UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
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OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-10621
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AMERICAN ECO CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 52-1742490
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
154 University Avenue, Toronto, Ontario M5H 3Y9
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(Address or principal executive offices) (Zip Code)
(416) 340-2727
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 9, 1998, there were 21,610,180 shares of Common Shares, no par
value, outstanding.
AMERICAN ECO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet:
August 31, 1998 and November 30, 1997 ...................... 3
Consolidated Statement of Operations:
Three Months and Nine Months Ended August 31, 1998 and
August 31, 1997 .......................................... 5
Consolidated Statement of Changes in Financial Position:
Nine Months Ended August 31, 1998 and August 31, 1997 ...... 6
Notes to Consolidated Financial Statements ................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities ..................................... 16
Item 6. Exhibits and Reports on Form 8-K .......................... 17
Signatures ........................................................ 18
2
ITEM 1. FINANCIAL STATEMENTS
PART I
FINANCIAL INFORMATION
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States dollars in thousands)
(Unaudited)
ASSETS
August 31, November 30,
1998 1997
------------ ------------
CURRENT ASSETS
Cash .......................................... $ 19,912 $ 1,259
Accounts receivable, trade, less allowance for
doubtful accounts of $2,182 in 1998 and
$2,078 in 1997 .............................. 53,652 50,349
Current portion of notes receivable ........... 15,970 17,757
Costs and estimated earnings in excess of
billings .................................... 16,575 13,145
Inventory ..................................... 20,494 18,079
Deferred income tax ........................... 1,281 1,133
Prepaid expenses and other current assets ..... 9,609 6,920
------------ ------------
TOTAL CURRENT ASSETS .................... 137,493 108,642
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net .............. 43,920 33,023
------------ ------------
OTHER ASSETS
Goodwill, net of accumulated amortization of
$2,472 in 1998 and $1,592 in 1997 ........... 31,051 30,484
Notes receivable .............................. 22,299 28,578
Investments ................................... 35,688 9,142
Other assets .................................. 7,392 1,917
------------ ------------
TOTAL OTHER ASSETS ...................... 96,430 70,121
------------ ------------
TOTAL ASSETS ............................ $ 277,843 $ 211,786
============ ============
The November 30, 1997 balance sheet was derived from the audited financial
statements at that date but does not include all of the disclosures required by
generally accepted accounting principles for complete financial presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States dollars in thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, November 30,
1998 1997
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities ...... $ 27,470 $ 28,400
Notes payable ................................. 341 8,904
Current portion of long-term debt ............. 112 8,081
Billings in excess of costs and estimated
earnings .................................... 2,892 3,350
------------ ------------
TOTAL CURRENT LIABILITIES ............... 30,815 48,735
------------ ------------
LONG-TERM LIABILITIES
Senior notes .................................. 120,000 --
Long-term debt ................................ 831 51,722
Deferred income tax liability ................. 3,233 3,144
Other liabilities ............................. 840 1,086
------------ ------------
TOTAL LONG-TERM LIABILITIES ............. 124,904 55,952
------------ ------------
TOTAL LIABILITIES ....................... 155,719 104,687
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Share capital ................................. 89,918 75,577
Contributed surplus ........................... 2,845 2,845
Cumulative foreign exchange ................... (4,528) (1,511)
Retained earnings ............................. 33,889 30,188
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .............. 122,124 107,099
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................ $ 277,843 $ 211,786
============ ============
The November 30, 1997 balance sheet was derived from the audited financial
statements at that date but does not include all of the disclosures required by
generally accepted accounting principles for complete financial presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(United States dollars in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUE ......................................... $ 64,602 $ 48,176 $ 182,498 $ 149,775
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Direct costs of revenue ....................... 48,161 32,418 142,637 110,683
Selling, general and administrative expenses .. 9,003 8,617 25,315 20,256
Interest expense, net ......................... 1,535 1,162 3,206 3,026
Loss on early extinguishment of debt .......... -- -- 2,400 --
Depreciation and amortization ................. 1,113 778 3,334 2,640
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES ................ 59,812 42,975 176,892 136,605
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES ........ 4,790 5,201 5,606 13,170
PROVISION FOR INCOME TAXES ...................... 1,621 653 1,906 653
------------ ------------ ------------ ------------
NET INCOME ...................................... $ 3,169 $ 4,548 $ 3,700 $ 12,517
============ ============ ============ ============
Earnings per common share:
Basic ......................................... $ 0.15 $ 0.28 $ 0.18 $ 0.83
============ ============ ============ ============
Fully diluted ................................. $ 0.13 $ 0.27 $ 0.16 $ 0.74
============ ============ ============ ============
Weighted average number of shares used in
computing earnings per common share:
Basic ......................................... 21,494,654 16,238,637 20,751,435 15,166,715
============ ============ ============ ============
Fully diluted ................................. 25,755,885 18,527,321 24,821,048 16,914,865
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED AUGUST 31,
(United States dollars in thousands)
(Unaudited)
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 3,700 $ 12,157
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on early extinguishment of debt ........ 2,400 --
Depreciation and amortization ............... 3,334 2,640
Change in deferred income taxes ............. (59) 404
Gain on sale of subsidiaries ................ -- (2,460)
Change in accounts receivable ............... (3,053) (12,598)
Change in costs and estimated earnings in
excess of billing ......................... (3,430) (6,037)
Change in inventory ......................... (2,415) 2,067
Change in prepaid expenses and other current
assets .................................... (4,460) 967
Change in other assets ...................... (4,014) --
Change in accounts payable and accrued
liabilities ............................... (930) (1,086)
Change in billings in excess of costs and
estimated earnings ........................ (458) (1,090)
Change in deferred gain and other liabilities (246) --
------------ ------------
Net cash used in operating activities ........... (9,631) (5,036)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................... (1,893) 755
Acquisition of business, net of cash acquired . -- (5,210)
Increase in goodwill .......................... -- (1,540)
Proceeds from (repayments of) notes receivable. 7,459 (15,740)
Increase in investment ........................ (25,638) --
------------ ------------
Net cash used in investing activities ........... (20,072) (21,735)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes .................... 116,139 --
Proceeds from notes payable ................... 3,500 --
Proceeds from long-term debt .................. 408 19,272
Principal payments on notes payable ........... (58,927) --
Principal payments on long-term debt .......... (12,404) --
Stock issuance costs .......................... (28) --
Issuance of common stock ...................... 2,685 12,512
------------ ------------
Net cash provided by financing activities ....... 51,373 31,784
------------ ------------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH.. (3,017) --
------------ ------------
NET INCREASE IN CASH ............................ 18,653 5,013
CASH AT BEGINNING OF PERIOD ..................... 1,259 317
------------ ------------
CASH AT END OF PERIOD ........................... $ 19,912 $ 5,330
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP") for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission ("SEC"). Such financial statements do not include all disclosures
required by generally accepted accounting principles for annual financial
statement reporting purposes. Accordingly, the information contained herein
should be read in conjunction with the Company's annual consolidated financial
statements and related disclosures. The accompanying financial statements
reflect, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods presented. See Note 8 for a description of the differences
between Canadian and United States GAAP. Results of operations for the three and
nine months ended August 31, 1998 are not necessarily indicative of results
expected for an entire year.
The accompanying consolidated financial statements include the accounts of
American Eco Corporation ("AEC") or (the "Company") and its wholly-owned
subsidiaries; Chempower, Inc., Specialty Management Group, Inc. /d/b/a CCG
(acquired September 1, 1997), Industra Service Corporation ("Industra"), MM
Industra, Ltd. ("MMI"), Separation and Recovery Systems, Inc. ("SRS"), The
Turner Group, United Eco Systems, Inc., Cambridge Construction Service
Corporation, and Lake Charles Construction Company, Inc. The 1997 financial
statements also include ECO Environmental, Inc. and Environmental Evolutions,
Inc., through August 31, 1997, the date these subsidiaries were sold. All
significant intercompany balances and transactions have been eliminated.
Recognition of Revenue: The Company recognizes revenues and profits on contracts
using the percentage-of-completion method of accounting. Under the
percentage-of-completion method, contract revenues are accrued based upon the
percentage that accrued costs to date bear to total estimated costs. As
contracts can extend over more than one accounting period, revisions in
estimated total costs and profits during the course of work are reflected during
the period in which the facts requiring the revisions become known. Losses on
contracts are charged to income in the period in which such losses are first
determined. The percentage-of-completion method of accounting can result in the
recognition of either costs and estimated profits in excess of billings, or
billings in excess of costs and estimated profits on uncompleted contracts,
which are classified as current assets and liabilities, respectively, in the
Company's balance sheet.
Foreign Exchange: The functional currency for the Company is the U.S. dollar,
with the exception of AEC, Industra and MMI whose functional currency is the
Canadian dollar. The translation of the Canadian dollar into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Gains and losses resulting from the
translation of AEC, Industra and MMI's financial statements are classified as a
component of shareholders' equity.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform with the current year presentation.
NOTE 2 - CASH RESTRICTIONS
The Company's cash balance at August 31, 1998 includes approximately $7.2
million held in escrow as security for a letter of credit required for the
Amethyst project (see Note 4).
NOTE 3 - NOTES RECEIVABLE
On February 18, 1998 the Company executed a "Third Amendment" to its $20 million
maximum line of credit note with U.S. Industrial Services, Inc. ("USIS")
(formerly EIF Holdings, Inc.). The Third Amendment extended the maturity to
August 18, 1998 from February 18, 1998.
On July 14, 1998 the Company converted $1 million of its outstanding note
receivable from USIS for 1,000,000 shares of USIS common stock pursuant to a
Stock Purchase Agreement dated February 2, 1996. (See NOTE 4 - INVESTMENTS for
additional disclosure).
On July 24, 1998, the Company sold its remaining note receivable from USIS,
which amounted to $17.9 million, to USIS Acquisition, LLC (UALC), for full face
value. Under the terms of the agreement, the Company received $5 million in cash
7
and a note from UALC in the amount of $12.9 million. The note bears interest at
10% per annum, matures on January 29, 1999 and is secured by a Stock Pledge
Agreement that grants the Company a security interest in all of the USIS common
stock owned by UALC. See Amendment No. 5 to Schedule 13D filed by the Company on
August 6, 1998 for copies of the Promissory Note and Stock Pledge Agreement.
On August 31, 1997 the Company sold its wholly owned subsidiaries, Eco
Environmental, Inc. and Environmental Evolutions, Inc., to Eurostar Interests,
Ltd. ("Eurostar"), a company controlled by John C. Pennie, the Vice-Chairman of
AEC. Eurostar assigned its interest in Eco Environmental and Environmental
Evolutions to Eco Technologies International, Inc. ("ETI"). John C. Pennie owns
50% of Windrush, which owns 6.6% of ETI, and Mr. Pennie is Chairman and Chief
Executive Officer of ETI. Barry Cracower, a director of the Company, is also a
director of ETI. As consideration for the sale the Company received a note in
the amount of $11 million, which bears interest at 10% and was due on August 31,
1998. The note is collateralized by all of the common stock of Eurostar and is
also supported by a $3 million performance bond. Subsequent to August 31, 1998,
the Company received a partial payment of $3 million. The Company is currently
discussing with ETI a possible extension and or amendment to the note.
NOTE 4 - INVESTMENTS
DOMINION BRIDGE CORPORATION
On February 20, 1998, the Company and Dominion Bridge Corporation ("Dominion
Bridge") entered into a non-binding Letter of Intent which provided for (a) the
purchase of $5.0 million of Dominion Bridge common stock and warrants to
purchase Dominion Bridge common stock by the Company, (b) a working capital loan
facility of up to $25.0 million to be provided by the Company to Dominion
Bridge, (c) the engagement of the Company to provide certain management services
to Dominion Bridge, and (d) the acquisition by the Company of the business and
assets of Dominion Bridge.
The purchase of $5.0 million dollars of Dominion Bridge stock was consummated on
February 20, 1998. The amount is included in the accompanying consolidated
balance sheet under the caption "Investments". Michael E. McGinnis, Chairman and
Chief Executive Officer of the Company, is also a member of the Board of
Directors of Dominion Bridge. On August 11, 1998, Dominion Bridge filed "notices
of intent to submit a proposal" under the Canadian Bankruptcy and Insolvency
Act. Proposals to the Dominion Bridge creditors are due by October 26, 1998.
Once proposals are submitted, Dominion Bridge will attempt to negotiate a final
agreement with its creditors. Due to the early stage of the proceedings, the
ultimate outcome cannot yet be predicted. As a result, the investment continues
to be stated at cost. Should the outcome of these proceedings lead to the
determination that a permanent decline in value of the Company's investment in
Dominion Bridge has occurred, a write-down to fair market value will be
necessary. See Note 8 for additional disclosures.
On March 23, 1998, the Company announced that it had withdrawn the Letter of
Intent and terminated negotiations for any further transactions due to
complexities of the transaction and the time constraints for its completion. The
Company subsequently entered into two projects with Davie Industries and Steen
Pipeline, subsidiaries of Dominion Bridge, to perform certain contract work in
Canada. During the quarter ended August 31, 1998, the Company's investment in
these projects increased by approximately $17.4 million, comprised of
approximately $11.4 million of capital investment, plus recognized gross profit
of approximately $6 million. See Note 8 for disclosures regarding the Company's
accounting treatment for these activities.
US INDUSTRIAL SERVICES, INC.
On July 14, 1998, the Company exercised its option to convert $1 million of
convertible notes into 1 million shares of US Industrial Services, Inc. common
stock. The Company sold the remaining portion of its convertible notes to UALC
on July 24, 1998, and UALC converted the notes to common stock effective July
27, 1998 (see Note 3). Michael E. McGinnis, Chairman and Chief Executive Officer
of the Company, is also a member of the Board of Directors of USIS. As a result
of these transactions, the Company's ownership of USIS common stock decreased
from approximately 36% to 21%. Accordingly, the Company continues to account for
the investment under the equity method, and has recognized income of
approximately $357,000 and $449,000, respectively, for the three and nine months
ended August 31, 1998.
NOTE 5 - SENIOR NOTES
In May 1998, the Company completed placement of $120,000,000 of 9-5/8% Senior
Notes that mature May 15, 2008. Interest on the notes is payable semi-annually
in arrears on May 15, and November 15 of each year, commencing November 15,
1998. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after May 15, 2003, at specified redemption prices.
8
The Notes are senior general unsecured obligations of the Company, ranking pari
passu in right of payment with all other senior indebtedness of the Company and
senior in right of payment to any subordinated indebtedness of the Company
incurred in the future. The Indenture contains certain covenants that, among
other things, will limit the ability of the Company and certain of its
subsidiaries to incur additional indebtedness, pay dividends or make other
distributions, purchase equity interest or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, issue or sell
capital stock of subsidiaries, engage in sale-and-leaseback transactions, sell
assets or enter into certain mergers or consolidations. The Company used
proceeds of $71.2 million to repay credit facilities, other outstanding
indebtedness and accrued interest associated with such indebtedness. The
remainder of the net proceeds will be used for general corporate purposes,
funding of joint venture start-up costs and future acquisitions. As a result of
the refinancing, the Company recorded a $2.4 million charge for the early
extinguishment of debt, primarily related to the prepaid financing costs of the
bank debt.
NOTE 6 - INCOME TAXES
During the nine months ended August 31, 1998, the Company has recorded a
provision for income taxes of $1.9 million, based on an effective tax rate of
34%. The effective tax rate was computed based on the statutory U.S. and
Canadian federal income tax rates, state and provincial tax rates, and estimated
utilization of certain available U.S. and Canadian net operating loss
carryforwards.
NOTE 7 - LITIGATION
The nature and scope of the Company's business operations bring it into regular
contact with the general public, a variety of businesses and government
agencies. These activities inherently subject the Company to litigation, which
are defended in the normal course of business. At August 31, 1998 there were
several claims and disputes incidental to the business. Management believes that
the disposition of all such claims and disputes, individually or in the
aggregate, should not have a material effect upon the Company's financial
position, results of operations or cash flows.
NOTE 8 - DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian Basis") which
differ in certain respects from those principles and practices that the Company
would have followed had its consolidated financial statements been prepared in
accordance with accounting practices generally accepted in the United States
("U.S. Basis").
During May 1998, the Company completed the sale of $120 million of 9 5/8% Senior
Notes. Upon completion of this sale, the Company extinguished its existing bank
indebtedness resulting in a charge of $2.4 million. Under Canadian Basis, this
charge is included in pretax earnings. Under U.S. Basis, however, this charge is
presented as an extraordinary item, net of tax.
On February 20, 1998, the Company purchased 1,923,077 shares of Dominion Bridge
common stock for $5.0 million. Under Canadian Basis, this investment is
accounted for as a long-term investment. As explained in Note 4, it is not
determinable whether an other than temporary decline in value has occurred in
this investment as of August 31, 1998. As a result, the investment continues to
be stated at cost. Under US Basis, the Company's investment in Dominion Bridge
would be accounted for pursuant to Statement of Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Under SFAS No. 115, the investment would be classified as an
available-for-sale security, and stated at its market value of $0.4 million at
August 31, 1998. The unrealized loss of $4.6 million would be presented as a
component of shareholders' equity. Under both the Canadian and US Basis, no
income statement charge is recognized until it is determined that a permanent
decline in value has occurred. As a result, there is no impact on net income for
the quarter ended August 31, 1998 under either basis of accounting.
Under Canadian Basis, the Company accounts for the results of its joint venture
activities under the proportionate consolidation method. Under US basis, the
equity method of accounting is required. While there is no impact on net income,
the Canadian Basis financial statements include approximately $6 million of
gross profit recognized under the proportionate consolidation method, which
would have been classified as other income under the equity method (US Basis).
9
Under U.S. Basis, utilization of pre-acquisition net operating loss
carryforwards should be credited to goodwill rather than as a reduction of the
income tax provision, as in practice under Canadian Basis. Therefore, under U.S.
Basis, the goodwill and income tax provision would have been adjusted by
approximately $295,000 and $1,279,000 for the three and nine months ended August
31, 1998, respectively, and by $1,428,000 and $2,821,000 for the three and nine
months ended August 31, 1997, respectively.
During the nine months ended August 31, 1997, the Company sold $19 million
aggregate principal amount of convertible debentures (the "Debentures"). Under
Canadian Basis, the total amount allocated to the conversion feature of
approximately $3 million was being charged to interest expense over ten years.
Had the U.S. Basis been followed, the $3 million would have been charged to
interest expense immediately as the conversion feature of the Debentures were
"in the money" and the Debentures were immediately convertible. As all
Debentures were converted by September 9, 1997, there is no impact on the fiscal
1998 financial statements.
During the first quarter of 1997, the Company commenced accounting for its
investment in USIS pursuant to the equity method of accounting. Under Canadian
Basis, the change is accounted for prospectively. Under U.S. Basis, however,
this change is accounted for retroactively to when the Company first invested in
USIS, resulting in an additional charge of approximately $1.5 million during the
first nine months of fiscal year 1997.
The following is a reconciliation of revenues, pretax income and net income
under Canadian Basis to U.S. Basis.
Canadian Basis
--------------------------------------------------------
3 months 9 months
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues ............. $ 64,602 $ 48,176 $ 182,498 $ 149,775
Pretax income ........ 4,790 5,201 5,606 13,170
Income tax provision.. 1,621 653 1,906 653
Income before
extraordinary item.. 3,169 4,548 3,700 12,517
Extraordinary loss on
extinguishment of
debt ............... -- -- -- --
Net income ........... $ 3,169 $ 4,548 $ 3,700 $ 12,517
U.S. Basis
--------------------------------------------------------
3 months 9 months
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues ............. $ 58,602 $ 48,176 $ 175,469 $ 149,775
Pretax income ........ 4,790 5,201 8,005 8,684
Income tax provision.. 1,916 2,081 3,185 3,474
Income before
extraordinary item.. 2,874 3,120 4,820 5,210
Extraordinary loss on
extinguishment of
debt ............... -- -- (1,440) --
Net income ........... $ 2,874 $ 3,120 $ 3,380 $ 5,210
Canadian Basis
--------------------------------------------------------
3 months 9 months
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net income ........... $ 3,169 $ 4,548 $ 3,700 $ 12,517
Net income per share:
Basic ............. $ .15 $ .28 $ .18 $ .83
Diluted ........... $ .13 $ .27 $ .16 $ .74
Weighted average
number of shares:
Basic ............. 21,494,654 16,238,637 20,751,435 15,166,715
Diluted ........... 25,755,885 18,527,321 24,821,048 16,914,865
10
Under U.S. Basis, basic and diluted earnings per share are calculated using the
treasury stock method. The calculation of earnings per share under U.S. Basis is
as follows:
U.S. Basis
--------------------------------------------------------
3 months 9 months
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net income ........... $ 2,874 $ 3,120 $ 3,380 $ 5,210
Net income per share:
Basic ............. $ .13 $ .19 $ .16 $ .34
Diluted ........... $ .13 $ .18 $ .16 $ .32
Weighted average
number of shares:
Basic ............. 21,494,654 16,238,637 20,751,435 15,166,715
Diluted ........... 21,615,208 17,197,557 21,486,250 16,180,986
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in its Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Forward looking statements involve
risks and uncertainties which could cause actual results or outcomes to differ
materially. The Company's expectations and beliefs are expressed in good faith
and are believed by the Company to have a reasonable basis but there can be no
assurance that management's expectations, beliefs or projections will be
achieved or accomplished. In addition to other factors and matters discussed
elsewhere herein, the following are important factors that, in the view of the
Company, could cause actual results to differ materially from those discussed in
the forward-looking statements: the ability of the Company to continue to expand
through acquisitions, the availability of debt or equity capital to fund the
Company's expansion program and capital requirements, the ability of the Company
to manage its expansion effectively, collection and realization of its
investments, economic conditions that could affect demand for the Company's
services, the ability of the Company to complete projects profitably and severe
weather conditions that could delay projects.
GENERAL
The Company entered into its current lines of business in November 1992 and has
continued to expand its service capabilities, geographic presence and customer
base primarily by acquiring other companies. The Company acquired nine
businesses between fiscal 1993 and fiscal 1997, and its revenues grew from $7.6
million in fiscal 1993 to $220.4 million in fiscal 1997 primarily as a result of
such acquisitions. In fiscal 1997, the Company continued its acquisition program
by acquiring Chempower and CCG, and intends to continue to expand its business
through the acquisition of companies in the industrial support and specialty
fabrication businesses. The Company's acquisition strategy entails the potential
risks inherent in assessing the value, strengths, weaknesses, contingent
liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. There can be no assurance that
acquisition opportunities will continue to be available.
The Company's acquisition strategy has led to rapid growth in the Company's
operations over the past five fiscal years. The Company's operations generally
are managed at each of its subsidiaries, but core administrative, financing and
strategic planning functions are performed at the corporate level. This rapid
growth has increased, and may continue to increase, the operational complexity
of the Company as well as the level and responsibility for both existing and new
management personnel at the corporate level. The Company's ability to manage its
expansion effectively will require it to retain new management personnel at the
corporate level and to continue to implement and improve its operational and
financial systems. The Company's inability to effectively manage its expansion
could have a materially adverse effect on its results of operations and
financial position.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's revenues from its industrial and specialty fabrication segments
may be affected by the timing of scheduled outages at its industrial customers'
facilities and by weather conditions. Historically, the Company has experienced
decreased activity during the first quarter of a fiscal year due to slower plant
turnaround activity in the refinery and power generating industries in the
northern United States and Canada. The effects of seasonality may be offset by
the timing of large individual contracts, particularly if all or a substantial
portion of the contracts fall within a one-to-two quarter period. Accordingly,
the Company's quarterly results may fluctuate and the results of one fiscal
quarter should not be deemed to be representative of the results of any other
quarter or for the full fiscal year.
12
RESULTS OF OPERATIONS
Three Months Ended August 31, 1998
Compared To
Three Months Ended August 31, 1997
Revenue
Consolidated revenue for three months ended August 31, 1998 increased to $64.6
million from $48.2 million for the same period in the previous year. The
increase was primarily the result of the inclusion of CCG, which was acquired on
September 1, 1997, and the current quarter inclusion of activity from the
Dominion Bridge projects, Amethyst and Steen Pipeline, which are under the
direction of MM Industra. In addition, during the three months ended August 31,
1998, Industra's revenue increased due to continued diversification into broader
market segments. The consolidated increase in revenue was partially offset by a
decreased number of sales of SRS Sarex Systems during the current quarter. In
addition, the three months ended August 31, 1997 included revenue related to the
MART project, a state of the art thermal treatment facility in which the Company
no longer has an interest. SAREX system sales are expected to improve in the
fourth quarter.
Gross Profit
Consolidated gross profit as a percent of revenue, for the three months ended
August 31, 1998 decreased to 25.4% from 32.7% for the same period in the
previous year. The decrease in gross profit percentage was the combined result
of Industra's current quarter diversification into the energy and general
construction markets which typically provide lower margins than the boiler
turnaround projects in the pulp and paper industry. In addition, SRS experienced
a decreased in the number of higher margin SAREX System project placements in
the current quarter and an increase in its lower margin processing operations.
Turner also contributed to the margin decrease due to revised profitability
estimates on certain jobs.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses (sg&a), as a
percentage of revenue, for the three months ended August 31, 1998 compared to
the same period in 1997 decreased 4% to 13.9% from 17.9%. The decrease in the
sg&a percentage was the result of the efficiencies recognized from the cost
containment initiatives the Company has implemented during the current year, and
reduced legal fees as compared to the same period in 1997.
Other Costs and Expenses
For the three months ended August 31, 1998, interest expense increased to $2.9
million from $1.5 million for the same period in 1997. The increase was the
result of the $120 million Senior Notes issued in May 1998. Interest expense is
shown net of interest income, which totaled approximately $1.4 million and $0.4
million for the quarters ended August 31, 1998 and 1997, respectively. The
increase in interest income resulted from an increase in the Company's notes
receivable and from the short-term investing of the Company's idle cash.
Nine Months Ended August 31, 1998
Compared To
Nine Months Ended August 31, 1997
Revenue
Consolidated revenue for the nine months ended August 31, 1998 increased to
$182.5 million from $149.8 million for the same period in the previous year. The
increase was primarily the result of the inclusion of a full year of operations
of CCG and Chempower, which were acquired on September 1, 1997 and March 1,
1997, respectively, and the current year inclusion of activity from the Dominion
Bridge projects, Amethyst and Steen Pipeline, which are under the direction of
MM Industra. In addition, during the nine months ended August 31, 1998, Turner's
revenue increased as a result of a major contract for the expansion of an oil
refinery and Industra's revenue increased due to continued diversification into
a broader range of market segments. The consolidated increase in revenue was
partially offset by a decreased number of sales of SRS Sarex Systems during the
current year. In addition, the nine months ended August 31, 1997 included
revenue related to the MART project, a state of the art thermal treatment
facility, which was completed in 1997.
13
Gross Profit
Consolidated gross profit as a percent of revenue, for the nine months ended
August 31, 1998 decreased 4.3% to 21.8% from 26.1% for the same period in the
previous year. The decrease in gross profit percentage was the combined result
of a decrease in the number of higher margin SRS SAREX System project placements
in the current year and an increase in its lower margin processing operations.
Turner also contributed to the margin decrease due to revised profitability
estimates on certain jobs. SAREX system sales are expected to improve in the
fourth quarter.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses, as a percentage of
revenue, for the nine months ended August 31, 1998 compared to the same period
in 1997 remained consistent. The Company has started recognizing efficiencies
from the cost containment initiatives it has implemented in the current year
which have been offset by costs related to the attempted acquisition of Dominion
Bridge.
Other Costs and Expenses
For the nine months ended August 31, 1998, interest expense increased to $6.7
million from $3.7 million for the same period in 1997. The increase was the
combined result of the $120 million Senior Notes issued in May 1998. Interest
expense is shown net of interest income, which totaled approximately $3.5
million and $0.7 million for the nine months ended August 31, 1998 and 1997,
respectively. The increase in interest income resulted from an increase in the
Company's notes receivable and from the short-term investing of the Company's
idle cash.
The Company used a portion of the proceeds it received from the issuance of $120
million Senior Notes in May 1998 to pay-off various bank debt and notes payable.
As a result of the refinancing, the Company recorded a charge on the early
extinguishment of debt of $2.4 million during the nine months ended August 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1998 the Company's current ratio improved to 4.5:1 as compared
with 2.2:1 as of November 30, 1997. The Company's cash increased by $18.7
million from November 30, 1997 to $19.9 million at August 31, 1998. The
significant increase in cash is primarily the result of the May 1998 issuance of
$120 million of 9 5/8%, ten year Senior Notes. The proceeds from the bond
issuance were utilized to retire existing bank debt and notes payable of
approximately $71.6 million. The remainder of the proceeds were used to fund
working capital needs or remain as available cash to the Company. As explained
in Note 2, the cash balance at August 31, 1998 includes approximately $7.2
million of restricted cash.
During the nine months ended August 31, 1998, the Company utilized net cash in
operating activities of $9.6 million, compared to net cash utilized in
operations of $5.0 for the same period in 1997. The increase in the utilization
of cash was primarily the result of a decrease in net income and increases in
inventory and prepaid expenses for the nine months ended August 31, 1998,
partially offset by improved cash flow from collection of accounts receivable.
During the nine months ended August 31, 1998, net cash used in investing
activities decreased to $20.1 million from $21.7 for the same period in 1997.
Net cash used in investing activities during the current fiscal year consisted
primarily of increased investments in joint venture activities, partially offset
by payments received on its notes receivable in the current period.
As permitted by the Indenture under which the Senior Notes were issued, the
Company expects to obtain a line of credit facility of approximately $20 to $30
million during the next sixty to ninety days secured by the Company's accounts
receivable. The facility will be used to assist its working capital needs and to
assist in the financing of the Company's growth strategy through acquisition.
The Company believes that its current cash position, the collection of certain
notes receivable, the cash flows from its operations, and the anticipated
availability of a line of credit facility, will be sufficient throughout the
next twelve months to finance its working capital needs, planned capital
expenditures, debt service requirements and its acquisition strategy.
14
IMPACT OF THE YEAR 2000 PROBLEM
The Year 2000 Problem is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in other routine business activities.
Based on a recent assessment, management determined that the Company will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that, with modifications to existing software and conversions
to new software, the Year 2000 Problem can be mitigated. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have a material impact on the operations of the Company.
The Company has initiated formal communication with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to the failure of these third parties to solve their own Year 2000
Problems. However, there can be no guarantee that the systems of other companies
on which the Company's system rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company has not incurred any expense for its Year 2000 project and expects
commencement of the project within 60 days. The Company will utilize both
internal and external resources to reprogram, or replace, and test the software
for Year 2000 modifications. The Company plans to complete the Year 2000 project
within one year. The total remaining cost of the Year 2000 project is estimated
at $1.5 million and will be funded through operating cash flow of the Company.
Of the total project cost, approximately $1.0 million is attributable to the
purchase of new software, which will be capitalized. The remaining $500,000 will
be expensed as incurred over the next two years and is not expected to have a
material effect on the results of operations of the Company.
15
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended August 31, 1998, the Company issued 157,500 common
shares in exchange for services. The issuances of these common shares were
exempt from registration under the Securities Act of 1933 by virtue of Section
4(2) thereof.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECO CORPORATION
(Registrant)
Dated: October 15, 1998 /s/ Michael E. McGinnis
--------------------------
Michael E. McGinnis
Chief Executive Officer
Dated: October 15, 1998 /s/ Joseph L. Vaillancourt
--------------------------
Joseph L. Vaillancourt
Corporate Controller
18
EXHIBIT INDEX
Exhibit Description Page
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27 Financial Data Schedule ................ 20
19