UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-10621
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AMERICAN ECO CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 52-1742490
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
154 University Avenue, Toronto, Ontario M5H 3Y9
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(Address or principal executive offices) (Zip Code)
(416) 340-2727
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of July 15, 1998, there were 21,450,199 shares of Common
Shares, no par value, outstanding.
<PAGE>
AMERICAN ECO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet:
May 31, 1998 and November 30, 1997 . . . . . . 3
Consolidated Statement of Operations:
Three Months and Six Months
Ended May 31, 1998 and May 31, 1997 . . . . . 5
Consolidated Statement of Changes in
Financial Position:
Six Months Ended May 31, 1998
and May 31, 1997 . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 16
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART I
FINANCIAL INFORMATION
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States dollars in thousands)
(Unaudited)
ASSETS
------
May 31, November 30,
1998 1997
------- ------------
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . $ 37,618 $ 1,259
Accounts receivable, trade, less
allowance for doubtful accounts
of $1,509 in 1998 and $2,078 in
1997, respectively . . . . . . 53,750 50,349
Current portion of notes
receivable . . . . . . . . . . 16,102 17,757
Costs and estimated earnings in
excess of billings . . . . . . 20,922 13,145
Inventory . . . . . . . . . . . . 19,526 18,079
Deferred income tax . . . . . . . 1,338 1,133
Prepaid expenses and other
current assets . . . . . . . . 6,911 6,920
-------- --------
TOTAL CURRENT ASSETS . . . . 156,167 108,642
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net 44,403 33,023
-------- --------
OTHER ASSETS
Goodwill, net of accumulated
amortization of $2,232 in 1998
and $1,592 in 1997,
respectively . . . . . . . . . 31,357 30,484
Notes receivable . . . . . . . . 27,312 28,578
Investments . . . . . . . . . . . 15,444 9,142
Other assets . . . . . . . . . . 5,018 1,917
-------- --------
TOTAL OTHER ASSETS . . . . . 79,131 70,121
-------- --------
TOTAL ASSETS . . . . . . . . $279,701 $211,786
======== ========
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States dollars in thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------
May 31, November 30,
1998 1997
------- ------------
CURRENT LIABILITIES
Accounts payable and accrued
liabilities . . . . . . . . . . . $ 31,441 $ 28,400
Notes payable . . . . . . . . . . . -- 8,904
Current portion of long-term debt . 594 8,081
Billings in excess of costs and
estimated earnings . . . . . . . 3,023 3,350
-------- --------
TOTAL CURRENT LIABILITIES . . 35,058 48,735
-------- --------
LONG-TERM LIABILITIES
Senior notes . . . . . . . . . . . 120,000 --
Long-term debt . . . . . . . . . . 779 51,722
Deferred income tax liability . . . 3,196 3,144
Other liabilities . . . . . . . . . 814 1,086
-------- --------
TOTAL LONG-TERM LIABILITIES . 124,789 55,952
-------- --------
TOTAL LIABILITIES . . . . . . 159,847 104,687
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Share capital . . . . . . . . . . . 87,937 75,577
Contributed surplus . . . . . . . . 2,845 2,845
Cumulative foreign exchange . . . . (1,647) (1,511)
Retained earnings . . . . . . . . . 30,719 30,188
-------- --------
TOTAL SHAREHOLDERS' EQUITY . 119,854 107,099
-------- --------
TOTAL LIABILITIES & $279,701 $211,786
SHAREHOLDERS' EQUITY . . . . ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(United States dollars in thousands except per share data)
(Unaudited)
Three Months Ended
May 31,
------------------
1998 1997
---- ----
REVENUE . . . . . . . . . . . . . . . . $ 59,461 $ 56,362
---------- ----------
COSTS AND EXPENSES
Direct costs of revenue . . . . . . . 49,025 41,407
Selling, general and administrative
expenses . . . . . . . . . . . . . 8,443 8,113
Interest expense, net . . . . . . . . 910 1,448
Loss on early extinguishment of debt 2,400 --
Depreciation and amortization . . . . 1,190 956
---------- ----------
TOTAL COSTS AND EXPENSES . . . . 61,968 51,924
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
(RECOVERY OF) INCOME TAXES . . . . . (2,507) 4,438
PROVISION FOR (RECOVERY OF) (877) --
INCOME TAXES . . . . . . . . . . . . ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . $ (1,630) $ 4,438
========== ==========
Earnings (loss) per common share:
Basic . . . . . . . . . . . . . . . . $ (0.08) $ 0.30
========== ==========
Fully diluted . . . . . . . . . . . . $ (0.08) $ 0.25
========== ==========
Weighted average number of shares used
in computing earnings (loss) per common
share:
Basic . . . . . . . . . . . . . . . . 20,604,111 14,816,802
========== ==========
Fully diluted . . . . . . . . . . . . 20,604,111 20,107,079
========== ==========
Six Months Ended May
31,
----------------
1998 1997
---- ----
REVENUE . . . . . . . . . . . . . . . . $ 117,896 $ 101,599
---------- ----------
COSTS AND EXPENSES
Direct costs of revenue . . . . . . . 94,477 78,265
Selling, general and administrative 16,312 11,626
expenses . . . . . . . . . . . . .
Interest expense, net . . . . . . . . 1,670 1,864
Loss on early extinguishment of debt 2,400 --
Depreciation and amortization . . . . 2,222 1,862
---------- ----------
TOTAL COSTS AND EXPENSES . . . . 117,081 93,617
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR 815
(RECOVERY OF) INCOME TAXES . . . . . 7,982
PROVISION FOR (RECOVERY OF) 285 -
INCOME TAXES . . . . . . . . . . . . ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . $ 530 $ 7,982
========== ==========
Earnings (loss) per common share:
Basic . . . . . . . . . . . . . . . . $ 0.03 $ 0.55
========== ==========
Fully diluted . . . . . . . . . . . . $ 0.03 $ 0.47
========== ==========
Weighted average number of shares used
in computing earnings (loss) per common
share:
Basic . . . . . . . . . . . . . . . . 20,295,522 14,624,864
========== ==========
Fully diluted . . . . . . . . . . . . 20,295,522 18,716,184
========== ==========
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE SIX MONTHS ENDED MAY 31,
(United States dollars in thousands)
(Unaudited)
1998 1997
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income . . . . . . . . . . . $ 530 $ 7,982
Adjustments to reconcile net
income to net cash provided by
operating activities:
Loss on early extinguishment
of debt . . . . . . . . . . . 2,400 --
Depreciation and amortization 2,222 1,863
Change in deferred income
taxes . . . . . . . . . . . . (153) --
Change in accounts receivable (3,151) (4,630)
Change in costs and estimated
earnings in excess of billing (7,777) (4,402)
Change in inventory . . . . . (1,447) --
Change in prepaid expenses and
other current assets . . . . (2,462) --
Change in other assets . . . (1,640) (3,426)
Change in accounts payable and
accrued liabilities . . . . . 3,041 (9,583)
Change in billings in excess
of costs and estimated
earnings . . . . . . . . . . (327) 1,003
Change in deferred gain and
other liabilities . . . . . . (272) (566)
-------- --------
Net cash used in operating
activities . . . . . . . . . . . (9,036) (11,759)
-------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures . . . . . (1,570) 683
Acquisition of business, net of
cash acquired . . . . . . . . . -- (5,210)
Increase in goodwill . . . . . - (1,540)
Proceeds from notes receivable 3,022 (2,978)
Increase in investment . . . . (6,102) --
-------- --------
Net cash used in investing
activities . . . . . . . . . . . (4,650) (9,045)
-------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from senior notes . . 116,139 --
Proceeds from notes payable . . 3,500 --
Proceeds from long-term debt . 408 21,118
Principal payments on notes
payable . . . . . . . . . . . . (58,838) --
Principal payments on long-term
debt . . . . . . . . . . . . . (12,404) --
Stock issuance costs . . . . . (18) -
Issuance of common stock . . . 1,394 5,056
-------- --------
Net cash provided by financing
activities . . . . . . . . . . . 50,181 26,174
-------- --------
EFFECT OF FOREIGN EXCHANGE
FLUCTUATIONS ON CASH . . . . . . (136) --
-------- --------
NET INCREASE IN CASH . . . . . . 36,359 5,370
CASH AT BEGINNING OF PERIOD . . . 1,259 317
-------- --------
CASH AT END OF PERIOD . . . . . . $ 37,618 $ 5,687
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Such financial statements do
not include all disclosures required by generally accepted
accounting principles for annual financial statement reporting
purposes. However, there has been no material change in the
information disclosed in the Company's annual consolidated
financial statements dated November 30, 1997, except as disclosed
herein. Accordingly, the information contained herein should be
read in conjunction with such annual consolidated financial
statements and related disclosures. The accompanying financial
statements reflect, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods presented.
Results of operations for the three and six months ended May 31,
1998 are not necessarily indicative of results expected for an
entire year. The November 30, 1997 balance sheet was derived
from the audited financial statements but does not include all
disclosures required by generally accepted accounting principles.
NOTE 1. INVENTORY
The components of inventory at May 31, 1998 and November 30, 1997
are as follows:
May 31, 1998 November 30, 1997
------------ -----------------
Raw Materials $ 7,841 $ 6,358
Consumable Supplies 3,250 3,345
Finished Goods 8,435 8,376
------- -------
$19,526 $18,079
======= =======
NOTE 2. INCOME TAXES
The accompanying consolidated financial statements reflect no
provision for income taxes for the period ended May 31, 1997 due
to the application of unrecorded net operating loss carry
forwards.
NOTE 3. DOMINION BRIDGE CORPORATION
On February 20, 1998, the Company and Dominion Bridge Corporation
("Dominion Bridge") entered into a non-binding Letter of Intent
which provided for (a) the purchase of $5.0 million of Dominion
Bridge common stock and warrants to purchase Dominion Bridge
common stock by the Company, (b) a working capital loan facility
of up to $25.0 million to be provided by the Company to Dominion
Bridge, (c) the engagement of the Company to provide certain
management services to Dominion Bridge, and (d) the acquisition
by the Company of the business and assets of Dominion Bridge.
The purchase of $5.0 million dollars of Dominion Bridge stock was
consummated on February 20, 1998. The amount is included in the
accompanying consolidated balance sheet under the caption
"Investments". Michael E. McGinnis, Chairman and Chief Executive
Officer of the Company, is also a member of the Board of
Directors of Dominion Bridge.
On March 23, 1998, the Company announced that it had withdrawn
the Letter of Intent and terminated negotiations for any further
transactions due to complexities of the transaction and the time
constraints for its completion. The Company subsequently entered
into two joint ventures with subsidiaries of Dominion Bridge to
perform certain contract work in Canada.
NOTE 4. US INDUSTRIAL SERVICES, INC. (FORMERLY EIF HOLDINGS,
INC.)
The Company has loaned money to US Industrial Services, Inc., a
Delaware corporation ("US Industrial") (formerly, EIF Holdings,
Inc., a Hawaii corporation), to a maximum amount of
$20.0 million. On February 18, 1998, the Company extended the
maturity date of this line of credit to August 18, 1998. At
May 31, 1998, the amount due from US Industrial was
$17.9 million.
8
<PAGE>
On July 15, 1998, the Company announced that it has exercised an
option to convert $1 million of this indebtedness into one
million common shares of US Industrial. In addition, the Company
has signed an agreement in principle to sell the remaining
indebtedness to an unrelated third party for $5 million in cash
plus a note for the remaining balance payable on January 29,
1999.
NOTE 5. LITIGATION
At May 31, 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.
NOTE 6. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
Canada ("Canadian Basis") which differ in certain respects from
those principles and practices that the Company would have
followed had its consolidated financial statements been prepared
in accordance with accounting practices generally accepted in the
United States ("U.S. Basis").
During May 1998, the Company completed the sale of $120 million
of 9 5/8% Senior Notes. Upon completion of this sale, the
Company extinguished its existing bank indebtedness resulting in
a charge of $2.4 million. Under Canadian Basis, this charge is
included in pretax earnings. Under U.S. Basis, however, this
charge is presented as an extraordinary item, net of tax.
On February 20, 1998, the Company purchased 1,923,077 shares of
Dominion Bridge common stock for $5.0 million. Under Canadian
Basis, this investment is accounted for as a long-term investment
and the Company has determined that an other than temporary
decline in value has not occurred in this investment as of May
31, 1998. Under U.S. Basis, the Company's investment in Dominion
Bridge would be accounted for pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115,
the Company's investment in Dominion Bridge would be classified
as an available-for-sale investment which would require the
Company to carry the investment at its market value of $2.4
million at May 31, 1998 with the difference of $2.6 million from
the Company's carrying value presented as an unrealized loss on
marketable securities in shareholders' equity.
In May 1998, the Company began a joint venture with a subsidiary
of Dominion Bridge. Under Canadian Basis, this joint venture is
accounted for using the proportionate consolidation method.
Under U.S. Basis, the investment in the joint venture is
accounted for using the equity method. While there is no impact
on net income, under U.S. Basis the Company would not have
recorded the revenues and cost of revenues of $1,029,000 and
$871,000, respectively and instead would have recorded its
proportionate interest in the net income of the joint venture.
Under U.S. Basis, utilization of pre-acquisition net operating
loss carryforwards should be credited to goodwill rather than as
a reduction of the income tax provision, as in practice under
Canadian Basis. Therefore, under U.S. Basis, the goodwill and
income tax provision would have been adjusted by approximately
$126,000 and $24,000 for the three and six months ended May 31,
1998, respectively, and by $888,000 and $1,603,000 for the three
and six months ended May 31, 1997, respectively.
During the six months ended May 31, 1997, the Company sold $19
million aggregate principal amount of convertible debentures (the
"Debentures"). Under Canadian Basis, the total amount allocated
to the conversion feature of approximately $3 million was being
charged to interest expense over ten years. Had the U.S. Basis
been followed, the $3 million would have been charged to interest
expense immediately as the conversion feature of the Debentures
were "in the money" and the Debentures were immediately
convertible.
During the first quarter of 1997, the Company commenced
accounting for its investment in US Industrial pursuant to the
equity method of accounting. Under Canadian Basis, the change is
accounted for prospectively. Under U.S. Basis, however, this
change is accounted for retroactively to when the Company first
invested in US Industrial, resulting in an additional charge of
approximately $1.5 million during the first six months of fiscal
year 1997.
8
<PAGE>
The following is a reconciliation of revenues, pretax income and
net income under Canadian Basis to U.S. Basis.
Canadian Basis
3 months 6 months
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues . . . . . . $ 59,461 $56,362 $117,896 $101,599
Pretax income . . . . (2,507) 4,438 815 7,982
Income tax provision (877) -- 285 --
Income (loss) before
extraordinary item (1,630) 4,438 530 7,982
Extraordinary loss on
extinguishment of
debt . . . . . . . -- -- -- --
Net income (loss) . . $ (1,630) $ 4,438 $ 530 $ 7,982
U.S. Basis
3 months 6 months
-------------------- -------------------
1998 1997 1998 1997
-------- -------- --------- --------
Revenues . . . . . . $ 58,432 $ 56,362 $116,867 $101,599
Pretax income . . . . (107) 4,438 3,214 3,483
Income tax provision (43) 888 1,269 1,603
Income (loss) before
extraordinary item (64) 3,550 1,945 1,880
Extraordinary loss on
extinguishment of
debt . . . . . . . (1,440) -- (1,440) --
Net income (loss) . . $ (1,504) $ 3,550 $ 505 $ 1,880
Under U.S. Basis, basic and diluted earnings per share are
calculated using the treasury stock method. The calculation of
earnings per share under U.S. Basis is as follows:
--------------------- --------------------
3 months 6 months
1998 1997 1998 1997
---- ---- ---- ----
Net income . . . . . $(1,504) $3,550 $ 505 $1,880
Net income per share
Basic . . . . . ($0.07) $0.24 ($0.02) $0.13
Diluted . . . . ($0.07) $0.23 ($0.02) $0.12
Weighted average
number of shares
Basic . . . . . 20,604,111 14,816,802 20,295,522 14,624,864
Diluted . . . . 20,604,111 15,273,277 21,348,624 15,105,381
NOTE 7. SENIOR NOTES
In May 1998, the Company completed placement of $120,000,000
of 9-5/8% Senior Notes that mature May 15, 2008. Interest on the
notes is payable semi-annually in arrears on May 15, and November
15 of each year, commencing November 15, 1998. The Notes are
redeemable at the option of the Company, in whole or in part, at
any time on or after May 15, 2003, at specified redemption
prices.
The Notes are senior general unsecured obligations of the
Company, ranking pari passu in right of payment with all other
senior indebtedness of the Company and senior in right of payment
to any subordinated indebtedness of the Company incurred in the
future. The Indenture contains certain covenants that, among
other things, will limit the ability of the Company and certain
of its subsidiaries to incur additional indebtedness, pay
dividends or make other distributions, purchase equity interest
or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, issue or sell capital stock
of subsidiaries, engage in sale-and-leaseback transactions, sell
assets or enter into certain mergers or consolidations.
The Company used proceeds of $71.2 million to repay credit
facilities, other outstanding indebtedness and accrued interest
associated with such indebtedness. The remainder of the net
proceeds will be used for general corporate purposes, funding of
joint venture start-up costs and future acquisitions. As a
result of the refinancing, the Company recorded a $2.4 million
charge for the early extinguishment of debt, primarily related to
the prepaid financing costs of the bank debt.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The results of operations for the six months ended May 31,
1998 are not necessarily indicative of the results for future
periods. The following discussion should be read in conjunction
with the unaudited financial statements included herein and the
notes thereto, and with the audited financial statements and
notes thereto for the year ended November 30, 1997.
OVERVIEW
The Company entered into its current lines of business in
November 1992 when it acquired Eco Environmental, Inc. ("Eco
Environmental"), and it has continued to expand its service
capabilities, geographic presence and customer base primarily by
acquiring other companies. The Company acquired nine businesses
between fiscal 1993 and fiscal 1997, and its revenues grew from
$7.6 million in fiscal 1993 to $220.4 million in fiscal 1997
primarily as a result of such acquisitions. In fiscal 1997, the
Company accelerated its acquisition program by adding Chempower,
Inc., an Ohio corporation ("Chempower") and Specialty Management
Group, Inc., d.b.a/CCG, a Texas corporation ("CCG"), while
disposing of Eco Environmental and Environmental Evolutions, Inc.
("Environmental Evolutions"). Effective as of May 31, 1998, the
Company acquired the assets of the Pictou shipyard in Nova
Scotia, Canada. In connection with such acquisition, the Company
issued 806,172 common shares.
The Company intends to continue to expand its business
through the acquisition of companies in the industrial support
and specialty fabrication businesses. The Company's acquisition
strategy entails the potential risks inherent in assessing the
value, strengths, weaknesses, contingent liabilities and
potential profitability of acquisition candidates and in
integrating the operations of acquired companies. There can be
no assurance that acquisition opportunities will continue to be
available, that the Company will have access to the capital
required to finance potential acquisitions or that any business
acquired will be integrated successfully or prove profitable.
The Company's acquisition strategy has led to rapid growth
in the Company's operations over the past five fiscal years. The
Company's operations generally are managed at each of its
subsidiaries, but core administrative, financing and strategic
planning functions are performed at the holding company level.
This rapid growth has increased, and may continue to increase,
the operation complexity of the Company as well as the level and
responsibility for both existing and new management personnel at
the holding company level. The Company's ability to manage its
expansion effectively will require it to retain new management
personnel at the holding company level and to continue to
implement and improve its operational and financial systems. The
Company's inability to effectively manage its expansion could
have a materially adverse effect on its results of operations and
financial position.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's revenues from its industrial and specialty
fabrication segments may be affected by the timing of scheduled
outages at its industrial customers' facilities and by weather
conditions with respect to projects conducted outdoors.
Historically, the Company has experienced decreased activity
during the first quarter of a fiscal year due to slower plant
turnaround activity in the refinery and power generating
industries in the northern United States and Canada. The effects
of seasonality may be offset by the timing of large individual
contracts, particularly if all or a substantial portion of the
contracts fall within a one-to-two quarter period. Accordingly,
the Company's quarterly results may fluctuate and the results of
one fiscal quarter should not be deemed to be representative of
the results of any other quarter or for the full fiscal year.
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 contracts can extend over more than
one accounting period, revisions in estimated total costs and
profits during the course of work are reflected during the period
in which the facts requiring the revisions become known. Losses
on contracts are charged to income in the period in which such
losses are first determined. The percentage-of-completion method
of accounting can result in the recognition of either costs and
estimated profits in excess of billings, or billings in excess of
costs and estimated profits on uncompleted contracts, which are
classified as current assets and liabilities, respectively, in
the Company's balance sheet.
10
<PAGE>
RESULTS OF OPERATIONS
Three months ended May 31, 1998 compared to three months
ended May 31, 1997.
Revenues
--------
Revenue during the three months ended May 31, 1998 increased
approximately 5.5% or $3.1 million to $59.5 million from $56.4
million during the same period in 1997. The $3.1 million
increase in revenue is comprised of:
Acquisitions in 1997 subsequent
to Second Quarter 1997 $ 4.4
Disposition in 1997 of
environmental subsidiaries (1.3)
-----
$ 3.1
-----
The acquisition in 1997 was the CCG subsidiary which was
acquired on September 1, 1997. The Company's environmental
subsidiaries, ECO Environmental and Environmental Evolutions were
included in the 1997 operations until their disposal date of
August 31, 1997. Revenues for the businesses that were included
in the consolidated financial statements for both periods were
essentially unchanged from the prior year. There was, however, a
shift in the revenue mix year between year as the 1997 quarter
included a higher percentage of specialty fabrication revenues
whereas the 1998 quarter reflected a higher percentage of
maintenance and engineering revenues. The 1997 quarter
benefitted from $5 million of construction services related to
the MART project, a state of the art thermal treatment facility
which was completed in 1997.
Operating Expenses
------------------
The Company's direct costs of revenue increased 18.6% to $49
million in the Second Quarter of 1998 compared to $41.4 million
for the comparable period in 1997. The increased costs are
partially attributable to the revenue growth in the period, but
the more significant increase in costs is attributable to the
shift in revenues towards maintenance and engineering activities
as compared to the fabrication activity in the prior year.
Selling, general and administrative expenses increased 4% to
$8.4 million compared to $8.1 million for the Second Quarter of
1997. Many of these costs are either fixed or semi-variable, and
the increases represent some modest increase in staff over the
prior year in addition to the selling, general and administrative
expenses of the acquisitions net of dispositions.
During the quarter, the Company issued $120 million of 9
5/8% ten year Senior Notes through a private placement. A
portion of the proceeds of the notes were used to pay off
existing bank debt and notes payable. As a result of the
refinancing, the Company recorded a charge of $2.4 million as a
loss on early extinguishment of debt, primarily related to the
prepaid financing costs of the bank debt.
Income Taxes
------------
The Company recorded an income tax benefit of $877 thousand
for the three months ended May 31, 1998 in recognition of the tax
benefit associated with the pre tax loss of $2.5 million for the
period. In the corresponding period of 1997, the Company
reflected pre tax income of $4.4 million but recorded no tax
provision, as the Company applied unrecorded net operating loss
carryforwards to its pre tax income. The loss carryfowards were
substantially utilized in fiscal 1997.
Six months ended May 31, 1998 compared to six months ended
May 31, 1997.
Revenues
--------
Revenues during the six months ended May 31, 1998 increased
approximately 16% or $16.3 million to $117.9 million from $101.6
million during the same period in 1997. The $16.3 million
increase in revenue is comprised of:
11
<PAGE>
Acquisitions in 1997 subsequent
to First Quarter 1997 $ 23.9
Disposition in 1997 of
environmental subsidiaries (3.8)
Reduction in revenue from
existing businesses (3.8)
------
$ 16.3
------
The acquisitions subsequent to the First Quarter of 1997
represent the Company's Chempower and CCG subsidiaries which were
acquired on March 1, 1997 and September 1, 1997, respectively.
The Company's environmental subsidiaries, Eco Environmental and
Environmental Evolutions were included in the 1997 operations
until their disposal date of August 31, 1997. The remaining
businesses were essentially flat for the six month period. There
was some shift of revenue from specialty fabrication to
maintenance and engineering from 1997 to 1998. The 1997 quarter
benefitted from $5 million of construction services related to
the MART project which was completed in 1997.
Operating Expenses
------------------
The Company's direct costs of revenue increased 20.7% to
$94.5 million for the six months ended May 31, 1998 compared to
$78.3 million during the same period of 1997. The increased
costs are attributable to the shift in revenue to lower margin
activities in the maintenance and engineering area versus the
higher margin specialty fabrication activity.
Selling, general and administrative expenses increased 40.3
% to $16.3 million compared to $11.6 million for the six months
ended May 31, 1997. Of the total increase of $4.7 million, $2.9
million represented the selling, general, and administrative
expenses added at Chempower and CCG which were acquired
subsequent to February 28, 1997. Also included in the six months
1998 figure is approximately $308 thousand of costs related to
the unsuccessful acquisition of Dominion Bridge.
In May 1998, the Company issued $120 million of 9 5/8% ten
year Senior Notes through a private placement. A portion of the
proceeds of the notes were used to pay off existing bank debt and
notes payable. As a result of the refinancing, the Company
recorded a charge of $2.4 million as a loss on early
extinguishment of debt, primarily related to the prepaid
financing costs of the bank debt.
Income Taxes
------------
In 1997 the Company recorded no income tax provision for the
six months ended May 31, 1997 as the Company applied unrecorded
net operating loss carryforwards to its pre tax income. The loss
carryforwards were substantially utilized in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing capital resources consist of cash on
hand. The Company's cash increased by $36.4 million from
November 30, 1997 to $37.6 million at May 31, 1998. The
significant increase in cash was generated by a refinancing of
debt which took place in May 1998. The Company issued $120
million of 9 5/8% ten year Senior Notes in a private placement
transaction. The net proceeds, after all expenses, aggregated
approximately $115.7 million. These proceeds were utilized to
retire existing bank debt and notes payable of approximately
$71.6 million. The remainder of the proceeds were used to fund
working capital needs or remain as available cash to the Company.
For the six months ended May 31, 1998 the Company utilized
$9.0 million of cash to fund operating activities versus $11.8
million for the like period in 1997. Increases in costs and
estimated earnings in excess of billing, inventory, and prepaid
expenses represented the primary variances. Several large
contracts in the current period do not permit billing by the
Company until milestones are met on the projects. Billing on
these contracts is expected to be accomplished in the third and
fourth quarters of 1998.
Cash used in investing activities was $4.7 million in 1998
versus $9.0 million in 1997. In 1998, the primary use of cash
was for capital spending of $1.6 million and an increase in
investment of $6.1 million, primarily the $5.0 million investment
in Dominion Bridge.
12
<PAGE>
Cash flow from financing activity was $50 million in the six
months ended May 31, 1998 compared to $26 million for the six
months ended May 31, 1997. The proceeds from the senior note
issuance were used to repay bank debt and notes payable in 1998.
The Company's cash requirements consist of working capital
needs, obligations under its leases and senior notes and the
funding of potential acquisitions. Management believes that the
Company's cash balances are sufficient to meet its anticipated
cash requirements for the foreseeable future.
IMPACT OF THE YEAR 2000 PROBLEM
The Year 2000 Problem is the result of computer programs
being written using two digits rather than four digits to define
the applicable year. Any of the Company's computer programs that
have 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, management determined that the
Company 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 Problem can be
mitigated. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 Problem
could have a material impact on the operations of the Company.
Based on presently available information, the Company has
initiated formal communication with all of its significant
suppliers and large customers to determine the extent to which
the Company is vulnerable to the failure of these third parties
to solve their own Year 2000 Problems. However, there can be no
guarantee that the systems of other companies on which the
Company's system rely will be timely converted, or that a failure
to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material
adverse effect on the Company.
The Company 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 remaining cost of the Year 2000 project is estimated at
$1.5 million and is being funded through operating cash flow of
the Company. Of the total project cost, approximately $1.0
million is attributable to the purchase of new software, which
will be capitalized. The remaining $500,000 will be expensed as
incurred over the next two years and is not expected to have a
material effect on the results of operations of the Company. To
date, the Company has not incurred any expense for its Year 2000
project.
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. These estimates were derived by
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.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement
in its Report on Form 10-Q to make applicable and take advantage
of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements
made by, or on behalf of, the Company. Forward-looking
statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying
assumptions and other statements which are other than statements
of historical facts. Certain statements contained herein are
forward looking statements and accordingly involve risks and
uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking
statements. The Company's expectations, beliefs and projects are
expressed in good faith and are believed by the Company to have a
reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the
Company's records and other data available from third parties,
13
<PAGE>
but there can be no assurance that management's expectations,
beliefs or projections will result or 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,
economic conditions that could affect demand for the Company's
services, the ability of the Company to complete projects
profitably and severe weather conditions that could delay
projects. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances
after the date hereof.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the Second Quarter the Company issued 50,000 common
shares upon the exercise of warrants which had been issued by the
Company in conjunction with private placements. Also during the
Second Quarter the Company issued an aggregate of 956,172 common
shares in connection with acquisitions. The issuances of these
common shares were exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act") by virtue of
Section 4(2) thereof.
During the Second Quarter, the Company issued 60,489 common
shares for services and payments, and an aggregate of 55,600
common shares upon the exercise of options granted pursuant to
the Company's Stock Option Plan. The issuances of these common
shares were exempt from registration under the Securities Act by
virtue of Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1998, the Company held its Annual and Special
Meeting of Shareholders (the "Meeting").
The following persons were elected directors at the Meeting:
Barry Cracower
William A. Dimma
Hon. Donald R. Getty
Michael E. McGinnis
John C. Pennie
Francis J. Sorg
At the Meeting, in addition to the election of directors, the
shareholders (1) appointed PricewaterhouseCoopers LLP (formerly,
Coopers & Lybrand L.L.P.) as auditors for fiscal 1998, (2)
approved a resolution amending the Company's Stock Option Plan,
(3) approved the adoption of a shareholder rights plan, and (4)
approved a resolution authorizing the Company to enter into
private placement agreements during the twelve month period
following the Meeting.
The voting by shareholders at the Meeting was as follows:
FOR AGAINST WITHHELD
--- ------- --------
Elect directors 15,090,630 - 121,025
Appoint Auditors 14,963,413 - 113,687
Amend Option Plan 14,344,257 729,149 116,126
Approve Rights Plan 14,558,324 539,755 97,076
Authorize Placements 14,409,855 696,164 106,821
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K for an event of April 9, 1998
reporting under Item 5 thereof the adoption of a shareholder
rights plan and the issuance, on April 20, 1998, of one common
share purchase right for each outstanding common share as of such
date.
The Company filed a Form 8-K for an event of May 21, 1998
reporting under Item 5 thereof the issuance and sale of US
$120,000,000 of 9-5/8% Senior Notes due 2008 in a transaction
exempt from the registration requirements of the Securities Act.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
AMERICAN ECO CORPORATION
(Registrant)
Dated: July 15, 1998 /s/ Michael E. McGinnis
-------------------------
Michael E. McGinnis
Chief Executive Officer
Dated: July 15, 1998 /s/ Bruce D. Tobecksen
-------------------------
Bruce D. Tobecksen
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AMERICAN ECO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED MAY 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 37,618
<SECURITIES> 0
<RECEIVABLES> 55,259
<ALLOWANCES> (1,509)
<INVENTORY> 19,526
<CURRENT-ASSETS> 156,167
<PP&E> 56,141
<DEPRECIATION> (11,738)
<TOTAL-ASSETS> 279,101
<CURRENT-LIABILITIES> 35,058
<BONDS> 0
0
0
<COMMON> 87,937
<OTHER-SE> 31,917
<TOTAL-LIABILITY-AND-EQUITY> 279,701
<SALES> 117,896
<TOTAL-REVENUES> 117,896
<CGS> 94,477
<TOTAL-COSTS> 94,477
<OTHER-EXPENSES> 20,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,670
<INCOME-PRETAX> 815
<INCOME-TAX> 285
<INCOME-CONTINUING> 530
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<NET-INCOME> 530
<EPS-PRIMARY> .03
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