<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999
---------------
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: 001-10621
---------
AMERICAN ECO CORPORATION
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA 52-1742490
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
154 UNIVERSITY AVENUE, TORONTO, ONTARIO M5H 3Y9
---------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(416) 340-2727
-------------------------------------------------------
(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 August 31, 1999, there were 21,960,180 shares of Common Shares, no par
value, outstanding.
<PAGE> 2
AMERICAN ECO CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet:
August 31, 1999 and November 30, 1998................................ 3
Consolidated Statement of Income:
Three Months and Nine Months Ended August 31, 1999
and August 31, 1998.................................................. 5
Consolidated Statement of Changes in Financial Position:
Nine Months Ended August 31, 1999
and August 31, 1998.................................................. 6
Notes to Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 11
PART II. OTHER INFORMATION
Item 1. Litigation............................................................ 17
Item 2. Changes in Securities................................................. 17
Item 6. Exhibits and Reports on Form 8-K...................................... 17
Signatures.................................................................... 18
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
PART I
FINANCIAL INFORMATION
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................... $ 13,584 $ 21,821
Accounts receivable, trade, less allowance for
doubtful accounts of $1,423 in 1999 and $1,751 in
1998, respectively ................................... 66,147 50,793
Current portion of notes receivables ................... 6,597 5,080
Costs and estimated earnings in excess of billings ..... 14,988 11,202
Inventory .............................................. 19,081 23,080
Refundable income taxes ................................ 2,419 2,419
Deferred income tax .................................... 15,990 9,464
Prepaid expenses and other current assets .............. 9,198 4,427
---------- ----------
TOTAL CURRENT ASSETS .................................. 148,004 128,286
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET .............................. 56,287 54,835
---------- ----------
OTHER ASSETS
Goodwill, net of accumulated amortization of
$3,558 in 1999 and $1,754 in 1998, respectively ...... 32,434 30,767
Notes receivable ....................................... 23,280 17,504
Investments ............................................ 4,458 13,855
Other assets ........................................... 5,397 5,136
---------- ----------
TOTAL OTHER ASSETS .................................... 65,569 67,262
---------- ----------
TOTAL ASSETS .......................................... $ 269,860 $ 250,383
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET
(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
----------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............... $ 31,429 $ 32,584
Current portion of long-term debt ...................... 8,193 630
Billings in excess of costs and estimated earnings ..... 6,161 3,834
----------- -----------
TOTAL CURRENT LIABILITIES ............................. 45,783 37,048
----------- -----------
LONG TERM LIABILITIES
Senior notes ........................................... 117,580 118,000
Long-term debt ......................................... 5,853 2,689
Line of credit ......................................... 12,000 --
Deferred income tax liability .......................... -- 1,334
Minority interest ...................................... 3,027 --
Other liabilities ...................................... 620 1,074
----------- -----------
TOTAL LONG-TERM LIABILITIES ........................... 139,080 123,097
----------- -----------
TOTAL LIABILITIES ..................................... 184,863 160,145
----------- -----------
SHAREHOLDERS' EQUITY
Share capital .......................................... 90,450 89,854
Contributed surplus .................................... 2,845 2,845
Cumulative foreign exchange ............................ 80 (2,470)
Retained earnings ...................................... (8,378) 9
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................ 84,997 90,238
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............... $ 269,860 $ 250,383
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND NINE MONTHS ENDED AUGUST 31
(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended August 31 Ended August 31
------------------------------------ ------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE ..................................... $ 66,410 $ 58,755 $ 199,708 $ 165,068
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES
Direct costs of revenue .................... 57,465 43,671 169,145 129,447
Selling, general, and administrative
expenses ................................. 6,784 6,768 18,535 19,441
Interest expense, net ...................... 2,087 1,535 6,244 3,206
Loss on early extinguishment of debt ....... -- -- -- 2,400
Litigation, severance and other
charges .................................. 10,000 -- 10,000 --
Depreciation and amortization .............. 1,188 1,042 3,428 3,127
--------------- --------------- --------------- ---------------
Total operating costs ...................... 77,524 53,016 207,352 157,621
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR
(RECOVERY OF) INCOME TAXES .................. (11,114) 5,739 (7,644) 7,447
PROVISION FOR (RECOVERY OF) INCOME TAXES..... (3,774) 1,951 (2,594) 2,549
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ................................ (7,340) 3,788 (5,050) 4,898
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX RECOVERY .................. (769) (618) (3,337) (1,198)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) ........................... $ (8,109) $ 3,170 $ (8,387) $ 3,700
=============== =============== =============== ===============
Basic earnings (loss) per common share
Earnings (loss) from continuing
operations ............................... $ (0.33) $ 0.18 $ (0.23) $ 0.24
Loss from discontinued operations .......... (0.04) (0.03) (0.16) (0.06)
--------------- --------------- --------------- ---------------
Net earnings (loss) per common share ....... $ (0.37) $ 0.15 $ (0.39) $ 0.18
=============== =============== =============== ===============
Fully diluted earnings (loss) per
common share
Earnings (loss) from continuing
operations ............................... $ (0.33) $ 0.15 $ (0.23) $ 0.20
Loss from discontinued operations .......... (0.04) (0.02) (0.16) (0.05)
--------------- --------------- --------------- ---------------
Net earnings (loss) per common share ....... $ (0.37) $ 0.13 $ (0.39) $ 0.15
=============== =============== =============== ===============
Weighted average number of shares used in
computing earnings per common share
Basic ...................................... 21,900,396 21,494,654 21,729,886 20,751,435
=============== =============== =============== ===============
Fully diluted .............................. 21,900,396 25,755,885 21,729,886 24,821,048
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
5
<PAGE> 6
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE NINE MONTHS ENDED AUGUST 31
(UNITED STATES DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ (8,387) $ 3,700
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on early extinguishment of debt ............................... -- 2,400
Depreciation and amortization ...................................... 3,427 3,334
Change in deferred income taxes .................................... (4,436) (59)
Change in accounts receivable ...................................... (8,271) (3,053)
Change in notes receivable ......................................... (264) --
Change in costs and estimated earnings in excess of billings ....... (3,309) (3,430)
Change in inventory ................................................ 4,074 (2,415)
Change in prepaid expenses ......................................... (2,575) (4,460)
Change in other assets ............................................. 171 (4,014)
Change in accounts payable ......................................... (7,682) (930)
Change in billings in excess of costs and estimated earnings ....... (1,154) (458)
Change in other long-term liabilities .............................. (454) (246)
----------- -----------
Net cash used in operating activities ..................................... (28,860) (9,631)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (2,785) (1,893)
Acquisition of business, net of cash received ...................... 820 --
Increase in minority interest ...................................... (346) --
Proceeds from repayment of notes receivable ........................ -- 7,459
Increase in investment ............................................. (897) (25,638)
----------- -----------
Net cash used in investing activities ..................................... (3,208) (20,072)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes ......................................... -- 116,139
Proceeds from notes payable and long-term debt ..................... 1,624 3,908
Proceeds from line of credit ....................................... 19,748 --
Principal payments on notes payable ................................ -- (58,927)
Principal payments on long-term debt ............................... (47) (12,404)
Stock issuance costs ............................................... (44) (28)
Issuance of common stock ........................................... -- 2,685
----------- -----------
Net cash provided by financing activities ................................. 21,281 51,373
----------- -----------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON
CASH....................................................................... 2,550 (3,017)
----------- -----------
NET INCREASE (DECREASE) IN CASH ........................................... (8,237) 18,653
CASH AT BEGINNING OF PERIOD ............................................... 21,821 1,259
----------- -----------
CASH AT END OF PERIOD ..................................................... $ 13,584 $ 19,912
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
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, 1998, 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 nine months ended August 31,
1999 are not necessarily indicative of results expected for an entire year. The
November 30, 1998 balance sheet was derived from the audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries; Chempower, Inc., Specialty Management
Group, Inc. /d/b/a CCG, Industra Service Corporation ("Industra"), MM Industra,
Ltd. ("MMI"), Separation and Recovery Systems, Inc. ("SRS"), The Turner Group,
and United Eco Systems, Inc. Since November 1998, the Company has owned
approximately 81.9% of the outstanding common stock of U.S. Industrial Services,
Inc. (USIS). The operating results of USIS are included in the consolidated
financial statements of the Company.
Recognition of Revenue: The Company recognizes revenues and profits on 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. The
percentage-of-completion method of accounting can result in the recognition of
either costs and estimated profits in excess of billings, or billings in excess
of costs and estimated profits on uncompleted contracts, which are classified as
current assets and liabilities, respectively, in the Company's balance sheet.
Foreign Exchange: The functional currency for the Company is the U.S. dollar,
with the exception of American Eco Corporation, Industra, and MMI whose
functional currency is the Canadian dollar. The translation of the Canadian
dollar into U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. Gains and
losses resulting from the translation of American Eco Corporation, Industra, and
MMI's financial statements are classified as a component of shareholders'
equity.
Reclassifications: Certain reclassifications have been made to the prior period
financial statements to conform with the current period presentation.
NOTE 2. INVENTORY
The components of inventory at August 31, 1999 and November 30, 1998 are as
follows:
<TABLE>
<CAPTION>
August 31, 1999 November 30, 1998
--------------- -----------------
<S> <C> <C>
Raw Materials $ 5,940 $ 8,388
Consumable Supplies 3,139 4,207
Finished Goods 10,002 10,485
---------- ----------
$ 19,081 $ 23,080
========== ==========
</TABLE>
7
<PAGE> 8
NOTE 3. U.S. INDUSTRIAL SERVICES, INC.
As of November 1998, the Company owns approximately 81.9% of the outstanding
common stock of USIS. Accordingly, the operating results of USIS are included in
the consolidated financial statements of the Company.
In November 1998, USIS sold the assets of J. L. Manta, Inc. 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. In June 1999, USIS announced a Letter of Intent to
sell its P.W. Stephens, St. Louis subsidiary.
NOTE 4. LINE OF CREDIT
In May 1999, the Company and its principal subsidiaries entered into a Credit
Agreement with General Electric Capital Corporation as lender and agent for
additional lenders. The Credit Agreement provides for a revolving credit
facility (the "Revolver") of up to $30 million to be used for working capital
and other general corporate purposes and is based upon certain eligible accounts
receivable. The Revolver has a two-year term, subject to two automatic one year
extensions at the mutual discretion of the Company and the lenders. Borrowings
under the Revolver will accrue interest at a rate equal to 2% above the
commercial paper rate.
NOTE 5. DISCONTINUED OPERATIONS
During the second quarter of 1999, management adopted plans to discontinue the
switchgear operations of Chempower and the engineering business of Industra. The
switchgear business was sold on June 1, 1999 and the Company expects to divest
the engineering business within the next six months.
Sales from discontinued operations were $2,230 and $5,847 for the three months
ended August 31, 1999 and 1998 and $11,142 and $17,430 for the nine months ended
August 31, 1999 and 1998, respectively.
Losses from discontinued operations for the nine months ended August 31, 1999
and 1998 were $3,337 (net of $1,719 income tax benefit) and $1,198 (net of $643
income tax benefit), respectively.
Interest expense has been allocated based on intercompany debt/asset balances.
After-tax interest expense of $557 has been included in the loss from
discontinued operations. Discontinued operations have not been separated in the
consolidated statement of cash flows; therefore, amounts for certain captions
will not agree with the respective consolidated statement of operations.
NOTE 6. LITIGATION
At August 31, 1999, 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, other than disclosed below, should
not have a material adverse affect upon the Company's financial position,
results of operations or cash flows.
The United States Attorney for the Middle District of Louisiana (the "US
Attorney") advised Advanced Coil Industries ("ACI") a division of Chempower,
Inc., a subsidiary of the Company acquired in March 1997, that ACI and several
others are the subject of a Federal criminal grand jury investigation in
connection with possible improper markings on coated steel which had occurred in
1994 and 1995 prior to the
8
<PAGE> 9
Company's acquisition of Chempower. The U.S. Attorney and ACI have agreed that
in the event criminal charges are filed, no criminal charges will be filed
against ACI until on or after March 5, 2000. The U.S. Attorney has also advised
ACI that a civil suit has been filed under seal in Baton Rouge, Louisiana in
which ACI is one of several names or potential defendants alleged to have
violated the Federal False Claims Act. As the civil suit was filed under seal
and is unavailable for ACI's review, the Company has not had the opportunity to
review the factual basis of the alleged claim nor the method by which damages
might be calculated. The Company recently received a report from the U.S.
Attorney setting forth its determination of the possible civil damages by all
parties, including ACI. The Company is reviewing the report with respect to the
methodology and the extent of involvement of ACI. However, if a potential action
by the U.S. Attorney and/or under the civil action against ACI is successful, it
could be material to the financial position of the Company.
On July 28, 1999, the Company and MM Industra filed an Amended Statement of
Claim in the Superior Court of Justice, Ontario, Canada, against Pride
International, Inc. ("Pride"), Petrodrill Offshore, Inc. ("Petrodrill") and the
issuer of the performance bonds seeking the release of the performance bonds to
the Company, and inter alia, damages of $50 million from Pride and Petrodrill,
plus $32 million from Pride and Petrodrill for the default in the August 18,
1998 installment and $5 million which remains in an escrow account established
for the first installment from Petrodrill to MM Industra, as well as the return
of the unearned portion of the premium paid to the issuer of the bonds of
approximately $1.4 million.
Petrodrill was to make certain installment payments to MM Industra for the
construction of the two rigs. The second installment of $32 million due on
August 18, 1998 was not paid, and on August 28, 1998 MM Industra notified
Petrodrill that it was in default and construction ceased. Discussions were held
among the parties regarding their agreements; however, no resolution was
reached.
On August 17, 1999, Pride commenced an action against the Company and its
wholly-owned subsidiary MM Industra Ltd. in the District Court of Harris County,
Texas, arising out of Pride's interest in Petrodrill, a joint venture formed by
Pride and a third party, to construct and own offshore drilling rigs known as
the Amethyst rigs. Two of these rigs were to be constructed at the shipyard of
Davie Industries, Inc. ("Davie") in Quebec, Canada. The Company had executed
performance guarantees for the performance by Davie. Pride alleges that the
Company and MM Industra made certain misrepresentations to Pride and also
engaged in conduct to cause injury to Pride for which Pride, with respect to its
interest in the joint venture, is seeking actual damages of at least $200
million, plus exemplary damages and costs.
NOTE 7. LITIGATION, SEVERANCE AND OTHER CHARGES
The Company took a charge in the third quarter of 1999 primarily to write-off
unrealizable assets related to the Amethyst projects. The Company is in
negotiations to resolve the disputes with Pride and the issuer of the
performance bonds mentioned in Note 6. The write-off is the Company's best
estimate of the assets included in the accompanying balance sheet which will not
be realizable. The write-offs include a portion of the cash received as down
payment and now held in escrow by the Company for the Amethyst projects as well
as inventory purchased for the projects which will not be retained by the
Company. The Company expects the return of the entire CDN$10 million cash letter
of credit it placed as collateral for the performance bond on the projects. The
charge, primarily related to the above write-offs, includes certain other asset
write-offs and legal expenses and approximately $1.5 million of severance costs
and incremental costs related to year 2000 computer upgrades.
NOTE 8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian Basis") which
differ in certain respects from those principles and practices that the Company
would have followed had its consolidated financial statements been prepared in
accordance with accounting practices generally accepted in the United States
("U.S. Basis").
9
<PAGE> 10
Differences between U.S. and Canadian GAAP may have caused the Company to not
present the switchgear business of Chempower and the engineering business of
Industra as discontinued operations. This difference would not have an impact on
net earnings, but the Company would not have presented the income statement
disclosure "Earnings from Continuing Operations."
In the last quarter of fiscal year 1998, the Company recorded a charge of $13.8
million related to the write-off of its investment in Dominion Bridge
Corporation. The Company has no continuing involvement in Dominion Bridge
Corporation. During the three months ended February 28, 1998, the Company
purchased 1,923,077 shares of Dominion Bridge for $5.0 million. Under Canadian
Basis, this investment was accounted for as a long-term investment and the
Company had determined that an other than temporary decline in value had not
occurred in this investment as of February 28, 1998. Under U.S. Basis, the
Company's investment in Dominion Bridge would have been 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 have been classified as an
available-for-sale investment which would have required the Company to carry the
investment at its market value of $3.7 million at February 28, 1998 with a
difference in the Company's carrying value presented as an unrealized loss of
marketable securities in shareholders' equity.
NOTE 9. SUBSEQUENT EVENT
The Company previously disclosed that it had entered into an Option Agreement to
sell substantially all of its USIS shares at a price of $1.90. This option
agreement has now been terminated.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The results of operations for the nine months ended August 31, 1999
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, 1998.
OVERVIEW
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 fabrication
of bus ducts and precision sheetmetal; and the erection of structural steel
support systems. 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 benefited 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 have 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 income were
$7.6 million and $0.3 million 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 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.
At August 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"); 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").
11
<PAGE> 12
At November 1998, 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. In December 1998, USIS sold its
P.W. Stephens Residential Inc. subsidiary, and in June 1999, USIS announced a
Letter of Intent to sell its P.W. Stephens, St. Louis subsidiary. USIS has been
engaged in asbestos abatement and lead hazard removal primarily in the Midwest.
USIS is seeking to refocus its strategic business plan in other businesses.
Up to the point of divestiture, the operations of each of the
subsidiaries of USIS are consolidated into the Company's financials. These
operations produced $2.5 million of revenue for the three months ended August
31, 1999 and $20.1 million for the nine months ended August 31, 1999.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's revenues from its industrial support, environmental,
specialty fabrication, and construction management 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 and construction activities in the
refinery and power generating industries in the northern United States and
Canada. This is somewhat offset by increased plant turnaround activity in the
Texas Gulf Coast refining region. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1998
Revenues
The Company's revenues increased 13% to $66.4 million in the three
months ended August 31, 1999 compared to $58.8 million for the same period in
1998. The $7.6 million increase is due to the inclusion of Tony Crawford
Construction ("TCC"), a division of CCG, and USIS which were not included in the
three months ended August 31, 1998. TCC was acquired effective March 1, 1999.
The Company's industrial support units produced revenues of $31.9
million in the three months ended August 31, 1999 compared to $40.3 million for
the same period in 1998. This reflects a decrease of 20.8% for the three months
ended August 31, 1999 compared to the same period in 1998. This decrease was due
to deferrals of major projects for several of the Company's industrial support
units.
12
<PAGE> 13
The Company's specialty fabrication units produced revenues of $15.3
million in the three months ended August 31, 1999 compared to $8.7 for the same
period in 1998. This reflects an increase of 76.4% for the three months ended
August 31, 1999 compared to the same period of 1998. This increase is from the
Edmonton pipe fabrication shop which opened early in 1998 and is now operating
at capacity, and increased revenue at the MMI facility.
The Company's environmental/remediation units produced revenues of
$0.6 million in the three months ended August 31, 1999 compared to $1.6 million
in the same period in 1998. This reflects a decrease of 62.2% for the three
months ended August 31, 1999 compared to same period in 1998.
The Company's construction management units produced revenues of $16.2
million in the three months ended August 31, 1999 compared to $8.2 million for
the same period in 1998. This increase was primarily due to the aforementioned
acquisition of TCC.
The Company recognized revenues of $2.5 million for the consolidation
of USIS in the three months ended August 31, 1999. USIS was not consolidated in
the same period in 1998.
Operating Expenses
The Company's direct costs of revenue increased 32% to $57.5 million
in the three months ended August 31, 1999 compared to $43.7 million for the
second quarter 1998. Direct costs as a percentage of revenue increased to 87% in
the three months ended August 31, 1999 compared to 74% in the three months ended
August 31, 1998. Increased costs are attributable to an increase in low risk,
lower margin maintenance work and construction management activity in the
current quarter and lower revenues in the higher margin industrial support
business. There is a focus on control of direct costs during the performance of
contract and maintenance work.
Selling, general and administrative expenses remained constant at $6.8
million in the three months ended August 31, 1999 compared to the three months
ended August 31, 1998. A reduction of 7% would have been realized in the three
months ended August 31, 1999, except for the consolidation of USIS. USIS was not
consolidated for the three months ended August 31,1998 as the Company did not
own controlling interest in USIS at that time. The Company is focused on
reducing its selling, general and administrative costs in its existing
businesses and at corporate.
Litigation, Severance and Other Charges
During the three months ended August 31, 1999, the Company has
reserved $10 million for the potential settlement and resolution of its legal
disputes with Petrodrill and for severance and other charges. See Note 6 to
Consolidated Financial Statements (unaudited).
Provision for Income Tax
During the three months ended August 31, 1999, the Company has
recorded a recovery of income taxes of $3.8 million based upon an effective tax
rate of 34%. The effective tax rate was computed based on the statutory U.S. and
Canadian federal income tax rates, state and provincial tax rates. For the three
months ended August 31, 1998, a provision of $2.0 million was reflected.
13
<PAGE> 14
NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO NINE MONTHS ENDED
AUGUST 31, 1998
Revenues
The Company's revenues increased 21% to $199.7 million in the nine
months ended August 31, 1999 compared to $165.1 million for the same period in
1998. The $34.6 million increase is primarily due to the inclusion of TCC, a
division of CCG, and USIS which were not included in 1998. TCC was acquired
effective March 1,1999.
The Company's industrial support units produced revenues of $100.2
million in the nine months ended August 31, 1999 compared to $110.4 million for
the same period in 1998. This reflects a decrease of 9.3% in the nine months
ended August 31, 1999 compared to the same period in 1998. This decrease was due
to deferrals of major projects for several of the Company's industrial support
units.
The Company's specialty fabrication units produced revenues of $38.6
million in the nine months ended May 31, 1999 compared to $30.3 for the same
period in 1998. This reflects an increase of 28% for the nine months ended
August 31, 1999 compared to the same period of 1998. This increase is from the
Edmonton pipe fabrication shop which opened early in 1998 and is now operating
at capacity, and increased revenue at the MMI facility.
The Company's environmental units produced revenues of $3.0 million in
the nine months ended August 31, 1999 compared to $4.5 million in the same
period in 1998. This reflects a decrease of 33% for the nine months ended August
31, 1999 compared to same period in 1998.
The Company's construction management units produced revenues of $37.8
million in the nine months ended August 31, 1999 compared to $19.9 million for
the same period in 1998. This increase was primarily due to the aforementioned
acquisition of TCC.
The Company recognized revenues of $20.1 million for the consolidation
of USIS in the nine months ended August 31, 1999. USIS was not consolidated in
the same period in 1998.
Operating Expenses
The Company's direct costs of revenue increased 31% to $169.1 million
in the nine months ended August 31, 1999 compared to $129.4 million for the nine
months ended August 31, 1998. Direct costs as a percentage of revenue increased
to 84.7% in the nine months ended August 31, 1999 compared to 78.4% in the nine
months ended August 31, 1998. Increased costs are attributable to an increase in
low risk, lower margin maintenance work and construction management activity in
the current quarter and lower revenues in the higher margin industrial support
business. There is a focus on control of direct costs during the performance of
contract and maintenance work.
Selling, general and administrative expenses decreased to $18.5
million in the nine months ended August 31, 1999 compared to $19.4 million for
the nine months ended August 31, 1998. The Company is focused on reducing its
selling, general and administrative costs in its existing businesses and at
corporate.
Litigation, Severance and Other Charges
During the nine months ended August 31, 1999, the Company has reserved
$10 million for the potential settlement and resolution of its legal disputes
with Petrodrill and for severance and other charges. See Note 6 to Consolidated
Financial Statements (unaudited).
14
<PAGE> 15
Provision for Income Tax
During the nine months ended August 31, 1999, the Company has recorded
a recovery of income taxes of $2.6 million based upon an effective tax rate of
34%. The effective tax rate was computed based on the statutory U.S. and
Canadian federal income tax rates, state and provincial tax rates. For the nine
months ended August 31, 1998, a provision of $2.5 million was reflected.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash decreased from $21.8 million on November 30, 1998
to $13.6 million at August 31, 1999. The Company utilized net cash in operating
activities of $28.9 million for the nine months ended August 31, 1999 compared
to $9.6 million for the same period in 1998. The primary reason for the change
is an increase in overall working capital in several of the Company's
businesses. Accounts receivable increased from $50.8 million to $66.1 million.
Net cash used in investing activities was $3.2 million in 1999
compared to $20.1 million in 1998. The primary use of cash in the first nine
months of 1998 was $5.0 million for the purchase of Dominion Bridge common stock
and other monies invested therein.
Cash flows provided by financing activities was $21.2 million in 1999
compared to $51.4 million in 1998, primarily due to proceeds from notes payable
and long-term debt.
In May 1999, the Company and its principal subsidiaries entered into a
Credit Agreement with General Electric Capital Corporation as lender and agent
for additional lenders. The Credit Agreement provides for a revolving credit
facility (the "Revolver") of up to $30 million to be used for working capital
and other general corporate purposes and is based upon certain eligible accounts
receivable. The outstanding balance on the revolver is $19.7 million with an
unused commitment of $10.3 million and availability of $3.0 million. The
Revolver has a two-year term, subject to two automatic one-year extensions at
the mutual discretion of the Company and the lenders. Borrowings under the
Revolver accrue interest at a rate equal to 2% above the commercial paper rate.
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 availability under its 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.
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 and Section
27a of the Securities Exchange Act of 1934 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 limitations, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, 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,
15
<PAGE> 16
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, severe weather conditions that could delay projects, and
litigations and claims. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
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 no later than November 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, 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.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. LITIGATION
See Note 6 to the Notes to Consolidated Financial Statements
(unaudited) in Part I.
ITEM 2. CHANGE IN SECURITIES
During the third quarter, the Company issued 250,000 common shares in
connection with an acquisition. The issuance of these common shares was exempt
from registration under the Securities Act of 1933, as amended by virtue of
Section 4(2) thereof.
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 August 17, 1999 reporting
under Item 1 thereof the notification that Pride International, Inc. had
commenced an action against the Company and its wholly-owned subsidiary MM
Industra Ltd. in the District Court of Harris County, Texas, arising out of
Pride's interest in Petrodrill Offshore, Inc., a joint venture formed to
construct and own offshore drilling rigs known as the Amethyst rigs. See Note 6
to the Notes to Consolidated Financial Statements (unaudited) in Part I.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN ECO CORPORATION
(Registrant)
Dated: October 15, 1999 /s/ Michael E. McGinnis
-------------------------------
Michael E. McGinnis
Chief Executive Officer
Dated: October 15, 1999 /s/ Michael Appling Jr.
-------------------------------
Michael Appling Jr.
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 13,584
<SECURITIES> 0
<RECEIVABLES> 67,570
<ALLOWANCES> 1,423
<INVENTORY> 19,081
<CURRENT-ASSETS> 148,004
<PP&E> 71,395
<DEPRECIATION> 15,108
<TOTAL-ASSETS> 269,860
<CURRENT-LIABILITIES> 45,783
<BONDS> 117,580
0
0
<COMMON> 90,450
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 269,860
<SALES> 199,708
<TOTAL-REVENUES> 199,708
<CGS> 169,145
<TOTAL-COSTS> 201,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,244
<INCOME-PRETAX> (7,644)
<INCOME-TAX> (2,594)
<INCOME-CONTINUING> (5,050)
<DISCONTINUED> (3,337)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,387)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
