UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 0-10621
AMERICAN ECO CORPORATION
(Exact name of Registrant as specified in its charter)
Ontario, Canada 52-1742490
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
154 University Avenue, Toronto, Ontario M5H 3Y9
(Address of principal executive offices, including zip code)
(416) 340-2727
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act.
Name of each exchange on
Title of each class which registered
- ------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act.
Common Shares, no par value
Shareholder Rights Plan
-----------------------
(Title of Class)
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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At January 31, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $38,488,000, and the number of Common
Shares outstanding of the Registrant was 21,610,810.
Documents Incorporated in Reference: None
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................ 3
Item 2. Properties...................................................................................... 18
Item 3. Legal Proceedings............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................. 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 20
Item 6. Selected Financial Data......................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 22
Item 8. Financial Statements and Supplementary Data..................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 58
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 59
Item 11. Executive Compensation......................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 63
Item 13. Certain Relationships and Related Transactions................................................. 64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 68
-2-
PART I
Unless otherwise indicated all dollar amounts are in United States dollars. For
a statement regarding forward looking statements contained herein, see "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition - Information Regarding Forward Looking Statements."
Item 1. Business
General
American Eco Corporation (the "Company" or "American Eco") through its
subsidiaries is a leading provider of industrial support, specialty fabrication
and environmental remediation services to principally three industry groups: (i)
energy, (ii) pulp and paper and (iii) power generation. The Company also
provides construction management services to a select group of commercial owners
and developers. The Company offers its customers a single-source solution for an
extensive array of support services such as equipment and facility repair,
maintenance, refurbishment, retrofit and expansion. Specialty fabrication
services offered by the Company include the construction of decks, well jackets
and modules for offshore oil and gas platforms, the fabrication of piping,
pressure vessels and other equipment used in process industries, the erection of
structural steel support systems and the manufacture of electrical switch gear,
power distribution panels, bus ducts and control rooms. The Company also
manufactures, sells, installs and operates SAREX(C) oil filtration and
separation systems worldwide.
The Company has strategically positioned itself as a single-source provider
of support services, which can be performed by an outside service company with
greater efficiency, safety and cost-effectiveness. By outsourcing support
services, the Company's customers can focus on their core manufacturing
processes, reduce operating costs, improve safety and conserve human and capital
resources.
American Eco's business has benefitted from several market trends. First is
the shift among industrial companies toward outsourcing maintenance and other
non-core services. Companies have increased their use of outside contractors to
control their internal labor and insurance costs and to eliminate the need for
maintaining expensive, under-utilized equipment. Second, the mounting costs of
training skilled employees, maintaining a satisfactory safety record and
complying with rapidly changing government regulations favors experienced
outsourcing providers. Third is a preference by customers to simplify vendor
management by working with larger, single-source providers which have broad
geographic coverage. These trends had driven American Eco's acquisition strategy
to consolidate regionally fragmented service providers in the United States and
Canada. American Eco has realized significant growth through acquiring companies
which provide services to several industries in different geographical regions.
Between fiscal 1993 and fiscal 1998, the Company acquired nine businesses,
including two environmental companies which were subsequently sold in August
1997. The Company's revenues and net operating income were $7.6 million and
$322,000 for the fiscal year ended November 30, 1993 and were $299.8 million and
a loss of $30.2 million for the fiscal year ended November 30, 1998. The
Company's strategy is to continue to pursue strategic acquisitions which broaden
and deepen its geographic presence, expand service offerings or client base and
contribute to earnings growth.
American Eco believes it has achieved a competitively advantaged position
in the industrial support, specialty fabrication and construction management
markets it serves by consistently providing high-quality, cost-effective
services on a safe and timely basis. The Company's key competitive strengths
include: (i) long-standing customer relationships, (ii) an outstanding safety
and quality record, (iii) a broad offering of value-added services and
capabilities, (iv) the ability to provide its services in the United States and
Canada and (v) an experienced management team in the field and at the corporate
level.
During 1998, the Company recorded certain impairment, severance and other
charges that management believes are not reflective of the Company's core or
on-going business activities and are therefore viewed by management
-3-
as non-recurring. These charges related primarily to certain investments in
Dominion Bridge Corporation ("Dominion Bridge") and certain of its subsidiaries
all of which filed "notices of intent to submit a proposal" under the Canadian
Bankruptcy and Insolvency Act in August 1998, to an impairment in its investment
in US Industrial Services, Inc. ("USIS"), and to severance costs of $3.2 million
relating primarily to changes in senior management positions both at the
corporate offices and at certain subsidiaries. In addition, management recorded
charges of $4.6 million related to certain single project joint ventures during
the fourth quarter which were not anticipated by management or the joint
ventures.
In February 1998, the Company purchased $5.0 million of common stock and
warrants of Dominion Bridge and, pursuant to a Letter of Intent, was to enter
into a credit facility, provide management services and acquire the assets of
Dominion Bridge. Although the Company did not enter into those proposed
transactions with Dominion Bridge, it did enter into joint venture and other
arrangements with Dominion Bridge with regard to a joint venture project
involving the construction of a major pipeline in Ontario, Canada and the
fabrication and construction of two semi-submersible oil drilling rigs. In
August 1998, Dominion Bridge and its principal operating subsidiaries in Canada
sought protection under the Canadian bankruptcy laws. Consequently, American Eco
has taken a one-time write-down of $13.8 million from its investment in Dominion
Bridge and other Dominion Bridge related activities, including the cessation of
the projects for the two oil drilling rigs.
During fiscal 1998, the Company underwent several management changes.
Michael E. McGinnis who was Chairman of the Board, President and Chief Executive
Officer surrendered the position of President in July 1998. Frank J. Fradella
was then elected President. Mr. Fradella had served as an executive officer of
the Company from October 1996 to May 1997 and, from May 1997 through July 1998,
he had been President of USIS, a partially owned subsidiary of the Company. At
which time, David L. Norris, who had been Senior Vice President and Chief
Administrative Officer of the Company resigned. In September 1998, the Company
terminated the employment of Bruce D. Tobecksen as Vice President and Treasurer
and named K. Mitchell Posner as Executive Vice President, Chief Financial
Officer and Director of Corporate Development. In December 1998, Mr. Fradella
resigned as President to return to a private company. Mr. Posner announced at
same time that he would leave his positions with the Company and return to the
investment banking industry. In December 1998, Mr. McGinnis was re-elected
President and ceased serving as Chairman of the Board, and J.C. Pennie, who was
Vice Chairman of the Board, then became Chairman of the Board.
On May 21, 1998, the Company issued $120 million principal amount of 95/8%
Senior Notes due May 15, 2008. The net proceeds from the issuance was
approximately $116.1 million, of which $71.2 million was used to repay
outstanding indebtedness, including $65.1 million of the Company's Credit and
Guaranty Agreement, dated as of August 22, 1997.
At January 31, 1999, the Company operated primarily through the following
first and second tier subsidiaries: C.A. Turner Construction Company, a Delaware
corporation ("C.A. Turner" and, together with Action Contract Services Inc., a
Delaware corporation, the "Turner Group"); Cambridge Construction Service Corp.,
a Nevada corporation ("Cambridge"); Lake Charles Construction Company, a
Louisiana corporation ("Lake Charles Construction" and, together with its
wholly-owned subsidiaries, the "Lake Charles Group"); Industra Service
Corporation, a British Columbia, Canada corporation ("Industra Service"); MM
Industra, Limited, a Nova Scotia, Canada corporation ("MM Industra"); United Eco
Systems, Inc., a Delaware corporation ("United Eco"); Separation and Recovery
Systems, Inc., a Nevada corporation ("SRS"); Chempower, Inc., an Ohio
corporation ("Chempower"); and Specialty Management Group, Inc., d.b.a/CCG, a
Texas corporation ("CCG").
Business Strategy
The Company's objectives are to continue to strengthen and broaden its
position as a leading provider of industrial support, specialty fabrication and
construction management services to the energy, pulp and paper, power generation
and retail industries in North America, and thereby increase cash flow and
profitability. To achieve these objectives, the Company is pursuing the
following business strategies:
-4-
Acquire Complementary Service Businesses. The Company evaluates, on an
ongoing basis, potential acquisitions of complementary businesses in an effort
to further strengthen and broaden its single-source service offering, and expand
its customer base and geographic presence. Management believes that the
industrial support services, specialty fabrication and commercial services
markets are fragmented markets which are entering a period of consolidation due
to: (i) customer demand for greater breadth and quality of service, (ii) the
need to service multiple customer facilities, thus enabling the customer to
reduce its vendor relationships and (iii) the increased importance of
established safety and environmental compliance records. These factors have
increased the necessary economies of scale and scope in the support services and
specialty fabrication markets, eroded the competitiveness of smaller industry
participants, and increased the barriers to entry for new competitors.
Strengthen Competitive Position in Growing Outsourcing Market. Management
believes that participants in the energy, pulp and paper, power generation and
retail industries, in an effort to remain competitive, will continue to increase
their reliance on the independent contractors to provide support and specialty
fabrication services. Management is expanding the Company's capabilities to
provide its customers a single-source solution for their support services and
specialty fabrication needs.
Cross-Sell Services. The sales staff, operations managers and business
development personnel of each of the Company's subsidiaries are familiar with
the capabilities of all the Company's subsidiaries. The Company trains its
personnel to identify cross-selling opportunities and integrate the breadth of
the Company's services into each bid proposal. This provides the customer a more
comprehensive portfolio of services. The Company's cross-selling initiatives
have resulted in several successful projects which have involved multiple
operating subsidiaries of the Company and the performance of services internally
which were historically performed by third parties.
Maintain Decentralized Operating Structure. While at the corporate level
the Company retains centralized control over certain administrative and finance
functions, its operating subsidiaries maintain a high level of autonomy.
Management believes that the Company's decentralized operating structure is
critical to its success, as many decisions to purchase its services are made by
local customers based on established relationships and a service provider's
ability to respond rapidly to the customer's needs. In addition, the Company has
instituted programs to improve subsidiary reporting procedure and eliminate
functional redundancy.
Development of the Business
The Company was organized under the laws of Ontario, Canada in 1969 and
entered the environmental business in 1987 under the name ECO Corp. Between 1987
and 1992, the Company developed and marketed certain environmental technologies,
including commercial and residential food waste composting systems. The Company
discontinued its composter operations, which resulted in the eventual write-down
or sale of substantially all of the assets associated with such operations by
1993. Since 1993, the Company has entered its current lines of business and has
grown substantially through acquisitions of other companies. In fiscal 1997, the
Company sold its subsidiaries Eco Environmental Inc. ("Eco Environmental") and
Environmental Evolutions, Inc. ("Environmental Evolutions") which significantly
reduced the operations and results of the environmental remediation services
segment.
Acquisitions
In November 1993, the Company purchased the operating assets and businesses
of the Turner Group, which is located in Port Arthur, Texas and provides
construction, maintenance, demolition, and industrial maintenance services to
petroleum and petrochemical refineries along the Gulf Coastal region of the
United States. Management believes that as a result of the acquisition of the
Turner Group, the Company is well positioned to provide industrial maintenance
services to the petroleum and petrochemical refining industry. The Turner Group
has a 55-year operating history and is located in the region that has the
largest crude refinery capacities in the United States.
-5-
In June 1994, the Company acquired Cambridge, a construction management
company located in Dallas, Texas which provides project management consulting
services to small contractors.
In July 1995, the Company acquired the Lake Charles Group, a construction
company located in Lake Charles, Louisiana. The Lake Charles Group commenced
operations in 1986 and provides general contracting, industrial maintenance,
heating and air conditioning and industrial sheet metal services to commercial
and light industrial clients.
Effective May 31, 1996, the Company acquired United Eco, a construction
company which is headquartered in High Point, North Carolina and provides
environmental contracting, remediation, waste water, ground contamination
treatment and recycling services to clients in the eastern and southeastern
regions of the United States. United Eco operates two thermal desorption
treatment facilities.
Effective July 1, 1996, the Company acquired all of the issued and
outstanding shares of capital stock of SRS, which is based in Irvine,
California. SRS manufactures and distributes a proprietary line of SAREX(R) oil
filtration and separation systems. There are approximately 30,000 such systems
currently installed in one-half of the world's oil and petrochemical tankers as
well as in major oil refineries.
Effective July 22, 1996, the Company acquired Industra Service, which is
based in Vancouver, British Columbia, Canada. Industra Service is an industrial
engineering and environmental services company which provides industrial support
services to the power generation, petroleum and petrochemical refining and
forest products industries principally in western Canada and northwestern United
States. The Company effected a take-over bid for Industra Service by exchanging
1,486,997 shares of the Company's Common Shares, which had a fair market value
of $10.7 million, for 94.0% of the outstanding shares of Industra common stock.
In December 1996, the Company received authorization to acquire the remaining
6.0% of Industra Service outstanding common stock. The Company currently owns
all of the outstanding common stock of Industra Service.
On September 3, 1996, the Company acquired certain assets of M & M
Manufacturing Limited Partnership of Dartmouth, Nova Scotia, which provided
pipefitting, assembling, machining and fabrication services to the petroleum and
petrochemical refining, power generation, forest products and offshore oil
exploration industries. The Company conducts the operations of M & M
Manufacturing Limited Partnership through MM Industra, which was formed for the
acquisition. Prior to their acquisition by the Company, the operations of M & M
Manufacturing Limited Partnership had been idle and in receivership. The
Province of Nova Scotia awarded the Company its bid to purchase and operate the
assets of the bankrupt company, and MM Industra commenced operations in October
1996.
On March 4, 1997, the Company completed its acquisition of Chempower, a
manufacturing, construction and environmental services company for the power
generation and chemical processing industries, headquartered in Akron, Ohio. As
a result of the merger, all of the shareholders of Chempower, other than two
principal shareholders (the "Principal Shareholders"), received $6.20 in cash
for each of their Chempower shares, and all Chempower optionholders received, in
cash, the difference between $6.20 and the exercise price per share for their
outstanding options. The Principal Shareholders received a portion of the merger
consideration in cash and the balance in the form of a $15.9 million promissory
note of Chempower, which was paid in August 1997. In addition, the Company
acquired property from the shareholders of Chempower in the amount of $4.0
million, which was being leased by Chempower. Based on the total 7,565,113
Chempower shares outstanding on the effective date of the merger and the amounts
due to Chempower optionholders, the total acquisition cost was approximately
$50.0 million.
On September 1, 1997, the Company acquired CCG, a provider of maintenance
and specialty construction services to commercial and retail clients throughout
Canada and the United States. CCG has developed a proprietary management
information software system which it will expand to include the Company's energy
-6-
management services for industrial clients. The consideration for CCG consisted
of 265,000 Common Shares of the Company, which Common Shares had a fair market
value of approximately $2.6 million.
In May 1998, the Company completed acquisition of the Pictou facility,
located in Nova Scotia, from the Province of Nova Scotia for Common Shares of
the Company and cash totaling approximately $8.5 million. As part of the
consideration for the transaction, the Company issued a three-year zero-coupon
note of approximately $928,000, which principal amount is to be reduced by
approximately $7,500 for each job created by the Company at the Pictou facility.
In addition, the Company will receive a grant of approximately $1.1 million from
the Province of Nova Scotia for improvements to the facility. The Pictou
facility is comprised of a fabrication facility, which has historically
conducted shipbuilding, ship repair and conversion, and industrial fabrication,
and administrative offices located on 10 acres in the Port of Pictou, Nova
Scotia. The Pictou facility and the Company's MM Industra subsidiary in
Dartmouth, Nova Scotia are the only existing fabrication facilities in the
Province of Nova Scotia which are capable of fabricating certain components
required to service the needs of the offshore oil and gas industry off the east
coast of Canada.
Other Business Ventures
Dominion Bridge Corporation
On February 20, 1998, the Company and Dominion Bridge, entered into a
non-binding letter of intent (the "Letter of Intent") which provided for (a) the
purchase of $5.0 million of Dominion Bridge common stock and warrants by the
Company (the "Dominion Bridge Stock Purchase"), (b) a working capital loan
facility (the "Dominion Bridge 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 Dominion
Bridge Stock Purchase was completed on February 20, 1998, whereby the Company
acquired 1,924,077 shares of common stock and warrants for the purchase of
192,308 shares, or approximately 6.3% of the outstanding shares of Dominion
Bridge. Immediately following the consummation of the Dominion Bridge Stock
Purchase, Michael E. McGinnis, the President and Chief Executive Officer of the
Company, was elected to serve on Dominion Bridge's Board of Directors and on the
Executive Committee thereof.
Dominion Bridge primarily operated as a diversified international
engineering and construction company in North America, Australia and Southeast
Asia, and had additional operations in shipbuilding and repair and industrial
specialty fasteners. In August 1998, Dominion Bridge's principal operating
subsidiaries in Canada sought protection under the Canadian Bankruptcy and
Insolvency Act for a stay of proceedings from their creditors. As of January 31,
1999, those Dominion Bridge subsidiaries remained under "notices of intent to
submit a proposal" under the Bankruptcy and Insolvency Act.
On May 8, 1998, the Company announced that it had entered into a joint
venture with Steen Contractors Ltd., ("Steen"), a subsidiary of Dominion Bridge,
for the fabrication and installation of 54 miles of high pressure pipeline for
the southern and eastern Ontario region. On November 17, 1998, the Company
announced that it purchased the balance of the interest in the joint venture
held by Steen. On June 9, 1998, the Company announced that it had entered into a
joint venture with MIL Davie Industries ("Davie"), a subsidiary of Dominion
Bridge, for the fabrication and construction of two semi-submersible oil
drilling rigs. The project known as the Amethyst II and III was being built for
Petrodrill Offshore, Inc. ("Petrodrill"). The project was to be completed by the
end of 1999.
In July 1998, the Company accepted a novation of the contracts originally
issued to Davie and issued a subcontract to Davie for the actual construction of
the Amethyst II and III rigs by reason of the notices of intent. On November 5,
1998, the Company announced that it had invoked a clause in its contract with
Petrodrill which rescinded its project associated with the construction of
Amethyst II and III based upon default for non-payment of an outstanding
invoice. The construction activity on this project has ceased. Petrodrill
formally terminated the
-7-
contract on November 5, 1998, asserting default by Davie and the Company under
certain provisions of the contract. Negotiations are currently underway between
the Company and Petrodrill to resolve this matter, although no assurance can be
given that these negotiations will result in a settlement favorable to the
Company.
US Industrial Services Inc.
At January 31, 1999, the Company owned approximately 81.9% of the
outstanding Common Stock of USIS. The USIS Common Stock is traded on the OTC
Bulletin Board. In November 1998, USIS sold the assets, subject to the related
liabilities, of its subsidiary J.L. Manta, Inc., and in December 1998, USIS sold
its P.W. Stephens Residential Inc. subsidiary. USIS is engaged in asbestos
abatement and lead hazard removal primarily in the midwest. It recently engaged
a consulting firm to prepare a strategic business plan to assist in refocusing
USIS in other businesses, one of which may be the commercial real estate
construction and management business.
In May 1998, USIS effected a recapitalization, including a corporate
migration to Delaware by its predecessor EIF Holdings, Inc. and a 1-for-10
reverse stock split of its Common Stock. Upon the recapitalization, the Company
acquired 1,000,000 shares of USIS Common Stock pursuant to a February 1996 Stock
Purchase Agreement. The closing had been delayed pending the recapitalization.
At that time, the Company held certain promissory notes (the "Notes") of USIS
consisting of outstanding principal and interest in the aggregate amount of
$17.9 million. The outstanding amount of the Notes had been reduced by $1
million, representing the purchase price for the 1,000,000 shares. In 1996, the
Company had provided USIS a $5.2 million line of credit, which line of credit
was increased to $20.0 million by September 1997. The Notes were convertible
into shares of USIS Common Stock at a price equal to 85.0% of the five day
weighted average price of such shares immediately preceding the conversion date.
As of July 24, 1998, the Company sold the Notes to USIS Acquisition, L.L.C. (the
"Holder"), an unrelated entity, for $5.0 million in cash and a secured
promissory note for $12.9 million repayable on January 29, 1999. The Holder
converted the Notes into 5,295,858 shares of USIS Common Stock, and secured its
promissory note to the Company with a pledge of the 5,295,858 shares. In
November 1998, the Holder advised the Company that the Holder would not be able
to pay its note at maturity, and the Company took ownership of the pledged
shares in discharge of the Holder's note.
Overview of Business and Geographical Segments
The Company is pursuing a strategy of becoming a single-source service
provider for the petroleum and petrochemical refining, power generation, forest
products and retail industries in the United States and Canada. Within this
general line of business, the Company provides industrial support, specialty
fabrication, environmental remediation and construction management services.
-8-
The following table provides information with respect to the Company's
principal business segments.
Environmental Industrial Specialty Construction
Remediation Support Fabrication Management
Services(1) Services Services Services(2)
----------- -------- -------- -----------
(In thousands)
Fiscal 1998
Contract revenue from customers $ 6,227 $ 148,138 $ 116,286 $ 29,138
Operating income (loss) ....... (851) (18,125) (10,258) 353
Depreciation and amortization . 842 3,092 806 176
Capital expenditures .......... 816 3,482 21,109 256
Fiscal 1997
Contract revenue from customers $ (12,125 $ 147,424 $ 51,562 $ 9,367
Operating income (loss) ....... (1,437) 11,768 10,472 168
Depreciation and amortization . 923 3,336 990 133
Capital expenditures .......... 312 1,871 1,536 --
Fiscal 1996
Contract revenue from customers $ (18,489 $ 094,584 $ 06,456 --
Operating income .............. 2,885 3,522 3,073 --
Depreciation and amortization . 699 1,063 470 --
Capital expenditures .......... 516 1,336 6,155 --
- ----------
(1) The sale of Eco Environmental and Environmental Evolutions on August 31,
1997 had significantly reduced the operations and results of the
environmental remediation services segment.
(2) Revenues from CCG were recognized commencing September 1, 1997.
-9-
The following table provides information with respect to the geographic
segmentation of the Company's business.
Canada United States
------ -------------
(In thousands)
Fiscal 1998
Contract revenue ................... $ 123,053 $ 176,736
Operating income (loss) ............ (6,123) (22,758)
Depreciation and amortization ...... 480 4,436
Capital expenditures during the year 22,962 2,701
Fiscal 1997
Contract revenue ................... $ 50,835 $ 169,643
Operating income ................... 6,503 14,468
Depreciation and amortization ...... 1,223 4,190
Capital expenditures during the year 124 3,595
Fiscal 1996
Contract revenue ................... $ 06,509 $ 113,020
Operating income ................... 256 9,224
Depreciation and amortization ...... 166 2,066
Capital expenditures during the year 6,151 1,856
Principal Industries Served by the Company
Power Generation
As the Federal Energy Regulatory Commission has begun to implement the
provisions of the Energy Policy Act of 1992, which deregulates the electric
power generation industry by allowing independent power producers and other
companies access to its transmission and distribution systems, the electric
utility industry in the United States have become increasingly competitive.
Utilities are attempting to reduce their operating costs in order to produce
power at competitive market rates, and are accomplishing this, in part, by
deferring repairs and refurbishing their existing power stations. In the near
term, such deferred maintenance may reduce the amount of available outside
contract business. However, in the longer terms, utility companies may make
necessary repairs in a manner similar to the evolution of outsourcing in the
petroleum refining industry.
Energy
The Company provides industrial support and specialty fabrication services
to the energy industry, with particular focus on (i) petroleum refineries in
North America, (ii) petrochemical and chemical facilities and (iii) the offshore
oil and gas industry in eastern Canada.
Petroleum Refineries. The typical petroleum refinery in North America is an
aging facility that must process crude oil at high utilization rates while
complying with stringent environmental regulations. High utilization rates
accelerate a facility's rate of deterioration and increase the need for repair
and maintenance work. The Company
-10-
believes that any increase in U.S. refining capacity is likely to require the
refurbishment or expansion of existing facilities due to the prohibitively high
cost to construct new facilities. The Company believes that plant managers
increasingly hire independent contractors to maintain the operability of
refineries and have generally reduced their internal maintenance personnel.
Petroleum refiners repair and replace process equipment and piping systems
on an on-going basis in order to maintain the operability and efficiency of
their facilities, and to ensure that such facilities comply with current safety
and environmental regulations. Refinery maintenance projects vary in scope from
routine repairs to major capital improvements and turnarounds which require the
shutdown of certain operating units or the entire refinery. In addition to
routine maintenance, refiners periodically undertake capital improvement
projects to refurbish their facilities. Such projects can require from six
months to three years to complete depending upon the type, utilization rate and
operating requirements of the particular refinery.
In the Company's core operating region along the U.S. Gulf Coast, there is
an aggregate of approximately 6.8 million barrels of crude oil distillation
capacity, which accounts for approximately 42% of total U.S. crude oil
distillation capacity.
Petrochemical/Chemical. The petrochemical and chemical industries are
capital-intensive and heavily regulated. Continuous capital spending is
necessitated by the large plant sizes and economies of scale required to process
end-products efficiently, as well as the complex technology and sophisticated
safety and environmental equipment utilized in these facilities. High capital
costs represent significant barriers to entry in this industry, so any entry
into the industry or increase in capacity is likely to result from the expansion
or refurbishment of existing facilities due to the prohibitively high cost
associated with building a "grass-roots" facility. As such, when
petrochemical/chemical processors undertake significant facility modification
programs, they also typically expand the rated capacity of their facilities.
Canadian Offshore Oil and Gas. Recent offshore oil and gas activity in
eastern Canada has concentrated on the development of the Hibernia and Terra
Nova fields, and Sable Island. The Company fabricated nine utility shaft modules
for the Hibernia field and delivered production well jackets to Sable Island.
The alliance which is developing Sable Island has committed that it will perform
the majority of the fabrication work for the project in the Province of Nova
Scotia. The Company operates the only facilities in Nova Scotia capable of
fabricating the production well jackets, decks and certain other components of
these offshore platforms. Management believes that Sable Island will generate
significant fabrication and maintenance revenues for the Company over the next
three years.
Pulp and Paper
The pulp and paper industry experienced severe pricing pressure from the
fall of 1995 through the spring of 1997 due principally to overbuilt customer
inventories caused by substantial price hikes during the period from mid-1994
to the fall of 1995. As a result of this pricing pressure, many plant managers
deferred maintenance and canceled capital expenditure projects. The American
Forest & Paper Association's annual capacity survey projects capacity growth
from 1997 to 1999 at an annual rate of 1.5% which is below the average rate of
2.6% from 1986 to 1995, but suggests pulp and paper producers are taking a more
conservative view toward pulp and paper demand growth. This modest projected
capacity increase should translate into greater stability in pulp and paper
prices.
In November 1997, the U.S. Environmental Protection Agency (the "EPA")
issued the Cluster Rule which is an integration of the Federal Clean Air and
Clean Water Acts. The Cluster Rule imposes stricter environmental regulations on
the pulp and paper industry through the reduction of pollutants generated by
using elemental chlorine free bleaching technologies which rely on chlorine
dioxide rather than pure chlorine. The EPA estimates that the cost of the
equipment and mill modifications required to comply with the Cluster Rule will
be approximately
-11-
$2.5 billion over the next three years. The Cluster Rule is expected to affect
155 mills across the U.S. and improve the water quality in 73 rivers and streams
receiving discharges from pulp and paper mills.
Industrial Support Services
The Company provides industrial support services to clients in the
petroleum and petrochemical refining, power generation and forest products
industries through the Turner Group, the Lake Charles Group, Industra Service,
Chempower and SRS. The industrial support service business segment generated
approximately 49.4% of the Company's revenues during fiscal 1998.
Turnarounds. Turnaround services include the maintenance of crude
distillation units, catalytic reformer units, delayed coker units, alkylation
units, platformers, fluid catalytic cracking units and butamer units as part of
a single project. These services also include the maintenance and modification
of heat exchangers, heaters, vessels and piping.
Planning and Project Management. The Company has developed the planning
capabilities, operational skills and field supervision techniques necessary to
manage all aspects of turnaround projects and other facility maintenance
services. During the management of a turnaround project, the Company is
responsible for cost control procedures, resource planning and scheduling,
safety control, hazardous material handling, personnel hiring and training,
equipment and tools procurement, field inspections, and overall project
coordination. Certain specialized types of welding are often provided directly
by the Company. Typically a portion of a turnaround project is performed by
subcontractors under the supervision of the Company. The Company also develops
suggested maintenance programs that incorporate its project experience.
Fluid Catalytic Cracking Turnarounds. Fluid Catalytic Cracking Units
("FCCU") require a high level of maintenance due to extreme temperatures, in
excess of 1000(degree)F inside the FCCU. The high temperature degrades the
refractory lining and stainless steel components inside the FCCU. Refractory
lining is heat resistant material designed to insulate the inner shell of the
FCCU. The main components of a FCCU are the reactor, the regenerator and the
flue gas exhaust system. The majority of FCCU maintenance during a turnaround
project is on this equipment. Major maintenance work is typically performed to
increase the efficiency of, and reduce the air pollution from, the FCCU.
Dismantling and Demolition. Dismantling and demolition services are
provided when a customer has decommissioned an entire facility or unit within
its plant. A typical dismantling project begins by identifying potential safety
hazards and preparing a work plan. This includes an estimate of the number of
personnel and type of equipment necessary to complete the project. Personnel
then examine and, if necessary, drain refinery pipelines or remove asbestos or
other hazardous materials. Dismantled equipment is typically cut into scrap and
sold in the scrap market. The Company salvages certain equipment for resale by
the customer.
ASME Code Stamp. The Company's subsidiaries which comprise the Turner Group
are qualified to perform welding services on equipment that contain American
Society of Mechanical Engineer ("ASME") stamps. State agencies and insurance
companies typically require that ASME-certified welders perform services on
ASME-coded equipment.
Instrumentation and Electrical. These services include lighting, power and
instrumentation wiring for electrical systems up to 5,000 volts, and the
installation, termination, troubleshooting and commissioning of switches,
transformers, and associated control and monitoring equipment. The Company is
qualified to calibrate and commission both electrical and pneumatic instrument
systems. The Turner Group has had extensive experience with the conversion and
physical design of distribution control systems.
-12-
Site Remediation. Site remediation includes the on-site clean-up and
treatment of hazardous and non-hazardous organic and inorganic contaminants.
Waste services include removal, encapsulation, stabilization, treatment and
disposal services. The Company employs bioremediation, vapor extraction, thermal
desorption and other techniques to degrade hazardous and non-hazardous
contaminates in soil, sludges, slurries, and liquids contaminated with
hydrocarbons, creosote, pentachlorophenol, pentachloroethylene, PCB's, digester
sulfides, phenols, benzene, toluene, chlorinate aliphatic solvents and raw
sewage. The Company has developed and licenses certain technologies that it uses
in its site remediation business. The Company's United Eco subsidiary has
executed a licensing agreement with Solucorp Industries Ltd. ("Solucorp"), to
use materials contaminated with heavy metals. The MBS technology uses a mobile
facility to process large quantities of soils, ash, sediments and sludges. The
agreement permits United Eco to use this technology throughout North America.
Specialty Fabrication Services
The Company provides specialty fabrication services to clients in the
petroleum and petrochemical refining, forest products and offshore oil
exploration industries through the Turner Group, the Lake Charles Group,
Industra Service, Chempower, SRS and MM Industra. The Company's specialty
fabrication service business segment generated approximately 38.8% of the
Company's revenues during fiscal 1998.
The specialty fabrication services market includes general industrial and
offshore construction projects, ranging greatly in size and complexity of the
project. The market in which the Company participates is affected by the state
of the economy in general as well as the levels of capital expenditures in the
chemical, petrochemical and refining industries.
Offshore Oil and Gas Structures. The Company operates two facilities in
Nova Scotia, Canada capable of fabricating platform topsides up to 1,800 tons,
production well jackets and piles up to 3,000 tons, subsea templates,
accommodation modules, BOP carriers and separation modules for use in the harsh
offshore environments of eastern Canada and the North Sea. In addition, the
Company's facilities have historically engaged in the refit, maintenance,
upgrade and modification of drilling rigs and other offshore structures utilized
by oil and gas companies and drilling contractors. The acquisition of the Pictou
facility provides an additional facility in Nova Scotia which, historically, has
conducted shipbuilding, ship repair and conversion, and industrial fabrication.
Industrial Fabrication. The Company owns and operates approximately 795,000
square feet of facilities in North America where it fabricates piping, power
boiler assemblies, pressure vessels, reactors, drums, towers, precipitators,
tanks, exchanger tubing, heater coils and other equipment used in process
industries. The Company also performs emergency fabrication as necessary. In
many instances, facilities are operated 24 hours a day to assist a turnaround
project.
Electrical Switch Gear, Bus Ducts and Sheet Metal. The Company's
manufacturing services include the design and fabrication of electrical switch
gear, power distribution panels, bus ducts and control rooms for mass transit
authorities, utilities, chemical and other industrial and commercial customers.
Chempower also manufacturers custom sheet metal products which include metal
casings for use in the gaming and electronics industries.
Oil Separation and Removal Systems. SRS manufactures, sells, installs and
operates the SAREX(R) process, an integrated, three phase, oily water processing
treatment system that combines centrifugal technology for sludge dewatering and
oil recovery. This process is currently utilized by hydrocarbon processing
customers in the United States, France, South Africa, Venezuela, Saudi Arabia
and Singapore. Over 30,000 SAREX(R) oil separation and removal systems have been
installed in oil tankers and petroleum refineries around the world.
Structural Steel Support Systems. The Company fabricates and erects,
according to customer specifications, structural steel support systems such as
pipe racks.
-13-
Commercial Management Services
The Company provides construction management services to a national network
of retailers with solid development and growth histories. The capabilities
include tenant improvement, renovations, additions and design build services.
These services are an outgrowth of the Company's September 1997 acquisition of
CCG. With the growing emphasis on renovations and additions to existing
properties, the Company's clients, which are various national retail chains as
well as regional and local developers, have shifted their focus to
rehabilitation. These clients have embarked on programs to modernize existing
facilities to remain competitive and aesthetically pleasing to its customers.
The Company's focus is on fast track projects that require attention to detail
and comprehensive scheduling methods, along with onsite professional project
management. The construction management services segment generated approximately
9.7% of the Company's revenues during fiscal 1998.
Environmental Remediation Services
The Company provides environmental remediation and waste services through
United Eco, Industra Service, Chempower, Cambridge and SRS. Remediation includes
the on-site clean-up and treatment of hazardous and nonhazardous organic and
inorganic contaminants utilizing a number of technologies. Waste services
include removal, encapsulation, stabilization, treatment and disposal services.
The environmental remediation services business segment generated approximately
2.1% of the Company's revenues during fiscal 1998. In fiscal 1997, the Company
sold Eco Environmental and Environmental Evolutions effective as of August 31,
1997 as part of the Company's strategic plan to focus on industrial support
services and specialty fabrication services.
Growth in the environmental remediation industry has been influenced by the
following legislation:
CERCLA--The Comprehensive Environmental Response, Compensation and
Liability Act of 1990 ("CERCLA" or the "Superfund Act"). The Superfund Act
authorizes the Environmental Protection Agency (the "EPA") to coordinate
responses to environmental emergencies and establishes liability for
cleanup costs and environmental damages on present and/or previous owners
and operators of treatment facilities and disposal sites, and persons who
generated, transported or arranged for the disposal or transportation of
wastes to such facilities. These provisions are enforceable by lawsuits
initiated by either the EPA or private citizens.
FFCA--The Federal Facilities Compliance Act of 1992 allows states and the
EPA to enforce solid and hazardous waste and violations against federal
facilities, including those operated by the Department of Defense ("DOD")
and the Department of Energy ("DOE"), the primary federal hazardous waste
generators.
Management recognizes that the environmental remediation industry, which is
largely the creation of federal legislation, is sensitive to shifts in public
opinion and legislation. While there is growing anti-regulatory sentiment in the
United States, management does not believe that this political trend will have a
substantial impact on the Company's environmental services business. The Company
has targeted projects involving soil, coal and tar remediation and ground water
cleanup. The cleanup projects on which the Company typically works have already
been designed and planned and, management believes, are unlikely to be delayed
or cancelled in the near term as a result of deregulation, if any.
Marketing
The Company obtains its contracts either through a competitive bidding
process or on a negotiated basis with long-standing customers. The Company
typically prepares bids for its services on a project basis. Fee arrangements
for services are typically bid either on a field-price or a detailed time and
material billing schedule. Bids are generally awarded based on price,
scheduling, performance, quality and safety. A substantial portion of the
Company's maintenance service is recurring in nature.
-14-
The sales staff, operations managers and business development personnel of
each of the Company's subsidiaries are familiar with the capabilities of all the
Company's subsidiaries. The Company trains its personnel to identify
cross-selling opportunities and integrate the breadth of the Company's services
into each bid proposal. This provides the customer a more comprehensive
portfolio of services. The Company's cross-selling initiatives have resulted in
several successful projects which have involved multiple operating subsidiaries
of the Company and the performance of services internally which were
historically performed by third parties. The Company is attempting to cross-sell
its services so that it may win larger, single-source turnkey projects. During
fiscal 1996, SRS, Industra Service and United Eco were awarded a contract to
construct a remediation facility, Mid-Atlantic Recycling Technologies ("MART"),
in New Jersey to treat soils contaminated by hydrocarbons, heavy coal tars and
polychlorinated biphenyls. The facility serves utilities, environmental
contractors and heavy manufacturing industries throughout the northeast United
States, and incorporated site remediation technologies provided by United Eco
and SRS. The facility commenced operation in July 1997, and the Company sold its
interest in MART in November 1997. In fiscal 1997, the Company obtained a
contract to fabricate and erect a 850-ton bulk material ship loader in Port
Moody, British Columbia. MM Industra fabricated the "bridge" and other
components of the ship loader, while Industra Service completed the final
assembly, erection, testing and commissioning of the ship loader. In January
1998, SRS assigned all of its fabrication of SAREX units to MM Industra in
Halifax. Proposals have been submitted for several projects employing one or
more of the Company's subsidiaries. The award of these projects are pending at
this time. The Company has also entered into strategic alliances with key
technology suppliers in an effort to position itself for larger contracts. The
Company has expanded its partnership to include Kournar Offshore to provide
operation and maintenance services for offshore gas and oil platforms in eastern
Canada.
The Company also enters into partnering arrangements and strategic alliance
with its customers, whereby the Company participates in the pre-planning stages
of projects. This early involvement by the Company enhances its knowledge of the
customers' needs.
The Company, through its SRS subsidiary, has entered in four strategic
alliances with established companies in Venezuela, France, Saudi Arabia and
South Africa. These alliances will enhance the Company's ability to grow its
other industrial support and specialty fabrication business internationally by
providing the Company an international presence. Effective January 1999, the
Company established an international marketing group headed by Besim Halef, a
corporate Vice President.
Competition
The market for industrial support services is highly competitive with
numerous companies of various sizes, geographic presence and capabilities
participating. Management believes that the typical provider of industrial
support services in North America is a small- to medium-sized company that
serves customers in one region, and offers a limited range of services. The
Company competes with numerous small, independent contractors which,
collectively, have a significant overall share of the market for these services.
Certain of the Company's competitors have greater financial resources or offer
specialized technologies or services not provided by the Company. Management
believes that none of the Company's competitors match the Company's geographic
diversity and breadth of services. The principal competitive factors for
industrial support services are price, quality, scope of services offered, and
safety.
The specialty fabrication market in North America is highly fragmented,
with few large participants. Many of the Company's competitors are local
entities. The principal competitive factors for specialty fabrication services
are price, quality, product availability, ability to meet delivery schedule, and
safety.
-15-
Research and Development
The Company does not have a research and development program. However, when
required for specific applications the Company obtains technology licenses.
Customers
During fiscal 1998 the Company generated approximately 88% of its revenues
from industrial customers in general and 44% of its revenues from customers in
the petroleum and petrochemical refining business in particular. TransCanada
Pipeline Limited ("TransCanada Pipeline"), Huntsman Chemical Corporation
("Huntsman Chemical"), Petrodrill Construction Inc. ("Petrodrill"), Oramet
International, Inc. ("Oramet") and Kilborne Engineering together accounted for
approximately 40.2% of the Company's total revenues in fiscal 1998, compared to
31.3% of revenues from its top six customers in fiscal 1997. TransCanada
Pipeline accounted for approximately 16% of the Company's fiscal 1998 revenues,
under the former joint venture with Steen, a subsidiary of Dominion Bridge,
which contract has been completed and is non-recurring, Huntsman Chemical
accounted for approximately 8.3% of the Company's fiscal 1998 revenues, and
Petrodrill accounted for approximately 5.4% of such revenues under a contract
which has been terminated. No other customer accounted for more than 5% of the
Company's revenues in fiscal 1998. Management believes that the Company's
continued efforts to expand and diversify its customer base should reduce the
Company's dependence on certain key customers.
Backlog
At November 30, 1998, the Company's backlog was approximately $275.0
million, compared to approximately $215.0 million of backlog for such contract
work at November 30, 1997. Approximately $63.0 million of the total backlog at
November 30, 1998 was associated with recurring work, such as maintenance
activity which is not under firm contract but which has a high probability of
recurring. Backlog represents the amount of revenue that the Company expects to
realize from work to be performed on uncompleted contracts in progress and from
contractual agreements upon which work has not commenced within the next
12-month period. Contracts included in backlog may have provisions which permit
cancellation or delay in their performance by the customer and there can be no
assurance that any work orders included in backlog will not be modified,
canceled or delayed.
Employees
At January 31, 1999, the Company employed approximately 700 full-time
employees and 1,450 hourly workers. Total employment levels ranged from
approximately 1,580 to 3,080 workers per week during fiscal 1998. The Company's
experience has been that hourly-rate employees are generally available over an
extended period of time in the quantity, and at the skill levels necessary for
its projects. Some of the employees are covered by union contracts expiring at
various dates. The Company has not experienced a significant work stoppage and
considers its employee relations to be good.
Raw Materials
The Company has not experienced any difficulties obtaining the raw
materials needed by its operating subsidiaries.
Government Regulation and Risk Management
Certain of the Company's services involve contact with crude oil, refined
petroleum products, asbestos and other substances classified as hazardous
material under the various federal, state and local environmental laws. Under
these laws, hazardous material is regulated from the point of generation to the
point of disposal. In addition, the EPA has issued regulations for hazardous
waste remediation contractors. To management's knowledge, the operating segments
have obtained all required permits and licenses in the jurisdictions in which
they operate.
-16-
The Company's United States operations are subject to regulations issued by
the United States Department of Labor under the Occupational Safety and Health
Act ("OSHA"). These regulations set forth strict requirements for protecting
personnel involved with any materials that are classified as hazardous, which
includes materials encountered when performing many of the Company's services.
There are similar federal and provincial rules governing the Company's Canadian
operations. Violations of these rules can result in fines and suspension of
licenses. To the best of management's knowledge, the Company and all of its
operating subsidiaries are in material compliance with OSHA and Canadian
regulations.
The Company's safety and training efforts are conducted primarily at the
subsidiary level. In addition to training designed to advance the skill level of
individual employees, the Company uses entry level screening and broad-based
skills development programs to improve the overall quality and technical
competence of its work force. The Company has a designated safety officer at
each of its operating subsidiaries who is responsible for compliance with
applicable governmental procedures and the Company's internal policies and
practices. All of the Company's technicians are subject to pre-employment,
scheduled and random drug testing. The Company's operations and personnel are
subject to significant regulations and certification requirements imposed by
federal, state and other authorities.
The Company maintains worker's compensation insurance in accordance with
statutory requirements and contractors' general liability insurance with an
annual aggregate coverage limit that varies with each subsidiary. The Company's
general liability insurance specifically excludes all pollution related claims
and fines levied against the Company as a result of any violations by the
Company of the regulations issued by the Department of Labor under OSHA. To
date, the Company has not incurred any significant fines or penalties or any
liability for pollution, environmental damage, toxic torts or personal injury
from exposure to hazardous wastes. However, a successful liability claim for
which the Company is only partially insured or completely uninsured could have a
material adverse effect on the Company. In addition, if the Company experiences
a significant amount of such claims, increases in the Company's insurance
premiums could materially and adversely affect the Company. Any difficulty in
obtaining insurance coverage consistent with industry practice may also impair
the Company's ability to obtain future contracts, which in most cases are
conditioned upon the availability of specified insurance coverage. The Company
has not experienced any difficulty in obtaining adequate insurance coverage for
its businesses.
The Company has arranged for a surety line to post performance and payment
bonds on contracts should a customer request that the Company post such bonds as
a condition to the granting of a contract to the Company.
-17-
Item 2. Properties
The location, ownership, primary use and approximate square footage of the
facilities of the Company are set forth in the following table. The principal
administrative offices of the Company are maintained in Toronto, Canada and
Houston, Texas. The Company owns 13 facilities and leases an additional 11
facilities in the United States and Canada. The Company believes that its
existing facilities are adequate to meet current requirements and that suitable
additional or substitute space would be available as needed to accommodate any
expansion of operations.
Approximate
Primary Square Feet
Business Unit and Site Location Ownership Use (1) of Floor Space
------------------------------- --------- ------- --------------
American Eco
Toronto, Ontario.............................. Leased Adm. 2,000
Houston, Texas................................ Leased Adm. 14,000
CCG
Dallas, Texas................................. Leased Adm. 7,000
Chempower
Canton, Ohio.................................. Owned Adm./Mfg. 205,000
Cincinnati, Ohio.............................. Owned Adm./Const. 25,000
Las Vegas, Nevada............................. Leased Adm./Mfg. 47,000
Washington, Pennsylvania...................... Owned Adm./Const./Mfg. 112,000(2)
Waverly, Tennessee............................ Owned Adm./Const./Mfg. 95,000
Winfield, West Virginia....................... Owned Adm./Const. 90,000
Industra Service
Edmonton, Alberta............................. Leased Adm./Const./Fabr./Ther. 50,000
New Westminster, British Columbia............. Owned Adm./Const./Mfg./Fabr./Ther. 74,000
Portland, Oregon.............................. Leased Adm./Const./Eng. 22,000
Greenville, South Carolina.................... Leased Adm./Eng. 14,000
Seattle, Washington........................... Leased Adm. 19,000
Lake Charles Group
Lake Charles, Louisiana....................... Owned Adm./Const./Fabr. 10,000
MM Industra
Dartmouth, Nova Scotia........................ Owned Adm./Mfg. 60,000
Dartmouth, Nova Scotia........................ Owned Mfg./Const. 180,000
Pictou, Nova Scotia........................... Owned Mfg./Const. 85,000
SRS
Irvine, California............................ Leased Adm./Mfg. 24,000
-18-
Turner Group
Bridge City, Texas............................ Owned Adm./Fabr. 2,700
Port Arthur, Texas(3)......................... Owned Adm./Const./Mfg. 29,000
United Eco
Highpoint, North Carolina..................... Owned Adm./Const./Remed. 7,500
Apex, North Carolina.......................... Leased Adm. 5,000
Blacksburg, Virginia.......................... Leased Lab. 5,000
- ----------------
(1) Adm. = Administration; Const. = Construction warehouse; Mfg. =
Manufacturing facility; Fabr. = Fabrication facility; Ther. = Thermal
facility; Eng. = Engineering facility; Remed. = Remediation facility; Lab.
= Laboratory.
(2) Amount includes approximately 30,000 square feet of floor space leased to
unaffiliated tenants.
(3) This facility is situated on 6.5 acres and contains 15,000 square feet of
office and warehouse space and 14,000 square feet of covered fabrication
area. The facility is in close proximity to the Intercoastal Waterway.
Item 3. Legal Proceedings
The Company and its operating subsidiaries are currently involved in
various claims and disputes in the normal course of business. Management
believes that the disposition of all such claims, individually or in the
aggregate, will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matter to a vote of shareholders during the
last quarter of fiscal 1998 through the solicitation of proxies or otherwise.
-19-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Public Market for Common Shares
The Company's Common Shares are traded on The Toronto Stock Exchange and
the Nasdaq National Market under the trading symbols ECX and ECGOF,
respectively. The Company's Common Shares were traded on the American Stock
Exchange under the symbol ECG until November 16, 1995 when the Company delisted
from such exchange and listed its Common Shares on the Nasdaq National Market.
As of January 31, 1999, there were 694 shareholders of record. The Company
believes that the number of beneficial holders is significantly greater than the
number of record holders as a large number of shares are held of record in
nominee or broker names.
The following table provides the quarterly high ask and low bid prices for
the Company's Common Shares on the Nasdaq National Market and The Toronto Stock
Exchange for the two years ended November 30, 1998.
Nasdaq Toronto Stock
National Market Exchange
----------------------- ----------------------
(US$) (CDN$)
High Ask Low Bid High Low
-------- ------- ------ ------
Fiscal year ended November 30, 1998
First quarter ............. $12.25 $ 8.69 $17.75 $12.25
Second quarter ............ 11.25 6.75 16.00 10.00
Third quarter ............. 8.00 2.44 11.40 4.00
Fourth quarter ............ 3.19 1.81 4.90 2.90
Fiscal year ended November 30, 1997
First quarter ............. 9.43 6.68 12.60 9.10
Second quarter ............ 8.50 6.75 11.50 9.70
Third quarter ............. 10.18 5.87 14.05 8.25
Fourth quarter ............ 14.75 9.12 20.05 12.95
The Company is subject to covenants in its Indenture which restrict or
limit the payment of cash dividends on its Common Shares. Notwithstanding such
restrictions and limitations, it is the Company's present policy to retain
future earnings for use in its business.
Private Placements of Common Shares
During the fourth quarter of fiscal 1998, the Company did not effect any
private placements of its Common Shares.
-20-
Item 6. Selected Financial Data.
The Turner Group was acquired in October 1993, Cambridge was acquired in
June 1994, the Lake Charles Group was acquired in July 1995, Environmental
Evolutions was acquired in January 1996, both SRS and Industra Service were
acquired in July 1996, MM Industra was acquired in September 1996, Chempower was
acquired in March 1997 and CCG was acquired in September 1997. Eco Environmental
and Environmental Evolutions were sold by the Company in August 1997, effective
as of August 31, 1997. The statement of operations for the year ended November
30, 1994 reflects six months of operations for Cambridge. The statement of
operations for the year ended November 30, 1995 reflects five months of
operations for the Lake Charles Group. The statement of operations for the year
ended November 30, 1996 reflects eleven months of operations for Environmental
Evolutions, six months of operations for United Eco, four months of operations
for SRS and Industra Service and one month of operations for MM Industra. The
statement of operations for the year ended November 30, 1997 reflects nine
months of operations for Chempower, three months of operations for CCG and nine
months of operations for Eco Environmental and Environmental Evolutions prior to
their sale. The following information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere herein.
Fiscal Year Ended
November 30
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share information)
Statement of Operations Data:
Total revenue ............... $ 299,789 $ 220,478 $ 119,529 $ 46,684 $ 34,991
Operating income (loss) ..... (28,881) 20,971 9,480 3,773 1,747
Interest expense ............ 9,506 4,946 1,747 713 681
Pretax income (loss) ........ (39,885) 19,264 7,954 3,060 1,066
Net income (loss) ........... (30,179) 17,435 8,763 2,852 903
========= ========= ========= ========= =========
Net income (loss) per share . $ (1.44) $ 1.08 $ 0.81 $ 0.40 $ 0.15
========= ========= ========= ========= =========
Weighted average shares
outstanding ................. 20,965 16,218 10,846 7,217 6,191
Balance Sheet Data:
Working capital ............. $ 91,238 $ 59,907 $ 3,280 $ 6,639 $ 6,441
Total assets ................ 250,383 211,786 104,484 31,061 22,947
Current debt ................ 630 8,081 22,107 4,497 3,785
Long-term debt .............. 120,689 51,722 6,720 2,100 4,977
Shareholders' equity ........ 90,238 107,099 55,043 18,736 11,299
-21-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
American Eco is a leading provider of industrial support and specialty
fabrication services to principally three industry groups: (i) energy, (ii) pulp
and paper and (iii) power generation. The Company also provides construction
management services to a select group of commercial owners and developers. The
Company offers its customers a single-source solution for a extensive array of
support services such as equipment and facility repair, maintenance,
refurbishment, retrofit and expansion. Specialty fabrication services offered by
the Company include the construction of decks, well jackets and modules for
offshore oil and gas platforms, the fabrication of piping, pressure vessels and
other equipment used in process industries, the erection of structural steel
support systems and the manufacture of electrical switch gear, power
distribution panels, bus ducts and control rooms. The Company also manufactures,
sells, installs and operates SAREX(R) oil filtration and separation systems
worldwide.
The trend toward greater customer emphasis on outsourcing dictates that
support services companies provide an increasing breadth of services. This
market trend is the primary tenet of the Company's acquisition strategy, and has
precipitated consolidation in the support services and specialty fabrication
markets in North America. The Company has grown significantly in the past five
years through the acquisition of nine industrial support and specialty
fabrication service providers in various complementary geographic regions. The
Company had also acquired two environmental remediation companies, which were
subsequently sold in August 1997.
A substantial portion of the Company's work is recurring in nature, either
through term contracts or long-standing customer relationships. At November 30,
1998, the Company had project backlog of approximately $275 million,
substantially all of which it expects to realize within the next twelve months.
Seasonality and Quarterly Fluctuations
The Company's revenues from its industrial, environmental and specialty
fabrication segments may be affected by the timing of scheduled outages at its
industrial customers' facilities and by weather conditions with respect to
projects conducted outdoors. 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.
Recognition of Revenues
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 contacts
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 know. 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.
See Note 1 to Consolidated Financial Statements.
-22-
Results of Operations
Fiscal 1998 to fiscal 1997
Revenues
The Company's revenues grew 36% to $299.8 million in fiscal 1998 from
$220.4 million in fiscal 1997 partly as a result of the recognition of revenues
from a joint venture project with MIL Davie Industries, Ltd. and a one-time
project involving the construction of a major pipeline project in Ontario,
Canada with Steen. Total revenues relating to these projects was $56.0 million.
Most operating units generated internal growth in fiscal 1998. MM Industra
experienced a 381% increase in revenues over fiscal 1997 primarily due to the
inclusion of revenue from the previously mentioned contracts and joint venture
in Canada, Industra Service generated a 25.7% increase in revenue from expansion
of its Edmonton, Alberta, Canada unit, Chempower generated a 37.6% increase in
revenue over fiscal 1997 as fiscal 1998 was the first full reporting year since
its acquisition by the Company, and The Turner Group generated a 14.1% increase
in revenue from existing operations. CCG had generated a 210% increase in
revenue, however, its fiscal 1997 revenues were recognized only from September
1, 1997 to November 30, 1997. Two operating divisions, SRS and United Eco
Systems, each showed a decline in revenue in fiscal 1998 of approximately 50%.
The decline relates primarily to work performed by these divisions in fiscal
1997 for MART.
During fiscal 1998, the Company generated approximately 49.4% of its
revenues from industrial support services, 38.8% of its revenues from the
specialty fabrication business, 9.7% of its revenues from the construction
management services, and 2.1% from its environmental remediation services. The
Company has provided its services to the energy, pulp and paper, power
generation, and retail industries in North America. Approximately 1% of the
Company's revenues have been generated from international opportunities.
Huntsman Chemical, TransCanada Pipeline, Petrodrill, Oramet and Kilbourne
Engineering together accounted for approximately 40.2% of the Company's total
revenues in fiscal 1998 compared to the Company's top six customers in fiscal
1997 which accounted for approximately 31.3% of revenues for such year.
TransCanada Pipeline accounted for approximately 16% of the Company's revenues
in fiscal 1998 under a joint venture with Steen, a subsidiary of Dominion
Bridge, which contract has been completed and is non-recurring, Huntsman
Chemical accounted for approximately 8.3% of the fiscal 1998 revenues and
Petrodrill accounted for approximately 5.4% of such revenues under a contract
which has been terminated (see "Item 1. Business - Other Business Ventures").
None of the other above-listed customers represented more than 5% of the
Company's fiscal 1998 revenues. The Company is expanding and diversifying its
customer base in an attempt to reduce the Company's dependence in the future on
certain key customers.
The Company's industrial support segment generated $148.1 million or 49.4%
of the Company's total revenues in fiscal 1998 compared to $147.4 million or
66.9% of the Company's total revenues in fiscal 1997. Management anticipates
that this trend should not continue in fiscal 1999 and the Company should
experience an increase in dollars and percent of total revenues from its
industrial support segment.
The specialty fabrication business segment generated $116.3 million or
38.8% of the Company's total revenues in fiscal 1998 compared to $51.6 million
or 23.4% of the Company's total revenues in fiscal 1997. The increase results
primarily from the revenues of $56.0 million generated by the Steen and Davie
projects. Management anticipates that the specialty fabrication business will
continue to grow and provide consistent recurring revenue for the Company by
reason of the expansion into Edmonton, Alberta and its presence in the offshore
oil and gas industry in Canada.
The revenues generated from the Company's construction management group
increased to $29.1 million or 9.7% of the Company's total revenues in fiscal
1998 compared to 4.2% in fiscal 1997. Revenue is generated primarily from the
CCG unit based in Dallas, Texas which was acquired as of September 1, 1997.
Accordingly, revenues from fiscal 1997 are included only for the fourth fiscal
quarter of such year.
-23-
The revenues generated from the Company's environmental services segment
decreased by 47.9% to $6.3 million in fiscal 1998 from $12.1 million in fiscal
1997, which decrease reflects the sale of Eco Environmental and Environmental
Evolutions on August 31, 1997.
Operating Expenses
The Company's total operating expenses increased approximately 60.7% to
$328.7 million in fiscal 1998 from $199.5 million in fiscal 1997 partly as a
result of adding the operations of the joint ventures to MM Industra's revenues
and including Chempower and CCG for the full year of fiscal 1998. Expressed as a
percentage of total revenues, operating expenses were approximately 109.6% in
fiscal 1998 compared to 90.5% in fiscal 1997. Direct costs increased to 84.6% in
fiscal 1998 compared to 73.8% in fiscal 1997 as a direct result of joint venture
activity. Selling, general and administrative expenses increased to $42.6
million in fiscal 1998 compared to $31.2 million in fiscal 1997. As a percentage
of total revenues, selling, general and administrative expenses remained
constant at 14.2% in fiscal 1998 and in fiscal 1997. Operating expense also
includes the $1.6 million expense incurred to purchase the 49% interest in the
Steen Pipeline joint venture not originally owned by the Company and $4.5
million in fees paid related to the Steen pipeline joint venture, which have
been categorized as operating expenses associated with the Steen pipeline
project due to its treatment as a one-time project, rather than a going concern.
SG&A was negatively impacted by certain costs associated with the Company's
management changes and $3.0 million in non-cash accounts receivable and other
charges taken in the fourth quarter of fiscal 1998. SG&A also includes an
aggregate of $0.4 million in signing bonuses paid to Mr. Fradella and Mr.
Posner, who are no longer employed by the Company. The Company is intent on
reducing overhead costs at all levels. An aggressive plan was implemented in
late 1998 to reduce corporate SG&A by at least $2.5 million in fiscal 1999.
The Company's interest expense on long term debt increased in fiscal 1998
to $9.5 million from $4.9 million and as a percentage of total revenue, interest
expense increased to 3.0% compared to 2.2% in fiscal 1997. During fiscal 1998,
the Company issued $120 million principal amounts of 9-5/8% Senior Notes and
repaid approximately $71.3 million of outstanding indebtedness. At November 30,
1998, the Company's debt to equity ratio was 1.8:1 and its current ratio was
3.4:1. Management will seek to control future operating expenses, but there can
be no assurance that the Company's cost control policies will be as effective.
Provision for Income Tax.
In fiscal 1998 the Company has a loss before provision for recovery of
income taxes of $39.9 million. A recovery of income taxes of $9.7 million
reduced the Company's net loss to $30.2 million. The recovery includes
approximately $2.4 million of net operating loss carryback.
Net Income (Loss).
The Company incurred a net loss of $30.2 million or $1.44 per share in
fiscal 1998 compared to a profit of $17.4 million or $1.08 per share in fiscal
1997. A tax recovery of $9.7 million in fiscal 1998 compares to a tax provision
of $1.8 million in tax expense in fiscal 1997.
-24-
Fiscal 1997 Compared to Fiscal 1996
Revenues
The Company's revenues grew 84.0% to $220.4 million in fiscal 1997 from
$119.5 million in fiscal 1996, primarily as a result of reporting the results of
Chempower from February 27, 1997, CCG from September 1, 1997 and a full year of
operations for MM Industra, SRS and Industra Services which were acquired in
fiscal 1996. These results are partially offset by a decrease in revenues from
Lake Charles Construction that generated $49.0 million in revenues in fiscal
1996 from a single contract. In addition, Eco Environmental and Environmental
Evolutions were included only through their disposal date of August 31, 1997.
During fiscal 1997, the Company generated approximately 66.9% of its
revenues from the provision of industrial support services and 44.7% of its
revenues from the provisions of such services to petroleum and petrochemical
refining customers. Huntsman Chemical, International Paper, Mobil Oil, American
Electric Power, Ashland Oil and Brown & Root together accounted for
approximately 31.3% of the Company's total revenues in fiscal 1997, compared to
18.0% of the Company's top six customers in fiscal 1996. Huntsman Chemical
accounted for 7.9% of the Company's revenues in fiscal 1997. Although, none of
the customers represented more than 10% of the Company's revenues, the loss of
any one or more key customers could have a material adverse effect on the
Company's results of operations and financial condition. Management believes
that the Company's continued efforts to expand and diversify its customer base,
in addition to the effects of a full year of operations from Chempower and the
operations of Dominion Bridge, assuming completion of such acquisition, will
further reduce the Company's dependence on certain key customers.
The Company's industrial support segment generated $147.4 million or 66.9%
of the Company's total revenues in fiscal 1997 compared to $94.6 million or
79.0% in fiscal 1996. This 56.0% increase in revenue is primarily the result of
reporting Chempower's revenues from February 1997 and the effect of a full year
of revenue from Industra and CCG's revenues from September 1, 1997. Management
anticipates that the revenues generated by its industrial support service
segment will represent a larger percentage of revenues in fiscal 1998 as the
Company benefits from a full year of operations from Chempower.
The revenues generated from the Company's environmental services segment
decreased 34.6% to $12.1 million in fiscal 1997 from $18.5 million in fiscal
1996. This decrease primarily reflects the sale of Eco Environmental and
Environmental Evolutions on August 31, 1997. As a percentage of total revenues
the Company's environmental remediation service segment contributed
approximately 5.5% of total revenues of fiscal 1997 compared to 15.5% of total
revenues in fiscal 1996.
The specialty fabrication business segment generated $51.6 million or 23.4%
of the Company's total revenues in fiscal 1997, compared to $6.5 million or 5.4%
in fiscal 1996. Management anticipates that the increase in revenues from the
Company's specialty fabrication service segment will continue and this segment
will contribute a greater percentage of the Company's total revenues in fiscal
1998 as a result of increased business at MM Industra, SRS and Chempower's
Controlled Power Division.
The construction management segment comprised 4.2% of the Company's total
revenues in fiscal 1997. Revenues included in this segment were primarily
generated by CCG, which was acquired as of September 1, 1997. Accordingly, this
segment included revenues only for the fourth quarter of fiscal 1997.
Operating Expenses.
The Company's total operating expenses increased approximately 81.3% to
$199.5 million in fiscal 1997 from $110.1 million in fiscal 1996 primarily as a
result of adding the operations of Chempower, from February 27, 1997, CCG from
September 1, 1997 and the 1996 acquisitions of MM Industra and Industra
Services. Expressed as a percentage of total revenues, operating expenses were
approximately 90.5% in fiscal 1997 compared to 92.0% in
-25-
fiscal 1996. Selling, general and administrative expenses incurred to $31.2
million in fiscal 1997 compared to $20.6 million in fiscal 1996. As a percentage
of total revenues, selling, general and administrative expenses decreased to
14.1% in fiscal 1997 compared to 17.2% in fiscal 1996. The decrease is
attributable to the Company's plan to control overhead expenses at all levels,
which was implemented in fiscal 1996 and continued in fiscal 1997. The Company's
interest expense on long-term debt increased to $4.9 million from $1.7 million,
and as a percentage of total revenue, interest expense increased to 2.2%
compared to 1.5% in fiscal 1996. Depreciation and amortization increased to $5.4
million in fiscal 1997 from $2.2 million in fiscal 1996. As a percentage of
total revenues, depreciation and amortization increased to 2.4% in fiscal 1997
from 1.9% in fiscal 1996. Management believes that the Company has been able to
contain operating expenses through a program instituted in fiscal 1994 pursuant
to which project managers are required to track such cost control indicators as
labor productivity and potential project cost overruns.
Operating expenses of the Company's industrial support segment increased to
$135.7 million in fiscal 1997 compared to $92.8 million in fiscal 1996. As a
percentage of revenues from the industrial support segment, operating expenses
decreased to 92.0% in fiscal 1997 compared to 98.2% in fiscal 1996.
Operating expenses of the Company's environmental services segment
decreased to $13.6 million in fiscal 1997 compared to $16.6 million in fiscal
1996. As a percentage of revenues from the environmental services segment,
operating expenses increased to 111.9% in fiscal 1997 compared to 90.0% in
fiscal 1996. Management does not expect this deteriorating trend to continue due
to the sale of two environmental operating units as of August 31, 1997.
Operating expenses of the Company's specialty fabrication services segment
increased to $40.1 million in fiscal 1997 compared to $4.3 million in fiscal
1996. As a percentage of revenues from the specialty fabrication services
segment, operating expenses increased to 82.5% in fiscal 1997 compared to 67.0%
in fiscal 1996. This significant increase is due to a full year of operations
for MM Industra and nine months of operations for Chempower's Controlled Power
Division. Management believes that the specialty fabrication services segment
will continue to grow based on the significant backlog of contracts in this
segment.
Operating expenses of the Company's construction management services
segment includes expenses of CCG for the fourth quarter of fiscal 1997. CCG was
acquired as of September 1, 1997.
Provision for Income Tax.
In fiscal 1997, the Company applied the remaining $3.2 million in net loss
carry forwards and began to accrue income taxes. The Company had $1.8 million in
tax expenses in fiscal 1997. At November 30, 1997, the Company had no tax loss
carry forwards.
Net Income.
Net income increased approximately 99.0% to $17.4 million, or $1.08 per
share, in fiscal 1997 from $8.8 million, or $0.81 per share, in fiscal 1996. A
tax recovery of $809,000 contributed approximately 9.2% of the Company's net
income in fiscal 1996 compared to a provision of $1.8 million in tax expense in
fiscal 1997.
Liquidity and Capital Resources
The Company's cash increased from $1.3 million on November 30, 1997 to
$21.8 million at November 30, 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 note issue were utilized to retire existing
bank debt and notes payable of approximately $71.2 million. The remainder of the
proceeds were used for working capital or remain as available cash to the
Company. The cash balance as of November 30, 1998 included approximately $7.5
million of restricted cash.
-26-
During fiscal year 1998, the Company utilized net cash in operating
activities of $3.8 million compared to net cash utilized in operations of $18.9
million for fiscal 1997. In fiscal 1998, the Company had a net loss of $30.2
million which includes the writedown of investments and non-recurring charges of
$27.5 million. The change in deferred income taxes of $12.6 million and a
build-up of inventory of $5.0 million were partially offset by an increase in
accounts payable of $4.2 million and a change in the cost of estimated earnings
in excess of billings of $1.9 million.
During fiscal 1998, net cash used in investing activities increased to
$23.3 million from $12.5 million in fiscal 1997. Net cash used in investing
activities during the current fiscal year consisted primarily of increased
investments in joint venture activities, partially offset by the proceeds from
payments received on its notes receivable in the current period.
The Company's financing activities in fiscal 1998 provided $48.6 million of
net cash compared to $32.4 million in fiscal 1997. The increase in 1998 was
primarily due to the May 1998 issuance of $120 million of the senior notes. As
permitted by the Indenture under which the senior notes were issued, the Company
expects to obtain a line of credit facility of approximately $30 million during
the next 60 to 90 days secured by the Company's accounts receivable. The credit
facility would be used to assist the Company's working capital needs and help
finance the Company's growth strategy through acquisitions.
The Company's cash requirements consist of working capital needs,
obligations under its leasing and promissory notes, and funding for potential
acquisitions. The Company believes that its current cash position, the expected
cash flow from operations, and the anticipated availability of a line of credit
should be sufficient throughout the next 12 months to finance its working
capital needs, planned capital expenditures, debt service requirements and
acquisition strategy.
The accounts receivable at November 30, 1998 were $50.8 million compared to
$50.4 million at November 30, 1997 after deducting allowances of $2.4 million
and $2.1 million for doubtful accounts at fiscal 1998 and 1997, respectively.
The current portion of notes receivable decreased to $5.1 million at November
30, 1998 from $17.8 million at November 30, 1997. This decrease is primarily due
to the renegotiation of notes payable in fiscal 1998. Inventory increased to
$23.0 million at November 30, 1998 from $18.1 million at November 30, 1997. The
increase in inventory is a result of the Company's 36% increase in revenues in
fiscal 1998.
Property, plant, and equipment increased to $54.8 million at November 30,
1998 from $33.0 million at November 30, 1997 as a result of the Company's
acquisition of the Pictou Shipyard in Pictou, Nova Scotia and additional
specialty fabrication equipment needed for its specialty fabrication segment.
Accounts payable and accrued liabilities increased to $32.6 million at November
30, 1998 from $28.4 million from November 30, 1997. This increase in accounts
payable is primarily due to increased operations and revenues for fiscal 1998.
Information Regarding Forward Looking Statements
This Annual Report on Form 10-K includes forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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, the reduction in outsourcing by the
industrial groups serviced by the
-27-
Company, the collection and realization of its investments and notes receivable,
the economic conditions that could affect demand for the Company's services, the
ability of the Company to complete projects profitably and the severe weather
conditions that could delay projects.
Impact of the Year 2000 Issue
The Year 2000 Issue 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 data-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, the Company determined that it will be
required to modify or replace significant 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 Issue can be mitigated. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
Based on presently available information, the Company has initiated formal
communications 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 remediate their own Year 2000 Issues. 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 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, but no later than April 1999.
The total cost of the Year 2000 project is estimated at $1.5 million and is
being funded through operating cash flows 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, which will be
expensed as incurred over the next two years, is not expected to have a material
effect on the results of operations of the Company.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from such plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
-28-
Item 8. Financial Statements and Supplementary Data.
AMERICAN ECO CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
-29-
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
February 23, 1999
To the Shareholders and Directors of
AMERICAN ECO CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and changes in
financial position present fairly, in all material respects, the financial
position of AMERICAN ECO CORPORATION and subsidiaries at November 30, 1998 and
1997, and the result of their operations and their cash flows for the two years
then ended in conformity with generally accepted accounting principles of
Canada. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 of the Notes to the Consolidated Financial Statements,
the Company changed its method of accounting for income taxes in 1998.
PricewaterhouseCoopers LLP
Miami, Florida
-30-
Karlins Arnold & Corbitt, P.C.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
American Eco Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity and changes in financial position of American Eco
Corporation for the year ended November 30, 1996, which as described in Note 16,
have been prepared on the basis of accounting principles generally accepted in
Canada. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States (and in Canada). U.S. standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Eco
Corporation as of November 30, 1996, and the consolidated results of its
operations and changes in financial position for the year then ended in
conformity with generally accepted accounting principles in Canada.
/s/ Karlins Arnold & Corbitt, P.C.
(successor to Karlins Fuller Arnold & Klodosky P.C.)
Houston, Texas
January 31, 1997
-31-
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States Dollars in thousands)
At November 30
----------------------------
1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash $ 21,821 $ 1,259
Accounts receivable, trade, less allowance for doubtful accounts of $2,378 in
1998 and $2,078 in 1997, respectively 50,793 50,349
Current portion of notes receivable 5,080 17,757
Costs and estimated earnings in excess of billings 11,202 13,145
Inventory 23,080 18,079
Refundable income taxes 2,419 --
Deferred income tax 9,464 1,133
Prepaid expenses and other current assets 4,427 6,920
--------- ---------
TOTAL CURRENT ASSETS 128,286 108,642
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 54,835 33,023
--------- ---------
OTHER ASSETS
Goodwill, net of accumulated amortization of $2,781 in 1998 and $1,592 in 1997
respectively $ 30,767 30,484
Notes receivable 17,504 28,578
Investments 13,855 9,142
Other Assets 5,136 1,917
--------- ---------
TOTAL OTHER ASSETS 67,262 70,121
--------- ---------
TOTAL ASSETS $ 250,383 $ 211,786
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 32,584 $ 28,400
Notes payable -- 8,904
Current portion of long-term debt 630 8,081
Billings in excess of costs and estimated earnings 3,834 3,350
--------- ---------
TOTAL CURRENT LIABILITIES 37,048 48,735
--------- ---------
LONG-TERM LIABILITIES
Senior notes 118,000 --
Long-term debt 2,689 51,722
Deferred income tax liability 1,334 3,144
Other liabilities 1,074 1,086
--------- ---------
TOTAL LONG-TERM LIABILITIES 123,097 55,952
--------- ---------
TOTAL LIABILITIES 160,145 104,687
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Share capital 89,854 75,577
Contributed surplus 2,845 2,845
Cumulative foreign exchange (2,470) (1,511)
Retained earnings 9 30,188
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 90,238 107,099
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 250,383 $ 211,786
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-32-
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED NOVEMBER 30, 1998
(United States Dollars in thousands)
1998 1997 1996
------------ ------------ ------------
REVENUE $ 299,789 $ 220,478 $ 119,529
------------ ------------ ------------
COSTS AND EXPENSES
Direct costs of revenue 253,638 162,882 87,203
Selling, general and administrative expenses 42,637 31,243 20,616
Asset impairment and severance charges 27,479 -- --
Depreciation and amortization 4,916 5,382 2,232
------------ ------------ ------------
Total operating costs 328,670 199,507 110,049
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (28,881) 20,971 9,480
OTHER INCOME (EXPENSE)
Interest expense, net (9,506) (4,946) (1,747)
Gain on sale of assets and subsidiaries -- 2,682 --
Foreign exchange income 332 557 221
Loss on early extinguishment of debt (1,830) -- --
------------ ------------ ------------
Total other income (expense) (11,004) (1,707) (1,526)
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR (RECOVERY OF) (39,885) 19,264 7,954
INCOME TAXES
PROVISION FOR (RECOVERY OF) INCOME TAXES (9,706) 1,829 (809)
------------ ------------ ------------
NET (LOSS) INCOME $ (30,179) $ 17,435 $ 8,763
============ ============ ============
Earnings (loss) per common share
Basic $ (1.44) $ 1.08 $ 0.81
============ ============ ============
Adjusted basic $ (1.44) $ 1.03 $ 0.78
============ ============ ============
Fully diluted $ (1.44) $ 0.90 $ 0.74
============ ============ ============
Weighted average number of shares used in computing earnings
(loss) per common share
Basic 20,965,383 16,218,034 10,846,516
============ ============ ============
Adjusted basic 20,965,383 17,667,960 11,435,636
============ ============ ============
Fully diluted 20,965,383 21,809,562 12,325,043
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-33-
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED NOVEMBER 30, 1998
(United States Dollars in thousands)
Share Capital Share Cumulative Total
------------- Capital Contributed Foreign Retained Shareholders'
Shares Amount Subscribed Surplus Currency Earnings Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, November 30, 1995 8,859,472 $ 11,803 $ 98 $ 2,845 $ -- $ 3,990 $ 18,736
Conversion of debentures 198,820 1,284 1,284
Issued for acquisitions 4,283,204 27,269 27,269
Issued for cash 594,940 1,743 1,743
Issued for services 281,000 1,753 1,753
Share issue cost (4,441) (4,441)
Subscriptions collected (64) (64)
Net income 8,763 8,763
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, November 30, 1996 14,217,436 39,411 34 2,845 -- 12,753 55,043
Conversion of debentures 3,126,366 21,150 21,150
Issued for acquisitions 1,010,913 8,570 8,570
Issued for notes 811,260 7,784 7,784
Issued for cash 376,575 1,613 1,613
Issued for services 66,530 578 578
Share issue cost (3,563) (3,563)
Cumulative foreign exchange (1,511) (1,511)
Subscriptions collected 20,000 34 (34) --
Net income 17,435 17,435
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, November 30, 1997 19,629,080 75,577 -- 2,845 (1,511) 30,188 107,099
Issued for prior acquisitions 138,856 1,526 1,526
Issued for asset acquisitions 1,122,142 9,220 9,220
Issued for cash 320,933 1,470 1,470
Issued for services 157,500 700 700
Issued for warrants 241,667 1,450 1,450
Share issue cost (89) (89)
Cumulative foreign exchange (959) (959)
Net loss (30,179) (30,179)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, November 30, 1998 21,610,178 $ 89,854 $ -- $ 2,845 $ (2,470) $ 9 $ 90,238
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
-34-
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE THREE YEARS ENDED NOVEMBER 30, 1998
(United States Dollars in thousands)
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (30,179) $ 17,435 $ 8,763
Adjustments to reconcile net income to net cash provided by
operating activities:
Asset impairments 27,140 -- --
Loss on early extinguishment of debt 2,400 -- --
Gain on repurchase of senior notes (570) -- --
Gain on sale of assets and subsidiaries -- (2,682) (2)
Depreciation and amortization 4,916 5,382 2,232
Change in deferred income taxes (7,287) 1,829 490
Noncash income, net -- 325 --
Change in accounts receivable (444) (15,932) (1,823)
Change in refundable income taxes (2,419) -- --
Change in notes receivable 3,549 (14,000) --
Change in costs and estimated earnings in excess of billings 1,943 (7,824) (363)
Change in inventory (5,001) 106 (2,511)
Change in prepaid expenses (465) 1,424 (748)
Change in other assets (2,046) -- --
Change in accounts payable 4,185 (4,523) (2,312)
Change in billings in excess of costs and estimated earnings 484 (458) 34
Change in other liabilities (12) -- --
--------- --------- ---------
Net cash (used in) provided by operating activities (3,806) (18,918) 3,752
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,794) (3,134) (4,803)
Proceeds from sale of equipment -- 3,448 53
Acquisition of business, net of cash acquired -- (10,493) (568)
Proceeds from notes receivables 8,775 996 3,257
Disbursements for notes receivables (3,820) (2,094) (8,350)
Increase in investment (16,450) (1,277) (6,156)
--------- --------- ---------
Net cash used in investing activities (23,289) (12,554) (16,567)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes 116,139 -- --
Proceeds from notes payable 5,700 33,500 14,920
Proceeds from long-term debt 498 58,500 428
Principal payments on notes payable (14,604) (53,196) (7,412)
Principal payments on long-term debt (59,068) (7,607) (1,015)
Proceeds from sales/leaseback -- 4,000 --
Repurchase of senior notes (1,430) -- --
Debt issuance costs -- (1,917) --
Stock issuance costs (89) (2,479) --
Issuance of common stock 1,470 1,613 5,506
--------- --------- ---------
Net cash provided by financing activities 48,616 32,414 12,234
--------- --------- ---------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH (959) -- --
NET INCREASE (DECREASE) IN CASH 20,562 942 (581)
CASH AT BEGINNING OF YEAR 1,259 317 898
--------- --------- ---------
CASH AT END OF YEAR $ 21,821 $ 1,259 $ 317
========= ========= =========
Supplemental Disclosures of Cash Flow Information
1998 1997 1996
--------- --------- ---------
Cash paid during the years for:
Interest $ 9,548 $ 4,718 $ 1,614
Income taxes $ 1,810 $ 281 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
-35-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars in thousands)
American Eco Corporation and its wholly-owned subsidiaries ("the Company" or
"AEC") provide industrial services, environmental services and specialty
manufacturing to the petrochemical, refining, forest products and offshore
fabrication industries. The Company also provides construction management
services to a select group of commercial owners and developers.
1. Basis of Presentation and Summary of Significant Accounting Policies
The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). The
differences between Canadian and United States GAAP are described in Note 18.
The accompanying consolidated financial statements include the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition - The Company recognizes revenues and profits on fixed price
contracts using the percentage-of-completion method. 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.
Inventory - Inventory is valued on the lower of cost or market method, with cost
determined on the first-in, first-out method.
Property, Plant and Equipment - Property and equipment are stated at cost.
Expenditures for additions, major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to earnings as incurred.
When property and equipment are retired or otherwise disposed of, the cost
thereof and the applicable accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is reflected in earnings.
Depreciation and amortization are provided over the estimated useful lives of
the respective assets using the straight-line method over the following periods
based on their estimated useful lives:
Goodwill - The cost in excess of the fair value of the net assets of businesses
acquired at their respective acquisition dates are amortized on a straight-line
basis over 40 years. The Company regularly assesses the carrying value in order
to determine whether an impairment has occurred, taking into account both
historical and forecasted results of operations.
Income Taxes - Effective November 1, 1998, the Company changed its method of
accounting for income taxes to CICA 3465, "Income Taxes." Under CICA 3465,
deferred future income taxes are provided on an asset and liability method
whereby deferred future income tax assets are recognized for deductible
temporary differences and operating loss or tax credit carryforwards, and
deferred income tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the amounts of
assets and liabilities recorded for income tax and financial reporting purposes.
Deferred future income tax assets are recognized only to the extent that
management determines that it is more likely than not that the deferred future
income tax asset will be realized.
Previously, income taxes were provided on a tax allocation basis whereby the
provision was based on accounting income and deferred income taxes resulted from
temporary differences which arose between accounting income and taxable income.
Other Assets - Included in other assets is approximately $4.5 million of debt
issuance costs which are being amortized over the term of the debt (10 years).
Per Share Data - Basic earnings (loss) per share has been calculated on the
basis of net earnings for the year divided by the weighted average number of
common shares outstanding during the period. Adjusted basic earnings (loss) per
share has been calculated assuming the actual debt conversion occurring during
the year had taken place at the beginning of the year, or at the date of
issuance if issued during the year. Fully diluted earnings (loss) per share
additionally assumes all options and warrants have been exercised at the later
of the beginning of the fiscal period or the option issue date. For fiscal year
1998, 1,526,000 options and 3,141,000 warrants have been excluded as their
impact would have been anti-dilutive.
-36-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
(continued)
Translation of Financial Statements into United States Dollars - The
consolidated financial statements are expressed in United States dollars using
foreign currency translation procedures established by the Canadian Institute of
Chartered Accountants.
For self-sustaining operations, the assets and liabilities denominated in a
foreign currency are translated at exchange rates in effect at the balance sheet
date. The resulting gains and losses are accumulated in a separate component of
shareholders' equity. Revenues and expenses are translated at average exchange
rates prevailing during the period. For integrated purposes current assets,
current liabilities and long-term debt are translated into United States dollars
using year end rates of exchange; all other assets and liabilities are
translated at applicable historical rates of exchange. Revenues, expenses and
certain costs are translated at annual average exchange rates except for
inventory, depreciation and amortization which are translated at historical
rates. Realized exchange gains and losses and currency translation adjustments
relative to long-term monetary items with a fixed and ascertainable life are
deferred and amortized on a straight-line basis over the life of the item.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain amounts from prior years have been reclassified to
conform to the current year's presentation.
2. Business Combinations
1997
Effective February 28, 1997, the Company acquired all of the outstanding common
stock of Chempower, Inc. ("Chempower"). All of the stockholders of Chempower,
other than two principal stockholders (the "Principal Stockholders") received
$6.20 in cash for each of their Chempower shares. The Principal Stockholders
received a portion of their consideration in cash and the balance was
represented by a $15.9 million promissory note paid in August 1997. Based upon a
total of approximately 7.6 million Chempower shares outstanding, the total
acquisition cost was approximately $50 million, including acquisition costs of
approximately $3 million. The acquisition was partially funded by a placement by
the Company of $15 million, 9.5%, 10 year Convertible Debentures. Concurrent
with the Chempower acquisition, the Company entered into installment purchase
agreements with Holiday Properties, a general partnership owned by the Principal
Stockholders. These agreements provided for the acquisition of three parcels of
real property which had been leased to Chempower. The aggregate purchase price
for the three properties amounted to $4.5 million, of which $.5 million was paid
on February 28, 1997. The purchase price and expenses associated with the
acquisition exceed the fair value of net assets acquired by approximately $12
million.
Effective September 1, 1997, the Company acquired all of the outstanding common
stock of Specialty Management Group Inc. d/b/a/ CCG Commercial Construction
Group ("CCG"), in exchange for 265,000 shares of Company common stock with a
fair market value of approximately $2.6 million. The aggregate purchase price
and expenses associated with the acquisition exceed the fair value of net assets
acquired by approximately $3.6 million.
1996
Effective January 1, 1996, the Company acquired all of the outstanding common
stock of Environmental Evolutions, Inc. ("Environmental Evolutions") in exchange
for 400,000 shares of Company common stock with a fair market value of $2.4
million. The purchase price and expenses associated with the acquisition
exceeded the fair value of net assets by approximately $3.3 million and has been
included in goodwill. Pro forma results were not material to the Company's
financial position or results of operations.
See Note 4 to Consolidated Financial Statements.
Effective May 31, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of United Eco Systems, Inc. ("United Eco"). The
purchase price consisted of 315,000 shares of Company common stock with a fair
market value of $2.5 million. The purchase price and expenses associated with
the acquisition exceeded the fair market value of net assets acquired by
approximately $2.8 million and has been included in goodwill. Pro forma results
were not material to the Company's financial position or results of operations.
Effective July 1, 1996, the Company acquired all of the outstanding common stock
of Separation and Recovery Systems, Inc. ("SRS"). The purchase price consisted
primarily of 753,634 shares of the Company common stock with a fair market value
of $5.7 million, which approximated the book value of SRS.
-37-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combinations (continued)
Effective July 22, 1996, the Company acquired all of the outstanding common
stock of Industra Service Corporation ("Industra"). AEC exchanged 0.425 common
shares for each common share of Industra, or 1,647,459 shares of AEC common
shares. The purchase price and expenses associated with the acquisition exceeded
the fair value of net assets of the business acquired by approximately $6.5
million.
All acquisitions have been accounted for using the purchase method; accordingly,
the assets and liabilities have been recorded at their estimated fair values at
the date of acquisition. The excess purchase price and related expenses over the
fair value of net assets acquired is included in Goodwill. Under the purchase
method of accounting, the results of operations are included in the consolidated
financial statements from their acquisition dates.
The unaudited pro forma results, assuming the CCG, Chempower, SRS and Industra
acquisitions had occurred at December 1, 1996, are as follows:
1997
--------
Revenues $245,898
Net income $ 12,348
Basic earnings per share $ 0.74
The unaudited pro forma summary is not necessarily indicative either of results
of operations that would have occurred had the acquisitions been made at the
beginning of the periods presented, or of future results of operations of the
combined companies.
3. Disposal of Eco Environmental and Environmental Evolutions
As of August 31, 1997, the Company sold Eco Environmental Inc. ("Eco
Evnironmental") and Environmental Evolutions to Eurostar Interests Ltd.
("Eurostar") in exchange for a note in the amount of $11 million collateralized
by a $3.0 million performance bond. Eurostar assigned its interest in Eco
Environmental and Environmental Evolutions to UKstar (Canada) Inc. ("UKstar")
which in turn transferred its interest in Eco Environmental and Environmental
Evolutions to Eco Technologies International Inc. ("ETI"), a Canadian company.
The Chairman of the Company serves as Secretary of UKstar and as Chairman of
ETI, and a director of the Company is also a director of ETI. The note, with
interest at the rate of 10%, was due on August 31, 1998. As a result of the
transaction, the Company recorded a gain of approximately $2.5 million.
In August 1998, a portion of the note was paid, and in November 1998, a new note
for the balance of $8.0 million, plus interest of 9.75%, is due from UKstar, on
September 30, 2000 with interest installments of $227,028 due quarterly
commencing February 28, 1999. This note is collaterized by 500,000 common shares
of ETI and a $3.0 million performance bond.
4. Impairment, Severance and Other Charges
During 1998, the Company recorded certain impairment, severance and other
charges that management believes are not reflective of the Company's core or
on-going business activities and are therefore viewed by management as
non-recurring. These charges related primarily to certain investments in
Dominion Bridge Corporation ("Dominion Bridge") and certain of its subsidiaries
all of which filed "notices of intent to submit a proposal" under the Canadian
Bankruptcy and Insolvency Act in August 1998 (see Note 6), an impairment in its
investment in US Industrial Services Inc. (see Note 7), and severance costs of
$3.2 million relating primarily to changes in certain senior management
positions both at the corporate offices and at certain subsidiaries. In addition
managment recorded charges of $4.6 million related to certain single project
joint ventures during the fourth quarter which were not anticipated by
management or the joint ventures.
-38-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Notes Receivable
1998 1997
------- -------
US Industrial Services, Inc., due August, 1998, maximum borrowings of $20 million,
interest at prime plus 2%, uncollateralized. See Note 7 to Consolidated Financial
Statements. $ -- $17,876
George E. Phillips Holdings, Ltd., $2.8 million due and paid in January 1998, quarterly
payments of $446,166 from February, 1998 through August, 2002, with final payments due in
November 2002, interest at 10% collateralized by 50% of the issued and outstanding
shares of common stock of Mid Atlantic Recycling Technologies, Inc. ("MART"). 11,034 14,000
UKstar, $9.3 million note presented net of unrecognized interest income of $1.3
million, due September 2000, with quarterly interest installments of $227,028, interest
at 9.75%, collaterized by 500,000 common shares of ETI and a $3.0 million
performance bond. 8,029 11,000
Receivables from joint ventures. See Note 8 to Consolidated Financial Statements. 3,002 1,500
Notes receivable from officers and directors. See Note 15 to Consolidated Financial
Statements. 1,213 1,468
Miscellaneous notes receivable 742 491
------- -------
24,020 46,335
Less reserve for notes receivable (1,436) --
------- -------
Total notes receivable 22,584 46,335
------- -------
Current portion 5,080 17,757
------- -------
Long-term portion $17,504 $28,578
======= =======
6. Acquisition of Dominion Bridge Corporation
On February 20, 1998, the Company and 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 President and Chief Executive Officer of the Company also became a
member of the Board of Directors of Dominion Bridge. On March 23, 1998, the
Company announced that it had withdrawn the Letter of Intent and terminated
negotiations for any further transactions. The Company subsequently entered into
two projects with Davie Industries and Steen Pipeline, subsidiaries of Dominion
Bridge, to perform certain contract work in Canada. The Company subsequently
acquired Dominion Bridge's interest in the Steen Pipeline transaction for an
additional $2.8 million.
On August 11, 1998, Dominion Bridge filled "notices of intent to submit a
proposal" under the Canadian Bankruptcy and Insolvency Act. During the fourth
quarter of fiscal 1998, the Company, after reviewing its prospects for recovery
of its investments in Dominion Bridge, determined that it was probable that a
recovery of its investment would not occur. As a result, during the fourth
quarter, the Company recorded a charge of approximately $13.8 million. This
amount includes primarily the Company's initial $5.0 million investments in
Dominion Bridge, costs associated with the Company's investment in Dominion
Bridge and amounts advanced to Dominion Bridge during 1998, primarily relating
to the two joint projects with Davie Industries and Steen Pipeline.
During the fourth quarter of 1998, the Company recorded revenues and cost of
revenues of $56.0 million and $44.8 million, which relate to work performed in
the second and third quarters on the two Dominion Bridge joint projects. In the
prior quarters, these amounts had been recorded as a single net amount in
revenues.
-39-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. US Industrial Services, Inc. (formerly EIF Holdings, Inc.)
During June 1996, the Company purchased 4,600,000 shares of US Industrial
Services, Inc. ("USIS") common stock for $2.8 million. On November 7, 1996, the
Company acquired an additional 200,000 shares of USIS common stock through the
issuance of 25,000 shares of its common stock, and on November 20, 1996, the
Company purchased 4,000,000 shares of USIS in exchange for $70 thousand and
300,000 shares of the Company's common stock. At November 30, 1997, the
Company's total investment in USIS was approximately $5.2 million and
represented 36% of USIS's total common stock. Additionally during 1996, the
Company entered into a Stock Purchase Agreement with USIS whereby the Company
had an option to purchase 10,000,000 shares of USIS for $1 million. This option
was subject to USIS stockholders increasing the authorized number of common
shares. The Company has accounted for its investment in USIS pursuant to the
equity method of accounting commencing January 1, 1997.
In February 1996, the Company agreed to loan money to USIS pursuant to a line of
credit agreement with a maximum borrowing of $5.2 million. This line of credit
was not collateralized and was due on July 31, 1997. Effective July 31, 1997,
the line of credit was renewed, extended and modified to increase the maximum
borrowing amount to $15 million and extend the maturity to February 18, 1998. On
September 30, 1997, the Company increased the maximum borrowing amount to $20
million. This renewal included an option for the Company to convert the entire
indebtedness into common shares of USIS at 85% of the average market price of
the previous five days, subject to approval of an increase in the number of
authorized shares by USIS's stockholders. On February 18, 1998, the Company
extended the maturity date of the line of credit to August 18, 1998. As of
November 30, 1997, the total receivable from USIS was $17.9 million, which
included accrued interest of $1.04 million. The Company received interest income
of $0.8 million related to the loan outstanding during 1997.
On November 19, 1997, USIS completed its acquisition of JL Manta, Inc.
("Manta"), an Illinois corporation which provided specialized maintenance
services for clients in the industrial, environmental and low-level nuclear
sectors. Pursuant to the terms of a Stock Purchase Agreement, USIS acquired all
of the issued and outstanding common stock of Manta for consideration of $4.7
million in cash and $2.2 million in convertible promissory notes of USIS,
payable in installments with a final payment due on November 18, 2000 (the
"Stockholder Notes").
In June 1998, the Company acquired 1,000,000 shares of USIS. This acquisition
was made pursuant to a February 1996 Stock Purchase Agreement, and gave effect
to a one-for-ten reverse split of the shares in June 1998 and a reincorporation
approved by stockholders in May 1998.
Subsequently, the Company held certain promissory notes of USIS consisting of
principal and interest in the aggregate of $17.9 million. The notes were reduced
by $1 million representing the purchase price for the 1,000,000 shares purchased
under the February 1996 Stock Purchase Agreement. The Company sold the remaining
portion of the notes to USIS Acquisition, L.L.C. ("UALC"), an unrelated entity,
for $5.0 million in cash and a secured promissory note for $12.9 million payable
on January 29, 1999. UALC converted the notes into 5,295,858 shares of USIS
common stock and secured its promissory note to the Company with a pledge of all
acquired shares. In November 1998, UALC advised the Company that UALC would be
unable to pay its note at maturity, and the Company took ownership of the
pledged shares in discharge of the note. As a result of the transaction, the
Company's ownership interest increased from 21% to 82% of the outstanding common
stock of USIS at November 30, 1998.
In November 1998, USIS sold the assets of Manta and transferred related
liabilities, including the credit facility, to Kenny Industrial Services,
L.L.C., for $23.0 million consisting of a combination of cash and notes.
On December 31, 1998, USIS sold the assets of P.W. Stephens Residential Inc. and
transferred its liabilities, to American Temporary Sanitation Inc. for $2.4
million consisting of $1.0 million in cash and a five year promissory note for
$1.4 million payable quarterly through 2004, together with interest at prime
rate plus 2.5% per annum.
Primarily as a result of UALC defaulting on the note payable to the Company and
the fees incurred by USIS in their sale of Manta, the Company recognized an
impairment in its net investment in USIS of $7 million. USIS is in the process
of selling its remaining operating assets and as such the Company's net carrying
value approximates the book value of USIS's remaining assets plus the gain
recognized on the sale of P.W. Stephens Residential Inc. This total amount of
$12.4 million is included in Investments on the Company's consolidated balance
sheet.
-40-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Investment in SRS Joint Ventures
The Company, through its wholly owned subsidiary SRS, participate in three joint
ventures with equity interests ranging from 33% to 50%. Each of these joint
ventures is involved in operating SRS' waste treatment equipment.
At November 30, 1998, the Company's total investment in these joint ventures was
approximately $1.2 million and the Company had receivables from the joint
ventures of approximately $1.7 million. During 1998, the Company sold and leased
certain equipment to the joint ventures for approximately $2.3 million. During
1997, the Company sold and leased certain equipment to the joint ventures in the
amount of approximately $5 million. The Company deferred profit on transactions
with the joint ventures to the extent of its ownership interests in the amounts
of approximately $.3 million and $1.6 million in 1998 and 1997, respectively.
The results of operations and financial position of these joint ventures are not
material to the Company's financial position and results of operations as of
November 30, 1998 and 1997.
9. Inventory
The components of inventory are as follows: 1998 1997
------- -------
Raw material $ 8,388 $ 6,358
Consumable supplies 4,207 3,345
Finished goods 10,485 8,376
------- -------
$23,080 $18,079
======= =======
10. Property, Plant and Equipment
Property, plant and equipment consists of the following: 1998 1997
------- -------
Land $11,223 $ 5,570
Buildings 20,831 14,140
Fabrication, machinery, mobile and other equipment 27,693 17,356
Furniture and fixtures 2,634 1,978
Buildings and equipment under capital leases 4,448 2,362
Leasehold improvements 1,451 1,389
------- -------
68,280 42,795
Accumulated depreciation and amortization 13,445 9,772
------- -------
$54,835 $33,023
======= =======
Depreciation expense for the years ended November 30, 1998, 1997 and 1996 was
$3,673, $4,467 and $1,695, respectively.
11. Long-Term Debt including Capital Leases
Note payable to Union Bank of California, payable $ -- $52,500
$2,386,364 per quarter beginning April, 1998,
interest at LIBOR plus 3.25% collateralized by the
stock of AEC's subsidiaries, their guarantees and
substantially all assets of AEC.
Note payable to Deere Park Capital management, -- 5,000
payable interest only until June, 1998 then
monthly payments of $83,333 plus interest until
final payment in May, 2000, interest at 10%,
uncollateralized.
Capital lease obligation to Sunnybank Property 2,061
Ltd., payable $22,160 monthly with an implicit
rate of 11.44% with final payments due October 31,
2018
Notes payable, other 1,258 2,303
------- -------
3,319 59,803
Current portion 630 8,081
------- -------
Long-term portion $ 2,689 $51,722
======= =======
-41-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Long-Term Debt including Capital Leases (continued)
The aggregate principal payments on long-term debt during the years subsequent
to November 30, 1998 are: 1999 - $630; 2000 - $540; 2001 - $513; 2002 - $395;
2003 - $304; thereafter $937.
At November 30, 1997, there was approximately $8,904 of notes payable
outstanding. Included in this amount was a payable to Union Bank of California
under a revolving credit facility in the amount of $8,500. The maximum
borrowings under the credit facility was $12,000, bearing interest at either the
prime rate plus 2% or LIBOR plus 3% and was collateralized by substantially all
of the assets of the Company. This revolving credit facility was to expire on
August 31, 2002. Additionally, the Company had a balance of $397 under a
revolving credit facility with Comerica. The maximum borrowings under this
facility was $500 and it was collateralized by the assets of CCG. All such
amounts were repaid during 1998.
12. Senior Notes
In May 1998, the Company issued $120 million 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. 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.
The net proceeds from the issuance of the Notes was $116.1 million. The Company
used proceeds of $71.2 million to repay credit facilities, other outstanding
indebtedness and accrued interest associated with such indebtedness.
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. The Company also recorded an asset of $4.5 million
related to prepaid financing costs associated with the Notes. This asset is
being amortized over the ten year term of the Notes.
In September 1998, the Company repurchased $2.0 million of Senior Notes on the
open market at a discounted price of $1.4 million. The transaction resulted in a
gain of $.6 million on the early extinguishment of debt.
13. Lease Agreements
The Company leases equipment and office and warehouse space under operating
leases that expire at various times through September 2002. Future minimum
payments, by year and in the aggregate, under these operating leases, consisted
of the following at November 30:
1999 $ 1,609
2000 $ 1,332
2001 $ 1,084
2002 $ 828
2003 $ 520
-------
Total minimum lease payment $ 5,373
=======
Rent expense for the years ended November 30, 1998, 1997 and 1996 amounted to
$1,522; $634 and $538, respectively.
In May 1997, the Company entered into a sales/leaseback transaction with a third
party for machinery and equipment. In conjunction with this transaction, the
Company recorded a deferred gain of $1.2 million, which is being amortized over
the sixty month life of the lease.
14. Costs and Estimated Earnings on Jobs in Progress
1998 1997
-------- --------
Costs, estimated earnings and billings are
summarized as follows:
Costs incurred on uncompleted jobs $126,323 $186,518
Estimated earnings 13,993 28,432
-------- --------
140,316 214,950
Billings to date 132,948 205,155
-------- --------
$ 7,368 $ 9,795
======== ========
-42-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Costs and Estimated Earnings on Jobs in Progress (continued)
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings $ 11,202 $ 13,145
Billings in excess of costs and estimated earnings (3,834) (3,350)
-------- --------
$ 7,368 $ 9,795
======== ========
15. Related Party Transactions
For the years ended November 30, 1998 and 1997, the Company had business with
related parties. The details of these transactions and balances owing from and
to these parties are as follows:
Pursuant to an agreement between the Company and Windrush Corporation
("Windrush"), dated December 1, 1997, Windrush receives a fee of $10 per month
in consideration for services plus fees negotiated on a project-by-project basis
for other specific services. The agreement expires on December 1, 2002 and has a
five year renewable term. The Chairman of the Company owns 50% of Windrush.
Pursuant to this agreement, Windrush received $303 during the year ended
November 30, 1998.
In July 1998, a subsidiary of the Company entered into a 15 year capital lease
for an office, shop and warehouse in Edmonton, Alberta from a company in which a
director of the Company is President and has a 25% interest. The annual lease
payments are approximately $310. During the year ended November 30, 1998, this
director was paid $38.5 for services rendered during the year.
In August 1998, the Board of Directors authorized the Company to loan up to $100
to each Director for the purpose of using the proceeds to purchase the Company's
Common Shares in the open market. These loans are to be repaid in three years,
bear interest at the rate of 9-5/8% per annum, and are unsecured. The
outstanding balance of these loans, including interest, as of November 30, 1998
was $360.
In September 1998, the Company loaned $100 to an executive officer of the
Company, repayable over three years with prepayments from future bonuses,
together with interest at the rate of 6% per annum.
During the year ended November 30, 1997, fees aggregating $522 were paid to a
director in his capacity as an officer of the Company. Additionally, another
director was paid $113 for services rendered during the year.
During fiscal 1997, the Company loaned $84 to the Chairman of the Board for the
purpose of purchasing Common Shares of the Company in the open market. The loan
increased his indebtedness to the Company. The loan was to mature on May 7,
1998, and the maturity was extended to May 31, 1999, bearing interest at the
rate of 10.0% per annum and was collateralized by the purchased shares. The
outstanding balance of the loan, including interest, as of November 30, 1998 was
$688.
In May 1997, the Company loaned $305 at 8.5% interest per annum to a former
officer of the Company, for the purchase of a home in connection with his
relocation to the Company's headquarters in Houston, Texas. The loan was to
mature in May 1998 and was extended to February 1, 2003, and is unsecured. The
outstanding balance of the loan, including interest, as of November 30, 1998 was
$320.
In June 1997, the Company loaned $60 to the Vice Chairman of the Board. The loan
was to mature in June 1998, and was extended to May 31, 1999 bears interest at
the rate of 8.5% per annum and is unsecured. The outstanding balance of the
loans, including interest, as of November 30, 1998 was $65.
-43-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Income Taxes
Canada
Income tax expense varies from the amount that would be computed by applying the
basic combined Canadian federal and provincial rate of 45.31%, as follows:
1998 1997 1996
-------- -------- --------
Basic rate applied to pre-tax income $(18,072) $ 8,542 $ 3,526
Reduction due to income taxes in other jurisdictions 4,624 (5,316) (2,603)
Increase in valuation allowance 5,648 -- --
Other 183 (247) (137)
Reduction of income taxes due to application
of loss carryforwards -- (2,507) (786)
-------- -------- --------
Effective Canadian tax expense $ (7,617) $ 472 $ --
======== ======== ========
The Company has Canadian non-capital income tax losses available to be carried
forward in the amount of $9.6 million expiring through 2005. The Company also
has capital losses available to be carried forward indefinitely in the amount of
$5 million.
United States
The components of the provision for (recovery of) income taxes are as follows:
1998 1997 1996
-------- -------- --------
Federal $ (1,767) $ 4,076 $ (865)
State (322) 360 50
Reduction of income taxes due to application of
loss carryforwards -- (1,710) --
Benefits from previously unrecorded tax items -- (1,529) --
Other -- 151 6
-------- -------- --------
$ (2,089) $ 1,357 $ (809)
======== ======== ========
The Company has income tax losses generated by its subsidiaries in the United
States available to be carried forward in the amount of $6.6 million expiring
through 2005.
Total tax expense (benefit) consisting of
Current $ (2,419) $ -- $ (815)
Deferred (7,287) 1,829 6
-------- -------- --------
$(9,706) $ 1,829 $ (809)
======== ======== ========
Deferred income taxes result from timing differences between the recording of
income for accounting purposes and for income tax purposes and from the
estimated future tax benefit from operating losses when, in the opinion of
management, realization of such benefits is not virtually certain.
During 1998, the Company adopted the provisions of CICA Section 3465, "Income
Taxes." CICA 3465. The Company has elected not to restate prior years and the
impact on the current year is not material. Had the Company restated prior
years, the prior year tax provision would have increased by approximately $1.0
million as certain net operating loss carryforwards which were utilized in 1997
would have been credit to goodwill and not to the income tax provision.
Additionally, goodwill amortization would have been reduced for each of the
remaining years of its useful life. The annual impact is not material to the
Company's results of operations.
-44-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Share Capital
Authorized Share Capital
The authorized share capital consists of unlimited Class A Preference shares and
unlimited, no par value common shares.
Share Warrants
As of November 30, 1998, the Company had 3.1 million outstanding share warrants,
which call for the issuance of one common share upon presentation of the warrant
at issue prices ranging from $4.00 to $9.56. These warrants expire at various
times through September, 2002.
Stock Options
In May 1998, the Stockholders amended the Company's 1995 Stock Option Plan (the
"Plan"). Under the Plan, the Company is authorized to issue 3,504,369 options to
purchase shares.
Information with regard to stock options is as follows:
Shares Option Price Range
------ ------------------
Outstanding, November 30, 1995 495,700 $
Granted 460,313 $3.23-$9.76
Cancelled (66,000) $3.23-$5.69
Exercised (336,850) $1.79-$6.00
---------
Outstanding, November 30, 1996 553,163 $1.76-$9.76
Granted 993,500 $6.67-$7.72
Cancelled (143,888) $1.76-$7.09
Exercised (267,075) $1.79-$7.72
---------
Outstanding, November 30, 1997 1,135,900 $1.79-$9.76
---------
Granted 715,500 $6.36-$10.76
Cancelled (212,700) $3.20-$6.00
Exercised (112,600) $1.66-$3.20
---------
Outstanding, November 30, 1998 1,525,900 $1.66-$6.00
=========
Options current exercisable 608,900 $1.66-$6.00
=========
The weighted average fair value of options granted during 1998, 1997 and 1996
were $3.59, $6.42 and $3.04, respectively.
The weighted average exercise price and remaining term as of November 30, 1998
are $1.83 and five years, respectively.
18. Differences Between Canadian and United States Generally Accepted
Accounting Principles and Practices
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 1998, the Company issued $120 million in Senior Notes (see note 12) and
used certain of the proceeds to retire existing indebtedness. As a result, the
Company recorded a charge of $2.4 million relating to the early extinguishment
of debt. Under U.S. Basis, such amount would have been presented as an
extraordinary item, net of tax. Additionally, the Company repurchased $2 million
face amount of Senior Notes for approximately $1.43 million, resulting in a gain
of $570. Under U.S. Basis, this gain would also be presented as an extraordinary
item.
-45-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Difference Between Canadian and United States Generally Accepted Accounting
Principles and Practices (continued)
During 1997, the Company sold $18 million aggregate principal amount of
convertible debentures (the "Debentures"). In connection with these Debentures,
the Company issued approximately 1.7 million stock purchase warrants to the
holders and as placement fees to third parties. Under Canadian Basis, the total
amount allocated to the conversion feature was being charged to interest expense
over ten years. All of these Debentures were converted during 1997 and the
unamortized amount of $11.8 million was charged to equity. Had the U.S. Basis
been followed, the intrinsic value of the conversion feature of approximately
$3.5 million would have been charged to interest expense immediately as the
Debentures contained a beneficial conversion feature on the date of issuance.
During June 1996, the Company acquired a 16% interest in USIS. This interest was
accounted for under the cost method of accounting. Commencing on January 1,
1997, the Company began accounting for its investment in USIS under the equity
method as its ownership percentage had increased to 36%. Under Canadian Basis,
the change is accounted for prospectively. Under U.S. Basis, the Company would
have recorded an adjustment to accrue its proportionate share (16%) of USIS's
losses from the period when the Company first invested in USIS through the
period when they commenced equity method accounting. The total amount of
additional losses which the Company would have recorded is approximately $1.5
million.
Under Canadian Basis, income tax losses available to be carried forward are
recognized only when there is virtual certainty that they will be realized.
Under U.S. Basis, income tax losses available to be carried forward are
recognized when it is more likely than not that they will be realized. For the
years ended November 30, 1996 and 1995, there were no significant differences
between these two methods.
Under U.S. Basis, utilization of pre-acquisition net operating losses should be
credited to goodwill rather than as a reduction in the income tax provision, as
is practice under Canadian Basis. Therefore, under U.S. Basis, the goodwill and
income tax provision would have been adjusted by approximately $1.0 million.
The following is a reconciliation of net income under Canadian Basis to net
income under U.S. Basis.
1998 1997
---------------------------- -----------------------------
Canadian Basis U.S. Basis Canadian Basis U.S. Basis
-------------- ---------- -------------- ----------
Pre-tax income (loss) $(39,885) $(38,055) $ 19,264 $ 14,264
Provision for (benefit of) income taxes (9,706) (9,011) 1,629 2,878
-------- -------- -------- --------
Income (loss) before extraordinary items (30,179) (29,044) 17,435 11,386
Loss from early extinguishment of debt -- (1,135) -- --
-------- -------- -------- --------
Net income (loss) (30,179) (30,179) 17,435 11,386
======== ======== ======== ========
Net income (loss) per share before extraordinary
items - Basic (1.44) (1.39) 1.08 .66
Extraordinary income (loss) -- (0.05) -- --
-------- -------- -------- --------
Net income (loss) (1.44) (1.44) 1.08 .66
======== ======== ======== ========
Under U.S. Basis, primary and fully diluted earnings per share is calculated
using the treasury stock method. The calculation of earnings per share for 1997
under U.S. Basis is as follows:
Net income $11,386
Net income per share - Primary $0.66
Net income per share - Fully diluted $0.65
Weighted average number of shares
Primary 17,142,519
Fully Diluted 18,784,330
SFAS No. 123 "Accounting for Stock Based Compensation," issued in October 1995,
defines a fair value method of accounting for employee stock options. Under this
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the vesting period. SFAS No. 123
allows, and the Company has elected, to continue to measure compensation cost in
accordance with APB No. 25 for purposes of the U.S. to Canadian GAAP
reconciliation. Accordingly, the Company is providing the disclosures required
by SFAS No. 123.
-46-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Difference Between Canadian and United States Generally Accepted Accounting
Principles and Practices (continued)
The pro forma net income and basic earnings per share amounts below have been
derived using the Black-Scholes stock option pricing model with the following
assumptions for each stock option grant during the respective year:
Assumptions 1998 1997 1996
----------- ----------- -----------
Risk-free interest rates 5.5% 6.37%-6.63% 5.60%-5.75%
Expected life of stock options (years) 5 5 5
Expected volatility of common stock 55% 55% 55%
Expected annual dividends of stock options 0 0 0
Net income - as reported (30,179) $17,435 $8,763
Net income - pro forma (31,100) $17,191 $8,311
Basic earnings per share - as reported (1.44) $1.08 $0.81
Basic earnings per share - pro forma (1.48) $1.06 $0.77
The pro forma effects on net income and income per common share for fiscal 1998,
1997 and 1996 may not be representative of the pro forma effects Statements of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
may have in future years.
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which are both effective for years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purposes financial statements. It
further requires that an enterprise a) classify items of other comprehensive
income by their nature in a financial statement and b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. The
adoption of SFAS 130 and 131 are for disclosure purposes only.
19. Retirement Plans
The Company has a profit-sharing plan (defined contribution) retirement plan
covering substantially all employees, except employees who are members of a
union who bargained separately for retirement benefits. Employees are eligible
upon attaining the age twenty-one (21) and completing one (1) year of service.
The amount of contribution to the plan is determined annually by the Board of
Directors and may vary from zero to fifteen percent of covered compensation.
The Company, through its collective bargaining agreements with various unions,
contributes to the unions' retirement plans. For the years ended November 30,
1998, 1997 and 1996, an expense of $2.7 million, $2.7 million and $1.5 million,
respectively, was incurred for these retirement plans.
20. Convertible Debt
On January 24, 1997, the Company sold $15 million aggregate principal amount of
9.5% Convertible Debentures ("January Debentures") due January 24, 2007,
together with 1,125,000 warrants to purchase the Company's common stock at a
price of $9.56. In connection with this transaction, the Company issued 300,000
warrants to a placement agent and incurred costs of approximately $1.5 million.
On February 14, 1997, the Company sold $1 million aggregate principal amount of
9.5% Convertible Debentures ("February Debentures") due February 3, 2007,
together with 71,429 warrants to purchase the Company's common stock at a price
of $9.49. In connection with this transaction, the Company incurred costs of
approximately $100.
On March 3, 1997, the Company sold $3 million aggregate principal amount of 9.5%
Convertible Debentures ("March Debentures") due March 3, 2007, together with
225,000 warrants to purchase the Company's common stock at a price of $9.21. In
connection with this transaction, the Company incurred costs of approximately
$50.
-47-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Convertible Debt (continued)
The total proceeds were allocated between the warrants issued to the holders,
the conversion feature and debt based on discounted cash flows and an effective
interest rate of 12%. All of these debentures were converted into common shares
during 1997 and the unamortized costs were charged to shareholders' equity upon
conversion.
21. Litigation
At November 30, 1997, the Company had been involved in an arbitration with a
customer whereby the customer claimed damages from the Company totaling $19.3
million consisting of delay damages and cost of completion. The Company counter
claimed for $2.4 million for breach of subcontract and $10.0 million for the
customer bad faith and intentional misconduct. On June 16, 1997, the arbitrator
ruled in favor of the Company and awarded the Company $1.3 million net of costs
of $1.1 million. The Company has received such amounts and has included them in
its results of operations for 1997.
At November 30, 1998, there were various claims and disputes incidental to the
business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a material adverse
affect upon the Company's financial position, results of operations or cash
flows.
22. Financial Statements
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and trade accounts receivable. At
November 30, 1998, and 1997, the Company had notes receivable balances of
$22,585 and $46,335, respectively, with various entities or persons as described
in Note 4 to Consolidated Financial Statements. Although some of the notes are
collateralized or partially collateralized, the ultimate collectibility is
dependent on the financial conditions of the various debtors. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer based and their diverse
industries and geographic areas. The Company has write offs, net of recoveries
of $707 in 1998, $466 in 1997 and $286 in 1996.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these items. The carrying amounts of long-term debt approximate fair
value because the interest rates on these instruments change with market
interest rates.
23. Segments of the Business
The Company operates in Canada and the United States in three primary industry
segments: (1) Environmental Remediation Services which involves asbestos
removal, insulation and other environmental services, (2) Industrial Support
Services which involves the repair, maintenance and modification of boilers,
pressure vessels and tubing used in industrial facilities and the provision of
engineering services, (3) Specialty Fabrication Services which involves
construction of high-quality custom steel and alloy products and (4)
Construction Management Services which involves tenant improvement, renovation,
addition and design services to a national
-48-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Segments of the Business (continued)
network of retailers. It is the Company's policy to price intersegment contracts
on an equivalent basis to that used for pricing external contracts. The
following is a summary of selected data for these business segments:
Environmental Industrial Specialty Construction
Remediation Support Fabrication Management Total
Services Services Services Services Consolidated
--------- --------- ----------- ------------ ------------
1998
Contract revenue $ 6,227 $ 148,138 $ 116,286 $ 29,138 $ 299,789
Operating income (loss) (851) (18,125) (10,258) 353 (28,881)
Depreciation and amortization 842 3,092 806 176 4,916
Capital expenditures during the year 816 3,482 21,109 256 25,663
Identifiable assets 6,640 125,865 108,742 9,136 250,383
1997
Contract revenue $ 12,125 $ 147,424 $ 51,562 $ 9,367 $ 220,478
Operating income (loss) (1,437) 11,768 10,472 168 20,971
Depreciation and amortization 923 3,336 990 133 5,382
Capital expenditures during the year 312 1,871 1,536 -- 3,719
Identifiable assets 7,375 133,390 61,020 10,001 211,786
1996
Contract revenue $ 18,489 $ 94,584 $ 6,456 -- $ 119,529
Operating income 2,885 3,522 3,073 -- 9,480
Depreciation and amortization 1,063 470 -- 2,232
Capital expenditures during the year 516 1,336 6,155 -- 8,007
Identifiable assets 22,988 29,121 19,668 -- 71,777
The following table provides information with respect to the geographic
segmentation of the Company's business.
Total
Canada United States Consolidated
------ ------------- ------------
1998
Contract revenue $ 123,053 $ 176,736 $ 299,789
Operating income (6,123) (22,758) (28,881)
Depreciation and amortization 480 4,436 4,916
Capital expenditures during the year 22,962 2,701 25,663
Identifiable assets 172,504 77,879 250,383
1997
Contract revenue $ 50,835 $ 169,643 $ 220,478
Operating income 6,503 14,468 20,971
Depreciation and amortization 1,223 4,159 5,382
Capital expenditures during the year 124 3,595 3,719
Identifiable assets 122,472 89,314 211,786
1996
Contract revenue $ 6,509 $ 113,020 $ 119,529
Operating income 256 9,224 9,480
Depreciation and amortization 166 2,066 2,232
Capital expenditures during the year 6,151 1,856 8,007
Identifiable assets 20,988 50,789 71,777
-49-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. Significant Transactions
In November 1997, the Company sold its 50% ownership in MART to a third party
for $14.0 million, payable quarterly over five years with interest at 10% per
annum. During fiscal 1997, two of the Company's subsidiaries (SRS and United
Eco) sold equipment and provided services to MART. SRS sold to MART equipment
for $4.0 million and United Eco provided construction, maintenance and operation
services for approximately $6.6 million. MART is a state of the art thermal
treatment facility which treat soils, sediments and other materials contaminated
with hazardous and non-hazardous chemicals.
The 1997 Consolidated Statement of Operations includes revenue and direct costs
of $24.6 million and $14.4 million, respectively, resulting from these
transactions.
-50-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information
Set forth below are condensed consolidating financial statements of the Company
(Parent) the Guarantor Subsidiaries and the Company on a consolidated basis.
AMERICAN ECO CORPORATION
CONSOLIDATING BALANCE SHEET
AT NOVEMBER 30, 1998
(United States Dollars in thousands)
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
CURRENT ASSETS
Cash ....................................................... $ 11,283 $ 10,538 $ -- $ 21,821
Accounts receivable ........................................ 767 50,026 -- 50,793
Current portion of notes receivable ........................ 1,916 3,164 -- 5,080
Amounts receivable from subsidiaries ....................... 105,093 (105,093) -- --
Costs and estimated earnings in excess of billings ......... -- 11,202 -- 11,202
Inventory .................................................. -- 23,080 -- 23,080
Refundable income taxes .................................... 2,419 -- -- 2,419
Deferred income taxes ...................................... 8,142 1,322 -- 9,464
Prepaid expenses and other current assets .................. 1,003 3,424 -- 4,427
--------- --------- --------- ---------
TOTAL CURRENT ASSETS ................................... 130,623 (2,337) -- 128,286
--------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, net ............................. 881 53,954 -- 54,835
--------- --------- --------- ---------
OTHER ASSETS
Goodwill ................................................... -- 30,767 -- 30,767
Notes receivable ........................................... 17,244 260 -- 17,504
Investments ................................................ 54,635 1,450 (42,230) 13,855
Other assets ............................................... 4,493 643 -- 5,136
--------- --------- --------- ---------
TOTAL OTHER ASSETS ..................................... 76,372 33,120 (42,230) 67,262
--------- --------- --------- ---------
TOTAL ASSETS ........................................... $ 207,876 $ 84,737 $ (42,230) $ 250,383
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ................... $ 5,482 $ 27,102 $ -- $ 32,584
Notes payable .............................................. -- -- -- --
Current portion of long-term debt .......................... -- 630 -- 630
Billings in excess of costs and estimated earnings ......... -- 3,834 -- 3,834
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES .............................. 5,482 31,566 -- 37,048
--------- --------- --------- ---------
LONG TERM LIABILITIES
Senior notes ............................................... 118,000 -- -- 118,000
Long-term debt ............................................. 70 2,619 -- 2,689
Deferred income tax liability .............................. 191 1,143 -- 1,334
Other liabilities .......................................... -- 1,074 -- 1,074
--------- --------- --------- ---------
TOTAL LONG-TERM LIABILITIES ............................ 118,261 4,836 -- 123,097
--------- --------- --------- ---------
TOTAL LIABILITIES ...................................... 123,743 36,402 -- 160,145
--------- --------- --------- ---------
SHAREHOLDERS' EQUITY
Share capital .............................................. 89,854 19 (19) 89,854
Contributed surplus ........................................ 2,845 42,211 (42,211) 2,845
Cumulative foreign exchange ................................ (4,291) 1,821 -- (2,470)
Retained earnings .......................................... (4,275) 4,284 -- 9
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................. 84,133 48,335 (42,230) 90,238
--------- --------- --------- ---------
TOTAL LIABILITIES & SHARHEOLDERS' EQUITY ............... $ 207,876 $ 84,737 $ (42,230) $ 250,383
========= ========= ========= =========
-51-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended November 30, 1998
(United States Dollars in thousands)
(Unaudited)
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
REVENUE ........................................... $ -- $ 299,789 $ -- $ 299,789
--------- --------- --------- ---------
COST AND EXPENSES
Direct costs of revenue ....................... -- 253,638 -- 253,638
Selling, general and administrative expenses .. 4,107 38,530 -- 42,637
Asset impairment and severance charges ........ 19,199 8,280 -- 27,479
Depreciation and amortization ................. 119 4,797 -- 4,916
--------- --------- --------- ---------
Total operating costs ......................... 23,425 305,245 -- 328,670
--------- --------- --------- ---------
OPERATING INCOME (23,425) (5,456) -- (28,881)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense, net ......................... 127 (9,633) -- (9,506)
Foreign exchange income ....................... 332 -- -- 332
Loss on early extinguishment of debt .......... (1,830) -- -- (1,830)
--------- --------- --------- ---------
Total other income (expense) .................. (1,371 (9,633) -- (11,004)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR (RECOVERY OF) (24,796) (15,089) -- (39,885)
INCOME TAXES
PROVISION FOR (RECOVERY OF) INCOME TAX (9,706) -- -- (9,706)
--------- --------- --------- ---------
NET (LOSS) $ (15,090) $ (15,089) $ -- $ (30,179)
========= ========= ========= =========
-52-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
For the Year Ended November 30, 1998
(United States Dollars in thousands)
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ (15,090) $ (15,089) $ -- $ (30,179)
Adjustments to reconcile net income to net cash provided by
operating activities:
Asset impairments ........................................... 28,629 (1,489) -- 27,140
Loss on early extinguishment of debt ........................ 2,400 -- -- 2,400
Gain on repurchase of senior notes .......................... (570) -- -- (570)
Depreciation and amortization ............................... 119 4,797 -- 4,916
Change in deferred income taxes ............................. (6,334) (953) -- (7,287)
Change in refundable income taxes ........................... (2,419) -- -- (2,419)
Change in accounts receivable ............................... 603 (1,047) -- (444)
Change in costs and estimated earnings in excess -- 1,943 -- 1,943
of billings .............................................
Change in inventory ......................................... -- (5,001) -- (5,001)
Change in prepaid expenses .................................. 1,439 (1,904) -- (465)
Change in other assets ...................................... (3,320) 1,274 -- (2,046)
Change in notes receivable .................................. 3,549 -- -- 3,549
Change in accounts payable .................................. 4,466 (281) -- 4,185
Change in billings in excess of costs and estimated -- 484 -- 484
earnings ................................................
Change in deferred gain ..................................... -- (12) -- (12)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities ................. 13,472 (17,278) -- (3,806)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (162) (11,632) -- (11,794)
Proceeds from notes receivable .................................. 8,425 350 -- 8,775
Disbursements for notes receivable .............................. (2,195) (1,625) -- (3,820)
Increase in investment .......................................... (18,898) 2,448 -- (16,450)
--------- --------- --------- ---------
Net cash used in investing activities ............................... (12,830) (10,459) -- (23,289)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes ...................................... 116,139 -- -- 116,139
Proceeds from notes payable ..................................... 5,700 -- -- 5,700
Proceeds from long-term debt .................................... 30 468 -- 498
Disbursements/receipts on intercompany debt ..................... (35,720) 21,116 -- (14,604)
Principal payments on notes payable ............................. (14,200) (44,868) -- (59,068)
Principal payments on long-term debt ............................ (58,515) 58,515 -- --
Repurchase of senior notes ...................................... (1,430) -- -- (1,430)
Debt issuance costs ............................................. -- -- -- --
Stock issuance costs ............................................ (89) -- -- (89)
Issuance of common stock ........................................ 1,470 -- -- 1,470
--------- --------- --------- ---------
Net cash provided by financing activities ........................... 13,385 35,231 -- 48,616
--------- --------- --------- ---------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH (2,890) 1,931 -- (959)
--------- --------- --------- ---------
NET INCREASE IN CASH ................................................ 11,137 9,425 -- 20,562
CASH AT BEGINNING OF PERIOD ......................................... 146 1,113 -- 1,259
--------- --------- --------- ---------
CASH AT END OF PERIOD ............................................... $ (11,283) $ 10,538 $ -- $ 21,821
========= ========= ========= =========
Supplemental disclosure of noncash investing and financing activities
Company Subsidiaries Eliminations Consolidated
--------- --------- --------- ---------
Acquisition of subsidiaries through issuance of stock 1,526 -- -- 1,526
Acquisition of assets through issuance of stock 8,910 -- -- 8,910
-53-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
CONSOLIDATING BALANCE SHEET
AT NOVEMBER 30, 1997
(United States Dollars in thousands)
ASSETS
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
CURRENT ASSETS
Cash ....................................................... $ 146 $ 1,113 $ -- $ 1,259
Accounts receivable ........................................ 1,370 48,979 -- 50,349
Amounts receivable from subsidiaries ....................... 57,768 (57,768) -- --
Current portion of notes receivable ........................ 15,573 2,184 -- 17,757
Costs and estimated earnings in excess of billings ......... -- 13,145 -- 13,145
Inventory .................................................. -- 18,079 -- 18,079
Deferred income taxes ...................................... 855 278 -- 1,133
Prepaid expenses and other current assets .................. 5,398 1,522 -- 6,920
--------- --------- --------- ---------
TOTAL CURRENT ASSETS ................................... 81,110 27,532 -- 108,642
--------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, net ............................. 837 32,186 -- 33,023
--------- --------- --------- ---------
OTHER ASSETS
Goodwill ................................................... -- 30,484 -- 30,484
Notes receivable ........................................... 28,578 -- -- 28,578
Investments ................................................ 47,474 2,372 (40,704) 9,142
Other assets ............................................... -- 1,917 -- 1,917
--------- --------- --------- ---------
TOTAL OTHER ASSETS ..................................... 76,052 34,773 (40,704) 70,121
--------- --------- --------- ---------
TOTAL ASSETS ........................................... $ 157,999 $ 94,491 $ (40,704) $ 211,786
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ................... $ 1,017 $ 27,383 $ -- $ 28,400
Notes payable .............................................. 8,334 570 -- 8,904
Current portion of long-term debt .......................... 8,081 -- -- 8,081
Billings in excess of costs and estimated earnings ......... -- 3,350 -- 3,350
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES .............................. 17,432 31,303 -- 48,735
--------- --------- --------- ---------
LONG TERM LIABILITIES
Long-term debt ............................................. 50,639 1,083 -- 51,722
Deferred income tax liability .............................. 2,092 1,052 -- 3,144
Other liabilities .......................................... -- 1,086 -- 1,086
--------- --------- --------- ---------
TOTAL LONG-TERM LIABILITIES ............................ 52,731 3,221 -- 55,952
--------- --------- --------- ---------
TOTAL LIABILITIES ...................................... 70,163 34,524 -- 104,687
--------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Share capital .............................................. 75,577 19 (19) 75,577
Contributed surplus ........................................ 2,845 40,685 (40,685) 2,845
Cumulative foreign exchange ................................ (1,401) (110) -- (1,511)
Retained earnings .......................................... (10,815) 19,373 -- 30,188
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................. 87,836 59,967 (40,704) 107,099
--------- --------- --------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............... $ 157,999 $ 94,491 $ (40,704) $ 211,786
========= ========= ========= =========
-54-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended November 30, 1997
(United States Dollars in thousands)
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
REVENUE ................................................. $ 20,952 $ 199,526 $ -- $ 220,478
--------- --------- --------- ---------
COST AND EXPENSES
Direct costs of revenue ............................. 9,858 153,024 -- 162,882
Selling, general and administrative expenses ........ 1,989 29,254 -- 31,243
Interest expense, net ............................... 2,053 2,893 -- 4,946
Depreciation and amortization ....................... 484 4,898 -- 5,382
Gain on sale of assets and subsidiaries ............. (2,459) (223) -- (2,682)
Foreign exchange income ............................. (545) (12) -- (557)
--------- --------- --------- ---------
11,380 189,834 -- 201,214
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES ........................................ 9,572 9,692 -- 19,264
PROVISION FOR INCOME TAX ................................ 2,100 (271) -- 1,829
--------- --------- --------- ---------
NET INCOME .............................................. $ 7,472 $ 9,963 $ -- $ 17,435
========= ========= ========= =========
-55-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
For the Year Ended November 30, 1997
(United States Dollars in thousands)
Company Guarantor
(Parent) Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 7,472 $ 9,963 $ -- $ 17,435
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of assets and subsidiaries ............................ (2,459) (223) -- (2,682)
Depreciation and amortization ...................................... 484 4,898 -- 5,382
Change in deferred income taxes .................................... 2,092 (263) -- 1,829
Noncash income, net ................................................ 648 (323) -- 325
Change in accounts receivable ...................................... (1,032) (14,900) -- (15,932)
Change in notes receivable ......................................... (14,000) -- -- (14,000)
Change in costs and estimated earnings in excess of billings ....... -- (7,824) -- (7,824)
Change in inventory ................................................ -- 106 -- 106
Change in prepaid expenses ......................................... 2,979 (1,555) -- 1,424
Change in accounts payable and accrued liabilities ................. (372) (4,151) -- (4,523)
Change in billings in excess of costs and estimated -- (458) -- (458)
earnings ....................................................... -------- -------- -------- --------
Net cash provided by (used in) operating activities ................ (4,188) (14,730) -- (18,918)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (461) (2,673) -- (3,134)
Proceeds from sales of equipment ................................... -- 3,448 -- 3,448
Acquisition of business, net of cash acquried ...................... (10,481) (12) -- (10,493)
Proceeds from notes receivable ..................................... 775 221 -- 996
Disbursements for notes receivable ................................. (5,436) 3,342 -- (2,094)
Increase in investment ............................................. (1,277) -- -- (1,277)
-------- -------- -------- --------
Net cash provided by (used in) investing activities .................... (16,880) 4,326 -- (12,554)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ........................................ 33,500 -- -- 33,500
Proceeds from long-term debt ....................................... 58,500 -- -- 58,500
Principal payments on notes payable ................................ (15,834) (37,362) -- (53,196)
Principal payments on long-term debt ............................... -- (7,607) -- (7,607)
Proceeds from sales/leaseback ...................................... -- 4,000 -- 4,000
Disbursements/receipts on intercompany debt ........................ (50,762) 50,762 -- --
Debt issuance costs ................................................ (1,917) -- -- (1,917)
Debenture issuance costs ........................................... -- -- -- --
Stock issuance costs ............................................... (2,479) -- -- (2,479)
Issuance of common stock ........................................... 1,613 -- -- 1,613
-------- -------- -------- --------
Net cash provided by financing activities .............................. 22,621 9,793 -- 32,414
-------- -------- -------- --------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH ........................ (1,401) 1,401 -- --
-------- -------- -------- --------
NET INCREASE IN CASH ................................................... 152 790 -- 942
CASH AT BEGINNING OF PERIOD ............................................ (6) 323 -- 317
-------- -------- -------- --------
CASH AT END OF PERIOD .................................................. $ 146 $ 1,113 $ -- $ 1,259
======== ======== ======== ========
Supplemental disclosure of cash flow information
Cash payments for interest ......................................... 1,788 2,930 -- 4,718
Cash payments for income taxes ..................................... -- 281 -- 281
======== ======== ======== ========
-56-
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Guarantor Financial Statement Information (continued)
Supplemental disclosure of noncash investing and financing activities
Company Subsidiaries Elimination Consolidated
------- ------------ ----------- ------------
Notes receivable issued for sale of subsidiaries.................. 11,000 -- -- 11,000
Notes receivable increase to USIS through stock issuance.......... 7,784 -- -- 7,784
Acquisition of subsidiaries through issuance of stock............. 5,296 -- -- 5,296
Debentures converted to stock..................................... 21,500 -- -- 21,500
Transfer of assets to/from parent and subsidiaries................ (26) 26 -- --
Acquisition of equipment for notes payable........................ -- 58 -- 58
Transfer of investment from subsidiary to parent.................. 1,000 (1,000) -- --
-57-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
In May 1997, the shareholders ratified the selection of Coopers & Lybrand,
L.L.P. (now PricewaterhouseCoopers LLP), as auditors of the Company, effective
May 7, 1997. Karlins Fuller Arnold & Klodosky, P.C., now Karlins Arnold &
Corbitt, P.C., ("Karlins Fuller"), which had been the Company's prior auditors,
resigned as auditors of the Company, effective May 7, 1997. The Company has had
no disagreements with Karlins Fuller during fiscal 1996 or 1995 on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. The reports of Karlins Fuller for either fiscal 1996 or 1995
did not contain an adverse opinion or a disclaimer of opinion or were qualified
or modified as to uncertainty, audit scope or accounting principles.
-58-
PART III
Item 10. Directors and Executive Officers of the Registrant.
The names of the executive officers and directors are set forth below,
together with the positions held by each such person in the Company and their
ages as of January 31, 1999. All directors are elected annually by the
shareholders of the Company and serve until their successors are duly elected
and qualified. Officers are elected by the Board of Directors and serve at the
will of the Board of Directors.
Name Age Positions
---- --- ---------
Michael E. McGinnis 49 President, Chief Executive Officer
and Director
J.C. Pennie 59 Chairman of the Board of
Directors
Matthew D. Hill 29 Senior Vice President Operations
North America
Besim Halef 43 Vice President of Marketing
Lanell Matlock 46 Assistant Vice President and
Controller
Bruce A. Rich 59 Secretary
Barry Cracower 60 Director
William A. Dimma 70 Director
Hon. Donald R. Getty 65 Director
Executive Officers
Michael E. McGinnis has been the Chief Executive Officer of the Company
since 1993, the President since December 1998 having served as President from
1993 to July 1998, a director since 1994 and was Chairman from May 1997 to
December 1998. He was the President and Chief Executive Officer of Eco
Environmental, a provider of environmental remediation services to industrial
clients, when it was acquired by the Company in 1993. Prior to joining Eco
Environmental, in 1992, Mr. McGinnis was employed with The Brand Companies,
Inc., one of the largest asbestos abatement contractors in the United States.
Mr. McGinnis joined The Brand Companies in 1965 and served in various
operational and administrative capacities for over 27 years. Mr. McGinnis has
been a director of USIS since February 1996, having served as its Chairman of
the Board from June 1996 to October 1997, and was President of USIS from March
1996 to August 1996. He was a director of Dominion Bridge from February 1998
through March 1999.
J.C. Pennie has been a director of the Company since February 1992, the
Chairman of the Board of Directors since December 1998 and was the Vice-Chairman
from October 1993 to December 1998. Mr. Pennie served as the Company's President
and Chief Executive Officer in 1992 in order to execute the downsizing and
reorganization of the Company. Since 1974, he has been President of Windrush
Corporation which provides management and financial services to turnaround and
start-up companies. He is the Chairman of Imark Corporation and of Eco
Technologies International, Inc., Canadian companies.
Matthew D. Hill has served as Senior Vice President Operations for North
America since December 1998, having served as Vice President/Director of
Operations, Gulf Coast, and President of The Turner Group from
-59-
April 1997 to December 1998. He served as the Company's Executive Director of
Administration from January 1997 until March 1997 and as the Company's Director
of Special Projects from March 1996 until January 1997. Prior thereto, Mr. Hill
was the Manager of Eco Environmental's Spill Response Division from April 1995
to March 1996. Prior to joining Eco Environmental, Mr. Hill had been Plant
Manager of Alumatech, Inc., a specialty aluminum trailer manufacturer, since May
1992.
Besim Halef has been Vice President of Marketing since January 1999, having
served as the Division President of MM Industra since June 1996. Between April
1994 and May 1996, Mr. Halef served as a project general manager for National
Heavy Industries Limited, Saudi Arabia in connection with a project to build
specialty fabrication facilities in the Kingdom of Saudi Arabia. Mr. Halef had
served in various capacities at M&M Manufacturing Limited Partnership, the
predecessor of MM Industra, between 1985 and 1994, most recently as the
Executive Vice President and General Manager of that company from March 1991 to
April 1994.
Lanell Matlock has been Assistant Vice President and Controller of the
Company since December 1997. For 20 years prior thereto she was employed by the
Real Estate division of Mitchell Energy & Development Corp. and the audit
division of Arthur Andersen & Co. LLP in Houston, Texas.
Bruce A. Rich has been Secretary of the Company since May 1997. He has been
a partner in Thelen Reid & Priest LLP, a New York, New York law firm since 1992,
and prior thereto was a partner in another law firm. His law firm performs legal
services for the Company.
Outside Directors
Barry Cracower has been a director of the Company since December 1996. Mr.
Cracower has been the President of Pharmx Rexall Drug Stores Ltd., a drug store
chain based in Concord, Ontario, since 1990. Prior to 1990, he held senior
executive positions at several major Canadian corporations. Mr. Cracower served
on the Board of Directors of the predecessor corporation to the Company, ECO
Corp., in 1992 during its restructuring. He also is as a director of Algonquin
Mercantile Corporation, a Canadian company.
William A. Dimma has been a director of the Company since January 1997. Mr.
Dimma has served as the Chairman of the Board of Canadian Business Media Ltd
since 1992, and York University since 1991. For more than five years through
1993, Mr. Dimma served as the Deputy Chairman and also as the President and
Chief Executive Officer of Royal LePage Limited, a Canadian real estate company.
In addition to the companies mentioned above, Mr. Dimma is a director of the
Greater Toronto Airport Authority, Magellan Aerospace Corporation, IPL Energy
Inc., a pipeline and gas distribution company, London Life Insurance Company,
Sears Canada Inc. and Trilon Financial Corporation, a financial services
company.
Hon. Donald R. Getty has been a director of the Company since January 1997.
Mr. Getty has been the President and Chief Executive Officer of Sunnybank
Investments Ltd., an investment and consulting company located in Edmonton,
Alberta, since December 1992. Mr. Getty has held elected and appointive offices
in Canadian government, most recently as the Premier of the Province of Alberta
from 1985 to 1992 and as the Minister of Energy and Natural Resources for the
Provincial Government of Alberta between 1971 and 1979. Mr. Getty currently
serves on the boards of directors of Guyanor Resources S.A., a mining company in
French Guyana; and Nationwide Resources, Mera Petroleum, an oil and gas company,
Cen Pro Technologies, an engineering company and Eclipse Investments, all
located in Canada. Mr. Getty is also a director and Vice Chairman of the Alberta
Racing Corporation, which is responsible for all forms of horse racing in
Alberta, Canada.
-60-
Significant Employees
Larry Cundy has served as the Division Chief Executive Officer of Industra
since April 1997. For more than twenty years prior thereto, he had been employed
by Parsons Power Inc. and its predecessor, his last position being Regional
Director of Sales.
Joseph D. DeFranco has served as the Division President of SRS since July
1996 when SRS was acquired by the Company. Mr. DeFranco had served as the
President, Chief Executive Officer, Treasurer and a director of SRS since 1973.
Michael Fugitt has served as the Division President of The Turner Group
since April 1998, having held various positions at The Turner Group since 1989.
Andrew Scott Hamilton has served as the Division President of MM Industra
since February 1998, from 1996 to 1998, he was Product Director for BC Fast
Ferries, and from 1995 to 1996, he was a project manager for M&M Manufacturing
Limited Partnership in Nova Scotia.
Willi Hamm has served as the Division President of Industra Service since
June 1997, having been a senior executive at Industra Service since 1986.
Cecil Hodgkinson has served as the Division President of Action Contract
Services since March 1997, having been with The Turner Group from 1989 to March
1997 with his last position being Manager of Estimating.
John Hoyle has served as the Division President of United Eco since
November 1996. Mr. Hoyle had been the President of Four Seasons Environmental,
Inc., an environmental services company, between July 1996 and August 1993, and
served as the Vice President of that corporation between August 1993 and
September 1990.
C.N. Jones has served as the Division President of CCG since September 1997
when CCG was acquired by the Company. Mr. Jones had served as the President of
CCG since 1991.
David Krache has served as the Division President of Chempower since
September 1998. From May 1998 to September 1998, Mr. Krache had been at Dominion
Bridge, and from April 1994 to May 1998, he had been President of National
Service Cleaning Corp., a subsidiary of NSC Corp.
Board of Directors Matters
The Board of Directors has an Audit Committee, a Compensation Committee and
a Corporate Governance Committee. The Audit Committee reviews the annual and
quarterly financial statements, and material investments and transactions, and
meets with the outside accountants and senior management regarding, among other
items, internal control procedures established by the Company. The Compensation
Committee sets the level of compensation of the Company's executive officers.
The Corporate Governance Committee monitors compliance with the corporate
governance guidelines of the Company.
During the 1998 fiscal year, the Board of Directors met in person or
telephonically 11 times, and each director attended at least 75% of the
meetings. The Board of Directors also authorized corporate actions through
written consents.
Compliance With Certain Reporting Requirements
Section 16(a) of the Securities Exchange Act of 1934 requires that the
officers, directors and 10.0% shareholders of a domestic issuer report the
ownership and purchase or sale of the equity securities of such issuer to the
SEC. Based on the Company's records, the Company believes its officers,
directors and 10.0% shareholders are in compliance with Section 16(a) for fiscal
1998.
-61-
Item 11. Executive Compensation.
The following table discloses the compensation awarded to or earned by the
Chief Executive Officer and the other most highly compensated executive officers
of the Company as of the end of fiscal 1998 whose annual salary plus other forms
of compensation exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term All Other
Annual Compensation Compensation Compensation
------------------------------------------------------- ------------- ------------
Name Securities
and Other Annual Underlying
Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- --------------------- ----------- ----------- --------- ---------------- -------------
Michael E. McGinnis 1998 300,000(1) 0 11,676(2) 40,000 0
Chairman of the 1997 279,166(1) 0 10,885(2) 150,000 0
Board, President and 1996 252,276(1) 0 6,439(2) 20,000 0
Chief Executive
Officer
Frank J. Fradella 1998 125,577 168,912 4,000(2) -0- 0
President(3)
David L. Norris 1998 151,443(1) 0 5,709(2) -0- 89,250(6)
Senior Vice President 1997 161,538 4,900(2) 70,000 0
and Chief Financial 1996 0 0 0 25,000
Officer (4)
Bruce D. Tobecksen 1998 186,115 0 6,000(2) 75,000 750,000(6)
Vice President and
Treasurer(5)
J. C. Pennie 1998 0 0 303,000(7) 40,000 0
Vice-Chairman 1997 0 0 112,885(7) 100,000 0
of the Board 1996 0 0 109,140(7) 0 0
- ----------
(1) Includes $1,056, $1,600 and $1,138 of deferred compensation contributed by
the Company to Mr. McGinnis' 401K Plan in fiscal 1998, 1997 and 1996,
respectively, and includes $1,916 of deferred compensation contributed by
the Company to Mr. Norris' 401K Plan in fiscal 1998.
(2) Represents automobile lease payments paid by the Company.
(3) Mr. Fradella served as President from July 1998 to December 1998 and
remained as a consultant through January 1999.
(4) Mr. Norris became an employee in August 1996. From August 1996 to February
1997, he had been an executive officer of USIS, and the Company reimbursed
USIS for compensation amounts paid by USIS to Mr. Norris. Mr. Norris
resigned in July 1998.
(5) Mr. Tobecksen became Vice-President and Treasurer in January 1998 and was
terminated in September 1998.
(6) Represents severance payment pursuant to his employment agreement.
(7) Represents fees paid to Windrush Corporation, 50% of which is owned by Mr.
Pennie, for executive and secretarial services for the Company's Toronto
office.
Employment Contracts
The Company and Michael E. McGinnis have entered into an employment
agreement pursuant to which Mr. McGinnis receives an annual base salary of
$300,000, an automobile allowance of $750 per month plus any operating and
maintenance expenses associated with such vehicle, and is entitled to
participate in an annual bonus program determined by the level of basic earnings
per share of the Company for each fiscal year of the term of the
-62-
employment agreement. The agreement provides for up to five years compensation
if he is terminated without cause, or upon his death or disability, subject to
certain limitations. The employment agreement terminates on May 1, 2002.
The Company and David L. Norris entered into a three year employment
agreement effective May 1, 1997 pursuant to which Mr. Norris was to be paid an
annual base salary of $225,000, an automobile allowance of $750 per month plus
any operating and maintenance expenses associated with such vehicle, and to
participate in an annual bonus program determined by the level of basic earnings
per share of the Company for each fiscal year of the term of the employment
agreement. The agreement provides for up to three years compensation if Mr.
Norris was terminated by the Company without cause subject to certain
limitations. Mr. Norris' employment terminated on July 21, 1998, and upon
termination Mr. Norris received $89,250 for acting as a consultant to the
Company.
The Company and Bruce D. Tobecksen entered into a three year employment
agreement effective January 1, 1998 pursuant to which Mr. Tobecksen was to
receive an annual base salary of $250,000, an automobile allowance of $750 per
month plus any operating and maintenance expenses associated with such vehicle,
and be entitled to participate in an annual bonus program determined by the
level of basic earnings per share of the Company for each fiscal year of the
term of the employment agreement. The agreement provided for up to three years
compensation if Mr. Tobecksen is terminated by the Company without cause subject
to certain limitations. Mr. Tobecksen's employment with the Company terminated
as of September 25, 1998. Pursuant to a Termination Agreement, he received a
lump sum payment of $750,000, his options to purchase 75,000 Common Shares
became fully vested and exercisable for one year and his benefits were to be
continued through the earlier of (i) December 31, 2000 or (ii) the date on which
he became eligible for comparable benefits by reason of subsequent employment.
Compensation of Directors
The directors of the Company who are not otherwise employees or consultants
of the Company receive CDN$20,000 per year. In addition, the directors of the
Company receive CDN$1,000 per Board or committee meeting attended and all
reasonable expenses incurred by the directors in respect of their duties are
reimbursed by the Company. None of the directors of the Company receives
compensation in his capacity as a director pursuant to any other arrangement or
in lieu of any standard arrangement except through the granting of stock
options.
During fiscal 1998, Hon. Donald R. Getty performed various consulting and
advisory services for the Company on the TransCanada and Amethyst II and III
projects for which he received fees in the aggregate amount of $38,500.
-63-
Stock Options
The following table provides information with respect to stock options
granted to the Named Executive Officers during fiscal 1998.
Stock Options Granted
in Fiscal Year Ended November 30, 1998
Market Value
% of Total of Securities
Options Underlying
Securities Granted to Options on
Under Employees Exercise the Date of
Options in Financial Price Grant
Name Granted (#) Year (CDN$) (CDN$) Expiration Date
- -------- ---------------- --------------- -------------- ----------- ---------------
Michael E. McGinnis 40,000 5.6% 9.75 390,000 6/18/03
Frank J. Fradella -0- -- -- -- --
David L. Norris -0- -- -- -- --
Bruce D. Tobecksen 75,000 10.5% 9.75-16.50 1,068,750 9/25/99
J.C. Pennie 40,000 5.6% 9.75 390,000 6/18/03
The following table provides information with respect to stock options
exercised by the Named Executive Officers during the fiscal year ended November
30, 1998 and the balance of stock options remaining after such exercises. All
stock options described below were presently exercisable at November 30, 1998.
Aggregated Stock Options Exercised
in Fiscal Year Ended November 30, 1998
and Fiscal Year-End Values
---------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Stock
Options at Fiscal Options at Fiscal
Year-End Year-End
(#) (CDN$)(1)
---------------------- --------------------
Securities
Acquired
Upon Exercisable/ Exercisable/
Name Exercise(#) Value Realized (US$) Unexercisable Unexercisable
---- ----------- -------------------- ------------- -------------
Michael E. McGinnis 100,000(2) $421,460 80,000/130,000 0/0
Frank J. Fradella -- -- 30,000/20,000 0/0
David L. Norris -- -- 33,000/52,000 0/0
Bruce Tobecksen -- -- 75,000/-0- 0/0
J.C. Pennie -- -- 48,000/92,000 0/0
- ----------
(1) Based on the closing price of the Common Shares on The Toronto Stock
Exchange on November 30, 1998 of CDN$3.00.
(2) Options exercised to provide shares to offset margin calls, which margin
calls resulted in losses to Mr. McGinnis.
-64-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of January 31, 1999 the number of Common
Shares beneficially owned by (i) each person known to be the beneficial owner of
more than five percent of the outstanding Common Shares, (ii) each director of
the Company, (iii) each Named Executive Officer and (iv) all executive officers
and directors of the Company as a group as known by the Company or as reflected
on the records of the transfer agent.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership(1)
- ---------------------------------------- ------------------------------
Number Percentage
---------- ----------
Michael E. McGinnis .................... 188,840(2) 0.9%
J.C. Pennie ............................ 95,400(3) 0.4%
Hon. Donald R. Getty ................... 93,000(4) 0.4%
Barry Cracower ......................... 82,000(4) 0.4%
William A. Dimma ....................... 68,000(4) 0.3%
Directors and executive
officers as a group (6 persons) ........ 538,940(5) 2.5%
- ----------
* Unless otherwise indicated, the address is c/o American Eco Corporation,
154 University Avenue, Toronto, Ontario M5H 3Y9.
(1) Unless otherwise indicated, the Company has been advised that each person
above has sole voting and investment power over the Common Shares indicated
above. The number of shares beneficially owned includes Common Shares which
each beneficial owner has the right to acquire within 60 days of January
31, 1999.
(2) Includes 114,000 Common Shares underlying stock options.
(3) Includes (i) 68,000 Common Shares underlying stock options, (ii) 700 Common
Shares owned by his wife and (iii) 26,700 Common Shares owned by a
corporation of which he is a 50% owner.
(4) Includes 68,000 Common Shares underlying stock options.
(5) Includes Common Shares disclosed in notes (2), (3) and (4) above.
-65-
Item 13. Certain Relationships and Related Transactions.
Transactions with Management or Affiliates of Management
Pursuant to an agreement between the Company and Windrush Corporation
("Windrush"), dated December 1, 1997, Windrush receives a fee of $10,000 per
month in consideration for executive services for administration, strategic and
marketing planning provided to the Company plus fees which are negotiated on a
project-by-project basis for other specific services rendered. This agreement
expires on December 1, 2002, and has a five-year renewable term. J.C. Pennie,
the Chairman of the Board of Directors of the Company, owns 50% of Windrush.
As of August 31, 1997, the Company sold Eco Environmental and Environmental
Evolutions to Eurostar Interests Ltd. ("Eurostar") for an aggregate purchase
price of $11.0 million payable in a one-year promissory note (the "EcoNote"),
which was to be collateralized by all of the capital stock of Eurostar. Eurostar
assigned its interest in Eco Environmental and Environmental Evolutions to
UKstar (Canada) Inc. ("UKstar"), which in turn transferred its interest in Eco
Environmental and Environmental Evolutions to Eco Technologies International,
Inc. ("ETI"), a Canadian public company. UKstar owns 85.5% of ETI. Windrush owns
3.2% of UKstar's parent company and 1.4% of ETI. Mr. Pennie also serves as the
Secretary of UKstar and as the Chairman of ETI, and Barry Cracower, a director
of the Company, also is a director of ETI. In February 1998, UKstar paid
$603,000 to the Company for reimbursement of monies advanced by the Company for
the operating expenses of Eco Environmental and Environmental Evolutions from
September 30, 1997 to November 30, 1997. In October 1998, UKstar paid $3.0
million on the Eco Note, and is to repay the remaining $9,313,975 on September
30, 2000 with quarterly interest installments of $227,028, which obligations are
collateralized by 500,000 shares of ETI Common Stock and a $3.0 million
performance bond.
In July 1998, Industra Service entered into a 15 year lease for an office,
shop and warehouse in Edmonton, Alberta from a company in which Donald R. Getty,
a director of the Company, is President and has a 25% interest. The annual lease
payments are $474,000(CDN$). Management believes the lease terms are at
commercially reasonable rates.
Indebtedness of Management or Affiliates of Management
In August 1998, the Board of Directors authorized the Company to loan up to
$100,000 to each Director for the purpose of using the proceeds to purchase the
Company's Common Shares in the open market. These loans are to be repaid in
three years, bear interest at the rate of 9-5/8% per annum, and are unsecured.
Messrs. Fradella, Getty and Pennie each took a loan for $100,000 and Mr.
Cracower took a loan for $50,000. As of November 30, 1998, the following
Director loans were outstanding: Mr. Fradella - $102,874, Mr. Getty - $102,847,
Mr. Pennie - $102,874 and Mr. Cracower - $51,437.
During fiscal 1997, the Company loaned $84,100 to Michael E. McGinnis for
the purpose of purchasing Common Shares of the Company in the open market. The
loan increased his indebtedness to the Company to $630,057. The loan was to
mature on May 7, 1998, and the maturity was extended to May 31, 1999, bearing
interest at the rate of 10.0% per annum and is collateralized by the purchased
shares. The outstanding balance of the loan, including interest, as of November
30, 1998 was $687,502.
In May 1997, the Company loaned $305,000 at 8.5% interest per annum to
David L. Norris for the purchase of a home in connection with his relocation to
the Company's headquarters in Houston, Texas. The loan was to mature in May 1998
and was extended to February 1, 2003, and is unsecured. The outstanding balance
of the loan, including interest, as of November 30, 1998 was $319,806.
In June 1997, the Company loaned $60,105 to J. C. Pennie. The loan was to
mature in June 1998, and was extended to May 31, 1999 bears interest at the rate
of 8.5% per annum and is unsecured. The outstanding balance of the loans,
including interest, as of November 30, 1998 was $64,878.
-66-
In September 1998, the Company loaned $100,000 to Besim Halef, an executive
officer, repayable over three years with prepayments from future bonuses,
together with interest at the rate of 6% per annum.
-67-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
The following audited consolidated financial statements of American Eco
Corporation and subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheet as of November 30, 1998 and 1997
Consolidated Statement of Income for the years ended November 30, 1998,
1997 and 1996
Consolidated Statement of Shareholders' Equity for the years ended November
30, 1998, 1997 and 1996
Consolidated Statement of Changes in Financial Position for the years ended
November 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following consolidated financial statement schedules of American Eco
Corporation and subsidiaries are included in Item 14(d):
All schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under related instructions or are not
applicable and, therefore, have been omitted.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth quarter of
fiscal 1998.
(c) Exhibits
3.1.1 Letters Patent (Certificate of Incorporation) filed February 6, 1969
(incorporated by reference to Exhibit 3.1.1 to the Company
registration statement on Form 10, dated September 19, 1990 [the "Form
10"]).
3.1.2 Supplementary Letters Patent, dated June 26, 1970 (incorporated by
reference to Exhibit 3.1.2 to the Form 10).
3.1.3 Articles of Amendment, filed June 16, 1975 (incorporated by reference
to Exhibit 3.1.3 to the Form 10).
3.1.4 Articles of Amendment, filed June 23, 1978 (incorporated by reference
to Exhibit 3.1.4 to the Form 10).
3.1.5 Articles of Amendment, filed June 20, 1986 (incorporated by reference
to Exhibit 3.1.5 to the Form 10).
3.1.6 Articles of Amendment, filed June 17, 1987 (incorporated by reference
to Exhibit 3.1.6 to the Form 10).
3.1.7 Articles of Amendment, certified on November 19, 1993 (incorporated by
reference 3.1.7 to the Company's Form 10-K for the fiscal year ended
November 30, 1996 [the "1996 Form 10-K"]).
-68-
3.1.8 Articles of Amendment, certified on May 27, 1997 (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter
ended May 31, 1997 [the "May 1997 Form 10-Q"]).
3.2.1 By-Laws (incorporated by reference to Exhibit 3.2 to the Form 10.).
3.2.2 By-Law Number 10 (incorporated by reference to Exhibit 3.2.2 to the
1996 Form 10-K).
3.2.3 Rights Agreement, dated as of April 1998, between the Company and The
CIBC Mellon Trust Company (incorporated by reference to Exhibit 4 to
the Company's Form 8-K for an event of April 9, 1998.)
4.1 Share Option Plan (incorporated by reference to Exhibit to Management
Information Circular to the Company's Form 6-K, dated September 27,
1995).
4.2 Indenture, dated as of May 14, 1998, among the Company, the Guarantors
named therein and State Street Bank and Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's Form 4.1
for an event of May 21, 1998).
4.3 Form of Common Stock Purchase Warrant expiring May 29, 2002
(incorporated by reference to Exhibit 4.5 to the May 1997 Form 10-Q).
*10.1 Agreement, dated as of December 1, 1997 between the Company and
Windrush Corporation.
10.2 Share Exchange Agreement, dated June 1, 1994, among Westlake
Interests, Ltd., Cambridge, the Company and Marc A. Sparks
(incorporated by reference to Exhibit 10.7.1 to the 1994 Form 20-F).
10.3 Acquisition Agreement, dated July 31, 1995, between the Company and
Kenneth Hagan and Janet Hagan. (incorporated by reference to Exhibit
2.7.1 to the 1995 Form 20-F).
10.4.1 Agreement and Plan of Merger dated as of April 26, 1996, among the
Company SRS Acquisition Corporation and Separation and Recovery
Systems, Inc. ("SRS") (incorporated by reference to Exhibit 10.4.1 to
the 1996 Form 10-K).
10.4.2 Business Loan Agreement, dated as of February 7, 1996, between Bank of
America National Trust and Savings Association ("BA") and SRS
(incorporated by reference to Exhibit 10.4.2 to the 1996 Form 10-K).
10.4.3 Amendment No. 1 to Business Loan Agreement, dated as of July 3, 1996,
between SRS and BA (incorporated by reference to Exhibit 10.4.3 to the
1996 Form 10-K).
10.4.4 Continuing Guarantee, dated as of July 3, 1996 from the Company to BA
(incorporated by reference to Exhibit 10.4.4 to the 1996 Form 10-K).
10.4.5 Subordination Agreement, dated July 3, 1996, among the Company, SRS
and BA (incorporated by reference to Exhibit 10.4.5 to the 1996 Form
10-K).
10.5 Acquisition Agreement, dated as of May 31, 1996, between the Company
and United Eco Systems, Inc. (incorporated by reference to Exhibit
10.5 to the 1996 Form 10-K).
10.6.1 WCMA Note, Loan and Security Agreement, dated as of August 23, 1996
between American Eco/SP Corporation and Merrill Lynch Business
Financial Services, Inc. ("MLBFS") (incorporated by reference to
Exhibit 10.6.1 to the 1996 Form 10-K).
-69-
10.6.2 Security Agreement, dated as of August 26, 1996 between C.A. Turner
Maintenance, Inc. ("Turner") and MLBFS (incorporated by reference to
Exhibit 10.6.2 to the 1996 Form 10-K).
10.6.3 Unconditional Guaranty, dated as of August 26, 1996 of Turner in favor
of MLBFS (incorporated by reference to Exhibit 10.6.3 to the 1996 Form
10-K).
10.6.4 Unconditional Guaranty, dated as of August 26, 1996 of American Eco/SP
Corporation in favor of MLBFS (incorporated by reference to Exhibit
10.6.4 to the 1996 Form 10-K).
10.7 Acquisition Agreement and Plan of Reorganization, dated as of January
1, 1996 between Jim Wright, Mark L. Crawford and Aaron Fine (as
shareholders of Environmental Evolutions, Inc.) and the Company, as
amended March 15, 1996 (incorporated by reference to Exhibit 10.7 to
the 1996 Form 10-K).
10.8.1 Agreement, dated April 9, 1996 between the Company and Wayne E. Shaw,
and as amended on April 17, 1996, April 18, 1996, May 23, 1996 and
June 12, 1996 (incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form F-8).
10.8.2 Arrangement Agreement, dated November 13, 1996, among Industra Service
Corporation, 519742 B.C. Ltd. and the Company (incorporated by
reference to Exhibit 10.8.2 to the 1996 Form 10-K).
10.9.1 Agreement and Plan of Merger, dated as of September 10, 1996, among
the Company, Sub Acquisition Corp. and Chempower, Inc. ("Chempower")
(incorporated by reference to Exhibit 10.9.1 to the 1996 Form 10-K).
10.9.2 Financing Agreement, dated February 28, 1997, among the Company,
Chempower, Toomas J. Kukk and Mark L. Rochester (incorporated by
reference to Exhibit 10.9.2 to the 1996 Form 10-K).
10.9.3 Loan Agreement, dated as of February 28, 1997, by and between
Chempower, Inc. and First National Bank of Ohio ("FNBO") (incorporated
by reference to Exhibit 10.9.7 to the 1996 Form 10-K).
10.9.4 Purchase Agreement, dated as of February 28, 1997, between Chempower
and Holiday Properties ("Holiday") (incorporated by reference to
Exhibit 10.9.9 to the 1996 Form 10-K).
10.10 Acquisition Agreement, dated as of August 31, 1997, between the
Company and Eurostar Interests Ltd. (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended August
31, 1997).
10.11 Lease, dated as of August 15, 1996, between 11011 Jones Road Joint
Venture Group and the Company (incorporated by reference to Exhibit
10.11 to the 1996 Form 10-K).
10.12 Employment Agreement, dated December 1, 1995, between the Company and
Michael E. McGinnis, as amended May 1, 1996 (incorporated by reference
to Exhibit 10.12.1 to the 1996 Form 10-K).
10.13.1 Employment Agreement, effective as of January 1, 1998, between the
Company and Bruce Tobecksen (incorporated by reference to exhibit
10.12.2 to the Company's Form 10-K for the fiscal year ended November
30, 1998).
*10.13.2 Termination Agreement, dated as of September 15, 1998, between the
Company and Tobecksen.
10.14 Employment Agreement, effective as of August 1, 1996, between the
Company and David L. Norris (incorporated by reference to Exhibit
10.12.3 to the 1996 Form 10-K).
-70-
10.15 Credit and Guaranty Agreement, dated as of August 22, 1997, among
American Eco Funding Corp., as Borrower, the Company, as Parent
Guarantor, and Union Bank of California, N.A. as Agent ("Union Bank")
(without schedules or exhibits) (incorporated by reference to Exhibit
10.1.1 to the Company's Form 8-K for an event of August 29, 1997).
10.16.1 Letter of Intent, dated February 20, 1998, between the Company and
Dominion Bridge Corporation ("Dominion Bridge") (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K for an event of
February 20, 1998 [the "February 1998 Form 8-K"]).
10.16.2 Securities Purchase Agreement, dated as of February 20, 1998, between
the Company and Dominion Bridge (incorporated by reference to Exhibit
10.2 to the February 1998 Form 8-K"]).
10.16.3 Warrant Agreement, dated February 20, 1998, issued by Dominion Bridge
(incorporated by reference to Exhibit 10.3 to the February 1998 Form
8-K").
10.16.4 Registration Rights Agreement, dated as of February 20, 1998, between
the Company and Dominion Bridge (incorporated by reference to Exhibit
10.4 to the February 1998 Form 8-K").
10.17 Acquisition Agreement, dated as of September 1, 1997, between the
Company and Jones Partners, Ltd. (incorporated by reference to Exhibit
10.15 to the Company's Form 10-K for the fiscal year ended November
30, 1997).
*21. Subsidiaries of the Company.
*27. Financial Data Schedule.
- ----------
* Filed herewith
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are
incorporated by reference to Item 14(a).
-71-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN ECO CORPORATION
Dated: March 10, 1999 By: /s/ Michael E. McGinnis
-----------------------------------------
Michael E. McGinnis, President and Chief
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 and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael E. McGinnis
- -----------------------
Michael E. McGinnis President, Chief Executive Officer and Director
(Principal Executive Officer) March 10, 1999
/s/ J.C. Pennie
- -----------------------
J.C. Pennie Chairman of the Board of Directors March 10, 1999
/s/ Lanell Matlock
- -----------------------
Lanell Matlock Assistant Vice President and Controller March 10, 1999
/s/ Barry Cracower
- -----------------------
Barry Cracower Director March 10, 1999
- -----------------------
William A. Dimma Director March , 1999
/s/ Donald R. Getty
- -----------------------
Hon. Donald R. Getty Director March 10, 1999
-72-
INDEX TO EXHIBITS
Exhibit Number Document
- -------------- --------
* 10.1 Agreement, dated as of December 1, 1997, between the
Company and Windrush Corporation.
* 10.13.2 Termination Agreement, dated as of September 15, 1998
between the Company and Bruce Tobecksen.
* 21. Subsidiaries of the Company.
* 27. Financial Data Schedule.
- ------------------
*Filed herewith