The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Consolidated Financial Statements
1.
|
Organization and Basis of Presentation
|
Ecology and Environment, Inc., (“EEI” or the “Parent Company”) was incorporated in 1970 as a global broad-based environmental consulting firm whose underlying philosophy is to provide professional services worldwide so that sustainable economic and human development may proceed with acceptable impact on the environment. Together with its subsidiaries (collectively, the “Company”), EEI has direct and indirect ownership in 7 active wholly-owned and majority-owned operating subsidiaries in 5 countries. The Company’s staff is comprised of individuals representing more than 80 scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions. The Company has completed thousands of projects for a wide variety of clients in more than 120 countries, providing environmental solutions in nearly every ecosystem on the planet.
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of such information. All such adjustments are of a normal recurring nature. Certain prior year amounts were reclassified to conform to the consolidated financial statement presentation for fiscal year ended July 31, 2016.
2.
|
Recent Accounting Pronouncements
|
Accounting Pronouncements Adopted During the Fiscal Year Ended July 31, 2016
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires entities to classify deferred tax liabilities and assets as noncurrent in a classified balance sheet. This differs from current U.S. GAAP which requires that deferred income tax liabilities and assets be separated into current and noncurrent amounts in a classified balance sheet. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted the provisions of ASU 2015-17 effective November 1, 2015, and elected to adopt the guidance retrospectively. As a result of adopting ASU 2015-17, deferred tax assets of $3.9 million were reclassified from current assets to non-current assets on the consolidated balance sheet at July 31, 2015. Refer to Note 12 of these consolidated financial statements for additional disclosures regarding deferred tax assets and liabilities.
Accounting Pronouncements Not Yet Adopted as of July 31, 2016
In September 2015, FASB issued ASU No. 2015-16, Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. In addition, the amendments in ASU 2015-16 require an acquirer to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in ASU 2015-16 also require an entity to present separately on the face of the income statement, or disclose in the notes to the financial statements, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, and are to be applied prospectively to adjustments to provisional amounts that occur after the effective date. Earlier application is permitted for financial statements that have not yet been made available for issuance. The Company adopted the provisions of ASU 2015-16 effective August 1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2015, FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (Or its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirements to: 1) categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per practical expedient; and 2) make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The amendments in ASU 2015-07 are effective for public entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendment is required to be applied retrospectively and early adoption is permitted. The Company adopted ASU 2015-07 effective August 1, 2016. Other than the changes to disclosures noted above, the adoption of ASU 2015-07 is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 provides guidance for management’s evaluation, including guidance regarding when substantial doubt about an entity’s ability to continue as a going concern exists, and when such doubt may be alleviated by management’s plans that are intended to mitigate those relevant conditions or events. ASU 2014-15 also provides guidance regarding appropriate financial statement disclosures regarding conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, and management’s plans that are intended to mitigate those conditions or events. The provisions of ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Earlier application is permitted. The Company adopted ASU 2014-15 effective August 1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The objective of ASU 2016-09 is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted in any interim or annual period, subject to transition requirements. The Company intends to adopt the provisions of ASU 2016-09 effective August 1, 2017. Management is currently assessing the provisions of ASU 2016-09 and has not yet estimated its impact on the Company’s consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is the result of a joint project of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for use in the U.S and internationally. ASU 2014-09 supersedes the revenue recognition requirements in Topic 605 of FASB’s Accounting Standards Codification (the “Codification”) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 enhances comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, reduces the number of requirements an entity must consider for recognizing revenue, and requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.
ASU 2014-09 was to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within the annual reporting period. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. The Company intends to adopt the provisions of ASU 2014-09 effective August 1, 2018.
During the year ended July 31, 2016, FASB issued four additional ASUs that provide clarification for specific aspects of ASU 2014-09. The effective dates and transition requirements for these ASUs are the same as the effective dates and transition requirements included in ASU 2014-09 and ASU 2015-14.
ASU 2014-09 requires retrospective application by either restating each prior period presented in the financial statements, or by recording the cumulative effect on prior reporting periods to beginning retained earnings in the year that the standard becomes effective. Management is currently assessing the provisions of ASU 2014-09 and has not yet estimated its impact or selected a transition method.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The amendments included in this update make targeted improvements to U.S. GAAP. Entities are required to apply the amendments included in ASU 2016-01 by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. For public entities, the amendments included in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company intends to adopt the provisions of ASU 2016-01 effective August 1, 2018. Management is currently assessing the provisions of ASU 2016-01 and has not yet estimated its impact on the Company’s consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The amendments included in this update provide guidance regarding eight specific cash flow classification issues that are not specifically addressed in previous U.S. GAAP. For public entities, the amendments included in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company intends to adopt the provisions of ASU 2016-01 effective August 1, 2018. Management is currently assessing the provisions of ASU 2016-15 and has not yet estimated its impact on the Company’s consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the assets and liabilities that arise from most leases. The main difference between previous U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. For lessors, the guidance included in ASU 2016-02 modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 provides specific guidance for determining whether a contractual arrangement contains a lease, lease classification by lessees and lessors, initial and subsequent measurement of leases by lessees and lessors, sale and leaseback transactions, transition, and financial statement disclosures. ASU 2016-02 requires entities to use a modified retrospective approach to apply its guidance, and includes a number of optional practical expedients that entities may elect to apply. For public entities, the amendments included in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company intends to adopt the provisions of ASU 2016-02 effective August 1, 2019. Early adoption of the amendments included in ASU 2016-02 is permitted. Management is currently assessing the provisions of ASU 2016-02 and has not yet estimated its impact on the Company’s consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). The amendments included in this update affect entities holding financial assets, including trade receivables and investment securities available for sale, that are not accounted for at fair value through net income. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments included in this update also provide guidance for measurement of expected credit losses and for presentation of increases or decreases of expected credit losses on the statement of operations. For public entities, the amendments included in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company intends to adopt the provisions of ASU 2016-01 effective August 1, 2020. Management is currently assessing the provisions of ASU 2016-15 and has not yet estimated its impact on the Company’s consolidated financial statements.
3.
|
Summary of Significant Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of EEI and its wholly owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management 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. Actual results may differ from those estimates.
Investment Securities Available for Sale
Investment securities available for sale are stated at fair value. Unrealized gains or losses related to investment securities available for sale are recorded in accumulated other comprehensive income, net of applicable income taxes in the accompanying condensed consolidated balance sheets and condensed consolidated statements of changes in shareholders' equity. The cost basis of securities sold is based on the specific identification method. Reclassification adjustments out of accumulated other comprehensive income resulting from disposition of investment securities available for sale are included within other income (expense) in the condensed consolidated statements of operations.
Investment securities available for sale include mutual funds that are valued at the net asset value (“NAV”) of shares held by the Company at period end. Mutual funds held by the Company are open-end mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily NAV and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.
Refer to Note 6 of these consolidated financial statements for additional disclosures regarding the Company’s investment securities available for sale.
Revenue Recognition and Contract Receivables, Net
Substantially all of the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours. The consulting work is performed under a mix of fixed price, cost-type, and time and material contracts. Contracts are required from all customers. Revenue is recognized as follows:
Contract Type
|
Work Type
|
Revenue Recognition Policy
|
|
|
|
Time and materials
|
Consulting
|
As incurred at contract rates.
|
|
|
|
Fixed price
|
Consulting
|
Percentage of completion, approximating the ratio of either total costs or Level of Effort (LOE) hours incurred to date to total estimated costs or LOE hours.
|
|
|
|
Cost-plus
|
Consulting
|
Costs as incurred plus fees. Fees are recognized as revenue using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.
|
Revenues reflected in the Company's consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenues are certain services outside the Company's normal operations which the Company has elected to subcontract to other contractors.
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. Revenue earned from fixed price and cost-plus contracts is recognized using the “percentage-of-completion” method, wherein revenue is recognized as project progress occurs. 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.
Substantially all of the Company's cost-type work is with federal governmental agencies and, as such, is subject to audits after contract completion. Under these cost-type contracts, provisions for adjustments to accrued revenue are recognized on a quarterly basis and based on past audit settlement history. Government audits have been completed and final rates have been negotiated through fiscal year 2010. The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits (refer to Note 12 of these consolidated financial statements). Allowances for project disallowances are recorded as adjustments to revenue when the amounts are estimable. Resolution of these amounts is dependent upon the results of government audits and other formal contract close-out procedures.
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 and profit are recognized on change orders when it is probable that the change order will be approved and the amount can be reasonably estimated. Revenues are recognized only up to the amount of costs incurred on contract claims when realization is probable, estimable and reasonable support from the customer exists.
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. Sales and cost of sales at the Company’s South American subsidiaries exclude tax assessments by governmental authorities, which are collected by the Company from its customers and then remitted to governmental authorities.
Billed contract receivables represent amounts billed to clients in accordance with contracted terms, which have not been collected from clients as of the end of the reporting period. Billed contract receivables may include: (1) amounts billed for revenues from incurred costs and fees that have been earned in accordance with contractual terms; and (2) progress billings in accordance with contractual terms that include revenue not yet earned as of the end of the reporting period.
Unbilled contract receivables result from: (i) revenues from incurred costs and fees which have been earned, but are not billed as of period-end; and (ii) differences between year-to-date provisional billings and year-to-date actual contract costs incurred.
The Company reduces contract receivables by establishing an allowance for contract adjustments related to revenues that are deemed to be unrealizable, or that may become unrealizable in the future.
Management reviews contract receivables and determines allowance amounts based on the adequacy of the Company’s performance under the contract, the status of change orders and claims, historical experience with the client for settling change orders and claims, and economic, geopolitical and cultural considerations for the home country of the client. Such contract adjustments are recorded as direct adjustments to revenue in the consolidated statements of operations.
The Company also reduces contract receivables by recording an
allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid obligations to the Company. The resulting provision for bad debts is recorded within administrative and indirect operating expenses on the consolidated statements of operations.
Refer to Note 7 of these consolidated financial statements for additional disclosures regarding the Company’s contract receivables, net.
Property, Buildings and Equipment, Depreciation and Amortization
Property, buildings and equipment are stated at the lower of depreciated or amortized cost or fair value. Land and land improvements are not depreciated or amortized. Methods of depreciation or amortization and useful lives for all other long-lived assets are summarized in the following table.
|
Depreciation / Amortization Method
|
Useful Lives
|
Buildings
|
Straight-line
|
32-40 Years
|
Building Improvements
|
Straight-line
|
7-15 Years
|
Field Equipment
|
Straight-line
|
3-7 Years
|
Computer equipment
|
Straight-line and Accelerated
|
3-7 Years
|
Computer software
|
Straight-line
|
10 Years
|
Office furniture and equipment
|
Straight-line
|
3-7 Years
|
Vehicles
|
Straight-line
|
3-5 Years
|
Leasehold improvements
|
Straight-line
|
(1)
|
(1)
|
Leasehold improvements are amortized for book purposes over the terms of the leases or the estimated useful lives of the assets, whichever is shorter.
|
Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for improvements are capitalized when either the value or useful life of the related asset have been increased. When property or equipment is retired or sold, any gain or loss on the transaction is reflected in the current year's earnings.
The Company capitalizes costs of software acquisition and development projects, including costs related to software design, configuration, coding, installation, testing and parallel processing. Capitalized software costs are recorded in fixed assets, net of accumulated amortization, on the consolidated balance sheets. Capitalized software development costs generally include:
|
●
|
external direct costs of materials and services consumed to obtain or develop software for internal use;
|
|
●
|
payroll and payroll-related costs for employees who are directly associated with and who devote time to the project, to the extent of time spent directly on the project;
|
|
●
|
costs to obtain or develop software that allows for access or conversion of old data by new systems;
|
|
●
|
costs of upgrades and/or enhancements that result in additional functionality for existing software; and
|
|
●
|
interest costs incurred while developing internal-use software that could have been avoided if the expenditures had not been made.
|
The costs of computer software obtained or developed for internal use is amortized on a straight-line basis over the estimated useful life of the software. Amortization begins when the software and all related software modules on which it is functionally dependent are ready for their intended use. Amortization expense is recorded in depreciation and amortization in the consolidated statements of operations.
The following software-related costs are expensed as incurred and recorded in general and administrative expenses on the consolidated statements of operations:
|
●
|
research costs, such as costs related to the determination of needed technology and the formulation, evaluation and selection of alternatives;
|
|
●
|
costs to determine system performance requirements for a proposed software project;
|
|
●
|
costs of selecting a vendor for acquired software;
|
|
●
|
costs of selecting a consultant to assist in the development or installation of new software;
|
|
●
|
internal or external training costs related to software;
|
|
●
|
internal or external maintenance costs related to software;
|
|
●
|
costs associated with the process of converting data from old to new systems, including purging or cleansing existing data, reconciling or balancing of data in the old and new systems and creation of new data;
|
|
●
|
updates and minor modifications; and
|
|
●
|
fees paid for general systems consulting and overall control reviews that are not directly associated with the development of software.
|
Capitalized software costs are evaluated for recoverability/impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, including when:
|
●
|
existing software is not expected to provide future service potential;
|
|
●
|
it is no longer probable that software under development will be completed and placed in service; and
|
|
●
|
costs of developing or modifying internal-use software significantly exceed expected development costs or costs of comparable third-party software.
|
Refer to Note 8 of these consolidated financial statements for additional disclosures regarding the Company’s property, buildings and equipment.
Goodwill
Goodwill is included in other assets on the accompanying consolidated balance sheets. Goodwill is subject to an annual assessment for impairment by comparing the estimated fair values of reporting units to which goodwill has been assigned to the recorded book value of the respective reporting units. The estimated fair value of reporting units is calculated using a discounted cash flows methodology. Goodwill is also assessed for impairment between annual assessments whenever events or circumstances make it more likely than not that an impairment may have occurred.
Refer to Note 9 of these consolidated financial statements for additional disclosures regarding the Company’s recorded goodwill.
Impairment of Long-Lived Assets
The Company assesses recoverability of the carrying value of long-lived assets 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.
Refer to Note 8 of these consolidated financial statements for additional disclosures regarding impairment of property, buildings and equipment.
Income Taxes
The Company follows the asset and liability approach to account for income taxes. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis 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.
The Company does not record United States income taxes applicable to undistributed earnings of foreign subsidiaries that the Company intends to indefinitely reinvest in the operations of those entities. Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to the U.S. at the discretion of Board of Directors of the respective entities. The Company would be required to accrue and pay taxes on any amounts repatriated to the U.S. from foreign subsidiaries.
Income tax expense includes U.S. and international income taxes, determined using the applicable statutory rates. A deferred tax asset is recognized for all deductible temporary differences and net operating loss carryforwards, and a deferred tax liability is recognized for all taxable temporary differences.
The Company has deferred tax assets, resulting principally from timing differences in the recognition of entity operating losses, contract reserves and accrued expenses. The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary.
U.S. GAAP prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in administrative and indirect operating expenses.
Refer to Note 12 of these consolidated financial statements for additional disclosures regarding income taxes.
Defined Contribution Plans
EEI has a non-contributory defined contribution plan providing deferred benefits for substantially all of its employees (the “EEI Defined Contribution Plan”). The annual expense of the EEI Defined Contribution Plan is based on a percentage of eligible wages as authorized by EEI’s Board of Directors.
EEI also has a supplemental retirement plan that provides post-retirement health care coverage for EEI’s founders and their spouses. As of July 31, 2016, one founder, his spouse and the spouse of a deceased founder were receiving healthcare coverage under this plan. The annual expense associated with this plan is determined based on discounted annual cost estimates over the estimated life expectancy of the founders and their spouses.
Walsh Environmental Scientists & Engineers, LLC (“Walsh”), a wholly-owned subsidiary of EEI, has a defined contribution plan providing deferred benefits for substantially all of its employees and the employees of two if its majority owned subsidiaries (the “Walsh Defined Contribution Plan”). The respective entities contribute a percentage of eligible wages up to a maximum of 4%.
Refer to Note 17 of these consolidated financial statements for additional disclosures regarding the Company’s defined contribution plans.
Incentive Compensation
The Company expenses cash bonuses during the performance period to which they relate. The value of stock awards is expensed over the vesting period of the respective award. Share-based awards are measured at fair value on the respective grant date, based on the estimated number of awards that are expected to vest. Compensation cost for awards that vest is not reversed if the awards expire without being exercised.
Refer to Note 14 of these consolidated financial statements for additional disclosures regarding the Company’s incentive compensation awards.
Earnings per Share
Basic and diluted earnings per share (“EPS”) are computed by dividing the net income (loss) attributable to Ecology and Environment, Inc. common shareholders by the weighted average number of common shares outstanding for the period. After consideration of all the rights and privileges of the Class A and Class B stockholders (refer to Note 14 of these consolidated financial statements), 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.
The Company has determined that its unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. These securities are included in the computation of earnings per share pursuant to the two-class method. As a result, unvested restricted shares are included in the weighted average shares outstanding calculation.
Refer to Note 18 of these consolidated financial statements for additional disclosures regarding the Company’s earnings per share.
Comprehensive Income (Loss)
Comprehensive income or loss represents the change in shareholders’ equity during a period, excluding changes arising from transactions with shareholders. Comprehensive income or loss includes net income (loss) from the consolidated statements of operations, plus (less) other comprehensive income (loss) during a reporting period.
Other comprehensive income (loss) represents the net effect of accounting transactions that are recognized directly in shareholders’ equity, such as the unrealized net impact of currency translation adjustments from foreign operations and unrealized gains (losses) on available-for-sale securities. Refer to Note 15 of these consolidated financial statements for additional disclosures regarding accumulated other comprehensive income (loss).
Foreign Currencies and Inflation
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. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The Company recorded foreign currency transaction gains (losses) of less than $0.1 million, $0.1 million and less than $(0.1) million for the fiscal years ended July 31, 2016, 2015 and 2014, respectively.
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 transaction adjustments which are included in net income. The Company did not record any highly inflationary economy translation adjustments for the fiscal years ended July 31, 2016, 2015 or 2014.
Noncontrolling Interests
Earnings and other comprehensive income (loss) are separately attributed to both the controlling and noncontrolling interests. Purchases of noncontrolling interests are recorded as reductions of shareholders’ equity on the consolidated statements of shareholders’ equity. EPS is calculated based on net income (loss) attributable to the Company’s controlling interests.
4.
|
Significant Adjustments During the Three Months Ended July 31, 2016
|
During the three months ended July 31, 2016, the Company identified and recorded the following adjustments of amounts previously reported during periods
prior to 2016. The Company determined that these amounts are not material to the current or any prior period
:
|
·
|
Accrued severance liabilities maintained by the Company’s South American subsidiaries, which were reported in accrued payroll costs on the consolidated balance sheet
at July 31, 2015
, were reversed, resulting in a reduction of $0.6 million of administrative and indirect operating expenses, and an increase of $0.1 million in income tax provision
for the three and twelve month periods ended July 31, 2016
. Net income attributable to EEI increased $0.3 million as a result of these adjustments
for the three and twelve month periods ended July 31, 2016
.
|
|
·
|
Correction of deferred tax assets and liabilities
reported as of July 31, 2015
related to U.S. and South American operations resulted in a net increase in income tax provision of $0.4 million
for the three and twelve month periods ended July 31, 2016
. Net income attributable to EEI decreased $0.2 million as a result of these adjustments
for the three and twelve month periods ended July 31, 2016
.
|
5.
|
Cash and Cash Equivalents
|
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company invests cash in excess of operating requirements in income-producing short-term investments. Money market funds of $0.3 million and less than $0.1 million were included in cash and cash equivalents in the accompanying consolidated balance sheets and consolidated statements of cash flows at July 31, 2016 and 2015, respectively.
6.
|
Fair Value of Financial Instruments
|
The Company’s financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. The asset’s or liability’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company has not elected a fair value option on any assets or liabilities. The three levels of the hierarchy are as follows:
Level 1 Inputs
– Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally, this includes debt and equity securities that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 Inputs
– Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data.
Level 3 Inputs
– Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. There were no transfers in or out of levels 1, 2 or 3 during fiscal years 2016, 2015 or 2014.
The fair value of the Company’s assets and liabilities that are measured at fair value on a recurring basis is summarized by level within the fair value hierarchy in the following table.
|
|
Balance at July 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
$
|
1,598
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
1,598
|
|
|
|
Balance at July 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
$
|
1,434
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
1,434
|
|
The Company recorded gross unrealized gains (losses) of less than $0.1 million related to investment securities available for sale in accumulated other comprehensive income (loss) at July 31, 2016 and 2015 and 2014. The Company did not record any sales of investment securities during the twelve months ended July 31, 2016.
The carrying amount of cash and cash equivalents approximated fair value at July 31, 2016 and 2015. These assets were classified as level 1 instruments at both dates.
Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of borrowings for working capital requirements. Based on the Company's assessment of the current financial market and corresponding risks associated with the debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at July 31, 2016 and 2015. These liabilities were classified as level 2 instruments at both dates. Refer to Note 10 and Note 11 of these consolidated financial statements for additional disclosures regarding the Company’s lines of credit, debt and capital lease obligations.
7.
|
Contract Receivables, net
|
Contract receivables, net are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Contract Receivables:
|
|
|
|
|
|
|
Billed
|
|
$
|
19,552
|
|
|
$
|
22,916
|
|
Unbilled
|
|
|
20,696
|
|
|
|
25,904
|
|
|
|
|
40,248
|
|
|
|
48,820
|
|
Allowance for doubtful accounts and contract adjustments
|
|
|
(5,929
|
)
|
|
|
(5,954
|
)
|
Contract receivables, net
|
|
$
|
34,319
|
|
|
$
|
42,866
|
|
Billed contract receivables included contractual retainage balances of $0.9 million and $0.5 million at July 31, 2016 and 2015, respectively. Management anticipates that unbilled contract receivables and retainage balances at July 31, 2016 will be substantially billed and collected within one year.
Contract Receivable Concentrations
Significant concentrations of contract receivables and the allowance for doubtful accounts and contract adjustments are summarized in the following table.
|
|
Balance at July 31, 2016
|
|
|
Balance at July 31, 2015
|
|
Region
|
|
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts and
Contract
Adjustments
|
|
|
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts and
Contract
Adjustments
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States, Canada and South America
|
|
$
|
35,266
|
|
|
$
|
1,034
|
|
|
$
|
43,629
|
|
|
$
|
1,043
|
|
Middle East and Africa
|
|
|
4,921
|
|
|
|
4,895
|
|
|
|
5,067
|
|
|
|
4,894
|
|
Asia
|
|
|
61
|
|
|
|
---
|
|
|
|
124
|
|
|
|
17
|
|
Totals
|
|
$
|
40,248
|
|
|
$
|
5,929
|
|
|
$
|
48,820
|
|
|
$
|
5,954
|
|
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods. Contract adjustments related to projects in the Middle East, Africa and Asia typically result from difficulties encountered while attempting to settle and close-out claims that may be several years old.
Combined contract receivables related to projects in the Middle East, Africa and Asia represented 12% and 11% of total contract receivables at
July 31, 2016
and 2015, respectively, while the combined allowance for doubtful accounts and contract adjustments related to these projects represented 83% and 82%, respectively, of the total allowance for doubtful accounts and contract adjustments at those same period end dates. These allowance percentages highlight the Company’s experience of heightened operating risks (i.e., political, regulatory and cultural risks) within these foreign regions in comparison with similar risks in the United States, Canada and South America. These heightened operating risks have resulted in increased collection risks and the Company expending resources that it may not recover for several months, or at all.
Allowance for Doubtful Accounts and Contract Adjustments
Activity within the allowance for doubtful accounts and contract adjustments is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
5,954
|
|
|
$
|
6,508
|
|
|
$
|
5,969
|
|
Net increase (decrease) due to adjustments in the allowance for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract adjustments (1)
|
|
|
(577
|
)
|
|
|
(263
|
)
|
|
|
474
|
|
Doubtful accounts (2)
|
|
|
552
|
|
|
|
(291
|
)
|
|
|
95
|
|
Transfer of reserves (to) from allowance for project disallowances (3)
|
|
|
---
|
|
|
|
---
|
|
|
|
(30
|
)
|
Balance at end of period
|
|
$
|
5,929
|
|
|
$
|
5,954
|
|
|
$
|
6,508
|
|
|
(1)
|
Increases (decreases) to the allowance for contract adjustments on the consolidated balance sheets are recorded as (decreases) increases to revenue on the consolidated statements of operations.
|
|
(2)
|
Increases (decreases) to the allowance for doubtful accounts on the consolidated balance sheets are recorded as increases (decreases) to administrative and other indirect operating expenses on the consolidated statements of operations.
|
|
(3)
|
The allowance for project disallowances is included in other accrued liabilities on the consolidated balance sheets. Refer to Note 13 of these consolidated financial statements.
|
During fiscal year 2016, the Company’s Brazilian operations continued to be adversely affected by an economic downturn, the total scope and duration of which are uncertain. Management is monitoring any adverse trends or events that may impact the realizability of the recorded net book value of contract receivables from customers in Brazil. The Company maintained $0.8 million and $0.4 million of allowance for doubtful accounts at July 31, 2016 and 2015, respectively, related to the Company’s Brazilian operations.
8.
|
Property, Buildings and Equipment, net
|
Property, buildings and equipment is summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
393
|
|
|
$
|
393
|
|
Buildings and building improvements
|
|
|
9,700
|
|
|
|
10,368
|
|
Field equipment
|
|
|
2,222
|
|
|
|
2,786
|
|
Computer equipment
|
|
|
4,439
|
|
|
|
4,685
|
|
Computer software
|
|
|
3,105
|
|
|
|
6,112
|
|
Office furniture and equipment
|
|
|
2,683
|
|
|
|
4,076
|
|
Vehicles
|
|
|
1,333
|
|
|
|
1,439
|
|
Other
|
|
|
543
|
|
|
|
693
|
|
|
|
|
24,418
|
|
|
|
30,552
|
|
Accumulated depreciation and amortization
|
|
|
(18,324
|
)
|
|
|
(23,438
|
)
|
Property, buildings and equipment, net
|
|
$
|
6,094
|
|
|
$
|
7,114
|
|
During the three months ended April 30, 2016, the Company’s Board of Directors directed management to sell vacant buildings owned by the Company. The buildings had a recorded net book value of $1.9 million at April 30, 2016. Management assessed the recoverability of the net book value of the buildings based on its plan to sell the buildings, expected future use of the buildings, and the buildings’ appraised market value. Based upon this assessment, management determined that the net book value of the buildings was impaired as of April 30, 2016. As a result, during the three months ended April 30, 2016, the Company recorded an impairment loss of approximately $0.4 million as a reduction of property, buildings and equipment, net in the consolidated balance sheet and as additional administrative and indirect operating expenses in the consolidated statement of operations.
Also during the three months ended April 30, 2016, the Company received net insurance proceeds of approximately $0.4 million related to storm damage to two of its buildings. These proceeds were recorded as a gain on insurance settlement in the consolidated statement of operations.
Goodwill of $1.1 million is included in other assets on the accompanying consolidated balance sheets at July 31, 2016 and 2015. The Company’s most recent annual impairment assessment for goodwill was completed during the fourth quarter of fiscal year 2016. Based on this assessment, the fair values of the reporting units to which goodwill is assigned exceeded the book values of the respective reporting units. As a result, no impairment of goodwill was identified.
Unsecured lines of credit are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Outstanding cash draws, recorded as lines of credit on the accompanying consolidated balance sheets
|
|
$
|
312
|
|
|
$
|
672
|
|
Outstanding letters of credit to support operations
|
|
|
2,187
|
|
|
|
1,144
|
|
Total amounts used under lines of credit
|
|
|
2,499
|
|
|
|
1,816
|
|
Remaining amounts available under lines of credit
|
|
|
36,496
|
|
|
|
30,993
|
|
Total approved unsecured lines of credit
|
|
$
|
38,995
|
|
|
$
|
32,809
|
|
Contractual interest rates ranged from 3.50% to 15.60% at July 31, 2016. The Company’s lenders have reaffirmed the lines of credit within the past twelve months.
11.
|
Debt and Capital Lease Obligations
|
Debt and capital lease obligations are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Various loans and advances (interest rates ranging from 3.25% to 12%)
|
|
$
|
217
|
|
|
$
|
635
|
|
Capital lease obligations (interest rates ranging from 7.36% to 14%)
|
|
|
240
|
|
|
|
311
|
|
|
|
|
457
|
|
|
|
946
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
(240
|
)
|
|
|
(551
|
)
|
Long-term debt and capital lease obligations
|
|
$
|
217
|
|
|
$
|
395
|
|
The aggregate maturities of long-term debt and capital lease obligations as of July 31, 2016 are summarized in the following table.
Fiscal Year Ended
July 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
2017
|
|
$
|
240
|
|
2018
|
|
|
171
|
|
2019
|
|
|
27
|
|
2020
|
|
|
13
|
|
Thereafter
|
|
|
6
|
|
Total
|
|
$
|
457
|
|
Income (loss) before income tax provision is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,558
|
|
|
$
|
3,500
|
|
|
$
|
(4,305
|
)
|
Foreign
|
|
|
(191
|
)
|
|
|
4,469
|
|
|
|
3,858
|
|
|
|
$
|
4,367
|
|
|
$
|
7,969
|
|
|
$
|
(447
|
)
|
The income tax provision is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,155
|
|
|
$
|
488
|
|
|
$
|
86
|
|
State
|
|
|
177
|
|
|
|
80
|
|
|
|
63
|
|
Foreign
|
|
|
730
|
|
|
|
2,047
|
|
|
|
1,012
|
|
Total current
|
|
|
2,062
|
|
|
|
2,615
|
|
|
|
1,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
587
|
|
|
|
1,379
|
|
|
|
(975
|
)
|
State
|
|
|
269
|
|
|
|
172
|
|
|
|
24
|
|
Foreign
|
|
|
841
|
|
|
|
(397
|
)
|
|
|
133
|
|
Total deferred
|
|
|
1,697
|
|
|
|
1,154
|
|
|
|
(818
|
)
|
Total income tax provision
|
|
$
|
3,759
|
|
|
$
|
3,769
|
|
|
$
|
343
|
|
A reconciliation of the income tax provision using the statutory U.S. income tax rate compared with the actual income tax provision reported on the consolidated statements of operations is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision at the U.S. federal statutory income tax rate
|
|
$
|
1,485
|
|
|
$
|
2,709
|
|
|
$
|
(152
|
)
|
Brazil valuation allowance
|
|
|
1,582
|
|
|
|
---
|
|
|
|
---
|
|
Income from "pass-through" entities taxable to noncontrolling partners
|
|
|
(39
|
)
|
|
|
31
|
|
|
|
35
|
|
International rate differences
|
|
|
(145
|
)
|
|
|
(338
|
)
|
|
|
(144
|
)
|
Other foreign taxes, net of federal benefit
|
|
|
153
|
|
|
|
161
|
|
|
|
(34
|
)
|
Foreign dividend income
|
|
|
263
|
|
|
|
508
|
|
|
|
597
|
|
State taxes, net of federal benefit
|
|
|
312
|
|
|
|
166
|
|
|
|
28
|
|
Re-evaluation and settlements of tax contingencies
|
|
|
---
|
|
|
|
---
|
|
|
|
(20
|
)
|
Peru non-deductible expenses
|
|
|
59
|
|
|
|
167
|
|
|
|
44
|
|
Canada and China valuation allowance
|
|
|
1
|
|
|
|
156
|
|
|
|
(83
|
)
|
Other permanent differences
|
|
|
88
|
|
|
|
209
|
|
|
|
72
|
|
Income tax provision, as reported on the consolidated statements of operations
|
|
$
|
3,759
|
|
|
$
|
3,769
|
|
|
$
|
343
|
|
The Company adopted the provisions of ASU 2015-17 effective November 1, 2015, and elected to adopt the guidance retrospectively. As a result of adopting ASU 2015-17, deferred income tax assets of $3.9 million were reclassified from current assets and included in non-current deferred income tax assets on the consolidated balance sheet at July 31, 2015. The significant components of deferred tax assets and liabilities are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Contract and other reserves
|
|
$
|
3,023
|
|
|
$
|
3,257
|
|
Accrued compensation and expenses
|
|
|
734
|
|
|
|
836
|
|
Net operating loss carryforwards
|
|
|
1,265
|
|
|
|
737
|
|
Foreign and state income taxes
|
|
|
59
|
|
|
|
57
|
|
Foreign tax credit
|
|
|
296
|
|
|
|
296
|
|
Federal benefit from foreign tax audits
|
|
|
157
|
|
|
|
212
|
|
Other
|
|
|
(26
|
)
|
|
|
454
|
|
Deferred tax assets
|
|
|
5,508
|
|
|
|
5,849
|
|
Less: valuation allowance
|
|
|
(2,278
|
)
|
|
|
(560
|
)
|
Net deferred tax assets
|
|
$
|
3,230
|
|
|
$
|
5,289
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal expense on state deferred taxes
|
|
$
|
(133
|
)
|
|
$
|
(225
|
)
|
Fixed assets and intangibles
|
|
|
(759
|
)
|
|
|
(341
|
)
|
Federal expense from foreign accounting differences
|
|
|
(213
|
)
|
|
|
(542
|
)
|
Net deferred tax liabilities
|
|
$
|
(1,105
|
)
|
|
$
|
(1,108
|
)
|
During the fiscal year ended July 31, 2014, the Company generated a net operating loss in the U.S. of $1.7 million, which was carried forward and fully utilized in fiscal year 2015. As of July 31, 2016, net operating losses attributable to operations in Brazil, Canada and China and net operating losses for state income tax purposes still exist.
The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary.
Activity within the deferred tax asset valuation allowance is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
560
|
|
|
$
|
398
|
|
Additions during the period
|
|
|
1,765
|
|
|
|
176
|
|
Reductions during period
|
|
|
(47
|
)
|
|
|
(14
|
)
|
Balance at end of period
|
|
$
|
2,278
|
|
|
$
|
560
|
|
The valuation allowance maintained by the Company primarily relates to: (i) net operating losses in Brazil and Canada, the utilization of which is dependent on future earnings; (ii) excess foreign tax credit carryforwards, the utilization of which is dependent on future foreign source income; and (iii) capital loss carryforwards, the utilization of which is dependent on future capital gains. Additions to the valuation allowance during the fiscal year ended July 31, 2016 primarily related to a deferred tax asset that resulted from net operating loss carryforwards from the Company’s Brazilian operations. During the fiscal year ended July 31, 2016, based on available evidence including recent cumulative operating losses, management determined that it is more likely than not that these deferred tax assets will not be realized.
The Company has recorded $0.1 million and $0 of income taxes applicable to undistributed earnings of foreign subsidiaries that will not be indefinitely reinvested in those operations. At July 31, 2016, the Company’s operations in Chile, Peru and Ecuador had $6.9 million of combined undistributed earnings that were indefinitely reinvested in those operations.
The Company files numerous consolidated and separate income tax returns in U.S. federal, state and foreign jurisdictions. The Company’s tax matters for the fiscal years 2013 through 2016 remain subject to examination by the IRS. 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.
At July 31, 2016, 2015 and 2014, the Company had $0.1 million of uncertain tax positions (“UTPs”) resulting from gross unrecognized tax benefits that if realized, would favorably affect the effective income tax rate in future periods. It is reasonably possible that the liability associated with UTPs will increase or decrease within the next twelve months. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
The Company
recognizes interest and penalties related to liabilities for UTPs in other accrued liabilities on the consolidated balance sheets and in administrative and indirect operating expenses on the consolidated statements of operations.
The Company recorded interest and penalties expense related to liabilities for UTPs of less than $0.1 million during the fiscal years ended July 31, 2016, 2015 and 2014. The Company had $0.1 million of accrued interest and penalties recorded at July 31, 2016 and 2015.
13.
|
Other Accrued Liabilities
|
Other accrued liabilities are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Allowance for project disallowances
|
|
$
|
1,819
|
|
|
$
|
2,243
|
|
Other
|
|
|
1,626
|
|
|
|
1,688
|
|
Total other accrued liabilities
|
|
$
|
3,445
|
|
|
$
|
3,931
|
|
Activity within the allowance for project disallowances is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,243
|
|
|
$
|
2,393
|
|
|
$
|
2,663
|
|
Reduction of reserves recorded in prior fiscal years
|
|
|
(424
|
)
|
|
|
(150
|
)
|
|
|
(300
|
)
|
Net change during the period, recorded as a transfer of reserves from allowance for doubtful accounts and contract adjustments
|
|
|
---
|
|
|
|
---
|
|
|
|
30
|
|
Balance at end of period
|
|
$
|
1,819
|
|
|
$
|
2,243
|
|
|
$
|
2,393
|
|
The reductions in the allowance for project disallowances during fiscal years 2016, 2015 and 2014, which were recorded as additions to revenue, net on the consolidated statements of operations, resulted from settlements of allowances recorded in prior fiscal years. The settlements resulted in cash payments of less than $0.1 million during fiscal years 2016, 2015 and 2014.
14.
|
Incentive Compensation
|
EEI and its subsidiaries may, at the discretion of their respective Boards of Directors, award incentive compensation to Directors, senior management and other employees based on the respective company’s financial performance and the individual’s job performance. Incentive compensation may be awarded as cash bonuses, Class A Common Stock issued under EEI’s Stock Award Plan (defined below), or a combination of both cash and stock.
Cash Bonuses
The Company recorded $1.7 million, $3.0 million and $1.4 million of cash bonus awards as incentive compensation expense during the fiscal years ended July 31, 2016, 2015 and 2014, respectively.
Stock Award Plan
EEI adopted the 1998 Stock Award Plan effective March 16, 1998. This plan, together with supplemental plans that were subsequently adopted by the Company’s Board of Directors, is referred to as the “Stock Award Plan”. The Stock Award Plan is not a qualified plan Section 401(a) of the Internal Revenue Code. Under the Stock Award Plan, Directors, officers and other key employees of EEI or any of its subsidiaries may be awarded Class A Common Stock as a bonus for services rendered to the Company or its subsidiaries, based upon the fair market value of the common stock at the time of the award. The Stock Award Plan authorizes the Company’s Board of Directors to determine the vesting period and the circumstances under which the awards may be forfeited.
Under the supplemental plan in place as of July 31, 2016, which expired in October 2016, the Company issued 17,386 shares of Class A Common Stock under the Stock Award Plan, all of which were fully vested at July 31, 2016. In October 2016, the Company’s Board of Directors adopted the current supplemental plan, the 2016 Stock Award Plan. This plan permits awards of up to 200,000 shares of Class A Common Stock for a period of up to five years until its termination in October 2021.
EEI recorded non-cash compensation expense of less than $0.1 million during the twelve months ended July 31, 2016 and 2015 and $0.4 million during the twelve months ended July 31, 2014 in connection with outstanding stock compensation awards. As of July 31, 2016, all previous stock awards were fully expensed.
The "pool" of excess tax benefits accumulated in Capital in Excess of Par Value was $0 and $0.1 million at July 31, 2016 and 2015, respectively.
In September 2015, EEI issued 4,533 Class A shares from the Stock Award Plan, which were valued at less than $0.1 million, to three directors as additional compensation for their roles as Chairman and members of EEI’s Audit Committee. In September 2016, the Company issued an additional 4,450 Class A shares, valued at less than $0.1 million, to the Chairman and members of the Company’s Audit Committee. These stock awards vested immediately upon issuance, subject to certain restrictions regarding transfer of the shares that expire one year after issuance.
Class A and Class B Common Stock
The relative rights, preferences and limitations of the Company's Class A and Class B Common Stock are 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.
Restrictive Shareholder Agreement
Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of Ecology and Environment, Inc. common stock (now classified as Class B Common Stock) owned by them, certain children of those individuals and any such shares subsequently transferred to their spouses and/or children outright or in trust for their benefit upon the demise of a signatory to the Agreement (“Permitted Transferees”). The Agreement provides that prior to accepting a bona fide offer to purchase some or all of their shares of Class B Common Stock governed by the Agreement, that the selling party must first allow the other signatories to the Agreement (not including any Permitted Transferee) 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.
Cash Dividends
The Company declared cash dividends of $1.9 million, $2.1 million and $2.1 million during the fiscal years ended July 31, 2016, 2015 and 2014. The Company paid cash dividends of $2.1 million during the fiscal years ended July 31, 2016, 2015 and 2014. The Company paid cash dividends of $0.9 million, $1.0 million and $1.0 million in August 2016, 2015 and 2014, respectively, that were declared and accrued in prior periods.
Stock Repurchase Program
In August 2010, the Company’s Board of Directors approved a program for repurchase of 200,000 shares of Class A Common Stock (the “Stock Repurchase Program”). As of July 31, 2016, the Company repurchased 122,918 shares of Class A stock, and 77,082 shares had yet to be repurchased under the Stock Repurchase Program. The Company did not acquire any Class A shares under the Stock Repurchase Program during fiscal years 2016 or 2015. The Company acquired 16,091 shares of Class A stock under the Stock Repurchase Program during fiscal year 2014 for a total acquisition cost of approximately $0.2 million.
Noncontrolling Interests
During the fiscal year ended July 31, 2015, Gustavson Associates, LLC (“Gustavson”), a majority owned indirect subsidiary of EEI, purchased an additional 7.2% of its outstanding common shares from noncontrolling shareholders for $0.3 million, paid as follows: (i) $0.1 million of cash paid on the transaction date; and (ii) $0.2 million payable in 3 annual installments during the fiscal years ended July 31, 2016, 2017 and 2018, plus interest accrued at 6% per annum. EEI’s indirect ownership of Gustavson increased to 83.6% as a result of this transaction.
During the fiscal year ended July 31, 2014, in three separate transactions, EEI purchased a combined 10.5% of outstanding Walsh Environmental, LLC (“Walsh”) common shares from noncontrolling shareholders for $1.8 million, paid as follows: (i) $0.8 million in cash paid on the purchase transaction dates; (ii) $0.5 million EEI Class A Common Stock issued on one of the transaction dates; and (iii) $0.5 million of cash payable in two annual installments during the fiscal years ended July 31, 2015 and 2016, plus interest accrued at 3.25% per annum. EEI’s direct ownership of Walsh increased to 100% as a result of these transactions.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following table.
|
Balance at July 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Unrealized net foreign currency translation losses
|
$
|
(2,176
|
)
|
|
$
|
(1,738
|
)
|
Unrealized net investment gains on available for sale investments
|
|
33
|
|
|
|
12
|
|
Total accumulated other comprehensive loss
|
$
|
(2,143
|
)
|
|
$
|
(1,726
|
)
|
16.
|
Operating
Lease Commitments
|
The Company rents certain office facilities and equipment under non-cancelable operating leases and certain other facilities for servicing project sites over the term of the related long-term government contracts. Lease agreements may contain step rent provisions and/or free rent concessions. Lease payments based on a price index have rent expense recognized on a straight line or substantially equivalent basis, and are included in the calculation of minimum lease payments. Gross rental expense associated with lease commitments was $3.5 million, $3.5 million and $3.9 million for the fiscal years ended July 31, 2016, 2015 and 2014, respectively.
Future minimum rental commitments under operating leases as of July 31, 2016 are summarized in the following table.
Fiscal Year Ended
July 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
2017
|
|
$
|
2,565
|
|
2018
|
|
|
2,289
|
|
2019
|
|
|
1,813
|
|
2020
|
|
|
1,278
|
|
2021
|
|
|
1,134
|
|
Thereafter
|
|
|
886
|
|
17.
|
Defined Contribution Plans
|
Contributions to the EEI Defined Contribution Plan and EEI Supplemental Retirement Plan are discretionary and determined annually by its Board of Directors. The Walsh Defined Contribution Plan provides for mandatory employer contributions to match 100% of employee contributions up to 4% of each participant’s compensation. The total expense under these plans was $1.4 million, $1.2 million, and $1.7 million for fiscal years 2016, 2015 and 2014, respectively.
The computation of basic and diluted EPS is included in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ecology and Environment, Inc.
|
|
$
|
886
|
|
|
$
|
3,396
|
|
|
$
|
(1,383
|
)
|
Dividend declared
|
|
|
1,895
|
|
|
|
2,066
|
|
|
|
2,066
|
|
Undistributed earnings
|
|
$
|
(1,009
|
)
|
|
$
|
1,330
|
|
|
$
|
(3,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic and diluted)
|
|
|
4,289,993
|
|
|
|
4,287,775
|
|
|
|
4,283,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
Undistributed earnings per share
|
|
|
(0.23
|
)
|
|
|
0.31
|
|
|
|
(0.80
|
)
|
Total earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.79
|
|
|
$
|
(0.32
|
)
|
The Company reports segment information based on the geographic location of EEI and its direct and indirect subsidiaries. Revenue, net and long-lived assets by business segment are summarized in the following tables.
|
|
Fiscal Years Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Revenue, net, by Business Segment:
|
|
|
|
EEI and its subsidiaries located in the United States
|
|
$
|
83,095
|
|
|
$
|
88,715
|
|
|
$
|
85,456
|
|
Subsidiaries located in South America (1)
|
|
|
22,722
|
|
|
|
38,220
|
|
|
|
42,569
|
|
Other foreign subsidiaries
|
|
|
---
|
|
|
|
---
|
|
|
|
402
|
|
|
(1)
|
Significant South American revenues included revenues from subsidiaries located in Peru ($9.7 million, $22.8 million and $19.5 million for fiscal years 2016, 2015 and 2014, respectively), Brazil ($5.0 million, $8.0 million and $13.8 million for fiscal years 2016, 2015 and 2014, respectively) and Chile ($7.5 million, $6.5 million and $8.8 million for fiscal years 2016, 2014 and 2014, respectively).
|
|
|
Balance at July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Long-lived assets by geographic location:
|
|
|
|
EEI and its subsidiaries located in the United States
|
|
$
|
4,916
|
|
|
$
|
5,901
|
|
|
$
|
6,566
|
|
Subsidiaries located in South America
|
|
|
1,178
|
|
|
|
1,213
|
|
|
|
1,374
|
|
Other foreign subsidiaries
|
|
|
---
|
|
|
|
---
|
|
|
|
1
|
|
20.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time, the Company is a 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 believes will have a material adverse effect on the Company’s results of operations, financial condition or 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.
On February 4, 2011, the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to ecology and environment do brasil Ltda (“E&E Brasil”), a majority-owned subsidiary of EEI. The Notice of Infraction concerned the taking and collecting wild animal specimens without authorization by the competent authority and imposed a fine of 520,000 Reais against E&E Brazil. The Institute also filed Notices of Infraction against four employees of E&E Brasil alleging the same claims and imposed fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E Brasil. No claim has been made against EEI.
E&E Brasil has filed court claims appealing the administrative decisions of the Institute for E & E Brasil’s employees that: (a) deny the jurisdiction of the Institute; (b) state that the Notice of Infraction is constitutionally vague; and (c) affirmatively state that E&E Brasil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is not clearly marked to show its boundaries. The claim of violations against one of the four employees was dismissed. The remaining three employees have fines assessed against them that are being appealed through the federal courts. Violations against E&E Brasil are pending agency determination. At July 31, 2016, the Company recorded a reserve of approximately $0.3 million in other accrued liabilities related to these claims.
Contract Termination Provisions
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 did not experience early termination of any material contracts during fiscal years 2016 or 2015.
In October 2015, EEI sold its majority interest in ECSI, LLC (“ECSI”), an engineering and environmental consulting company headquartered in Kentucky, to ECSI’s minority shareholders for $0.3 million. EEI recognized a loss on valuation of its investment in ECSI of approximately $0.4 million in administrative and indirect operating expenses on the accompanying consolidated statements of operations during the fourth quarter of the fiscal year ended July 31, 2015. The offsetting allowance for loss on valuation of investment in ECSI was recorded in other assets on the accompanying consolidated balance sheets at July 31, 2015.
Effective with consummation of the sale in October 2015, ECSI and its owners are no longer related parties to EEI or any of its consolidated subsidiaries.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
None to report.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected.
As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Notwithstanding the material weakness discussed below, management has concluded that the consolidated financial statements included in this Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal year ended July 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
|
●
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
|
|
●
|
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations; and
|
|
●
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of our internal control over financial reporting as of July 31, 2016 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control—Integrated Framework (1992)
. Based upon this assessment, management has concluded that our internal control over financial reporting was not effective as of July 31, 2016 due to the fact that there was a material weakness in the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.
Specifically, management identified control deficiencies related to: (i) contingent losses that were incorrectly accrued as liabilities by certain foreign subsidiaries during fiscal years prior to 2016; and (ii) deferred income tax assets and liabilities that were incorrectly recorded by certain foreign subsidiaries during fiscal year prior to 2016. Accounting staff of these foreign subsidiaries were not adequately trained regarding U.S. GAAP accounting and reporting requirements related to contingent losses and income taxes. In addition, management located at the Company’s corporate headquarters in the U.S. did not provide adequate review and oversight over accounting for these items by foreign subsidiaries. Although the combined deficiencies did not result in a material misstatement of the Company’s financial statements for any of the periods presented in this Form 10-K, management concluded that there was a reasonable possibility that, if any material misstatement had occurred, it would not have been prevented or detected on a timely basis.
Management has actively engaged in developing a remediation plan to address the material weakness noted above. Specifically, the following controls have been established or will be established in during the fiscal year ended July 31, 2017:
|
●
|
Enhanced training of foreign accounting staff regarding U.S. GAAP accounting and reporting requirements as they relate to their operations;
|
|
●
|
Enhanced training of foreign accounting staff regarding accounting and reporting risks inherent in their operations and development of internal controls developed to mitigate those risks; and
|
|
●
|
Enhanced review and oversight controls established for corporate finance management located in the U.S. over the accounting and financial reporting activities of subsidiaries.
|
Management has developed a detailed plan and timetable for the implementation of the foregoing remediation efforts. Under the direction of the Audit Committee, management will monitor the implementation plan and continue to review and make necessary changes to the plan to improve the overall design of the Company’s internal control environment.
In May 2014, COSO adopted an updated
Internal Control—Integrated Framework
, which includes enhancements to, and clarifications of, its original framework published in 1992. The Company intends to implement COSO’s updated framework during the fiscal year ended July 31, 2017 in order to ensure full adoption by August 1, 2017.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
By:
|
/s/Gerard A. Gallagher III
|
|
By:
|
/s/H. John Mye III
|
|
Gerard A. Gallagher III
|
|
|
H. John Mye III
|
|
Chief Executive Officer
|
|
|
Chief Financial and Accounting Officer
|
Item 9B. Other Information
None to report.
PART III
Item
10.
Directors and Executive Officers of the Registrant
The names, ages and positions of the executive officers and Directors of the Company are included in the following table.
Name
|
Age
|
Position
|
|
|
|
Frank B. Silvestro
|
79
|
Chairman of the Board, Executive Vice President and Director
|
Ronald L. Frank
|
78
|
Executive Vice President, Secretary, and Director
|
Gerard A. Gallagher III
|
59
|
President and Chief Executive Officer
|
Fred J. McKosky
|
62
|
Senior Vice President, Chief Operating Officer
|
H. John Mye III
|
64
|
Vice President, Chief Financial and Accounting Officer, and Treasurer
|
Laurence M. Brickman
|
72
|
Senior Vice President
|
Cheryl A. Karpowicz
|
65
|
Senior Vice President
|
Gerald A. Strobel
|
76
|
Director
|
Gerard A. Gallagher, Jr.
|
85
|
Director
|
Michael C. Gross
|
56
|
Director
|
Michael S. Betrus
|
63
|
Director
|
Michael R. Cellino, M.D.
|
63
|
Director
|
Each Director is elected to hold office until the next annual meeting of shareholders and until his successor is elected and qualified. Executive officers are elected annually and serve at the discretion of the Board of Directors. Specific experience, qualifications, attributes and skills for each Director and executive officer follow.
Mr. Frank B. Silvestro is a co-founder of the Company and has served as a Vice President and a Director since its inception in 1970. In August 1986, he became Executive Vice President. In 2013, he was appointed Chairman of the Board of Directors. He also serves on the Pension Review Committee. Mr. Silvestro has a B.A. in physics and an M.A. in biophysics. In July 2016, Mr. Silvestro informed the Company’s Board of Directors that he will retire from his positions as Executive Vice President and Chairman of the Board of Directors effective January 1, 2017. After his retirement, Mr. Silvestro intends to continue to serve as a Director of the Company and as a contracted consultant to the Company.
Mr. Ronald L. Frank is a co-founder of the Company and has served as Secretary, Treasurer, Vice President of Finance and a Director since its inception in 1970. In 1986, he became Executive Vice President of Finance. In 2008, Mr. Frank resigned his positions as Vice President of Finance and Treasurer of the Company. Mr. Frank continues in his position as Executive Vice President on a part-time basis. He also continues to serve as a Director of the Company, and as Chairman of the Pension Review Committee. Mr. Frank has a B.S. in engineering and a M.A. in Physics.
Mr. Gerald A. Strobel is a co-founder of the Company and has served as a Vice President and a Director since its inception in 1970. In August 1986, he became Executive Vice President of Technical Services. He served as the Company’s Chief Executive Officer (“CEO”) from 2013 until his retirement in 2015. He continues to serve as a Director of the Company and as a contracted consultant to the Company. Mr. Strobel is a registered Professional Engineer in the state of New York, and has a B.S. in civil engineering and a M.S. in sanitary engineering.
Messrs. Silvestro, Frank and Strobel each have over forty years of work experience in managing the Company and knowing its markets and customers, which makes them uniquely qualified to serve as Directors.
Mr. Gerard A. Gallagher III has served as CEO of the Company since 2015 and as President of the Company since 2014. He has been employed by the Company for 34 years, and previously served as Senior Vice President of Environmental Sustainability, Vice President and Regional Manager for the Company’s Southern U.S. operations. Mr. Gallagher has a B.A. in physical geography.
Mr. Fred J. McKosky has served as the Chief Operating Officer of the Company since 2014. He has been employed by the Company for 38 years, and previously served as Senior Vice President of Corporate Operations. Mr. McKosky has an M.S. in environmental engineering and a B.S. in environmental science, and is a registered Professional Engineer in the state of New York.
Mr. H. John Mye III has served as Chief Financial Officer, a Vice President and Treasurer of the Company since 2008. Mr. Mye was previously employed in various finance roles, including: Finance Director at Vishay Intertechnology, a high technology company located in Buffalo, N.Y. (2002-2007); Vice President with FAI, Inc., a start-up company located in Buffalo, N.Y. (2000-2002); and Director of Finance for American Precision Industries, a Fortune 500 company located in Buffalo, N.Y. (1993-2000). During his career, Mr. Mye has gained extensive experience with management of sales, earnings and cash flow reporting, evaluating and consummating mergers and acquisitions, financial planning and analysis, and general finance operations. Mr. Mye has an MBA and is a registered Professional Engineer in the state of New York.
Mr. Laurence M. Brickman joined the Company in 1971. He became Vice President in 1988 and became a Senior Vice President in 1994. Mr. Brickman has a B.S., M.S. and Ph.D. in biology.
Ms. Cheryl A. Karpowicz has been a Senior Vice President of the Company since 2011 and was named Senior Vice President of Business Development in 2014. Ms. Karpowicz has been employed by the Company for 38 years and previously led its energy services area. She has a B.A. in Interdepartmental Studies and is a Certified Planner and member of the American Institute of Certified Planners.
Mr. Gerard A Gallagher Jr. joined the Company in 1972, and retired in 2001 as a Senior Vice President. He has served as a Director since 1986, and also serves as a contracted consultant to the Company. Mr. Gallagher has a B.S. in Physics. Mr. Gallagher’s tenure of 44 years with the Company, principally in domestic and international program management and in government contracting, provides an important understanding of the Company and its markets that makes him a valuable member of the Board of Directors.
Mr. Michael C. Gross has been a Director of the Company since 2010, and currently serves on the Audit Committee and the Pension Review Committee. Mr. Gross was employed by the Audit Division of the New York State Department of Taxation and Finance for 32 years before his retirement in March 2016. He has a B.S. in accounting and was a licensed property and casualty insurance broker from 2003 until 2016. Mr. Gross’ accounting and insurance experience provide valuable experience and perspective to the Board of Directors.
Mr. Michael S. Betrus has been a Director of the Company since 2014, and currently serves as Chairman of the Audit Committee. From 2005 until his retirement in 2015, Mr. Betrus served as Senior Vice President and Chief Financial Officer of Power Drives, Inc, a manufacturing and industrial distribution company located in Buffalo, New York. He previously served as the Company’s Accounting and Contracts Manager from 1994 to 2005. He has an M.S. in accounting and is a Certified Public Accountant in New York State. Mr. Betrus has been designated as the Audit Committee financial expert. With over 35 years of accounting, financial management, contractual oversight and forecasting experience, Mr. Betrus provides valuable financial perspective and insight to the Board of Directors.
Dr. Michael R. Cellino, M.D. has been a Director of the Company since 2015, and currently serves on the Audit Committee. Dr. Cellino is
a physician with a license to practice medicine from New York State, and is board certified in internal medicine. Dr. Cellino has been a shareholder and employee of Buffalo Medical Group, PC, located in Buffalo, New York since 1991, where he has served in various governance roles, including Corporation Secretary, Chairman of the Governance Committee, Chairman of the Budget and Audit Committee and a Member of the Finance Committee. His experience with oversight related to cost management and budgetary forecasting provides valuable financial perspective and insight to the Board of Directors.
Code of Ethics
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, was filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2004 and is posted on the Company's website at
www.ene.com
. 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.
Board of Directors Leadership, Structure and Risk Oversight
The Board of Directors operates under the leadership of its Chairman. The Company’s restated bylaws require that the offices of Chairman of the Board, CEO and Secretary must be held by separate individuals. Notwithstanding anything to the contrary in the previous sentence, in the event of removal, incapacity, or extended leave of the CEO, the Chairman of the Board will act as the CEO temporarily, until the CEO returns or is replaced by a resolution of the Board of Directors. E&E believes the current leadership structure provides the appropriate balance of oversight, independence, administration and hands-on involvement in activities of the Board of Directors that are required for the efficient conduct of corporate governance activities.
The Company has a standing Audit Committee established in accordance with section 3 (a)(58)(A) of the Securities Exchange Act of 1934 and the requirements of NASDAQ. Messrs. Betrus and Gross and Dr. Cellino serve as members of the Audit Committee. The Board of Directors has designated Mr. Betrus as the financial expert serving on its Audit Committee, as Chairman of the Audit Committee. Messrs. Betrus and Gross and Dr. Cellino are each independent, as that term is used in Item 407 (a) (as to Messrs. Betrus and Gross and Dr. Cellino) and 407 (d)(5)(i)(B) (as to just Mr. Betrus) of Regulation S-K and Rule 5605 (a)(2) of the NASDAQ listing standards in that none of them is an employee of the Company, nor is there any family relationship of those three individuals to the Company’s other Directors or any Executive Officer of the Company
.
The Board of Directors is responsible for overseeing the Company’s risk profile and management’s processes for managing risk. This oversight is conducted primarily through the Audit Committee. The Audit Committee focuses on financial risks, including those that could arise from accounting and financial reporting processes, as well as review of overall risk function and senior management’s establishment of appropriate systems and processes for managing areas of material risk to the Company, including, but not limited to, operational, financial, legal, regulatory and strategic risks.
The Board of Directors has a standing Pension Review Committee, the principal functions of which are to review changes to retirement plans necessitated by law or regulation and to determine whether retirement plans meet the compensation goals for the Company’s employees as established by the Board of Directors. Messrs. Frank (Chairman), Silvestro and Gross serve on the Pension Review Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s Executive Officers and Directors, and persons who beneficially own more than ten percent (10%) of the Company’s stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Executive Officers, Directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the Company and written representations from the Company’s Executive Officers and Directors, the Company believes that during the fiscal year ending July 31, 2016 all Section 16(a) filing requirements applicable to its Executive Officers, Directors and greater than ten percent (10%) beneficial owners were complied with by such persons, except for the following: (i) Ronald L. Frank purchased 500 shares of Class A Common Stock on August 29, 2016 but did not file his Form 4 concerning that transaction until September 1, 2016; and (ii) Mr. Frank also purchased 1 share of Class A Common Stock on April 1, 2016 but did not file his Form 4 concerning that transaction until June 20, 2016.
Item 11. Executive Compensation
The Company's Board of Directors, acting as a Compensation Committee of the whole, is responsible for overseeing all of the executive compensation and equity plans and programs to ensure that its officers and senior staff are compensated in a manner that is consistent with its competitively based annual and long term performance goals.
The Board of Directors is responsible for establishing and approving our policies governing the compensation of our executive officers. The Company provides what it believes is a competitive total compensation package to our executive team through a combination of base salary, cash bonuses, equity plans (for Company officers other than its Executive Vice Presidents) and other broad-based benefit programs. Our compensation philosophy, policies, and practices with respect to all of the Company’s officers, including the CEO and our three most highly compensated officers as of July 31, 2016, is described below.
Objectives and Philosophy of Our Executive Compensation Program
Our primary objectives with respect to executive compensation are to:
|
●
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attract, retain, and motivate talented executives by offering executive compensation that is competitive with our peer group;
|
|
●
|
promote the achievement of key financial and strategic performance measures by linking short- and long-term cash and equity incentives to the achievement of measurable corporate and, in some cases, individual performance goals; and
|
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●
|
align the incentives of our executives with the creation of value for our shareholders.
|
We compete with many other companies for executive personnel. Accordingly, our Board of Directors will generally target overall compensation for executives to be competitive with that of the Company’s peer group. Variations to this targeted compensation may occur depending on the experience level of the individual and market factors, such as the demand for executives with similar skills and experience.
Our executive compensation program ties a substantial portion of each executive’s overall compensation to key strategic, financial, and operational goals such as our financial and operational performance, the growth of our customer base, new development initiatives, and the establishment and maintenance of key strategic relationships.
Components of Our Executive Compensation Program
The primary elements of our executive compensation program are:
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●
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cash incentive bonuses;
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●
|
equity incentive awards;
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●
|
severance benefits upon termination without cause; and
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●
|
insurance and other employee benefits and compensation.
|
We do not have a formal or informal policy or target for allocating compensation between short-term and long-term compensation or between cash and non-cash compensation. Salaries and bonuses of executive officers are reviewed and approved annually by the Board of Directors based primarily upon:
|
●
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financial and operational performance of the Company as a whole, as evaluated against annual operating goals established by the Board of Directors;
|
|
●
|
individual performance of the executive, as evaluated against individual goals and objectives established by the Board of Directors;
|
|
●
|
performance of the executive management team as a whole, as evaluated against corporate goals and objectives established by the Board of Directors; and
|
|
●
|
informal benchmarking data, including comparison of our executive compensation to other peer companies.
|
Bonuses of executive officers may be in the form of cash, restricted awards of Class A Common Stock, or a combination of both. The allocation between cash and non-cash compensation of executive officers is considered annually on a discretionary basis by the Board of Directors.
The following table provides a summary of the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended July 31, 2016 and 2015 of those persons who were at July 31, 2016: (i) the Company’s Chief Executive Officer and President; and (ii) the three other most highly compensated executive officers employed at July 31, 2016 with annual salary and bonus for the fiscal year ended July 31, 2016 in excess of $100,000. In this Annual Report, the four persons named in the table below are referred to as the "Named Executives."
SUMMARY COMPENSATON TABLE
|
|
|
|
|
|
|
|
|
|
|
|
Name and
Principal Position
|
Fiscal
Year
|
|
Salary
|
|
|
Bonus
(1)
|
|
|
Stock
Awards (2)
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
(3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerard A. Gallagher III
|
2016
|
|
$
|
314,390
|
|
|
$
|
30,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
10,930
|
|
|
$
|
355,320
|
|
CEO and President
|
2015
|
|
$
|
234,961
|
|
|
$
|
100,000
|
|
|
$
|
18,533
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
9,702
|
|
|
$
|
363,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank B. Silvestro (4)
|
2016
|
|
$
|
356,601
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
10,666
|
|
|
$
|
367,267
|
|
Executive Vice President and Chairman of the Board
|
2015
|
|
$
|
356,601
|
|
|
$
|
100,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
10,466
|
|
|
$
|
467,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald L. Frank
|
2016
|
|
$
|
213,960
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
8,822
|
|
|
$
|
222,782
|
|
Executive Vice President and Director
|
2015
|
|
$
|
213,960
|
|
|
$
|
60,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
8,822
|
|
|
$
|
282,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fred J. McKosky
|
2016
|
|
$
|
214,870
|
|
|
$
|
30,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
8,879
|
|
|
$
|
253,749
|
|
Senior Vice President and Chief Operating Officer
|
2015
|
|
$
|
192,662
|
|
|
$
|
80,000
|
|
|
$
|
23,468
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
7,961
|
|
|
$
|
304,091
|
|
|
(1)
|
Amounts earned for bonus compensation are determined at the discretion of the Board of Directors.
|
|
(2)
|
As of July 31, 2016, there were no outstanding restricted stock awards issued to Mr. Gallagher III or Mr. McKosky pursuant to the Company's Stock Award Plan.
|
|
(3)
|
Represents group term life insurance premiums and contributions made by the Company to its Defined Contribution Plan on behalf of the Named Executives.
|
|
(4)
|
In July 2016, Mr. Silvestro informed the Company’s Board of Directors that he will retire from his positions as Executive Vice President and Chairman of the Board of Directors effective January 1, 2017. After his retirement, Mr. Silvestro intends to continue to serve as a Director of the Company and as a contracted consultant to the Company.
|
Compensation Pursuant to Plans
Defined Contribution Plan
The Company maintains a Defined Contribution Plan ("the DC Plan") which is qualified under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") pursuant to which the Company contributes an amount not in excess of 15% of the aggregate compensation of all employees who participate in the DC Plan. All employees, including the executive officers identified under "Executive Compensation", are eligible to participate in the plan, provided that they have attained age 21 and completed one year of employment with at least 1,000 hours of service. The amounts contributed to the plan by the Company are allocated to participants based on a ratio of each participant's points to total points of all participants determined as follows: one point per $1,000 of compensation plus two points per year of service completed prior to August 1, 1979, and one point for each year of service completed after August 1, 1979.
Stock Award Plan
EEI adopted the 1998 Stock Award Plan effective March 16, 1998. This plan, together with supplemental plans that were subsequently adopted by the Company’s Board of Directors, is referred to as the “Stock Award Plan”. The Stock Award Plan is not a qualified plan Section 401(a) of the Internal Revenue Code. Under the Stock Award Plan, Directors, officers and other key employees of EEI or any of its subsidiaries may be awarded Class A Common Stock as a bonus for services rendered to the Company or its subsidiaries, based upon the fair market value of the common stock at the time of the award. The Stock Award Plan authorizes the Company’s Board of Directors to determine the vesting period and the circumstances under which the awards may be forfeited.
Under the supplemental plan in place as of July 31, 2016, which expired in October 2016, the Company issued 17,386 shares of Class A Common Stock under the Stock Award Plan, all of which were fully vested at July 31, 2016. In October 2016, the Company’s Board of Directors adopted the current supplemental plan, the 2016 Stock Award Plan. This plan permits awards of up to 200,000 shares of Class A Common Stock for a period of up to five (5) years until its termination in October 2021.
Outstanding Equity Awards
At July 31, 2016, there were no outstanding awards for shares of Class A Common Stock that were granted and remained subject to vesting under the Stock Award Plan.
Director Compensation
Compensation earned by each employee and non-employee director for his services during fiscal year 2016 is summarized in the following table.
DIRECTOR COMPENSATION
|
|
|
|
Name
|
|
Fees Earned or
Paid in Cash
|
|
|
Stock
Awards
(1)
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
Earnings (2)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
(3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank B. Silvestro
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
35,000
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
35,000
|
|
Ronald L. Frank
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
21,000
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
21,000
|
|
Gerald A. Strobel
|
|
$
|
36,611
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
12,000
|
|
|
|
---
|
|
|
$
|
63,389
|
|
|
$
|
112,000
|
|
Gerard A. Gallagher, Jr.
|
|
$
|
36,611
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
6,000
|
|
|
|
---
|
|
|
$
|
34,755
|
|
|
$
|
71,366
|
|
Michael C. Gross
|
|
$
|
36,611
|
|
|
$
|
13,811
|
|
|
|
---
|
|
|
$
|
6,000
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
50,422
|
|
Michael R. Cellino, M.D.
|
|
$
|
36,611
|
|
|
$
|
13,811
|
|
|
|
---
|
|
|
$
|
6,000
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
50,422
|
|
Michael S. Betrus
|
|
$
|
36,611
|
|
|
$
|
18,752
|
|
|
|
---
|
|
|
$
|
12,000
|
|
|
|
---
|
|
|
|
---
|
|
|
$
|
55,363
|
|
|
(1)
|
In September 2015, the Company issued 1,350 shares, 1,350 shares and 1,833 shares of Class A Common Stock to Mr. Gross, Dr. Cellino, and Mr. Betrus, respectively. These shares vested immediately upon issuance, subject to certain restrictions regarding transfer of the shares that expired on August 1, 2016.
|
|
(2)
|
Represents bonuses approved by the Board of Directors for the fiscal year ended July 31, 2016.
|
|
(3)
|
Represents compensation paid under a consulting arrangement.
|
Bonuses paid to Directors are reviewed and approved by the Board of Directors based primarily upon:
|
●
|
financial and operational performance of the Company as a whole, as evaluated against annual operating goals established by the Board of Directors;
|
|
●
|
individual performance of each Director; and
|
|
●
|
performance of the Board of Directors as a whole.
|
In July, 2015, the Board of Directors increased annual director compensation to $55,000 for Mr. Betrus and $50,000 for Mr. Gross and Dr. Cellino, effective August 1, 2016, in recognition for roles as Chairman and members of the Audit Committee. Annual compensation will be in the form of cash ($36,611 per annum for each, paid quarterly) and stock.
In September 2016, the Company issued 1,812 shares, 1,319 shares and 1,319 shares of Class A Common Stock to Mr. Betrus, Mr. Gross and Dr. Cellino, respectively. These shares vested immediately upon issuance, subject to certain restrictions regarding transfer of the shares that expired on August 1, 2017.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The number of outstanding shares of Class A Common Stock and Class B Common Stock of the Company beneficially owned by each person known by the Company to be the beneficial owner of more than 5 percent of the then outstanding shares of common stock as of September 30, 2016 are summarized in the following table.
|
|
Class A Common Stock
|
|
|
Class B Common Stock
|
|
Name and Address (1)
|
|
Nature and
Amount
of Beneficial
Ownership
(2) (3)
|
|
|
Percent of
Class as
Adjusted
(3)
|
|
|
Nature and
Amount
of Beneficial
Ownership
(2) (3)
|
|
|
Percent
Of Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank B. Silvestro*
|
|
|
297,052
|
|
|
|
9.0
|
%
|
|
|
292,052
|
|
|
|
22.6
|
%
|
Ronald L. Frank*
|
|
|
219,943
|
|
|
|
6.9
|
%
|
|
|
187,234
|
|
|
|
14.5
|
%
|
Gerald A. Strobel*
|
|
|
219,604
|
|
|
|
6.8
|
%
|
|
|
219,604
|
|
|
|
17.0
|
%
|
Gerhard J. Neumaier Testamentary Trust U/A Fourth
|
|
|
97,039
|
|
|
|
3.1
|
%
|
|
|
97,039
|
|
|
|
7.5
|
%
|
Kirsten Shelly
|
|
|
115,558
|
|
|
|
3.7
|
%
|
|
|
115,558
|
|
|
|
8.9
|
%
|
Franklin Resources, Inc. (4)
|
|
|
576,000
|
|
|
|
19.2
|
%
|
|
|
---
|
|
|
|
---
|
|
Edward W. Wedbush (5)
|
|
|
363,673
|
|
|
|
12.1
|
%
|
|
|
---
|
|
|
|
---
|
|
Mill Road Capital II GP LLC
|
|
|
463,072
|
|
|
|
15.4
|
%
|
|
|
---
|
|
|
|
---
|
|
North Star Investment Management Corporation (6)
|
|
|
249,260
|
|
|
|
8.3
|
%
|
|
|
---
|
|
|
|
---
|
|
*See Footnotes in the Security Ownership of Management table below.
(1)
|
The address for Frank B. Silvestro, Ronald L. Frank and Gerald A. Strobel is c/o Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York 14086, unless otherwise indicated. The address for the Gerhard J. Neumaier Testamentary Trust U/A Fourth is 248 Mill Road, East Aurora, New York 14052. The address for Kirsten Shelly is 12 Running Brook Drive, Lancaster, New York 14086. The address for Franklin Resources, Inc. is One Franklin Parkway, San Mateo, CA 94403-1906. The address for Edward W. Wedbush is P.O. Box 30014, Los Angeles, CA 90030-0014. The address for Mill Road Capital II GP LLC is 382 Greenwich Avenue, Suite One, Greenwich, CT 06830. The address for North Star Investment Management Corporation is 20 N. Wacker Drive, Suite 1416, Chicago, Illinois 60606.
|
(2)
|
Each named individual or corporation is deemed to be the beneficial owners of securities that may be acquired within 60 days through the exercise of exchange or conversion rights. The shares of Class A Common Stock issuable upon conversion by any such shareholder are not included in calculating the number of shares or percentage of Class A Common Stock beneficially owned by any other shareholder.
|
(3)
|
There are 3,000,956 shares of Class A Common Stock issued and outstanding and 1,293,146 shares of Class B Common Stock issued and outstanding as of September 30, 2016.
For each named individual, the percentage in the “Class A Common Stock — Percent of Class as Adjusted” column is based upon the total shares of Class A Common Stock outstanding, plus shares of Class B Common Stock that may be converted at any time by that holder to Class A Common Stock on a per person basis. The shares of Class B Common Stock assumed to be converted to Class A Common Stock for any named individual are not included in the calculation of the percentage of Class A Common Stock beneficially owned by any other named individual.
|
(4)
|
Includes shares owned by subsidiaries and affiliates of Franklin Resources, Inc. based upon a Schedule 13-G filed on February 7, 2012.
|
(5)
|
Includes shares owned by subsidiaries and affiliates of Edward W. Wedbush based upon a Schedule 13-G filed on February 15, 2013.
|
(6)
|
Includes shares owned by North Star Investment Management Corporation based upon a Schedule 13-G filed on January 19, 2016.
|
Security Ownership of Management
Beneficial ownership of the Company's Class A Common Stock and Class B Common Stock as of September 30, 2016, by (i) each Director of the Company; and (ii) all Directors and officers of the Company as a group are summarized in the following table.
|
|
Class A Common Stock
|
|
|
Class B Common Stock
|
|
Name (1)
|
|
Nature and
Amount
of Beneficial
Ownership
(2) (3)
|
|
|
Percent of
Class as
Adjusted
(4)
|
|
|
Nature and
Amount
of Beneficial
Ownership
(2) (3)
|
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank B. Silvestro (8)
|
|
|
297,052
|
|
|
|
9.0
|
%
|
|
|
292,052
|
|
|
|
22.6
|
%
|
Ronald L. Frank (5)(8)
|
|
|
219,943
|
|
|
|
6.9
|
%
|
|
|
187,234
|
|
|
|
14.5
|
%
|
Gerald A. Strobel (6)(8)
|
|
|
219,604
|
|
|
|
6.8
|
%
|
|
|
219,604
|
|
|
|
17.0
|
%
|
Gerard A. Gallagher, Jr.
|
|
|
59,606
|
|
|
|
1.9
|
%
|
|
|
59,265
|
|
|
|
4.6
|
%
|
Michael C. Gross (7)
|
|
|
26,568
|
|
|
|
*
|
|
|
|
23,449
|
|
|
|
1.8
|
%
|
Michael R. Cellino, M.D.
|
|
|
4,389
|
|
|
|
*
|
|
|
|
---
|
|
|
|
---
|
|
Michael S. Betrus
|
|
|
4,645
|
|
|
|
*
|
|
|
|
---
|
|
|
|
---
|
|
Directors and Officers Group
(12 individuals)
|
|
|
907,452
|
|
|
|
23.9
|
%
|
|
|
794,944
|
|
|
|
61.5
|
%
|
* Less than 1.0%
(1)
|
The address of each of the above shareholders is c/o Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York 14086.
|
(2)
|
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, beneficial ownership of a security consists of sole or shared voting power (including the power to vote or direct the vote) or sole or shared investment power (including the power to dispose or direct the disposition) with respect to a security whether through any contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, the shareholders identified in this table have sole voting and investment power of the shares beneficially owned by them.
|
(3)
|
Each named person and all Directors and officers as a group are deemed to be the beneficial owners of securities that may be acquired within 60 days through the exercise of exchange or conversion rights. The shares of Class A Common Stock issuable upon conversion by any such shareholder are not included in calculating the number of shares or percentage of Class A Common Stock beneficially owned by any other shareholder.
|
(4)
|
There are 3,000,956 shares of Class A Common Stock issued and outstanding and 1,293,146 shares of Class B Common Stock issued and outstanding as of September 30, 2016.
For each named individual, the percentage in the “Class A Common Stock — Percent of Class as Adjusted” column is based upon the total shares of Class A Common Stock outstanding, plus shares of Class B Common Stock that may be converted at any time by that holder to Class A Common Stock on a per person basis. The shares of Class B Common Stock assumed to be converted to Class A Common Stock for any named individual are not included in the calculation of the percentage of Class A Common Stock beneficially owned by any other named individual.
|
(5)
|
Includes 7,640 shares of Class A Common Stock owned by Mr. Frank's individual retirement account and 6,265 shares of Class A Common Stock owned by Mr. Frank’s 401(k) plan account.
|
(6)
|
Includes 704 shares of Class B Common Stock held in equal amounts by Mr. Strobel as custodian for two of his children, as to which he disclaims beneficial ownership. Does not include any shares of Class B Common Stock held by a trust created by one of his children for which Mr. Strobel serves as Trustee.
|
(7)
|
Mr. Gross is one of three co-trustees of two inter vivos trusts established by his parents for their benefit that own these shares of Class B Common Stock and is a one-third contingent remainder beneficiary of both trusts’ assets, which include an aggregate total of 70,348 such shares, of which he disclaims beneficial interest in 46,899 of those shares.
|
(8)
|
Subject to the terms of the Restrictive Agreement. See "Security Ownership of Certain Beneficial Owners-Restrictive Agreement."
|
Restrictive Agreement
Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of Ecology and Environment, Inc. common stock (now classified as Class B Common Stock) owned by them, certain children of those individuals and any such shares subsequently transferred to their spouses and/or children outright or in trust for their benefit upon the demise of a signatory to the Agreement (“Permitted Transferees”). The Agreement provides that prior to accepting a bona fide offer to purchase some or all of their shares of Class B Common Stock governed by the Agreement, that the selling party must first allow the other signatories to the Agreement (not including any Permitted Transferee) 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.
Item 13. Certain Relationships and Related Transactions
Director Gerard A. Gallagher, Jr.'s son, Gerard A. Gallagher, III, serves as Chief Executive Officer and President of the Company and received aggregate compensation of $355,320 for his services during fiscal year 2016. The Company believes that his compensation was commensurate with his peers during fiscal year 2016 and that his relationships during the year were reasonable and in the best interest of the Company.
Directors Michael R. Cellino, Michael C. Gross and Michael S. Betrus
are independent, as that term is used in Item 407(a) of Regulation S-K and Rule 5605(a)(2) of the NASDAQ listing standards, as described in their relevant business experiences set forth in Item 10 hereof in that none of them is an employee of the Company, nor is there any family relationship of those three individuals to the Company’s other four Directors or any Executive Officer of the Company.
Item 14.
Principal Accounting Fees and Services
The Audit Committee meets with the Company’s independent registered accounting firm to approve the annual scope of accounting services to be performed, including all audit, audit-related, and non-audit services, and the related fee estimates. The Audit Committee also meets with the Company’s independent registered accounting firm on a quarterly basis, following completion of their quarterly reviews and annual audit before our earnings announcements, to review the results of their work. As appropriate, management and our independent registered accounting firm update the Audit Committee with material changes to any service engagement and related fee estimates as compared to amounts previously approved. Under its charter, the Audit Committee has the authority and responsibility to review and approve, in advance, any audit and proposed permissible non-audit services to be provided to the Company by its independent registered public accounting firm.
Effective November 6, 2016, the Company dismissed its registered independent accounting firm, Schneider Downs & Co. Inc. and engaged Ernst & Young LLP as the successor independent registered accounting firm to provide audit and certain audit-related services. The aggregate fees billed by Ernst & Young LLP to the Company for audit and audit-related services during fiscal years 2016 and 2015 are summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Audit fees
|
|
$
|
416,309
|
|
|
$
|
*
|
|
Audit-related fees
|
|
|
---
|
|
|
|
*
|
|
Total
|
|
$
|
416,309
|
|
|
$
|
*
|
|
* Not applicable.
The aggregate fees billed by Schneider Downs & Co. Inc. to the Company for audit and audit-related services during fiscal years 2016 and 2015 are summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Audit fees
|
|
$
|
52,979
|
|
|
$
|
442,747
|
|
Audit-related fees
|
|
|
30,259
|
|
|
|
45,045
|
|
Total
|
|
$
|
83,238
|
|
|
$
|
487,792
|
|
Audit Fees
Audit fees include aggregate fees paid or accrued for the audit of the annual financial statements included in this Annual Report on Form 10-K, reviews of the financial statements included in the Company's quarterly reports on Form 10-Q, and expenses incurred related to audit services.
Audit-Related Fees
Audit-related fees include aggregate fees paid or accrued for services rendered for audits of the Company’s defined contribution plans, and for indirect rate audits.