<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 February 29, 2000
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 February 29, 2000, there were 22,260,180 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>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet:
February 29, 2000 and November 30, 1999.............................................3
Consolidated Statement of Income:
Quarters Ended February 29, 2000
and February 28, 1999...............................................................5
Consolidated Statement of Changes in Financial Position:
Quarters Ended February 29, 2000
and February 28, 1999...............................................................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 1. Litigation............................................................................15
Item 2. Changes in Securities.................................................................15
Item 6. Exhibits and Reports on Form 8-K......................................................15
Signatures.....................................................................................16
</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>
February 29, November 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................. $ 3,853 $ 5,480
Accounts receivable, trade, less allowance for
doubtful accounts of $4,331 in 2000 and $4,528 in
1999, respectively ................................. 52,976 62,185
Current portion of notes receivables ................. 5,359 4,266
Costs and estimated earnings in excess of billings.... 7,947 8,600
Inventory ............................................ 17,598 16,694
Refundable income taxes .............................. 1,188 1,188
Prepaid expenses and other current assets ............ 4,102 5,012
------------ ------------
TOTAL CURRENT ASSETS ............................... 93,023 103,425
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ................................... 65,150 56,877
------------ ------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $4,239
in 2000 and $3,900 in 1999, respectively ........... 54,573 32,690
Deferred income tax .................................. 19,895 17,879
Notes receivable ..................................... 4,011 16,969
Investments .......................................... 4,642 4,519
Other assets ......................................... 4,559 4,565
------------ ------------
TOTAL OTHER ASSETS ................................. 87,680 76,622
------------ ------------
TOTAL ASSETS ....................................... $ 245,853 $ 236,924
============ ============
</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>
February 29, November 30,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............ $ 46,285 $ 39,424
Line of credit ...................................... 23,376 18,003
Current portion of long-term debt ................... 1,336 789
Income tax payable .................................. -- 638
Billings in excess of costs and estimated earnings... 7,218 8,441
------------ ------------
TOTAL CURRENT LIABILITIES .......................... 78,215 67,295
------------ ------------
LONG TERM LIABILITIES
Senior notes ........................................ 117,300 117,300
Long-term debt ...................................... 4,869 3,706
Minority interest ................................... 2,089 2,127
Other liabilities ................................... 525 572
------------ ------------
TOTAL LONG-TERM LIABILITIES ........................ 124,783 123,705
------------ ------------
TOTAL LIABILITIES .................................. 202,998 191,000
------------ ------------
SHAREHOLDERS' EQUITY
Share capital ....................................... 90,777 90,450
Contributed surplus ................................. 2,845 2,845
Cumulative foreign exchange ......................... (280) (1,109)
Retained earnings ................................... (50,487) (46,262)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ......................... 42,855 45,924
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ........... $ 245,853 $ 236,924
============ ============
</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 MONTHS ENDED
(United States Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
REVENUE ............................................... $ 53,987 $ 69,183
------------ ------------
COSTS AND EXPENSES
Direct costs of revenue .............................. 46,965 56,554
Selling, general, and administrative expenses......... 8,116 5,555
Interest expense, net ................................ 3,495 2,248
Depreciation and amortization ........................ 1,606 1,060
------------ ------------
Total operating costs ................................ 60,182 65,417
------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE PROVISION FOR
(RECOVERY OF) INCOME TAXES ............................ (6,195) 3,766
PROVISION FOR (RECOVERY OF) INCOME
TAXES ................................................. (2,107) 1,355
------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ............................................ (4,088) 2,411
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX BENEFIT ............................. (136) (1,436)
------------ ------------
NET INCOME (LOSS) ..................................... $ (4,224) $ 975
============ ============
Basic earnings (loss) per common share
Earnings (loss) from continuing operations ........... $ (0.18) $ 0.11
Loss from discontinued operations .................... (0.01) (0.07)
------------ ------------
Net earnings (loss) per common share ................. $ (0.19) $ 0.04
============ ============
Fully diluted earnings (loss) per
common share
Earnings (loss) from continuing operations ........... $ (0.18) $ 0.11
Loss from discontinued operations .................... (0.01) (0.07)
------------ ------------
Net earnings (loss) per common share ................. $ (0.19) $ 0.04
============ ============
Weighted average number of shares
used in computing earnings per common share
Basic ................................................ 21,960 21,610
============ ============
Fully diluted ........................................ 21,960 21,610
============ ============
</TABLE>
5
<PAGE> 6
AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE THREE MONTHS ENDED
(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (4,224) $ 975
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on early extinguishment of debt .......................... -- --
Depreciation and amortization ................................. 1,506 1,159
Change in deferred income taxes ............................... (2,654) --
Change in accounts receivable ................................. 5,223 791
Change in notes receivable .................................... -- 103
Change in costs and estimated earnings in excess of billings... 653 (193)
Change in inventory ........................................... (807) (726)
Change in prepaid expenses .................................... 533 (1,273)
Change in other assets ........................................ 7 536
Change in accounts payable .................................... (4,487) (6,264)
Change in billings in excess of costs and estimated earnings... (1,992) (1,009)
Change in other long-term liabilities ......................... (47) (376)
------------ ------------
Net cash used in operating activities ................................ (6,289) (6,277)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................... (972) (929)
Acquisition of business, net of cash received ................. 4 --
Increase in minority interest ................................. (38) --
Decrease (increase) in investment ............................. (282) 1,131
------------ ------------
Net cash provided by (used in) investing activities .................. (1,288) 202
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt ................ 300 483
Proceeds from line of credit .................................. 5,319 --
Principal payments on long-term debt .......................... (498) --
------------ ------------
Net cash provided by financing activities ............................ 5,121 483
------------ ------------
EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH ...................... 829 (428)
------------ ------------
NET DECREASE IN CASH ................................................. (1,627) (6,020)
CASH AT BEGINNING OF PERIOD .......................................... 5,480 21,821
------------ ------------
CASH AT END OF PERIOD ................................................ $ 3,853 $ 15,801
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(United States Dollars in thousands, except per share amounts)
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, 1999, 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 quarter ended February 29, 2000 are not
necessarily indicative of results expected for an entire year. The November 30,
1999 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. ("Chempower"),
Specialty Management Group, Inc. /d/b/a CCG ("CCG"), Industra Service
Corporation ("Industra"), MM Industra Limited ("MMI"), Separation and Recovery
Systems, Inc. ("SRS"), C.A. Turner Construction Company ("C.A. Turner" and,
together with Action Contract Services Inc. the "Turner Group"), MidAtlantic
Recycling Technologies, Inc. ("MART"), and United Eco Systems, Inc. ("United
Eco"). 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 February 29, 2000 and November 30, 1999 are as
follows:
<TABLE>
<CAPTION>
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Raw Materials $ 1,563 $ 4,024
Consumable Supplies 5,493 3,127
Finished Goods 10,542 9,543
------------ ------------
$ 17,598 $ 16,694
============ ============
</TABLE>
7
<PAGE> 8
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(United States Dollars in thousands, except per share amounts)
NOTE 3. U.S. INDUSTRIAL SERVICES, INC.
Since November 1998, the Company has owned 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. ("Manta") and
transferred related liabilities, including the credit facility, to Kenny
Industrial Services, L.L.C., for $23.0 million consisting of a combination of
cash and notes. Accordingly, two months of operating results of Manta are
included in the consolidated financial statements of the Company for the first
quarter of fiscal year 1999.
On December 31, 1998, USIS sold the assets of P.W. Stephens Residential Inc.
("Residential"), and transferred its liabilities to American Temporary
Sanitation Inc. for $2.4 million consisting of a combination of cash and notes.
Recognition of the gain on this sale has been deferred and is presented as a
reduction of the note balance. As a result of the sale, three months of
Residential's operating results are included in the consolidated financial
statements of the Company at February 29, 1999.
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 as amended provides for a
collateralized revolving credit facility (the "Revolver") of up to $30.0 million
to be used for working capital and other general corporate purposes and is based
upon certain eligible accounts receivable and fixed assets. The Revolver has a
two-year term, subject to two automatic one year extensions at the mutual
agreement of the Company and the lenders. Borrowings under the Revolver accrue
interest at a rate equal to 4% above the commercial paper rate, (9.8% at
February 29, 2000). Interest is payable monthly. The revolver is collateralized
by the Company's accounts receivables and inventory, and most of the owned
properties are mortgaged as security. The total availability based on eligible
collateral was $2.3 million at February 29, 2000. The Company was not in
compliance with certain financial covenants at February 29, 2000. See discussion
regarding liquidity and capital resources in Item 2.
NOTE 5. DISCONTINUED OPERATIONS
During the second quarter of fiscal year 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 during 2000, although no assurances
can be made that a sale will be consummated.
Sales from discontinued operations were $1.1 million and $4.6 million for the
quarter ended February 29, 2000 and the same period last year, respectively. The
loss from from these discontinued operations for the quarter ended February 29,
2000 and the same period last year, respectively, was $.2 million, and $1.4
million, respectively, net of $.07 million and $.9 million income tax benefit,
respectively.
NOTE 6. LITIGATION
The United States Attorney for the Middle District of Louisiana (the "US
Attorney") advised Advanced Coil Industries ("ACI") a division of Chempower,
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 Company's acquisition of Chempower. The U.S. Attorney
and ACI have agreed that in the event criminal charges are filed, no criminal
8
<PAGE> 9
AMERICAN ECO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(United States Dollars in thousands, except per share amounts)
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 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.
At February 29, 2000, 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, except as disclosed above.
NOTE 7. 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").
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."
For the three months ended February 29, 2000, there were no other material
variances between accounting practices generally accepted in the United States
and Canada.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The results of operations for the quarter ended February 29, 2000 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, 1999.
OVERVIEW
American Eco Corporation (the "Company" or "American Eco") through its
subsidiaries is a leading provider of industrial outsourcing which includes
specialty fabrication and environmental services to principally three industry
groups in the United States and Canada: (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 outsourcing solutions for an extensive array of support
services such as equipment and facility repair, maintenance, refurbishment,
retrofit and expansion. The Company's specialty fabrication services include the
construction of decks, well jackets and modules for offshore oil and gas
platforms, the fabrication of piping, pressure vessels, boiler tube bundles, and
other equipment used in process industries, as well as the erection of
structural steel support systems. The Company also manufactures, sells, installs
and operates SAREX(R) oil filtration and separation systems worldwide. The
Company's environmental services include diversified waste recycling and other
material handling processes.
The Company has strategically positioned itself as a consolidator of
outsourcing services, which can be performed by the 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. The Company's strategy is to focus on its operating
subsidiaries' profitability and future growth.
American Eco believes it has achieved a competitively advantaged
position in the industrial outsourcing services, environmental services and
construction management services 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. However, the Company is dependent upon the
business cycles of the industry groups to which it provides the outsourcing
services.
At February 29, 2000, the Company operated primarily through the
following first and second tier wholly-owned 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"); MM Industra Limited, a Nova Scotia, Canada corporation ("MMI");
United Eco Systems, Inc., a Delaware corporation ("United Eco"); Separation and
Recovery Systems, Inc., a Nevada corporation ("SRS"); Chempower, Inc., an Ohio
corporation ("Chempower"); Specialty Management Group, Inc., d.b.a/CCG, a Texas
corporation ("CCG"); and MidAtlantic Recycling Technologies, Inc. a Delaware
corporation ("MART").
10
<PAGE> 11
Since November 1998, the Company has 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. ("Manta"). In December 1998,
USIS sold its P.W. Stephens Residential Inc. subsidiary ("Residential"). 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. USIS' quarter ends on December 31, which results have been
consolidated as of February 29, 2000.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's revenues from its industrial, environmental 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 February 29, 2000 compared to three months ended
February 28, 1999.
Revenues
Revenue for the three months ended February 29, 2000 was $54.0 million,
a decrease of 22.0% from $69.2 million for the same period last year. The $15.2
million decrease is primarily due to the sale of two USIS subsidiaries, Manta
and Residential, which contributed $12.9 million of revenues for the three
months ended February 28, 1999. This is partially offset by the acquisition of
Tony Crawford Construction and MART, which contributed $5.2 million of revenue
in the first quarter of fiscal year 2000. The remaining decrease is primarily
attributable to revenues generated from a nonrecurring project in the Gulf Coast
region of the United States (approximately $7.5 million) in the prior year
within the industrial outsourcing segment.
The industrial outsourcing segment produced revenues for the three
months ended February 29, 2000 of $34.5 million, a decrease of 19.4% from $42.8
million for the same period last year. This decrease was primarily attributable
to revenues generated from a nonrecurring project in the prior year, as
explained above.
11
<PAGE> 12
The construction management group generated revenues for the three
months ended February 29, 2000 of $12.3 million, an increase of 53.4% from $8.0
million for the same period last year. This increase is primarily from the
acquisition of Tony Crawford Construction, which contributed $3.5 million in
revenues during the first quarter of fiscal year 2000.
The environmental services segment contributed revenues for the three
months ended February 29, 2000 of $7.2 million, a decrease of 60.9% from $18.4
million for the same period last year. This decrease reflects the sale of two
USIS subsidiaries, Manta and Residential, which contributed $12.9 million of
revenues for the three months ended February 28, 1999. This is partially offset
by revenues of $1.7 million generated by MART, which was acquired in fiscal year
2000.
Operating Expenses
The direct costs of revenue for the three months ended February 29,
2000 was $47.0 million, a decrease of 17.0% from $56.6 million for the same
period last year. Direct costs as a percentage of revenue for the three months
ended February 29, 2000 increased to 87.0%, compared to 81.8% for the same
period last year. 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 outsourcing
business.
Selling, general and administrative expenses for the three months ended
February 29, 2000 was $8.0 million, an increase of 44.2% from $5.6 million for
the same period last year. Selling, general and administrative expenses as a
percentage of revenue for the three months ended February 29, 2000 increased to
14.8% from 8.0% for the same period last year. The percentage of total revenues
would have been 10.1% and a net increase of $.6 million, excluding non-recurring
adjustments made in the first quarter of 1999. The current year increase is
primarily due to the acquisition of Tony Crawford Construction and MART, which
are reflected in the first quarter of fiscal year 2000.
Interest expense on long term debt for the three months ended February
29, 2000 was $3.5 million, an increase of 55.6% from $2.2 million for the same
period last year. As a percentage of total revenues, interest expense increased
to 6.5% compared to 3.2% for the same period last year. During fiscal year 1999,
the Company entered into a $30 million revolving credit facility with General
Electric Capital Corporation.
Discontinued Operations
During the second quarter of fiscal year 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 during 2000, although no
assurances can be made that a sale will be consummated.
Sales from discontinued operations were $1.1 million and $4.6 million
for the quarter ended February 29, 2000 and 1999. The loss from these
discontinued operations for the quarter ended February 29, 2000 and 1999, was
$.2 million, and $1.4 million, respectively, net of $.07 million and $.9 million
income tax benefit, respectively.
Provision for Income Tax
During the three months ended February 29, 2000, the Company has
recorded a recovery of income taxes of $2.1 million based upon an effective tax
rate of 34%. This rate is being utilized based on the Company's estimate of what
the annual income tax rate will be for the year end November 30, 2000, which
rate is based on the estimated taxable income for the full year. For the three
months ended February 28, 1999, a provision of $1.4 million was reflected.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased from $5.5 million on November 30, 1999 to $3.9 million
at February 29, 2000. The Company utilized net cash in operating activities of
$6.3 million for the three months ended February 29, 2000 compared to $6.3
million for the same period last year. Accounts receivable decreased from $62.2
million to $53.0 million.
Net cash used in investing activities was $1.3 million in the first
quarter of fiscal year 2000 compared to net cash provided by investing
activities of $.2 million in the same period last year. The primary use of cash
in the current period was for capital expenditures.
Cash flows provided by financing activities was $.4 million in 1999
compared to $5.1 million in 2000, primarily due to proceeds from line of credit
of $5.3 million (See Note 4 to the Notes to Consolidated Financial Statements
(unaudited) in Part I).
At February 29, 2000, the Company had working capital of $14.8 million
which includes $23.4 million of liabilities to General Electric Capital
Corporation (see Note. 4 to the Notes to Consolidated Financial Statements
(unaudited) in Part I). Cash requirements consist primarily of working capital
needs, obligations under its line of credit and Senior Notes, including interest
payments of approximately $5.6 million in May and November, and capital
expenditures. Although the Company believes that its existing cash, anticipated
cash flow from operations and the monetization of certain non-operating assets
will meet certain of these requirements, there are no assurances that these
resources will be sufficient throughout the next 12 months to finance its
working capital needs, planned capital expenditures, and debt service
requirements. The Company has engaged a financial advisor to assist in
evaluating strategic alternatives.
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 collateralized
revolving credit facility (the "Revolver") of up to $30.0 million to be used for
working capital and other general corporate purposes and is based upon certain
eligible accounts receivable and fixed assets. The outstanding balance on the
Revolver as of February 29, 2000 was $23.4 million with an unused commitment of
$6.6 million and availability of $2.3 million. The Revolver has a two-year term,
subject to two automatic one-year extensions at the mutual agreement of the
Company and the lenders. Borrowings under the Revolver accrue interest at a rate
equal to 4% above the commercial paper rate (9.8% at February 29, 2000).
Interest is payable monthly. The Revolver is collateralized by the Company's
accounts receivable and inventory, and most of the owned properties are
mortgaged as security. The Company was not in compliance with certain financial
covenants at February 29, 2000 and is currently in discussion with the lender to
resolve these issues. However, there can be no assurance that a satisfactory
resolution will be achieved and that the lender will not pursue its remedies
under the Credit Agreement.
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,
13
<PAGE> 14
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, 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.
14
<PAGE> 15
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 first quarter, the Company issued 300,000 common shares in
partial settlement of an outstanding obligation to a creditor as of November 30,
1999. 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.
None
15
<PAGE> 16
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: April 19, 2000 /s/ Michael E. McGinnis
-----------------------
Michael E. McGinnis
Chief Executive Officer
Dated: April 19, 2000 /s/ David Tighe
----------------------
David Tighe
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-29-2000
<CASH> 3,853
<SECURITIES> 0
<RECEIVABLES> 57,307
<ALLOWANCES> 4,331
<INVENTORY> 17,598
<CURRENT-ASSETS> 93,023
<PP&E> 65,150
<DEPRECIATION> 1,606
<TOTAL-ASSETS> 245,853
<CURRENT-LIABILITIES> 78,215
<BONDS> 117,300
0
0
<COMMON> 90,777
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 245,853
<SALES> 53,987
<TOTAL-REVENUES> 53,987
<CGS> 46,965
<TOTAL-COSTS> 60,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,495
<INCOME-PRETAX> (6,195)
<INCOME-TAX> (2,107)
<INCOME-CONTINUING> (4,088)
<DISCONTINUED> (136)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,224)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
