<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1994
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 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 Corporation) (I.R.S. Employer
Identification Number)
U.S. Highway 22 West and Station Road, Branchburg, NJ 08876
------------------------------------------------------------
(Address of Principal Executive Offices)
Telephone: (908) 685-4600
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1994.
Class A
$.001 Par Value Common Stock 31,816,504
- ---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1994 AND OCTOBER 31, 1993
--------------------------------------------------------------------
(in thousands , except share data)
--------------------------------
<TABLE>
ASSETS 1994 1993
------ ---- ----
<CAPTION>
(unaudited)
---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,040 $ 7,624
Accounts receivable, less allowance for doubtful
accounts of $21,621 and $3,100 in 1994 and 1993,
respectively 101,940 115,131
Costs and estimated earnings in excess of
billings on uncompleted contracts 67,307 80,966
Inventories 29,191 30,140
Prepaid expenses and other current assets 10,736 17,548
Net current assets of discontinued operations 2,865 18,487
------- -------
Total current assets 218,079 269,896
PROPERTY, PLANT AND EQUIPMENT, net 46,311 45,441
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 22,019 18,323
DEFERRED DEBT ISSUANCE COSTS 3,550 4,084
GOODWILL 287,728 237,002
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS _ 6,269
OTHER ASSETS 21,684 20,275
------- -------
Total assets $599,371 $601,290
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and notes payable $ 14,563 $ 28,240
Current installments of long-term debt 1,483 3,455
Accounts payable 41,184 56,499
Accrued expenses 130,702 51,359
Billings in excess of costs and estimated earnings on
uncompleted contracts 19,043 24,229
U.S. and foreign income taxes 2,015 4,743
------- -------
Total current liabilities 208,990 168,525
------- -------
NON-CURRENT LIABILITIES 28,000 -
------- -------
LONG-TERM DEBT 246,187 221,906
------- -------
MINORITY INTEREST IN AFFILIATES 306 545
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 authorized, 2,500,000
shares; issued 1,200,000 shares in 1994 12 -
Common stock par value $.001 authorized 100,000,000
shares;issued 31,906,406 and 24,908,183 shares in
1994 and 1993 32 25
Additional paid-in capital 425,061 301,048
Accumulated deficit (308,918) (89,557)
Common stock in treasury, at cost (10) (108)
Cumulative currency translation adjustment (191) (1,094)
-------- --------
Total stockholders' equity 115,888 210,314
-------- --------
Total liabilities and stockholders' equity $599,371 $601,290
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE AND NINE MONTH PERIODS ENDING JULY 31, 1994 AND 1993
------------------------------------------------------------------
(in thousands, except per share data)
-----------------------------------
(unaudited)
---------
[CAPTION]
<TABLE>
Three Months Nine Months
Ending July 31 Ending July 31
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 143,070 $ 140,764 $ 408,501 $474,212
COST OF SALES 109,647 98,621 324,725 347,190
Gross Margin 33,423 42,143 83,776 127,022
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 36,422 34,056 105,494 100,099
AMORTIZATION OF GOODWILL 1,885 1,714 5,329 5,127
UNUSUAL CHARGES 107,000 _ 124,300 _
Operating Income (loss) (111,884) 6,373 (151,347) 21,796
INTEREST EXPENSE ( 5,989) ( 5,805) ( 19,006) (18,079)
INTEREST INCOME 183 206 825 605
OTHER EXPENSE, NET ( 1,375) ( 7) ( 2,669) ( 1,238)
Income (loss) from continuing
operations before income taxes
and minority interest (119,065) 767 (172,197) 3,084
PROVISION FOR INCOME TAXES 716 181 758 615
MINORITY INTEREST 20 ( 16) ( 239) 81
-------- -------- -------- -------
Income (loss) from continuing
operations (119,801) 602 (172,716) 2,388
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS _ 1,388 ( 38,229) 2,956
EXTRAORDINARY ITEM ( 8,000) _ ( 8,000) _
-------- -------- -------- -------
NET INCOME ( LOSS) $(127,801) $ 1,990 $(218,945) $ 5,344
======== ======= ======== =======
EARNINGS (LOSS) PER SHARE
Continuing operations $( 4.19) $ .02 $ ( 6.61) $ .10
Discontinued operations _ .06 ( 1.46) .12
Extraordinary item ( .28) _ ( .30) _
--------- -------- --------- ------
NET INCOME (LOSS) PER SHARE $( 4.47) $ .08 $ ( 8.37) $ .22
======== ======= ========= =======
Weighted average number of shares
outstanding 28,710 24,813 26,210 24,814
========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTH PERIODS ENDING JULY 31, 1994 AND 1993
--------------------------------------------------------
(in thousands)
(unaudited)
[CAPTION]
<TABLE>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (218,945) $ 5,344
Adjustments to reconcile net income (loss) to
net cash provided by(used for) continuing operations -
Discontinued operations 38,229 (2,956)
Depreciation and amortization 14,022 12,947
Minority interest (239) 81
Extraordinary loss on debt retirement 8,000 -
--------- --------
(158,933) 15,416
Changes in working capital, net of effects from
acquisitions -
(Increase) decrease in current assets -
Accounts receivable 23,106 7,311
Costs and estimated earnings in excess of
billings on uncompleted contracts 16,482 22,764
Inventories 1,342 (2,068)
Prepaid expenses and other current assets 7,751 441
Increases (decrease) in current liabilities -
Accounts payable (16,885) (32,038)
Accrued expenses 59,824 (12,271)
Billings in excess of costs and estimated
earnings on uncompleted contracts (6,964) (8,059)
Income taxes (2,950) (1,324)
Other assets 6,637 (7,817)
Other non-current liabilities 28,000 -
--------- ---------
Net cash used for continuing operations (42,590) (17,645)
Net cash used for discontinued operations (16,338) (7,870)
--------- ---------
Net cash used for operating activities (58,928) (25,515)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,017) (2,578)
Investment in environmental treatment facilities (3,696) (647)
Software development (2,659) _
Other, net 259 (479)
--------- ---------
Net cash used for investing activities (9,113) (3,704)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and
preferred stock 64,598 _
Proceeds from issuance of notes payable and
long-term debt 126,035 3,500
Payment of notes payable and long-term debt (110,222) (2,565)
Net borrowings (repayments) under line of credit (14,506) 24,391
Preferred dividends (145) _
Change in cumulative currency translation adjustment 697 (957)
Other, net _ (9)
--------- ---------
Net cash provided by financing activities 66,457 24,360
--------- ---------
Net decrease in cash and cash equivalents (1,584) (4,859)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,624 10,121
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,040 $ 5,262
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 21,217 $ 17,047
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
JULY 31, 1994
-------------
(unaudited)
---------
(in thousands, except share data)
-------------------------------
The interim consolidated financial statements and the following notes should
be read in conjunction with the notes to the consolidated financial
statements of the Company as included in its amended Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended October 31,
1993. The interim information reflects all adjustments, including normal
recurring accruals, which are, in the opinion of management, necessary for a
fair presentation of the results for the interim period. Results for the
interim period are not necessarily indicative of results to be expected for
the full year.
(1) 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 at July 31,
1994 and October 31, 1993.
(2) Net Income (Loss) Per Share:
---------------------------
Net income (loss) per share is computed by dividing the net income (loss)
after deducting preferred stock dividends by the weighted average number of
common and common equivalent shares outstanding. Fully diluted earnings per
share are not presented as the assumed conversion of the Company's $115,000
8% Convertible Debentures and 5.5% Convertible Exchangeable Preferred Stock
is antidilutive to per share amounts presented herein. The debentures and
preferred stock are convertible into shares of Class A Common Stock at
conversion prices of $30.00 and $12.50 per share, respectively.
(3) Sale of Accounts Receivable:
---------------------------
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 until expiration of the agreement on January 31, 1995. Sales of
accounts receivable under the agreement are subject to limited recourse. As
needed, the Company replaces accounts receivable previously sold with new
accounts receivable when the original receivables sold are collected. As of
July 31, 1994 and October 31, 1993, $20,000, of accounts receivable were
outstanding under the agreement and, accordingly, excluded from accounts
receivable.
(4) 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.
<PAGE>
Summary financial information for joint ventures accounted for on the equity
method for the nine month periods ending July 31, 1994 and 1993 follows:
[CAPTION]
<TABLE>
1994 1993
---- ----
<S> <C> <C>
Sales $ 25,616 $ 40,732
Cost of sales 20,448 33,576
General and administrative expenses 3,320 4,378
-------- --------
Income $ 1,848 $ 2,778
======== ========
Investment at July 31 $ 1,108 $ 477
======== ========
</TABLE>
The Company's share of joint venture income presented above includes general
and administrative expenses incurred by the joint ventures. General and
administrative expenses incurred by the Company attributed 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 $2,784 at July 31, 1994 and $2,783 at October 31, 1993,
relating to current services provided by the Company to the joint ventures.
The data presented above primarily represents the Company's investment in a
43% owned joint venture with CRSS, Inc. providing services to the U. S. Air
Force in Saudi Arabia.
(5) Unusual Items:
-------------
During the first quarter of fiscal 1994, the Company determined that certain
businesses no longer met strategic objectives and should therefore be
divested. These businesses primarily consist of certain manufacturing
operations and properties which do not fit with the Company's strategy and
which divert management attention from its core products and services. As a
result of the anticipated divestitures, the Company recorded a $17,300
charge representing the difference between the carrying value of these
operations of $37,000 and management's estimate of the anticipated net sales
proceeds of approximately $19,700. Total assets of these operations
approximates $41,000 at July 31, 1994, which includes approximately $7,500
for accounts receivable, $2,900 for costs and estimated earnings in excess
of billings, $12,500 for inventories, $9,800 for property plant and
equipment, $3,000 for other assets and $5,300 for goodwill. As of August
31, 1994 no divestiture transaction had been consummated, however several
negotiations are currently ongoing.
During the third quarter of fiscal 1994, the Company recorded charges of
approximately $107,000. These charges relate to various cost reduction
programs, new managements' de-emphasis of certain product lines which
provide the opportunity for a sharper focus on the Company's three core
competency areas; engineering consulting, contract operations and air
pollution control and to costs directly attributable to the CGE Transaction
(as discussed more fully in Note 7).
Included in the charges is (a) approximately $8,900 of termination benefits
primarily to the Company's former Chairman under the terms of an employment
contract which were triggered by the CGE Transaction and include a $2,300
loan forgiveness, certain tax payments and other payments (no payments have
been made to date to the Company's former chairman as discussions regarding
modification of the employment contract terms are ongoing); (b)
approximately $28,000 of impaired asset values primarily related to the
Company's de-emphasis of its cooling tower product line; (c) approximately
$7,200 of costs associated with the termination of certain leases and the
closing of certain facilities; (d) approximately $11,200 related to the
ongoing PRASA litigation which reflects revised estimates of the expenses
required to pursue, through trial, the Company's belief that substantially
all of the billings questioned by PRASA (see Note 6) represent appropriate
charges and revised estimates of collectibility given the complexity of the
litigation and the continuing deferral of a trial date; (e) approximately
$11,800 of estimated costs to settle pending litigation; (f) approximately
$9,000 to write-off substantially all of the Company's deferred software
costs reflecting a shift in focus to a standard industrial continuous
emission monitor; (g) approximately $22,500 of costs and asset writedowns
associated primarily with warranty and other claims in the Company's
electrostatic precipitator and continuous emission monitor product lines;
and (h) approximately $8,400 for other items primarily representing revised
estimates for potential insurance claims.
<PAGE>
Of the total unusual charges of $124,300 recorded during fiscal 1994, future
cash components amounted to approximately $30,000.
(6) Commitments and Contingencies:
-----------------------------
At July 31, 1994 and October 31, 1993, approximately $37,400 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 $52,000 in
damages from PRASA. M&E's suit initially sought $27,000 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 $37,400 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.
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 of billings for possible technical
violations of equipment procurement procedures under the contract and
charges outside the contract. 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.
PRASA had denied the allegations of the complaint and challenged the
jurisdiction of the United States District Court. The trial court has
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 had stayed all proceedings
(including further factual discovery and an initial trial date which had
been set for May 18, 1992) 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
complete. On April 15, 1994, the District Court issued an Order requiring a
Special Master to assist the Court with the complex accounting matters in
this case. A Special Master has not yet been appointed. In August 1994,
the District Court scheduled July 17, 1995 as the trial commencement date.
<PAGE>
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 which is still pending before the Court.
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 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 pre-tax charge to earnings reflecting costs associated
with the PRASA litigation. Additionally, in its third quarter ended July
31, 1994, the Company as more fully discussed in Note 5 recorded a further
pre-tax charge to earnings of $11,200 to reflect a revised estimate of costs
and expenses associated with this litigation and revised estimates of
collectibility. The Company has consulted with counsel as to its
obligations under the contract and the course of the litigation generally.
As the matter is complex litigation, no assurance as to the final outcome of
the litigation can be given. However 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 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.
(7) CGE Transaction:
---------------
On June 14, 1994, the Company's shareholders approved the terms of an
Investment Agreement entered into on March 30, 1994 with its largest
stockholder, Compagnie Generale des Eaux ("CGE") and Anjou International
Company, a wholly-owned subsidiary of CGE ("Anjou"). Under the terms of the
agreement, the Company entered into a series of transactions with CGE and
Anjou ("the CGE Transaction") in which it: (i) issued for cash $60,000 of a
new series of convertible exchangeable preferred stock with a dividend yield
of 5.5%, convertible at $12.50 per share into shares of Class A Common
Stock; (ii) acquired CGE's U.S. water management subsidiary, Professional
Service Group, Inc. ("PSG"), in exchange for 6,701,500 newly issued shares
of Class A Common Stock; (iii) benefits from certain financial undertakings
from CGE which include a $125,000 term loan from CGE of which substantially
all of the proceeds were used to repay the Prudential Notes; and (iv) became
CGE's exclusive vehicle in the United States, its possessions and
territories for CGE's water and wastewater management and air pollution
activities.
The $125,000 term loan from CGE is an unsecured facility bearing interest at a
rate based upon LIBOR plus 125 basis points, as defined, and has a final
maturity of June 15, 2001.
In connection with the related agreements, the Company in March 1994 also
issued 500,000 shares of Class A Common Stock to CGE for $5,000 in cash. As
a result of the transactions, CGE currently owns approximately 40% of the
common stock outstanding and has approximately 48% of the total voting
power. CGE also has proportionate representation on the Company's Board of
Directors.
<PAGE>
(8) PSG Acquisition:
---------------
In connection with the CGE Transaction, the Company on June 14, 1994 acquired
CGE's PSG water/wastewater management subsidiary (see Note 7). The
acquisition has been accounted for under the purchase method and,
accordingly, the operating results of PSG have been included in the
consolidated operating results since the date of acquisition. The purchase
price of $70,215 is based upon 6,701,500 shares of common stock issued in
exchange for PSG valued at the quoted market price at the date of issuance
($65,340) plus $4,875 of estimated direct acquisition costs. The purchase
price was assigned to tangible assets $26,072 and liabilities $11,907
acquired at an estimate of their fair value. The excess of purchase price
over PSG's tangible net assets acquired of $56,050 has been recorded as
goodwill and is being amortized over 40 years.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if PSG had been acquired as of the
beginning of the periods presented, after including the impact of certain
adjustments such as: amortization of goodwill, reduction of interest
expense from the CGE Transaction, and the related income tax effects.
Nine Months Nine Months
Ending July 31 Ending July 31
1994 1993
-------------- --------------
(Unaudited) (Unaudited)
Sales $ 464,106 $ 531,480
Income (loss) from continuing
operations $ (167,572) $ 6,893
Net income (loss) $ (213,749) $ 9,849
Earnings (loss) per share:
Continuing operations $ (5.31) $ .14
Net income (loss) $ (6.75) $ .23
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergy that might be achieved from combined
operations.
(9) Extraordinary Item:
------------------
On June 14, 1994 the Company utilized a portion of the proceeds from the
$125,000 CGE term loan to retire its 11.18% Senior Notes with the Prudential
Insurance Company of America . The difference between the redemption price
of $107,500 in cash plus unamortized debt issuance costs of $500 and the
$100,000 carrying value of the debt has been recorded as an extraordinary
loss.
(10) Reclassifications:
-----------------
Certain reclassifications have been made to conform the 1993 consolidated
financial statements to the 1994 presentation.
<PAGE>
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following information should be read in conjunction with the unaudited
interim consolidated financial statements and the notes thereto included in
this Quarterly Report and the audited financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's amended Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended October 31, 1993. As a result
of the CGE Transaction including, the acquisition of PSG (See note 7 to
Consolidated Financial Statements), the Company has identified three primary
business segments: Research-Cottrell, focused on air pollution treatment
and control; Metcalf & Eddy focused on engineering consulting in the areas
of water/wastewater and remediation; and PSG (Contract Operations), focused
on the operation of treatment facilities. This segment reflects the merger
of PSG and the Company's Metcalf & Eddy Services business units. The
"other" segment primarily represents the Company's activities in the natural
gas compressor business.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the core
environmental segments of the Company (in thousands).
[CAPTION]
<TABLE>
Three Months Ending Nine Months Ending
July 31, July 31,
--------------------------- --------------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Research - Cottrell $ 58,144 $ 64,751 $ 161,427 $208,684
Metcalf & Eddy 51,526 50,906 163,948 186,856
PSG (Contract Operations) 26,350 12,059 53,055 37,697
Other 7,050 13,048 30,071 40,975
-------- --------- ---------- --------
$143,070 $ 140,764 $ 408,501 $474,212
======== ========= ========== ========
Cost of Sales:
Research - Cottrell $ 49,808 $ 49,248 $ 151,486 $165,124
Metcalf & Eddy 31,474 29,551 105,786 121,088
PSG (Contract Operations) 22,728 9,354 43,703 28,356
Other 5,637 10,468 23,750 32,622
-------- --------- ---------- --------
$109,647 $ 98,621 $ 324,725 $347,190
======== ========= ========== ========
Selling, General and
Administrative Expenses:
Research - Cottrell $ 10,682 $ 11,469 $ 31,666 $ 31,236
Metcalf & Eddy 18,117 17,346 53,111 52,602
PSG (Contract Operations) 3,537 1,043 6,604 2,811
Other 1,978 2,153 7,513 7,889
Corporate Unallocated 2,108 2,045 6,600 5,561
-------- --------- ---------- --------
$ 36,422 $ 34,056 $ 105,494 $100,099
======== ========= ========== ========
Amortization of Goodwill:
Research - Cottrell $ 792 $ 800 $ 2,383 $ 2,384
Metcalf & Eddy 789 787 2,387 2,365
PSG (Contract Operations) 292 117 523 348
Other 12 10 36 30
-------- --------- ---------- --------
$ 1,885 $ 1,714 $ 5,329 $ 5,127
======== ========= ========== ========
Unusual Charges:
Research-Cottrell $ 63,500 $ - $ 70,300 $ -
Metcalf & Eddy 24,000 - 24,000 -
PSG (Contract Operations) 1,000 - 5,200 -
Corporate Unallocated 18,500 - 24,800 -
-------- --------- ---------- --------
$107,000 $ - $ 124,300 $ -
======== ========= ========== ========
Operating Income (loss):
Research - Cottrell $(66,638) $ 3,234 $ (94,408) $ 9,940
Metcalf & Eddy (22,854) 3,222 (21,336) 10,801
PSG (Contract Operations) (1,207) 1,545 (2,975) 6,182
Other (577) 417 (1,228) 434
Corporate Unallocated (20,608) (2,045) (31,400) (5,561)
--------- --------- --------- --------
$(111,884) $ 6,373 $(151,347) $ 21,796
========= ========= ========= ========
</TABLE>
<PAGE>
Three Months Ended July 31, 1994 Compared to
- ---------------------------------------------
Three Months Ended July 31, 1993
- --------------------------------
Consolidated sales of $143,070 for the three months ended July 31, 1994
reflected an increase from $140,764 in the prior comparable period. The
increase is attributed primarily to sales volumes generated by the PSG
acquisition. Sales at Research-Cottrell decreased $6,607 compared to the
prior comparable period. The decrease was principally attributable to the
level of work derived from the Company's backlog of which lower volumes of
approximately $13,152 were recorded in Research-Cottrell's equipment product
lines primarily with respect to particulate, acid gas and VOC control
equipment, both in the United States and in Europe. The sales in the United
States remain negatively impacted as customers are continuing to evaluate
both compliance options and the enforcement framework related to the Clean
Air Act Amendments of 1990 ("Clean Air Act"), as well as their capital
spending plans in view of the economic climate. Sales of particulate and
VOC control equipment in Europe have decreased by $5,974. Lower volume of
$2,985 from Research-Cottrell's cooling tower business also contributed to
the decrease. The decline in cooling tower work resulted from the Company's
focus on higher margin services. Offsetting these decreases was an increase
of $13,032 in sales of the Company's continuous emission monitoring product
line. Metcalf & Eddy sales increased by $620 primarily from an increase of
$2,673 in remediation services offset by a minor decrease in general
engineering service. PSG (Contract Operations) sales increased by $14,291
primarily as a result of the PSG acquisition which contributed $12,266 to
the increase. The Company's other segment recorded a decrease in sales of
$5,998 primarily attributable to lower volume in natural gas compressors and
other related systems.
Cost of sales increased $11,026 to $109,647 from $98,621 in 1993. For
Research-Cottrell, cost of sales increased by $560 to $49,808 primarily as a
result of lower sales volume partially offset by additional installation and
construction costs associated with particulate and acid gas control systems,
chimneys and emissions monitoring equipment, all of which contributed to the
increase as of percent of sales. At Metcalf & Eddy costs of sales increased
$1,923 to $31,474 primarily due to a change in business mix discussed above.
The PSG acquisition contributed $10,747 of the $13,374 increase in PSG
(Contract Operations) cost of sales. Cost of sales in the other segment
decreased as a result of the decreased sales volume described above.
Selling, general and administrative expenses of $36,422 increased $2,366 from
$34,056 in the prior period. Selling, general and administrative expenses
at Research-Cottrell decreased $787 compared to the prior period primarily
reflecting the lower volume of activity. Metcalf & Eddy's selling, general
and administrative expenses increased by $771 but remained fairly consistent
as a percentage of sales. Selling general and administrative expenses in
the PSG (Contract Operations) segment increased by $2,494 primarily as a
result of increased insurance costs and the PSG acquisition. Decreases in
selling, general and administrative expenses for the other segment were due
to lower levels of expenses related to the decreases in sales volume
described above.
During the third quarter of fiscal 1994, the Company recorded charges of
approximately $107,000. These charges relate to various cost reduction
programs, new managements' de-emphasis of certain product lines which
provide the opportunity for a sharper focus on the Company's three core
competency areas; engineering consulting, contract operations and air
pollution control and to costs directly attributable to the CGE Transaction
(as discussed more fully in Note 7).
Included in the charges is (a) approximately $8,900 of termination benefits
primarily to the Company's former Chairman under the terms of an employment
contract which were triggered by the CGE Transaction and include a $2,300
loan forgiveness, certain tax payments and other payments (no payments have
been made to date to the Company's former chairman as discussions regarding
modification of the employment contract terms are ongoing); (b)
approximately $28,000 of impaired asset values primarily related to the
Company's de-emphasis of its cooling tower product line; (c) approximately
$7,200 of costs associated with the termination of certain leases and the
closing of certain facilities; (d) approximately $11,200 related to the
ongoing PRASA litigation which reflects revised estimates of the expenses
required to pursue, through trial, the Company's belief that substantially
all of the billings questioned by PRASA (see Note 6) represent appropriate
charges and revised estimates of collectibility given the complexity of the
litigation and the continuing deferral of a trial date; (e) approximately
$11,800 of estimated costs to settle pending litigation; (f) approximately
$9,000 to write-off substantially all of the Company's deferred software
costs reflecting a shift in focus to a standard industrial continuous
emission monitor; (g) approximately $22,500 of costs and asset writedowns
associated primarily with warranty and other claims in the Company's
electrostatic precipitator and continuous emission monitor product lines;
and (h) approximately $8,400 for other items primarily representing revised
estimates for potential insurance claims.
<PAGE>
Interest expense increased $184 primarily as a result of higher levels of
average short-term borrowings during the current period compared to the
prior period. Other expenses increased by $1,368 primarily as a result of
the sale of certain leasing equipment in fiscal 1993.
On June 14, 1994 the Company utilized a portion of the proceeds from the
$125,000 CGE term loan to retire its 11.18% Senior Notes with the Prudential
Insurance Company of America . The difference between the redemption price
of $107,500 in cash plus unamortized debt issuance costs of $500 and the
$100,000 carrying value of the debt has been recorded as an extraordinary
loss.
Nine Months Ended July 31, 1994 Compared to
- -------------------------------------------
Nine Months Ended July 31, 1993
- -------------------------------
Consolidated sales of $408,501 for the nine months ended July 31, 1994
reflected a decline from $474,212 in the prior comparable period. The
decline is attributed to lower sales volumes in all segments, excluding PSG
(Contract Operations). Sales at Research-Cottrell decreased $47,257
compared to the prior comparable period. The decrease was principally
attributable to the level of work derived from the Company's backlog of
which lower volumes of approximately $44,709 were recorded primarily in
Research-Cottrell's particulate and VOC control equipment product lines,
both in the United States and in Europe. The sales in the United States
remain negatively impacted as customers are continuing to evaluate both
compliance options and the enforcement framework related to the Clean Air
Act Amendments of 1990 ("Clean Air Act"), as well as their capital spending
plans in view of the economic climate. Sales of particulate and VOC control
equipment in Europe have decreased by $16,213. Offsetting these decreases
was an increase of $13,198 in sales of the Company's continuous emission
monitoring equipment product line. Lower volume of $11,616 from Research-
Cottrell's cooling tower business also contributed to the decrease. The
decline in cooling tower work resulted from the Company's focus on higher
margin services. Metcalf & Eddy sales decreased $22,908 primarily from
lower pass-through sales of approximately $14,434 representing direct
project costs passed through to the Company's clients and planned reductions
in its general engineering services of $5,127 which were not offset by
expected growth in the hazardous waste remediation. PSG (Contract
Operations) sales increased by $15,358 of which the PSG acquisition
represented $12,266. The remainder of the increase was due to volume growth
resulting from recent contract awards. The Company's other segment recorded
a decrease in sales of $10,904 primarily attributable to lower volume in
natural gas compressors and other related systems.
Cost of sales decreased $22,465 to $324,725 from $347,190 in fiscal 1993. For
Research-Cottrell, cost of sales decreased by $13,638 to $151,486 primarily
as a result of lower sales volume partially offset by a $8,200 charge for
advanced software and field applications related to its emissions monitoring
and particulate control equipment and additional installation and
construction costs associated with particulate and acid gas control systems,
chimneys and emissions monitoring equipment. At Metcalf & Eddy costs of
sales decreased $15,302 to $105,786 primarily due to lower sales volume
described above. Of the $15,347 increase in PSG (Contract Operations) cost
of sales, $10,747 resulted from the PSG acquisition with the remainder
primarily due to the increased volume discussed above. The increase as a
percent of sales is due to a $2,000 resolution of an outstanding claim in
1993. Cost of sales in the Company's other segment decreased as a result of
the decreased sales volume described above.
<PAGE>
Selling, general and administrative expenses of $105,494 increased $5,395 from
$100,099 in the prior period. Selling, general and administrative expenses
at Research-Cottrell, Metcalf & Eddy and the Company's other segment
remained fairly constant with the minor change due to the volume of activity
and normal salary adjustments. Selling general and administrative expense
in the PSG (Contract Operations) segment increased $3,793 primarily due to
the PSG acquisition, increased bid and proposal activity and insurance
costs.
Certain businesses no longer meeting strategic objectives are anticipated to
be divested. These businesses primarily consist of certain manufacturing
operations and properties which do not fit with the Company's strategy of
becoming a full-service environmental company and divert management
attention from its core products and services. As a result of the
anticipated divestitures, the Company in the first quarter of fiscal 1994
recorded a $17,300 charge representing the difference between the carrying
value of these operations of $37,000 and management's estimate of the
anticipated net sales proceeds of approximately $19,700. Total assets of
these operations approximate $41,000 at July 31, 1994, which includes
approximately $7,500 for accounts receivable, $2,900 for costs and estimated
earnings in excess of billings, $12,500 for inventories, $9,800 for property
plant and equipment, $3,000 for other assets and $5,300 for goodwill. As of
August 31, 1994 no divestiture transaction had been consummated, however
several negotiations are currently ongoing.
During the third quarter of fiscal 1994, the Company recorded charges of
approximately $107,000. These charges relate to various cost reduction
programs, new managements' de-emphasis of certain product lines which
provide the opportunity for a sharper focus on the Company's three core
competency areas; engineering consulting, contract operations and air
pollution control and to costs directly attributable to the CGE Transaction
(as discussed more fully in Note 7).
Included in the charges is (a) approximately $8,900 of termination benefits
primarily to the Company's former Chairman under the terms of an employment
contract which were triggered by the CGE Transaction and include a $2,300
loan forgiveness, certain tax payments and other payments (no payments have
been made to date to the Company's former chairman as discussions regarding
modification of the employment contract terms are ongoing); (b)
approximately $28,000 of impaired asset values primarily related to the
Company's de-emphasis of its cooling tower product line; (c) approximately
$7,200 of costs associated with the termination of certain leases and the
closing of certain facilities; (d) approximately $11,200 related to the
ongoing PRASA litigation which reflects revised estimates of the expenses
required to pursue, through trial, the Company's belief that substantially
all of the billings questioned by PRASA (see Note 6) represent appropriate
charges and revised estimates of collectibility given the complexity of the
litigation and the continuing deferral of a trial date; (e) approximately
$11,800 of estimated costs to settle pending litigation; (f) approximately
$9,000 to write-off substantially all of the Company's deferred software
costs reflecting a shift in focus to a standard industrial continuous
emission monitor; (g) approximately $22,500 of costs and asset writedowns
associated primarily with warranty and other claims in the Company's
electrostatic precipitator and continuous emission monitor product lines;
and (h) approximately $8,400 for other items primarily representing revised
estimates for potential insurance claims.
Interest income increased $220 and interest expense increased $927 primarily
as a result of a favorable tax settlement and higher levels of average short-
term borrowings during the current period compared to the prior period.
Other expenses increased by $1,431 primarily as a result of the sale of
certain leasing equipment in fiscal 1993.
<PAGE>
The Company on May 13, 1994 announced that it has determined to liquidate its
asbestos abatement business. The Company previously reported in January
1994 that it would discontinue its asbestos abatement operations and that
these operations, which it would seek to sell, had been considered a
discontinued operation for financial reporting purposes as of the Company's
1993 fiscal year. The Company made its determination to discontinue this
business after an operational review, initiated in the fourth quarter of its
1993 fiscal year, that was prompted by increasing negative cash flows
during fiscal 1993. The operational review led to a more extensive
investigation of, among other things, recorded financial results and
internal operating controls within the asbestos abatement operations after
the discovery of accounting irregularities. The Company further reported
that certain members of senior management of the asbestos abatement
operations had been replaced. Subsequently, for the first quarter of fiscal
1994, the Company reported that the asbestos abatement operations incurred a
loss of $3,229 primarily due to revisions of estimates of costs to complete
on existing contracts.
The Company's determination to liquidate its asbestos abatement business and
take an additional charge in the second quarter of fiscal 1994 is based upon
consideration of a number of factors occurring in fiscal 1994 that have
caused the Company to conclude that it will be unable to realize value
through the sale of the business and associated assets. The Company's
efforts to sell the business on a reasonable basis were unsuccessful and,
since the announcement of the Company's plans to discontinue the business,
the operations' performance continued to deteriorate. Factors that
contributed to the declining performance include the loss of management and
other personnel with the experience and skill necessary for the business to
be operated profitably and without continuing negative cash flows,
deteriorating margins both with respect to new project contracts and
existing backlog, greater difficulties in obtaining change orders from
clients, and the likelihood of further erosion of margins due to substantial
increases in required workers' compensation contributions for a significant
percentage of the business's employees. The $38,229 charge reflected in the
current period consists of operating losses of $15,988 and an estimated loss
on disposition of $22,241.
On June 14, 1994 the Company utilized a portion of the proceeds from the
$125,000 CGE term loan to retire its 11.18% Senior Notes with the Prudential
Insurance Company of America . The difference between the redemption price
of $107,500 in cash plus unamortized debt issuance costs of $500 and the
$100,000 carrying value of the debt has been recorded as an extraordinary
loss.
Financial Condition
- -------------------
On March 30, 1994, the Company entered into an Investment Agreement with its
largest stockholder, Compagnie Generale des Eaux ("CGE") and Anjou
International Company, a wholly-owned subsidiary of CGE ("Anjou"), designed
to strengthen the Company's competitive and financial position and increase
its working capital availability. On June 14, 1994 the Company's
shareholders approved the terms of the Investment Agreement. Under the
terms of the Investment Agreement, the Company entered into a series of
transactions with CGE and Anjou ("the CGE Transaction") in which it: (i)
issued for cash $60,000 of a new series of convertible exchangeable
preferred stock with a dividend yield of 5.5%, convertible at $12.50 per
share into shares of Class A Common Stock; (ii) acquired CGE's U.S.
water/wastewater management subsidiary, Professional Service Group, Inc.,
in exchange for 6,701,500 newly issued shares of Class A Common Stock; (iii)
benefits from certain financial undertakings from CGE which include a
$125,000 term loan from CGE to repay the Prudential Notes; and (iv) became
CGE's exclusive vehicle in the United States, its possessions and
territories for CGE's water and wastewater management and air pollution
activities.
In connection with the related agreements, the Company in March 1994, also
issued 500,000 shares of Class A Common Stock to CGE for $5,000 in cash. As
a result of the transactions, CGE currently owns approximately 40% of the
common stock outstanding and has approximately 48% of the total voting
power. CGE also has proportionate representation on the Company's Board of
Directors.
<PAGE>
On June 14, 1994 the Company utilized a portion of the proceeds from the
$125,000 CGE term loan to retire its 11.18% Senior Notes with the Prudential
Insurance Company of America. The difference between the redemption price
of $107,500 in cash plus unamortized debt issuance costs of $500 and the
$100,000 carrying value of the debt has been recorded as an extraordinary
loss.
Cash used by continuing operations for the nine months ended July 31, 1994
amounted to $42,590. In addition, during the nine months ended July 31,
1994 the Company's discontinued asbestos abatement operations utilized
$16,338 of cash, resulting in net cash used for operating activities of
$58,928. The Company also utilized $9,113 of cash for capital expenditures,
investments in environmental treatment facilities, software development and
other investment activities during the first nine months. Excluding the
redemption of the Prudential Notes for $107,500 of cash an additional
$27,228 of cash was used for the payment of notes payable and long-term
debt, and the reimbursement of a temporary $10,000 accounts receivable
purchase facility with the First National Bank of Chicago ("First Chicago"),
during this period. These cash requirements were funded principally by the
CGE Transaction.
The Company's principal sources of liquidity to meet short-term working
capital needs, in addition to its existing cash balances ($6,040 at July 31,
1994) consisted of its $70,000 Credit Agreement with a syndicate of banks
represented by First Chicago and its $20,000 Accounts Receivable Purchase
Agreement with First Chicago, both of which facilities expire on January 31,
1995. Under the Credit Agreement, the Company may borrow up to $40,000 for
working capital purposes of which $9,500 was outstanding on July 31, 1994
(compared to $14,000 at October 31, 1993) with the remaining unused balance
of the Credit Agreement available for Letters of Credit of which $19,655 was
issued and outstanding on July 31, 1994. Of these Letters of Credit
outstanding, $8,600 support foreign borrowing facilities of which $5,063 was
borrowed on July 31, 1994. Under the Company's Account Receivable Purchase
Agreement, $20,000 was outstanding on July 31, 1994. At July 31, 1994 the
Company had $40,845 of additional credit capacity available under the credit
agreement. As of September 2, 1994, the Company had $500 available to it
under the Accounts Receivable Purchase Agreement and $28,900 of additional
credit capacity available to it under the Credit Agreement.
The Company's operating losses and other cash requirements including cash
utilized through September 2, 1994, have resulted in the decreased
availability of working capital under the Company's credit facilities which
expire on January 15, 1995. Further reductions in working capital
availability are anticipated in the fourth quarter unless measures are taken
by the Company. The prospect of a cash deficiency during the fourth quarter
will be significantly impacted by the timing of cash disbursements and the
sale of certain assets. Primarily affecting the timing of disbursements
will be the cash payments that will be made as a result of the unusual
charges recorded by the Company in its third quarter which is currently
anticipated to be approximately $14,000 over the next two quarters. (See
Note 5 to the Consolidated Financial Statements).
Since their inception, the Company has historically re-negotiated or amended
its credit facilities to satisfy business needs. As a result of its losses,
the Company would have been in default of certain financial covenants in a
number of its loan agreements. The Company has requested and has received
waivers of default from all of its applicable lenders.
The Company believes that it has the ability to manage its cash needs and is
currently continuing its efforts to control both its expense levels
(reflected by recent internal cost control programs) as well as reducing the
level of investment in customer projects. Further negotiations are
continuing to be pursued with potential buyers of certain Company businesses
no longer meeting strategic objectives (see Note 5 to the Consolidated
Financial Statements). While the Company anticipates net proceeds of
approximately $19,700 upon the sale of those businesses, the timing of
receipt of those proceeds is not yet determinable.
<PAGE>
While no assurances can be given, the Company believes that the CGE
Transaction and its ongoing relationship and recent internal operational
changes provide it with an opportunity to obtain additional credit capacity.
Negotiations with a number of banks regarding the availability of a new and
expanded credit facility are ongoing. Should the Company not be successful
in its efforts to obtain new credit facilities it will be required to seek
other sources of capital from investors, potential investors or other
lenders, if available. Additionally, the Company will also need to reach
accommodations with its creditors and suppliers.
The businesses of the Company have not historically required significant
ongoing capital expenditures. For the nine months ended July 31, 1994 and
for the years ended October 31, 1993 and 1992 total capital expenditures
were $3,017 and $5,188 and $8,145, respectively. Such amounts, however, do
not include investments by the Company made in connection with the Company's
total project delivery services. The Company has been able to obtain
satisfactory financing in connection with such services in the past, however
no assurance can be given, that it will be able to continue to obtain such
financing in the future without improvements in its credit capacity as
outlined above. At July 31, 1994, the Company had no material outstanding
purchase commitments for capital expenditures.
PRASA Litigation
- ----------------
At July 31, 1994, approximately $37,400 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 $52,000 in damages from PRASA. M&E's suit
initially sought $27,000 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 $37,400 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.
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 of billings for possible technical
violations of equipment procurement procedures under the contract and
charges outside the contract. 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 .
PRASA had denied the allegations of the complaint and challenged the
jurisdiction of the United States District Court. The trial court has
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 had stayed all proceedings
(including further factual discovery and an initial trial date which had
been set for May 18, 1992) 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
complete. On April 15, 1994, the District Court issued an Order requiring a
Special Master to assist the Court with the complex accounting matters in
this case. A Special Master has not yet been appointed. In August 1994,
the District Court scheduled a July 17, 1995 as the trial commencement date.
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 which is still pending before the Court.
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 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 pre-tax charge to earnings reflecting costs associated
with the PRASA litigation. Additionally in its third quarter ended July 31,
1994 the Company as more fully discussed in Note 5 to the consolidated
financial statements recorded a further pre-tax charge to earnings of
$11,200 to reflect a revised estimate of costs and expenses associated with
this litigation and revised estimates of collectibility. The Company has
consulted with counsel as to its obligations under the contract and the
course of the litigation generally. As the matter is complex litigation, no
assurance as to the final outcome of the litigation can be given. However,
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 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM I. Legal Proceedings
Reference is made to Part I Item I (Note 6 to the Interim Consolidated
Financial Statements) for discussion of a legal matter involving the
Company's lawsuit in Puerto Rico against PRASA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
On June 14, 1994, the Registrant held its Annual Meeting of Stockholders
pursuant to which, among other actions, eleven individuals were elected to
the Registrant's Board of Directors. The eleven directors elected at the
Annual Meeting are Eckardt C. Beck, D. Costle, Jacques-Henri David, Nicholas
DeBenedictis, Jean-Dominique Deschamps, Richard M. Dowd, Claudio Elia, Carol
Lynn Green, William Kriegel, John W. Morris, Enrique Senior. In addition to
the election of directors, at the Annual Meeting the Registrant's
stockholders also voted in favor of (i) certain issuances of the
Registrant's securities pursuant to an Investment Agreement, dated as of
March 30, 1994, among the Registrant, Compagnie Generale des Eaux and Anjou
International Company, and (ii) ratification of Arthur Andersen & Co. as the
Company's independent accountants for the Company's 1994 fiscal year.
ITEM 6. Exhibits and Reports on Form 8-K
There are no reportable items under Part II., items II. III., and V..
<PAGE>
SIGNATURE
---------
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.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
(registrant)
Date September 14, 1994 /s/ Alain Brunais
------------------ ------------------------
Alain Brunais
Chief Financial Officer
<PAGE>
<TABLE>
EXHIBIT INDEX
-------------
<CAPTION>
Exhibit Number
- --------------
<C> <S>
11 Statement re Computation of per share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> EXHIBIT 11
AIR & WATER TECHNOLOGIES CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(in thousands except per share amounts)
[CAPTION]
<TABLE>
Three Months Ended Nine Months Ended
July 31, July 31,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings (Loss) Per Share:
1. Income (loss) from continuing
operations $(119,801) $ 602 $(172,716) $ 2,388
2. Less preferred dividends ( 416) - ( 416) -
--------- --------- ---------- ------
3. Income (loss) from continuing
operations applicable to
common shareholders (120,217) 602 (173,132) 2,388
4. Income (loss) from discontinued
operations - 1,388 (38,229) 2,956
5. Extraordinary item (8,000) - (8,000) -
--------- -------- --------- ------
6. Net income (loss) applicable
to common shareholders $(128,217) $ 1,990 $(219,361) $ 5,344
--------- -------- --------- ------
7. Weighted Average shares
Outstanding 28,710 24,813 26,210 24,814
--------- -------- --------- ------
8. Earnings (loss) per share from
continuing operations (3/7) $ (4.19) $ .02 $ (6.61) $ .10
9. Earnings (loss) per share from
discontinued operations (4/7) - .06 (1.46) .12
10. Loss per share on extraordinary
item (5/7) (.28) - (.30) -
--------- -------- --------- ------
11. Net income (loss) per share $ (4.47) $ .08 $ (8.37) $ .22
======== ======== ========= ======
Fully Diluted Earnings (Loss) Per Share:
12. Line 3. above $(120,217) $ 602 $(173,132) $ 2,388
13. Add back preferred dividends 416 - 416 -
14. Add back interest, net of tax,
on assumed conversion of the
Company's 8% Convertible
Debentures 2,300 2,300 6,900 6,900
--------- -------- -------- ------
15. Income (loss) from continuing
operations (117,501) 2,902 (165,816) 9,288
16. Income (loss) from discontinued
operations - 1,388 (38,229) 2,956
17. Extraordinary item (8,000) - (8,000) -
--------- ------- -------- ------
18. Net income (loss) $(125,501) $ 4,290 $(212,045) 12,244
--------- -------- -------- ------
19. Weighted average shares
outstanding (Line 7) 28,710 24,813 26,210 24,814
20. Add additional shares issuable
upon assumed conversion of
preferred shares from date of
issuance 2,452 - 826 -
21. Add additional shares issuable
upon assumed conversion of the
Company's 8%Convertible Debentures 3,833 3,833 3,833 3,833
--------- -------- -------- ------
22. Adjusted weighted average shares
outstanding 34,995 28,646 30,869 28,647
--------- -------- -------- ------
23. Earnings (loss) per share from
continuing operations (15/22)* $ (3.36) $ .10 $ (5.37) $ .33
24. Earnings (loss) per share from
discontinued operations (16/22) - .05 (1.24) .10
25. Loss per share from extraordinary
item (17/22) (.23) - (.26) -
--------- ------- -------- ------
25. Net income (loss) per share
(18/22)* $ (3.59) $ .15 $ (6.87) $ .43
========= ======= ======== =======
</TABLE>
* Fully diluted earnings (loss) per share are not presented as the assumed
conversion of the Company's Convertible Preferred and Convertible Debentures
is anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> JUL-31-1994
<CASH> 6,040
<SECURITIES> 0
<RECEIVABLES> 123,561
<ALLOWANCES> 21,621
<INVENTORY> 29,191
<CURRENT-ASSETS> 218,079
<PP&E> 78,265
<DEPRECIATION> 31,954
<TOTAL-ASSETS> 599,371
<CURRENT-LIABILITIES> 208,990
<BONDS> 246,187
<COMMON> 32
0
12
<OTHER-SE> 115,844
<TOTAL-LIABILITY-AND-EQUITY> 599,371
<SALES> 408,501
<TOTAL-REVENUES> 408,501
<CGS> 324,725
<TOTAL-COSTS> 324,725
<OTHER-EXPENSES> 111,639
<LOSS-PROVISION> 18,484
<INTEREST-EXPENSE> 18,181
<INCOME-PRETAX> (172,197)
<INCOME-TAX> 758
<INCOME-CONTINUING> (172,716)
<DISCONTINUED> (38,229)
<EXTRAORDINARY> (8,000)
<CHANGES> 0
<NET-INCOME> (218,945)
<EPS-PRIMARY> (8.37)
<EPS-DILUTED> (6.87)
</TABLE>
