Defined Contribution Plans
EEI has a non-contributory defined contribution plan providing deferred benefits for substantially all of its U.S. 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, 2018, two founders, their spouses 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.
Earnings per Share
Basic and diluted earnings per share (“EPS”) are computed by dividing the net income attributable to EEI 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 (defined in Note 15 of these consolidated financial statements), 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.
Comprehensive Income
Comprehensive income represents the change in shareholders’ equity during a period, excluding changes arising from
transactions with shareholders. Comprehensive income includes net income from the consolidated statements of operations, plus other comprehensive income during a reporting period. Other comprehensive income (loss) represents the net effect of
accounting transactions that are recognized directly in shareholders’ equity, such as unrealized net income or losses resulting from currency translation adjustments from foreign operations and unrealized gains or losses on available-for-sale
securities.
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 until the related assets and liabilities are settled or otherwise disposed of. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are
included in net foreign exchange (loss) gain in the consolidated statements of operations as incurred.
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 adjustments during
fiscal years 2018, 2017 or 2016.
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.
5.
|
Cash, Cash Equivalents and Restricted Cash
|
Cash, cash equivalents and restricted cash are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,496
|
|
|
$
|
12,858
|
|
Restricted cash included in other assets
|
|
|
250
|
|
|
|
277
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
13,746
|
|
|
$
|
13,135
|
|
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash
equivalents. Money market funds of $0.4 million and $0.2 million were included in cash and cash equivalents at July 31, 2018 and 2017, respectively.
Restricted cash included in other assets represents collateral for pending litigation matters in Brazil that are not
expected to be resolved within one year from the balance sheet date.
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 Company classifies assets and liabilities within the fair value hierarchy 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 Company monitors the availability of observable market data 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 2018, 2017 or 2016.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at July 31, 2018 and 2017. These
assets were classified as level 1 instruments at both dates.
Investment securities available for sale of $1.5 million at July 31, 2018 and 2017 primarily included mutual funds invested
in U.S. municipal bonds, which the Company may immediately redeem without prior notice. These mutual funds are valued at the NAV of shares held by the Company at period end as a practical expedient to estimate fair value. These mutual funds
are deemed to be actively traded, are required to publish their daily NAV and are required to transact at that price.
The Company recorded unrealized investment losses or gains of less than $0.1 million in accumulated other comprehensive loss
at July 31, 2018, 2017 and 2016. The Company did not record any sales of investment securities during the twelve months ended July 31, 2018 or 2017.
Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of borrowings for working
capital requirements. Based the relative immateriality of consolidated debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at July 31, 2018 and 2017. These liabilities
were classified as level 2 instruments at both dates. Refer to Note 11 and Note 12 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.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
Contract receivables:
|
|
|
|
|
|
|
Billed
|
|
$
|
12,905
|
|
|
$
|
15,003
|
|
Unbilled
|
|
|
13,994
|
|
|
|
17,990
|
|
|
|
|
26,899
|
|
|
|
32,993
|
|
Allowance for doubtful accounts
|
|
|
(1,284
|
)
|
|
|
(2,044
|
)
|
Contract receivables, net
|
|
$
|
25,615
|
|
|
$
|
30,949
|
|
Billed contract receivables included contractual retainage balances of $1.4 million and $0.9 million at July 31, 2018 and
2017, respectively. Management anticipates that the unbilled contract receivables and retainage balances at July 31, 2018, included in the table above, will be substantially billed and collected within one year.
At July 31, 2018, management identified $0.5 million of contract receivables, net that are not expected to be collected
within one year. These net receivables represent long-term assets that are included in other assets on the consolidated balance sheet at July 31, 2018.
Contract Receivable Concentrations
Significant concentrations of contract receivables and the allowance for doubtful accounts are summarized in the following
table.
|
|
July 31, 2018
|
|
|
July 31, 2017
|
|
Region
|
|
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts
|
|
|
Contract
Receivables
(Restated)
|
|
|
Allowance for
Doubtful
Accounts
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
21,580
|
|
|
$
|
569
|
|
|
$
|
25,472
|
|
|
$
|
797
|
|
South American operations
|
|
|
5,319
|
|
|
|
715
|
|
|
|
7,521
|
|
|
|
1,247
|
|
Totals
|
|
$
|
26,899
|
|
|
$
|
1,284
|
|
|
$
|
32,993
|
|
|
$
|
2,044
|
|
The allowance for doubtful accounts for the Company’s South American operations represented 13% and 17% of related contract
receivables at July 31, 2018 and 2017, respectively. Unstable local economies that adversely impacted certain of our South American clients in recent years demonstrated signs of stabilizing during fiscal year 2018. Management continues to
monitor trends and events that may adversely impact the realizability of recorded receivables from our South American clients.
Allowance for Doubtful Accounts
Activity within the allowance for doubtful accounts is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,044
|
|
|
$
|
6,792
|
|
|
$
|
6,817
|
|
Provision for doubtful accounts during the period
|
|
|
813
|
|
|
|
682
|
|
|
|
1,164
|
|
Write-offs and recoveries of allowance recorded in prior periods
|
|
|
(943
|
)
|
|
|
(5,430
|
)
|
|
|
(1,189
|
)
|
Reclassification of allowance from current to noncurrent
|
|
|
(630
|
)
|
|
|
---
|
|
|
|
---
|
|
Balance at end of period
|
|
$
|
1,284
|
|
|
$
|
2,044
|
|
|
$
|
6,792
|
|
During fiscal year 2017, the Company reversed $4.9 million of allowance related to a specific project in the Middle East, for which a
corresponding $4.9 million contract receivable balance was also written off during the period.
8.
|
Variable Interest Entities and Equity Method Investment
|
Variable Interest Entities
As of July 31, 2018 and 2017, the Company’s consolidated one majority owned subsidiary that was deemed to be a VIE. The financial position
of this VIE as of July 31, 2018 and 2017 is summarized in the following table.
|
|
July 31,
2018
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ecology and Environment Inc. shareholder’s equity
|
|
|
|
)
|
|
|
|
)
|
Noncontrolling interests shareholders’ equity
|
|
|
|
)
|
|
|
|
)
|
Total shareholders’ equity
|
|
|
|
)
|
|
|
|
)
|
Total liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Total gross revenue of the consolidated VIE was $10.0 million, $8.9 million and $5.0 million for the fiscal years ended July
31, 2018, 2017 and 2016, respectively. With the exception of restricted cash of $0.3 million included in noncurrent assets at July 31, 2018 and 2017 (refer to Note 5), all assets of the VIE were available for the general operations of the VIE.
Equity Method Investment
The Company’s equity method investment in GAC had a carrying value of $2.1 million and $1.5 million at July 31, 2018 and
2017, respectively. The Company’s ownership percentage was 55.1% at both dates. The equity method investment in GAC is included within the Company’s South American operating segment.
Activity recorded for the Company’s equity method investment during the fiscal years ended July 31, 2018, 2017 and 2016 is
summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment carrying value at beginning of period
|
|
$
|
1,463
|
|
|
$
|
1,944
|
|
|
$
|
1,793
|
|
GAC net income attributable to EEI
|
|
|
595
|
|
|
|
368
|
|
|
|
363
|
|
EEI’s portion of dividends declared by GAC
|
|
|
---
|
|
|
|
(849
|
)
|
|
|
(212
|
)
|
Equity investment carrying value at end of period
|
|
$
|
2,058
|
|
|
$
|
1,463
|
|
|
$
|
1,944
|
|
GAC’s financial position as of July 31, 2018 and 2017 is summarized in the following table.
|
|
July 31,
2018
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ecology and Environment Inc. shareholder’s equity
|
|
|
|
|
|
|
|
|
Noncontrolling interests shareholders’ equity
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
The results of GAC’s operations for fiscal years 2018, 2017 and 2016 are summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
11,987
|
|
|
$
|
7,737
|
|
|
$
|
7,530
|
|
Direct cost of services and subcontract costs
|
|
|
(7,286
|
)
|
|
|
(4,633
|
)
|
|
|
(4,632
|
)
|
Income from operations
|
|
|
1,381
|
|
|
|
568
|
|
|
|
727
|
|
Net income
|
|
|
1,079
|
|
|
|
668
|
|
|
|
659
|
|
Net income attributable to EEI
|
|
|
595
|
|
|
|
368
|
|
|
|
363
|
|
9.
|
Property, Buildings and Equipment, net
|
Property, buildings and equipment is summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
|
|
|
|
|
|
Buildings and building improvements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
|
|
Property, buildings and equipment, net
|
|
|
|
|
|
|
|
|
Goodwill of $0.9 million is included in other assets on the accompanying consolidated balance sheets at July 31, 2018 and
2017. The Company completed its annual goodwill impairment assessment at July 31, 2018 and 2017, and determined that the fair value of the reporting unit to which goodwill is assigned exceeded its book value at both dates. As a result, no
impairment of goodwill was identified as of July 31, 2018 or 2017.
Unsecured lines of credit are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
Outstanding cash advances, recorded as lines of credit on the
accompanying consolidated balance sheets
|
|
$
|
---
|
|
|
$
|
372
|
|
Short-term loan issued under lines of credit included in current
portion of long-term debt
|
|
|
---
|
|
|
|
200
|
|
Outstanding letters of credit to support operations
|
|
|
1,668
|
|
|
|
2,193
|
|
Total amounts used under lines of credit
|
|
|
1,668
|
|
|
|
2,765
|
|
Remaining amounts available under lines of credit
|
|
|
33,932
|
|
|
|
35,735
|
|
Total unsecured lines of credit
|
|
$
|
35,600
|
|
|
$
|
38,500
|
|
The Company’s U.S. operations are supported by two line of credit arrangements:
|
•
|
$19.0 million available line of credit at July 31, 2018; no outstanding cash advances as of July 31, 2018 or 2017; letters of credit of
less than $0.1 million were outstanding at July 31, 2018 and 2017; interest rate based on LIBOR plus 275 basis points; and
|
|
•
|
$13.5 million available line of credit at July 31, 2018; no outstanding cash advances as of July 31, 2018 or 2017; letters of credit of
less than $0.1 million outstanding at July 31, 2018 and 2017; interest rate based on LIBOR plus 200 basis points.
|
The Company’s South American operations are supported by two line of credit arrangements:
|
•
|
$2.0 million available line of credit at July 31, 2018 to support operations in Peru; no outstanding cash advances as of July 31, 2018 or
2017; letters of credit of $1.0 million and $1.6 million were outstanding at July 31, 2018 and 2017, respectively; interest rate is affirmed by or negotiated with the lender annually; and
|
|
•
|
$1.1 million available line of credit at July 31, 2018 to support operations in Brazil; combined balance of outstanding cash advances and
short-term loan of $0 and $0.6 million as of July 31, 2018 and 2017, respectively; letters of credit of $0.6 million and $0.5 million were outstanding at July 31, 2018 and 2017, respectively; interest rate based on a Brazilian
government economic index.
|
12.
|
Debt and Capital Lease Obligations
|
Debt and capital lease obligations are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Short-term loan issued under lines of credit (Note 11)
|
|
$
|
---
|
|
|
$
|
200
|
|
Bank loan (interest rate of 2.94% at July 31, 2018)
|
|
|
28
|
|
|
|
128
|
|
Capital lease obligations (interest rates ranging from 4.25% to
17.07% at July 31, 2018)
|
|
|
80
|
|
|
|
120
|
|
|
|
|
108
|
|
|
|
448
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
(54
|
)
|
|
|
(382
|
)
|
Long-term debt and capital lease obligations
|
|
$
|
54
|
|
|
$
|
66
|
|
The aggregate maturities of long-term debt and capital lease obligations as of July 31, 2018 are summarized in the following
table.
Fiscal Year Ending July 31,
|
|
Amount
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
Total
|
|
|
|
|
On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revised U.S. corporate income tax
regulations including, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.
The Tax Act lowered the Company's statutory federal tax rate from 34% (effective through December 31, 2017) to 21%
(effective January 1, 2018). As the Company has a July 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in an average statutory federal tax rate of approximately 26.5% for the fiscal year ending July 31,
2018 and 21% for subsequent fiscal years.
The reduction of the statutory federal tax rate also resulted in revaluation of the Company's U.S. deferred tax assets and
liabilities. Revaluation is based on the tax rates at which the deferred tax assets and liabilities are expected to reverse in the future, which is generally 21%. The Company recorded a net federal tax expense of $0.3 million during fiscal
year 2018, representing the one-time effect to deferred taxes in the U.S. because of the rate change.
The Tax Act includes provisions for a territorial federal tax system that:
|
•
|
imposes a U.S. federal tax on historical cumulative earnings of foreign subsidiaries, replacing the previous system of taxing the earnings
of foreign subsidiaries only as they were repatriated to the U.S. in the form of dividends;
|
|
•
|
eliminates or reduces the ability to utilize certain foreign tax credits that existed prior to enactment of the Tax Act; and
|
|
•
|
provides for a deduction for dividends received from foreign subsidiaries
|
Pertaining to the international provisions of the Tax Act, the Company recorded net federal tax expense of $0.1 million
during fiscal year 2018, representing the net of a one-time transition tax of $0.5 million on cumulative earnings of foreign subsidiaries, offset by $0.4 million of benefit from outstanding unpaid dividends declared by a foreign subsidiary, and
previously recorded at a higher federal income tax rate. The increase in the tax on cumulative earnings of foreign subsidiaries from the original estimated amount was due to a foreign tax credit limitation not previously applicable based on
forecasted earnings.
There are other transitional impacts of the Tax Act, certain of which had an immaterial impact on the income tax provision
for fiscal year ended July 31, 2018, and certain of which will become effective during future fiscal years.
While the Tax Act provided for a territorial tax system, beginning in 2018, it included two new U.S. tax base erosion
provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of
an allowable return on the foreign subsidiary’s tangible assets. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in fiscal year 2019, with a partial or complete foreign tax credit offset. The
Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the fiscal year ended July 31, 2018.
The BEAT provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign
corporations and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company
recorded final adjustments for the tax effects of the Tax Act during the fourth quarter of fiscal year 2019, and all tax effects of the Tax Act were recorded in its consolidated financial statements for the fiscal year ended July 31, 2018.
Income before income tax provision is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign operations (primarily South American operations)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
The statutory U.S. income tax rate was 26.5%, 34% and 34% during fiscal years 2018, 2017 and 2016, respectively. 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,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) at the U.S. federal statutory
income tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Tax Rates under Tax Act
|
|
|
|
|
|
|
|
|
|
|
|
|
International rate differences
|
|
|
|
|
|
|
|
|
|
|
|
|
Peru non-deductible expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from "pass-through" entities taxable to noncontrolling
partners
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-evaluation and settlements of tax contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Other permanent differences
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision, as reported on the consolidated
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
|
|
Accrued compensation and expenses
|
|
|
|
|
|
|
|
|
Federal benefit from foreign accounting differences
|
|
|
|
|
|
|
|
|
Contract and other reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
|
|
|
|
|
|
Foreign and state income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets and intangibles
|
|
|
|
|
|
|
|
|
Federal expense on state deferred taxes
|
|
|
|
|
|
|
|
|
Federal expense from foreign accounting differences
|
|
|
|
|
|
|
|
|
Unremitted foreign earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
|
|
|
|
|
|
As of July 31, 2018, net operating losses attributable to operations in Brazil and Peru and net operating losses for U.S.
state income tax purposes exist. The foreign and U.S. state net operating losses at July 31, 2018 are approximately $2.8 million and $2.0 million, respectively. The foreign net operating losses may be carried forward indefinitely and the
state net operating losses have expiration dates in various years starting in fiscal year 2023 through indefinite carryforward periods.
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,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,020
|
|
|
$
|
2,278
|
|
Additions during the period
|
|
|
60
|
|
|
|
2
|
|
Reductions during period
|
|
|
(74
|
)
|
|
|
(260
|
)
|
Balance at end of period
|
|
$
|
2,006
|
|
|
$
|
2,020
|
|
The valuation allowance maintained by the Company primarily relates to: (i) net operating losses in Brazil, 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 fiscal year 2018 primarily related to additional deferred tax assets accumulated from the Company’s Brazilian operations. During fiscal year 2018, 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.
During the fiscal years ended July 31, 2018, 2017 and 2016, the Company recorded $0.2 million, $0.6 million and $0.7
million, respectively, of income taxes applicable to undistributed earnings of foreign subsidiaries that will not be indefinitely reinvested in those operations. As part of Tax Act, all foreign earnings were taxed in the U.S. through December
31, 2017. At December 31, 2017, the Company had $5.6 million of taxed, but undistributed foreign earnings. At July 31, 2018, the Company had $1.0 million of foreign earnings, occurring after January 1, 2018, that will be subject to a full
dividend received deduction when distributed.
The Company files numerous consolidated and separate income tax returns in U.S. federal, state and foreign jurisdictions.
The Company’s U.S. federal tax matters for fiscal years 2015 through 2018 remain subject to examination by the IRS. The Company’s state, local and foreign tax matters for fiscal years 2014 through 2017 remain subject to examination by the
respective tax authorities. No waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute.
The Company had less than $0.1 million of uncertain tax positions (“UTPs”) at July 31, 2018, 2017 and 2016.
The Company recognizes interest accrued related to liabilities for UTPs in other accrued liabilities on the consolidated balance sheets and
in selling, general and administrative expenses on the consolidated statements of operations. The Company recorded $0.1 million or less in each of the fiscal years ending July 31, 2018, 2017 and 2016.
14.
|
Other Accrued Liabilities
|
Other accrued liabilities are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Allowance for project disallowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
|
|
|
|
|
|
|
Activity within the allowance for project disallowances is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
687
|
|
|
$
|
1,819
|
|
|
$
|
2,243
|
|
Reduction of reserves recorded in prior fiscal years
|
|
|
---
|
|
|
|
(1,132
|
)
|
|
|
(424
|
)
|
Balance at end of period
|
|
$
|
687
|
|
|
$
|
687
|
|
|
$
|
1,819
|
|
The reductions in the allowance for project disallowances during fiscal years 2017 and 2016, which were recorded as additions to gross
revenue on the consolidated statements of operations, resulted from final settlements of allowances recorded in prior fiscal years. The settlements resulted in cash payments of less than $0.1 million during fiscal years 2017 and 2016.
15.
|
Incentive Compensation
|
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, are referred to as the “Stock Award Plan”. The Stock Award Plan is not a qualified plan under 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 compensation 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. 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.
During fiscal year 2018, EEI issued a total of 11,531 Class A shares under the 2016 Stock Award Plan, valued at $0.1
million, to five directors as a portion of their annual compensation. These shares will vest upon expiration of certain restrictions regarding transfer of the shares that expire in April 2019.
During fiscal years 2017 and 2016, EEI issued a combined total of 11,952 Class A shares, valued at $0.1 million under the
Stock Award Plan to certain directors as a portion of their annual compensation. These shares were fully vested as of July 31, 2018.
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 EEI 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 $1.7
million during
fiscal years 2018 and 2017,
and $1.9 million
during fiscal year 2016
. The Company paid cash dividends of $1.7 million during
fiscal years 2018 and 2017,
and $2.1
million during
fiscal year 2016
. The Company had dividends declared but unpaid of $0.9 million as of July 31, 2018, 2017 and 2016.
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, 2018, the Company had 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 2018, 2017 or 2016.
Noncontrolling Interests
During fiscal year 2018, the Company purchased one of the noncontrolling member’s interest in Lowham-Walsh Engineering &
Environment Services, LLC (“Lowham”) for less than $0.1 million, increasing its ownership interest in the subsidiary from 80.56% to 87.88%. The Company did not purchase additional shares of any of its majority owned subsidiaries during fiscal
years 2017 or 2016.
In November 2018, the Company purchased all remaining noncontrolling interests in Lowham for less than $0.1 million, thereby
increasing its ownership interest in Lowham to 100%.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following table.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Unrealized net foreign currency translation losses
|
|
|
|
|
|
|
|
|
Unrealized net investment (losses) gains on available for
sale investments
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
17.
|
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 result in 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 $3.2 million, $3.3 million (restated) and $3.4 million (restated) in
fiscal years 2018, 2017 and 2016, respectively.
Future minimum rental commitments under operating leases as of July 31, 2018 are summarized in the following table.
Fiscal Year Ending
July 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
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 total expense under these plans was $1.3 million, $1.5 million, and $1.4 million for fiscal years 2018, 2017 and 2016, respectively.
The computation of basic and diluted EPS is included in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ecology and Environment Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (distributions in excess of earnings)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (distributions in excess of earnings)
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Management generally assesses operating performance and makes strategic decisions based on the geographic regions in which
the Company does business. The Company reports separate operating segment information for its U.S. and South American operations. Gross revenue, net income (loss) attributable to EEI and total assets by operating segment are summarized in the
following tables.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
|
|
Gross revenue:
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
|
|
|
|
|
|
|
|
|
|
|
South American operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from U.S. federal government contracts were $15.8 million, $21.9 million and $25.3 million for fiscal years
2018, 2017 and 2016, respectively.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
|
|
Net (loss) income attributable to EEI:
|
|
|
|
|
|
|
|
|
|
U.S. operations (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
South American operations (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net (loss) income attributable to EEI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes depreciation and amortization expense of $0.8 million, $0.8 million and $0.9 million for fiscal years 2018, 2017 and 2016,
respectively.
|
|
(b)
|
Includes depreciation and amortization expense of $0.3 million, $0.2 million and $0.1 million for fiscal years 2018, 2017 and 2016,
respectively.
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
Total Assets:
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
43,823
|
|
|
|
|
|
South American operations
|
|
|
9,006
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
52,829
|
|
|
|
|
|
21.
|
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 Brazil”), a majority-owned consolidated subsidiary of EEI. The Notice of Infraction concerned the taking and collecting of wild animal specimens without authorization by the
competent authority and imposed a fine of approximately 0.5 million Reais against E&E Brazil. The Institute also filed Notices of Infraction against four employees of E&E Brazil alleging the same claims and imposed fines against those
individuals that, in the aggregate, were equal to the fine imposed against E&E Brazil. No claim has been made against EEI.
E&E Brazil has filed court claims appealing the administrative decisions of the Institute for E&E Brazil’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 Brazil 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 Brazil are pending agency determination. At July 31, 2018, the Company recorded a reserve of approximately $0.4 million in other accrued
liabilities related to these claims.
22.
|
Related Party Transactions
|
Assets, liabilities and expenses associated with related party transactions are summarized in the following tables.
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
|
(in thousands)
|
|
Related party assets:
|
|
|
|
|
|
|
Loans to minority shareholders of E&E Brazil
|
|
$
|
276
|
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
|
Related party liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
---
|
|
|
$
|
85
|
|
Accounts payable
|
|
|
22
|
|
|
|
56
|
|
Total related party liabilities
|
|
$
|
22
|
|
|
$
|
141
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2018
|
|
|
2017
(Restated)
|
|
|
2016
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
234
|
|
|
$
|
251
|
|
|
$
|
250
|
|
Interest expense
|
|
|
2
|
|
|
|
7
|
|
|
|
15
|
|
Total related party expenses
|
|
$
|
236
|
|
|
$
|
258
|
|
|
$
|
265
|
|
Loans to minority shareholders of E&E Brazil consist of loans to senior managers of E&E Brazil, which were used to
acquire noncontrolling financial interests in E&E Brazil. These loans are classified as long-term and are included in other assets on the consolidated balance sheets. Notes payable and interest expense relate to prior year acquisitions of
minority interests of a U.S. subsidiary. Accounts payable and rent expense relate to obligations for rental of office space owned by employees of South American subsidiaries, which are also minority shareholders of the subsidiaries.
Staff Reduction Programs
In December 2018, the Company began to notify affected employees of a voluntary retirement program. In February 2019, the Company began to
notify affected employees of an involuntary separation program. These programs (collectively, the “Staff Reduction Programs”) are being implemented in connection with a corporate restructuring plan. Company management anticipates that the
combined effect of the Staff Reduction Programs and other expense reduction initiatives will result in annual pre-tax cost savings of greater than $6.0 million. These activities are expected to result in pre-tax charges and cash expenditures
of approximately $1.0 million during the second half of fiscal year ending July 31, 2019, consisting primarily of employee severance and termination benefits. The Company expects these initiatives to be completed by July 31, 2019.
Sale of Majority Owned Subsidiary
In February 2019, the Company consummated the sale of its majority interest in a consolidated subsidiary located in Ecuador. The cash proceeds and loss
from the sale to noncontrolling shareholders, both recorded in February 2019, were less than $0.1 million and $0.1 million, respectively. The sold subsidiary did not represent a material portion of the Company’s consolidated assets,
shareholders’ equity, gross revenue or net income attributable to EEI for any previously reported period, and management does not expect that the sale of this subsidiary will have a material impact on the Company’s results of operations,
financial position or cash flows for future reporting periods.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None to report.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures 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 “Securities 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.
As of the end of the period covered by this report, our management, with the participation of our Acting Principal Executive
Officer and Acting 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. As a consequence of the material weaknesses
discussed below, our Acting Principal Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at July 31, 2018.
Notwithstanding the material weaknesses discussed below, our management, including our Acting Principal Executive Officer
and Acting Chief Financial Officer, has concluded that the consolidated financial statements included in this annual report on form 10-K present fairly, in all material aspects, our financial position as at the end of, and the results of
operations and cash flows for, the periods presented in conformity with accounting principles generally accepted in the United States.
Management’s Annual Report on Internal Control over Financial Reporting
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.
|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Exchange Act Rule 13a-15(f). Under the supervision and with the participation with our management, including our Acting Principal Executive Officer and Acting Chief Financial Officer, we assessed the effectiveness of our internal control
over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2018
because of material weaknesses in the Company’s internal control over financial reporting as described below. A material weakness is a deficiency, or 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. The material weaknesses arise from deficiencies relating to:
|
•
|
determining the appropriate application of accounting standards when assessing whether the Company’s investments in subsidiaries should be
consolidated or accounted for under the equity method of accounting;
|
|
•
|
ascertaining and disclosing the appropriate accounting policies, including the effects of non-standard provisions, for revenue recognition
related to the Company’s fixed-price service contracts;
|
|
•
|
establishing appropriate cutoff procedures for appropriate revenue and expense recognition.
|
As described in Note 2 of the Consolidated Financial Statements included in Item 8 of this Annual Report, management determined that an
error in accounting for EEI
’
s investment in GAC resulted in a material misstatement of the Company
’
s consolidated financial statements reported prior to July 31, 2018. Management identified deficiencies related to
determining
the appropriate application of accounting when assessing whether the Company’s investments in subsidiaries should be consolidated or accounted for under the equity method of accounting
. Specifically, the deficiencies relate to its
process to review all factors necessary to assess its influence and control over the operations of its subsidiaries, and to assess the proper accounting for its investments in subsidiaries. The financial statements for the fiscal years ended
July 31, 2017 and 2016 have been restated to correct this error.
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.
Changes in Internal Control Over Financial Reporting
Other than the material weaknesses previously described and changes to controls and procedures to address material weaknesses identified as
of July 31, 2017, 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 fiscal year 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During fiscal year 2018 the Company remediated previously reported material weakness as of July 31, 2017 relating to
accounting for income taxes, review controls related to its goodwill assessment model and its financial statement consolidation process.
Remediation of Material Weaknesses
With input from the Audit Committee, management developed, and is in the process of implementing, a remediation plan to
address the material weaknesses as of July 31, 2018 noted above. Specifically, the following controls and procedures will be established or strengthened to address the material weaknesses:
|
•
|
We will assess our current accounting staff and identify the need to train existing staff resources regarding technical accounting topics
and related disclosure requirements that are pertinent to the Company’s operations, including those relating to consolidation, equity method and revenue recognition standards. We will also consider adding new staff resources and/or
engaging third-party advisors that have adequate expertise and experience with pertinent U.S. GAAP requirements.
|
|
•
|
We will assess our policies and processes to determine controls required to appropriately address technical accounting topics and establish cutoff for
recognition of revenues and expenses. Once determined, we will implement any needed enhancements and/or additional procedures and controls.
|
|
•
|
The design and execution of any new or enhanced controls noted above will be periodically tested by the Company’s Internal Auditor.
|
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/Marshall A. Heinberg
|
|
By:
|
/s/Peter F. Sorci
|
|
Marshall A. Heinberg
|
|
|
Peter F. Sorci
|
|
Acting Principal Executive Officer
|
|
|
Acting Chief Financial Officer
|
Item 9B. Other Information
None.
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
|
|
|
|
Marshall A. Heinberg
|
62
|
Chairman of the Board, Director and Executive Chairman
|
Ronald L. Frank
|
80
|
Executive Vice President, Secretary, and Director
|
Frank B. Silvestro
|
82
|
Director
|
Michael C. Gross
|
59
|
Director
|
Justin C. Jacobs
|
44
|
Director
|
Michael El-Hillow
|
67
|
Director
|
Stephanie W. Abramson
|
74
|
Director (until May 2019)
|
Gerard A. Gallagher III
|
62
|
President and Chief Executive Officer (until December 2018)
|
Fred J. McKosky
|
65
|
Senior Vice President, Technical Operations Director
|
Todd M. Musterait
|
47
|
President of United States Operations
|
JoAnn Shea
|
54
|
Chief Administrative Officer
|
Peter F. Sorci
|
59
|
Acting Chief Financial Officer
|
Cheryl A. Karpowicz
|
68
|
Senior Vice President (until March 2019)
|
Each Director is elected to hold office until the next annual meeting of shareholders and until his or her 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.
In September 2018, the Board of Directors appointed Mr. Heinberg, as Executive Chairman, a provisional office presiding over
the principal officers of the Corporation responsible for the performance of the Company’s global business in accordance with the Board of Directors’ strategic initiatives. In furtherance of these initiatives, the Board of Directors also
promoted Mr. Musterait, as President of United States Operations to provide focused leadership, development and management of the Company’s domestic operations.
In December 2018, the Company announced that Mr. Gallagher, who had served as the Company
’
s Chief Executive Officer (
“
CEO
”
) since
2015, left the Company. Mr. Gallagher
’
s responsibilities for oversight of international operations were assigned to Mr. McKosky, and the remainder of Mr.
Gallagher
’
s duties were assumed by the newly formed Operations Committee, which consists of Mr. Heinberg, Mr. Musterait and Ms. Shea.
Mr. Marshall A. Heinberg was elected as a Director in April 2017. He was appointed Chairman of the Board of Directors and
Chairman of the Governance, Nominating and Compensation Committee in June 2017. On September 18, 2018, the Board of Directors appointed Mr. Heinberg as Executive Chairman, a provisional office presiding over the principal officers of the
Company responsible for the performance of the Company’s global business in accordance with the Board of Directors’ strategic initiatives. Mr. Heinberg began his investment banking career in 1987 in the Corporate Finance Division of
Oppenheimer & Co., Inc., which was acquired by Canadian Imperial Bank of Commerce (“CIBC”) in 1997. Mr. Heinberg served as Head of the Investment Banking Department and as a Senior Managing Director of Oppenheimer & Co. Inc. from 2008
until July 2012, and as the Head of U.S. Investment Banking at CIBC World Markets from 2001 until 2008. Mr. Heinberg is the founder and Managing Director of MAH Associates, LLC, which provides strategic advisory and consulting services, a
director of Universal Biosensors, a director of Galmed Pharmaceuticals, and serves as a Senior Advisor to Burford Capital. Mr. Heinberg has a B.S. in Economics from the Wharton School at the University of Pennsylvania and a J.D. from Fordham
Law School. During his career, he has worked on several financing and merger and acquisition transactions with many leading environmental engineering and consulting firms. His experience managing a professional services business and in
various investment banking, capital markets and advisory roles provide valuable experience and perspective to the Board of Directors.
Mr. Ronald L. Frank is a co-founder of the Company and has served at various times as Secretary, Treasurer, Vice President
of Finance, Executive Vice President and a Director since its inception in 1970. He currently serves as Executive Vice President on a part-time basis. He also continues to serve as a Director of the Company, as Corporation Secretary, and as
Chairman of the Pension Review Committee. Mr. Frank has a B.S. in Engineering and a M.A. in Physics. With over forty years of work experience in managing the Company and knowledge of its markets and customers, Mr. Frank is uniquely qualified
to serve as Director.
Mr. Frank B. Silvestro is a co-founder of the Company and served as a Vice President and Director since its inception in
1970. In 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 retired from his positions as Executive Vice President and
Chairman of the Board of Directors effective January 1, 2017. He continues to serve as a Director of the Company and as a contracted consultant to the Company. Mr. Silvestro has a B.A. in Physics and an M.A. in Biophysics. With over forty
years of work experience in managing the Company and knowledge of its markets and customers, Mr. Silvestro is uniquely qualified to serve as Director.
Mr. Michael C. Gross has been a Director of the Company since 2010, and currently serves on the Audit Committee, Governance,
Nominating and Compensation Committee and Pension Review Committee. Mr. Gross was employed by the Audit Division of the New York State Department of Taxation and Finance for 32 years until 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. Justin C. Jacobs was elected as a Director in April 2017 and currently serves on the Audit Committee and the Governance,
Nominating and Compensation Committee. Mr. Jacobs is a Management Committee Director of Mill Road Capital II, L.P., an investment firm focused on investments in small, publicly traded companies, where he has worked since 2005. From 1999 to
2004, Mr. Jacobs held various operational positions in numerous portfolio companies at LiveWire Capital, an investment and management group focused on control, operationally-intensive buyouts of small companies. Mr. Jacobs was an investment
professional in the private equity group of The Blackstone Group from 1996 to 1999. Mr. Jacobs holds a B.S. from the McIntire School of Commerce at the University of Virginia. His experience in various investment banking, capital markets and
advisory roles provide valuable experience and perspective to the Board of Directors.
Mr. Michael El-Hillow
was elected as a Director
in April 2017 and was appointed Chairman of the Audit Committee in June 2017. Mr. El-Hillow served as Chief Financial Officer of Lignetics, Inc., a manufacturer of heating wood pellets, from March 2018 until April 2019. He served as Chief
Financial Officer of National Technical Systems, Inc., an engineering services company, from 2012 until 2017. Mr. El-Hillow, a certified public accountant, has over two decades of experience serving as a Chief Financial Officer of public
companies, including in technology and engineering environments. He also has sixteen years’ experience working for Ernst & Young in numerous roles, including Audit Partner. Mr. El-Hillow holds a B.S. in Accounting from the University of
Massachusetts and an MBA from Babson College. His experience in various senior auditing, accounting and finance roles provides valuable financial expertise and perspective to the Board of Directors.
Ms. Stephanie W. Abramson served as a Director from April 2018 until her death in May 2019, and served on the Audit
Committee during her tenure as a Director. Prior to her passing, Ms. Abramson directed the Business Law Transactions Clinic (from 2010 through May 2019) and Law and Business Experiential Classes (from 2013 through May 2019) at the NYU School
of Law. From May 2011 through May 2013, Ms. Abramson served as Dean of Graduate Professional and Executive Education Programs for NYU Shanghai. She was a director of National Financial Partners Corp. from 2003 until July 2013. From July 2005
to July 2008, she was an Executive Vice President, General Counsel and Secretary of DoubleClick Inc. and its Chief Privacy Officer. Ms. Abramson graduated with honors from Harvard University and from New York University School of Law. Her
experience as outside and general counsel to financial institutions and publicly traded companies and as a director of a public company provided valuable experience and perspective to the Board.
Mr. Gerard A. Gallagher III served as CEO from 2015 until his departure from the Company in December 2018. He also served
as President of the Company since 2014, and previously served as Senior Vice President of Environmental Sustainability, Vice President and Regional Manager for the Company’s Southern U.S. operations. At the time of his departure, Mr. Gallagher
had been employed by the Company for 36 years. Mr. Gallagher had a B.A. in Physical Geography.
Mr. Fred J. McKosky was named Technical Operations Director in November 2018. Mr. McKosky previously served as the Chief
Operating Officer from 2014 until November 2018. He has been employed by the Company for 40 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. Todd M. Musterait was named President of United States Operations in September 2018. Prior to that, Mr. Musterait
served as Senior Vice President of Corporate Development from September 2017 to September 2018. Prior to joining the Company, he served as Vice President and Director of Environment for WSP Global Inc. from 2014 to 2017; Program Manager for
HDR from 2013 to 2014; and Director for Rich Products Corporation related to environmental matters from 2010 to 2013. With 25 years of experience and over a year as an officer of the Company, Mr. Musterait has led U.S. environmental business
lines and served on various leadership teams for global integrated consulting environmental and engineering firms. Mr. Musterait holds a Masters of Engineering, Civil Engineering, from Clarkson University and a B.S. in Civil Engineering from
the University of New Hampshire.
Ms. JoAnn Shea joined the Company as Chief Administrative Officer in August 2018. Ms. Shea is a certified public accountant
in the State of Colorado and she most recently served as Vice President of Finance at CH2M HILL, where she worked for 20 years until December 2017. During her tenure at CH2M HILL, she served as Acting Chief Financial Officer twice and Chief
Accounting Officer for over 15 years.
Mr. Peter F. Sorci was appointed Acting Chief Financial Officer in April 2018. Mr. Sorci had been the Company’s Corporate
Controller since 2013. During his career, Mr. Sorci has gained extensive experience in management of various finance and accounting functions, including: Senior Audit Manager for HSBC Bank USA, N.A., a financial institution located in Buffalo,
New York from 2011 to 2013; Director of External Reporting for MX Energy Holdings Inc., a retail energy company located in Stamford, Connecticut from 2007 to 2011; and Senior Manager of SEC Reporting for HSBC Bank USA, N.A. from 2005 to 2007.
Mr. Sorci also has previous experience as a Controller and in other senior finance roles.
Ms. Cheryl A. Karpowicz was a Senior Vice President from 2011 until her departure from the Company in March 2019. She was named Senior Vice
President of Business Development in 2014. At the time of her departure, Ms. Karpowicz had been employed by the Company for 40 years and previously led its energy services area. She had a B.A. in Interdepartmental Studies and is a Certified
Planner and member of the American Institute of Certified Planners.
Code of Ethics
The Company has a code of ethics that applies to its principal executive officer, principal financial officer and principal
accounting officer, as well as all other employees, directors, officers, subsidiaries, affiliates, consultants, representatives and agents of the Company. The code of ethics, which the Company calls its Code of Conduct, was last revised and
approved by the Board of Directors on June 1, 2017, 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 or principal accounting officer, 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 Board of Directors may appoint a Director as
Executive Chairman as an interim position presiding over the Executive Officers responsible for the performance of the Corporation’s business, as dictated by the overall strategy agreed by EEI’s Board of Directors. EEI 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 Board of Directors has a standing Audit Committee established in accordance with section 3(a)(58)(A) of the Securities
Exchange Act and the requirements of Nasdaq. Messrs. El-Hillow and Gross and Ms. Abramson serve as members of the Audit Committee. The Board of Directors has designated Mr. El-Hillow as the audit committee financial expert serving on its
Audit Committee and as Chairman of the Audit Committee. Messrs. El-Hillow and Gross and Ms. Abramson are each independent, as that term is used in Item 407(a) (as to Messrs. El-Hillow and Gross and Ms. Abramson) and Item 407(d)(5)(i)(B) (as to
just Mr. El-Hillow) of Regulation S-K and Rule 5605(a)(2) of the Nasdaq listing standards.
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 the 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 Governance, Nominating and Compensation Committee that functions to ensure that the
Board of Directors fulfills its legal, ethical and functional responsibilities through adequate corporate and Board governance. Messrs. Heinberg (Chairman), Jacobs and Gross serve on the Governance, Nominating and Compensation Committee.
The Board of Directors considers nominees for
Directors recommended by shareholders. Shareholders wishing to recommend a director candidate for consideration by the Board of Directors can do so by writing to the Secretary of Ecology and Environment Inc., 368 Pleasant View Drive,
Lancaster, New York, 14086. Nominations must be received not later than the close of business on the 120
th
day prior to the first anniversary of the previous year’s annual shareholders meeting and not earlier than the close of business on the 180
th
day prior to the first
anniversary of the preceding year’s annual shareholders meeting.
In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a shareholder’s notice as
described above. Nominations must meet the requirements of Article II, Section 4.A.1. of the Company’s Re-stated By-Laws dated February 25, 2016, as amended September 18, 2018 and May 28, 2019.
In evaluating candidates, the Board considers the entirety of each candidate’s credentials to ensure that the Board consists
of individuals who collectively provide meaningful counsel to management. The Board does not maintain a specific diversity policy. It believes that diversity is an expansive attribute that includes differing points of view, professional
experience and expertise, and education, as well as more traditional diversity concepts. The Board considers the candidates’ character, integrity, experience, understanding of strategy and policy-setting, and reputation for working well with
others. If candidates are recommended by our shareholders, then such candidates will be evaluated using the same criteria. With respect to nomination of continuing directors for re-election, the individual’s past contributions to the Board
are also considered.
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 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 SEC. 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 ended July 31, 2018 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.
Item 11. Executive Compensation
The Company's Board of Directors has a Governance, Nominating and Compensation Committee, which among other matters, is
responsible for providing oversight, and recommendations to the entire Board, regarding 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 as a whole 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 plan awards 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, 2018, is described below.
Objectives and Philosophy of Our Executive Compensation Program
Our primary objectives with respect to executive compensation are to:
|
•
|
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
|
|
•
|
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.
Components of Our Executive Compensation Program
The primary elements of our executive compensation program are:
|
•
|
cash incentive bonuses;
|
|
•
|
equity incentive awards;
|
|
•
|
severance benefits upon termination without cause; and
|
|
•
|
insurance and other employee benefits and compensation.
|
We do not have a specific 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:
|
•
|
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, 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, 2018 and 2017 of those persons who were at July 31, 2018: (i) the Company’s CEO and President; and (ii) the two other most highly compensated executive officers employed at July 31, 2018 with annual
salary and bonus for the fiscal year ended July 31, 2018 in excess of $100,000. In this Annual Report, the three persons named in the table below are referred to as the "Named Executive Officers."
SUMMARY COMPENSATION
TABLE
Name and
Principal Position
|
Fiscal
Year
|
|
Salary
|
|
|
Bonus
(1)
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
(2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Executive Vice President and Director
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Senior Vice President and Technical Operations Director
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(1)
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Amounts earned for bonus compensation are determined at the discretion of the Board of Directors.
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(2)
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Represents group term life insurance premiums and contributions made by the Company to its Defined Contribution Plan on behalf of the
Named Executives.
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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 Named
Executives, are eligible to participate in the DC 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 DC 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 under 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.
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 until its termination in October 2021.
Outstanding Equity Awards
As of July 31, 2018, the Company has issued 19,033 shares of Class A Common Stock under the 2016 Stock Award Plan, including
7,502 shares that are fully vested and 11,531 shares that will vest upon expiration of certain restrictions regarding transfer of the shares in April 2019.
Director Compensation
Compensation earned by each employee and non-employee director for his or her services during fiscal year 2018 is
summarized in the following table.
DIRECTOR
COMPENSATION
Name
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Fees Earned or
Paid in Cash
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Stock
Awards
(1)
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Option
Awards
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Non-Equity
Incentive Plan
Compensation
Earnings
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Nonqualified
Deferred
Compensation
Earnings
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All Other
Compensation
(2)
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Total
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Gerald A. Strobel (3)
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Stephanie W. Abramson (3)
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(1)
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In May 2018, the Company issued 4,303 shares of Class A Common Stock to Mr. Heinberg, 2,065 Shares of Class A Common Stock to Mr.
El-Hillow, and 1,721 shares of Class A Common Stock to Mr. Gross, Mr. Jacobs, and Ms. Abramson. These shares will vest upon expiration of certain restrictions regarding transfer of the shares that expire in April 2019.
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(2)
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Represents compensation paid under a consulting arrangement.
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(3)
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Mr. Strobel’s tenure as a Director was terminated effective April 18, 2018. Ms. Abramson was elected a Director effective April 18, 2018.
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As an employee Director, Mr. Frank did not receive any director compensation during fiscal year 2018. As non-employees, all other Directors
in the table above received director fees during fiscal year 2018. Messrs. Strobel and Silvestro also earned consulting fees during fiscal year 2018.
In May 2018, the Board of Directors approved, retroactive to April 18, 2018, annual director compensation for the twelve months ending April
17, 2019, as follows:
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•
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Each non-employee director will receive a base annual director fee of $50,000;
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•
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Mr. Heinberg will receive additional fees of $65,000 and $10,000 for his roles as Chairman of the Board of Directors and Chairman of the Governance,
Nominating and Compensation Committee, respectively.
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•
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Mr. El-Hillow will receive an additional fee of $10,000 for his role as Chairman of the Audit Committee;
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•
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Total director fees payable to Messrs. Heinberg, El-Hillow, Jacobs and Gross and Ms. Abramson are payable 60 percent in cash and 40 percent in shares of
Class A Common Stock.
In May 2018, the Company issued 1,721 shares of Class A Common Stock to Mr. Gross, Mr. Jacobs, and Ms. Abramson,
and 4,303 shares and 2,065 shares of Class A Common Stock to Mr. Heinberg, and Mr. El-Hillow, respectively. These shares will vest upon expiration of certain restrictions regarding transfer of the shares that expire in April
2019.
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•
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As an employee Director, Mr. Frank will not receive any compensation for his role as Director;
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•
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Directors holding more than 100,000 shares of Common Stock (Class A and/or Class B) have the option to decline being paid 40 percent of their director
compensation in Common Stock and can choose to take their compensation completely in cash. Mr. Silvestro elected to take his director compensation completely in cash;
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•
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Mr. Heinberg will also be included in the Company’s health care program.
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In October 2018, the Board of Directors approved an additional fee of $75,000 to be paid to Mr. Heinberg for his newly appointed role as
Executive Chairman of the Company, to be paid ratably over a 12 month period beginning in September 2018. Similar to other fees paid to non-employee directors, this additional fee is payable 60 percent in cash and 40 percent in shares of Class
A Common Stock. Mr. Heinberg will only be paid this additional compensation for those months that he actually serves as Executive Chairman. In October 2018, the Board of Directors also approved a cash bonus of $65,000 to be paid immediately
to Mr. Heinberg.
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 March 31, 2019 are summarized in the following table.
|
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Class A Common Stock
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Class B Common Stock
|
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Name and Address (1)
|
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Nature and
Amount
of Beneficial
Ownership
(2) (3)
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Percent of
Class as
Adjusted
(3)
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Nature and
Amount
of Beneficial
Ownership
(2) (3)
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Percent
Of Class
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Gerhard J. Neumaier Testamentary Trust U/A Fourth
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Mill Road Capital II, L.P. (6)(7)
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North Star Investment Management Corporation (8)
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Harbert Discovery Fund, LP (9)
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*See Footnotes in the Security Ownership of Management table below.
(1)
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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 Edward W. Wedbush is P.O. Box 30014, Los Angeles, CA 90030-0014. The address for Mill Road Capital II, L.P. 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. The address for Harbert Discovery Fund, LP is 2100 Third Avenue North, Suite 600, Birmingham, AL 35203.
|
(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 3,088,865 shares of Class A Common Stock issued and
outstanding and 1,226,270 shares of Class B Common Stock issued and outstanding as of March 31, 2019.
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 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. Subject to the terms of the Restrictive Agreement. See
"Security Ownership of Certain Beneficial Owners-Restrictive Agreement."
|
(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 subsidiaries and affiliates of Mill Road Capital II, L.P. (“MRC”) based upon a Form 4 filed on May 18, 2018. The
shares reported are directly held by MRC; see also Footnote (7) below. Mill Road Capital II GP LLC (the “GP”) is the sole general partner of MRC and has sole authority to vote (or direct the vote of), and to dispose (or direct the
disposal) of, these shares on behalf of MRC. Both Messrs. Thomas E. Lynch and Scott Scharfman are management committee directors of the GP and have shared authority to vote (or direct the vote of), and to dispose (or direct the
disposal of), these shares on behalf of the GP. Each of the subsidiaries and affiliates of MRC listed in the Form 4 filed on May 18, 2018 disclaims beneficial ownership of such shares except to the extent of his or its pecuniary
interest therein, if any.
|
(7)
|
Includes MRC’s acquisition of an indirect pecuniary interest in 1,721 shares of restricted stock granted by the Company to Mr. Justin
Jacobs in accordance with Rule 16b-3(d) as compensation for serving as a member of the Company’s board of directors. The shares of restricted stock will vest on April 18, 2019. Pursuant to a pre-existing contractual obligation,
Mill Road Capital Management LLC, an affiliate of MRC that does not have Section 13(d) beneficial ownership of any shares of the Company, has the right to receive the economic benefit of the reported shares and, accordingly, Mr.
Jacobs has no direct pecuniary interest in such shares. Each of the subsidiaries and affiliates of MRC listed in the Form 4 filed on May 18, 2018 may be deemed to have an indirect pecuniary interest in the reported shares. Each of
the subsidiaries and affiliates of MRC listed in the Form 4 filed on May 18, 2018 disclaims beneficial ownership of such shares except to the extent of his or its pecuniary interest therein, if any.
|
(8)
|
Includes shares owned by North Star Investment Management Corporation based upon a Schedule 13-G filed on January 8, 2018.
|
(9)
|
Includes shares owned by Harbert Discovery Fund, LP based upon a Schedule 13-D/A filed on December 18, 2018.
|
Security Ownership of Management
Beneficial ownership of the Company's Class A Common Stock and Class B Common Stock as of March 31, 2019, by (i) each
Director of the Company; (ii) the Named Executive Officers; and (iii) 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
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Directors and Officers as a Group (13 individuals)
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* Less than 1.0%
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(1)
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The address of each of the above shareholders is c/o Ecology and Environment Inc., 368 Pleasant View Drive, Lancaster, New York 14086.
|
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(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.
|
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(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 3,088,865 shares of Class A Common Stock issued and
outstanding and 1,226,270 shares of Class B Common Stock issued and outstanding as of March 31, 2019.
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 8,640 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)
|
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.
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(7)
|
Subject to the terms of the Restrictive Agreement. See "Security Ownership of Certain Beneficial Owners-Restrictive Agreement."
|
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(8)
|
Mr. Jacobs is a Management Committee Director of Mill Road Capital GP II LLC (the “GP”), the sole general partner of Mill Road Capital II
L.P. (“MRC”). The GP has shared power to vote and dispose of the 463,072 shares of Class A Common Stock beneficially owned by MRC, of which 1,000 shares are held of record by MRC. Mr. Jacobs may be deemed to be a beneficial owner
of the shares of Class A Common Stock beneficially owned by MRC; however, Mr. Jacobs disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.
|
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 EEI 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
Directors Marshall A. Heinberg, Michael
El-Hillow, Michael C. Gross, Justin C. Jacobs and Stephanie W. Abramson
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
five individuals to the Company’s other two 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.
The aggregate fees billed by Ernst & Young LLP to the Company for audit and audit-related services related to fiscal
years 2018 and 2017 are summarized in the following table.
|
|
Fiscal Year Ended July 31,
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2018
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2017
|
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(in thousands)
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1,172
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1,197
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Audit Fees
Audit fees include aggregate fees billed for the audit of the annual financial statements included in this Annual Report,
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 billed for services rendered for indirect rate audits.
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
|
1.
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Financial Statements
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Page
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Report of Independent Registered Public Accounting Firm
|
26
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Consolidated Balance Sheets at July 31, 2018 and 2017 (Restated)
|
27
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Consolidated Statements of Operations for the fiscal years ended July 31, 2018, 2017 (Restated) and 2016 (Restated)
|
28
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Consolidated Statements of Comprehensive Income for the fiscal years ended July 31, 2018, 2017 (Restated) and
2016 (Restated)
|
29
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Consolidated Statements of Cash Flows for the fiscal years ended July 31, 2018, 2017 (Restated) and 2016 (Restated)
|
30
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Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended July 31, 2018, 2017
(Restated) and 2016 (Restated)
|
31
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Notes to Consolidated Financial Statements
|
32
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2.
|
Financial Statement Schedules
|
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All schedules are omitted because they are not applicable, or the required information is shown in the consolidated
financial statements or notes thereto.
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3.
|
Exhibits
|
|
Exhibit
No.
|
|
Description
|
|
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3.1
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Certificate of Incorporation (1)
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3.2
|
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Certificate of Amendment of Certificate of Incorporation filed on March 23, 1970 (1)
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3.3
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Certificate of Amendment of Certificate of Incorporation filed on January 19, 1982 (1)
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3.4
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Certificate of Amendment of Certificate of Incorporation filed on January 29, 1987 (1)
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3.5
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Certificate of Amendment of Certificate of Incorporation filed on February 10, 1987 (1)
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3.6
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Certificate of Change under Section 805-A of the Business Corporation Law filed August 18, 1988 (2)
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Re-stated By-Laws dated February 25, 2016 (9)
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Certificate of Amendment of Certificate of Incorporation filed on March 1, 2016 (5)
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4.1
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Specimen Class A Common Stock Certificate (1)
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4.2
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Specimen Class B Common Stock Certificates (1)
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10.1
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Stockholders' Agreement among Gerhard J. Neumaier, Ronald L. Frank, Frank B. Silvestro and Gerald A. Strobel dated
May 12, 1970 (1)
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10.2
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Ecology and Environment Inc. Defined Contribution Plan Agreement dated July 25, 1980 as amended on April 28, 1981
and July 21, 1983 and restated effective August 1, 1984 (1)
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|
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1998 Ecology and Environment Inc. Stock Award Plan and Amendments (3)
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10.4
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2016 Ecology and Environment Inc. Stock Award Plan (6)
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|
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Amendment No. 1 dated January 24, 2011 to the Stockholders’ Agreement among Gerhard J. Neumaier, Ronald L. Frank,
Frank B. Silvestro and Gerald A. Strobel dated May 12, 1970 (4)
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|
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Code of Ethics (7)
|
|
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Schedule of Subsidiaries as of July 31, 2018 (8)
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|
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Consent of Independent Registered Public Accounting Firm – Ernst & Young LLP (8)
|
|
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Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)
|
|
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Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (8)
|
|
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Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8)
|
|
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Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (8)
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Footnotes
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(1)
|
Filed as exhibits to the Company's Registration Statement on Form S-1, as amended by Amendment Nos. 1 and 2,
(Registration No. 33-11543), and incorporated herein by reference.
|
|
(2)
|
Filed as exhibits to the Company's Form 10-K for Fiscal Year Ending July 31, 1988, and incorporated herein by
reference.
|
|
(3)
|
Filed as exhibits to the Company's Form 10-K for Fiscal Year Ending July 31, 2002, and incorporated herein by
reference.
|
|
(4)
|
Filed as exhibits to the Company’s 10-K for the Fiscal Year Ending July 31, 2011, and incorporated herein by
reference.
|
|
(5)
|
Filed as exhibits to the Company’s 10-K for the Fiscal Year Ending July 31, 2016, and incorporated herein by
reference.
|
|
(6)
|
Filed as Annex B to the Company’s Definitive Proxy Statement (Schedule 14A) dated March 7, 2017, and incorporated
herein by reference.
|
|
(7)
|
Filed as an exhibit to the Company’s Form 8-K dated June 1, 2017, and incorporated herein by reference.
|
|
(8)
|
Filed herewith.
|
Item 16.
Form 10-K Summary
Not Applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
ECOLOGY AND ENVIRONMENT INC.
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|
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Dated: May 31, 2019
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/s/ Marshall A. Heinberg
|
|
Marshall A. Heinberg
|
|
Acting Principal Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Marshall A. Heinberg
|
|
|
|
|
Marshall A. Heinberg
|
|
Chairman of the Board, Director, Executive Chairman, and Acting Principal Executive Officer
|
|
May 31, 2019
|
|
|
|
|
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/s/ Ronald L. Frank
|
|
|
|
|
Ronald L. Frank
|
|
Executive Vice President, Secretary and Director
|
|
May 31, 2019
|
|
|
|
|
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/s/ Peter F. Sorci
|
|
|
|
|
Peter F. Sorci
|
|
Acting Chief Financial Officer and Chief Accounting Officer
|
|
May 31, 2019
|
|
|
|
|
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/s/ Frank B. Silvestro
|
|
|
|
|
Frank B. Silvestro
|
|
Director
|
|
May 31, 2019
|
|
|
|
|
|
/s/ Michael C. Gross
|
|
|
|
|
Michael C. Gross
|
|
Director
|
|
May 31, 2019
|
|
|
|
|
|
/s/ Michael El-Hillow
|
|
|
|
|
Michael El-Hillow
|
|
Director
|
|
May 31, 2019
|
|
|
|
|
|
/s/ Justin C. Jacobs
|
|
|
|
|
Justin C. Jacobs
|
|
Director
|
|
May 31, 2019
|