fiscal year 2006. Offsetting these decreases, Walsh
Environmental reported revenue of $11.1 million for the first six months of
fiscal year 2007, up 32% from the $8.4 million reported in the prior year as a
result of higher revenues from its energy, mining and transportation
sectors. E&E do Brasil reported revenue of $2.1 million for the
first six months of fiscal year 2007, up 62% from the $1.3 million reported in
the prior year due to energy related projects. The Company reported
an increase of $3.0 million in other government work, mainly due to increased
activity on United States Department of Defense contracts.
Income From Continuing
Operations Before Income Taxes and Minority Interest
Fiscal
Year 2008 vs 2007
The
Company’s income from continuing operations before income taxes and minority
interest was $652,000 for the second quarter of fiscal year 2008, down 57% from
the $1.5 million reported in the second quarter of fiscal year
2007. Gross profits increased slightly during the second quarter of
fiscal year 2008 as a result of the increased revenue reported at Walsh
Environmental and a decrease in corporate wide subcontractor
costs. The increased gross profits were offset by higher indirect
costs at the Company’s subsidiaries Walsh Environmental and E&E do Brasil as
well as increased staffing levels and business development and proposal costs
worldwide within the parent company. Contract bookings for the first
six months of fiscal year 2008 have increased 14% over the prior
year. Staff levels companywide have increased as a result of
anticipated manpower needs for the remainder of the fiscal year. The
volume of proposals has increased 51% while the value of the proposals submitted
increased 83% to $172 million compared to $94 million in the prior
year. Walsh Environmental reported indirect costs of $2.6 million for
the second quarter of fiscal year 2008, an increase of $800,000 from the $1.8
million reported in the prior year. The increase in indirect costs
was attributable to increased staffing levels and increased operational expenses
related to their overall business growth. For the three months ended
January 26, 2008, E&E accrued additional interest and penalties of
approximately $146,000 ($.03 per share) related to the FIN 48 tax
accrual. The majority of this expense is related to the Kuwait
taxes. In the second quarter of fiscal year 2007, the Company sold
its interest in the shrimp farm located in Costa Rica. After
deducting costs of the sale, there was an after tax gain recorded on the sale of
the farm of approximately $553,000 or $.13 per share and is included in
discontinued operations.
The
Company’s income from continuing operations before income taxes and minority
interest was $1.9 million for the first six months of fiscal year 2008, down 39%
from the $3.1 million reported in the first six months of fiscal year
2007. Gross profits increased as a result of the increased revenues
reported at Walsh Environmental and E & E do Brasil and a decrease
in corporate wide subcontractor costs. The increased gross profits
were offset by higher indirect costs during the first six months of fiscal year
2008. Consolidated indirect costs increased $2.4 million during the
first six months of fiscal year 2008 as a result of an increase in marketing and
bid and proposal costs and costs associated with increased staffing levels at
Walsh Environmental and E&E do Brasil.
Marketing and bid and
proposal costs were $5.7 million for the first six months of fiscal year 2008,
an increase of $801,000 from the $4.9 million reported in the prior
year. The Company continues to increase business development costs
worldwide to capitalize on the global demands for energy and environmental
infrastructure improvements. These expenditures should result in
increased contract bookings and revenues in future periods. For the
six months ended January 26, 2008, E&E accrued additional interest and
penalties of approximately $253,000 ($.04 per share) related to the FIN 48 tax
accrual. The majority of this FIN 48 obligation is related to the Kuwait
taxes.
Fiscal
Year 2007 vs 2006
The
Company’s income from continuing operations before income taxes and minority
interest was $1.5 million for the second quarter of fiscal year 2007, up 15%
from the $1.3 million reported in the second quarter of fiscal year
2006. Gross margins increased in fiscal year 2007 due to higher
margin work and increased revenues from the Walsh Environmental
subsidiary. The increase in gross margins was offset by an overall
increase in indirect, administrative, marketing and proposal costs throughout
the Company. Administrative and indirect operating expenses were $6.5
million during the second quarter of fiscal year 2007, up from the $6.0 million
reported during the prior year. Marketing and proposal costs were
$2.4 million during the fiscal year 2007, an increase of 14% from the $2.1
million reported during the second quarter of fiscal year 2006. The
increase in indirect costs was attributable to increased proposal work brought
about by significant opportunities in the energy sector relating to alternative
energy and clean technologies. The Company increased business
development costs worldwide to capitalize on global energy
opportunities. Interest income increased $63,000 from the $55,000
reported during the second quarter of fiscal year 2006, consistent with the
doubling of the Company’s cash balances.
On
January 9, 2007 the Company sold its interest in the shrimp farm in Costa Rica
to the Roozen Group for $2,500,000 in cash. The farm had been written down to a
carrying value of $1,500,000 as a result of the shutdown of the operation in
July 2003. After deducting costs of the sale, there was a pretax gain
recorded on the sale of the farm of approximately $960,000 which was included in
discontinued operations.
The
Company’s income from continuing operations before income taxes and minority
interest was $3.3 million for the first six months of fiscal year 2007, up 14 %
from the $2.9 million reported in fiscal year 2006. Gross margins
increased during fiscal year 2007 due to higher margin work and increased
revenues from the Walsh Environmental subsidiaries and E&E do
Brasil. The increase in gross margins was offset by higher indirect
costs incurred by the parent company. Administrative and indirect
operating expenses were $13.3 million during the first six months of fiscal year
2007, up from the $11.9 million reported during the prior
year. Marketing and proposal costs were $4.9 million during fiscal
year 2007, up from the $4.5 million reported during the first six months of
fiscal year 2006. The increase in indirect costs was mainly
attributable to a decrease in staff utilization for the parent company and
increased bid and proposal work brought about by significant opportunities in
the energy sector relating to alternative energy and clean
technologies. Interest income was $246,000 for the first six months
of fiscal year 2007, up 154% from the $97,000 reported during the prior
year. The increase in interest income is consistent with the
increased cash generated by the Company from the completion of major projects
and the sale of the shrimp farm.
Income
Taxes
During
the first quarter of fiscal year 2008, the Company adopted the FASB
Interpretation No. 48 “Uncertainty in Income Taxes” (FIN 48). FIN 48
applies to all tax positions and clarifies the recognition of tax benefits in
the financial statements by providing a two-step approach to recognition and
measurement. The first step involves assessing whether the tax
position is more likely than not to be sustained upon examination based on the
technical merits. The second step involves measurement of the amount
to recognize. Tax positions that meet the more likely than not
threshold are measured at the largest amount of tax benefit greater than 50%
likely of being realized upon ultimate finalization with tax
authorities.
The
Company recorded a decrease to retained earnings as of August 1, 2007 of
$2,845,845 as a cumulative effect of a change in accounting principle for the
adoption of FIN 48 with corresponding increases to the liability for uncertain
tax positions of $2,744,396, the non-current deferred tax asset of $1,116,079,
and the liability for interest and penalties associated with uncertain tax
positions of $1,205,667. The Company also decreased the current deferred tax
assets of $67,869 and minority interest liability of $56,008. At
August 1, 2007, E & E had approximately $2,523,443 of gross
unrecognized tax benefits that if recognized, would favorably affect the
effective income tax rate in future periods. At January 26, 2008, the
liability for uncertain tax positions and associated interest and penalties are
classified as noncurrent liabilities.
During
the three and six months ended January 26, 2008, the Company did
not recognize an additional liability with respect to the reassessment of
uncertain tax positions. However, the Company reclassified $242,000
that was originally classified in error as income taxes payable to
accrued interest and penalties. For the three months ended
January 26, 2008, the Company recorded an additional liability for interest and
penalties associated with uncertain tax positions of
$146,000.
The
Company’s majority owned subsidiary, the Consortium of International Contracts
LLC (CIC) entered into three Environmental Services Agreements (ESA’s) with a
public authority of the State of Kuwait which were funded by the United Nations
Compensation Commission (UNCC). CIC’s work connected with the ESA’s
began in fiscal 2002 and extended into fiscal year 2007. The ESA’s
between the client, the Public Authority for Assessment of Compensation for
Damages Resulting from Iraqi Aggression (PAAC), and CIC were signed in January
of 2002. These ESAs contemplated the receipt of a tax exemption order
from Kuwait’s Ministry of Finance declaring that the income generated by CIC,
and in turn the Company, to the extent that the Company performed work for CIC
under the ESA’s would be exempt from Kuwait income tax. The ESAs also
provide that CIC would be entitled to be reimbursed by PAAC for Kuwait income
tax costs, if any, as finally determined. CIC was given written
notice in May 2002 by PAAC that the tax exemption order contemplated in the ESAs
had officially been granted by the Ministry of Finance and that CIC would not be
required to obtain a tax clearance certificate. In fiscal year 2007,
CIC received notification from PAAC that it should file Kuwait income tax
returns, notwithstanding the earlier May 2002 notification letter to the
contrary, with the Ministry of Finance in order to facilitate the closure and
final payments under the ESAs. Upon notification from PAAC in fiscal
year 2007, the Company evaluated their position under the related guidance of
FAS 5 “Accounting for Contingencies” and concluded a reasonable estimate could
not be identified. While the Company evaluated the likelihood of the
probability of success of its tax exempt status, a reasonable estimate of the
tax liability of the contracts could not be made due to the subjective nature of
the Kuwait tax system on foreign companies. In addition, the Company
considered, and still maintains that any additional tax liability would be
offset by an obligation for reimbursement from its client PAAC for any income
taxes, penalties and interest.
Under the
new guidance for uncertain tax positions, the Company does not believe that the
tax exempt order claimed by PAAC to have been received, will meet the more
likely than not threshold to obtain benefit, and has therefore accrued a
cumulative impact of adoption related to the Kuwait income taxes. The
Company has continued its assertion of a contractual obligation for
reimbursement from PAAC should any tax liability be agreed to with the Kuwait
Ministry of Finance, however the assessment of this reimbursement is not
permitted under FIN 48. E & E’s management believes
that, given the ESA’s provisions, providing for reimbursement of any Kuwait
income taxes, this liability recorded for estimated income taxes in Kuwait, may
lead to volatility in the Company’s future reported earnings when the Company’s
actual exposure is settled.
The
Company files numerous consolidated and separate income tax returns in the U.S.
federal jurisdiction and in many state and foreign jurisdictions. The Company
has substantially concluded all U.S. federal income tax matters for years
through fiscal 2006. The Company’s tax matters for the fiscal years 2007 and
2008 remain subject to examination by the Internal Revenue Service. The
Company’s New York State tax matters have been concluded for years through
fiscal 2005. The Company’s tax matters in other material jurisdictions remain
subject to examination by the respective state, local, and foreign tax
jurisdiction authorities. No waivers have been executed that would extend the
period subject to examination beyond the period prescribed by
statute.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in administrative and indirect operating
expenses. For the three and six months ended January 26, 2008,
E & E incurred interest and penalties of approximately $146,000
and $253,000, respectively.
It is
reasonably possible that the liability associated with our unrecognized tax
benefits will increase or decrease within the next twelve months. These changes
will most likely be the result of the Kuwait tax matter described above. At this
time, an estimate of the range of the reasonably possible outcomes cannot be
made.
The
estimated effective tax rate for fiscal year 2008 is 28.8%, up from the 2.3%
reported for fiscal year 2007. This is due mainly to tax benefits
recognized on the write-off of the investment in Venezuela and a reduction in
the Company’s estimated tax liabilities as a result of the completion of audits
in fiscal year 2007.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurement” (FAS
157), which established a framework for measuring fair value under generally
accepted accounting principles and expands disclosure about fair value
measurements. FAS 157 is effective for financial statements issued
with fiscal years beginning after November 15, 2007. The Company is
assessing the impact that the adoption of FAS 157 may have on its financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (FAS 159). The fair value option
established by FAS 159 permits entities to choose to measure eligible items at
fair value at specified election dates. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. The Company is assessing the impact that the adoption
of FAS 159 may have on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements- An amendment of ARB No. 51."
This Statement amends ARB 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008 (that is, for the fiscal year ending July 31, 2010 for
the Company). Earlier adoption is prohibited. The Company is currently assessing
the effect SFAS No. 160 will have on its financial
statements.
Critical Accounting Policies
and Use of Estimates
Management's
discussion and analysis of financial condition and results of operations discuss
the Company's consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States 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, 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.
Revenue
recognition
The
Company’s revenues are derived primarily from the professional and technical
services performed by its employees or, in certain cases, by subcontractors
engaged to perform on under contracts we enter into with our clients. The
revenues recognized, therefore, are derived from our ability to charge clients
for those services under the contracts.
The
Company employs three major types of contracts: “cost-plus contracts,”
“fixed-price contracts” and “time-and-materials contracts.” Within each of the
major contract types are variations on the basic contract mechanism. Fixed-price
contracts generally present the highest level of financial and performance risk,
but often also provide the highest potential financial returns. Cost-plus
contracts present a lower risk, but generally provide lower returns and often
include more onerous terms and conditions. Time-and-materials contracts
generally represent the time spent by our professional staff at stated or
negotiated billing rates.
Fixed
price contracts are accounted for on the “percentage-of-completion” method,
wherein revenue is recognized as project progress occurs. Time and material
contracts are accounted for over the period of performance, in proportion to the
costs of performance, predominately based on labor hours incurred. If
an estimate of costs at completion on any contract indicates that a loss will be
incurred, the entire estimated loss is charged to operations in the period the
loss becomes evident.
The use
of the percentage of completion revenue recognition method requires the use of
estimates and judgment regarding the project’s expected revenues, costs and the
extent of progress towards completion. The Company has a history of making
reasonably dependable estimates of the extent of progress towards
completion, contract revenue and contract completion costs. However, due to
uncertainties inherent in the estimation process, it is possible that completion
costs may vary from estimates.
Most of
our percentage-of-completion projects follow a method which approximates the
“cost-to-cost” method of determining the percentage of completion. Under the
cost-to-cost method, we make periodic estimates of our progress towards project
completion by analyzing costs incurred to date, plus an estimate of the amount
of costs that we expect to incur until the completion of the project. Revenue is
then calculated on a cumulative basis (project-to-date) as the total contract
value multiplied by the current percentage-of-completion. The revenue for the
current period is calculated as cumulative revenues less project revenues
already recognized. The recognition of revenues and profit is dependent upon the
accuracy of a variety of estimates. Such estimates are based on
various judgments we make with respect to those factors and are difficult to
accurately determine until the project is significantly underway.
For some
contracts, using the cost-to-cost method in estimating percentage-of-completion
may overstate the progress on the project. For projects where the cost-to-cost
method does not appropriately reflect the progress on the projects, we use
alternative methods such as actual labor hours, for measuring progress on the
project and recognize revenue accordingly. For instance, in a project where a
large amount of equipment is purchased or an extensive amount of mobilization is
involved, including these costs in calculating the percentage-of-completion may
overstate the actual progress on the project. For these types of projects,
actual labor hours spent on the project may be a more appropriate measure of the
progress on the project.
The
Company’s contracts with the U.S. government contain provisions requiring
compliance with the Federal Acquisition Regulation (FAR), and the Cost
Accounting Standards (CAS). These regulations are generally applicable to all of
the Company’s federal government contracts and are partially or fully
incorporated in many local and state agency contracts. They limit the recovery
of certain specified indirect costs on contracts subject to the FAR. Cost-plus
contracts covered by the FAR provide for upward or downward adjustments if
actual recoverable costs differ from the estimate billed. Most of our federal
government contracts are subject to termination at the convenience of the
client. Contracts typically provide for reimbursement of costs incurred and
payment of fees earned through the date of such termination.
Federal
government contracts are subject to the FAR and some state and local
governmental agencies require audits, which are performed for the most part by
either the EPA Office of Inspector General (EPAOIG) or the Defense Contract
Audit Agency (DCAA). The EPAOIG and DCAA audit overhead rates, cost proposals,
incurred government contract costs, and internal control systems. During the
course of its audits, the EPAOIG or DCAA may question incurred costs if it
believes we have accounted for such costs in a manner inconsistent with the
requirements of the FAR or CAS and recommend that our U.S. government financial
administrative contracting officer disallow such costs. Historically, we have
not experienced significant disallowed costs as a result of such audits.
However, we can provide no assurance that the EPAOIG audits will not result in
material disallowances of incurred costs in the future.
The
Company maintains reserves for cost disallowances on its cost based contracts as
a result of government audits. The Company recently settled fiscal years
1996 thru 2001 for amounts within the anticipated range. Final rates have
been negotiated under these audits through 2001. The Company has estimated
its exposure based on completed audits, historical experience and discussions
with the government auditors. If these estimates or their related
assumptions change, the Company may be required to record additional charges for
disallowed costs on its government contracts.
Allowance for Doubtful
Accounts and Contract Adjustments
We reduce
our accounts receivable and costs and accrued earnings in excess of billings on
contracts in process by establishing an allowance for amounts that, in the
future, may become uncollectible or unrealizable, respectively. We determine our
estimated allowance for uncollectible amounts based on management’s judgments
regarding our operating performance related to the adequacy of the services
performed, the status of change orders and claims, our experience settling
change orders and claims and the financial condition of our clients, which may
be dependent on the type of client and current economic conditions that the
client may be subject to.
Deferred Income
Taxes
We use
the asset and liability approach for financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances based on
our judgments and estimates are established when necessary to reduce deferred
tax assets to the amount expected to be realized in future operating results.
Management believes that realization of deferred tax assets in excess of the
valuation allowance is more likely than not. Our estimates are based on facts
and circumstances in existence as well as interpretations of existing tax
regulations and laws applied to the facts and circumstances, with the help of
professional tax advisors. Therefore, we estimate and provide for amounts of
additional income taxes that may be assessed by the various taxing
authorities.
Changes in Corporate
Entities
On
September 1, 2007 Gustavson Associates LLC purchased from minority unit holder,
Prospect Resources, their remaining 50 ownership units. Prospect was paid
$466,708 for its units with 25% of the amount paid in cash, and
the assumption of a three year note with a six percent annualized interest
rate. The purchase price that was paid was at a premium over the capital
value of the units. This excess created additional goodwill of $255,578
which was recorded in the first quarter.
On May
15, 2007 one of the Walsh Peruvian minority shareholders sold 14% of their
shares in that subsidiary for $332,000. Half of the shares were
repurchased by the Peruvian company, and the other half was purchased by Walsh
Environmental Scientists and Engineers, LLC (the majority
shareholder). Both of the transactions were completed for the same
terms and conditions. Half of the purchase price was paid in cash and
the remainder was taken as loans to be repaid over a two and a half year
period. The purchase price that was paid was at a premium over the
book value of the stock. This has created additional goodwill of
approximately $147,000 that was recorded in the fourth
quarter.
On
January 9, 2007 the Company sold its interest in the shrimp farm in Costa Rica
to the Roozen Group for $2,500,000 in cash. There was a pretax gain on the sale
of the farm of approximately $960,000 after deducting costs of the sale. This
gain is included in the accompanying financial statements under discontinued
operations.
On
December 29, 2006 a capital infusion of $500,000 was made to E & E
do Brasil, Ltda. order to fund working capital requirements resulting from the
subsidiary’s significant growth. On the same date the Company entered into a
loan agreement for $120,000 each with its two Brazilian partners. The
loans were granted to allow them to maintain their ownership percentage in
E & E do Brasil, Ltda. (a limited partnership). The loans made to
the partners are payable to Ecology and Environment, Inc., and are five year
loans with annual principal repayments, and twelve per cent interest costs due
on the outstanding balance. The loans are secured by the partners'
shares.
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 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 26, 2008. 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. Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that, as of January 26, 2008, 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, to ensure that information required to be disclosed by the Company in
the reports that the Company files or submits under the Exchange Act is
accumulated and communicated to Company’s management, including its principal
executive and principal financial officers, or persons providing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. 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.
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Legal
Proceedings
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From time
to time, the Company is named defendant in legal actions arising out of the
normal course of business. The Company is not a party to any pending legal
proceeding the resolution of which the management of the Company believes will
have a material adverse effect on the Company’s results of
operations, financial condition, cash flows or to any other pending
legal proceedings other than ordinary, routine litigation incidental to its
business. The Company maintains liability insurance against risks arising out of
the normal course of business.
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.
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Changes in Securities and Use of
Proceeds
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(e)
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Purchased
Equity Securities. The Company did not purchase any common stock during
the first six months of its fiscal year ending July 31,
2008.
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Item 3.
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Defaults Upon Senior
Securities
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The
Registrant has no information for Item 3 that is required to be
presented.
Item 4.
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Submission of Matters to a Vote
of Security Holders
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The
Registrant has no information for Item 4 that is required to be
presented.
Item 5.
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Other
Information
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The
Registrant has no information for Item 5 that is required to be
presented.
Item 6.
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Exhibits and Reports on Form
8-K
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(a)
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- 31.1 Certification of Principal
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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-
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.
|
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(b)
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Registrant filed a Form 8-K
report on January 18, 2008 to report a departure of an officer and an
appointment of a new officer.
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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.
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Ecology
and Environment, Inc.
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Date:
March 11, 2008
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By:
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/s/ H.
John Mye, III
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H.
John Mye, III
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Vice
President, Treasurer and Chief Financial Officer -
Principal
Financial Officer
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