<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 January 31, 1995
----------------
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 (I.R.S. Employer Identification Number)
Corporation)
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 January 31, 1995.
Class A
$.001 Par Value Common Stock 32,018,004
- ---------------------------- ----------
(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 JANUARY 31, 1995 AND OCTOBER 31, 1994
-----------------------------------------------------------------------
(in thousands , except share data)
-------------------------------
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ---- ----
(unaudited)
---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,534 $ 11,021
Accounts receivable, net 86,418 80,534
Costs and estimated earnings in excess of
billings on uncompleted contracts 57,438 59,250
Inventories 20,067 20,405
Prepaid expenses and other current assets 6,903 7,281
Net current assets of discontinued operations 3,904 9,825
------- -------
Total current assets 184,264 188,316
PROPERTY, PLANT AND EQUIPMENT, net 42,445 43,013
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 23,386 23,343
DEFERRED DEBT ISSUANCE COSTS 3,465 3,507
GOODWILL 281,596 283,638
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 905 6,295
OTHER ASSETS 56,455 54,826
------- -------
Total assets $592,516 $602,938
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 641 $ 29,000
Current installments of long-term debt 511 533
Accounts payable 52,987 50,988
Accrued expenses 114,772 126,158
Billings in excess of costs and estimated earnings on
uncompleted contracts 26,408 30,840
Income taxes payable 2,394 2,003
------- -------
Total current liabilities 197,713 239,522
------- -------
NON-CURRENT LIABILITIES 42,700 42,700
------- -------
LONG-TERM DEBT 285,910 245,984
------- -------
MINORITY INTEREST IN AFFILIATES 426 351
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 authorized, 2,500,000
shares; issued 1,200,000 shares in 1994; liquidation
value $60,000 12 12
Common stock par value $.001 authorized 100,000,000 shares;
issued 32,107,906 shares in 1995 and 1994 32 32
Additional paid-in capital 427,028 427,028
Accumulated deficit (360,798) (352,580)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (399) (3)
------- -------
Total stockholders' equity 65,767 74,381
------- -------
Total liabilities and stockholders' equity $ 592,516 $ 602,938
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE MONTH PERIODS ENDING JANUARY 31, 1995 AND 1994
------------------------------------------------------------
(in thousands, except per share data)
-----------------------------------
(unaudited)
---------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
SALES $ 148,451 $ 122,753
COST OF SALES 113,180 100,379
------- -------
Gross Margin 35,271 22,374
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 34,346 30,478
AMORTIZATION OF GOODWILL 2,050 1,707
UNUSUAL CHARGES - 14,500
------- -------
Operating Loss (1,125) (24,311)
INTEREST EXPENSE (5,722) (6,263)
INTEREST INCOME 121 393
OTHER EXPENSE, NET (358) (753)
------- -------
Loss from continuing operations
before income taxes and minority interest (7,084) (30,934)
INCOME TAX PROVISION (BENEFIT) 293 (22)
MINORITY INTEREST 16 (138)
------- -------
Loss from continuing operations (7,393) (30,774)
LOSS FROM DISCONTINUED OPERATIONS - (6,623)
------- -------
NET LOSS $(7,393) $(37,397)
======= =======
LOSS PER SHARE:
Continuing operations $ (.26) $ (1.24)
Discontinued operations - (.27)
------- -------
LOSS PER SHARE $ (.26) $ (1.51)
======= =======
Weighted average number of shares outstanding 32,018 24,818
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTH PERIODS ENDING JANUARY 31, 1995 AND 1994
------------------------------------------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,393) $ (37,397)
Adjustments to reconcile net income (loss) to
net cash provided by
(used for) continuing operations -
Discontinued operations - 6,623
Depreciation and amortization 4,507 3,911
Minority interest 16 (138)
------- -------
(2,870) (27,001)
Changes in working capital, net of effects from
acquisitions -
(Increase) decrease in current assets -
Accounts receivable (4,884) 8,599
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,812 8,933
Inventories 338 (244)
Prepaid expenses and other current assets 193 (1,472)
Increases (decrease) in current liabilities -
Accounts payable 1,999 (11,465)
Accrued expenses (10,169) 21,663
Billings in excess of costs and
estimated earnings on
uncompleted contracts (4,432) 3,497
Income taxes 391 (1,097)
Other assets (1,286) 933
------- -------
Net cash provided by (used for)
continuing operations (18,908) 2,346
Net cash used for discontinued
operations (277) (9,051)
------- -------
Net cash used for operating activities (19,185) (6,705)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of business 11,588 -
Capital expenditures (1,429) (867)
Investment in environmental treatment facilities (43) (954)
Software development (125) (970)
Other, net (1,084) 28
------- -------
Net cash provided by (used for)
investing activities 8,907 (2,763)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt (63) (2,083)
Net borrowings under line of credit 11,641 11,114
Cash dividends paid (825) -
Change in cumulative currency translation adjustment (337) 28
Other, net (1,625) -
------- -------
Net cash provided by financing activities 8,791 9,059
------- -------
Net decrease in cash and cash equivalents (1,487) (409)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,021 7,624
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,534 $ 7,215
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 7,593 $ 7,157
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
JANUARY 31, 1995
----------------
(unaudited)
---------
The interim consolidated financial statements and the following
notes should be read in conjunction with the notes to the
consolidated financial statements of Air & Water Technologies
Corporation and its consolidated subsidiaries (the "Company") as
included in its Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended October 31, 1994. 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) Earnings (Loss) Per Share:
-------------------------
The earnings (loss) per share was computed by dividing the
net income (loss) after preferred dividends by the weighted
average number of common shares outstanding each period.
Common Stock Equivalents (stock options) and the Company's
8% Convertible Notes have not been included in the earnings
(loss) per share calculation since the effect is
antidilutive.
(2) CGE Transaction:
---------------
On June 14, 1994, the stockholders of the Company approved
the issuance of Company securities pursuant to an Investment
Agreement dated as of March 30, 1994 (the "Investment
Agreement"), among AWT, Compagnie Generale des Eaux, a
French corporation and AWT's largest shareholder ("CGE"),
and Anjou International Company, a Delaware corporation and
a wholly-owned subsidiary of CGE ("Anjou"), pursuant to
which, among other things, AWT (i) issued to CGE 1,200,000
shares of a newly designated series of Preferred Stock,
designated as 5 1/2% Series A Convertible Exchangeable
Preferred Stock, convertible into 4,800,000 shares of Class
A Common Stock, for cash consideration of $60,000,000, and
(ii) issued to Anjou an aggregate of 6,701,500 shares of
Class A Common Stock in connection with the acquisition from
Anjou of Professional Services Group, Inc., a Minnesota
corporation, and 2815869 Canada, Inc., a Canadian
corporation (hereinafter collectively "Professional Services
Group" or "PSG"). As a result of these transactions, CGE
increased its ownership interest in AWT to approximately 48%
of the total voting power of the Company's voting
securities. In addition, AWT benefited from a $125,000,000
loan from CGE which bears interest at a rate based upon one,
two, three or six-month LIBOR, as selected by AWT, plus 125
basis as defined and became CGE's exclusive vehicle in the
United States, its possessions and its territories for CGE's
water and wastewater management and air pollution
activities. CGE also obtained representation on AWT's Board
of Directors and the right to designate AWT's Chief
Executive Officer and Chief Financial Officer.
In connection with the Investment Agreement, the Company
incurred fees and expenses of approximately $9,800,000,
including $7,750,000 payable to Allen & Company,
Incorporated for financial advisory services. These
estimated fees and expenses have been allocated as follows:
to the PSG acquisition ($4,875,000); to the preferred stock
issuance ($4,475,000); to the common stock issuance
($400,000); and to the term loan from CGE ($50,000).
<PAGE>
(3) Unusual Charges:
---------------
During the three months ended January 31, 1994, the Company
recorded an impaired asset valuation charge primarily
related to certain businesses that no longer meet strategic
objectives and are anticipated to be divested. These
businesses primarily consist of certain manufacturing
operations and properties which divert management attention
from the Company's core products and services provided by
Research-Cottrell, Metcalf & Eddy and PSG. As a result of
the anticipated divestitures, the Company recorded a
$14,500,000 charge representing the difference between the
carrying value of these operations and management's estimate
of the anticipated net sales proceeds. Total assets of these
operations approximate $20,900,000 at January 31, 1995,
which includes approximately $3,000,000 for accounts
receivable, $2,000,000 for costs and estimated earnings in
excess of billings, $3,200,000 for inventories, $6,100,000
for property plant and equipment, $2,900,000 for other
assets and $3,700,000 for goodwill. As of January 31, 1995
several divestiture negotiations were ongoing, although no
assurance can be given that such negotiations will result in
the successful disposition of any of these businesses. The
sale of the assets of Power Application & Manufacturing Co.,
Inc. ("Pamco") (natural gas compressor and power generation
systems operations) was completed in November 1994 and is
reported as a discontinued operation.
(4) PSG Acquisition:
---------------
In connection with the transactions contemplated by the
Investment Agreement, the Company on June 14, 1994 acquired
CGE's water/wastewater management subsidiary, PSG. 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 $70,215,000 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 ($65,340,000) plus $4,875,000 of estimated
acquisition costs. The purchase price was assigned to
tangible assets of $26,072,000 and liabilities of
$11,907,000 acquired at an estimate of their fair value.
The excess of purchase price over PSG's tangible net assets
acquired of $56,050,000 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 period
presented, after including the impact of certain adjustments
such as amortization of goodwill and the related income tax
effects (in thousands, except share data):
[CAPTION]
<TABLE>
Three Months
Ending January 31
1994
----
(Unaudited)
<S> <C>
Sales $ 145,770
Loss from continuing operations $ (30,640)
Net loss $ (37,263)
Loss per share:
Continuing operations $ (.97)
Net loss $ (1.18)
</TABLE>
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.
(5) Sale of Accounts Receivable:
---------------------------
Through an accounts receivable purchase agreement with the
First National Bank of Chicago ("First Chicago"), the
Company at its option could sell up to $20,000,000 of
eligible accounts receivable on an ongoing basis to First
Chicago, until expiration of the agreement on March 10, 1995
at which time it was replaced with a new credit facility as
discussed in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Sales of accounts receivable under the agreement were
subject to limited recourse. As needed, the Company
replaced accounts receivable previously sold with new
accounts receivable when the original receivables sold were
collected. As of January 31, 1995 and October 31, 1994,
$19,000,000 and $20,000,000 of accounts receivable were
outstanding under the agreement and excluded from accounts
receivable.
<PAGE>
(6) Commitments and Contingencies:
-----------------------------
At January 31, 1995 and 1994, approximately $37,400,000 in
delinquent payments on Metcalf & Eddy's contract with the
Puerto Rico Aqueduct and Sewer Authority ("PRASA") contract
were outstanding. In September 1990, Metcalf & Eddy, Inc.
filed an action in United States District Court in San Juan,
Puerto Rico, seeking $52 million in damages from PRASA. .
On December 18, 1990, Metcalf & Eddy announced that it had
suspended all work under the contract pending resolution of
the litigation between the parties. Metcalf & Eddy's suit
initially sought $27 million in damages for payment for
goods and services Metcalf & Eddy sold and rendered to PRASA
under a contract to rehabilitate PRASA's wastewater
treatment system and provide related program management
services. In July 1991, Metcalf & Eddy 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 Metcalf & Eddy with respect to the PRASA contract and
violations of good faith and fair dealing under the
contract. The matter is complex litigation and no assurance
as to the final outcome of the litigation can be given.
PRASA has been withholding payments under its contract with
Metcalf & Eddy. 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. Metcalf
& Eddy disputes the findings of the PRASA audit and 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 Metcalf & Eddy.
Discovery in this matter is completed. 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 been appointed
and is scheduled to issue an opinion in June 1995. The
trial of this matter is scheduled to commence on July 17,
1995.
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 Metcalf & Eddy's action against
PRASA. This ruling held that certain portions of the multi-
year contract between Metcalf & Eddy and PRASA were invalid
as contrary to Puerto Rican law insofar as they called for
the practice of engineering by Metcalf & Eddy. This action,
originally filed in September 1986 by the Puerto Rico
College of Engineers, an island-wide professional
engineering organization, sought a declaratory judgment that
the engineering design portion of Metcalf & Eddy's contract
violated 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 Metcalf & Eddy 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 AWT is unable to determine
with any specificity what impact the Colegio decision will
have on its efforts to recover monies from PRASA. AWT has
also consulted with counsel as to its obligations under the
contract and the course of the litigation generally. Based
on its consideration of all of the foregoing and the status
of the litigation to date, AWT believes that Metcalf & Eddy
has performed substantially in accordance with the terms of
the contract and that, ultimately, at least a majority of
the sums due Metcalf & Eddy pursuant to the contract will be
realized.
<PAGE>
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 charge
to earnings reflecting costs associated with the PRASA
litigation. Additionally, in its third quarter ended July
31, 1994, the Company recorded a further charge to earnings
of $11,200,000 to reflect a revised estimate of costs and
expenses associated with this litigation and revised
estimates of collectibility. Approximately $37,400,000 of
amounts due from PRASA has been reclassified to other assets
at October 31, 1994 due to the continuing trial delays. The
PRASA related reserves are included in noncurrent
liabilities at January 31, 1995 and October 31, 1994. If
the Company were to recover less than all of the receivables
owed it by PRASA, the Company would recognize a
corresponding reduction in income (less any unutilized
reserves) in the period in which a final determination of
the amount to be recovered is reached.
By letters dated February 9, 1995, counsel for Texas
Electric Utilities Company ("TU Electric") made written
demand against Air & Water Technologies Corporation,
Research-Cottrell, Inc., Custodis-Hamon Constructors, Inc.,
Custodis Construction Company, Custodis-Ecodyne, Inc., and
Custodis-Cottrell, Inc. ("Custodis") for any and all
liability and damages growing out of or in any way connected
with the collapse of a 600 foot chimney at the Monticello
Steam Electric Station owned by TU Electric. TU Electric's
demand letter indicates that while total damages have yet to
be fully determined, the total amount of damages it will
suffer is expected to be in excess of $100 million. The
subject chimney collapsed on November 14, 1993 as its
interior was being cleaned by employees of Custodis under a
contract between Custodis and TU Electric pursuant to which
Custodis was to be paid approximately $35,000. Custodis, as
well as AWT and its other subsidiaries that are the subject
of TU Electric's demand, have denied any liability for
damages suffered by TU Electric as a result of the incident
in question. Based on its investigation of this incident,
including expert analysis, Custodis believes that the root
cause of the chimney collapse was TU Electric's failure to
properly maintain it. Based upon the facts and
circumstances known to it at this time, the Company believes
that the ultimate resolution of this matter will not have a
material adverse effect on its consolidated financial
position or results of operations, taken as a whole.
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) Reclassifications:
-----------------
Certain reclassifications have been made to conform the 1994
consolidated financial statements to the 1995 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 Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended October 31, 1994.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the
core business segments of the Company (in thousands).
<TABLE>
<CAPTION>
Three Months Ending January 31,
1995 1994
---- ----
<S> <C> <C>
Sales:
Research - Cottrell $ 54,072 $ 54,550
Metcalf & Eddy 51,185 55,149
PSG (Contract Operations) 41,785 11,637
Other and Eliminations 1,409 1,417
------- -------
$148,451 $122,753
======= =======
Cost of Sales:
Research - Cottrell $ 44,832 $ 52,899
Metcalf & Eddy 31,879 37,292
PSG (Contract Operations) 35,755 9,424
Other and Eliminations 714 764
------- -------
$113,180 $100,379
======= =======
Selling, General and Administrative Expenses:
Research - Cottrell $ 8,842 $ 9,740
Metcalf & Eddy 18,466 17,339
PSG (Contract Operations) 3,546 611
Other 662 630
Corporate (unallocated) 2,830 2,158
------- -------
$ 34,346 $ 30,478
======= =======
Amortization of Goodwill:
Research - Cottrell $ 813 $ 816
Metcalf & Eddy 771 775
PSG (Contract Operations) 466 116
------- -------
$ 2,050 $ 1,707
======= =======
Unusual Charges:
Research - Cottrell $ - $ 8,000
Metcalf & Eddy - -
PSG (Contract Operations) - -
Other - 4,200
Corporate - 2,300
------- -------
$ - $ 14,500
======= =======
Operating Income (Loss):
Research - Cottrell $ (415) $(16,905)
Metcalf & Eddy 69 (257)
PSG (Contract Operations) 2,018 1,486
Other 33 (4,177)
Corporate (2,830) (4,458)
------- -------
$ (1,125) $(24,311)
======= =======
</TABLE>
<PAGE>
Three Months Ended January 31, 1995 Compared to
- ------------------------------------------------
Three Months Ended January 31, 1994
- -----------------------------------
Sales of $148,451,000 for the three months ended January 31,
1995 increased from $122,753,000 in the prior comparable
period. The increase is attributable to the acquisition of
PSG off-set by lower sales volume within Metcalf & Eddy and
to a lesser degree Research-Cottrell. PSG (Contract
Operations) sales increased by $30,148,000 of which the
additional sales resulting from the acquisition of PSG
represented $29,618,000. Sales at Research-Cottrell
decreased $478,000 compared to the prior comparable period.
The decrease was principally attributable to the level of
work derived from its backlog, of which lower volumes of
approximately $6,140,000 and $3,608,000 were recorded
primarily in Research-Cottrell's domestic particulate and
acid gas control equipment product lines and chimney product
lines. International sales of particulate and acid gas
control equipment have increased by $2,714,000 and higher
volume of $5,258,000 from VOC control equipment off-set the
aforementioned decreases. Metcalf & Eddy sales decreased
$3,964,000 primarily from lower Peace Shield pass-through
sales representing direct project costs passed through to
the client.
Cost of sales of $113,180,000 for the three months ended
January 31, 1995 increased from $100,379,000 in the prior
comparable period. The increase is attributable to the
acquisition of PSG off-set by lower costs within Metcalf &
Eddy and Research-Cottrell. Of the $26,331,000 increase in
PSG (Contract Operations) cost of sales, $25,596,000
resulted from the PSG acquisition with the remainder
primarily due to additional costs related to a composting
facility and favorable change order settlements reflected in
the prior period. Research-Cottrell cost of sales decreased
by $8,067,000 to $44,832,000 primarily as a result of lower
costs related to its emissions monitoring equipment
($4,200,000) and installation and construction costs
associated with particulate control systems ($4,000,000).
Metcalf & Eddy costs of sales decreased $5,413,000 to
$31,879,000 primarily due to lower sales volume described
above and a $1,000,000 charge recorded in the prior period
related to claims and asset valuations
Selling, general and administrative expenses of $34,346,000
increased from $30,478,000 in the prior period. Selling
general and administrative expense in the PSG (Contract
Operations) segment increased $2,935,000 primarily due to
the PSG acquisition. Selling, general and administrative
expenses at Research-Cottrell decreased $898,000 due to cost
reductions within its particulate and acid gas control
equipment, cooling tower and emissions monitoring product
lines partially off-set with higher costs related to
international activities. Selling general and
administrative expenses in the Metcalf & Eddy segment
increased by $1,127,000 due to higher bid and proposal and
other related selling costs partially off-set by lower
litigation costs compared to the prior period. Selling,
general and administrative expense in corporate increased
due to recruiting and unallocated legal and facility
related costs.
The improved operating margins of all business units were
essentially in line with management's expectations with the
exception of the emissions monitoring equipment operation
which is experiencing difficulties in resolving software
issues related to systems recently shipped to utilities.
Management is currently investigating the situation in order
to develop and implement corrective measures.
During the three months ended January 31, 1994, the Company
recorded an impaired asset valuation charge primarily
related to certain businesses that no longer meet strategic
objectives and are anticipated to be divested. These
businesses primarily consist of certain manufacturing
operations and properties which divert management attention
from the Company's core products and services provided by
Research-Cottrell, Metcalf & Eddy and PSG. As a result of
the anticipated divestitures, the Company recorded a
$14,500,000 charge representing the difference between the
carrying value of these operations and management's estimate
of the anticipated net sales proceeds. Total assets of these
operations approximate $20,900,000 at January 31, 1995,
which includes approximately $3,000,000 for accounts
receivable, $2,000,000 for costs and estimated earnings in
excess of billings, $3,200,000 for inventories, $6,100,000
for property plant and equipment, $2,900,000 for other
assets and $3,700,000 for goodwill. As of January 31, 1995
several divestiture negotiations were ongoing. The sale of
the assets of Pamco (natural gas compressor and power
generation systems operations) was completed in November
1994 and is reported as a discontinued operation.
<PAGE>
Interest expense decreased $541,000 although borrowings
increased primarily due to lower interest rates during the
current period compared to the prior period. Interest income
decreased $272,000 primarily as a result of interest on a
favorable tax settlement in the prior period. Other
expenses decreased by $395,000 as a result of favorable
foreign exchange gains.
During the first quarter of fiscal 1994, the Company's
discontinued asbestos abatement operations incurred a loss
of $3,229,000 primarily due to revisions of estimates of
costs to complete on existing contracts.
On November 18, 1994, the Company sold substantially all of
the net assets of Pamco for cash. Preliminary proceeds of
$11,588,000 were received during November 1994, excluding
$1,500,000 held in escrow, subject to the finalization of
the closing account balance and collection of Pamco's
accounts receivable. The related asset purchase agreement
provides for a final purchase price based on the net asset
valuation, as defined, as of the closing date. Additional
proceeds of $1,038,000 were received during February 1995,
including $750,000 previously held in escrow. The
$3,394,000 charge reflected in the prior period consists of
operating losses of $594,000 and an estimated loss on
disposition of $2,800,000.
Financial Condition
- -------------------
On June 14, 1994, the stockholders of the Company approved
the issuance of Company securities pursuant to the
Investment Agreement, pursuant to which, among other things,
AWT (i) issued to CGE 1,200,000 shares of a newly designated
series of Preferred Stock, designated as 5 1/2% Series A
Convertible Exchangeable Preferred Stock, convertible into
4,800,000 shares of Class A Common Stock, for cash
consideration of $60,000,000 and (ii) issued to Anjou an
aggregate of 6,701,500 shares of Class A Common Stock in
connection with the acquisition from Anjou of PSG. As a
result, CGE increased its ownership interest in AWT to
approximately 48% of the total voting power of the Company's
voting securities. In addition, AWT benefited from certain
financial undertakings from CGE, including a $125,000,000
loan from CGE which bears interest at LIBOR plus 1.25%
(currently 7.69%) and became CGE's exclusive vehicle in the
United States, its possessions and its territories for CGE's
water and wastewater management and air pollution
activities. CGE also has representation on AWT's Board of
Directors and the right to designate AWT's Chief Executive
Officer and Chief Financial Officer.
On June 14, 1994 the Company utilized a portion of the
proceeds from the $125,000,000 term loan from CGE to retire
its 11.18% Senior Notes owed to The Prudential Insurance
Company of America.
Cash used by continuing operations for the three-month
period ended January 31, 1995 amounted to $18,908,000. In
addition, the Company's discontinued operations utilized
$277,000 of cash, resulting in net cash used for operating
activities of $19,185,000. The Company also utilized
$2,681,000 of cash for capital expenditures, investments in
environmental treatment facilities, software development and
other investment activities during the period. These cash
requirements were funded principally by $11,641,000 of short-
term borrowings under its line of credit and preliminary
proceeds of $11,588,000 from the sale of Pamco.
The Company's principal sources of liquidity to meet
short-term working capital needs, in addition to its
existing cash balances ($9,534,000 at January 31, 1995)
consisted of its $70,000,000 Credit Agreement with a
syndicate of banks represented by First Chicago and its
$20,000,000 Accounts Receivable Purchase Agreement with
First Chicago, both of which facilities expired on March 10,
1995 and were replaced with a new facility discussed below.
Under this $70,000,000 Credit Agreement, the Company was
able to borrow up to $40,000,000 for working capital
purposes of which $30,000,000 was outstanding on January 31,
1995 (compared to $19,000,000 at October 31, 1994), with the
remaining unused balance of the Credit Agreement available
for Letters of Credit, of which $26,400,000 was issued and
outstanding on January 31, 1995. Of these Letters of Credit
outstanding, $14,300,000 support foreign borrowing
facilities of which $10,641,000 was borrowed on January 31,
1995. Under the Company's Accounts Receivable Purchase
Agreement, $19,000,000 was outstanding on January 31, 1995.
At January 31, 1995 the Company had $14,600,000 of
additional credit capacity available under the Credit
Agreement.
<PAGE>
On March 10, 1995, the Company entered into a new three-year
$130,000,000 Senior Secured Credit Facility (the "New Credit
Facility") with First Chicago and Societe Generale acting as
co-agents for a syndicate which includes seven additional
banks. The New Credit Facility replaces the Credit
Agreement and the Accounts Receivable Purchase Agreement and
increases the amount of borrowings available to the Company
at a reduced cost. It is primarily designed to finance
working capital requirements and allow for the issuance of
letters of credit, both subject to limitations and secured
by a first security interest in substantially all of the
assets of the Company.
Of the total commitment, borrowings are limited to the sum
of a percentage of certain eligible receivables,
inventories, net property, plant and equipment and costs and
estimated earnings in excess of billings (approximately
$77,000,000 using January 31, 1995 financial data) and bear
interest at LIBOR, as defined, plus .725% or at a defined
bank rate approximating prime (currently 9%). The New
Credit Facility also allows for certain additional
borrowings, including, among other things, project financing
and foreign borrowing facilities, subject to limitations.
The New Credit Facility contains certain financial and other
restrictive covenants with respect to the Company,
including, among other things, the maintenance of certain
financial ratios, and restrictions on the incurrence of
additional indebtedness, acquisitions, the sale of assets
and the payment of dividends or repurchase of subordinated
debt. In addition, the agreement requires CGE to maintain a
minimum 40% ownership interest in the Company.
As a result of the Company entering into the New Credit
Facility, the Company's existing performance and surety bond
agreements with Reliance Surety Company will terminate on
April 6, 1995, absent an extension by Reliance. The Company
is negotiating a new bond underwriting agreement with
Reliance and expects to enter into a new arrangement by
April 6, 1995 or shortly thereafter.
The Company believes that it has the ability to manage its
cash needs and is currently continuing its efforts to
control its expenses as well as reducing its working capital
requirements. Further negotiations are continuing to be
pursued with potential buyers of certain Company businesses
no longer meeting strategic objectives. While the Company
currently anticipates net proceeds of approximately
$28,000,000 upon the sale of those businesses, of which
$12,626,000 has been received through February 1995, no
assurance can be given that such negotiations will result in
the successful disposition of any of these businesses.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For three months
ended January 31, 1995 and the years ended October 31, 1994
and 1993 total capital expenditures were $1,429,000,
$5,523,000 and $3,880,000, respectively. At January 31,
1995, the Company had no material outstanding purchase
commitments for capital expenditures.
Litigation
- ----------
In September 1990, Metcalf & Eddy, Inc. filed an action in
United States District Court in San Juan, Puerto Rico,
seeking $52 million in damages from the Puerto Rico Aqueduct
and Sewer Authority ("PRASA"). On December 18, 1990,
Metcalf & Eddy announced that it had suspended all work
under the contract pending resolution of the litigation
between the parties. Metcalf & Eddy's suit initially sought
$27 million in damages for payment for goods and services
Metcalf & Eddy sold and rendered to PRASA under a contract
to rehabilitate PRASA's wastewater treatment system and
provide related program management services. In July 1991,
Metcalf & Eddy 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 Metcalf & Eddy with
respect to the PRASA contract and violations of good faith
and fair dealing under the contract. The matter is complex
litigation and no assurance as to the final outcome of the
litigation can be given.
<PAGE>
PRASA has been withholding payments under its contract with
Metcalf & Eddy. 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.
Metcalf & Eddy disputes the findings of the PRASA audit and
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 Metcalf
& Eddy. Discovery in this matter is completed. 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 been
appointed and is scheduled to issue an opinion in June 1995.
The trial of this matter is scheduled to commence on July
17, 1995.
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 Metcalf & Eddy's action against
PRASA. This ruling held that certain portions of the multi-
year contract between Metcalf & Eddy and PRASA were invalid
as contrary to Puerto Rican law insofar as they called for
the practice of engineering by Metcalf & Eddy. This action,
originally filed in September 1986 by the Puerto Rico
College of Engineers, an island-wide professional
engineering organization, sought a declaratory judgment that
the engineering design portion of Metcalf & Eddy's contract
violated 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 Metcalf & Eddy 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 AWT is unable to determine
with any specificity what impact the Colegio decision will
have on its efforts to recover monies from PRASA. AWT has
also consulted with counsel as to its obligations under the
contract and the course of the litigation generally. Based
on its consideration of all of the foregoing and the status
of the litigation to date, AWT believes that Metcalf & Eddy
has performed substantially in accordance with the terms of
the contract and that, ultimately, at least a majority of
the sums due Metcalf & Eddy pursuant to the contract will be
realized.
By letters dated February 9, 1995, counsel for Texas
Electric Utilities Company ("TU Electric") made written
demand against Air & Water Technologies Corporation,
Research-Cottrell, Inc., Custodis-Hamon Constructors, Inc.,
Custodis Construction Company, Custodis-Ecodyne, Inc., and
Custodis-Cottrell, Inc. ("Custodis") for any and all
liability and damages growing out of or in any way connected
with the collapse of a 600 foot chimney at the Monticello
Steam Electric Station owned by TU Electric. TU Electric's
demand letter indicates that while total damages have yet to
be fully determined, the total amount of damages it will
suffer is expected to be in excess of $100 million. The
subject chimney collapsed on November 14, 1993 as its
interior was being cleaned by employees of Custodis under a
contract between Custodis and TU Electric pursuant to which
Custodis was to be paid approximately $35,000. Custodis, as
well as AWT and its other subsidiaries that are the subject
of TU Electric's demand, have denied any liability for
damages suffered by TU Electric as a result of the incident
in question. Based on its investigation of this incident,
including expert analysis, Custodis believes that the root
cause of the chimney collapse was TU Electric's failure to
properly maintain it. Based upon the facts and
circumstances known to it at this time, the Company believes
that the ultimate resolution of this matter will not have a
material adverse effect on its consolidated financial
position or results of operations, taken as a whole.
AWT 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. AWT
believes that the disposition of such various actions,
individually or in the aggregate, will not have a material
adverse effect on the consolidated financial position or
results of operations of AWT taken as a whole.
<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.
There are no reportable items under Part II., items II.
through VI.
<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 March 17, 1995 /s/Alain Brunais
----------------------- ----------------------
Alain Brunais
Chief Financial Officer
<PAGE>
<PAGE> EXHIBIT 11
AIR & WATER TECHNOLOGIES CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Primary Earnings (Loss) Per Share:
1. Income (loss) from continuing operations $ (7,393) $ (30,774)
2. Less preferred dividends (825) -
------- -------
3. Income (loss) from continuing operations applicable
to common shareholders (8,218) (30,774)
4. Income (loss) from discontinued operations - (6,623)
5 Extraordinary item - -
------- -------
6. Net loss applicable to common shareholders (8,218) (37,397)
------- -------
7. Weighted average shares outstanding 32,018 24,818
------- -------
8. Earnings (loss) per share from continuing
operations (3/7) $ (.26) $ (1.24)
9. Earnings (loss) per share from discontinued
operations (4/7) - (.27)
10. Loss per share on extraordinary item (5/7) - -
------- -------
11. Net loss per share $ (.26) $ (1.51)
======= =======
Fully Diluted Earnings (Loss) Per Share:
12. Line 3. above $ (8,218) $ (30,774)
13. Add back preferred dividends 825 -
14. Add back interest, on assumed conversion
of the Company's 8% Convertible Debentures 2,300 2,300
------- -------
15. Income (loss) from continuing operations (5,093) (28,474)
16. Income (loss) from discontinued operations - (6,623)
17. Extraordinary item - -
------- -------
18. Net income (loss) $ (5,093) $ (35,097)
------- -------
19. Weighted average shares outstanding (Line 7) 32,018 24,818
20. Add additional shares issuable upon assumed conversion
of preferred shares from date of issuance 4,800 -
21. Add additional shares issuable upon assumed
conversion of the Company's 8% Convertible
Debentures 3,833 3,833
------- -------
22. Adjusted weighted average shares outstanding 40,651 28,651
------- -------
23. Earnings (loss) per share from continuing
operations (15/22) $ (.13) $ (1.00)
24. Earnings (loss) per share from discontinued
operations (16/22) - (.23)
25. Loss per share from extraordinary item (17/22) - -
-------- ------
26. Net income (loss) per share (12/15)* $ (.13) $ (1.23)
======= ========
* Fully diluted earnings (loss) per share are not presented
as the assumed conversion of the Company's 8% Convertible
Debentures is anti-dilutive.
</TABLE>
<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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 9,534
<SECURITIES> 0
<RECEIVABLES> 95,125
<ALLOWANCES> 8,707
<INVENTORY> 20,067
<CURRENT-ASSETS> 184,264
<PP&E> 75,476
<DEPRECIATION> 33,031
<TOTAL-ASSETS> 592,516
<CURRENT-LIABILITIES> 197,713
<BONDS> 285,910
<COMMON> 32
0
12
<OTHER-SE> 66,230
<TOTAL-LIABILITY-AND-EQUITY> 592,516
<SALES> 148,451
<TOTAL-REVENUES> 148,451
<CGS> 113,180
<TOTAL-COSTS> 113,180
<OTHER-EXPENSES> 2,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,601
<INCOME-PRETAX> (7,084)
<INCOME-TAX> 293
<INCOME-CONTINUING> (7,393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,393)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.13)
</TABLE>
