<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1993
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: 033-17921
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3418759
- - - ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
P.O. Box 1500, Somerville, New Jersey 08876
- - - ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (908) 685-4600
--------------
----------
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock,
$.001 par value American Stock Exchange, Inc.
----------
Securities registered pursuant to Section 12(g) of the Act:
None
----
----------
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, if definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $141,321,000 on December 31, 1993.
The number of outstanding shares of the Registrant's Class A Common Stock, par
value $.001 per share, was 24,818,281 on December 31, 1993.
The Exhibit Index to this Annual Report on Form 10-K is located at Page 78
herein.
<PAGE>
The undersigned registrant hereby amends Item 8, Financial Statements and
Supplemental Data, of its Annual Report on Form 10-K for the fiscal year ended
October 31, 1993, Commission File No. 033-17921, as set forth in the pages
attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
AIR & WATER TECHNOLOGIES CORPORATION
(Registrant)
Date: May 12, 1994 By: /s/ Douglas A. Satzger
--------------------------------
Senior Vice President
and General Counsel
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - - ------ -------------------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Air & Water Technologies Corporation: Page
- - - ------------------------------------ ----
<S> <C>
Report of Independent Public Accountants....................... 34
Consolidated Balance Sheets as of October 31, 1993 and 1992.... 35
Consolidated Statements of Operations for the Years ended
October 31, 1993, 1992 and 1991............................... 36
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1993, 1992 and 1991......................... 37
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1993, 1992 and 1991............................... 38
Notes to Consolidated Financial Statements..................... 40
Schedule II - Amount Receivable from Related Party............. 55
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Air & Water Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Air & Water
Technologies Corporation (a Delaware corporation) and subsidiaries as of October
31, 1993 and 1992, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 31, 1993. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Air & Water
Technologies Corporation and subsidiaries as of October 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the three years
in the period ended October 31, 1993, in conformity with generally accepted
accounting principles.
As more fully discussed in Note 15, a subsidiary of the Company entered into a
contract with the Puerto Rico Aqueduct and Sewer Authority ("PRASA") to
rehabilitate PRASA's wastewater treatment system and provide related program
management services. That subsidiary filed an action in the United States
District Court in San Juan, Puerto Rico which, among other things, seeks to
recover $37.4 million of outstanding receivables from PRASA. In October 1992,
the Supreme Court of the Commonwealth of Puerto Rico ruled in a separate action
involving the Company's subsidiary which could impact the Company's action
against PRASA pending in Federal Court. The Company believes that it has
performed substantially in accordance with the terms of its contract with PRASA
and that, ultimately, at least a majority of all sums due its subsidiary
pursuant to the contract will be realized. Because of the uncertainty as to how
the United States District Court in the PRASA case will interpret and apply the
ruling of the Supreme Court of the Commonwealth of Puerto Rico to the facts
before it, the Company is unable to determine with any specificity what impact
the Commonwealth Court decision will have on its efforts to recover the $37.4
million from PRASA. Accordingly, no provision for loss relating to the
uncollectability of these receivables has been made in the accompanying
financial statements.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN & CO.
Roseland, New Jersey
January 13, 1994
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1993 AND 1992
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1993 1992
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash $ 7,624 $ 10,121
of $1,396 in 1993 (Note 1)
Accounts receivable, less allowance for doubtful accounts of
$3,100 and $3,300 in 1993 and 1992,
respectively (Notes 5 and 15) 115,131 116,207
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 1) 80,966 100,854
Inventories (Note 1) 30,140 33,747
Prepaid expenses and other current assets (Note 15) 17,548 14,194
Net current assets of discontinued operations (Note 4) 19,232 13,089
-------- --------
Total current assets 270,641 288,212
PROPERTY, PLANT AND EQUIPMENT, net (Note 1) 45,441 49,082
INVESTMENTS IN ENVIRONMENTAL TREATMENT
FACILITIES (Note 6) 18,323 16,611
DEFERRED DEBT ISSUANCE COSTS, net (Note 1) 4,084 4,136
GOODWILL, net (Notes 1, 2 and 3) 237,002 242,149
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 4) 6,269 2,912
OTHER ASSETS, net (Notes 1 and 12) 20,275 10,717
-------- --------
Total assets $602,035 $613,819
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 7) $ 28,240 $ --
Current installments of long-term debt (Note 8) 3,730 4,276
Accounts payable 56,419 65,179
Accrued expenses (Note 1) 51,359 68,461
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 1) 24,229 30,822
U. S. and foreign income taxes (Note 14) 4,743 6,135
-------- --------
Total current liabilities 168,720 174,873
-------- --------
LONG-TERM DEBT (Note 8) 222,456 221,975
-------- --------
MINORITY INTEREST IN SUBSIDIARIES 545 524
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 15)
STOCKHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, par value $.01,
authorized 2,500,000 shares; none issued -- --
Common stock, par value $.001,
authorized 100,000,000 shares; issued 24,908,183
and 24,915,041 shares in 1993 and 1992, respectively 25 25
Additional paid-in capital 301,048 300,607
Accumulated deficit (89,557) (84,002)
Common stock in treasury, at cost (108) (109)
Cumulative currency translation adjustment (1,094) (74)
-------- --------
Total stockholders' equity 210,314 216,447
-------- --------
Total liabilities and stockholders' equity $602,035 $613,819
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands, except per share data)
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
SALES (Note 1) $630,377 $672,949 $620,129
COST OF SALES 453,898 495,292 461,544
-------- -------- --------
Gross margin 176,479 177,657 158,585
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 139,047 153,801 146,992
AMORTIZATION OF GOODWILL (Note 1) 6,835 6,745 6,183
PRASA LITIGATION (Note 15) -- 7,000 --
RESTRUCTURING CHARGE (Note 2) -- -- 16,000
-------- -------- --------
Operating income (loss) from continuing operations 30,597 10,111 (10,590)
INTEREST INCOME 852 1,335 2,563
INTEREST EXPENSE (24,589) (22,680) (21,429)
OTHER INCOME (EXPENSE), net (Note 5) (2,218) (1,712) (932)
-------- -------- --------
Income (loss) from continuing operations before income taxes
and minority interest 4,642 (12,946) (30,388)
PROVISION FOR INCOME TAXES (Note 14) 68 819 1,482
MINORITY INTEREST 21 265 (90)
-------- -------- --------
Income (loss) from continuing operations 4,553 (14,030) (31,780)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 4) (10,108) 3,994 5,885
-------- -------- --------
Net loss $ (5,555) $(10,036) $(25,895)
======== ======== ========
EARNINGS (LOSS) PER SHARE (Note 1):
Continuing operations $ .18 $ (.56) $ (1.41)
Discontinued operations (.40) .16 .26
-------- -------- --------
Net loss $ (.22) $ (.40) $ (1.15)
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
------------------------------- Class A Common Cumulative
Class A Class B Additional Treasury Stock Currency
--------------- -------------- Paid-in Accumulated ---------------- Translation
Shares Amount Shares Amount Capital Deficit Shares Amount Adjustment Total
------ ------ ------ ------ ---------- ----------- -------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1990 21,472,350 $21 1,010,000 $ 1 $248,891 $(48,071) (55,000) $ (60) $ 140 $200,922
Net loss -- -- -- -- -- (25,895) -- -- -- (25,895)
Treasury stock purchases -- -- -- -- -- -- (1,406) (2) -- (2)
Exercise of stock
options (Note 10) 22,475 -- -- -- 387 -- -- -- -- 387
Issuance of common stock
in exchange for MECI
common stock
(Notes 2 and 9) 2,295,344 3 -- -- 49,347 -- -- -- -- 49,350
Issuance of stock options
in exchange for MECI stock
options (Notes 2 and 10) -- -- -- -- 1,090 -- -- -- -- 1,090
Currency translation
adjustment -- -- -- -- -- -- -- -- (67) (67)
Exchange of Class B for
Class A shares (Note 9) 1,010,000 1 (1,010,000) (1) -- -- -- -- -- --
---------- --- ---------- --- -------- -------- ------- ----- ------- --------
Balance, October 31, 1991 24,800,169 25 -- -- 299,715 (73,966) (56,406) (62) 73 225,785
Net loss -- -- -- -- -- (10,036) -- -- -- (10,036)
Treasury stock purchases -- -- -- -- -- -- (35,998) (47) -- (47)
Exercise of stock
options (Note 10) 36,802 -- -- -- 627 -- -- -- -- 627
Grant and amortization of
restricted stock (Note 10) 78,070 -- -- -- 265 -- -- -- -- 265
Currency translation
adjustment -- -- -- -- -- -- -- -- (147) (147)
---------- --- ---------- --- -------- -------- ------- ----- ------- --------
Balance, October 31, 1992 24,915,041 25 -- -- 300,607 (84,002) (92,404) (109) (74) 216,447
Net loss -- -- -- -- -- (5,555) -- -- -- (5,555)
Treasury stock purchases -- -- -- -- -- -- (7,498) (9) -- (9)
Treasury stock issued -- -- -- -- -- -- 10,000 10 -- 10
Exercise of stock
options (Note 10) 1,250 -- -- -- 13 -- -- -- -- 13
Forfeiture and
amortization of
restricted stock (Note 10) (8,108) -- -- -- 428 -- -- -- -- 428
Currency translation
adjustment -- -- -- -- -- -- -- -- (1,020) (1,020)
---------- --- ---------- --- -------- -------- ------- ----- ------- --------
Balance, October 31, 1993 24,908,183 $25 -- $-- $301,048 $(89,557) (89,902) $(108) $(1,094) $210,314
========== === ========== === ======== ======== ======= ===== ======= ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands)
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,555) $(10,036) $(25,895)
Adjustments to reconcile net loss to net cash provided by
(used for) continuing operations-
Discontinued operations 10,108 (3,994) (5,885)
Depreciation and amortization 15,149 16,461 14,640
Minority interest 21 265 (90)
-------- -------- --------
19,723 2,696 (17,230)
Changes in working capital, net of effects from acquisitions-
(Increase) decrease in current assets-
Accounts receivable 1,076 8,031 13,257
Costs and estimated earnings in excess of billings
on uncompleted contracts 19,888 (25,804) (7,913)
Inventories 3,607 (3,382) 2,400
Prepaid expenses and other current assets (3,978) 1,093 (925)
Increase (decrease) in current liabilities-
Accounts payable (8,760) 19,737 (920)
Accrued expenses (17,308) (2,877) (8,462)
Billings in excess of costs and estimated earnings
on uncompleted contracts (6,593) 10,486 (2,504)
Income taxes (1,392) (141) 3,169
Other assets (1,149) (4,066) (1,861)
-------- -------- --------
Net cash provided by (used for) continuing operations 5,114 5,773 (20,989)
Net cash provided by (used for) discontinued operations (17,608) (736) 232
-------- -------- --------
Net cash provided by (used for) operating activities (12,494) 5,037 (20,757)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired -- -- (5,770)
Capital expenditures (5,188) (8,145) (10,385)
Investment in environmental treatment facilities (1,712) (2,229) (508)
Software development (10,680) -- --
Other, net 1,495 (112) (717)
-------- -------- --------
Net cash used for investing activities $(16,085) $(10,486) $(17,380)
-------- -------- --------
</TABLE>
CONTINUED
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(in thousands)
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and long-term debt $ 3,500 $ 281 $ 2,298
Payments of notes payable and long-term debt (4,642) (5,150) (10,795)
Net borrowings under line of credit 28,240 -- --
Stock issued under employee stock option plan 13 627 387
Change in cumulative currency translation adjustment (1,020) (147) (67)
Other, net (9) (47) (2)
-------- -------- --------
Net cash provided by (used for) financing activities 26,082 (4,436) (8,179)
-------- -------- --------
Net decrease in cash and cash equivalents (2,497) (9,885) (46,316)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,121 20,006 66,322
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,624 $ 10,121 $ 20,006
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 23,765 $ 22,195 $ 21,269
Cash paid during the year for income taxes $ 2,791 $ 2,014 $ 2,448
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
(1) SUMMARY OF SIGNIFICANT
- - - --------------------------
ACCOUNTING POLICIES:
- - - --------------------
CONSOLIDATION-
The consolidated financial statements include the accounts of Air & Water
Technologies Corporation ("AWT" or the "Company") and all majority-owned
subsidiaries. All significant intercompany transactions have been eliminated.
Investments in joint ventures, which are 50% or less owned, are accounted for
using the equity method, under which the Company's share of joint venture
results of operations are included in "sales", "cost of sales" and "selling,
general and administrative expenses" in the accompanying consolidated statements
of operations.
CASH EQUIVALENTS-
Cash equivalents consist of investments in short-term highly liquid
securities having an original maturity at the date of acquisition of three
months or less and primarily include investments in bank time deposits.
REVENUE RECOGNITION-
The Company follows the practice of accruing income from long-term contracts
using the percentage-of-completion method. Under this method, the Company
primarily recognizes as profit that proportion of the total anticipated profit
which the cost of work completed bears to the estimated total cost of the work
covered by the contract, including estimated warranty and performance guarantee
costs. As contracts extend over one or more years, revisions of cost and profit
estimates are made periodically and are reflected in the accounting period in
which they are determined. If the estimate of total costs on a contract
indicates a loss, the total anticipated loss is recognized immediately.
Estimated warranty and performance guarantee costs on completed contracts are
included in accrued expenses ($5,166,000 and $7,491,000 in 1993 and 1992,
respectively).
The asset, "costs and estimated earnings in excess of billings on uncompleted
contracts," represents contract costs incurred plus earned margin in excess of
amounts billed and includes unbilled retentions which result from performance of
work on contracts in progress in advance of billings pursuant to certain
contract terms. Approximately $74,700,000 of costs and estimated earnings in
excess of billings on uncompleted contracts is expected to be collected in 1994.
The liability, "billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of contract costs incurred
and earned margin.
In connection with various agreements relating to the licensing of the
Company's technologies to third parties, the Company records sales for licensing
and related fees as they are earned as specified under the terms of the related
agreements.
INVENTORIES-
Inventories are stated principally at the lower of first-in, first-out cost
or market. Inventories at October 31 consist of the following (in thousands)-
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Raw materials $ 4,747 $ 3,195
Work in process 1,262 2,892
Components and parts 24,131 27,660
------- -------
$30,140 $33,747
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT-
Property, plant and equipment is stated on the basis of cost. Depreciation
and amortization of property, plant and equipment is computed on the straight-
line method over the estimated useful lives of the assets. During 1993, the
Company standardized the estimated average useful lives used by each of its
subsidiaries to compute depreciation for property, plant and equipment. These
changes were made to better reflect the estimated periods during which such
assets remain in service. The estimated useful lives are 20 years for land
improvements, 20 to 30 years for buildings and improvements and 5-12 years for
machinery, equipment and fixtures. The revised estimated useful lives
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
decreased 1993 depreciation expense by approximately $2,500,000. Repair and
maintenance costs are expensed as incurred; major renewals and betterments are
capitalized. Property, plant and equipment at October 31 consist of the
following (in thousands)-
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Land and
land improvements $ 6,567 $ 8,138
Buildings and
improvements 22,964 22,646
Machinery, equipment
and fixtures 42,366 41,213
Rental equipment 757 3,298
-------- --------
72,654 75,295
Less- Accumulated
depreciation and
amortization (27,213) (26,213)
-------- --------
$ 45,441 $ 49,082
======== ========
</TABLE>
SOFTWARE DEVELOPMENT COSTS-
The Company has capitalized costs primarily incurred in the development of
certain software elements to be sold for use with its emission monitoring
equipment. In accordance with Statement of Financial Accounting Standards No.
86, capitalization begins when technological feasibility has been established
and ends when the product is available for general release to customers.
Amortization has been computed as the ratio of current sales over anticipated
future sales of emission monitoring systems over a five year period. Deferred
software costs of $9,846,000 at October 31, 1993 are included in other assets
net of accumulated amortization of $834,000.
AMORTIZATION-
Goodwill is being amortized over 40 years under the straight-line method.
Subsequent to its acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the related
business operation's undiscounted operating income over the remaining life of
the goodwill in measuring whether the goodwill is recoverable. Deferred debt
issuance costs are amortized over the life of the related debt utilizing the
effective interest method. Amortization of deferred debt issuance costs for the
periods ended October 31, 1993, 1992 and 1991 was $520,000, $219,000 and
$151,000, respectively.
EARNINGS (LOSS) PER SHARE-
The earnings (loss) per share was computed by dividing the net income (loss)
by the weighted average number of common and common equivalent shares
outstanding each period. The weighted average number of shares outstanding were
24,815,000 in 1993, 24,812,000 in 1992 and 22,437,000 in 1991. Fully diluted
earnings per share are not presented as the assumed conversion of the Company's
8% Convertible Notes is antidilutive to the earnings (loss) per share presented
herein.
RECLASSIFICATIONS-
Certain reclassifications have been made to the 1992 consolidated financial
statements to conform to the 1993 presentation.
(2) RESTRUCTURING OF OPERATIONS AND THE MERGER WITH METCALF & EDDY COMPANIES
- - - ----------------------------------------------------------------------------
INC. ("MECI"):
- - - --------------
On October 31, 1991, the Company completed a merger (the "Merger") with MECI,
whereby the Company acquired all of the outstanding shares of common stock of
MECI other than those already held by the Company or its subsidiaries (2,623,251
shares or approximately 18% of the outstanding shares) and issued options to
acquire MECI's outstanding stock options. In the Merger, MECI shares and
options were converted into .875 AWT shares and options.
In 1991, the Company initiated a restructuring of its operations in
conjunction with the Merger in order to achieve marketing leverage and obtain
operating efficiencies through the consolidation of regional facilities as well
as implement corporate-wide restructuring and cost reduction programs. The
estimated one-time cost of these efforts of $16,000,000 pre-tax or $.68 per
share after tax, was reflected as a charge to the Company's 1991 operating
income. The charge provided for costs associated with the consolidation and
integration of certain selling and administrative functions, the
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
relocation of Company facilities, computer systems integration and MECI's
expenses relating to the Merger.
The Merger was accounted for using the purchase method of accounting. The
value of the AWT shares ($49,350,000) and stock options ($1,090,000) issued as
purchase consideration was determined using the closing price of AWT's Common
Stock on October 31, 1991 of $ 21.50. The excess of purchase consideration
including expenses associated with the Merger over the fair value of the
proportional net assets of MECI attributed to the ownership of MECI not
controlled by AWT was $21,422,000. This excess has been allocated to goodwill
and is being amortized over 40 years.
The following unaudited pro forma summary presents certain elements of the
Company's results of operations as if the Merger had occurred at the beginning
of 1991. The pro forma summary includes the historical sales and costs of the
Company adjusted for the effects of the Merger, such as amortization of goodwill
created by the Merger and the elimination of the minority interest in MECI. The
effect of eliminating recurring costs as a result of the Merger has not been
reflected in the pro forma summary. However, the impact on 1991 operating
income is estimated at approximately $ 340,000. The cost reductions result from
the elimination of legal, accounting and reporting costs as a direct result of
the Merger. The pro forma summary does not purport to project the results of
operations of the Company as of any future period (in thousands, except per
share data).
<TABLE>
<CAPTION>
Unaudited 1991
--------
<S> <C>
Sales $620,129
========
Loss from continuing operations $(11,259)
========
Minority Interest $ 167
========
Net loss from continuing operations $(32,706)
========
Net loss per share from continuing
operations $ (1.46)
========
</TABLE>
(3) ACQUISITIONS:
- - - ------------------
1991 ACQUISITIONS-
Effective November 1, 1990, the Company acquired Regenerative Environment
Equipment Co., Inc., ("REECO") and related companies which provide a broad range
of volatile organic compound and air toxics control systems for cash of
$7,000,000 and obligations totaling approximately $3,000,000. The Company may
also make additional payments based on the future cumulative operating income of
the acquired businesses, as defined. No such payments were required to be paid
to date.
This acquisition has been accounted for as a purchase and, accordingly, the
results of REECO are included in the accompanying 1991 consolidated statement of
operations since the date of acquisition. The purchase price was assigned to
assets ($25,815,000) and liabilities ($15,815,000) acquired at an estimate of
their fair values. The excess of purchase price over the net assets acquired of
$15,839,000 was assigned to goodwill.
Effective August 1, 1991, the Company purchased the assets of Laser Precision
Corporation's analytical division, Analect Instruments ("Analect"). Analect is
engaged in the manufacture and marketing of environmental monitors as well as
process and laboratory systems. The acquisition agreement calls for the Company
to pay Laser Precision Corporation $3,534,000 over a three year period with
$500,000 having been paid upon consummation of the agreement.
The acquisition has been accounted for as a purchase and, accordingly, the
results of Analect are included in the accompanying 1991 consolidated statement
of operations since the date of acquisition. The purchase price has been
assigned to assets ($6,960,000 including $1,171,000 assigned to patents) and
liabilities ($3,426,000) acquired at an estimate of their fair values. The
excess of purchase price over the net assets acquired of $2,718,000 was assigned
to goodwill. On a pro forma basis, the results of Analect's operations from
November 1, 1990 to the date of acquisition would not have had a material effect
on the accompanying 1991 consolidated statement of operations.
(4) DISCONTINUED OPERATIONS:
- - - ----------------------------
In January 1994, the Company announced that it would discontinue its asbestos
abatement operations. Accordingly, the asbestos abatement business, as of the
Company's 1993 fiscal year, is considered a discontinued operation for financial
reporting purposes. The Company made its determination to discontinue this
business after an operational review prompted by increasing negative cash flows
during fiscal 1993. The
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
review, which was initiated during the fourth quarter of 1993, has led to a more
extensive investigation of among other things, recorded financial results and
other internal operating and accounting controls within the asbestos abatement
operations, after the discovery of accounting irregularities. Certain members of
the senior management team within the asbestos abatement operations have been
replaced. The investigation is continuing as of the date of the filing of the
Annual Report on Form 10-K.
As a result of the review the Company recorded certain adjustments in the
fourth quarter of fiscal 1993. The asbestos abatement operations experienced
operating losses, leading to a fourth quarter total loss from discontinued
operations of $13,064,000. The adjustments consisted of a $2,200,000 reversal
of recorded revenues in connection with projects which were found to be non-
existent and $430,000 of inflated inventory quantities. The operating losses
resulted primarily from revised estimates by current management of costs to
complete on certain existing contracts.
The Company plans to sell the business during 1994. The assets and
liabilities of this business have been reclassified on the consolidated balance
sheet from the previously reported classification to separately identify such as
net current assets and net non-current assets related to discontinued
operations. These net assets consist of net working capital, net property,
plant and equipment and other assets less related liabilities. Sales applicable
to this business were $59,218,000, $46,238,000 and $37,353,000 for the periods
ended October 31, 1993, 1992 and 1991, respectively. Income taxes applicable to
the results of this business were $0, $213,000 and $583,000 for the periods
ended October 31, 1993, 1992 and 1991, respectively.
The net cash provided by (used for) discontinued operations consists of the
following (in thousands) -
<TABLE>
<CAPTION>
1993 1992 1991
-------- ------- -------
<S> <C> <C> <C>
Income (loss) $(10,108) $ 3,994 $ 5,885
Depreciation and
amoritization 944 617 639
Cash used for working
capital (7,229) (4,134) (4,573)
(Increase) decrease in
other assets (88) (56) 61
Capital expenditures (874) (1,043) (1,569)
Payment of long-term
debt (130) (96) (240)
Other net (123) (18) 29
-------- ------- -------
$(17,608) $ (736) $ 232
======== ======= =======
</TABLE>
(5) ACCOUNTS RECEIVABLE:
- - - ------------------------
As of October 31, 1993 and 1992, accounts receivable included balances of
$4,906,000 and $989,000, respectively, billed to customers under retainage
provisions of long-term contracts. Substantially all of the retainage in
accounts receivable as of October 31, 1993 is expected to be collected in 1994.
Through an accounts receivable purchase agreement with the First National
Bank of Chicago ("the Institution"), the Company may sell eligible accounts
receivable, at its option, on an ongoing basis, to the Institution, up to
$20,000,000 until expiration of the agreement on January 31, 1995. As needed,
the Company replaces accounts receivable previously sold when they are
collected. On average, the Company had approximately $20,000,000 of accounts
receivable outstanding under this agreement during 1993. Sales of accounts
receivable under the agreement are subject to limited recourse. As of October
31, 1993 and 1992, $20,000,000 and $18,500,000, respectively, of accounts
receivable were outstanding under the agreement and, accordingly, excluded from
accounts receivable.
The difference between the proceeds received upon the sale of accounts
receivable and the net carrying value of such receivables has been reflected as
a loss. Such losses have been included in other expense and amounted to
approximately $1,320,000, $1,026,000 and $508,000 for the periods ended October
31, 1993, 1992 and 1991, respectively.
(6) INVESTMENTS IN ENVIRONMENTAL
- - - --------------------------------
TREATMENT FACILITIES:
- - - ------------------------
The Company has designed and constructed environmental treatment facilities
for certain governmental entities (the "entities"). The cost of these facilities
was primarily funded through the issuance of tax-exempt Industrial Revenue Bonds
by the entities, the proceeds of which were loaned to the Company. The entities
have entered into long-term service agreements with the Company which transfers
to them substantially all risks of ownership and which will generate sufficient
revenues to service the debt and return the Company's investment. Accordingly,
these transactions have been accounted for as sales-type leases. Consistent with
the definition of a legal right of offset (the related agreements provide for a
net settlement of the obligations between the parties, and the revenues referred
to above are legally assigned to payment of debt service), neither the
facilities nor the associated debt (approximately $33,469,000 and $34,075,000 at
October 31, 1993 and 1992, respectively) are reflected in the accompanying
consolidated balance sheets. These agreements provide for various performance
guaran-
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
tees by the Company. Construction has been completed on all of these
facilities and all are operational. Management believes that the Company will
continue to maintain the stipulated performance guarantees.
During 1993, the long-term service agreement between the Company and certain
governmental entities relating to one of its treatment facilities was amended.
The amended agreement provided for an estimated settlement of $4,000,000 of
outstanding claims for which costs had previously been incurred, the refinancing
of the project's outstanding debt and related financing of $3,500,000 for the
enhancement and expansion of the facility to improve the project's operating
performance. The above settlement of claims was recorded as revenue in 1993.
The net investment in these sales-type leases consists of the following at
October 31 (in millions)-
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Future minimum lease
payments $ 41.4 $ 40.3
Expected residual value 9.3 9.3
Other assets 3.8 2.3
Unearned income (5.5) (4.6)
------ ------
Net investment in leases 49.0 47.3
Offset- nonrecourse debt
of $33.5 million and
$34.0 million, respectively,
in 1993 and 1992, net of
available funds in hands
of trustee (30.7) (30.7)
------ ------
$ 18.3 $ 16.6
====== ======
</TABLE>
At October 31, 1993, minimum lease payments to be received, net of executory
costs for the five succeeding fiscal years, are as follows (in thousands):
<TABLE>
<S> <C>
1994 $1,029
1995 1,226
1996 1,399
1997 1,390
1998 1,486
</TABLE>
(7) FINANCING ARRANGEMENTS:
- - - ---------------------------
In September 1990, the Company entered into a Credit Agreement ("the Credit
Agreement") with The First National Bank of Chicago as agent for a syndicate of
three banks. The total line available under the Credit Agreement is $70,000,000,
which may be used for working capital loans and letters of credit to be used for
general corporate purposes. Of the total commitment, no more than $40,000,000
may be used for working capital loans. The working capital facility matures and
the Company's ability to draw on the letter of credit facility expires on
January 31, 1995.
During 1993, certain covenants (as summarized below) were amended to reduce
the level of scheduled escalating interest coverage requirements and to allow
for the discontinuance of the Company's asbestos abatement business. The
respective amendments also set new interest rates which are further described
below.
Working capital loans bear interest payable quarterly. At the option of the
Company, working capital loans bear interest at a floating rate (corporate base
rate, as defined, plus 1.5%, 7.5% at October 31, 1993, up to $30,000,000 in
borrowings and 2.0% above such amount) or a fixed rate (LIBOR, as defined, plus
2.5%, 5.2% at October 31, 1993, up to $30,000,000 in borrowings and 3.0% above
such amount). Drawdowns under any letter of credit are reimbursable on demand
unless funded with a working capital loan bearing interest at the floating rate.
The Credit Agreement, as amended, contains certain financial and other
restrictive covenants, as defined, with respect to the Company and its
subsidiaries relating to, among other things, the maintenance of certain
financial ratios, the incurrence of additional indebtedness, the creation of
liens, guarantees, investments, the sale of assets and the payment of dividends
on or the redemption, repurchase, acquisition or retirement of securities of the
Company or its subsidiaries. The Company may pay cash dividends on its Common
Stock or make other restricted payments, as defined, up to $2,000,000. As of
October 31, 1993, approximately $1,938,000 was available for payment of such
dividends and restricted payments. At October 31, 1993, the Company had short
term borrowings outstanding of $28,240,000 under the total facility and an
unused line of approximately $26,300,000 under the total facility. The average
daily balance on all short term loans outstanding under the facility was
approximately $26,407,000, $11,336,000 and $164,000 in 1993, 1992 and 1991,
respectively, at a weighted average interest rate of approximately 6.6%,
6.3% and 8.1% in 1993, 1992 and 1991, respectively. The maximum month-end
short term loan balance outstanding under the facility was $33,791,000
$20,000,000, and $3,500,000 in 1993 1992 and 1991, respectively.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
(8) LONG-TERM DEBT:
- - - --------------------
The Company's long-term debt consists of the following at October 31 (in
thousands)-
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
10.48% to 11.18% Senior Notes due September 18, 2000 $100,000 $100,000
8% Convertible Subordinated Debentures due May 15, 2015 115,000 115,000
8.5 % Note due July 1, 2007 (Note 6) 3,500 --
Real estate mortgage loans at rates from 7.5% to 9.5%, due 1994-2003 5,157 5,475
Obligations due in annual installments through August 1994 to
former shareholders of acquired businesses bearing interest at 8% 534 3,166
Other 1,995 2,610
-------- --------
226,186 226,251
Less current installments of long-term debt (3,730) (4,276)
-------- --------
Long-term debt $222,456 $221,975
======== ========
</TABLE>
The Company's $100,000,000 of Senior Notes (the "Notes") to The Prudential
Insurance Company of America bear interest payable semiannually. The Notes are
redeemable in whole or in part at the option of the Company at any time at a
redemption price of 100% of the principal amount plus a floating premium, as
defined, together with accrued interest to the redemption date. The Notes are
payable in annual installments of $25,000,000 commencing in September 1997. The
Notes contain certain financial and other restrictive covenants substantially
identical to those contained in the Credit Agreement (Note 7). During 1993, such
covenants were amended to reduce the level of scheduled escalating interest
coverage requirements through the expiration of the Credit Agreement and to
allow for the discontinuance of the Company's asbestos business.
During 1990, the Company completed the public offering of $115,000,000 of 8%
Convertible Subordinated Debentures. Interest on the debentures is payable
semiannually. The debentures are redeemable in whole or in part at the option of
the Company at any time on or after May 15, 1993, at a redemption price of
105.6% of the principal amount in 1993 reducing to 100% of the principal amount
in 2000, together with accrued interest to the redemption date. The debentures
require equal annual sinking fund payments beginning May 15, 2000, which are
calculated to retire 75% of the debentures prior to maturity. The debentures are
convertible into shares of Class A Common Stock at a conversion price of $30.00
per share.
The aggregate net book value of property securing long-term debt obligations
was approximately $17,000,000 as of October 31, 1993.
The aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1994 $ 3,730
1995 1,127
1996 657
1997 25,403
1998 25,423
Thereafter 169,846
--------
$226,186
========
</TABLE>
(9) COMMON AND PREFERRED STOCK:
- - - -------------------------------
On October 31, 1991, the Company completed its Merger with MECI (Note 2)
whereby the Company issued 2,295,344 shares of Class A Common Stock valued at
the closing price as of that date of $21.50.
The Company has authorized 2,500,000 shares of Preferred Stock which the
Board of Directors may allocate to any class or series of preferred stock and
determine the relative rights and preferences for each class or series
designated.
Each holder of outstanding shares of Common Stock at the date of the
Company's initial public stock offering in August 1989 is subject to an Amended
and Restated Stockholder Agreement dated June 13, 1989 (the "Stockholder
Agreement"), by and among the Company and such shareholders. This agreement
grants certain demand registration rights to Institutional Investors (as
defined) and certain piggy-back registra-
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
tion rights to all stockholders with respect to the Common Stock. Unless
terminated earlier by the written consent of at least 70% of the stockholders,
the Stockholder Agreement expires on July 13, 1997.
During November 1990, the holder of the Company's nonvoting Class B Common
Stock sold such stock and in accordance with the Company's Certificate of
Incorporation, as amended, this stock immediately converted into voting Class A
Common Stock upon its sale. Accordingly, there is no longer any Class B Common
Stock outstanding.
(10) STOCK OPTION AND PURCHASE PLANS:
- - - -------------------------------------
The Company established its stock option and restricted stock award plan (the
"Plan") in 1989 under which incentive stock options and nonqualified stock
options may be granted to purchase shares of Common Stock of the Company and
restricted shares of Common Stock of the Company may be awarded. The Plan
authorizes the granting of stock options and restricted stock awards for up to
an aggregate of 2,892,735 shares of Class A Common Stock of the Company. As a
result of the Company's Merger with MECI (Note 2), all stock awards available
under the MECI plan were converted into equivalent AWT Common Stock Options and,
accordingly all amounts and activity presented for the Plan, herein, are
inclusive of awards under the MECI plan. Options and restricted stock awards
granted may not be exercised or vest during the first year after grant but,
thereafter, 25% of the shares granted become exercisable or vest in the case of
restricted stock on the first through fourth anniversaries of grant. The
following is a summary of certain information pertaining to options under the
Plan.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Outstanding
November 1 1,637,406 856,797 787,677
Granted 963,900 972,900 174,081
Exercised (1,250) (36,802) (25,953)
Forfeited (249,904) (155,489) (79,008)
--------- --------- ---------
Outstanding
October 31 2,350,152 1,637,406 856,797
========= ========= =========
At October 31-
--------- --------- ---------
Exercisable 732,487 494,223 353,868
========= ========= =========
Options and
restricted
stock
available for
grant 411,952 1,124,530 2,013,463
========= ========= =========
Option price
range
per share-
Outstanding $10.50 $10.50 $14.57
to to to
$31.43 $31.43 $31.43
Exercised $10.50 $14.57 $16.57
to to
$19.13 $19.13
</TABLE>
In December 1991, the Company granted 78,070 restricted shares to its
employees in accordance with the terms of the Plan described above at the then
prevailing market price of the Company's Common Stock of $18.50. The aggregate
fair market value of the shares granted was recorded as unearned compensation
expense and is being amortized over the restricted period. The unamortized
unearned compensation value is shown as a reduction of shareholders' equity. In
1993 and 1992, $428,000 and $265,000, respectively was amortized to expense.
Under the Company's employee stock purchase plan (the "Stock Purchase Plan"),
officers and other key employees may be granted the right to purchase up to
1,000,000 shares of the Company's Class A Common Stock. The Compensation
Committee of the Board of Directors determines the purchase price of shares
issuable under the Stock Purchase Plan. At October 31, 1993 and 1992,
approximately 232,000 shares of Class A Common Stock were available for sale
under the Stock Purchase Plan.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
(11) BENEFIT PLANS:
- - - -------------------
The Company maintains profit sharing plans providing for annual discretionary
Company contributions which are fixed by the Board of Directors based on the
performance of the applicable employee group. Company contributions and
forfeitures are allocated among the participants' accounts on the basis of each
participant's base salary. All full-time regular employees who meet minimum age
(21) and service requirements participate. Participants' accounts vest at a rate
of ten percent for the first four years and twenty percent for the next three
years of continuous service. No contributions to profit sharing plans were made
for the years ended October 31, 1993, 1992 and 1991.
Certain employees retiring from the Company between the ages of 55 and 62 who
have rendered the requisite number of years of service (generally 25 years) are
entitled to postretirement health care coverage. These benefits are subject to
deductibles, copayment provisions and other limitations. The Company reserves
the right to change or terminate the benefits at any time. The cost of the
benefits is recognized as expense as benefits are paid. The total cost of these
postretirement benefits charged to the results of operations was $286,000,
$380,000 and $342,000 for 1993, 1992 and 1991, respectively.
The Financial Accounting Standards Board has issued a pronouncement that
would require the Company to change its method of accounting for postretirement
benefits. The prescribed accounting treatment is required to be implemented in
its first quarter of fiscal 1994. The Company will amortize the catch-up
effect over participants' future service periods . The adoption of the new
prescribed accounting for postretirement benefits is not expected to have a
significant effect on the Company's reported consolidated financial position and
results of operations in fiscal 1994.
(12) INVESTMENTS IN JOINT VENTURES:
- - - -----------------------------------
The Company, in the normal conduct of its subsidiaries' business, has entered
into certain partnership arrangements, referred to as "joint ventures," for
engineering and program management projects. A separate joint venture is
established with respect to each such project. The joint venture arrangements
generally commit each venturer to supply a predetermined proportion of the
engineering labor and capital, and provide each venturer a predetermined
proportion of income or loss. Each joint venture is terminated upon the
completion of the underlying project. Summary financial information for joint
ventures accounted for on the equity method follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Financial position as
of October 31-
Current assets $61,719 $61,651
Current liabilities (Note 15) 54,114 51,779
------- -------
$ 7,605 $ 9,872
======= =======
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Operations for the
years ended October 31-
Sales $122,548 $162,195 $186,642
Cost of sales 101,127 137,317 159,889
General and
administrative
expenses 11,730 12,687 13,369
-------- -------- --------
Income $ 9,691 $ 12,191 $ 13,384
======== ======== ========
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Company share of joint ventures
for the years ended October 31-
Sales $49,788 $70,867 $82,945
Cost of sales 40,385 59,075 69,708
General and
administrative
expenses 5,448 6,378 7,161
------- ------- -------
Income $ 3,955 $ 5,414 $ 6,076
======= ======= =======
Investment as of
October 31 $ 2,275 $ 2,841 $ 669
======= ======= =======
</TABLE>
The Company's share of joint venture income presented above includes general
and administrative expenses incurred by the joint venture. General and
administrative expenses incurred by the Company attributable to the management
and administration of the joint ventures are not included.
The Company's investment in joint ventures includes capital contributed to
the joint ventures and the Company's share of undistributed earnings (included
in other assets). In addition, the Company had receivables from the joint
ventures totaling $2,783,000 and $2,337,000 at October 31, 1993 and 1992,
respectively, related to current services provided by the Company to the joint
ventures.
The data presented above primarily represents Metcalf & Eddy's investment in
a 43%-owned joint venture with CRSS Inc., providing services to the U. S. Air
Force in Saudi Arabia.
(13) BUSINESS SEGMENTS AND GEOGRAPHIC DATA:
- - - -------------------------------------------
The Company currently generates substantially all of its revenues from
environmental treatment and related services.
Metcalf & Eddy provides a comprehensive range of water related services,
including treatment process design, contract operation and ownership of
facilities and on-site and off-site remediation of environmental contamination.
Gross sales to federal, state and municipal governmental agencies totaled 72%,
76% and 72% of Metcalf & Eddy's gross sales in the years ended October 31, 1993,
1992 and 1991, respectively.
Research-Cottrell services include the initial analysis of air/thermal
pollution problems, consultation, design and installation of the appropriate
treatment technologies including electrostatic precipitators, fabric filters,
chimneys, cooling towers, dry emission control systems, continuous emission
monitors and thermal oxidizers. Additionally, this segment through its service
and maintenance operations provides parts, repairs, service and maintenance for
its and others installed equipment base.
The Company's activities in the Residuals Management segment primarily relate
to the design, fabrication and service of natural gas compressors and other
systems and methane extraction.
Sales between segments are included within the segment recording the sales
transaction and eliminated for consolidation purposes. Operating profit by
segment is total operating revenue less operating expenses and amortization of
goodwill. Unallocated corporate expenses includes administrative costs not
allocable to a specific segment. Identifiable assets are those assets used by
each segment in its operation. Corporate assets primarily include cash, fixed
assets and deferred debt issuance costs.
Sales and identifiable assets of foreign operations as of and for the years
ended October 31, 1993, 1992 and 1991 were less than 10% of consolidated assets
and sales. In addition, sales through a 43%-owned joint venture (Note 12)
represented approximately 7%, 9% and 12%, respectively, of consolidated sales in
the years ended October 31, 1993, 1992 and 1991.
Information by business segment is as follows:
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
<TABLE>
<CAPTION>
RESEARCH- METCALF RESIDUALS UNALLOCATED
COTTRELL & EDDY MANAGEMENT OTHER CORPORATE ELIMINATIONS CONSOLIDATED
--------- -------- ---------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED OCTOBER 31, 1993-
Sales $276,584 $299,349 $54,444 $ -- $ -- $ -- $630,377
Costs and expenses 261,358 269,743 53,544 280 8,020 -- 592,945
Amortization of goodwill 3,177 3,617 41 -- -- -- 6,835
-------- -------- ------- ------ -------- ------- --------
Operating income (loss) 12,049 25,989 859 (280) (8,020) -- 30,597
Interest income 407 181 55 9 200 -- 852
Interest expense (494) (1,510) (179) -- (23,561) 1,155* (24,589)
Other income (expense) (525) (1,401) 146 -- (438) (2,218)
-------- -------- ------- ------ -------- ------- --------
Income (loss) before income tax $ 11,437 $ 23,259 $ 881 $ (271) $(31,819) $ 1,155 $ 4,642
======== ======== ======= ====== ======== ======= ========
Identifiable assets as of
October 31, 1993 $250,039 $269,780 $25,527 $4,774 $ 51,915 $ -- $602,035
======== ======== ======= ====== ======== ======= ========
Depreciation and amortization $ 1,305 $ 2,232 $ 360 $ 135 $ 439 $ -- $ 4,471
======== ======== ======= ====== ======== ======= ========
Capital expenditures $ 1,760 $ 1,851 $ 1,308 $ -- $ 269 $ -- $ 5,188
======== ======== ======= ====== ======== ======= ========
FOR THE YEAR ENDED OCTOBER 31, 1992-
Sales $266,899 $342,366 $64,087 $ 110 $ -- $ (513) $672,949
Costs and expenses 253,918 327,182 61,127 283 7,096 (513) 649,093
Amortization of goodwill 3,112 3,612 21 -- -- -- 6,745
PRASA litigation charge -- 7,000 -- -- -- -- 7,000
-------- -------- ------- ------ -------- ------- --------
Operating income (loss) 9,869 4,572 2,939 (173) (7,096) -- 10,111
Interest income 466 124 59 31 655 -- 1,335
Interest expense (530) (2,542) (125) (21) (21,211) 1,749* (22,680)
Other income (expense) (997) (1,217) 636 -- (134) -- (1,712)
-------- -------- ------- ------ -------- ------- --------
Income (loss) before income tax $ 8,808 $ 937 $ 3,509 $ (163) $(27,786) $ 1,749 $(12,946)
======== ======== ======= ====== ======== ======= ========
Identifiable assets as of
October 31, 1992 $247,746 $280,337 $34,558 $6,066 $ 45,112 $ -- $613,819
======== ======== ======= ====== ======== ======= ========
Depreciation and amortization $ 2,091 $ 4,374 $ 508 $ 26 $ 645 $ -- $ 7,644
======== ======== ======= ====== ======== ======= ========
Capital expenditures $ 2,971 $ 3,650 $ 1,064 $ 389 $ 71 $ -- $ 8,145
======== ======== ======= ====== ======== ======= ========
FOR THE YEAR ENDED OCTOBER 31, 1991-
Sales $225,913 $344,984 $49,072 $1,584 $ -- $(1,424) $620,129
Costs and expenses 216,491 333,524 49,981 1,612 8,352 (1,424) 608,536
Amortization of goodwill 3,104 3,065 14 -- -- -- 6,183
Restructuring charge 5,900 4,500 500 -- 5,100 -- 16,000
-------- -------- ------- ------ -------- ------- --------
Operating income (loss) 418 3,895 (1,423) (28) (13,452) -- (10,590)
Interest income 707 76 14 -- 1,766 -- 2,563
Interest expense (226) (3,455) (124) (58) (20,226) 2,660* (21,429)
Other income (expense) (469) (589) 163 -- (37) -- (932)
-------- -------- ------- ------ -------- ------- --------
Income (loss) before income tax $ 430 $ (73) $(1,370) $ (86) $(31,949) $ 2,660 $(30,388)
======== ======== ======= ====== ======== ======= ========
Identifiable assets as of
October 31, 1991 $221,877 $292,884 $24,623 $3,493 $ 53,552 $ -- $596,429
======== ======== ======= ====== ======== ======= ========
Depreciation and amortization $ 2,034 $ 4,281 $ 495 $ 56 $ 532 $ -- $ 7,398
======== ======== ======= ====== ======== ======= ========
Capital expenditures $ 2,195 $ 5,873 $ 1,637 $ 27 $ 653 $ -- $ 10,385
======== ======== ======= ====== ======== ======= ========
</TABLE>
*Represents intercompany interest income/expense relating to loans to/from
Metcalf & Eddy, under the terms of a corporate and administrative service
agreement.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
(14) INCOME TAXES:
------------------
During the fourth quarter of fiscal year 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
109) as of the beginning of fiscal year 1993. SFAS 109 represents a new method
of accounting for income taxes; it generally requires that deferred taxes be
calculated using an asset and liability approach at currently enacted income tax
rates. As required under SFAS 109, in the year of adoption, the previously
reported 1993 quarterly results of operations were restated to reflect the
effects of applying SFAS 109 which eliminated the income tax provision and
corresponding extraordinary item. The cumulative effect of the change had no
effect on the Company's 1993 earnings or earnings per share.
SFAS 109 requires the recognition of deferred tax assets and liabilities for
both the expected future tax impact of differences between the financial
statement and tax basis of assets and liabilities, and for the expected future
tax benefit to be derived from tax loss carryforwards. SFAS 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
the realization of deferred tax assets.
At October 31, 1993, the Company had a net deferred tax asset of $24,600,000
which has been fully reserved by a valuation allowance. The deferred tax asset
is comprised of the tax effects of net operating losses ($26,100,000),
receivable reserves ($1,100,000), inventory reserves ($900,000) and accruals not
yet deductible ($8,200,000). The deferred tax liability is comprised of fixed
assets depreciation ($11,700,000).
At October 31, 1993, the Company had tax loss carryforwards of approximately
$75,000,000. Such carryforwards expire through 2008.
Income (loss) from continuing operations before income taxes and minority
interest at October 31 was (in thousands)-
<TABLE>
<CAPTION>
1993 1992 1991
------- -------- --------
<S> <C> <C> <C>
United States $ 853 $(17,435) $(30,957)
Foreign 3,789 4,489 569
------- -------- --------
$ 4,642 $(12,946) $(30,388)
======= ======== ========
<CAPTION>
Provision for income taxes at October 31 includes the following (in thousands)-
1993 1992 1991
------- -------- --------
<S> <C> <C> <C>
U. S. Federal-
Currently payable $ -- $ -- $ --
Deferred -- -- --
Foreign-
Currently payable 282 307 763
State (including approximately $750
of benefit in 1993
from the resolution of tax issues) (214) 512 719
------- -------- --------
$ 68 $ 819 $ 1,482
======= ======== ========
<CAPTION>
The difference between the income tax provision (benefit) computed by applying
the statutory federal income tax rate to pretax income (loss) and the actual tax
provision is as follows (in thousands)-
1993 1992 1991
------- -------- --------
<S> <C> <C> <C>
Statutory provision (benefit) $ 1,615 $ (4,402) $(10,332)
State income taxes (139) 338 475
Goodwill 1,913 2,293 2,102
Impact of net operating loss (2,576) 3,421 9,342
Impact of foreign operations (745) (831) (105)
------- -------- --------
$ 68 $ 819 $ 1,482
======= ======== ========
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
(15) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION:
- - - ---------------------------------------------------------------
At October 31, 1993 and 1992, approximately $37,400,000 in delinquent
payments on the Puerto Rico Aqueduct and Sewer Authority ("PRASA") contract were
outstanding. The Company, through Metcalf & Eddy, Inc. ("M&E") has filed an
action seeking payment of these delinquent payments and related damages as
described below. In September 1990, M&E filed an action in United States
District Court in San Juan, Puerto Rico, seeking $52 million in damages from
PRASA. M&E's suit initially sought $27 million in damages for payment of goods
and services M&E sold and rendered to PRASA under a contract to rehabilitate
PRASA's wastewater treatment system and provide related program management
services. In July 1991, M&E amended its action to seek $37.4 million in damages
for these delinquent payments, which represented the total account receivable
with respect to the PRASA contract as of that date. The suit also claims
damages for anticipated claims by suppliers to M&E with respect to the PRASA
contract, violations of good faith and fair dealing under the contract and loss
of business reputation. On December 18, 1990, M&E announced that it had
suspended all work under the contract pending resolution of the litigation
between the parties. The matter is complex litigation. No assurance as to the
final outcome of the litigation can be given.
PRASA has been withholding payments under its contract with M&E. An audit of
the contract, dated November 16, 1990, performed by a governmental affiliate of
PRASA, questioned up to $39,988,200 of billings for possible technical
violations of equipment procurement procedures under the contract and charges
outside the contract. PRASA had denied the allegations of the complaint and
challenged the jurisdiction of the United States District Court. The trial
court denied PRASA's jurisdictional motions and the United States Court of
Appeals for the First Circuit dismissed PRASA's appeal on procedural grounds.
PRASA then filed a petition for a writ of certiorari in the United States
Supreme Court asking that court to review that procedural dismissal, and the
Supreme Court granted that petition. The trial court stayed all proceedings
pending disposition by the Supreme Court of the appeal of the procedural issue.
On January 12, 1993, the Supreme Court decided this appeal in PRASA's favor and
remanded the case to the First Circuit for disposition on the merits of the
jurisdictional issue. On May 3, 1993, the First Circuit ruled against PRASA and
in favor of Metcalf & Eddy on the merits of the jurisdictional issue. Discovery
in this matter is nearing completion and a July 7, 1994 trial date has been
scheduled.
The Company disputes the findings of the PRASA audit. The Company believes
that substantially all of the billings questioned by the audit represent
appropriate charges under the contract for goods and services provided to PRASA
by M&E.
In October 1992, the Supreme Court of the Commonwealth of Puerto Rico ruled
on a separate action entitled "Colegio de Ingenieros vs. Autoridad de Acueductos
y Metcalf & Eddy, Inc." which could impact the Company's action against PRASA.
This ruling held that certain portions of a multi-year contract to repair,
rehabilitate or decommission 82 sewage treatment plants between M&E and PRASA
that pertained to design engineering were invalid as contrary to Puerto Rican
law insofar as they called for the practice of engineering by M&E. This action,
originally filed in September 1986 by the Puerto Rico College of Engineers (the
"Colegio"), an island-wide professional engineering organization, sought a
declaratory judgment that the engineering design portion of M&E's contract
violated a Puerto Rico law prohibiting corporations from practicing engineering.
The Company has filed a Motion for Reconsideration that remains undecided.
The Colegio decision complicates further what is complex commercial
litigation between the Company and PRASA. In particular, uncertainty exists as
to how the Federal District Court in the PRASA case will interpret and apply the
Colegio decision to the facts
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
before it. Because of this uncertainty, at this time the Company is unable to
determine with any specificity what impact the Colegio decision will have on its
efforts to recover monies from PRASA. As a result of these developments and the
status of the litigation with PRASA to date, the Company in its fourth quarter
ended October 31, 1992 recorded a $7,000,000 pre-tax charge ($.28 per share)
to earnings reflecting costs associated with the PRASA litigation. The Company
has consulted with counsel as to its obligations under the contract and the
course of the litigation generally. Based on its considerations of all of the
foregoing and the status of litigation to date, the Company believes that it has
performed substantially in accordance with the terms of the contract and that,
ultimately, at least a majority of all sums due M&E pursuant to the contract
will be realized. If the Company were to recover less than all of the account
receivable owed it by PRASA, the Company would recognize a corresponding
reduction in income (less any unutilized portion of the $ 7,000,000 in costs
accrued for) and accounts receivable for, and as of the end of, the period in
which a final determination of the amount to be recovered is reached.
The Company and its subsidiaries are parties to various other legal actions
arising in the normal course of their businesses, some of which involve claims
for substantial sums. The Company believes that the disposition of such actions,
individually or in the aggregate, will not have a material adverse effect on the
consolidated financial position or results of operations of the Company taken as
a whole.
The Company and its subsidiaries are obligated under various leases for
office and manufacturing facilities and certain machinery, equipment and
fixtures. Lease terms range from under one year to ten years. Certain leases
have renewal or escalation clauses or both. Certain equipment leases have
purchase options. Total rent expense in the periods ended October 31, 1993, 1992
and 1991, was $21,480,000, $19,161,000, and 15,808,000, respectively.
Minimum rental commitments under all noncancellable leases as of October 31,
1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------------------
<S> <C>
1994 $16,512
1995 13,474
1996 11,741
1997 10,081
1998 8,917
Thereafter 18,306
</TABLE>
It has been both a Company policy and a requirement of many customers for the
Company to carry insurance for the services it performs when such insurance can
be obtained on commercially reasonable terms. The Company and others in its
industry have been unable to cost effectively obtain additional environmental
liability insurance because of aggressive enforcement of federal environmental
regulations and legal decisions adverse to insurance carriers involving
pollution damage. In addition, for environmental and certain other insurance
coverages, insurance companies have switched from "occurrence" to "claims made"
liability policies so that the insured is only covered if the claim is made
during the period in which the policy is maintained. Under the Company's general
liability and other insurance policies, there are various pollution and
hazardous waste exclusions. Accordingly, there can be no assurance that
environmental liabilities, if any, that may be incurred by the Company would be
covered by its insurance or that the dollar amount of such liabilities that are
covered will not exceed the Company's policy limits. Management believes that
the Company is substantially in compliance with applicable environmental
regulations.
In connection with the sale of two manufacturing facilities in prior years,
the Company remains contingently liable as guarantor under $4,100,000 of
Industrial Revenue Bond financing. In addition, the Company is a guarantor under
a $15,000,000 revolving credit facility for a joint venture which expires on May
14, 1994, in which a subsidiary of the Company has a 43% interest. As of October
31, 1993, approximately $6,339,000 was outstanding under this agreement.
In March 1989, a subsidiary of the Company en-
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993
tered into a long-term bonding arrangement with a surety company. The bonding
agreement provides substantially all of the Company's operating entities with
bid bonds, performance bonds and other surety instruments. This agreement
requires that the subsidiary satisfies certain financial tests, as defined.
On August 20, 1990, the Company made a one-year, interest-free, unsecured
loan of $2,300,000 to the Chief Executive Officer of the Company. During 1991,
the terms and conditions of this loan were amended. Subject to certain
employment conditions, one-fifth of the loan would be forgiven on each
succeeding anniversary beginning on August 20, 1992. Accordingly, as the
required employment conditions are met, the forgiveness of the loan will be
reflected as compensation expense ratably over a five-year period. During 1992
and 1993, the Company and its Chief Executive Officer agreed to waive the
scheduled one-fifth forgiveness of the loan and extend the employment agreement
for a new five -year term. Interest has been imputed on the loan at
approximately 8%.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
- - - ------------------------------------
Summarized quarterly financial data for 1993 and 1992 are as follows (in
thousands, except share data):
<TABLE>
<CAPTION>
1993 BY QUARTER
FIRST SECOND THIRD FOURTH(2) YEAR
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales $161,099 $172,349 $140,764 $156,165 $630,377
Cost of sales 119,132 126,420 97,106 111,240 453,898
-------- -------- -------- -------- --------
Gross profit 41,967 45,929 43,658 44,925 176,479
Income (loss) from continuing operations before
income taxes and minority interest 483 1,834 767 1,558 4,642
Provision for income taxes 121 313 181 (547) 68
Minority interest 83 14 (16) (60) 21
-------- -------- -------- -------- --------
Income (loss) from continuing operations 279 1,507 602 2,165 4,553
Discontinued operations 100 1,468 1,388 (13,064) (10,108)
-------- -------- -------- -------- --------
Net income (loss) $ 379 $ 2,975 $ 1,990 $(10,899) $ (5,555)
======== ======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ .01 $ .06 $ .02 $ .09 $ .18
Discontinued operations .01 .06 .06 (.53) (.40)
-------- -------- -------- -------- --------
Net income (loss) $ .02 $ .12 $ .08 $ (.44) $ (.22)
======== ======== ======== ======== ========
<CAPTION>
1992 BY QUARTER
FIRST SECOND THIRD FOURTH(1) YEAR
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales $145,334 $163,267 $170,576 $193,772 $672,949
Cost of sales 104,478 119,672 125,605 145,537 495,292
-------- -------- -------- -------- --------
Gross profit 40,856 43,595 44,971 48,235 177,657
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and minority interest 223 (84) (4,639) (8,446) (12,946)
Provision for income taxes 745 554 (203) (277) 819
Minority interest 29 123 45 68 265
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary item $ (551) $ (761) $ (4,481) $ (8,237) $(14,030)
Discontinued Operations 704 429 2,150 711 3,994
Extraordinary item 741 362 (1,103) -- --
-------- -------- -------- -------- --------
Net income (Loss) 894 30 (3,434) (7,526) (10,036)
======== ======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ (.02) $ (.03) $ (.18) $ (.33) $ (.56)
Discontinued operations .03 .02 .08 .03 .16
Extraordinary item .03 .01 (.04) -- --
-------- -------- -------- -------- --------
Net Income (Loss) .04 .00 (.14) (.30) (.40)
======== ======== ======== ======== ========
</TABLE>
(1) The Company recognized a pre-tax charge of $7,000,000 for costs associated
with its litigation with PRASA (See Note 15 of the Notes to the Consolidated
Financial Statements).
(2) See Note 4 of the Notes to the Consolidated Financial Statements.
<PAGE>
SCHEDULE II
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
AMOUNT RECEIVABLE FROM RELATED PARTY
------------------------------------
FOR THE THREE YEARS ENDED OCTOBER 31, 1993, 1992 and 1991
---------------------------------------------------------
<TABLE>
<CAPTION>
Balance at
Balance at Deductions End
Beginning (Amounts of Period
Name of Debtor of Period Additions Increase (c) Decrease written off) (Current)
- - - -------------- ---------- --------- ------------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Eckardt C. Beck,
Chairman & Chief
Executive Officer
of the Company
Fiscal Year ended October 31, 1991:
- - - -----------------------------------
$2,164,709 (a) $ - $162,529 ($477,782) (d) (76,667) (e) $1,772,789
========== ======== ======== ========= ======= ==========
Fiscal Year ended October 31, 1992:
- - - -----------------------------------
$1,772,789 (a) $391,920 (b) $162,529 ($477,782) (d) (76,667) (e) $1,772,789
========== ======== ======== ========= ======= ==========
Fiscal Year ended October 31, 1993:
- - - -----------------------------------
$1,772,789 (a) $391,920 (b) $162,529 ($477,782) (d) (76,667) (e) $1,772,789
========== ======== ======== ========= ======= ==========
</TABLE>
(a) Represents the present value of a $2,300,000 face value loan originally
due on or before August 20, 1991. The loan is unsecured and bears no
interest. Interest was imputed on the loan at approximately 8%. During
1991, the loan agreement was amended. Subject to the maintenance of
certain employment conditions, one-fifth of the loan was scheduled to be
forgiven on each succeeding anniversary.
(b) During July 1992 and 1993 , the Company and its Chief Executive Officer
agreed to waive the first scheduled one-fifth forgiveness of the loan and
extend the employment agreement one year. Accordingly, the addition
represents the effect of reestablishing the loan's full face value of
$2,3000,000 at August 20, 1993 and 1992.
(c) Represents the amortization of the total imputed interest on the loan. At
the loan's inception total imputed interest amounted to $178,218. With
the amendment of the loan during 1991, imputed interest was recalculated
to total $477,782 (utilizing an interest rate of approximately 8%)
assuming the loan will be retired over five years as defined.
(d) Represents the amended loan discount as of October 31, 1993, 1992 and
1991.
(e) Represents the pro rata amortization of the anticipated forgiveness of
the principal amount under the amended terms of the loan as defined.
