SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) March 4, 1997
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AMERICAN ECO CORPORATION
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(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 0-10621 52-1742490
------------------------- -------------------- -----------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
11011 JONES ROAD
HOUSTON, TEXAS 77070
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code - (281) 774-7000
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
American Eco Corporation, an Ontario, Canada
corporation ("American Eco"), has reported the events disclosed
therein previously with the Securities and Exchange Commission
under cover of Form 6-K on March 14, 1997. Subsequently,
American Eco discovered that its reporting status as a foreign
private issuer had changed to that of a domestic private issuer.
This Current Report on Form 8-K is being filed by American Eco
with the Securities and Exchange Commission in order to provide
the information required to be filed pursuant to Item 7 herein.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 4, 1997, American Eco completed its proposed
acquisition of Chempower, Inc. ("Chempower"), a manufacturing,
construction and environmental services company for the power
generation industry. Pursuant to the terms of an Agreement and
Plan of Merger, dated as of September 10, 1996, and as amended on
January 15, 1997, a newly-formed, wholly-owned subsidiary of
American Eco, merged with and into Chempower and Chempower became
a wholly-owned subsidiary of American Eco (the "Merger"). 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 option holders 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 was
represented by a $15.9 million promissory note of Chempower (the
"Shareholder Note"), payable on February 28, 1998. The
Shareholder Note is secured by all of Chempower's assets, subject
to the prior security interest of the First National Bank of
Ohio, as referred to below, and guaranteed by American Eco which
has secured its guaranty by a pledge of its Chempower shares.
Pending repayment of the Shareholder Note, certain restrictions
are imposed upon Chempower's business. Based on the total
7,565,113 Chempower shares outstanding on the effective date of
the Merger and the amounts due to Chempower option holders, the
total acquisition cost was approximately $50 million.
Concurrently with the closing of the Merger, Chempower
entered into installment purchase agreements with Holiday
Properties, a general partnership owned by Toomas J. Kukk and
Ernest M. Rochester, two executive officers of Chempower. These
agreements provide for the acquisition by Chempower of three
parcels of real property which had been leased to Chempower by
Holiday Properties, including Chempower's executive offices in
Akron, Ohio and two other properties located in Cincinnati, Ohio
and Winfield, West Virginia. The aggregate purchase price for
the three properties was $4.5 million, of which $500,000 was paid
on the closing date of the Merger.
Messrs. Kukk and Rochester each entered into three year
Employment Agreements to serve as Chempower's President and Chief
Executive Officer and as Vice Chairman, respectively, at an
annual salary of not less than $280,000 for Mr. Kukk and $150,000
for Mr. Rochester. Messrs. Kukk and Rochester each also entered
into five year Non-Competition Agreements for which each will
receive $75,000 per year.
Also concurrently with the Merger, Chempower entered
into a one-year $15.7 million line of credit facility with the
First National Bank of Ohio. Approximately $6 million of such
facility was used by Chempower to finance a portion of the merger
consideration and the balance will be used for general corporate
purposes. The credit facility is secured by a first security
interest in all of the assets of Chempower, and guaranteed by
American Eco.
-2-
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Consolidated Financial Statements of Chempower, Inc.
at December 31, 1996 and December 31, 1995 and the
years then ended:
Report of McGladrey & Pullen, LLP, independent
accountants to Chempower
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION.
Unaudited Pro Forma Combined Financial Statements:
Introduction to Unaudited Pro Forma Combined
Financial Statements
Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statement of Income
Notes to Unaudited Proforma Combined Financial
Statements
(c) EXHIBITS.
Exhibit
Number Description of Document
------ -----------------------
10.1 Agreement and Plan of Merger, dated as of
September 10, 1996, among American Eco, Sub
Acquisition Corp. and Chempower
(incorporated by reference to Exhibit 10.9.1
to American Eco's Annual Report on Form 10-K
filed on May 5, 1996 (the "1996 Form
10-K")).
10.2 Financing Agreement, dated February 28,
1997, among American Eco, Chempower, Toomas
J. Kukk and Mark L. Rochester (incorporated
by reference to Exhibit 10.9.2 to the 1996
Form 10-K).
10.3 Letter Agreement, dated February 28, 1997,
between American Eco and Toomas J. Kukk, as
agent (the "Agent") (incorporated by
reference to Exhibit 10.9.3 to the 1996 Form
10-K).
10.4 Guaranty, dated February 28, 1997, by
American Eco in favor of the Agent
(incorporated by reference to Exhibit 10.9.4
to the 1996 Form 10-K).
10.5 Pledge Agreement, dated February 28, 1997,
between American Eco and the Agent
(incorporated by reference to Exhibit 10.9.5
to the 1996 Form 10-K).
-3-
10.6 Security Agreement, dated February 28, 1997,
between American Eco and the Agent
(incorporated by reference to Exhibit 10.9.6
to the 1996 Form 10-K).
10.7 Loan Agreement, dated as of February 28,
1997, by and between Chempower and First
National Bank of Ohio ("FNBO") (incorporated
by reference to Exhibit 10.9.7 to the 1996
Form 10-K).
10.8 Promissory Note, dated February 28, 1997, of
Chempower in favor of the Agent
(incorporated by reference to Exhibit 10.9.8
to the 1996 Form 10-K).
10.9 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 Commercial Guaranty, dated February 28,
1997, by American Eco in favor of FNBO
(incorporated by reference to Exhibit
10.9.10 to the 1996 Form 10-K).
10.11 Promissory Note, dated February 28, 1997, of
Chempower in favor of FNBO (incorporated by
reference to Exhibit 10.9.11 to the 1996
Form 10-K).
10.12 Subordination Agreement, dated February 28,
1997, among Chempower, FNBO, Toomas J. Kukk,
Mark L. Rochester and the Agent
(incorporated by reference to Exhibit
10.9.12 to the 1996 Form 10-K).
10.13 Commercial Security Agreement, dated as of
February 28, 1997, between Chempower and
FNBO (incorporated by reference to Exhibit
10.9.13 to the 1996 Form 10-K).
-4-
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
CHEMPOWER, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
-5-
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Chempower, Inc.
Akron, Ohio
We have audited the accompanying consolidated balance sheets of
CHEMPOWER, INC. AND SUBSIDIARIES at December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders'
equity, and cash flows for the years then ended. 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 in accordance with generally accepted
auditing standards. Those standards 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. 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CHEMPOWER, INC. AND SUBSIDIARIES as of December 31,
1996 and 1995, and the results of their operations and their cash
flows for the years the ended, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Elkhart, Indiana
February 28, 1997
-6-
CHEMPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
ASSETS
Current Assets
Cash and cash equivalents . $13,494 $11,603
Marketable securities . . 3,291 1,084
Trade receivables . . . . 20,618 22,022
Contracts in progress . . 3,358 4,608
Inventories . . . . . . . 3,338 4,058
Other current assets . . . 463 385
------- -------
Total current assets . . $44,562 43,760
Property and Equipment,
at depreciated cost . . . 6,180 6,865
Intangible Assets . . . . . . 595 623
Other Assets . . . . . . . . 2,238 3,322
------- -------
$53,575 $54,570
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Trade payables . . . . . . $4,502 $4,688
Contracts in progress . . 1,166 1,465
Payroll related accruals . 7,420 7,740
Income taxes payable . . . 9 330
Other current liabilities 1,706 2,396
------- -------
Total current liabilities 14,803 16,619
------- -------
Deferred Credit, excess of
acquired interest over 546 986
cost . . . . . . . . . . . ------- -------
Commitments
Shareholders' Equity
Common stock . . . . . . . 776 776
Additional paid-in capital. 20,334 20,334
Retained earnings . . . . 17,736 16,465
Unrealized loss on
available-for-sale (10) -
securities . . . . . . . ------- -------
38,836 37,575
Less cost of common stock in 610 610
treasury . . . . . . . . ------- -------
38,226 36,965
------- -------
$53,575 $54,570
======= =======
See Notes to Financial Statements
-7-
CHEMPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
Revenues . . . . . . . . . . $71,377 $78,684
Cost of revenues . . . . . . 61,306 66,740
------- -------
Gross profit . . . . . . . 10,071 11,944
Selling, general, and 9,273 8,925
administrative expenses . . . -------- --------
Operating income . . . . . 798 3,019
------- -------
Nonoperating income (expense):
Interest and dividend income 758 538
Gain on sale of 1,097 -
available-for-sale
securities . . . . . . . .
Professional fees incurred
in connection with (714) -
acquisition . . . . . . . ------- -------
1,141 538
------- -------
Income before income taxes 1,939 3,557
Income taxes . . . . . . . . 668 1,310
------- -------
Net income . . . . . . . . $ 1,271 $ 2,247
======= =======
See Notes to Financial Statements.
-8-
CHEMPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ----------- ---------
Balance, December 31, 1994 . $ 741 $ 19,463 $ 14,218
Net income . . . . . . . . . - - 2,247
Options exercised for 343,550
shares of common stock . . 35 871 -
Purchase of 87,691 shares of
common stock for the - - -
treasury . . . . . . . . . ------ --------- ---------
Balance, December 31, 1995 . 776 20,334 16,465
Unrealized losses on
available-for-sale - - -
securities . . . . . . . .
Net income . . . . . . . . . - - 1,271
------ --------- ---------
Balance, December 31, 1996 . $ 776 $ 20,334 $ 17,736
====== ========= =========
UNREALIZED
LOSS ON
AVAILABLE- COMMON
FOR-SALE STOCK IN
SECURITIES TREASURY
----------- ----------
Balance, December 31, 1994 . . . . . $ - $ (410)
Net income . . . . . . . . . . . . . - -
Options exercised for 343,550
shares of common stock . . . . . . - -
Purchase of 87,691 shares of
common stock for the treasury . . . - (200)
------- ---------
Balance, December 31, 1995 . . . . . - (610)
Unrealized losses on available-
for-sale securities . . . . . . . . (10) -
Net income . . . . . . . . . . . . . - -
------- ---------
Balance, December 31, 1996 . . . . . (10) $ (610)
======= =========
STOCK
REPURCHASE
AGREEMENT TOTAL
--------- -----
Balance, December 31, 1994 . . . . . $ 420 $ 33,592
Net income . . . . . . . . . . . . . - 2,247
Options exercised for 343,550
shares of common stock . . . . . . - 906
Purchase of 87,691 shares of
common stock for the treasury . . . (420) 220
------ ---------
Balance, December 31, 1995 . . . . . - 36,965
Unrealized losses on available-
for-sale securities . . . . . . . . - (10)
Net income . . . . . . . . . . . . . - 1,271
------ ---------
Balance, December 31, 1996 . . . . . $ - $ 38,226
====== =========
See Notes to Financial Statements
-9-
CHEMPOWER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . $ 1,271 $ 2,247
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization . 1,240 1,007
Change in assets and
liabilities:
Decrease in:
Trade receivables . . . . 1,404 2,053
Contracts in progress . . 1,250 1,815
Inventories and other . . 642 1,353
Increase (decrease) in:
Trade payables . . . . . (293) (2,019)
Contracts in progress . . (299) (1,801)
(1,664) 2,339
Accruals and other . . . ------- -------
Net cash provided by 3,551 6,994
operating activities . ------- -------
Cash Flows From Investing Activities
Purchase of property and equipment (527) (1,573)
Business acquisitions . . . . . . - (4,796)
Available-for sale securities:
Purchases . . . . . . . . . . . (8,828) (1,084)
Sales . . . . . . . . . . . . . 6,621 -
1,074 (508)
Other . . . . . . . . . . . . . . ------- -------
Net cash (required for) (1,660) (7,961)
investing activities . . . . . . ------- -------
Cash Flows From Financing Activities
Proceeds from issuance of common
stock . . . . . . . . . . . . . . - 906
- (200)
Purchase of treasury stock . . . . ------- -------
Net cash provided by financing - 706
activities . . . . . . . . . . . ------- -------
Increase (decrease) in cash and
cash equivalents . . . . . . . . 1,891 (261)
11,603 11,864
Cash and cash equivalents, beginning ------- -------
$13,494 $11,603
Cash and cash equivalents, ending . . ======= =======
See Notes to Financial Statements.
-10-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, AND SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company provides contracting and material distribution to
industrial customers, primarily electric utilities. The Company
also provides manufactured and fabricated products to a variety
of customers. The Company provides its services and products to
customers throughout the United States, generally on terms of 30
days.
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 as 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.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Hunter Insulation,
Inc., Global Power Company, Southwick Corp., and Brookfield Corp.
Southwick Corp. and Brookfield Corp. were formed for the purposes
of acquiring all the partnership interests of Controlled Power
Limited Partnership.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company has cash on deposit with financial institutions
which, at times, may be in excess of FDIC insurance limits.
The Company considers all highly liquid investments with an
original maturity of ninety days or less when purchased to be
cash equivalents. Cash equivalents consist primarily of money
market funds.
MARKETABLE SECURITIES:
The Company has classified all investment securities as
available-for-sale. At December 31, 1996 and 1995, the fair
market value of marketable securities approximated their cost.
REVENUE AND COST RECOGNITION:
Revenues from fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the
percentage of contract costs incurred to date to estimated total
contract costs for each contract. This method is used because
management considers expended costs to be the best available
measure of progress on these contracts. Provisions for estimated
losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job
conditions, and estimated profitability are recognized in the
period in which the revisions are determined. An amount equal to
contract costs attributable to claims is included in revenue when
realization is probable and the amount can be reliably estimated.
-11-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
A portion of contract revenue relates to time and material
contracts. These contracts are generally billed weekly for work
performed and are treated as completed contracts at each billing.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories consist of asbestos abatement
supplies, specialized products, and insulation materials
purchased for resale.
DEPRECIATION AND AMORTIZATION:
Depreciation of property and equipment is computed by the
straight-line method over the estimated useful lives. Generally,
useful lives are 20-39 years for land improvements, buildings,
and leasehold improvements, 3-10 years for machinery and
furniture and fixtures, and 5-7 years for transportation
equipment.
Amortization of intangible assets is being computed by the
straight-line method using periods of thirty to forty years.
Amortization of the fair value of the partnership over the
purchase price (negative goodwill) is amortized over a period of
3 years.
NOTE 2. CONTRACTS IN PROGRESS AND TRADE RECEIVABLES
Comparative information with respect to fixed-price contracts in
progress as of December 31, 1996 and 1995 is as follows:
1996 1995
----- -----
(DOLLARS IN THOUSANDS)
Costs incurred on uncompleted $57,931 $68,335
contracts . . . . . . . . . . . . .
Estimated earnings . . . . . . . . 5,300 5,906
Estimated losses . . . . . . . . . (748) -
------- -------
62,483 74,241
Less billings to date . . . . . . . 60,291 71,098
------- -------
$ 2,192 $ 3,143
======= =======
-12-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1996 1995
----- -----
(DOLLARS IN THOUSANDS)
Included in the accompanying balance
sheets as contracts in progress:
Costs and estimated earnings in excess
of related billings on uncompleted $3,358 $4,608
contracts . . . . . . . . . . . .
Billings in excess of related costs
and estimated earnings on
uncompleted contracts and provisions (1,166) (1,465)
for estimated losses on contracts ------ ------
$2,192 $3,143
====== ======
As a part of the Company's percentage-of-completion method, the
Company evaluates the completion of its contracts in progress and
projects the estimated costs to complete on each contract. It is
common in the industry to experience differences between
estimated costs and actual costs incurred upon completion of the
contracts and to be reimbursed for additional costs incurred.
Trade receivables include amounts aggregating $3,218,000 and
$1,344,000 at December 31, 1996 and 1995 respectively, billed
under the retainage provisions of construction contracts. Based
on the Company's experience with similar contracts, the balances
are expected to be collected in the subsequent fiscal year.
Trade receivables in the accompanying balance sheets at December
31, 1996 and 1995 are stated net of an allowance for doubtful
accounts of $473,000 and $529,000 respectively.
Other assets at December 31, 1995 include amounts aggregating
$1,881,000 billed under the retainage provisions of construction
contracts.
NOTE 3. PROPERTY AND EQUIPMENT
The composition of property and equipment, stated at cost, as of
December 31, 1996 and 1995 is as follows:
1996 1995
----- -----
(DOLLARS IN THOUSANDS)
Land and improvements . . . . . . . $ 275 $ 263
Buildings . . . . . . . . . . . . . 2,207 2,115
Leasehold improvements . . . . . . 555 553
Machinery . . . . . . . . . . . . . 6,948 7,940
Transportation equipment . . . . . 2,015 1,876
Furniture and fixtures . . . . . . 981 891
------ -------
12,981 13,638
Less accumulated depreciation . . . 6,801 6,773
------ -------
$ 6,180 $ 6,865
======= =======
-13-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4. BORROWING CAPACITY
The terms of an unsecured line of credit agreement with a bank
permit the Company to borrow a maximum of $10,000,000, none of
which was outstanding at December 31, 1996. Any borrowings under
this agreement, which expires in May 1997, bear interest at the
Eurodollar rate (5.625% at December 31, 1996) plus 1%.
NOTE 5. COMMON STOCK
At December 31, 1996 and 1995, the Company had 15,000,000 shares
of common stock, with a par value of $.10 per share, authorized,
of which 7,756,121 shares were issued and 191,008 shares had been
purchased for the treasury.
NOTE 6. INCOME TAX MATTERS
Deferred taxes are provided on a liability method whereby
deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The composition of the deferred tax assets and liabilities, which
are netted and included in income taxes payable at December 31,
1996 and 1995, is as follows:
1996 1995
----- -----
(DOLLARS IN THOUSANDS)
Gross deferred tax assets:
Bad debt allowance . . . . . . . $ 194 $ 217
Accrued expenses . . . . . . . . 891 1,148
Other 13 11
------- -------
1,098 1,376
------- -------
Gross deferred tax liabilities:
Depreciation . . . . . . . . . . (307) (518)
Partnership basis differences . (590) (669)
------- -------
(897) (1,187)
------- -------
Net deferred tax assets . $ 201 $ 189
======= =======
-14-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Federal and state income tax expense for the years ended December
31, 1996 and 1995 consists of the following:
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
Current:
Federal . . . . . . . . . . . . $580 $1,442
State . . . . . . . . . . . . . 100 300
----- ------
680 1,742
----- ------
Deferred:
Federal . . . . . . . . . . . . (10) (357)
State . . . . . . . . . . . . . (2) (75)
----- ------
(12) (432)
----- ------
$668 $1,310
===== ======
A reconciliation of the effective income tax rate with the
statutory federal income tax rate for the years ended December
31, 1996 and 1995 is as follows:
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
Tax at statutory rate . . . . . . . 34.0% 34.0%
State income taxes, net of federal 7.0 7.0
tax benefit . . . . . . . . . . . .
Non-taxable interest income . . . . (6.6) (4.2)
----- -----
34.4% 36.8%
===== =====
NOTE 7. EMPLOYEE BENEFIT PLANS
The Company makes contributions along with many other employers
to defined-contribution union-sponsored pension plans. At
December 31, 1996, approximately 65% of the Company's employees
were covered by these plans. The Employee Retirement Income
Security Act of 1974, as amended in 1980, imposes certain
liabilities upon employers who are contributors to a
multi-employer pension plan in the event of such employers'
withdrawal from, or upon a termination of such a plan. The share
of the plans' unfunded vested liabilities allocable to the
Company, and for which it may be contingently liable, is not
ascertainable at this time.
The Company's contributions to union-sponsored employee benefit
plans which are based on varying rates for the hours worked by
the employees, including the pension plans mentioned above,
totaled approximately $6,176,000 and $7,098,000 for the years
ended December 31, 1996 and 1995 respectively.
The Company has a qualified Employee Stock Ownership Plan for
non-union employees under which shares of common stock are
allocated to participant employees on an annual basis, based on a
determination of the Board of Directors. There was no expense for
contributions to the plan for the years ended December 31, 1996
and 1995.
-15-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
During the year ended December 31, 1995, the Company adopted a
qualified profit-sharing plan, more commonly known as a 401k
plan, for non-union employees. The plan provides for matching
contributions by the Company as defined in the agreement and in
addition, provides for discretionary contributions annually as
determined by the Board of Directors. The Company's contributions
to the plan for the years ended December 31, 1996 and 1995
totaled approximately $68,000 and $21,000 respectively
Prior to the acquisition of Controlled Power Limited Partnership,
the partnership had a active defined-benefit pension plan which
covered substantially all it of its employees. In connection with
the acquisition, the Company curtailed the benefits of the plan
and accrued a termination liability for the unfunded amount of
the plan. In 1996, the Company terminated the plan by among
employees to transfer benefits to existing retirement plans or
purchasing annuities to completely settle the obligations.
NOTE 8. STOCK OPTIONS PLANS
The Company has a qualified stock option plan authorizing key
employees options to purchase 1,300,000 shares of common stock
reserved for the grant at exercise prices equal to the fair
market value of the common stock on the date of grant. Options
become exercisable two years after the grant and expire ten years
after grant. As permitted under generally accepted accounting
principles, grants under the plan are accounted for following the
provisions of APB Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost has been recognized for grants
made to date. Had compensation cost been determined based on the
fair value method prescribed in FASB Statement No. 123, reported
net income would have been reduced to $1,115,000 and $2,147,000
for the years ended December 31, 1996 and 1995 respectively.
In determining the pro forma amounts above, the value of each
grant is estimated at the grant date using the fair value method
prescribed in Statement No. 123, with weighted-average
assumptions for grants in 1995 and 1996 of no anticipated
dividend rates for all years and risk-free interest rates of
5.25% on expected lives of 10 years.
No options granted in 1995 and 1996 have been exercised to date
and all options granted are outstanding at December 31, 1996. The
following summarizes the number of grants and their respective
exercise prices and grant date fair values per option, for the
years ended December 31, 1996 and 1995 and the number outstanding
and exercisable at those dates:
-16-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1996
-------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -------
Outstanding, beginning of year 580,000 $3.27
Granted . . . . . . . . . 319,000 3.73
Canceled during year . . . (5,000) 3.75
Exercised during the year. - -
-------
Outstanding, end of year 894,000 3.44
=======
Exercisable at end of year . 535,000
=======
Weighted average fair value $1.46
per option for options granted =====
during the year . . . . . . .
1995
--------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
Outstanding, beginning of year 820,550 $2.94
Granted . . . . . . . . . . 163,000 3.06
Canceled during year . . . . (60,000) 2.85
Exercised during the year . (343,550) 2.64
-------
Outstanding, end of year 580,000 3.27
=======
Exercisable at end of year . . 285,000
=======
Weighted average fair value $1.20
per option for options granted =====
during the year . . . . . . . .
A further summary of stock options is as follows:
OPTIONS OUTSTANDING
---------------------
WEIGHTED
AVERAGE
REMAINING
NUMBER CONTRACTUAL
OUTSTANDING LIFE
----------- -----------
Range of exercise price,
2.875 to 3.75 894,000 7.65
OPTIONS EXERCISABLE
-------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE
PRICE EXERCISABLE PRICE
--------- ----------- ----------
Range of exercise price,
2.875 to 3.75 $3.44 535,000 $3.35
NOTE 9. BUSINESS ACQUISITION
In May 1995, the Company acquired all the partnership units of
Controlled Power Limited Partnership, an Illinois partnership,
specializing in designing, manufacturing, and selling electrical
metal-clad switchgear, power distribution systems, and bus duct
systems. The total purchase price was $5,400,000. The excess of
fair value of net assets over acquisition cost (negative
goodwill) is being amortized over 3 years by the straight-line
method. The acquisition has been accounted for as a purchase and
results of operations since the acquisition date are included in
the consolidated financial statements.
-17-
CHEMPOWER, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company self-insures for workers' compensation in certain
states. Provisions for losses under these programs are recorded
based upon the Company's estimates of the aggregate liability for
claims incurred. The Company was required in one state to fund an
interest bearing deposit of $2.2 million, which has been included
in other assets.
The Company leases certain of its facilities from affiliated
parties under agreements which expire on December 31, 1997 and
also leases a warehouse and manufacturing facility under a
noncancellable agreement which expires on August 1998. These
leases require annual rentals of $480,000 plus the payment of
operating expenses. The total minimum rental commitment at
December 31, 1996 under the leases is $586,000, which is due
$480,000 and $106,000 during the years ending December 31, 1997
and 1998 respectively. The total rental expense for the years
ended December 31, 1996 and 1995 was $503,000 and $475,000
respectively, of which $322,000 and $321,000 respectively was
paid to affiliates.
NOTE 11. CASH FLOWS INFORMATION
Cash payments for income taxes, net of refunds, for the years
ended December 31, 1996 and 1995 were $1,012,000 and $1,163,000
respectively.
The changes in assets and liabilities are stated net of the
effects of the business acquisition and the business acquisition
is stated net of cash acquired.
During the year ended December 31, 1995, the Company entered into
a mutual release and settlement agreement relating to an
agreement to repurchase common stock and options, resulting in
$220,000 forgiveness of debt.
NOTE 12. SUBSEQUENT EVENT
Subsequent to December 31, 1996, American Eco, Inc. purchased all
of the outstanding shares of the Company for cash and notes
totaling $6.20 per share or approximately $46,900,000. The
Company also redeemed all of the outstanding stock options for
$6.20 per option less the exercise price for a net amount of
approximately $2,600,000. To finance the purchase of stock and
options, the Company borrowed $9,000,000 on its line of credit
agreement. The Company also purchased all of the facilities
leased from affiliated parties for $4,500,000, which was financed
primarily through notes.
-18-
ITEM 7(B). PRO FORMA FINANCIAL INFORMATION.
INTRODUCTION TO
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma financial statements presented below
reflect the results of operations and financial position of
American Eco after giving effect to the transactions described
herein has if such transactions had occurred at December 1, 1995
for the purposes of the unaudited pro forma combined statement of
operations. The unaudited combined balance sheet statement
presents the financial position of American Eco at November 30,
1996 and Chempower at December 31, 1996 on an historical basis
and on a pro forma combined basis as if the acquisition of
Chempower had occurred on November 30, 1996.
American Eco acquired Separation and Recovery Systems, Inc., a
Nevada corporation ("SRS"), effective July 1, 1996, by acquiring
all of the issued and outstanding shares of capital stock of SRS
by exchanging 736,667 common shares of American Eco, no par value
("Common Shares"), which had a fair market value of $5.6 million.
American Eco acquired Industra Service Corporation, a British
Columbia, Canada corporation ("Industra"), effective July 22,
1996, by exchanging 1,486,997 Common Shares, which had a fair
market value of $10.7 million, for 94% of the outstanding shares
of Industra capital stock.
The SRS, Industra and Chempower acquisitions were treated as
purchases for financial reporting purposes. Under the purchase
method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair value at the date of the
acquisition.
Management believes that the assumptions used in preparing the
unaudited pro forma financial statements provide a reasonable
basis upon which to present the pro forma financial data. The
unaudited pro forma financial statements are provided for
informational purposes only and should not be construed to be
indicative of American Eco's results of operations or financial
position had the transactions described below been consummated on
or as of the dates assumed, and are not intended to project
American Eco's results of operations of its financial position
for any future period as of any future date. The pro forma
adjustments set forth in the following unaudited pro forma
financial statements are estimated and may differ from the actual
adjustments when they become known, but management anticipates no
material differences.
-19-
AMERICAN ECO CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
HISTORICAL
---------------------
AMERICAN
ECO CHEMPOWER
-------- ---------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . $ 317 $13,494(3)
Marketable securities . . . . . - 3,291
Certificate of deposit restricted 180 -
Accounts receivable trade, less 20,918 20,618(3)
allowance for doubtful accounts
Current portion of notes 6,695 -
receivable . . . . . . . . . .
Costs and estimated earnings in 3,446 3,358
excess of billings on jobs in
progress . . . . . . . . . . .
Inventory . . . . . . . . . . . 6,807 3,338
Deferred income taxes . . . . . 1,393 -
4,499 463
Prepaid expenses, other . . . . ------- -------
44,255 44,562
TOTAL CURRENT ASSETS . . . . . . ------- -------
33,238 6,180(3)
PLANT, PROPERTY AND EQUIPMENT, net ------- -------
OTHER ASSETS
Goodwill net of accumulated 18,969 595(3)
amortization . . . . . . . . .
Debenture issue costs . . . . . 97 -
Notes receivable . . . . . . . . 280 -
Other assets . . . . . . . . . . - 2,238
7,645 -
Investment . . . . . . . . . . . ------- -------
26,991 2,833
------- -------
$104,484 $53,575
TOTAL ASSETS . . . . . . . . . . . ======== =======
PRO FORMA CONSOLIDATED
ADJUSTMENTS PRO FORMA
------------ -----------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . $(12,500) $ 1,311
Marketable securities . . . . . . . 3,291
Certificate of deposit restricted . 180
Accounts receivable trade, less (1,441) 40,095
allowance for doubtful accounts . .
Current portion of notes receivable . 6,695
Costs and estimated earnings in 6,804
excess of billings on jobs in
progress . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . 10,145
Deferred income taxes . . . . . . . 1,393
4,962
Prepaid expenses, other . . . . . . -------- --------
(13,941) 74,876
TOTAL CURRENT ASSETS . . . . . . . . -------- --------
13,503 52,921
PLANT, PROPERTY AND EQUIPMENT, net . -------- --------
OTHER ASSETS
Goodwill net of accumulated 4,769 24,333
amortization . . . . . . . . . . .
Debenture issue costs . . . . . . . 97
Notes receivable . . . . . . . . . . 280
Other assets . . . . . . . . . . . . 2,238
7,645
Investment . . . . . . . . . . . . . -------- --------
4,769 34,593
-------- --------
$ 4,331 $162,390
TOTAL ASSETS . . . . . . . . . . . . . ======== ========
The accompanying notes are an integral part of this pro forma
combined financial information.
-20-
AMERICAN ECO CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
HISTORICAL
----------------------
AMERICAN
ECO CHEMPOWER
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $18,449 $13,628 (3)
Notes payable . . . . . . . . . . . . 20,399 -
Current portion of long-term debt . . 1,595 -
Current portion of obligations under
capital leases . . . . . . . . . . . 113 -
Income taxes payable . . . . . . . . . - 9
Deferred income taxes . . . . . . . . - -
Billings in excess of costs and 419 1,166
estimated earnings on jobs in progress ------- -------
TOTAL CURRENT LIABILITIES . . . . . . 40,975 14,803
------- -------
LONG TERM LIABILITIES
Long-term debt . . . . . . . . . . . . 6,618 - (3)
Obligations under capital leases . . . 102
Deferred credit, excess of acquired
interest over cost . . . . . . . . . 0 546 (3)
Deferred income tax liability . . . . 1,373 - (3)
------- ------
8,093 546
------- -------
TOTAL LIABILITIES . . . . . . . . . . 49,068 15,349
------- -------
MINORITY INTEREST . . . . . . . . . . . . 373 -
------- -------
SHAREHOLDERS' EQUITY
Share capital . . . . . . . . . . . . 39,411 776 (3)
Share capital subscribed . . . . . . . 34 -
Contributed surplus . . . . . . . . . 2,845 20,334 (3)
Retained earnings . . . . . . . . . . 12,753 17,736 (3)
Unrealized loss on available-for-sale
securities . . . . . . . . . . . . . - (10)
Treasury stock . . . . . . . . . . . . - (610)(3)
-------- -------
55,043 38,226
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY . . . . . . . . . . . . . . . . . $104,484 $53,575
======== =======
PRO FORMA CONSOLIDATED
ADJUSTMENTS PRO FORMA
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities . . . . . . . . . . . . $ (42) $32,035
Notes payable . . . . . . . . . . . . 20,399
Current portion of long-term debt . . 1,595
Current portion of obligations under
capital leases . . . . . . . . . . . 113
Income taxes payable . . . . . . . . . 9
Deferred income taxes . . . . . . . . -
Billings in excess of costs and
estimated earnings on jobs 1,585
in progress . . . . . . . . . . . . . ------- -------
TOTAL CURRENT LIABILITIES . . . . . . (42) 55,736
------- -------
LONG TERM LIABILITIES
Long-term debt . . . . . . . . . . . . 28,945 35,563
Obligations under capital leases . . . 102
Deferred credit, excess of acquired
interest over cost . . . . . . . . . (546) 0
Deferred income tax liability . . . . 4,200 5,573
------- -------
32,599 41,238
------- -------
TOTAL LIABILITIES . . . . . . . . . . 32,557 96,974
------- --------
MINORITY INTEREST . . . . . . . . . . . . - 373
------- --------
SHAREHOLDERS' EQUITY
Share capital . . . . . . . . . . . . 224 40,411
Share capital subscribed . . . . . . . 34
Contributed surplus . . . . . . . . . (11,334) 11,845
Retained earnings . . . . . . . . . . (17,736) 12,753
Unrealized loss on available-for-sale
securities . . . . . . . . . . . . . 10 0
Treasury stock . . . . . . . . . . . . 610 -
------- --------
(28,226) 65,043
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' $ 4,331 $162,390
EQUITY . . . . . . . . . . . . . . . . . ======= ========
The accompanying notes are an integral part of this pro forma
combined financial information.
-21-
AMERICAN ECO CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
HISTORICAL
----------------------------
AMERICAN
ECO SRS
-------- -----
REVENUE . . . . . . . . . . . . . $119,529 $4,585
-------- ------
COSTS AND EXPENSES
Costs of contracts, sales and
other operating expenses . . 107,819 4,299
Interest expense on
long-term debt . . . . . 1,747 241
Depreciation and amortization
expense . . . . . . . . . 2,232 1,042
Loss (gain) on sale of equipment
or available-for-sale
securities . . . . . . . (2) -
Interest income . . . . . . . . 0 -
Foreign exchange (221) (13)
loss (income) . . . . . . -------- ------
111,575 5,669
-------- ------
INCOME BEFORE PROVISION FOR INCOME
TAX . . . . . . . . . . . . . . . 7,954 (1,064)
PROVISION FOR 809 167
INCOME TAX . . . . . . . . . . . -------- ------
NET INCOME . . . . . . . . . . . $ 8,763 $ (917)
======== ======
Net Income . . . . . . . . . . $ 0.81
=======
Weighted average number of
shares used in computing 10,846,516
income per common share . . ==========
HISTORICAL
------------------------------
INDUSTRA
SERVICE CHEMPOWER
------- ---------
REVENUE . . . . . . . . . . . . . $32,365 $71,377
------- -------
COSTS AND EXPENSES
Costs of contracts, sales and
other operating expenses . . 25,449 71,293
Interest expense on
long-term debt . . . . . 186 0 (4)
Depreciation and amortization
expense . . . . . . . . . 490 0 (4)
Loss (gain) on sale of equipment
or available-for-sale
securities . . . . . . . - (1,097)
Interest income . . . . . . . . . - (758)(4)
Foreign exchange
loss (income) . . . . . . - -
------- -------
26,124 69,438
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAX . . . . . . . . . . . 6,240 1,939
PROVISION FOR (462) (668)(4)
INCOME TAX . . . . . . . . . . . ------- -------
NET INCOME . . . . . . . . . . . $ 5,779 $ 1,271
======= =======
Net Income . . . . . . . . . .
Weighted average number of
shares used in computing
income per common share . .
PRO FORMA CONSOLIDATED
ADJUSTMENTS PRO FORMA
----------- ------------
REVENUE . . . . . . . . . . . . . $ - $227,856
------ --------
COSTS AND EXPENSES
Costs of contracts, sales and
other operating expenses . . 208,959
Interest expense on
long-term debt . . . . . 2,600 4,774
Depreciation and amortization
expense . . . . . . . . . 1,323 5,087
Loss (gain) on sale of equipment
or available-for-sale
securities . . . . . . . (1,089)
Interest income . . . . . . . . 617 -
Foreign exchange
loss (income) . . . . . . (234)
------ --------
4,540 217,487
------ --------
INCOME BEFORE PROVISION FOR
INCOME TAX . . . . . . . . . . . (4,540) 10,369
PROVISION FOR 1,540 1,386
INCOME TAX . . . . . . . . . . . ------ --------
NET INCOME . . . . . . . . . . . $3,000 $ 8,983
====== ========
Net Income . . . . . . . . . . $ 0.83
========
Weighted average number of
shares used in computing 10,846,516
income per common share . . ==========
The accompanying notes are an integral part of this pro forma
combined financial information.
-22-
AMERICAN ECO CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
1. The pro forma statements have been prepared based upon the
audited financial statements of American Eco for the fiscal
year ended November 30, 1996; the [unaudited] financial
statements of SRS from December 1, 1995 through July 1,
1996, its date of acquisition; the [unaudited] financial
statements of Industra from December 1, 1995 through July
22, 1996, its date of acquisition; and the audited financial
statements of Chempower for the fiscal year ended December
31, 1996.
2. Chempower equity has been eliminated based upon Chempower's
shareholders receiving consideration of $6.20 per share for
7.8 million shares outstanding. The total cost to American
Eco was partially funded by placement by American Eco of
$15.0 million 9.5% convertible debentures due 2007 and the
principal shareholders of Chempower receiving $19.9 million
of one year notes payable.
3. The following adjustments have been made to the unaudited
pro forma combined balance sheet.
The unaudited pro forma combined balance sheet assumes that
the acquisition occurred on December 1, 1995 to give effect
to the adjustments described below.
To adjust assets and liabilities assumed to be their fair
values, determined as follows:
(a) Trade receivables adjustment represents the
adjustment to net present value of amounts
expected to be received.
(b) The resulting excess of cost over the fair
value of net assets acquired was classified
as goodwill. Deferred taxes were computed on
the difference between book and tax resulting
from the acquisition transaction.
4. The following adjustments having been made to the unaudited
proforma combined statement of operations:
(1) To reflect the increase in depreciation and
amortization expense on long-term assets acquired and
to amortize goodwill associated with the purchase.
(2) To eliminate interest income due to the decrease in
cash and marketable securities.
(3) To provide an income tax benefit on the pro forma loss
of Chempower.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
Date: June 2, 1997 AMERICAN ECO CORPORATION
(Registrant)
/s/ David L. Norris
-------------------------------
David L. Norris,
Senior Vice President and Chief
Financial Officer
-24-