<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, 1997
-----------------
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 January 31, 1997.
Class A
$.001 Par Value Common Stock 32,019,254
- ---------------------------- -----------------------------
(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, 1997 AND OCTOBER 31, 1996
-----------------------------------------------------------------------
(in thousands , except share data)
--------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,441 $ 12,667
Accounts receivable, net 89,233 100,933
Costs and estimated earnings in excess of
billings on uncompleted contracts 49,677 48,097
Inventories 13,156 11,319
Prepaid expenses and other current assets 11,147 12,027
-------- --------
Total current assets 172,654 185,043
PROPERTY, PLANT AND EQUIPMENT, net 35,339 35,432
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 22,133 22,062
GOODWILL 263,810 265,860
OTHER ASSETS 29,285 29,873
-------- --------
Total assets $523,221 $538,270
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ 384 $ 378
Accounts payable 69,438 73,951
Accrued expenses 66,851 76,656
Billings in excess of costs and estimated
earnings on uncompleted contracts 29,262 23,995
Income taxes payable 2,239 2,507
-------- --------
Total current liabilities 168,174 177,487
-------- --------
LONG-TERM DEBT 314,670 306,542
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 authorized,
2,500,000 shares;issued 1,200,000 shares;
liquidation value $60,000 12 12
Common stock par value $.001 authorized
100,000,000 shares;issued 32,109,156 and
32,107,906 shares 32 32
Additional paid-in capital 427,036 427,036
Accumulated deficit (385,787) (372,433)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (808) (298)
-------- --------
Total stockholders' equity 40,377 54,241
-------- --------
Total liabilities and stockholders' equity $523,221 $538,270
======== ========
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, 1997 AND 1996
------------------------------------------------------------
(in thousands, except share data)
-------------------------------
(unaudited)
---------
Three Months
Ending January 31
-----------------
1997 1996
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
SALES $146,959 $159,206
COST OF SALES 122,755 128,424
-------- --------
Gross margin 24,204 30,782
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 25,194 22,990
DEPRECIATION AND AMORTIZATION 5,229 4,929
-------- --------
Operating income (loss) (6,219) 2,863
INTEREST EXPENSE (5,968) (5,614)
INTEREST INCOME 114 260
OTHER EXPENSE, NET (326) (131)
-------- --------
Loss before income taxes
and minority interest (12,399) (2,622)
INCOME TAXES 131 323
-------- --------
NET LOSS $(12,530) $(2,945)
======== ========
LOSS PER COMMON SHARE
(AFTER PREFERRED STOCK DIVIDENDS) (.42) (.12)
======== ========
Weighted average number of shares
outstanding 32,019 32,018
======== ========
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, 1997 AND 1996
------------------------------------------------------------
(in thousands)
------------
(unaudited)
---------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,530) $(2,945)
Adjustments to reconcile net loss to net cash
provided by (used for) continuing operations -
Depreciation and amortization 5,229 4,929
Other, net 191 269
Changes in assets and liabilities -
(Increase) decrease in assets -
Accounts receivable 11,700 4,077
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,580) 4,330
Inventories (1,837) 403
Prepaid expenses and other current assets 301 (3,904)
Other assets (121) 76
Increase (decrease) in liabilities -
Accounts payable (4,596) (2,307)
Accrued expenses (9,572) (5,953)
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,267 (255)
Income taxes (265) (9)
-------- --------
Net cash used for continuing operations (7,813) (1,289)
Net cash provided by
discontinued operations 662 112
-------- --------
Net cash used for operating activities (7,151) (1,177)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business -- 2,353
Capital expenditures (1,758) (1,983)
Investment in environmental treatment facilities 69 215
Start up costs and other, net (1,182) (2,052)
-------- --------
Net cash used for
investing activities (2,871) (1,467)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt (66) (68)
Net borrowings under credit facilities 8,200 4,500
Cash dividends paid (825) (825)
Other, net (513) (921)
-------- --------
Net cash provided by financing activities 6,796 2,686
-------- --------
Net increase (decrease) in cash and cash
equivalents (3,226) 42
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,667 11,168
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,441 $11,210
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,106 $ 7,497
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
JANUARY 31, 1997
----------------
(unaudited)
---------
(1) Basis of Presentation:
---------------------
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, 1996. 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.
(2) Commitments and Contingencies:
-----------------------------
The Company and its subsidiaries are parties to various
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.
(3) Reclassifications:
-----------------
Certain reclassifications have been made to conform the 1996
consolidated financial statements to the 1997 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, 1996.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the
core segments of the Company (in thousands):
[CAPTION]
<TABLE>
Three Months Ended January 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Sales:
Professional Services Group $ 62,588 $ 64,034
Metcalf & Eddy 44,591 47,138
Research - Cottrell 40,322 48,649
Other and eliminations (542) (615)
-------- --------
$146,959 $159,206
======== ========
Cost of Sales:
Professional Services Group $ 57,959 $ 56,676
Metcalf & Eddy 32,050 33,873
Research - Cottrell 33,288 38,490
Other and eliminations (542) (615)
-------- --------
$122,755 $128,424
======== ========
Selling, General and Administrative Expenses:
Professional Services Group $ 3,821 $ 3,478
Metcalf & Eddy 11,052 9,539
Research - Cottrell 8,252 8,320
Other and eliminations -- --
Corporate (unallocated) 2,069 1,653
-------- --------
$ 25,194 $ 22,990
======== ========
Depreciation and Amortization:
Professional Services Group $ 2,046 $ 1,964
Metcalf & Eddy 1,712 1,464
Research - Cottrell 1,343 1,389
Other and eliminations -- --
Corporate (unallocated) 128 112
-------- --------
$ 5,229 $ 4,929
======== ========
Operating Income (Loss):
Professional Services Group $ (1,238) $ 1,916
Metcalf & Eddy (223) 2,262
Research - Cottrell (2,561) 450
Other and eliminations -- --
Corporate (unallocated) (2,197) (1,765)
-------- --------
$ (6,219) $ 2,863
======== ========
</TABLE>
<PAGE>
Professional Services Group
- ---------------------------
Additional direct project costs required under the PRASA
contract and costs associated with the U.S. Department of
Justice investigation contributed significantly to the
operating loss of $1.2 million for the three month period
ended January 31, 1997. Also impacting the results were
lower operating margins on several other projects due to
higher direct costs which were not recovered due to
competitive pricing pressures.
The Company's sales have remained comparable to the prior
period as a result of the privatization market developing
more slowly than anticipated. Although the Company has been
successful in obtaining most of its contract renewals it
continues to experience delays in negotiating and closing
new business opportunities. Results are expected to improve
throughout the year and be comparable to the prior period
results due to potential new contracts and certain
contractual incentive clauses which are expected to be
realized later in the fiscal year.
Metcalf & Eddy
- --------------
The $.2 million operating loss during the three month period
ended January 31, 1997 was primarily due to a $1.7 million
charge related to a cancellation penalty for one of its high
cost leased facilities. Excluding this charge, the results
compared to the prior period were unfavorably impacted by
lower sales volume due to delays in obtaining task order
releases on several of its government contracts.
The results are expected to improve throughout the year and
be comparable to the prior year due to the seasonality
impacts and task order releases which could result in higher
sales levels. The operating margins may also decrease
compared to the prior period as more design-build and
construction type projects are pursued.
Research-Cottrell
- -----------------
An operating loss of $2.6 million was sustained during the
three month period ended January 31, 1997 which was $3.0
million worse than the comparable prior period. The results
were unfavorably impacted by lower sales volumes in certain
operations and decreases in margin rates due to delays in
issuing new air quality standards by the EPA, price
pressures from the highly competitive markets, unfavorable
product line mix and project execution. Lower operating
margins were reflected in REECO and Ecodyne ($1.0 and $.7
million) due to lower sales volume as well as Custodis and R-
C International ($.7 million and $.5 million) due to sales
volume and lower margin rates. Although the results are
expected to improve slightly throughout the year, the
unfavorable trend compared to the prior periods related to
volume and margin rates is expected to continue due to the
aforementioned reasons.
Corporate and Other
- -------------------
The unallocated corporate costs were $.4 million higher than
the comparable prior period due to increased outside
services. In addition, higher average borrowings resulted
in increased interest expense.
Financial Condition
- -------------------
Cash used by operations for the three month period ended
January 31, 1997 amounted to $7.2 million and was
unfavorably impacted by the net loss of $12.5 million
including a $2.2 million cancellation penalty for a leased
facility. The Company also utilized $2.8 million of cash
for capital expenditures, investments in environmental
treatment facilities and other investment activities
including start up costs during the period. These cash
requirements were funded principally through borrowings
under the Company's credit facilities discussed below. As a
result of the above, net financial debt (debt less cash)
increased by $11.4 million during the three month period
ended January 31, 1997.
<PAGE>
During August, 1996 the Company entered into a seven year
$60 million unsecured revolving credit facility with Anjou
International Company ("Anjou Credit Facility"), an
affiliated company. The borrowings under the facility bear
interest at LIBOR plus .6%. In conjunction with this new
financing the Company reduced its more expensive $130
million Senior Secured Credit Facility ("Bank Credit
Facility") to $50 million. As of October 31, 1996, the
Company's outstanding borrowings under the Anjou Credit
Facility totaled $60 million.
The Bank Credit Facility is primarily designed to finance
working capital requirements and provide 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, and
bear interest at LIBOR (5.5% at January 31, 1997), as
defined, plus .875% or at a defined bank rate approximating
prime (8.25% at January 31, 1997). The Bank Credit Facility
also allows for certain additional borrowings, including,
among other things, project financing and foreign borrowing
facilities, subject to limitations and contains certain
financial and other restrictive covenants , including, among
other things, the maintenance of certain financial ratios,
and restrictions on the incurrence of additional
indebtedness, acquisitions, the sale of assets, the payment
of dividends and the repurchase of subordinated debt. In
addition, the related agreement requires CGE to maintain its
support of the Company, including, a minimum 40% ownership
interest in the Company and its right to designate its
proportionate share of the Company's Board of Directors as
well as the Chief Executive Officer and Chief Financial
Officer. The Company compensates CGE for its support in an
amount equal to .95% per annum of the outstanding commitment
of its credit facilities. Under the Bank Credit Facility at
January 31, 1997, the Company had outstanding borrowings of
$9.5 million (capacity of $27.5 million) and outstanding
letters of credit of $22.5 million.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the three
month period ended January 31, 1997, and the years ended
October 31, 1996 and 1995 total capital expenditures were
$1.8 million, $7.5 million and $7.9 million, respectively.
At October 31, 1996, the Company had no material outstanding
purchase commitments for capital expenditures. As of
February 20, 1997, the Company has borrowed an additional
$3.5 million during the second quarter of fiscal 1997 under
its credit facilities. Management believes that it will be
able to manage its near-term cash requirements through its
remaining Bank Credit Facility capacity ($14 million),
current cash balances and working capital reductions.
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Statements contained in this report, including Management's
Discussion and Analysis, are forward looking statements that
involve a number of risks and uncertainties which may cause
the Company's actual operating results to differ materially
from the projected amounts. Among the factors that could
cause actual results to differ materially are risk factors
listed from time to time in the Company's SEC reports
including:
- the Company's highly competitive marketplace,
- changes in as well as enforcement levels of
federal, state and local environmental legislation
and regulations that change demand for a significant
portion of the Company's services,
- the ability to obtain new contracts (some of
which are significant) from existing and new clients,
- the execution of the expected new projects and
those projects in backlog within the most recent
cost estimates and
- the favorable resolution of existing
claims arising in the ordinary course of business.
<PAGE>
PART II. OTHER INFORMATION
ITEM I. Legal Proceedings
In connection with a broad investigation by the U.S.
Department of Justice into alleged illegal payments by
various persons to members of the Houston City Council,
the Company's subsidiary, PSG, received a federal grand
jury subpoena on May 31, 1996 requesting documents
regarding certain PSG consultants and representatives
that had been retained by PSG to assist in advising the
City of Houston regarding the benefits that could
result from the privatization of Houston's water and
wastewater system. PSG has cooperated and continues to
cooperate with the Justice Department which has
informed the Company that it is reviewing transactions
among PSG and its consultants. The Company promptly
initiated its own independent investigation into these
matters and placed PSG's chief executive officer,
Michael M. Stump, on administrative leave of absence
with pay. Mr. Stump, who has denied any wrongdoing,
resigned from PSG on December 4, 1996. In the course
of its ongoing investigation, the Company became aware
of questionable financial transactions with third
parties and payments to certain PSG consultants and
other individuals, the nature of which requires further
investigation. The Company has brought these matters
to the attention of the Department of Justice and
continues to cooperate fully with its investigation.
No charges of wrongdoing have been brought against PSG
or any PSG executive or employee by any grand jury or
other government authority. However, since the
government's investigation is still underway and is
conducted largely in secret, no assurance can be given
as to whether the government authorities will
ultimately determine to bring charges or assert claims
resulting from this investigation that could implicate
or reflect adversely upon or otherwise have a material
adverse effect on the financial position or results of
operations of PSG or the Company 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.
ITEM 2-5
There are no reportable items under Part II, items 2
through 5.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of per share earnings.
Exhibit 27. Financial Data Supplement
<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 February 21, 1997 /s/ Alain Brunais
----------------- ------------------
Alain Brunais
Chief Financial Officer
EXHIBIT 11
AIR & WATER TECHNOLOGIES CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
1997 1996
<C> <S> <C> <C>
Primary Earnings (Loss) Per Share:
1. Net loss $ (12,530) $(2,945)
2. Less preferred dividends (825) (825)
-------- --------
3. Net loss applicable to common shareholders (13,355) (3,770)
-------- --------
4. Weighted average shares outstanding 32,019 32,018
-------- --------
5. Net loss per share $ (.42) $ (.12)
======== ========
Fully Diluted Earnings (Loss) Per Share:
6. Line 3. above $ (13,355) $(3,770)
7. Add back preferred dividends 825 825
8. Add back interest, on assumed
conversion of the Company's 8% Convertible
Debentures 2,300 2,300
-------- --------
9. Net loss $ (10,230) $ (645)
-------- --------
10. Weighted average shares outstanding (Line 4) 32,019 32,018
11. Add additional shares issuable upon assumed
conversion of preferred shares 4,800 4,800
12. Add additional shares issuable upon assumed
conversion of the Company's 8% Convertible
Debentures 3,833 3,833
-------- --------
13. Adjusted weighted average shares outstanding 40,652 40,651
-------- --------
14. Net loss per share (9/13)* $ (.25) $ (.02)
======== ========
</TABLE>
* Fully diluted earnings (loss) per share are not presented as
the assumed conversion of the Company's 8% 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 9,441
<SECURITIES> 0
<RECEIVABLES> 94,238
<ALLOWANCES> 5,005
<INVENTORY> 13,156
<CURRENT-ASSETS> 172,654
<PP&E> 67,540
<DEPRECIATION> 32,201
<TOTAL-ASSETS> 523,221
<CURRENT-LIABILITIES> 168,174
<BONDS> 314,670
0
12
<COMMON> 32
<OTHER-SE> 41,249
<TOTAL-LIABILITY-AND-EQUITY> 523,221
<SALES> 146,959
<TOTAL-REVENUES> 146,959
<CGS> 122,755
<TOTAL-COSTS> 122,755
<OTHER-EXPENSES> 5,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,854
<INCOME-PRETAX> (12,399)
<INCOME-TAX> 131
<INCOME-CONTINUING> (12,530)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,530)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.25)
</TABLE>
