The weakness is likely due to the 10k and I must admit that after my initial reading, I didn't like it at all. It appears that too much of their income in 1997 came from one time gains making it look like margins are very poor. I've been calling around trying to get some answers. So far, this is what I've got.
The sale of the New Jersey MART is part of regular business. This was intended to be sold. Equipment is made by MM Industra, they are set up, put into working order, then sold. Eco plans on continuing with the strategy and will be setting up and selling more of these in 1998. So these sales are NOT one time gains and suggests we will seem similar profits in 1998.
It appears that in 1997, a lot of the profits disappeared into EIFH. - around $17 mill was invested. Not certain of this, but it appears that if it wasn't for EIFH, Eco would have recorded a profit of over $2/share. EIFH recorded a profit their last quarter and Eco is now interested in selling their interest - and expects to profit by this - possibly in the next quarter or so.
There is also a section in the 10k that states that earnings by US GAAP accounting would be considerably below Canadian GAAP reported earnings. This appears to be primarily due to a difference in how the costs of the debentures are reported, as stated below. By US GAAP its all booked in 97 - by Canadian GAAP its spread over 10 years. So US GAAP earnings take a hit in 97 - while in 98, there will be no hit to U.S. GAAP at all and Canadian GAAP will take a small hit.
Bottom line, is in trying to figure out what they will make in 1998, and its not easy to see from these numbers. It doesn't look like Eco will putting any more money in EIFH in 98 - and in fact should pull out a nice profit when they are all done. So margins, should move towards their usual levels except for the fact that they are fully taxed. MM Industra, Chempower, SRS all appear healthy, the other ones are harder to decipher. However, despite a rather ugly looking 10k, it does appear that they will do well in 98.
David
from the filing
During 1997, the Company sold $18 million aggregate principal amount of convertible debentures (the "Debentures"). In connection with these Debentures, the Company issued approximately 1.7 million stock purchase warrants to the holders and as placement fees to third parties. Under Canadian Basis, the total amount allocated to the conversion feature was being charged to interest expense over ten years. All of these Debentures were converted during 1997 and the unamortized amount of $11.8 million was charged to equity. Had the U.S. Basis been followed, the intrinsic value of the conversion feature of approximately $3.5 million would have been charged to interest expense immediately as the Debentures contained a beneficial conversion feature on the date of issuance.
During June, 1996, the Company acquired a 16% interest in EIFH. This interest was accounted for under the cost method of accounting. Commencing on January 1, 1997, the Company began accounting for its investment in EIFH under the equity method as its ownership percentage had increased to 36%.
Under Canadian Basis, the change is accounted for prospectively. UnderU.S. Basis, the Company would have recorded an adjustment to its
proportionate share (16%) of EIFH's losses from the period when the Company first invested in EIFH through the period when they commenced equity method accounting. The total amount of additional losses which the Company would have recorded is approximately $1.5 million. |
