<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AIR & WATER TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7311 13-3418759
STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
U.S. HIGHWAY 22 WEST AND STATION ROAD
BRANCHBURG, NEW JERSEY 08876
(908) 685-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DOUGLAS A. SATZGER, ESQ.
SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
U.S. HIGHWAY 22 WEST AND STATION ROAD
BRANCHBURG, NEW JERSEY 08876
(908) 685-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
RICHARD A. STEINWURTZEL, ESQ. JOHN A. BICK, ESQ. MARTHA E. MCGARRY, ESQ.
FRIED, FRANK, HARRIS, SHRIVER DAVIS POLK & WARDWELL SKADDEN, ARPS, SLATE,
& JACOBSON 450 LEXINGTON AVENUE MEAGHER
SUITE 800 NEW YORK, NEW YORK 10017 & FLOM LLP
1001 PENNSYLVANIA AVENUE, (212) 450-4000 919 THIRD AVENUE
N.W. NEW YORK, NEW YORK 10022
WASHINGTON, D.C. 20004 (212) 735-3000
(202) 639-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF
SECURITIES TO BE AMOUNT TO PROPOSED MAXIMUM AMOUNT OF
REGISTERED BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Rights.................. (1) N/A None(2)
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share........ (3) $210,000,000 $63,637
- --------------------------------------------------------------------------------
Warrants................ (3) N/A None
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Such indeterminable number of Rights as may be issued to existing
stockholders.
(2) Pursuant to Rule 457(g), no registration fee is payable with respect to
the Rights since the Rights are being registered in the same registration
statement as the securities to be offered pursuant thereto.
(3) Such indeterminable number of shares of Class A Common Stock, Class B
Common Stock and Warrants as may be issued at the actual offering price
per share such that the maximum aggregate offering price equals
$210,000,000.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 30, 1997.
[LOGO OF AIR & WATER]
SHARES
AIR & WATER TECHNOLOGIES CORPORATION
COMMON STOCK
WARRANTS TO PURCHASE SHARES OF CLASS A COMMON STOCK
----------------
Air & Water Technologies Corporation, a Delaware corporation (the "Company")
is distributing to holders of record ("Recordholders") of shares of its Class
A Common Stock, par value $.001 per share (the "Class A Common Stock"), at the
close of business on , 1997 (the "Record Date"), transferable
subscription rights (the "Rights") to subscribe for and purchase additional
shares of the Class A Common Stock (the "Underlying Shares") (subject to the
Company's obligation to issue shares of Class B Common Stock (as defined
hereinafter) in certain circumstances) at the Subscription Price (as defined
hereinafter). The Rights are being issued in connection with a
recapitalization of the Company (the "Recapitalization") consisting of (i) the
Exchange (as defined hereinafter) and (ii) the Rights Offering (as defined
hereinafter). See "The Recapitalization."
Each Recordholder will receive Rights for each share of Class A Common
Stock owned of record as of the close of business on the Record Date. Each
Right allows the holder to acquire, at the Subscription Price,
(continued on next page)
BEFORE MAKING AN INVESTMENT DECISION, POTENTIAL INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 19.
STOCKHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS IN FULL WILL EXPERIENCE DILUTION
IN THEIR RELATIVE PERCENTAGE OWNERSHIP IN THE COMPANY UPON ISSUANCE OF THE
COMMON STOCK TO STOCKHOLDERS EXERCISING THEIR RIGHTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIPTION DISCOUNTS AND PROCEEDS TO THE
PRICE COMMISSIONS COMPANY(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $ (2) None $
- -------------------------------------------------------------------------------
Total Maximum Subscription(3)....... $210,000,000 None $210,000,000
- -------------------------------------------------------------------------------
Total Minimum Subscription(4)....... $185,000,000 None $185,000,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated expenses of $ payable by the Company, including registration
fees, legal and accounting fees, subscription agent fees, information
agent fees, printing expenses and other miscellaneous fees and expenses
will be paid out of existing cash of the Company.
(2) The Subscription Price means the price per share of Class A Common Stock
equal to 82% of the average daily Closing Price (as defined hereinafter)
of the Class A Common Stock for the ten consecutive Trading Days (as
defined hereinafter) ending five days prior to the Record Date; provided,
however, that in no event shall the Subscription Price be less than $1.75
per share of Class A Common Stock or exceed $2.50 per share of Class A
Common Stock. See "The Rights Offering--Subscription Price."
(3) Assumes that Public subscribers in the Rights Offering exercise Rights
providing at least $25 million of gross proceeds in the Rights Offering.
(4) Assumes that CGE exercises its Basic Subscription Privilege and the
Conditional CGE Subscription and no holder of Rights other than CGE or
Anjou purchases Class A Common Stock.
----------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(Continued from previous page)
one share of Class A Common Stock (the "Basic Subscription Privilege")
(subject to the Company's obligation to issue Class B Common Stock in certain
circumstances). See "The Rights Offering--Subscription Privileges--Basic
Subscription Privilege."
Rights holders other than Compagnie Generale des Eaux ("CGE"), the
beneficial owner of % of the outstanding Class A Common Stock, and Anjou
International Company, a wholly owned subsidiary of CGE ("Anjou"), which
exercise their Basic Subscription Privilege will also be eligible to subscribe
(the "Oversubscription Privilege") at the Subscription Price for shares of
Class A Common Stock that are not otherwise purchased pursuant to the exercise
of Rights (the "Excess Shares"), subject to availability and proration and the
Company's obligation to issue Class B Common Stock (in certain circumstances).
See "The Rights Offering--Subscription Privileges--Oversubscription
Privilege." Once a Rights holder has exercised any Rights, such exercise may
not be revoked. See "The Rights Offering--No Revocation." The Rights will be
evidenced by transferable Rights certificates ("Rights Certificates"). As used
herein, the term "Rights Offering" means the offering of securities pursuant
to (i) the Basic Subscription Privilege, (ii) the Oversubscription Privilege
and (iii) the Conditional CGE Subscription (as defined hereinafter).
The Rights will expire at 5:00 p.m., New York City time, on , 1998
unless such time is extended by the Company as described herein (as it may be
extended, the "Expiration Date"). See "The Rights Offering--Expiration Date."
Rights holders who do not exercise or sell their Rights will relinquish the
value inherent in the Rights. See "Risk Factors--Dilution." Rights holders are
encouraged to consider carefully the exercise or sale of the Rights by the
Expiration Date.
Public Rights holders (the "Public") (other than CGE and Anjou) who exercise
Rights in the Rights Offering also will receive a certain number of
transferable warrants (the "Warrants") to acquire shares of Class A Common
Stock. Each Warrant will entitle the holder to acquire one share of Class A
Common Stock at an exercise price of $2.50 per share, subject to adjustment
under certain circumstances. The Company has available for issuance up to
10,000,000 Warrants, which when exercised, would entitle the holders thereof
to purchase, in the aggregate, up to 10,000,000 shares of Class A Common
Stock. The Company will issue that percentage of such 10,000,000 Warrants
equivalent to the percentage of the total number of Underlying Shares
purchased by the Public in the Rights Offering relative to the total number of
Underlying Shares issuable upon full exercise of Rights by the Public in the
Rights Offering (the "Warrant Pool"). The Company will issue to each Public
subscriber in the Rights Offering such number of Warrants to purchase shares
of Class A Common Stock equal to the product of the Warrant Pool multiplied by
a fraction the numerator of which is the total number of Underlying Shares
purchased by such holder in the Rights Offering and the denominator of which
is the total number of Underlying Shares purchased by all Public subscribers
in the Rights Offering. See "Prospectus Summary--The Warrants," "Rights
Offering--The Rights" and "Description of Warrants--General."
In the Rights Offering, CGE has agreed to exercise its Basic Subscription
Privilege in full. In addition, in the event that all Underlying Shares are
not purchased pursuant to the Rights Offering (including pursuant to the
Oversubscription Privilege), CGE will subscribe for and purchase, at the
Subscription Price, such number of shares of Class A Common Stock (subject to
the Company's obligation to issue shares of Class B Common Stock in certain
circumstances) (the "Conditional CGE Subscription"), such that (i) the total
number of shares of Class A Common Stock subscribed for by CGE in the
Conditional CGE Subscription shall be no greater than (A) the total number of
shares of Class A Common Stock available to be purchased by the Public, minus
(B) the total number of shares of Class A Common Stock actually purchased by
the Public, and (ii) in no event shall the gross proceeds resulting from CGE's
Basic Subscription Privilege and the Conditional CGE Subscription exceed $185
million. See "The Rights Offering--Subscription Privileges--Conditional CGE
Subscription." As of the date hereof, CGE beneficially owns an aggregate of
shares of Class A Common Stock, representing approximately % of the
outstanding Class A Common Stock. If no Rights holder other than CGE and Anjou
exercises Rights in the Rights Offering and the Requisite Consents (as defined
hereinafter) are obtained, CGE will beneficially own shares of Class A
Common Stock, representing approximately % of the
2
<PAGE>
outstanding shares of Class A Common Stock. If the Public fully exercises its
Basic Subscription Privilege and its Oversubscription Privilege in full, then
CGE will beneficially own shares of Class A Common Stock, representing
approximately % of the outstanding shares of Class A Common Stock of the
Company.
Concurrently with the Rights Offering, the Company is soliciting the consent
(the "Consent Solicitation") of the holders of at least a majority in
principal amount (the "Requisite Consents") of the Company's outstanding 8%
Convertible Subordinated Debentures due 2015 (the "Convertible Debentures") to
amend certain provisions of the indenture governing the Convertible Debentures
(the "Indenture") permitting the holders thereof to require the Company to
repurchase the Convertible Debentures if any person acquires beneficial
ownership of 75% or more of the voting power of the Company (the "Change of
Control Provision"). In the event the Requisite Consents are not obtained
prior to the Expiration Date and the exercise of the Basic Subscription
Privilege or Oversubscription Privilege or the Conditional CGE Subscription
would cause a Rights holder's beneficial ownership of Class A Common Stock to
exceed 74%, the Company shall be obligated to issue to such holder only such
number of shares of Class A Common Stock as would cause such holder's
beneficial ownership of the Company's voting power to be no greater than 74%
of the outstanding voting power and any additional shares to be issued
thereunder shall be shares of Class B Common Stock, par value $.001 per share,
of the Company (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock").
Prior to the Expiration Date, the Company intends to effect the Charter
Amendment (as hereinafter defined) to increase the number of authorized shares
of capital stock and amend the terms of the Class B Common Stock such that the
Class A Common Stock and the Class B Common Stock will be identical in all
respects except that (i) the Class B Common Stock will not be entitled to vote
and (ii) the Class B Common Stock will convert automatically into Class A
Common Stock immediately upon the earlier of August 1, 2000 or seventy-five
days following the termination of the Change of Control Provision. Based on
the current ownership of the Company's Class A Common Stock, the Company does
not believe that any stockholder other than CGE would be issued Class B Common
Stock in the event the Company fails to obtain the Requisite Consents.
The Class A Common Stock is traded on the American Stock Exchange, Inc. (the
"AMEX") under the symbol "AWT." On September 23, 1997, the last full trading
day prior to the public announcement of the Recapitalization, the closing sale
price of the Class A Common Stock on the AMEX was $1.50 per share. On ,
1997, the last full day of trading prior to the effective date of the
registration statement of which this prospectus forms a part, the closing sale
price of the Class A Common Stock on the AMEX was $ per share.
The Company intends to apply for the Warrants to be listed and the Rights to
be admitted to dealings on the AMEX. If the Rights are admitted to dealings on
the AMEX, it is expected that the Rights will trade on the AMEX until the
close of business on the last trading day prior to the Expiration Date, at
which time they will cease to have value. The Company does not intend to apply
for listing of the Class B Common Stock.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained upon
written request addressed to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The
Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically. The address of that Web site is http://www.sec.gov. The
Company's Class A Common Stock is listed on the American Stock Exchange, Inc.
and such reports, proxy statements and other information can also be inspected
at the offices of the American Stock Exchange, Inc., 86 Trinity Place, New
York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Rights, the Warrants and the shares of Common Stock issuable upon exercise
of the Rights. This Prospectus (this "Prospectus") does not contain all the
information set forth in the Registration Statement. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Prospectus as to the contents of
any contract or other document referred to herein or therein summarize all
material elements of the relevant document but are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
4
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety.
THE COMPANY
GENERAL
Air & Water Technologies Corporation, through its subsidiaries, provides a
comprehensive range of services and technologies directed principally at
providing complete services for the operation, maintenance and management of
water and wastewater treatment systems; engineering, design and construction of
water and wastewater treatment facilities; the remediation of hazardous waste;
and services and technologies for controlling air pollution. The Company
believes it provides a complement of products and services that satisfy the
environmental and essential services needs of its targeted client base. The
Company markets its products and services through three renowned trade names:
Professional Services Group ("PSG") for the operation, maintenance and
management of water and wastewater treatment systems; Metcalf & Eddy for water,
wastewater-related and hazardous waste products and engineering services; and
Research-Cottrell for air pollution control related products and services.
The Company provides its full complement of products and services to
predominantly four major customer sectors consisting of the electric generating
industry; the solid waste incineration industry; governmental entities,
including municipalities and state and federal agencies; and specific
industrial categories, such as petroleum refining, pulp and paper,
pharmaceutical, chemical, primary and secondary metals, food processing,
printing and furniture manufacture.
The Company's principal executive offices are located at U.S. Highway 22 West
and Station Road, Branchburg, New Jersey 08876.
PROFESSIONAL SERVICES GROUP
PSG provides its clients with complete services for the operation,
maintenance and management of treatment systems in the various water and
wastewater and sludge and biosolid waste management markets. PSG operates in
thirty-five states, Canada and Puerto Rico. In the United States, PSG currently
has 135 projects, concentrated east of the Mississippi, with the highest
concentration in the Northeast. These services range from assisting owners and
operators in addressing individual operating needs to the assumption by PSG of
complete responsibility for operating complex treatment systems. PSG provides
operation, maintenance and management ("OM&M") services for water supply and
wastewater treatment systems, primarily for cities, municipalities and other
local governmental entities. PSG also serves the industrial market and federal
and state governments by providing OM&M services for wastewater treatment
systems and groundwater remediation treatment systems. PSG has significant
experience dealing with the planning and implementation of large biosolids
management programs, including composting facilities. The water and wastewater
privatization market is estimated to be, on an annual basis, a $1.1 billion
market, of which PSG has a 45% market share among the top seven companies and a
25% share of the total market. PSG's sales were $179.7 million and $270.6
million during the fiscal years ended October 31, 1995 and 1996, and $195.4
million during the nine months ended July 31, 1997.
METCALF & EDDY
Metcalf & Eddy provides its clients with a broad spectrum of environmental
consulting services, including engineering studies and design, project
management, site evaluation, environmental assessment and master planning.
Metcalf & Eddy's services are directed principally at the protection of public
health and the
5
<PAGE>
environment through sound water resources management, hazardous waste
remediation, and solid waste disposal. These services include protection,
treatment and distribution of water from surface and groundwater sources;
collection, treatment and disposal of wastewater and its associated by-products
such as sludge; pretreatment of industrial wastewater prior to discharge into a
municipal system or on-site treatment and disposal; remediation of hazardous
waste sites involving contaminated soils and groundwater; monitoring and
closure of sanitary landfills with disposal of associated leachate; and
management and transportation of hazardous waste. In addition, Metcalf & Eddy
provides expertise in environmental science, institutional and public policy
support, regulatory compliance and the use of innovative technologies to meet
clients' needs. Metcalf & Eddy's sales were $216.9 million and $215.4 million
during the fiscal years ended October 31, 1995 and 1996, and $132.1 million
during the nine months ended July 31, 1997.
RESEARCH-COTTRELL
Research-Cottrell designs and develops products and technologies targeted at
specific client needs such as air pollution control equipment. Research-
Cottrell's air pollution control related technologies and services are directed
principally at cost-effectively reducing air pollution, treating thermal
discharges, dispersing airborne contaminants, continuously monitoring emissions
and providing expertise in regulatory and engineering services for a wide range
of industrial processing plants and power generation facilities in the United
States and internationally. Research-Cottrell's services include identifying
and analyzing air pollution control problems and recommending effective and
cost-efficient control options; designing and engineering treatment facilities
and equipment; procuring, fabricating, constructing, and installing air
pollution control equipment; and providing overall project management. In
addition, Research-Cottrell provides high quality replacement parts and expert
maintenance and repair services for its own base of installed equipment as well
as equipment provided by others on a routine outage and emergency response
basis. Research-Cottrell's wide range of air pollution control technologies
includes: electrostatic precipitators; fabric filters, dust collectors, and
mechanical collectors; regenerative thermal oxidizers; VOC concentration
systems; concrete chimneys and steel stacks; scrubbers; heat exchangers and
fired heaters; and continuous emissions monitoring systems. These technologies
are provided separately or can be combined into an integrated pollution control
system. Research-Cottrell's sales were $220.2 million and $219.0 million for
the fiscal years ended October 31, 1995 and 1996, and $128.1 million for the
nine months ended July 31, 1997.
RECENT DEVELOPMENTS
Recapitalization
The Company entered into the Recapitalization Agreement (the
"Recapitalization Agreement"), dated as of September 24, 1997, with Anjou and
CGE. The Recapitalization Agreement provides, among other things, for the
exchange (the "Exchange") by CGE and its subsidiaries of $60 million of 5 1/2%
Series A Convertible Preferred Stock, par value $.01 per share, of the Company
(the "Series A Preferred Stock") for shares of Class A Common Stock at an
exchange price equal to the Subscription Price. On , 1997, the Company and
CGE effected the Exchange and the Company issued shares of Class A Common
Stock (the "Exchange Common Shares") in exchange for the Series A Preferred
Stock. See "The Recapitalization--The Exchange."
In addition, the Recapitalization Agreement provides for the Rights Offering
and various other strategic and business matters, including the use of the
proceeds from the Rights Offering. See "The Recapitalization" and "Use of
Proceeds."
In accordance with the terms of the Investment Agreement, dated as of March
30, 1994, among the Company, Anjou and CGE, as amended as of September 24, 1997
(the "Investment Agreement"), the terms and conditions of the Recapitalization
Agreement were negotiated at arm's length between CGE and a special committee
(the "Special Committee") of Independent Directors (as hereinafter defined) and
were approved by the Board of Directors of the Company (the "Board") based in
part on the recommendation of the Special
6
<PAGE>
Committee. The Investment Agreement was approved by the Company's stockholders
at the 1994 Annual Stockholders Meeting and was amended by the Recapitalization
Agreement. It contains ongoing covenants among the Company, CGE and Anjou,
including covenants concerning the composition of the Company's Board of
Directors (and the maintenance of not less than three Independent Directors),
CGE's right to cause the election of the Company's Chief Executive Officer and
its Chief Financial Officer, the use of an independence governing mechanism to
review certain transactions between the Company and CGE (and its affiliates),
and CGE's agreement for the Company to be CGE's exclusive vehicle in the United
States for certain purposes. See "Certain Relationships and Related
Transactions--The Investment Agreement--Certain Covenants of CGE--Exclusivity."
Consent Solicitation
Concurrently with the Rights Offering, the Company is conducting the Consent
Solicitation to eliminate the Change of Control Provision in the Indenture
governing the Convertible Debentures. In the event the Requisite Consents are
not obtained prior to the Expiration Date and the exercise of the Basic
Subscription Privilege or Oversubscription Privilege or Conditional CGE
Subscription would cause a person's beneficial ownership of Class A Common
Stock to exceed 74%, the Company shall be obligated to issue to such person
only such number of shares of Class A Common Stock as would cause such person's
beneficial ownership of the Company's voting power to equal 74% of the
outstanding voting power. Any additional shares to be issued thereunder shall
be shares of Class B Common Stock. Prior to the Expiration Date, the Company
intends to effect the Charter Amendment, among other things, amending the terms
of the Class B Common Stock such that the Class A Common Stock and the Class B
Common Stock will be identical in all respects except that (i) the Class B
Common Stock will not be entitled to vote and (ii) the Class B Common Stock
will automatically convert into Class A Common Stock immediately upon the
earlier of August 1, 2000 or seventy-five days following the termination (by
amendment of the Indenture, redemption of the Convertible Debentures or
otherwise) of the Change of Control Provision. Based upon the current ownership
of Class A Common Stock, the Company does not believe that any stockholder
other than CGE would be issued Class B Common Stock in the event the Company
fails to obtain the Requisite Consents.
Charter Amendment
Prior to the Expiration Date, the Company intends to amend the Restated
Certificate of Incorporation of the Company (the "Charter Amendment") to (i)
increase the authorized capital stock of the Company to permit the issuance of
shares of Class A Common Stock and, to the extent necessary, Class B Common
Stock in the Rights Offering and (ii) to amend the terms of the Class B Common
Stock to provide that such Class B Common Stock will be non-voting and will
automatically convert into Class A Common Stock immediately upon the earlier of
August 1, 2000 or seventy-five days following the termination (by amendment of
the Indenture, redemption of the Convertible Debentures or otherwise) of the
Change of Control Provision. Each of CGE and Anjou, the holders of 50.0009% of
the voting power of the Company has provided its written consent for the
Charter Amendment. The consent of CGE and Anjou is sufficient to adopt the
Charter Amendment without any further vote of the Company's stockholders. The
Charter Amendment will be effective upon the filing of an appropriate
certificate of amendment with the Secretary of State of the State of Delaware,
which filing is expected to occur as soon as practicable following the
expiration of the twenty calendar day period following the mailing of an
information statement pursuant to Rule 14c-2 under the Exchange Act (the
"Information Statement").
Business Planning Committee
In connection with the Recapitalization, the Company has established a new
business planning committee of the Board (the "Business Planning Committee") to
review the business strategies prepared by senior management of the Company
and, as appropriate, make recommendations on the formulation and implementation
of those strategies that have as their objectives increasing stockholder value.
The Business Planning Committee,
7
<PAGE>
which will remain in place through the end of fiscal year 1999, is comprised of
three CGE appointed directors and two directors who are unaffiliated with and
independent of CGE.
Among other things, the Business Planning Committee will identify areas where
CGE's management expertise and the Company's business may be effectively
integrated. The Chairman of the Business Planning Committee is currently Daniel
Caille, the Chief Executive of CGE's worldwide water Business.
USF&G Guarantees by CGE
The Company is often required to procure bid and performance bonds from
surety companies, particularly for clients in the public sector. A bid bond
guarantees that the Company will enter into the contract under consideration at
the price bid and a performance bond guarantees performance of the contract. In
August 1997, United States Fidelity and Guaranty Company and certain of its
affiliates ("USF&G") notified the Company that it would suspend the renewal and
issuance of new bid and performance bonds as of September 30, 1997, due to the
Company's operating performance and resulting financial condition as reported
at the end of the fiscal quarter ended April 30, 1997, unless it received
indemnification from CGE or Anjou for at least 20% of all future bond requests
including renewals. Anjou has entered into an agreement with USF&G regarding an
arrangement pursuant to which, until terminated at Anjou's discretion, Anjou
will enter into guarantees of certain obligations of the Company relating to
the bonding of certain contracts under the Master Surety Agreement dated as of
October 31, 1995 between USF&G and the Company and its subsidiaries. Such
guarantees would cover, in each instance, 30% of the aggregate amount of the
bonds executed, procured or provided on behalf of the Company or its
subsidiaries on or after October 1, 1997, and certain penalty amounts, up to
$45 million. See "The Recapitalization--Other."
Bank Credit Facility Support by CGE
The Company maintains three-year senior secured credit facility (the "Bank
Credit Facility") dated as of March 10, 1995, with The First National Bank of
Chicago and Societe Generale, New York Branch, acting as co-agents for a
syndicate which includes seven additional banks (the "Lending Banks"). On
October 30, 1997, the Company entered into an amendment and waiver (the
"Amendment") in respect of the Bank Credit Facility pursuant to which the
Lending Banks waived the Company's compliance for the period beginning on
October 31, 1997 with certain covenants in the Bank Credit Facility through the
earlier of the consummation of the transactions contemplated by the
Recapitalization Agreement or March 22, 1998. In addition, the Amendment
provides for amendments to certain covenants contained in the Bank Credit
Facility. The waiver and amendments provided for in the Amendment shall
terminate if the Bank Credit Facility is not extended on or prior to December
15, 1997 beyond the current maturity date of March 31, 1998. The Company is
currently in discussions with the Lending Banks regarding the extension of the
Bank Credit Facility beyond its currently scheduled maturity at March 31, 1998.
Following the Recapitalization, the Company intends to enter into discussions
regarding the establishment of a new senior secured credit facility following
the maturity of the Bank Credit Facility. At the request of the Lending Banks,
CGE has reaffirmed to the Lending Banks the terms of CGE's existing credit
support of the Company, including a commitment by CGE to maintain a minimum 40%
equity ownership interest and to regularly check to ensure that the Company
will have sufficient funds to meet its obligations under the Bank Credit
Facility.
RELATIONSHIP WITH CGE
As of the date hereof, CGE, directly and indirectly through Anjou,
beneficially owns approximately % of the Class A Common Stock. In addition,
pursuant to the Investment Agreement, CGE received the right to designate as
members of the Company's Board of Directors (and all committees thereof, other
than the Special Committee) at least that number of directors that is
proportionate to the aggregate voting power represented by
8
<PAGE>
the shares of Class A Common Stock and Series A Preferred Stock beneficially
owned by CGE (subject to a minimum of three Independent Directors on the
Board). The Company has also agreed in the Investment Agreement that CGE shall
have the right to designate the Chief Executive Officer and the Chief Financial
Officer of the Company. See "Certain Relationships and Related Transactions--
The Investment Agreement." In addition, the Bank Credit Facility requires CGE
to maintain its support of the Company, including a minimum 40% ownership
interest in the Company and its right to designate at least 40% of the
Company's Board of Directors as well as the Chief Executive Officer and the
Chief Financial Officer. See "Certain Relationships and Related Transactions--
Involvement of CGE in Other Financing Arrangements." As a result of its
ownership interest and its representation on the Board of Directors of the
Company, CGE exercises significant influence on the Company and its governance
structure. See "Risk Factors--Controlling Stockholder; Ability of Controlling
Stockholder to Increase Ownership."
In connection with the Investment Agreement, the Company and CGE also entered
into a Credit Agreement dated as of June 14, 1994, pursuant to which the
Company received a $125 million unsecured term loan from CGE (the "CGE Note")
due June 15, 2001. See "Certain Relationships and Related Transactions--CGE
Note." On August 2, 1996, the Company entered into a seven-year $60 million
unsecured revolving credit facility with Anjou (the "Anjou Note"). The facility
matures on August 2, 2003. See "Certain Relationships and Related
Transactions--Anjou Note" and "Risk Factors--Substantial Leverage." Both the
CGE Note and the Anjou Note contain restrictive covenants requiring CGE to
remain the largest stockholder of the Company and to maintain a certain voting
percentage. See "Risk Factors--Controlling Stockholder; Ability of Controlling
Stockholder to Increase Ownership." Other than the first $25 million of gross
proceeds, if any, received from subscriptions by the Public, the gross proceeds
of the Rights Offering will be used to repay the CGE Note and the Anjou Note.
See "Use of Proceeds."
Pursuant to the Recapitalization Agreement, immediately prior to the Record
Date, CGE and the Company effected the Exchange pursuant to which the shares of
Series A Preferred Stock held by CGE were automatically exchanged for shares
of Class A Common Stock. In addition, CGE has agreed to exercise in full its
Basic Subscription Privilege and the Conditional CGE Subscription, up to a
maximum aggregate subscription of $185 million. As a result, if no other Rights
are exercised and the Requisite Consents are obtained, CGE will acquire
shares of Class A Common Stock. Consequently, immediately after the
Recapitalization, CGE would own approximately % of the total outstanding Class
A Common Stock of the Company. Under such circumstances, if all Rights holders
exercise their Rights in the Rights Offering CGE would own approximately % of
the total outstanding Class A Common Stock of the Company. See "Risk Factors--
Controlling Stockholder; Ability of Controlling Stockholder to Increase
Ownership."
Following the Recapitalization, the Company will require additional financial
resources to develop and support each of its businesses at PSG and Metcalf &
Eddy, to undertake related long-term capital expenditures or other investments
and to participate in the emerging privatization market in the wastewater
management industry. CGE has informed the Company that it intends to work with
the Company to explore various ways to develop such financial resources for
these purposes, including, among others, the raising by CGE of an investment
fund or other off-balance sheet vehicle which would invest, on a case-by-case
basis, in various project financings undertaken by the Company. It is
anticipated that any such vehicle would invest in such project finance
activities of the Company on terms which are commercially reasonable. As a
result, CGE and the Company and possibly others, investing either directly or
indirectly through such vehicle or otherwise, would share in the returns on
such projects pro rata in relation to their respective equity investments.
9
<PAGE>
THE RIGHTS OFFERING
Securities Offered...... An aggregate of shares of Class A Common Stock
are being offered in the Rights Offering, subject to
the Company's obligation to issue Class B Common
Stock in the event the Requisite Consents are not
obtained and issuing Class A Common Stock to any
individual stockholder would cause such person to
beneficially own more than 74% of the voting power of
the Company. In addition, the Company will issue on a
pro rata basis to Rights holders other than CGE and
Anjou who purchase Underlying Shares in the Rights
Offering an aggregate number of Warrants to purchase
shares of Class A Common Stock at an exercise price
of $2.50 per share, equal to the Warrant Pool. See
"The Rights Offering--The Rights" and "Description of
Warrants."
Basic Subscription
Privilege.............. Each Recordholder of Class A Common Stock at the
close of business on the Record Date will receive, at
no cost, approximately Rights for each share of
Class A Common Stock owned of record at the close of
business on such date. Each Right will allow the
holder to subscribe for one Underlying Share of Class
A Common Stock at the Subscription Price, subject to
the Company's obligation to issue shares of Class B
Common Stock in certain circumstances. No fractional
Rights or cash in lieu thereof will be issued or
paid. Fractional Rights will be rounded to the
nearest whole number, with such adjustments as may be
necessary to ensure that if all Rights are exercised,
gross proceeds to the Company will equal $210
million. ONCE A RIGHT HAS BEEN PROPERLY EXERCISED, IT
CANNOT BE REVOKED. See "The Rights Offering--
Subscription Privileges--Basic Subscription
Privilege."
Oversubscription
Privilege.............. Each holder of Rights other than CGE and Anjou which
elects to exercise the Basic Subscription Privilege
may also subscribe at the Subscription Price for
Excess Shares of Class A Common Stock, subject to
availability and proration and the Company's
obligation to issue shares of Class B Common Stock in
certain circumstances. If an insufficient number of
Underlying Shares is available to satisfy fully all
elections to exercise the Oversubscription Privilege,
the available Excess Shares will be prorated among
holders who exercise their Oversubscription Privilege
based on the respective number of shares of Class A
Common Stock each holder of Rights shall have
subscribed for pursuant to the Basic Subscription
Privilege. All excess payments shall be returned by
mail without interest or deduction promptly after the
Expiration Date and after all prorations and
adjustments contemplated by the Rights Offering have
been effected. See "The Rights Offering--Subscription
Privileges--Oversubscription Privilege."
Conditional CGE
Subscription........... CGE, the beneficial owner of approximately % of the
Class A Common Stock currently outstanding, has
agreed to exercise in full its Basic Subscription
Privilege to subscribe for shares of Class A
Common Stock. In addition, in the event that all
Underlying Shares are not purchased pursuant to the
Rights Offering (including pursuant to the
Oversubscription Privilege), CGE will subscribe for
and purchase at the
10
<PAGE>
Subscription Price an additional number of shares of
Class A Common Stock pursuant to its Conditional CGE
Subscription. The total number of shares subscribed
for by CGE and its subsidiaries pursuant to the
Conditional CGE Subscription will be no greater than
(i) the total number of shares of Class A Common
Stock available to be purchased by the Public in the
Rights Offering, minus (ii) the total number of
shares of Class A Common Stock actually purchased by
the Public in the Rights Offering, and in no event
will the gross proceeds resulting from CGE's and its
subsidiaries' Basic Subscription Privilege and
Conditional CGE Subscription exceed $185 million. As
a result, if no other Rights holder exercises Rights
in the Rights Offering, CGE will purchase shares
of Class A Common Stock in the Rights Offering
(subject to the Company's obligation to issue shares
of Class B Common Stock in certain circumstances).
See "The Rights Offering--Subscription Privileges--
Conditional CGE Subscription."
Subscription Price...... The Subscription Price means the price per share of
Class A Common Stock equal to 82% of the average
daily Closing Prices (as defined hereinafter) of the
Class A Common Stock for the ten consecutive Trading
Days (as defined hereinafter) ending five days prior
to the Record Date; provided, however, that in no
event shall the Subscription Price be less than $1.75
per share of Class A Common Stock or exceed $2.50 per
share of Class A Common Stock. As used herein, (i)
"Closing Price" means on any day the last reported
sale price regular way on such day or in case no sale
takes place on such day, the average of the reported
bid and asked prices regular way on the AMEX or, if
the Class A Common Stock is not listed on such
exchange, on the principal national securities
exchange or quotation system on which such Class A
Common Stock is listed or admitted to trading or
quoted, or, if not listed or admitted to trading or
quoted on any national securities exchange or
quotation system, the average of the closing bid and
asked prices in the over-the-counter market on such
day as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted
reporting service, or, if not so available in such
manner, as furnished by any New York Stock Exchange
Member firm selected from time to time by the Board
of Directors of the Company for that purpose and (ii)
"Trading Day" means a day on which securities traded
on the national securities exchange or quotation
system or in the over-the-counter market used to
determine the Closing Price. Payment of the
Subscription Price will be held in a segregated
account to be maintained by the Subscription Agent
(as hereinafter defined) and will be applied to the
purchase of Class A Common Stock as provided herein.
Record Date............. , 1997.
Expiration Date......... The Rights will expire, if not exercised, at 5:00
p.m., New York City time on , 1998, unless
extended for up to ten days in the sole discretion of
the Company. See "The Rights Offering--Expiration
Date."
Transferability of
Rights................. The Rights will be evidenced by transferable Rights
Certificates that will be exercisable by a Rights
holder until the Expiration Date. The Company will
use its commercially reasonable efforts to cause the
Rights to be
11
<PAGE>
admitted to dealings on the AMEX. If the Rights are
admitted to dealings on the AMEX, it is expected that
the rights will trade on the AMEX until the close of
business on the last trading day prior to the
Expiration Date, at which time they will cease to
have value. However, no assurance can be given that a
market for the Rights will develop or, if such a
market develops, how long it will continue. See "Risk
Factors--No Prior Market for Rights or Warrants."
Procedure for
Exercising Rights...... The Basic Subscription Privilege and the
Oversubscription Privilege may be exercised by
properly completing and signing the Rights
Certificate and forwarding such Rights Certificate
(or following the Guaranteed Delivery Procedures),
with payment of the Subscription Price for each
Underlying Share subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription
Privilege to the Subscription Agent, who must receive
such Rights Certificate or Notice of Guaranteed
Delivery and payment on or prior to the Expiration
Date. If the mail is used to forward Rights
Certificates, Rights holders are urged to use
insured, registered mail, return receipt requested.
See "The Rights Offering--Method of Subscription--
Exercise of Rights."
If the aggregate Subscription Price paid by an
exercising Rights holder is insufficient to purchase
the number of Underlying Shares that the Rights
holder indicates are being subscribed for, or if no
number of Underlying Shares to be purchased is
specified, then the Rights holder will be deemed to
have exercised the Basic Subscription Privilege to
purchase Underlying Shares to the full extent of the
payment price tendered. If the aggregate Subscription
Price paid by an exercising Rights holder exceeds the
amount necessary to purchase the number of Underlying
Shares for which the Rights holder has indicated an
intention to subscribe, then the Rights holder will
be deemed to have exercised the Oversubscription
Privilege to the full extent of the excess payment
tendered, and any remaining amount shall be returned
to such Rights holder. No interest will be paid on
funds delivered in payment of the Subscription Price.
See "The Rights Offering--Method of Subscription--
Exercise of Rights."
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC
SUBSCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION
PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. RIGHTS
NOT EXERCISED PRIOR TO THE EXPIRATION DATE WILL
EXPIRE.
Persons Holding Shares,
or Wishing to Exercise
Rights, Through
Others................. Persons holding shares of Class A Common Stock
beneficially and receiving the Rights distributable
with respect thereto, through a broker, dealer,
commercial bank, trust company or other nominee, as
well as persons holding certificates of Class A
Common Stock directly who would prefer to have such
institutions effect transactions relating to the
Rights on their behalf, should contact the
appropriate institution or nominee and request it to
effect the transactions for them. If a beneficial
owner wishes to obtain a separate Rights Certificate,
such beneficial owner should contact the nominee as
soon as possible and request that a separate Rights
12
<PAGE>
Certificate be issued. A nominee may request any
Rights Certificate held by it to be split into such
smaller denominations as it wishes, provided that the
Rights Certificate is received by the Subscription
Agent, properly endorsed, no later than 11:00 a.m.,
New York City time, on , 1998. See "The Rights
Offering--Method of Subscription--Exercise of
Rights."
Procedure for
Exercising Rights by
Foreign and Certain
Other Stockholders..... Rights Certificates will not be mailed to holders of
Class A Common Stock whose addresses are outside the
United States or who have an Army Post Office ("APO")
or a Fleet Post Office ("FPO") address, but will be
held by the Subscription Agent for their accounts. To
exercise such Rights, such holders must notify the
Subscription Agent and take all other steps which are
necessary to exercise the Rights on or prior to 11:00
a.m., New York City time, on , 1998. If the
procedures set forth in the preceding sentence are
not followed prior to the Expiration Date, the Rights
will expire. See "The Rights Offering--Foreign and
Certain Other Stockholders."
Federal Income Tax
Consequences........... For United States income tax purposes, receipt of
Rights by a Recordholder pursuant to the Rights
Offering will be treated as a nontaxable distribution
with respect to the Class A Common Stock. See
"Certain United States Federal Income Tax
Consequences."
Issuance of Class A
Common Stock........... Certificates representing shares of Class A Common
Stock purchased pursuant to the Basic Subscription
Privilege and Oversubscription Privilege and the
Conditional CGE Subscription will be delivered to
subscribers as soon as practicable after the
Expiration Date and after all prorations and
adjustments contemplated by the terms of the Rights
Offering have been effected, subject to the Company's
obligation to issue Class B Common Stock under
certain circumstances. See "The Rights Offering--
Subscription Privileges."
Issuance of Class B
Common Stock........... In the event the Requisite Consents are not obtained
prior to the Expiration Date and the exercise of the
Basic Subscription Privilege or Oversubscription
Privilege or the Conditional CGE Subscription would
cause a person's beneficial ownership of the
Company's voting power to exceed 74%, the Company
shall be obligated to issue to such person only such
number of shares of Class A Common Stock as would
cause such person's beneficial ownership of the
Company's voting power to be no greater than 74% of
the outstanding voting power and any additional
shares to be issued thereunder shall be shares of
Class B Common Stock. Certificates representing
shares of Class B Common Stock purchased pursuant to
the Basic Subscription Privilege or Oversubscription
Privilege or the Conditional CGE Subscription will be
delivered to subscribers at the same time as the
shares of Class A Common Stock. Based upon the
current stock ownership of the Company, the Company
expects that CGE would be the only stockholder to be
issued shares of Class B Common Stock.
13
<PAGE>
Issuance of Warrants.... Certificates representing the transferable Warrants
acquired pursuant to the Rights Offering will be
issued to Public subscribers in the Rights Offering
as soon as practicable following the Expiration Date
but in no event later than the date on which
certificates representing Underlying Shares purchased
pursuant to the Basic Subscription Privilege and
Oversubscription Privilege are delivered to
subscribers.
No Board or Special
Committee
Recommendation......... An investment in the Class A Common Stock, the Class
B Common Stock (to the extent applicable) and the
Warrants must be made pursuant to each investor's
evaluation of such investor's best interests.
Accordingly, neither the Board of Directors of the
Company nor the Special Committee makes any
recommendation to Rights holders regarding whether
they should exercise their Rights.
AMEX Symbol for Class A
Common Stock........... "AWT"
AMEX Symbol for
Rights.................
AMEX Symbol for
Warrants...............
Use of Proceeds......... If no Rights holder other than CGE exercises Rights
in the Rights Offering, the gross cash proceeds to
the Company from the sale of the shares pursuant to
the Rights Offering are estimated to be $185 million.
Assuming Public Rights holders exercise Rights
providing the Company with at least $25 million of
gross proceeds, the aggregate gross cash proceeds to
the Company from the sale of the shares pursuant to
the Rights Offering are estimated to be $210 million.
CGE has agreed to subscribe in the Rights Offering
for up to $185 million of Class A Common Stock
(subject to the Company's obligation to issue shares
of Class B Common Stock in certain circumstances).
The Rights Offering, however, is not conditioned upon
any minimum level of exercise of Rights by the
Public. Consequently, there can be no assurance that
the Company will raise more than $185 million of
proceeds from the Rights Offering or that the Public
will participate in the Rights Offering. See "Risk
Factors-- Indefinite Amount and Use of Proceeds."
Other than the first $25 million of gross proceeds
received from subscriptions by the Public, which
shall be retained by the Company for general
corporate purposes, the gross proceeds of the Rights
Offering, including the Conditional CGE Subscription,
will be used to repay the $185 million aggregate
principal amount of debt of CGE and its subsidiaries
consisting of (i) the $125 million CGE Note and (ii)
the $60 million Anjou Note. The Company has taken all
necessary legal actions in order to repay such
indebtedness, including obtaining any required
waivers. See "Use of Proceeds."
Subscription Agent...... See "Subscription Agent."
Information Agent....... See "Information Agent."
14
<PAGE>
THE WARRANTS
The Warrants............ The Company has available for issuance up to
10,000,000 Warrants, which when exercised, would
entitle the holders thereof to purchase, in the
aggregate, up to 10,000,000 shares of Class A Common
Stock. The Company will issue that percentage of such
10,000,000 Warrants equivalent to the percentage of
the total number of Underlying Shares purchased by
the Public in the Rights Offering relative to the
total number of Underlying Shares issuable upon full
exercise of Rights by the Public in the Rights
Offering. The Company will issue to each Public
subscriber in the Rights Offering such number of
Warrants to purchase shares of Class A Common Stock
equal to the product of the Warrant Pool multiplied
by a fraction the numerator of which is the total
number of Underlying Shares purchased by such holder
in the Rights Offering and the denominator of which
is the total number of Underlying Shares purchased by
all Public subscribers in Rights Offering. See "The
Rights Offering--The Rights" and "Description of
Warrants--General."
Expiration Date......... The Warrants will expire three years from the date of
issuance (the "Warrant Expiration Date"). See
"Description of Warrants--General."
Exercise................ Each Warrant will entitle the holder thereof, subject
to certain conditions, to purchase, at any time and
from time to time prior to the Warrant Expiration
Date, one share of Class A Common Stock (a "Warrant
Share") at a price equal to $2.50 per share (the
"Warrant Exercise Price"), subject to adjustment from
time to time upon the occurrence of certain changes
in Class A Common Stock. See "Description of
Warrants--General" and "Description of Warrants--
Adjustments."
Rights as
Stockholders........... Holders of Warrants will not, by virtue of being such
holders, have any rights as stockholders of the
Company. See "Description of Warrants--General."
Registration of Warrant
Shares................. Holders of Warrants will be able to exercise their
Warrants only if a registration statement relating to
the Warrant Shares is then in effect, or the exercise
of such Warrants is exempt from the registration
requirements of the Securities Act and such
securities are qualified for sale or exempt from
qualification under the applicable state blue sky
laws. Subject to Black Out Periods (as defined
hereinafter), at such time as the average daily
Closing Price of the Class A Common Stock is greater
than or equal to 85% of the Warrant Exercise Price
($2.125) for twenty consecutive Trading Days, the
Company will prepare, file and use its best efforts
to cause to become effective a registration statement
in respect of all of the Warrant Shares and the
Company will use its commercially reasonable efforts
to keep such registration statement continuously
effective under the Securities Act in order to permit
the prospectus included therein to be lawfully
delivered. See "Description of Warrants--Registration
of Warrant Shares" and "Risk Factors--Ability to
Exercise Warrants."
Transfer Restrictions/
Listing................ The Warrants will be freely transferable. The Company
will use its commercially reasonable efforts to
secure the listing of the Warrants and
15
<PAGE>
the Warrant Shares upon the AMEX and will use its
commercially reasonable efforts to maintain such
listing, so long as any other shares of Class A
Common Stock will be so listed or quoted. See
"Description of Warrants--Transfer Restrictions;
Listing" and "Risk Factors--No Prior Market for the
Rights or Warrants."
Warrant Agent...........
For additional information concerning the Rights, the Warrants and the Common
Stock, see "The Rights Offering," "Description of Warrants" and "Description of
Capital Stock."
RISK FACTORS
Purchasers of securities in the Rights Offering should carefully consider the
factors set forth under the caption "Risk Factors" and other information
included in this Prospectus prior to making an investment decision.
16
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED OCTOBER 31, JULY 31,
--------------------------------- ------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.................... $ 522,573 $ 618,868 $ 701,099 $503,861 $454,173
Cost of sales............ 437,997 480,555 567,758 404,974 390,416
Selling, general and ad-
ministrative expenses... 104,178 103,125 95,592 70,079 83,559
Depreciation and amorti-
zation.................. 17,702 18,348 20,015 14,806 16,889
Unusual charges.......... 145,200 -- -- -- 25,000
---------- --------- --------- -------- --------
Operating income (loss)
from continuing
operations.............. (182,504) 16,840 17,734 14,002 (61,691)
Interest income.......... 1,283 1,201 1,049 700 346
Interest expense......... (24,386) (24,379) (22,808) (16,964) (18,217)
Other expense, net....... (4,580) (434) (1,661) (1,445) (964)
---------- --------- --------- -------- --------
Income (loss) from
continuing operations
before income taxes,
minority interest and
extraordinary item...... (210,187) (6,772) (5,686) (3,707) (80,526)
Income taxes............. 998 1,115 (418) 1,001 780
Minority interest........ (194) 98 -- -- --
---------- --------- --------- -------- --------
Loss from continuing
operations before
extraordinary item...... (210,991) (7,985) (5,268) (4,708) (81,306)
Discontinued operations.. (42,787) -- -- -- --
Extraordinary item....... (8,000) -- -- -- --
---------- --------- --------- -------- --------
Net loss................. $ (261,778) $ (7,985) $ (5,268) $ (4,708) $(81,306)
========== ========= ========= ======== ========
Loss per common share
(after preferred stock
dividend)
Continuing operations
before extraordinary
item................... $ (7.68) $ (0.35) $ (0.27) $ (0.22) $ (2.62)
Discontinued
operations............. (1.55) -- -- -- --
Extraordinary item...... (0.29) -- -- -- --
---------- --------- --------- -------- --------
Loss per common share.... $ (9.52) $ (0.35) $ (0.27) $ (0.22) $ (2.62)
========== ========= ========= ======== ========
Weighted average shares
outstanding............. 27,632 32,018 32,018 32,018 32,019
========== ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JULY 31, 1997
---------------------------- -------------------------------------
AS ADJUSTED AS ADJUSTED
HISTORICAL MINIMUM MAXIMUM
1994 1995 1996 COMPANY SUBSCRIPTION SUBSCRIPTION
-------- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (defi-
cit)................... $(51,206) $(12,568) $ 7,556 $ (41,830) $ (46,830) $ (21,830)
Total assets............ 602,938 547,917 538,270 484,084 479,084 504,084
Goodwill................ 283,638 276,549 265,860 242,179 242,179 242,179
Total long-term debt.... 245,984 289,120 306,542 304,922 119,922 119,922
Stockholders' equity
(deficit).............. 74,381 63,089 54,241 (30,770) 149,230 174,230
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, NINE MONTHS ENDED
--------------------------------- -------------------
JULY 31, JULY 31,
1994 1995 1996 1996 1997
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
SEGMENT DATA:
PSG
Sales................... $ 83,678 $ 179,713 $ 270,640 $195,474 $ 195,383
Costs and expenses...... 80,252 164,435 255,882 183,624 194,298
Depreciation and amorti-
zation................. 2,061 5,679 7,335 5,710 6,028
Unusual charges......... 5,300 -- -- -- --
---------- --------- --------- -------- ---------
Operating income
(loss)................. $ (3,935) $ 9,599 $ 7,423 $ 6,140 $ (4,943)
========== ========= ========= ======== =========
METCALF & EDDY
Sales................... $ 219,106 $ 216,852 $ 215,358 $150,663 $ 132,108
Costs and expenses...... 211,173 200,125 195,745 136,404 141,168
Depreciation and amorti-
zation................. 5,780 5,691 6,223 4,489 6,546
Unusual charges......... 38,700 -- -- -- --
---------- --------- --------- -------- ---------
Operating income
(loss)................. $ (36,547) $ 11,036 $ 13,390 $ 9,770 $ (15,606)
========== ========= ========= ======== =========
RESEARCH-COTTRELL
Sales................... $ 213,172 $ 220,207 $ 219,008 $160,615 $ 128,077
Costs and expenses...... 234,295 208,207 207,630 152,742 134,698
Depreciation and amorti-
zation................. 7,733 6,069 6,032 4,283 3,930
Unusual charges......... 81,800 -- -- -- 25,000
---------- --------- --------- -------- ---------
Operating income
(loss)................. $ (110,656) $ 5,931 $ 5,346 $ 3,590 $ (35,551)
========== ========= ========= ======== =========
CORPORATE (UNALLOCATED)
Sales................... $ -- $ -- $ -- $ -- $ --
Costs and expenses...... 9,559 8,854 8,000 5,174 5,206
Depreciation and amorti-
zation................. 1,602 602 425 324 385
Unusual charges......... 15,200 -- -- -- --
---------- --------- --------- -------- ---------
Operating loss.......... $ (26,361) $ (9,456) $ (8,425) $ (5,498) $ (5,591)
========== ========= ========= ======== =========
OTHER
Sales................... $ 6,617 $ 2,096 $ (3,907) $ (2,891) $ (1,395)
Costs and expenses...... 6,896 2,059 (3,907) (2,891) (1,395)
Depreciation and amorti-
zation................. 526 307 -- -- --
Unusual charges......... 4,200 -- -- -- --
---------- --------- --------- -------- ---------
Operating loss.......... $ (5,005) $ (270) $ -- $ -- $ --
========== ========= ========= ======== =========
</TABLE>
18
<PAGE>
NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA
(1) See Note 2 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for
information regarding the Company's transaction with CGE in 1994.
(2) See Note 3 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for further
explanation of the unusual charges and extraordinary item incurred in the
fiscal year ended October 31, 1994.
(3) See Note 4 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for
information regarding the PSG acquisition in 1994.
(4) See Notes 6 and 7 to the Unaudited Consolidated Financial Statements as of
and for the nine-month period ended July 31, 1997 contained elsewhere in
this Prospectus for further explanation of the unusual charges incurred in
the nine-month period ended July 31, 1997.
(5) See Notes (a) and (b) to the Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of July 31, 1997 contained elsewhere in this Prospectus
for further explanation of the amounts reflecting the effects of the
Recapitalization.
19
<PAGE>
RISK FACTORS
Each prospective purchaser should carefully examine all the information
contained in this Prospectus and should give particular consideration to the
following factors in evaluating an investment in the securities offered
hereby:
SUBSTANTIAL LEVERAGE
Following the Rights Offering, the Company will continue to be highly
leveraged. As of July 31, 1997, the Company's total consolidated long-term
indebtedness (excluding the current portion) was approximately $304.9 million,
primarily consisting of an aggregate of $125.0 million principal amount
outstanding under the CGE Note, $60.0 million principal amount outstanding
under the Anjou Note and $115.0 million principal amount of Convertible
Debentures. At such date the Company's consolidated cash and cash equivalents
was approximately $13.6 million and its stockholders' equity was a deficit of
approximately $30.8 million. On a pro forma basis, after giving effect to the
Rights Offering and the application of the proceeds therefrom to the payment
of the CGE Note and the Anjou Note, the Company's consolidated long-term
indebtedness (excluding the current portion) would have been approximately
$119.9 million. Assuming no Rights holder other than CGE exercises Rights in
the Rights Offering, after giving effect to the Rights Offering, the Company's
consolidated cash and cash equivalents would have been approximately $8.6
million and its stockholders' equity would have been approximately $149.2
million. Assuming full participation in the Rights Offering, after giving
effect to the Rights Offering, the Company's consolidated cash and cash
equivalents would have been approximately $33.6 million and its stockholders'
equity would have been approximately $174.2 million. There can be no
assurances that any Rights holder other than CGE will exercise Rights in the
Rights Offering.
The level of the Company's indebtedness could have important consequences to
holders of the Company's securities, including but not limited to the
following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital and capital expenditures
could be limited; (iii) the Company may be more vulnerable to extended
economic downturns and may be restricted in exploiting business opportunities;
and (iv) the Company's level of indebtedness could limit its flexibility in
planning for, or reacting to, changes in market conditions, including adverse
governmental regulations (including a decline in enforcement of environmental
regulations). The Company may not be able to obtain the additional capital
required in connection with its planned growth initiatives, including
additional investments resulting from potential new or renewals of OM&M
contracts and acquisitions. See "--Reliance on Environmental Regulation;
Potential Environmental Liabilities."
In addition, the Bank Credit Facility 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. On October 30, 1997, the Company entered
into the Amendment in respect of the Bank Credit Facility pursuant to which
the Lending Banks waived the Company's compliance for the period beginning on
October 31, 1997 with certain covenants in the Bank Credit Facility through
the earlier of the consummation of the transactions contemplated by the
Recapitalization Agreement or March 22, 1998. In addition, the Amendment
provides for amendments to certain covenants contained in the Bank Credit
Facility. The waiver and amendments provided for in the Amendment shall
terminate if the Bank Credit Facility is not extended on or prior to December
15, 1997 beyond the current maturity date of March 31, 1998. The Company is
currently in discussions with the Lending Banks regarding the extension of the
Bank Credit Facility beyond its currently scheduled maturity at March 31, 1998
for a period of approximately one year. Following the Recapitalization, the
Company intends to enter into discussions regarding the establishment of a new
senior secured credit facility following the expiration of the Bank Credit
Facility. The Bank Credit Facility matures on March 31, 1998. There can be no
assurance that the Bank Credit Facility will be extended or that the Company
will have access to a new credit facility following this date, even if the
Rights Offering is completed.
Even if the Company obtains a waiver, the Company's ability to comply with
the financial and other covenants in such agreements beyond November 1, 1997
is substantially dependent upon the completion of the Rights Offering. Failure
to complete the Rights Offering may require additional waivers or amendments
to the
20
<PAGE>
Bank Credit Facility. There can be no assurance that such waivers or
amendments could be obtained. In the absence of a waiver or amendment, the
Lending Banks under the Bank Credit Facility would have the right to refuse
any further extensions of credit and the right to accelerate payment of all
outstanding amounts under the Bank Credit Facility. In addition, substantially
all of the Company's long-term debt and certain other financial and non-
financial obligations contain cross-default or acceleration provisions. In the
event the Company were required to repay accelerated outstanding amounts under
the Bank Credit Facility and other obligations, the Company does not believe
that it will have financial resources adequate to repay such amounts and to
satisfy its ongoing working capital requirements. Therefore, the failure to
complete the Rights Offering could have a material adverse effect on the
Company's business prospects and on its financial condition and liquidity.
Furthermore, the ability of the Company to satisfy its obligations will be
dependent upon its future performance and market conditions, which will be
subject to prevailing economic conditions and to financial, business and other
factors, including factors beyond the Company's control. A substantial portion
of the long-term indebtedness of the Company bears interest at rates that
fluctuate with the London Interbank Offered Rate ("LIBOR"). The Anjou Note
bears interest at LIBOR plus 0.6%, the CGE Note bears interest at a rate based
upon one, two, three or six-month LIBOR, as selected by the Company, plus
1.25%, and the Bank Credit Facility, as amended, bears interest at LIBOR plus
1.0% or at a defined bank rate approximating prime. As a result, the Company's
financial performance may be adversely affected by increases in LIBOR.
CONTINUING NET LOSSES
The Company has experienced net losses on a historical basis and may incur
net losses in the future. The Company incurred net losses of approximately
$5.3 million, $8.0 million, $261.8 million, $5.6 million and $10.0 million for
the fiscal years ended October 31, 1996, 1995, 1994, 1993 and 1992,
respectively, and net losses of $81.3 million for the nine-month period ended
July 31, 1997. The amount of the Company's net loss for the fiscal year ended
October 31, 1994 is attributable in part to the impact of unusual charges,
losses from discontinued operations and extraordinary loss in the amount of
$196.0 million for such period. The amount of the Company's net loss for the
nine-month period ended July 31, 1997 is primarily the result of certain
operating charges and asset write-offs, including a $25.0 million impairment
charge taken in connection with a review of certain of the Research-Cottrell
businesses. See "Selected Consolidated Financial Data." There can be no
assurance as to when, if ever, the Company will be profitable.
REDEPLOYMENT OF CAPITAL; REVISED BUSINESS STRATEGY
During the second quarter of 1997, the Company completed a review of its
operations' three-year business plans. These plans included a detailed
analysis of markets, growth opportunities and forecasted three-year operating
results, cash flows and return on capital employed for each business segment.
As a result of this review, management is considering the actions necessary to
redeploy its capital to its PSG and Metcalf & Eddy operations. This approach
reflects management's assessment of the greater market opportunities and
growth potential in these sectors and limited growth opportunities in its
Research-Cottrell operations. Among other factors contributing to this
approach were recent tax law changes which may expand the duration of OM&M
contracts and create additional opportunities within the water and wastewater
treatment markets which are the primary markets for PSG and Metcalf & Eddy.
These enhanced opportunities are in contrast to those in the air pollution
control market where continuing delays in issuing new air quality standards by
the Environmental Protection Agency (the "EPA") and lack of enforcement of
existing standards are expected to limit the growth opportunities within the
air pollution control markets targeted by Research-Cottrell. See "--Reliance
on Environmental Regulation; Potential Environmental Liabilities."
Furthermore, the returns on capital employed within the PSG and Metcalf &
Eddy segments are forecasted to be greater than the returns for the Research-
Cottrell segment. From a competitive standpoint management also believes that
the Company has greater competitive advantages and market penetration through
its PSG and Metcalf & Eddy businesses than what has been achieved by its
Research-Cottrell operations.
21
<PAGE>
As a result of the above, management is assessing the impact of de-
emphasizing the Research-Cottrell business segment and redeploying its capital
to its PSG and Metcalf & Eddy segments. A financial advisor has been retained
to assist the Company in developing and evaluating alternative means related
to the redeployment of this capital in the most efficient and expeditious
manner. The successful implementation of a redeployment program could include
the divestiture of portions or substantially all of the Research-Cottrell
segment, although no such definite decision to divest has been made by the
Company's Board of Directors at this time. The Company is currently in
discussions with several parties regarding the potential divestiture of this
business. There can be no assurance as to whether the Company will divest the
Research-Cottrell business, or, if divested, as to the impact the redeployment
of capital will have on the Company's financial condition.
The Company's future results and financial condition are dependent on the
successful implementation of this new business strategy. The Company's revised
business plans include assumptions relating to growth initiatives related to
longer term OM&M contracts, including those related to the privatization of
the water and wastewater treatment market, which may require significant up-
front investments including capital improvements, upgrades or other
investments. In addition, new capital may be required to be invested in the
Metcalf & Eddy segment in order to achieve its growth targets through
geographical expansion and/or acquisitions. The Company's ability to access
capital for these requirements, whether through access to the capital markets
or a potential investment fund or off-balance sheet funding vehicle in
conjunction with CGE, may have a significant impact on the successful
implementation of its business plans. While the Company believes that this
strategy will enable it to improve its financial results, there can be no
assurance that this new strategy will be successful, that the anticipated
benefits of this new strategy will be realized, that management will be able
to implement such strategy on a timely basis, that the Company will return to
profitability or that losses will not continue in the future.
PROJECT EXECUTION
A substantial amount of the Company's revenues are derived from fixed price
long-term contracts. The ultimate profitability of these contracts is
contingent upon the Company's ability to meet its required contractual
obligations related to a service or product within the current cost estimates
which are subject to change as the project develops. Among other factors which
would impact the profitability under such contracts are the resolution of
various claims and back charges related to its subcontractors or clients.
Historically the Company has experienced difficulties in executing certain
projects from time to time within the original cost estimates in all segments
but primarily within the Research-Cottrell segment. The Company's inability to
execute its existing backlog within the current cost estimates may have a
material adverse impact on its financial condition and results of operations.
POTENTIAL LITIGATION LIABILITY
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 it in
advising the City of Houston regarding the benefits that could result from the
privatization of Houston's water and wastewater system (the "DOJ
Investigation"). PSG has cooperated and continues to cooperate with the
Department of Justice 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 then Chief
Executive Officer on administrative leave of absence with pay. The former PSG
Chief Executive Officer, 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
22
<PAGE>
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.
The City of Bremerton, Washington brought a contribution action against
Metcalf & Eddy Services, Inc. ("M&E Services"), the operator of a City-owned
wastewater treatment plant from 1987 until late 1995. The contribution action
arises from two prior lawsuits against the city for alleged odor nuisances
brought by two groups of homeowners neighboring the plant. In the first
homeowner's suit, the City paid $4.3 million in cash and approximately $5.0
million for odor control technology to settle the case. M&E Services
understands the odor control measures generally have been successful and the
odors have been reduced as a result. M&E Services was not a party to the first
homeowner's suit, which has been dismissed with prejudice as to all parties.
In the settlement of the second homeowner's case, the City of Bremerton paid
the homeowners $2.9 million, and M&E Services contributed $0.6 million to the
settlement without admitting liability. All claims raised by the homeowners in
the second suit (except for two recalcitrant homeowners) were resolved. All
claims by and between M&E Services and the City in the second homeowner's suit
were expressly reserved and will be tried after the City's contribution
action, which is currently scheduled for trial in March 1998. The City is
seeking to recover the amounts it expended on the two settlements, damages for
M&E Services' alleged substandard operation of the plant and attorneys' fees.
M&E Services denies any liability to the City and believes that it has
meritorious defenses to the claim. However, no assurances can be given that an
adverse judgment would not have a material adverse effect on the financial
position or results of operations of M&E Services or the Company 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. Moreover, as a general matter, providers of services
similar to those provided by the Company may be subject to lawsuits alleging
negligence or other similar claims and environmental liabilities, which may
involve claims for substantial damages. Damages assessed in connection with,
and the costs of defending any such actions could be substantial. The
Company's management believes that the levels of coverage are adequate to
cover currently estimated exposures. Although the Company believes that it
will be able to obtain adequate insurance coverage in the future at acceptable
costs, there can be no assurance that the Company will be able to obtain such
coverage or will be able to do so at an acceptable cost or that the Company
will not incur significant liabilities in excess of policy limits.
HIGHLY COMPETITIVE INDUSTRY
The Company faces substantial competition in each market in which it
operates. The Company competes primarily on its engineering, scientific and
technological expertise. To the extent that non-proprietary or conventional
technologies are used, the Company also relies upon its experience and trade
names as a basis for competition. Such trade names include: "Professional
Services Group" and "Metcalf & Eddy" in the water and wastewater treatment and
sludge management markets and "Metcalf & Eddy" in the hazardous waste
remediation market; "Research-Cottrell" and "Flex-Kleen" in the air pollution
control equipment market; "Custodis" in the chimney market; "KVB" in the
market for continuous emissions monitors and "REECO" in the market for
controlling emissions of volatile organic compounds. Many companies, some of
which have greater resources than the Company, participate in the Company's
markets and no assurance can be given that such other companies will not enter
its markets.
Customers for PSG's and Metcalf & Eddy's water and wastewater treatment
services are primarily governmental entities and typically award contracts on
the basis of technical qualifications and price. For PSG's treatment system
OM&M contracts, technical qualification is required; however, price is
generally a key determining factor. For Metcalf & Eddy's design services
contracts, the majority of which are cost-plus-fixed-fee arrangements,
technical qualifications are the primary factor, followed by price
competitiveness. In the hazardous waste clean-up market, Metcalf & Eddy
competes with many local, regional and national firms on the basis of
experience, reputation and price.
23
<PAGE>
Almost all contracts for the Company's services and technologies are
obtained through competitive bidding. Electric utilities, government and
industrial customers typically purchase these services and technologies after
a thorough evaluation of price, service, experience and quality. Although
price is an important factor, it is not necessarily the determining factor
because contracts are often awarded in part on the basis of the efficiency or
reliability of products or services.
There can be no assurance that the Company will be able to compete
successfully with its existing or any new competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
results or operations and financial condition. In addition, while the Company
has been successful in obtaining new contracts and renewing existing
contracts, there can be no assurance that due to competitive pressures the
margins achieved from such contracts will not be decreased. See "Business--
Competition."
DEPENDENCY ON KEY PROJECTS AND GOVERNMENT CONTRACTS
In any given period, a substantial percentage of the Company's sales is
dependent upon several large projects. Typically, Metcalf & Eddy's fifteen
largest projects in terms of sales represent approximately 50% of its total
sales. In addition, Research-Cottrell's sales volume in several of its
businesses fluctuates significantly from period to period based on the level
of work completed on several large projects. To the extent that these projects
are canceled or substantially delayed and not replaced, it could have a
material adverse impact on the Company's sales and earnings.
Approximately 62% of the Company's fiscal year 1996 gross revenues were
derived from contracts with federal, state, municipal and other governmental
agencies. The termination of any of the Company's significant contracts with
such governmental agencies, or the failure to obtain either extensions or
renewals of certain existing contracts or additional contracts with such
governmental agencies, could have a material adverse effect on the Company's
earnings and business.
PSG has historically been successful in obtaining most of its OM&M contract
renewals. Approximately 35 projects with annual revenues of $40 million are
expected to be renewed in fiscal year 1998. The failure to renew most of these
projects at comparable operating margins could materially and adversely impact
PSG's financial condition and results of operations.
During the nine-month period ended July 31, 1997 and in fiscal year 1996,
PSG's contract with the Puerto Rico Aqueduct and Sewer Authority ("PRASA")
accounted for 37% and 39% of PSG's total sales and 16% and 15% of the
Company's total sales, respectively. Operations were initiated under the
contract on September 1, 1995. The contract has a five-year term but PRASA may
cancel the contract for any reason after August 31, 1998. Pursuant to the
contract, PSG manages 69 wastewater plants, 128 water treatment plants and
related collection and distribution systems and pumping stations in Puerto
Rico. The contract's profitability is contingent upon achieving and/or
successful negotiations of certain incentive revenues and operating
efficiencies, as well as the collection of its normal operating fee and
certain unreimbursed costs which totaled $24.2 million as of July 31, 1997.
BONDING
The Company is often required to procure bid and performance bonds from
surety companies, particularly for clients in the public sector. A bid bond
guarantees that the Company will enter into the contract under consideration
at the price bid and a performance bond guarantees performance of the
contract. In August 1997, USF&G notified the Company that it would suspend the
renewal and issuance of new bid and performance bonds as of September 30,
1997, due to the Company's operating performance and resulting financial
condition as reported at the end of the fiscal quarter ended April 30, 1997,
unless it received indemnification from CGE or Anjou for at least 20% of all
future bond requests including renewals. Anjou has entered into an agreement
with USF&G regarding an arrangement pursuant to which, until terminated at
Anjou's discretion, Anjou will enter into guarantees of certain obligations of
the Company relating to the bonding of certain contracts under the
24
<PAGE>
Master Surety Agreement dated as of October 31, 1995 between USF&G and the
Company and its subsidiaries. Such guarantees would cover, in each instance,
30% of the aggregate amount of the bonds executed, procured or provided on
behalf of the Company or its subsidiaries on or after October 1, 1997, and
certain penalty amounts, up to $45 million. There can be no assurance that
USF&G will be willing to provide bid bonds to the Company following the
Recapitalization without a guarantee from CGE (or one of its affiliates) and
there can be no assurance that CGE would be willing to provide such a guarantee
following the Recapitalization. See "--Dependency on Key Projects and
Government Contracts."
RELIANCE ON ENVIRONMENTAL REGULATION; POTENTIAL ENVIRONMENTAL LIABILITIES
Federal, state and local legislation and regulations which require
substantial expenditures to meet minimum environmental quality standards and
which impose substantial penalties for non-compliance are a principal factor
driving demand for the Company's services. Although the Company does not expect
a decline in enforcement, such a decline in enforcement and related required
expenditures could have a significant adverse effect on the demand for the
Company's services. Furthermore, to the extent the Company may have assumed or
may in the future assume liability for the quality of the air or water
discharged by treatment facilities it operates under contract or the treatment
facilities and pollution control systems to which it provides its services, and
to the extent the discharged air or water may not comply with quality standards
established by federal and state regulations due to factors within the
Company's control, the Company may be held liable for such non-compliance and
perhaps for any consequences thereof. See "--Potential Litigation Liability."
EFFECTIVENESS OF BUSINESS PLANNING COMMITTEE
The Board of Directors has constituted the Business Planning Committee to
review the business strategies prepared by the Company's senior management and,
as appropriate, make recommendations on the formulation and implementation of
those strategies that have as their objective increasing stockholder value.
There can be no assurance that the Business Planning Committee will
successfully identify any such strategies, or if identified that such
strategies can be successfully implemented or will increase stockholder value.
CONTROLLING STOCKHOLDER; ABILITY OF CONTROLLING STOCKHOLDER TO INCREASE
OWNERSHIP
After giving effect to the Exchange, CGE, directly and indirectly through
Anjou, beneficially owns shares of Class A Common Stock representing
approximately % of the Class A Common Stock (and voting power) of the Company.
In addition, pursuant to the Investment Agreement, CGE received the right to
designate as members of the Company's Board of Directors (and all committees
thereof, other than the Special Committee) at least that number of directors
that is proportionate to the aggregate voting power represented by the shares
of Class A Common Stock and Series A Preferred Stock beneficially owned by CGE
(subject to a minimum of three Independent Directors on the Board). The Company
has also agreed in the Investment Agreement that CGE shall have the right to
designate the Chief Executive Officer and Chief Financial Officer of the
Company. Except for the two current Independent Directors, the Company's seven
person Board of Directors is comprised entirely of CGE designees. Furthermore,
the Bank Credit Facility requires CGE to maintain its support of the Company,
including a minimum 40% ownership interest in the Company and its right to
designate at least 40% of the Company's Board of Directors as well as the Chief
Executive Officer and Chief Financial Officer. In addition, the CGE Note and
Anjou Note both contain restrictive covenants requiring CGE to remain the
largest stockholder of the Company and to maintain a certain voting percentage
(26% under the CGE Note and 40% under the Anjou Note). As a result of its
ownership interest and its representation on the Board of Directors of the
Company, CGE exercises significant influence on the Company and its governance
structure.
Pursuant to the Investment Agreement, CGE and its affiliates have the right
to engage in transactions with the Company and its affiliates, including the
acquisition of securities, subject to approval, in certain circumstances, of a
majority of the Independent Directors or a special committee thereof. Moreover,
pursuant to the Recapitalization Agreement, until the third anniversary of the
consummation of the Recapitalization, CGE has agreed not to effect a "short-
form" merger of the Company without approval of a majority of the Independent
Directors. See "The Recapitalization--Other."
25
<PAGE>
Pursuant to the Recapitalization Agreement, immediately prior to the Record
Date, the shares of Series A Preferred Stock held by CGE were automatically
exchanged into shares of Class A Common Stock. In addition, CGE has agreed
to exercise in full its Basic Subscription Privilege and Conditional CGE
Subscription, up to a maximum aggregate subscription of $185 million of Class
A Common Stock. As a result, if no other Rights are exercised and the
Requisite Consents are obtained, CGE would acquire shares of Class A
Common Stock (subject to the Company's obligation to issue Class B Common
Stock in certain circumstances). Consequently, immediately after the Exchange
and Rights Offering, CGE would own approximately % of the total outstanding
Class A Common Stock of the Company. See "The Rights Offering--Subscription
Privileges--Basic Subscription Privilege" and "The Rights Offering--
Subscription Privileges--Conditional CGE Subscription."
There can be no assurance that the interests of CGE will be the same as
those of the other stockholders of the Company. In addition, CGE's controlling
ownership interest in the Company may tend to deter non- negotiated tender
offers or other efforts to obtain control of the Company and thereby preclude
stockholders from having the opportunity to sell shares at prices higher than
those otherwise prevailing.
PROHIBITION ON PAYMENT OF DIVIDENDS ON THE CLASS A COMMON STOCK
The Company has never paid cash dividends on the Class A Common Stock, and
the Company currently intends to retain its earnings, if any, to finance the
growth and development of its business and to repay any outstanding
indebtedness and does not expect to pay dividends on the Class A Common Stock
in the foreseeable future. In addition, the Bank Credit Facility prohibits the
Company from declaring or paying cash dividends on the Class A Common Stock.
See "Price Range of Class A Common Stock and Dividend Policy."
MARKET RISKS ASSOCIATED WITH THE CLASS A COMMON STOCK
The Subscription Price of $ per share of Class A Common Stock represents a
discount/premium of % from the average closing price of $ for the Class A
Common Stock as reported on the AMEX for the ten consecutive trading day
period ending on , 1997, five days before the Record Date and a discount
of % from the closing price of $ for the Class A Common Stock as reported
on the AMEX for the 60 day trading period ending on the Record Date.
The market price of the Company's Class A Common Stock has been volatile in
recent years and on , 1997 reached a 52-week low of $ . Factors such as
quarter-to-quarter variations in the Company's revenues and results of
operations and liquidity have caused and are expected to continue to cause the
market price of the Company's securities to fluctuate significantly. In
addition, in recent years the stock markets have experienced significant
volatility, which often may be unrelated to the operating performance of the
affected companies. Such volatility may also adversely affect the market price
of the Company's securities. See "Price Range of Class A Common Stock and
Dividend Policy."
There can be no assurance that the market price of the Class A Common Stock
will not decline during the period the Rights and Warrants are outstanding or
that, following the issuance of the Rights, the Underlying Shares and
Warrants, respectively, a subscribing holder will be able to sell shares
purchased in the Rights Offering at a price equal to or greater than the
Subscription Price or to sell the Warrants. Once a holder of Rights has
exercised the Basic Subscription Privilege or the Oversubscription Privilege,
such exercise may not be revoked. See "The Rights Offering--No Revocation."
Moreover, until certificates are delivered, subscribing Rights holders may not
be able to sell the shares of Class A Common Stock that they have purchased in
the Rights Offering. Certificates representing shares of Class A Common Stock
purchased pursuant to the Rights Offering will be delivered as soon as
practicable after the Expiration Date and all prorations and adjustments
contemplated by the terms of the Rights Offering have been effected.
No interest will be paid to Rights holders on funds delivered to the
Subscription Agent pursuant to the exercise of Rights pending delivery of
Underlying Shares.
26
<PAGE>
NO PRIOR MARKET FOR RIGHTS OR WARRANTS
The Rights and Warrants constitute new issues of securities with no
established trading market. The Company has agreed to use its commercially
reasonable efforts to cause the Warrants to be listed and the Rights to be
admitted to dealings on the AMEX. There can be no assurance, however, that the
Warrants will be accepted for listing or that the Rights will be admitted to
dealings. Accordingly, no assurance can be given as to the liquidity of, or
trading market for, the Rights or Warrants.
CONTINUED LISTING OF SECURITIES
On August 13, 1997, the Company's Convertible Debentures were delisted from
the Nasdaq SmallCap Market as a consequence of the Company's capital and
surplus not meeting the established requirements. In addition, on September
16, 1997, the AMEX temporarily suspended trading on that day of the Company's
Class A Common Stock. The AMEX will consider suspending dealings in, or
removing from listing, securities of a company which, among other things,
fails to meet certain minimum levels of stockholders' equity and/or suffers
sustained losses for a certain period. The Company has agreed to use its
commercially reasonable efforts to meet the continued listing requirements of
the AMEX and to continue to be listed thereon and for the Rights and Warrants
to be admitted to dealings and listed thereon, as the case may be. There can
be no assurance, however, that the Company will continue to meet the
requirements for continued listing or admission to dealings, as the case may
be, of its Class A Common Stock or the Rights or the Warrants on the AMEX.
ABILITY TO EXERCISE WARRANTS
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then in effect or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of the Warrants reside. The Company is required under the
terms of the Warrant Agreement (as defined hereinafter) to use its best
efforts to cause to become effective under the Securities Act, at such time as
the average daily Closing Price of the Class A Common Stock is greater than or
equal to 85% of the Warrant Exercise Price ($2.125) for twenty consecutive
Trading Days, a registration statement covering the issuance and resale, to
the extent applicable, of the Warrant Shares upon exercise of the Warrants.
Subject to certain Black-Out Periods, the Company will also be required to use
its best efforts to maintain the effectiveness of the registration statement
relating to the Warrant Shares until the expiration or exercise of all
Warrants. See "Description of Warrants--Registration of Warrant Shares." There
can be no assurance that the Company will be able to file, cause to be
declared effective or keep a registration statement continuously effective
until all of the Warrants have been exercised or have expired.
DILUTION
The consummation of the Recapitalization will result in an increase of up to
shares of Class A Common Stock outstanding, assuming full exercise of
Rights if the Requisite Consents are obtained, or, if the Requisite Consents
are not obtained, up to shares of Class A Common Stock and shares of
Class B Common Stock (which, except that it does not vote and converts
automatically into an equal number of Class A Common Stock immediately upon
the earlier of August 1, 2000 or seventy-five days following the termination
of the Change of Control Provision, is identical to the Class A Common Stock).
Holders who do not exercise their Rights will experience a substantial
decrease in their proportionate interest in the equity ownership and voting
power of the Company. The sale of the Rights may not compensate a holder for
all or any part of any reduction in the market value of such stockholder's
Class A Common Stock resulting from the Rights Offering. Stockholders who do
not exercise or sell their Rights will relinquish any value inherent in the
Rights.
CHANGE OF CONTROL PROVISION OF CONVERTIBLE DEBENTURES
The Company currently has outstanding $115 million of Convertible
Debentures. The Change of Control Provision of Article Fifteen of the
Indenture grants holders of the Convertible Debentures the right to require
the
27
<PAGE>
Company to repurchase outstanding Convertible Debentures at a repurchase price
of 100% of the principal amount of the Convertible Debentures, together with
accrued interest to the repurchase date, if any person becomes the beneficial
owner of 75% or more of the total voting power of all shares of capital stock
of the Company entitled to vote in the election of directors. The Indenture
currently provides that at the option of the Company, if such repurchase right
is triggered and exercised, the Company may repurchase such Convertible
Debentures with a cash payment or, so long as the Class A Common Stock is
listed on a national securities exchange or quoted on the Nasdaq National
Market System, by delivery of shares of Class A Common Stock having a fair
market value equal to the redemption price. For purposes of a repurchase with
Class A Common Stock, the fair market value of shares of the Class A Common
Stock shall be equal to 95% of the average of quoted prices over a five-day
period prior to the repurchase date.
The Company is currently conducting the Consent Solicitation to amend the
Indenture to delete the Change of Control Provision. The Rights Offering is
not conditioned upon obtaining the Requisite Consents, and there can be no
assurance that the Company will obtain the Requisite Consents. See "Prospectus
Summary--The Company--Recent Developments." Moreover, assuming the Requisite
Consents are not obtained, there can be no assurance that after the Expiration
Date a person will not acquire beneficial ownership of 75% or more of voting
power of the Company thus triggering the Change of Control Provision or that
the Company would have adequate cash available to redeem the Convertible
Debentures. If the Company were to satisfy its obligations in respect of the
Change of Control Provision by delivering Class A Common Stock, as discussed
above, stockholders would experience substantial dilution in their relative
ownership interest in the Class A Common Stock.
INDEFINITE AMOUNT AND USE OF PROCEEDS
If no Rights holder other than CGE exercises Rights in the Rights Offering,
the gross proceeds from the Rights Offering will be $185 million. Assuming
Public Rights holders exercise Rights providing the Company with at least $25
million in gross proceeds, the aggregate gross proceeds from the Rights
Offering will be $210 million. The first $25 million of gross proceeds, if
any, received pursuant to the Rights Offering from subscriptions by the Public
will be retained by the Company for general corporate purposes. Other than the
first $25 million of gross proceeds received from subscriptions by the Public,
the gross proceeds of the Rights Offering will be used to repay the $185
million aggregate principal amount of debt of CGE and its subsidiaries
consisting of the CGE Note and the Anjou Note. See "Use of Proceeds."
CGE has agreed to subscribe in the Rights Offering for up to $185 million of
Class A Common Stock (subject to the obligation of the Company to issue shares
of Class B Common Stock in certain circumstances), for a total subscription of
up to shares of Class A Common Stock. The Rights Offering, however, is not
conditioned upon any minimum level of exercise of the Rights. Consequently,
there can be no assurance that the Company will raise more than $185 million
of gross proceeds from the Rights Offering or that the Public will participate
in the Rights Offering.
28
<PAGE>
USE OF PROCEEDS
If Public Rights holders exercise Rights providing the Company with at least
$25 millon in gross proceeds, the aggregate gross proceeds from the Rights
Offering will be $210 million. If no Rights holder other than CGE exercises
Rights in the Rights Offering, the gross proceeds from the Rights Offering
will be $185 million. CGE has agreed to subscribe in the Rights Offering for
up to $185 million of Class A Common Stock, for a total subscription of up to
shares of Class A Common Stock. The Rights Offering, however, is not
conditioned upon any minimum level of exercise of Rights by the Public.
Consequently, there can be no assurance that the Company will raise more than
$185 million of gross proceeds from the Rights Offering or that the Public
will participate in the Rights Offering. See "Risk Factors--Indefinite Amount
and Use of Proceeds."
The gross proceeds will be used in the following order of priority. The
first $25 million of gross proceeds, if any, received pursuant to the Rights
Offering from subscriptions by the Public will be retained by the Company for
general corporate purposes. Other than the first $25 million of gross proceeds
received from subscriptions by the Public, the gross proceeds of the Rights
Offering will be used to repay the $185 million aggregate principal amount of
debt of CGE and its subsidiaries consisting of (i) the $125 million CGE Note
and (ii) the $60 million Anjou Note. The Company has taken all necessary legal
actions in order to repay such indebtedness, including obtaining any required
waivers. Any remaining proceeds will be retained for general corporate
purposes.
The CGE Note is an unsecured facility bearing interest at a rate based upon
one, two, three or six-month LIBOR, as selected by the Company, plus 1.25% and
has a final maturity of June 15, 2001. The loan contains certain financial and
other restrictive covenants with respect to the Company relating to, among
other things, the maintenance of certain financial ratios, and restrictions on
the sale of assets and the payment of dividends on or the redemption,
repurchase, acquisition or retirement of securities of the Company or its
subsidiaries. The CGE Note also contains a covenant requiring CGE to remain
the largest stockholder of the Company and maintain at least a 26% voting
interest in the Company's common stock.
The Anjou Note is an unsecured revolving credit facility that matures on
August 2, 2003 and bears interest at LIBOR plus 0.6%. The Anjou Note also
contains a covenant requiring CGE to remain the largest stockholder of the
Company and maintain at least a 40% voting interest in the Company's common
stock.
29
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
The Class A Common Stock began trading publicly on August 10, 1989 at an
initial public offering price of $17.00 per share and is traded on the AMEX
under the symbol "AWT." On , 1997 there were holders of record of the
Company's Class A Common Stock.
The following table sets forth, for the fiscal periods shown, the high and
low sales prices for the Class A Common Stock as reported on the AMEX.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1995
First Quarter........................................... $6.875 $5.875
Second Quarter.......................................... $5.625 $4.313
Third Quarter........................................... $6.625 $4.125
Fourth Quarter.......................................... $6.375 $5.000
Fiscal 1996
First Quarter........................................... $8.125 $4.000
Second Quarter.......................................... $7.000 $5.250
Third Quarter........................................... $6.750 $4.969
Fourth Quarter.......................................... $9.500 $5.500
Fiscal 1997
First Quarter........................................... $7.500 $5.000
Second Quarter.......................................... $6.500 $4.500
Third Quarter........................................... $5.250 $2.250
Fourth Quarter (through October 29, 1997)............... $4.063 $1.250
</TABLE>
On September 23, 1997, the last trading day immediately prior to the
announcement of the Recapitalization, the closing price per share on the AMEX
for the Class A Common Stock was $1.50. On , 1997, the day before the
effective date of the Registration Statement of which this Prospectus forms a
part, the closing price per share on the AMEX for the Class A Common Stock was
$ .
The Company did not declare any cash dividends on its Class A Common Stock
during fiscal 1995 and fiscal 1996. Pursuant to the Bank Credit Facility, the
Company is prohibited from declaring or paying cash dividends on its Class A
Common Stock or other restricted payments, as defined in the Bank Credit
Facility. The Company currently intends to retain its earnings, if any, to
finance the growth and development of its business and to repay outstanding
indebtedness and does not anticipate paying cash dividends on its Class A
Common Stock in the foreseeable future.
30
<PAGE>
DILUTION
The Company currently has a negative tangible net worth. The negative net
tangible book value of the shares of Class A Common Stock as of July 31, 1997
was approximately ($332,949,000) or ($10.40) per share which will change to
($272,949,000) or ($4.12) per share upon consummation of the Exchange
(assuming an exchange price of $1.75 per share). "Net tangible book value" per
share represents the amount of total tangible assets (total assets less
intangible assets) less total liabilities, divided by the number of shares of
Class A Common Stock outstanding. Assuming the Requisite Consents are obtained
and a Subscription Price of $1.75, (i) after giving effect to the sale by the
Company of approximately 105,714,000 shares of Class A Common Stock in the
case of the "Minimun Subscription," such that the Company will receive gross
proceeds of $185 million, and after deducting the estimated offering expenses,
the pro forma negative net tangible book value of the Company as of July 31,
1997 would have been approximately ($92,949,000), or ($.54) per share,
representing an immediate and substantial dilution of ($2.29) per share and
(ii) after giving effect to the sale by the Company of approximately
120,000,000 shares of Class A Common Stock in the case of the "Maximum
Subscription," such that the Company will receive gross proceeds of $210
million, and after deducting the estimated offering expenses, the pro forma
negative net tangible book value of the Company as of July 31, 1997 would have
been approximately ($67,949,000), or ($.36) per share, representing an
immediate and substantial diluton of ($2.11) per share, in each case, in
respect of the Subscription Price for shares of Class A Common Stock purchased
pursuant to the Rights Offering. The following table illustrates the per share
dilution:
<TABLE>
<CAPTION>
DILUTION DILUTION
MINIMUM MAXIMUM
SUBSCRIPTION SUBSCRIPTION
-------------- --------------
<S> <C> <C> <C> <C>
Subscription Price.............................. $ 1.75 $ 1.75
Net negative tangible book value per share
before Rights Offering, as adjusted for the
Exchange(1).................................. $(4.12) $(4.12)
Increase per share attributable to
stockholders exercising Rights............... 3.58 3.76
------ ------
Pro forma net tangible book value per share
after Rights Offering.......................... (0.54) (0.36)
------ ------
Dilution to stockholders exercising Rights(2)... $(2.29) $(2.11)
====== ======
</TABLE>
- --------
(1) Reflects the issuance of approximately 34,286,000 shares of Class A Common
Stock for $60 million of Series A Preferred Stock at an exchange price
equal to $1.75 per share.
(2) Dilution is determined by subtracting the pro forma negative net tangible
book value per share from the Subscription Price paid by an investor for a
share of Class A Common Stock in the Rights Offering.
31
<PAGE>
THE RECAPITALIZATION
GENERAL
On September 24, 1997, the Company, CGE and Anjou entered into the
Recapitalization Agreement, whereby the Company would restructure its debt and
retire all of the outstanding shares of Series A Preferred Stock. The
Recapitalization is comprised of two primary elements: (i) the Exchange and
(ii) the Rights Offering. Pursuant to the Recapitalization Agreement, the
Company, CGE and Anjou also entered into agreements with respect to certain
other matters, including the Consent Solicitation, the Charter Amendment and
CGE's intent to work with the Company to enhance the Company's participation
in the emerging privatization market in the wastewater management industry.
See "--Consent Solicitation" and "--Other." Certain of the terms of the
Recapitalization are summarized below. Such summary is qualified in its
entirety by reference to the Recapitalization Agreement which is an exhibit to
the Registration Statement of which this Prospectus forms a part.
BACKGROUND
In early 1997, management of the Company determined to consider a
recapitalization of the Company. On January 28, 1997, the Company retained
Lazard Freres & Co., LLC ("Lazard Freres") to explore various strategic
alternatives relating to a recapitalization of the Company and a possible
disposition of Research-Cottrell. Lazard Freres subsequently proposed a rights
offering structure to the Company's management. Shortly thereafter, management
of the Company approached CGE with the concept of a rights offering, at which
time CGE determined to retain its own legal and financial advisors for
purposes of entering into discussions with the Board of Directors of the
Company with respect to a recapitalization.
In a special meeting of the Board of Directors of the Company on June 23,
1997, the Board of Directors decided, in anticipation of entering into
discussions with CGE and in accordance with the Investment Agreement, that Ms.
Carol Lynn Green and Lieutenant General John W. Morris, the Company's
directors not affiliated with CGE, would be appointed as the Special Committee
to consider any recapitalization proposal by CGE.
Shortly thereafter, the Special Committee retained Wasserstein Perella &
Co., Inc. ("WP&Co.") as its financial advisor and Fried, Frank, Harris,
Shriver & Jacobson ("Fried, Frank") as its special legal counsel, having
previously identified and interviewed prospective independent advisors to
assist in its assignment.
The July 10 Proposal
On July 10, 1997, CGE and its financial advisor, Houlihan, Lokey, Howard &
Zukin Capital ("Houlihan Lokey"), and its special legal counsel, Skadden,
Arps, Slate, Meagher & Flom LLP ("Skadden, Arps") met with and presented a
recapitalization proposal (the "July 10 Proposal") to the Special Committee
(and its advisors), other members of the Company's Board of Directors, the
Company's outside legal counsel, Davis Polk & Wardwell, and its financial
advisor, Lazard Freres. CGE invited questions or discussions about any aspects
of its proposal at any stage of the Special Committee's study of the proposal.
The July 10 Proposal consisted of an exchange of CGE's Series A Preferred
Stock for Class A Common Stock at a conversion price of $1.75 per share with a
concurrent rights offering for a new series of convertible preferred stock
(the "Convertible Preferred Stock"). Each holder of Class A Common Stock,
including CGE, would have received, for every 0.700 share of Class A Common
Stock owned, a nontransferable right to acquire one share of Convertible
Preferred Stock at a subscription price of $2.00 per share. The Convertible
Preferred Stock would have been immediately convertible into the Company's
Class A Common Stock on a one-for-one basis at a conversion price of $2.00 per
share, with the conversion price subsequently reset two years from the date of
issuance based upon the then trading price of the Class A Common Stock,
subject to a maximum conversion price of $2.00 per share and a minimum
conversion price of $.50 per share. The Convertible Preferred Stock would have
carried a dividend rate of 8% on its par value per share to be paid in kind
and would have
32
<PAGE>
been mandatorily converted by the Company into Class A Common Stock three
years from the date of issuance or upon a change in control of the Company at
the conversion price in effect on such date.
The Rights Offering under the July 10 Proposal would have permitted
stockholders (including CGE) exercising their rights to subscribe for
additional underlying shares available as a result of the unexercised rights.
CGE's participation in the July 10 Proposal's rights offering was
conditioned upon the Special Committee's approval of (i) the exchange of CGE's
Series A Preferred Stock for Class A Common Stock at an exchange price of
$1.75 per share, (ii) successful completion of the Consent Solicitation to
amend the Indenture governing the Convertible Debentures to eliminate the
Change of Control Provision and (iii) an amendment to Section 5.6 of the
Investment Agreement to clarify that it shall not apply to CGE's existing
investments in OTV-Kruger, Inc., Consumers Water Company, Philadelphia
Suburban Corporation and to similar water-utility-related investments,
acquisitions or activities by CGE or its affiliates.
Following the July 10, 1997 meeting, WP&Co. conducted financial due
diligence and Fried, Frank conducted legal due diligence with respect to the
Company on behalf of the Special Committee. During the course of this review,
the Special Committee and its advisors met numerous times, both collectively
and in working groups, to consider business and financial information
collected independently, and from the Company and CGE and their respective
advisors, and to analyze the July 10 Proposal and alternatives thereto. During
the course of its review in July and August, the Special Committee determined
that certain alternatives to the July 10 Proposal, including various break-up
scenarios, a Chapter 11 reorganization, an immediate liquidation of the
Company upon dissolution, a sale of the Company to a third party, and a CGE
debt to equity exchange, alone would have been either undesirable or likely to
have been less attractive to the Public stockholders than other alternatives
potentially available to them.
On August 20, 1997, the financial and legal advisors of the Special
Committee met with the financial and legal advisors of CGE to discuss the
proposed terms of the recapitalization and to present the preliminary views of
the Special Committee with respect to the July 10 Proposal. On behalf of the
Special Committee, Fried, Frank and WP&Co. communicated the Committee's
rejection of the July 10 Proposal on several bases, including the lack of
business resolutions to the Company's business problems, concerns over the
structure of the July 10 Proposal's rights offering due to such factors as the
rights' nontransferability and its pricing, and the combined adverse dilutive
effect of the reset mechanism and payment-in-kind provisions on the Public
stockholders' share ownership in the Company. The advisors to the Special
Committee proposed to the CGE advisors that CGE make a tender offer for the
Public stockholders' Class A Common Stock. The CGE advisors expressed doubt
concerning CGE's receptivity to this alternative but indicated CGE's
willingness to listen to all of the Special Committee's ideas and proposals.
The financial advisors to the Special Committee and to CGE agreed that, based
upon their respective determinations of the Company's enterprise value, the
Class A Common Stock currently had no intrinsic value. The respective advisors
agreed that a meeting between the Special Committee and CGE's representative,
Mr. Francois Jobard, Charge de Mission a la Direction Financiere of CGE,
should be organized.
The Special Committee and Mr. Jobard agreed to meet on September 3, 1997. On
August 29, 1997, and in response to his request, the Special Committee wrote
Mr. Jobard, among other things, to identify three objectives for any
recapitalization proposal to be acceptable to the Special Committee: (i) the
Company must be placed on a financially viable basis, (ii) CGE and the Company
must establish a demonstrably effective long-term business strategy for the
Company and (iii) Public stockholders must have liquidity in a fair, active
and reliable trading market.
On September 3 and 4, CGE, the Special Committee and their respective
advisors met to discuss the July 10 Proposal. The Special Committee stated
that the July 10 Proposal was unacceptable, citing among other things, its
belief that the terms of the rights offering made it unlikely that Public
stockholders would have participated and that the reset and payment-in-kind
provisions of any shares of Convertible Preferred Stock acquired by CGE could
have had a potentially high dilutive impact on the Public stockholders, and
under certain
33
<PAGE>
circumstances, could have resulted in Public ownership of the Class A Common
Stock of as low as 3.4%. Moreover, the July 10 Proposal provided for the
reduction of the Company's debt burden by as much as $180 million with full
Public participation in the rights offering or, assuming less than full Public
participation, if CGE exercised its oversubscription privilege in the rights
offering; however, CGE made no commitment to do so.
The Special Committee also noted the absence in the July 10 Proposal of any
specific business commitment of CGE to the Company, observing that it provided
no mechanism for CGE to fund, or assist the Company in funding, future capital
expenditures such as those necessary to successfully compete in the
privatization of the United States municipal wastewater treatment market (to
the extent such a market should emerge) nor did it address CGE's role in
assisting the Company to develop new and more effective business strategies.
In response, the Special Committee instead proposed that CGE consider a two-
step acquisition consisting of a cash tender offer followed by a merger
pursuant to which CGE would acquire 100% of the Class A Common Stock of the
Company. Mr. Jobard, however, informed the Special Committee that CGE believed
that in order to successfully accomplish a two-step acquisition, the offer
price would have to be close to or above the market price of the Class A
Common Stock and that because the market price of the Class A Common Stock was
so far above what CGE believed the intrinsic value of the Class A Common Stock
to be, a tender offer, in CGE's view, was not financially prudent. Moreover,
CGE rejected this approach on the basis that its funds would not have gone
toward the Company's capital needs and instead would only have been additive
to such needs. While the two parties discussed possible elements of a common
understanding affecting the Company's business need for support and improved
business strategy, no consensus was reached. Mr. Jobard inquired at what price
the Special Committee would consider a cash tender offer. The Special
Committee indicated it would consider a cash tender offer proposal from CGE at
$3.00 per share. Mr. Jobard rejected any further effort by the Special
Committee to pursue a CGE acquisition proposal, but instead requested a
counterproposal to be based on a structure similar to that set forth in the
July 10 Proposal.
The September 4 Proposal
On September 4, 1997, the Special Committee made a proposal to CGE (the
"September 4 Proposal") pursuant to which CGE would exchange the Series A
Preferred Stock, the Anjou Note and the CGE Note for Class A Common Stock, at
a price of $3.35 per share, and the Public would receive warrants as a
dividend. Under the September 4 Proposal, the initial Public ownership of
Class A Common Stock would have been approximately 18%, with the Public
receiving freely transferable warrants exercisable at the price at which CGE
would have converted its debt to equity in order to enable the Public over
time to increase its ownership to approximately 35% of the Class A Common
Stock. In addition, the Special Committee proposed that CGE agree to
repurchase shares of Class A Common Stock held by the Public in up to three
future "Dutch auction" tender offers in the event the average closing price of
the Class A Common Stock fell below a determined threshold preceding any of
the first three anniversaries of the recapitalization. The Special Committee
also proposed that CGE agree to offer to purchase all outstanding shares of
Class A Common Stock held by the Public, at a price to be independently agreed
upon at a later date, if the Public's percentage ownership or the market
capitalization of the Class A Common Stock held by the Public fell below a
determined threshold or certain other events occurred.
The September 4 Proposal raised certain strategic business issues which the
Special Committee explained were important to its conception of fairness. For
example, the September 4 Proposal, among other things, called for CGE to
commit to provide a substantial amount of project investments, guarantees and
other capital support and for CGE to provide management to the Company to
enhance the Company's business efforts. The September 4 Proposal also called
for CGE to reaffirm the language of Section 5.6 of the Investment Agreement
that designates the Company as CGE's exclusive vehicle in the United States
with respect to water and wastewater management and air pollution activities.
The September 4 Proposal further would have required the Company to conduct a
regular stockholder relations program and to promote analyst coverage.
34
<PAGE>
The September 5 Proposal
CGE rejected the Special Committee's September 4 Proposal primarily because
(i) the implied price at which CGE would exchange its securities into the
Company's Class A Common Stock was in excess of the intrinsic value of such
stock, (ii) the proposed warrants were being given to the Public for no
consideration, (iii) CGE did not consider it to be an appropriate balance to
provide only the Public with downside price protection, and (iv) CGE was not
prepared to commit now to the funding of unidentified projects at an unknown
time in the future. On September 5, 1997, CGE provided a counterproposal (the
"September 5 Proposal") to the Special Committee. Pursuant to the September 5
Proposal, CGE would exchange approximately $105 million of debt of CGE ("CGE
Debt"), consisting of the CGE Note and the Anjou Note, into shares of Class A
Common Stock at an exchange price of $1.75 per share, and would exchange the
remaining approximately $80 million of CGE Debt as well as the $60 million of
Series A Preferred Stock into a new series of cumulative redeemable pay-in-
kind ("PIK") preferred stock which would pay market rate dividends in kind for
an agreed upon period of time and be mandatorily redeemed at an agreed upon
date. This proposal, in CGE's view, would have resulted in the Company
exchanging its $245 million of cash pay obligations into equity securities
with no cash interest or cash dividend payment obligations, and would have
resulted in Public stockholders initially having a 20% ownership interest in
the Class A Common Stock of the Company. CGE agreed to consider the strategic
business points raised in the Special Committee's September 4 Proposal,
including CGE's working with the Company to formulate a focused business
strategy and implementing a process of making available funding of capital
expenditures for the Company's business on a project-by-project basis, if
commercially reasonable. The September 5 Proposal left the determination of
holding analysts conferences and other such programs to the discretion of the
Company's management. Furthermore, if the Company did not obtain the consent
of the Convertible Debenture holders to eliminate the Change of Control
Provision from the Indenture, the September 5 Proposal called for the Company
to satisfy the Change of Control Provision by delivering Class A Common Stock
in lieu of cash to the Convertible Debenture holders in accordance with the
terms of the Indenture.
The September 8 Proposal
The Special Committee rejected CGE's September 5 Proposal in part because
the Special Committee believed that it did not adequately resolve problems
with the Company's capital structure and would have left Public stockholders
with inadequate value after taking into account the financial implications of
the $140 million of manditorily redeemable PIK preferred stock. The September
5 Proposal also lacked, in the Special Committee's view, a means by which the
Public stockholders could further participate in the Company's future
potential, beyond their 20% ownership interest, among other things. In
addition, the Special Committee disfavored CGE's approach with respect to the
Convertible Debentures because of its potentially dilutive impact on the
minority stockholders in the event the Consent Solicitation failed.
On September 8, 1997, the Special Committee and its advisors suggested
another proposal in anticipation of a meeting with CGE and its advisors (the
"September 8 Proposal") that modified the exchange provisions of CGE's
September 5 Proposal and provided for the issuance of two series of freely
transferable warrants. The September 8 Proposal called for the exchange of
approximately $91 million of CGE Debt into shares of Class A Common Stock at
an exchange price of $2.50 per share and the exchange of approximately $94
million of CGE Debt into shares of a new issue of nonvoting convertible
preferred stock (the "Exchange Preferred Stock") at an exchange price of $2.50
per share. The Exchange Preferred Stock would have been convertible into Class
A Common Stock in certain circumstances. In addition, CGE would have
separately exchanged its Series A Preferred Stock for a new series of
redeemable participating preferred stock (the "Participating Preferred Stock")
that would have paid market rate cash dividends commencing at such time as the
Company achieved an agreed upon level of earnings before taxes excluding
extraordinary items for any four consecutive profitable quarters, and which
would have been mandatorily redeemed on the tenth anniversary following
issuance. Immediately after the exchange and assuming conversion of the
Exchange Preferred Stock into Class A Common Stock, CGE would have
beneficially owned approximately 83% of the Class A Common Stock.
In addition to the exchange of the CGE Note, Anjou Note and Series A
Preferred Stock, the September 8 Proposal provided that the Company would
issue to Public stockholders two series of freely tradable Warrants.
35
<PAGE>
The first series of warrants (the "Recap Warrants") would have entitled the
Public to purchase 10% of the Class A Common Stock at an exercise price of
$2.50 per share and would have expired eighteen months from the date of
issuance. The Recap Warrants were intended to enable the Public to fund the
recapitalization on a cost basis similar to CGE. Upon exercise of the Recap
Warrants and assuming conversion of the Exchange Preferred Stock into Class A
Common Stock, the Public would have owned up to approximately 27% of the
outstanding shares of Class A Common Stock. The second series of warrants (the
"Term Warrants") would have entitled the Public to purchase an additional 8%
of the Class A Common Stock at an exercise price representing a premium to the
exercise price of the Recap Warrants. The Term Warrants would have expired
five years from the date of issuance and were intended to enable the Public to
participate in the long-term appreciation potential of the Company and to
provide the Company with capital for project and infrastructure development.
Upon exercise of the Recap Warrants and Term Warrants and assuming conversion
of the Exchange Preferred Stock, the Public would have owned up to
approximately 35% of the Class A Common Stock. Proceeds from the exercise of
the Recap and Term Warrants would have been retained by the Company to fund
working capital requirements and capital expenditures.
The September 8 Proposal also set forth several strategic business issues.
The September 8 Proposal would have required CGE to defer an acquisition of
the Company for five years from the date of the recapitalization to provide
sufficient time for the recapitalization to succeed. The September 8 Proposal
also called for approval of the recapitalization by a majority of the
outstanding shares of publicly-held Class A Common Stock in addition to a
majority of the outstanding shares of Class A Common Stock and Series A
Preferred Stock, and repeated requirements for the establishment of a
stockholder relations program and efforts to improve analyst coverage. The
September 8 Proposal further called for, among other things, the creation of
the Business Planning Committee comprised of three CGE appointed directors and
two directors who are independent and unaffiliated with CGE to review business
strategies prepared by the Company's senior management and, as appropriate,
make recommendations on the formulation and implementation of those strategies
that would have as their objective increasing stockholder value. Among other
things, for example, the Business Planning Committee would have identified
areas where CGE's water management expertise and resources and the Company's
business could be effectively integrated. The Business Planning Committee
would have remained in place through the end of fiscal year 1999.
The September 8 Proposal also repeated the requirement that CGE reaffirm
that the Company be CGE's exclusive North American vehicle for water-related
investments, including water utilities, but provided for certain
clarifications to the Investment Agreement with respect to CGE investments
prior to execution of the Investment Agreement. The September 8 Proposal
reiterated CGE's intention of implementing a process of making available
funding of capital expenditures entered into in the course of the Company's
business through an off-balance sheet vehicle or entity, but would have
required that the Company have the right of first investment for any such
capital expenditures and the opportunity to co-invest in the equity of all
Company related projects otherwise sponsored by CGE, to the extent the Company
had the resources necessary to do so, if and when such vehicle was realized.
CGE rejected the September 8 Proposal, reiterating that it would not accept
a proposal which it believed was not supportable on a valuation basis, and
provided the Company's Class A Common stockholders with, in its view, zero
cost warrants, and required CGE to provide significant financial commitments
on the Company's behalf. CGE returned to its September 5 Proposal, pursuant to
which it would have converted the CGE Note and Anjou Note into Class A Common
Stock at a conversion price of $1.75 per share and exchanged its Series A
Preferred Stock for newly issued mandatorily redeemable PIK preferred stock.
CGE disagreed with the concept of requiring Public stockholder approval of a
recapitalization agreement by a majority of the outstanding shares of
publicly-held Class A Common Stock based on its analysis of applicable law.
Among other things, CGE expressed a willingness to consider offering two
series of warrants to Public stockholders. CGE acknowledged the Special
Committee's concern that a funding vehicle not compete with the Company, but
expressed concerns that the Special Committee's framework would have deterred
third party investors. CGE objected to the Special Committee's position that
Section 5.6 of the Investment Agreement applied to water utilities businesses
except for certain pre-existing CGE investments, since such position
conflicted, in CGE's view, with the history of the
36
<PAGE>
negotiations of the Investment Agreement. CGE reiterated its position that
water utility investments were never intended to be encompassed by the
Investment Agreement.
The September 9 Proposal
On September 9, 1997, the Special Committee suggested a compromise proposal
(the "September 9 Proposal") pursuant to which CGE would have exchanged the
CGE Note and the Anjou Note for Class A Common Stock at an exchange price of
$2.25 per share. The exchange under the September 9 Proposal was conditioned
on receiving the Requisite Consents to amend the Indenture. In the event the
Consent Solicitation was unsuccessful, the Special Committee called for the
exchange of the CGE Note and the Anjou Note to be handled in the same manner
as in its September 8 Proposal. Under the September 9 Proposal, the Series A
Preferred Stock would have been exchanged for a new series of preferred stock
that would have been noncumulative participating preferred stock for three
years and thereafter would have been cumulative preferred stock with a cash
dividend. The September 9 Proposal also provided that Public stockholders
would receive two series of warrants, entitling them to purchase shares of
Class A Common Stock at a premium to the above- referenced exchange price,
such that after full exercise of the warrants by the Public, the Public would
own 35% of the Class A Common Stock. The Special Committee also sought
protection against a short-form merger of the Company with or into CGE or an
affiliate for a period of five years following the recapitalization; agreed to
study further the vote requirements that should apply with respect to the
Company's stockholders; repeated requirements for establishment of a policy
requiring the Company to hold semi-annual analyst conferences, conduct
conference calls concurrent with earnings releases, promote analyst coverage
of its stock and initiate a stockholder relations program; reiterated the
establishment of the Business Planning Committee; and detailed further how a
funding vehicle would not compete with the Company. The Special Committee also
undertook to study further the background of Section 5.6 of the Investment
Agreement.
The September 10 Proposal
On September 10, 1997, CGE rejected the September 9 Proposal and made a
revised proposal to the Special Committee (the "September 10 Proposal"). The
September 10 Proposal provided that CGE would exchange the Anjou Note and the
CGE Note for Class A Common Stock at an exchange price of $2.00 per share and
would exchange the Series A Preferred Stock into shares of newly issued PIK
preferred stock which, for the first five years, would have paid dividends at
the rate of 7% in cash or 9% in kind at the Company's option and after five
years, would have paid 7% dividends in cash. CGE's proposal also provided for
the issuance of two series of warrants to the Public stockholders: (i)
warrants entitling the holders to acquire seven million shares of Class A
Common Stock at an exercise price of $2.75 per share and expiring two years
from the date of issuance and (ii) warrants entitling holders to acquire seven
million shares of Class A Common Stock at an exercise price of $4.00 per share
and expiring five years from the date of issuance. The exercise price of the
warrants implied a 17% annual rate of accretion. Assuming full exercise of the
warrants by the Public, Public ownership in the Company would have increased
to approximately 23%.
In addition, under the terms of the September 10 Proposal, CGE reiterated
its willingness to explore a process of making available funding of capital
expenditures for the Company's business through an off-balance sheet vehicle
or entity on a project-by-project basis if commercially reasonable but
remained resistant to any firm commitment to set dollar amounts or specific
terms of a capital funding program. CGE required that the recapitalization be
contingent upon the resolution of interpretive issues with respect to Section
5.6 of the Investment Agreement through either a non-compete agreement (based
on the Company's existing business) or an amendment to Section 5.6 of the
Investment Agreement to make clear its inapplicability, in CGE's view, to
water utility businesses and to certain businesses in which CGE had pre-1994
investments. CGE further offered to agree not to conduct a short-form merger
of the Company prior to the eighteen-month anniversary of a recapitalization
without the prior consent of the Company's Independent Directors (as defined
in the Investment Agreement). CGE rejected the idea of requiring Public
stockholder approval of a recapitalization agreement by a majority of the
outstanding shares of publicly-held Class A Common Stock.
The September 12 Proposal
On September 12, 1997, the Special Committee responded to CGE's September 10
Proposal by reiterating its offer to exchange the CGE Note and the Anjou Note
for a combination of Class A Common Stock and newly
37
<PAGE>
issued preferred stock at an exchange price of $2.25 per share and to issue to
Public stockholders two series of warrants to acquire shares of Class A Common
Stock (the "September 12 Proposal"). The preferred stock issuable upon
exchange of the CGE Note and the Anjou Note under the September 12 Proposal
contained the same features as the Exchange Preferred Stock issuable upon the
exchange of the CGE Note and Anjou Note under the September 8 Proposal.
The September 12 Proposal further provided for the exchange of CGE's Series
A Preferred Stock into shares of newly issued noncumulative preferred stock
(the "New Preferred Stock") that would have paid 7% cash dividends or 9%
dividends in-kind, at the option of the Company. The New Preferred Stock was
exchangeable, at the option of the Company, into subordinated debt of the
Company, provided that a certain financial ratio was satisfied.
The September 12 Proposal further called for Public stockholders to receive
two series of freely tradable warrants to acquire shares of Class A Common
Stock. The warrants to be issued under the September 12 Proposal contained
similar expiration terms as the warrants to be issued under the September 9
Proposal of the Special Committee. The first series of warrants (the "Recap
Warrants") would have entitled the Public to purchase 11.35 million shares of
Class A Common Stock at an exercise price of $2.72 per share and would have
expired two years from the date of issuance. The second series of warrants
(the "Market Warrants") would have entitled the Public to purchase 11.35
million shares of Class A Common Stock at an exercise price of $3.62 per
share, provided that the exercise price of the Market Warrants would be
adjusted downward by the aggregate amount of dividends received by CGE on the
New Preferred Stock through the third anniversary of issuance, and would have
expired five years from the date of issuance. Recap Warrants not exercised
prior to their expiration would have automatically converted into an
equivalent amount of additional Market Warrants. Upon exercise of the Recap
Warrants and Market Warrants and assuming conversion of the Exchange Preferred
Stock into Class A Common Stock, the Public would have owned up to
approximately 30% of the outstanding Class A Common Stock of the Company.
Proceeds from the exercise of the Recap Warrants and Market Warrants would
have been retained by the Company to fund working capital requirements and
capital expenditures.
The September 12 Proposal further required CGE, Company management and the
Special Committee to commence negotiations, within fifteen days of agreement
on the terms of the recapitalization, on a process whereby CGE would make
available guarantees and funding of capital expenditures enabling the Company,
on an exclusive basis and through one or more off-balance sheet vehicles or
entities on a project-by-project basis, to bid on and obtain management and
other project related contracts. The September 12 Proposal further required
that by the closing of the recapitalization, CGE and the Company would agree
on the terms of such funding process which would remain in place for a period
of five years following the date of the recapitalization.
The September 12 Proposal also contemplated the amendment of Section 5.6 of
the Investment Agreement (i) to provide that the exclusivity clause would not
apply to privately-owned (versus government or non-profit majority owned or
operated) drinking water activities or investments, including Philadelphia
Suburban and Consumers Water, (ii) to clarify that the exclusivity clause
would cover all other CGE North American air and water business activities
and/or other investments, and (iii) to indicate that CGE and its affiliates
would not compete with the Company (including through its investment in OTV-
Kruger) except with respect to privately-owned drinking water activities or
investments. The amendment of Section 5.6 of the Investment Agreement was
conditioned upon (i) the Special Committee's confirmation that it (a) would
not have been inconsistent with the intent of the parties to the Investment
Agreement and (b) would not have represented a competitive conflict with the
Company based upon its current business plans, and (ii) the Special
Committee's satisfaction with the terms of the off-balance sheet and/or other
funding process to be established.
With respect to other strategic issues, the September 12 Proposal required
that CGE agree not to acquire the Company through a short-form merger through
the fifth anniversary of the recapitalization, repeated the language of
earlier proposals for a policy under which the Company would hold semi-annual
analyst conferences, conduct conference calls concurrent with earnings
releases, promote analyst coverage of its stock and initiate a stockholder
relations program and continued to call for the creation of a Business
Planning Committee as
38
<PAGE>
provided in the September 8 Proposal. Under the September 12 Proposal, the
Special Committee further withdrew its earlier proposal to require approval of
the recapitalization by a majority of the outstanding shares of the publicly-
held Class A Common Stock, contemplating instead stockholder consent (without
a meeting) under the standard Delaware statutory vote to increase the
authorized number of shares of the Common Stock of the Company.
The Form 10-Q for the Quarter Ended July 31, 1997
On September 15, 1997, the Company filed with the Commission its Form 10-Q
for the quarter ended July 31, 1997 (the "10-Q"). Among other things, the 10-Q
addressed the Company's deteriorating operating results; the establishment of
the Special Committee and the fact that discussions were being held regarding
a range of possible debt restructuring or other recapitalization alternatives
but that an agreement had not yet been reached; the delisting of the Company's
Convertible Debentures from the Nasdaq SmallCap Market; the possible need to
obtain an amendment of the Bank Credit Facility (or other long-term debt or
other obligations) or waivers in the event that the Company was in violation
of covenants under the Bank Credit Facility at October 31, 1997, and the
expectation that the Lending Banks would request additional credit support
from CGE and certain other changes to the Bank Credit Facility as a condition
to a waiver, which support CGE was not prepared to provide pending the outcome
of its discussions with the Special Committee; and the notification from USF&G
that it would suspend the renewal and issuance of new bid and performance
bonds as of September 30, 1997, unless it received certain indemnification
from CGE or Anjou, which indemnification CGE was not prepared to provide
pending the outcome of its discussions with the Special Committee. The 10-Q
also stated the possibility of a material adverse effect on the business
prospects and financial condition of the Company in the event the Company was
unsuccessful in reaching an agreement on the terms of a possible debt
restructuring or other recapitalization transaction or satisfactory
arrangements with the Lending Banks or USF&G. On September 16, 1997, the AMEX
temporarily suspended trading on that day of the Company's Class A Common
Stock pending review of the Company's earnings release. The closing price of
the Company's Class A Common Stock dropped from $3.125 on September 15, 1997
to $1.438 on September 17, 1997.
During the week of September 15, 1997, the Special Committee and its
advisors received additional information on the status of negotiations among
the Company, CGE and representatives of the Lending Banks and USF&G. CGE and
the Special Committee and its advisors also were apprised of the status of
certain of the Company's management contracts with its customers and potential
adverse impact of the Company's business prospects and financial condition, as
disclosed in the 10-Q, on the continuation of such contracts.
The September 18 Proposal
On September 17, 1997, Mr. Jobard sent a letter to the Special Committee
summarizing the position of CGE on the recapitalization negotiations to date
and underscoring CGE's desire to complete discussions expeditiously. On
September 18, the Special Committee responded to Mr. Jobard's letter and
stated that it too was looking forward to resuming discussions. Mr. Jobard and
the Special Committee met that night at dinner to confirm this mutual
objective and review the history of the negotiations.
On September 18, 1997, CGE sent a new proposal to the Special Committee (the
"September 18 Proposal") which reintroducted the concept of a rights offering.
Under the September 18 Proposal, following the exchange by CGE of $60 million
of Series A Preferred Stock for Class A Common Stock, each holder of Class A
Common Stock would have received for every 0.5525 share of Class A Common
Stock a transferable right to acquire one share of Class A Common Stock at a
subscription price of $1.75 per share. The September 18 Proposal also included
an oversubscription privilege which would have allowed all stockholders
exercising rights in the rights offering to subscribe for additional
underlying shares of Class A Common Stock available as a result of unexercised
rights, if any. Assuming full participation of all holders of Class A Common
Stock in the rights offering, the gross proceeds to the Company from the
rights offering would have been approximately $210 million.
Under the September 18 Proposal, CGE would have agreed to exercise its
oversubscription privilege in the rights offering to the extent required to
result in total proceeds available to repay the CGE Note and the Anjou
39
<PAGE>
Note in the case that the Public invested less than $24 million, and in the
case that the Public invested $24 million or more, to the extent of $185
million less the amount invested by the Public over $24 million up to the
point the Public had invested $34 million. The first $24 million of proceeds
from the Public and all proceeds from the exercise of CGE's rights would have
been used to repay the CGE Note and the Anjou Note, with all additional
proceeds, if any, being used by the Company for general corporate purposes.
The September 18 Proposal provided that CGE's offer to participate in the
rights offering was conditioned on the Special Committee's approval of: (i) a
separate exchange offer whereby CGE would exchange its $60 million of Series A
Preferred Stock for Class A Common Stock at an exchange price of $1.75 per
share, which newly issued shares of Class A Common Stock would be eligible to
participate in the rights offering, (ii) successful completion of the Consent
Solicitation to amend the Indenture governing the Convertible Debentures to
delete the Change of Control Provision, and (iii) an amendment to Section 5.6
of the Investment Agreement to clarify that it shall not apply to CGE's
existing investments in OTV-Kruger, Inc., Consumers Water Company and
Philadelphia Suburban Corporation and to any similar water utility-related
investments, acquisitions or activities by CGE or its affiliates. The
September 18 Proposal also provided that if the Requisite Consents were not
obtained in the Consent Solicitation, CGE would have received in the exchange
of its Series A Preferred Stock the number of shares of a new class of
nonvoting common stock required to limit its voting control of the Company to
74.0%. Other than voting rights, the rights and privileges of the nonvoting
common stock would have been identical to the Class A Common Stock and would
have automatically converted into Class A Common Stock upon expiration of the
Change of Control Provision.
With respect to strategic issues, the September 18 Proposal adopted prior
Special Committee proposals for a Business Planning Committee and a policy
under which the Company would hold semi-annual analyst conferences, conduct
conference calls concurrent with earnings releases, promote analyst coverage
of its stock and initiate a stockholder relations program. The September 18
Proposal, in addition, provided that following the recapitalization, CGE would
assess various methods of funding capital expenditures on a project-by-project
basis and would give the Company the opportunity to co-invest in the equity of
such projects to the extent the Company had the resources necessary to do so.
CGE further would have agreed not to acquire the Company through a short-form
merger without the approval of the Independent Directors of the Company
through the eighteen-month anniversary of the recapitalization.
On September 19 and 20, the Special Committee and its advisors and CGE and
its advisors continued negotiations. On September 19, the Special Committee
objected, among other things, to the pricing of the rights offering, the use
of Public stockholders' proceeds raised, if any, from the rights offering
being first used to pay down the Company's indebtedness to CGE and Anjou, and
the shortness of the period during which Public stockholders would not have
been subject to a short form merger transaction.
On September 19, 1997, the Special Committee suggested that the terms of the
rights offering provide, among other things, that if Public stockholders did
not exercise at least 50% of their rights in the rights offering, the Public
stockholders' unexercised rights would "roll over" into a deferred
transferable right which, among other terms, could be extended for a period of
three years. The Special Committee, moreover, suggested a discount mechanism
for the rights offering and different pricing of CGE's exchange of its Series
A Preferred Stock. The Special Committee and CGE continued to discuss Section
5.6 of the Investment Agreement.
CGE rejected the deferred rights mechanism and instead proposed that Public
stockholders exercising their rights in the rights offering receive a share of
a fixed pool of warrants, such warrants entitling the holders to acquire
additional shares of Class A Common Stock. Pursuant to its proposal, CGE
reaffirmed its proposed subscription price in the rights offering, and its
proposed exchange price for its Series A Preferred Stock, of $1.75 per share.
CGE also suggested that the first $10 million of any Public proceeds raised by
the rights offering be retained by the Company, with any additional Public
proceeds then being used to pay down the CGE Note and Anjou Note. CGE also
offered to extend to a period of up to two and one-half years, the period
during which it agreed not to acquire the Company through a short-form merger
without approval of the Independent Directors of the Company.
40
<PAGE>
On September 20, 1997, the Special Committee rejected CGE's proposed warrant
structure and expressed a willingness to consider a rights offering with a
minimum subscription price of $1.75, or an 18% discount from the market price
of the Class A Common Stock, whichever was higher, with the additional
requirement that CGE exchange its Series A Preferred Stock at an exchange
price equal to the subscription price and agree to subscribe, if necessary,
for unexercised rights sufficient to pay down the CGE Note and the Anjou Note.
The Special Committee also suggested a restructuring of the pool of warrants
to be issued to Public stockholders, including, among other things, the
ratable issuance of up to 10,000,000 warrants with an exercise price of $2.49.
The exercise price of the warrants was based on a 12.5% annual rate of
accretion. The Special Committee and CGE continued to discuss other terms,
including the use of Public proceeds, if any, raised from the rights offering
and limitations on CGE's ability to acquire the Company through a short-form
merger within a specified time period to be determined.
CGE accepted the Special Committee's warrant formulation and sought a
ceiling price of $2.50 for the subscription price in the rights offering. CGE
also indicated a willingness to limit its ability to dilute the Public
stockholders by setting a cap on its own subscription rights at $185 million
in the rights offering. After additional meetings and discussions, the parties
reached an oral agreement in principle on the terms of the Recapitalization.
From September 21 to 24, CGE and the Special Committee (and their respective
advisors) negotiated the written terms of the Recapitalization Agreement.
The Recapitalization Agreement
In the afternoon of September 24, 1997, the Special Committee (i) determined
that the Recapitalization is fair to, and in the best interests of, the
Company and its stockholders (other than CGE and its subsidiaries) and (ii)
resolved to approve and recommend the Recapitalization Agreement and the
transactions contemplated thereby to the Board of Directors of the Company,
having taken into account, among other things, the written opinion of WP&Co.
to the effect that as of such date, and based upon and subject to the
assumptions and limitations set forth therein, the financial terms of the
Recapitalization Transactions (as defined in the opinion) taken as a whole
were fair to the holders of the Class A Common Stock (other than CGE and its
subsidiaries) from a financial point of view. Later that same day, the Special
Committee met with the Board of Directors of the Company. Following the report
of the Special Committee, the Board of Directors of the Company unanimously
(i) determined that the Recapitalization is fair to, and in the best interests
of, the Company and its stockholders and (ii) resolved to approve and adopt
the Recapitalization and the transactions contemplated thereby subject to the
terms and conditions thereof.
On September 24, 1997, the Company, CGE and Anjou entered into the
Recapitalization Agreement. The Company and CGE issued a joint press release
announcing that they had entered into a definitive agreement with respect to
the recapitalization of the Company. On September 25, 1997, the Company issued
a press release supplementing the press release of September 25, 1997, for the
purpose of clarifying the effect of an amendment to the Indenture to eliminate
the Change of Control Provision.
REASONS FOR THE RECAPITALIZATION
Special Committee
The Special Committee met with its financial and legal advisors on 18
different occasions from July 10, 1997 to September 24, 1997 to review the
July 10 Proposal, evaluate the Company and its financial and business
condition and its prospects, consider alternatives presented by its financial
and legal advisors and respond to alternative CGE proposals. CGE and the
Special Committee met on five different occasions during this time period and
its respective advisors had discussions in addition to these occasions. In
considering and evaluating recapitalization proposals, the Special Committee
considered a number of factors in reaching its decision. It did not quantify,
rank or otherwise assign relative weights to the factors discussed below.
The Special Committee considered the business, results of operations,
financial condition, assets, liabilities, business strategy and prospects for
the Company. The members of the Committee were generally familiar in respect
of such matters and further informed themselves in the course of their
evaluation. Among other things,
41
<PAGE>
the Special Committee considered the financial analysis of its financial
advisor, WP&Co., and its view that the common equity of the Company lacked any
intrinsic value at this time, the disappointing historical operations and
financial performance of the Company, the current condition of the business,
including the highly leveraged nature of its balance sheet, the content and
relative reliability of internal projections, management tenure at the
operating levels, the potential impact of the DOJ Investigation of certain
matters related to PSG, the status and prospects for Research-Cottrell, the
Company's standing with the Lending Banks and USF&G, the Company's overall
liquidity, and the impact of such matters on the Company's ability to meet its
customer's expectations and needs for current and future contracts.
In reaching its decision, the Special Committee took into account the
opinion of WP&Co. which was delivered on September 24, 1997. WP&Co. advised
the Special Committee, subject to the assumptions and limitations described in
its opinion (including the limitation that WP&Co. is not opining as to any
individual term of the Recapitalization Agreement), that the financial terms
of the Recapitalization Agreement, taken as a whole, are fair from a financial
point of view to the Public stockholders. A copy of the opinion of WP&Co. is
attached as Annex A to this Prospectus. Such opinion should be read in its
entirety for a description of the opinion expressed, procedures followed,
matters considered and limitations of review undertaken in connection with
such opinion. The Special Committee considered such opinion and the several
presentations made by WP&Co. to support its decision as well as the multiple
alternatives considered and rejected by WP&Co. and the Special Committee.
The Recapitalization Agreement, in the Special Committee's view, was reached
after long, difficult and active negotiations. As discussed above, the Special
Committee sought to meet three general principles: (i) to place the Company on
a financially viable basis, (ii) to establish a demonstrably effective long-
term business strategy for the Company, and (iii) to provide liquidity for the
Public stockholders in a fair, active and reliable trading market. In its
view, it achieved these principles in an arm's-length independent manner with
the advice of its independent financial and legal advisors by approving a
program that would successfully deleverage the Company's balance sheet, create
a structure to implement an effective business strategy, minimize the dilutive
effects to the Public stockholders of a necessary recapitalization and
maximize the Public stockholders' ability to participate in the Company's
progress free of the threat of an unfair short-form merger during the next
three years, among other elements of the Recapitalization Agreement.
In this regard, the Special Committee believes that the following factors
are reasons in support of the Recapitalization:
(i) Through the elimination of $185 million in debt and the Series A
Preferred Stock, the Recapitalization Agreement substantially reduces the
Company's interest and dividend requirements and enhances the Company's
ability to fund its working capital requirements, capital expenditures and
other corporate needs.
(ii) The Recapitalization Agreement calls for CGE to support the
Company's surety bond relationship with USF&G through consummation of the
Recapitalization. This step permits the Company to continue to do business
in the ordinary course.
(iii) The execution of the Recapitalization Agreement and its closing
should permit the Company to resume normal commercial banking
relationships.
(iv) The Recapitalization Agreement offers less dilution to the Public
stockholders in its worst case (10.7% Public stockholder ownership) than
the worst case arising under the July 10 Proposal (3.4% Public stockholder
ownership with the reset mechanism) and is not materially different than
the July 10 Proposal without the reset mechanism in a worst case (11.4%
Public stockholder ownership).
(v) Taking into account the Warrants issuable to Public stockholders in
the Rights Offering, and assuming full Public stockholder participation in
the Rights Offering, the Recapitalization offers more Public stockholder
ownership potential--31.4% (assuming a Subscription Price of $1.75) or
37.3% (assuming a Subscription Price of $2.50)--than the Public
stockholders would have had under the July 10 Proposal (27.8%).
42
<PAGE>
(vi) The Rights Offering provides the Public stockholders value in the
form of transferable Rights that may be resold in lieu of exercise by the
receiving Public stockholder. This factor assumes that the Rights will have
value.
(vii) The commitment by the Company and CGE to a timely and coordinated
roadshow enhances the ability of Public stockholders and other potential
investors to make informed judgments on whether and how to participate in
the Rights Offering. No such commitment was made in the July 10 Proposal.
(viii) Through the Warrants (which are received by a subscribing Public
stockholder in the Rights Offering), the stockholder is able to defer a
further investment in the Company until the stockholder has seen
substantial evidence of the Company's progress of recovery. The Warrants
are available to subscribing Public stockholders and not to CGE. Because
the warrants are transferable, the warrants should have value even if not
exercised by the holder thereof.
(ix) The Recapitalization does not contemplate the triggering of the
Change of Control Provision set forth in the Indenture.
(x) The stated commitment of CGE to work with the Company in developing
further sources of capital for the Company is an important statement of
assurance to the Company's Public stockholders, customers, creditors, and
employees.
(xi) CGE's agreement not to effect a short-form merger under applicable
Delaware law for three years without the approval of a majority of the
Independent Directors of the Company (as defined in the Investment
Agreement) protects the Public stockholders' ability to benefit from the
Company's recovery in such time period.
(xii) The newly created Business Planning Committee is an appropriate
means to refine and implement a demonstrably effective business strategy
and to identify areas where CGE's water management expertise and resources
and the Company's business could be effectively integrated with those of
the Company.
(xiii) The Recapitalization Agreement requires the Company to take steps
designed to obtain better financial market coverage of its affairs and to
take other steps aimed at improving the investment community's
understanding of the Company and thus to improve the quality of the trading
market in the Common Stock.
(xiv) If the Public stockholders invest in the Rights Offering, up to $25
million of such investments will be used by the Company in its business and
will not be used to repay the Company's debt obligations to CGE and its
affiliates. Under the July 10 Proposal if all Rights were exercised, the
maximum amount of proceeds which would remain in the Company would have
been $10 million.
(xv) Upon consummation of the Recapitalization, the Class A Common Stock
is expected to have intrinsic value which is higher generally, the Special
Committee believes, than the range of intrinsic values implied in the July
10 Proposal.
(xvi) The Recapitalization permits Public stockholders to realize value
for their shares which, the Special Committee believes, would have been
unavailable or lower in a Chapter 11 reorganization, liquidation or certain
other transactions involving the Company and third parties.
Company Board
On September 24, 1997, the Board of Directors of the Company unanimously (i)
determined that the Recapitalization is fair to, and in the best interests of,
the Company and its stockholders, and (ii) resolved to approve and adopt the
Recapitalization Agreement and the transactions contemplated thereby subject
to the terms and conditions thereof. In reaching such determinations, the
Board of Directors of the Company considered the following factors, each of
which, in the view of the Board, supported such determinations: (i) the
conclusions and recommendations of the Special Committee; (ii) the factors
referred to above as having been taken into account by the Special Committee,
including the receipt by the Special Committee of the opinion of WP&Co.,
43
<PAGE>
that subject to the assumptions and limitations described in its opinion
(including the limitation that WP&Co. is not opining as to any individual term
of the Recapitalization Agreement), that the financial terms of the
Recapitalization Transactions (as defined in the opinion) taken as a whole are
fair from a financial point of view to the Public stockholders, (iii) the fact
that the terms and conditions of the Recapitalization Agreement were the
result of arm's-length negotiations between the Special Committee and CGE and
(iv) the financial position of the Company as disclosed in the 10-Q.
The members of the Board of Directors of the Company, including the members
of the Special Committee, evaluated the Recapitalization in light of their
knowledge of the business, financial condition and prospects of the Company,
and based upon the advice of financial and legal advisors. In light of the
number and variety of factors that the Board of Directors of the Company and
the Special Committee considered in connection with their evaluation of the
Recapitalization, the Board of Directors of the Company did not find it
practicable to assign relative weights to the foregoing factors, and
accordingly, the Board of Directors of the Company did not do so.
The Board of Directors of the Company, including the members of the Special
Committee, believes that the Recapitalization is procedurally fair because,
among other things: (i) the Special Committee consisted of Independent
Directors appointed to represent the interests of the stockholders other than
CGE; (ii) the Special Committee retained and was advised by independent legal
counsel; (iii) the Special Committee retained WP&Co. as its independent
financial advisor to assist it in evaluating a proposed recapitalization and
received advice from WP&Co.; (iv) the deliberations pursuant to which the
Special Committee evaluated the proposed recapitalization and alternatives
thereto were procedurally fair; and (v) the terms and conditions of the
Recapitalization Agreement resulted from active arm's-length bargaining
between representatives of the Special Committee, on the one hand, and
representatives of CGE on the other.
ROLE OF FINANCIAL ADVISOR
In connection with the review of the Recapitalization, the Special Committee
retained an independent financial advisor to assist it in its consideration of
valuation, financial and other matters relating to the transactions
contemplated by the Recapitalization Agreement. In this regard, the Special
Committee retained WP&Co. as its financial advisor, and WP&Co. has acted
exclusively in such capacity and is not, among other things, acting as
underwriter for or otherwise participating in the distribution of the
securities being offered hereby.
Prior to the establishment of the Special Committee to review CGE's
recapitalization proposal, the Company had engaged Lazard Freres in January
1997 to develop a preliminary recapitalization plan and to assess the
possibility of de-emphasizing the Research-Cottrell business segment and
redeploying capital to the PSG and Metcalf & Eddy segments. The Special
Committee retained WP&Co. in July 1997 to assist the Special Committee in its
review of the recapitalization proposal presented by CGE to the Company.
During the course of the assignment, WP&Co. conducted business and financial
due diligence with respect to the Company and CGE's initial recapitalization
proposal of July 10, 1997. During that time, WP&Co. interviewed corporate
executives of the Company, management of the Company's operating subsidiaries,
and met with the Company's financial advisor, Lazard Freres. WP&Co. also held
meetings with CGE's financial advisor, Houlihan Lokey, in an effort to
understand the purposes, operation and implications of CGE's recapitalization
proposals. WP&Co.'s analysis has taken into consideration, among other things,
financial information provided by the Company and others; several alternative
business plans with accompanying financial projections provided by management;
independent financial and business information compiled by WP&Co.; and
responses to WP&Co.'s questions with respect to the Company and the objectives
the Special Committee sought to achieve in a recapitalization.
In approving the Recapitalization Agreement for consideration by the Board
of Directors of the Company after determining that the Recapitalization
Agreement was desirable and in the best interests of the Company and its
Public stockholders, the Special Committee considered the views and the
written opinion of WP&Co., dated September 24, 1997 (the "WP&Co. Opinion"),
described below.
44
<PAGE>
Opinion of Wasserstein Perella & Co., Inc.
The Special Committee retained WP&Co. to assist in evaluating the terms of
and responding to a recapitalization proposal from CGE. WP&Co. was not
authorized to and did not (i) solicit bids or conduct an auction for the sale
of the Company or (ii) solicit alternative proposals to the Recapitalization
from any person other than CGE. The WP&Co. Opinion does not address the
Company's or the Special Committee's underlying business decision to effect the
Recapitalization nor does it address the fairness of any individual term of the
Recapitalization Agreement. In addition, WP&Co. expresses no opinion as to the
price at which the shares of Class A Common Stock, the Rights or the Warrants
will actually trade at any time or as to the fairness to any stockholder or the
Company of the Subscription Price or the Warrant Exercise Price. The WP&Co.
Opinion does not constitute a recommendation that any stockholder should
exercise its Rights or Warrants and should not be relied upon by any holder as
such or as to the manner in which any stockholder should vote with respect to
the Recapitalization. The terms of the Recapitalization Agreement were
determined in arm's length negotiations between CGE and the Special Committee
in which negotiations the Special Committee was advised by WP&Co. No
restrictions or limitations were imposed upon WP&Co. with respect to the
investigations made or procedures followed by WP&Co. in rendering its opinion.
A copy of the WP&Co. Opinion is attached as Annex A to this Prospectus.
Stockholders are urged to read the WP&Co. Opinion in its entirety for
information with respect to the procedures followed, assumptions made, matters
considered and limits of the review by WP&Co. in rendering its opinion.
References to the WP&Co. Opinion herein and the summary of the WP&Co. Opinion
set forth below are qualified by reference to the full text of the WP&Co.
Opinion, which is incorporated herein by reference.
As discussed above, on July 10, 1997, the Special Committee, its legal
advisors and WP&Co. met with, among other persons, CGE and its financial and
legal advisors to receive CGE's July 10 Proposal. Thereafter, both upon
concluding its initial due diligence of the financial and business condition of
the Company and during the course of its representation of the Special
Committee, WP&Co. held meetings (in person or by telephone) with the Special
Committee and its legal counsel, and with CGE's various advisors on numerous
occasions.
On August 8, 1997, after concluding initial due diligence, WP&Co. provided to
the Special Committee an initial summary overview of the financial and business
condition of the Company and of the initial CGE recapitalization proposal of
July 10, 1997, in comparison to various other alternatives available to the
Company. WP&Co. continued to perform due diligence after this date. On August
20, 1997, WP&Co. and the Special Committee's legal counsel met with CGE's
financial and legal advisors to discuss preliminary reactions to CGE's July 10
proposal. Subsequently, the Special Committee and its advisors, including
WP&Co., met with CGE and its advisors regarding recapitalization discussions on
five occasions and held numerous other telephonic discussions in various
working group combinations to continue recapitalization discussions.
On September 24, 1997, WP&Co. made its final presentation to the Special
Committee with respect to the Recapitalization Agreement that had been
negotiated between CGE and the Special Committee, which presentation was
accompanied by delivery of its written opinion dated the same date, to the
effect that, as of such date, and based upon and subject to the assumptions and
limitations set forth in such opinion, the financial terms of the
Recapitalization Transactions (as defined in the WP&Co. Opinion), taken as a
whole, are fair from a financial point of view to the holders of the Class A
Common Stock (other than CGE and its affiliates). Following WP&Co.'s September
24, 1997 presentation, the Special Committee and the Company's Board of
Directors separately authorized the Recapitalization Agreement on that same
date.
WP&Co.'s September 24 presentation to the Special Committee included a
summary and analysis of the Recapitalization Agreement, a comparison of the
Recapitalization Agreement to the July 10 Proposal, various financial analyses
of the Company, an analysis of the business of the Company and a discussion of
general developments in the industries in which the Company is involved. A
summary of certain of the analyses performed by WP&Co. is set forth below under
"Summary and Analysis of the Recapitalization Proposal."
45
<PAGE>
In arriving at its opinion, WP&Co. reviewed, among other things, (i) drafts
of the Recapitalization Agreement, (ii) certain publicly available business
and financial information with respect to the Company, including publicly
available consolidated financial statements of the Company for recent years
and interim periods that were available as of the date of the WP&Co. Opinion,
(iii) certain internal financial and operating information, including
financial forecasts, analyses and projections prepared by or on behalf of the
Company and provided by or on behalf of the management of the Company to
WP&Co. for purposes of its analysis and (iv) certain financial and stock
market data relating to the Company. WP&Co. then compared such data with
similar data for certain other companies, the securities of which are publicly
traded, that WP&Co. believed to be relevant or comparable in certain respects
to the Company or one or more of its businesses or assets. In evaluating the
Company's financial condition and prospects, WP&Co. considered, among other
things, limitations placed by the Company's banks on its ability to borrow
amounts otherwise available under its banking facilities and the necessity of
seeking waivers in order to avoid an event of default under such facilities,
the expected suspension of certain USF&G bonding arrangements as of September
30, 1997, the pending DOJ Investigation with regard to certain activities of
PSG, the involuntary cessation of quotation of the Company's Convertible
Debentures on the Nasdaq SmallCap Market and the notification by AMEX that the
Company no longer meets certain requirements for its Class A Common Stock to
be listed on AMEX. WP&Co. also considered the implications of the Company's
capital structure to bidding for contracts being awarded by municipalities and
other entities.
WP&Co. met with management of the Company to review and discuss, among other
matters, the Company's business, operations, assets, financial condition and
future prospects as well as its financial difficulties, liquidity constraints,
difficulty in funding operations in the ordinary course and certain contingent
liabilities identified in the Company's public filings. In addition, WP&Co.
performed such studies, analyses and investigations and reviewed such other
information as it considered appropriate for purposes of arriving at and
preparing the WP&Co. Opinion.
In rendering its opinion, WP&Co. relied upon and assumed the accuracy and
completeness of, without independent verification, all of the financial and
other information that was available to it from public sources or that was
provided to it by the Company or its representatives. WP&Co. relied upon the
reasonableness and accuracy of the financial projections, forecasts and
analyses provided to it and WP&Co. assumes that such projections, forecasts
and analyses (as such were modified by management of the Company in the course
of WP&Co.'s assignment) were reasonably prepared in good faith and on bases
reflecting the best currently available judgments and estimates of the
Company's management. WP&Co. expresses no opinion with respect to such
projections, forecasts and analyses or the assumptions upon which they are
based. In addition, WP&Co. did not, and was not requested to, review any of
the books and records of the Company, or conduct a physical inspection of the
properties or facilities of the Company, or make or obtain an independent
valuation or appraisal of the assets or liabilities of the Company, and WP&Co.
was not provided with any such independent valuation or appraisal.
In arriving at its opinion, WP&Co. assumed that the final form of the
Recapitalization Agreement document would not differ in any material respect
from the drafts provided to it and that the Recapitalization Transactions
would be consummated on the terms set forth or provided for in the
Recapitalization Agreement, without material waiver or modification. In
addition, WP&Co. assumed that the terms of the definitive agreement evidencing
the Warrants will reflect the terms of the Warrants as set forth on Exhibit A
to the Recapitalization Agreement, but noted that WP&Co. had not been provided
with any drafts of such definitive agreement. Furthermore, WP&Co. assumed
that, prior to completing the Rights Offering, the Company would adopt an
amendment to its Restated Certificate of Incorporation in the form of Exhibit
B to the Recapitalization Agreement.
The WP&Co. Opinion is based on economic and market conditions and other
circumstances as they existed and were evaluated by WP&Co. as of the date of
the WP&Co. Opinion. WP&Co. has no duty or obligation to advise the Company or
any other person of any change in any fact or matter affecting its opinion of
which it becomes aware after the date of its opinion. WP&Co.'s valuation
analyses of the Company necessarily required it to make a broad range of
subjective judgments as to appropriate comparable companies and
recapitalizations
46
<PAGE>
and appropriate multiples of various selected financial data and appropriate
discount rates. WP&Co. relied upon its experience in valuing companies to
select data that enabled WP&Co. to perform the valuation analyses necessary to
permit it to arrive at its opinion.
Summary and Analysis of the Recapitalization
At the September 24, 1997 meeting of the Special Committee, WP&Co. presented
its analysis of the material terms of the Recapitalization. In addition,
WP&Co. reviewed with the Special Committee certain financial, business and
historical stock market information with respect to the Company, and the
procedures used in arriving at, and the analyses underlying, the WP&Co.
Opinion. The summary set forth below does not purport to be a complete
description of the analyses relating to the WP&Co. Opinion. The preparation of
a fairness opinion is a complex process that is not purely mathematical and is
not necessarily susceptible to partial analyses or summary description.
Stockholders are urged to review WP&Co.'s written opinion in its entirety.
Summary Implied Valuation of the Company
Discounted Cash Flow Analysis. WP&Co. performed a discounted cash flow
analysis of the business of the Company on a subsidiary-by-subsidiary basis
excluding Research-Cottrell. A discounted cash flow analysis is a traditional
valuation methodology used to derive a valuation of a corporate entity by
capitalizing estimated future earnings and calculating the estimated future
unlevered free cash flows of such corporate entity (unlevered net income plus
deprecation and amortization, less capital expenditures and changes in working
capital) and discounting such aggregated results back to a present value using
a range of risk-adjusted discount rates (representing a range of risk-adjusted
costs of capital for companies with similar and/or appropriate business
portfolios than the applicable division). The WP&Co. discounted cash flow
analysis considered the projected operating performance of the Company for the
years ended October 31, 1998, through 2000 based on a management case
utilizing projections prepared by the Company's management for PSG as of May
1997 (the "May 1997 PSG Projections") and for Metcalf & Eddy as of May 1997
(the "May 1997 M&E Projections") and as of July 1997 (the "July 1997 M&E
Projections"). WP&Co. conducted various analyses in the course of its due
diligence to evaluate the reasonableness of the projections, including a
review of historical financial data of PSG and Metcalf & Eddy to analyze the
relationship between projected and actual results, review of unusual expense
items for the latest twelve months, and interviews with senior management of
the Company and its subsidiaries. The July 1997 M&E Projections reflect the
Company's senior management's expectations for the financial performance of
Metcalf & Eddy at that time and reflect a downward revision of the May 1997
M&E Projections in light of earlier downward revisions to the 1997 Metcalf &
Eddy forecast to reflect actual operating results and expectations for future
periods and also exclude the results of two projected acquisitions that were
included in the May 1997 M&E Projections.
Discount rate ranges utilized ranged from 13.0% to 15.0% in the case of PSG
and Metcalf & Eddy. The sum of the present values of such cash flows was then
added to the present value of the applicable subsidiary's terminal value in
2000. The terminal value was calculated by multiplying the earnings before
interest, taxes, depreciation and amortization ("EBITDA") for fiscal year 2000
by multiples ranging from 6.0x to 7.0x (in the case of PSG) to 5.0x to 6.0x
(in the case of Metcalf & Eddy). Based on this analysis, WP&Co. calculated a
pre-tax valuation reference range of $116 million to $150 million for PSG
(utilizing the May 1997 PSG Projections). In addition WP&Co. calculated a pre-
tax valuation reference range of $138 million to $170 million for Metcalf &
Eddy (utilizing the May 1997 M&E Projections) and of $61 million to $74
million for Metcalf & Eddy (utilizing the July 1997 M&E Projections).
With respect to the discounted cash flow analysis, WP&Co. noted that the
selection of an appropriate discount rate is an inherently subjective process
and is affected by such factors as the Company's cost of capital, the
uncertainty associated with achieving the projections provided by the
management of the Company and transaction risk generally. WP&Co. also noted
that discounted cash flow analysis is a widely used valuation methodology, but
that it relies on numerous assumptions regarding the future performance of a
company and the future economic environment, including earnings growth rates,
unlevered free cash flows, terminal values and
47
<PAGE>
discount rates, all of which are inherently uncertain because they are
predicated upon future events and circumstances not under the Company's
control.
Comparable Companies. WP&Co. analyzed stock price performance and operating
performance of the Company and certain selected comparable companies to
conduct a comparable companies analysis. WP&Co. considered a variety of
multiples and other financial information for the companies, including
multiples of Enterprise Value to Sales, Enterprise Value to EBITDA, and
Enterprise Value to earnings before interest and taxes ("EBIT"), and Market
Value as a multiple of Net Income and Book Value. Comparable companies
utilized in the analysis for the Company included ATC Group Services, Dames &
Moore, Harding Lawson, ICF Kaiser International, International Technology, Ohm
Corp, Roy F. Weston, Terra Tech, and U.S. Filter.
The comparable corporations were chosen because they are publicly traded
companies with operations that, for purposes of this analysis, may be
considered to be similar to the operations of the Company. WP&Co. observed
that comparable company analysis is subject to certain limitations, including
the fact that no individual company has a business mix that precisely mirrors
that of any division of the Company and the analysis has limited applicability
to a loss-making business. Accordingly, an assessment of the results of
WP&Co.'s analysis necessarily involves certain considerations and judgments
concerning differences in the financial and operating characteristics of each
subsidiary which could affect the implied trading values of the companies to
which it is being compared.
Based on such calculations, WP&Co. determined that the appropriate range of
valuation multiples for PSG was .4x to .6x for revenue, 7.5x to 8.5x for
EBITDA, and 10.5x to 11.5x for EBIT. Likewise, WP&Co. determined that the
appropriate range of multiples for Metcalf & Eddy was 0.4x to 0.5x for
revenue, 6.0x to 8.0x for EBITDA, and 9.0x to 10.0x for EBIT. WP&Co. applied
such multiples of PSG to the subsidiary's 1998 operating projections to arrive
at the following revenue, EBITDA and EBIT valuation ranges for PSG: $125
million to $187 million for revenue, $157 million to $178 million for EBITDA
and $121 million to $132 million for EBIT. Likewise, WP&Co. applied such
multiples of Metcalf & Eddy to the subsidiary's 1998 operating projections
(utilizing management projections for Metcalf & Eddy as of July 1997) to
arrive at revenue, EBITDA and EBIT valuation ranges for Metcalf & Eddy as
follows: $78 million to $98 million for revenue, $76 million to $102 million
for EBITDA and $55 million to $61 million for EBIT. Utilizing management
projections for Metcalf & Eddy as of May 1997, WP&Co. arrived at the following
revenue, EBITDA and EBIT valuation ranges for Metcalf & Eddy: $90 million to
$113 million for revenues, $119 million to $158 million for EBITDA, and $119
million to $132 million for EBIT.
Comparable Acquisitions Analysis. WP&Co. reviewed and analyzed certain
financial information based on eleven selected mergers and acquisitions in
industries considered comparable to the Company between 1993 and 1996.
Comparable acquisitions (listed by acquiror/acquiree) for the Company included
Heidemij N.V./Geraghty & Miller, Inc.; OHM Corp./Environmental Remediation
Services of Rust International; Insituform Technologies/Insituform Mid-
America; Fluor Daniel/Groundwater Technology Inc.; U.S. Filter Corp./Zimpro
Environmental Inc.; U.S. Filter Corp./Davis Water & Waste Industries; U.S.
Filter Corp./Utility Supply Group; U.S. Filter Corp./WaterPro; U.S. Filter
Corp./Water Systems and Manufacturing Group of Wheelabrator Technologies;
Rollins Environmental Services/Laidlaw Environmental Services; and USA Waste
Services/Mid-American Waste. WP&Co. considered certain financial information
related to those transactions, including multiples of Enterprise Value to
Sales, Enterprise Value to EBITDA, and Enterprise Value to EBIT.
The comparable transactions were chosen because, for the purpose of this
analysis, the acquired companies may be considered to be similar to the
operations of the Company. WP&Co. observed that comparable acquisitions
analysis is subject to certain limitations, including that the analysis does
not take into account the timing of the transactions, no single transaction is
precisely comparable in business characteristics and market conditions, there
is a scarcity of public disclosure on terms of comparable transactions and the
financial performance of acquirees and the analysis has limited applicability
to financially distressed businesses. Accordingly, an analysis of the results
of the foregoing necessarily involves certain considerations and judgments
concerning differences in the financial and operating characteristics of the
Company and certain other
48
<PAGE>
characteristics that could affect the derived value of the transactions to
which the Company is being compared. WP&Co. also noted that the particular
circumstances surrounding the business and financial condition of the Company,
including its financial distress, the changes in its market base, its
substantial ownership and control by CGE, and legal uncertainties surrounding
PSG make a control premium implied in a comparable transactions analysis not
as meaningful. In arriving at its range of enterprise valuations for the
Company, WP&Co. noted that it did not give significant weight to the multiples
and values implied in the comparable acquisitions analysis.
Enterprise Valuation. WP&Co. determined the enterprise value of the Company
to be the sum of valuations for each of its PSG and Metcalf & Eddy businesses
using discounted cash flow and comparable companies analysis. WP&Co.'s
valuation analysis included a value for Research-Cottrell, which value was
provided to WP&Co. by Lazard Freres, which has been engaged by the Company to
assist in exploring various strategic alternatives for Research-Cottrell
including a possible disposition of the Research-Cottrell business, based upon
preliminary expressions of interest proposed by potential acquirors of
Research-Cottrell. WP&Co.'s valuation analysis also included the discounted
cash flow analysis of the corporate overhead costs of the Company at $30
million to $33 million utilizing rates of 10.0% to 11.0% and a terminal
multiple of 5.5x to 6.0x. Based on the Company's May 1997 projections for PSG
and Metcalf & Eddy, and corporate overhead and values for Research-Cottrell
(as provided to WP&Co.), WP&Co. determined that the enterprise value of the
Company was between $272 million to $325 million. Based on the revised July
1997 forecast for Metcalf & Eddy, the enterprise value of the Company would be
between $207 million and $260 million. The management projections from May,
1997 were favored as a basis of valuation because these represented the only
comprehensive set of projections that were prepared and reviewed by senior
management and business division heads available from management. WP&Co. also
conducted a sensitivity analysis on the discount rates and terminal EBITDA
multiples used to determine Enterprise Value. At one end of the range, using a
16.0% discount rate and 5.0x EBITDA multiple applied to PSG and Metcalf &
Eddy, the Enterprise Value of the Company was determined to be $231 million
and at the other end, using a 12.0% discount rate and a 7.5x EBITDA multiple,
the Enterprise Value of the Company was determined to be $377 million (based
on May 1997 projections). WP&Co.'s range of enterprise valuation excludes the
value, if any, arising from the Company's net operating loss carryforwards
because of its potentially limited utilization based on the Company's
projections.
Cash Flow and Liquidity Analysis. WP&Co. conducted a cash flow and liquidity
analysis to evaluate the Company's financial condition. The analysis shows
that assuming a sale of Research-Cottrell in fiscal 1998 and without a
recapitalization, the Company will not be able to meet interest payments for
fiscal year 1999 based on management's July 1997 business projections.
Furthermore, if the Company is unable to use proceeds from such a sale of
Research-Cottrell for general corporate purposes, the Company will run out of
cash during fiscal 1998 (which commences November 1, 1997).
Pro Forma Ownership Effects of the Recapitalization. WP&Co. also analyzed
the pro forma effects of a recapitalization involving CGE under the
Recapitalization Agreement and under other recapitalization alternatives
considered by CGE and the Company. In performing its pro forma analysis WP&Co.
took into account a number of assumptions. For example, in a comparison of the
pro forma effects of the July 10 Proposal with the Recapitalization Agreement,
WP&Co. used an assumed enterprise value of the Company of $300 million, and
calculated EBITDA figures using the July 1997 M&E Projections under various
cases where all stockholders exercised their rights and no Public stockholders
exercised their rights (other than CGE and its affiliates) under specified
subscription and stock prices.
WP&Co. described the pro forma ownership effects on the Company's
stockholders under the Recapitalization Agreement and in comparison to
alternative proposals such as the July 10 Proposal. Assuming full
participation in the Rights Offering under the Recapitalization Agreement at a
Subscription Price of $1.75 per share, the Public stockholders' equity
position would be reduced to approximately 27.8%. At a Subscription Price of
$2.50 per share, that percentage would be 32.9%. Under the case in which only
CGE and its affiliates participated in the Rights Offering at a Subscription
Price of $1.75 per share, the Public stockholders would be diluted down to
10.7%. At a Subscription Price of $2.50 per share, that percentage would be
14.2%. These percentages do not reflect the Warrants to be issued to Public
stockholders who exercise their Rights. Public
49
<PAGE>
stockholders exercising Rights also would receive their respective pro rata
share of the Warrants issued from the Warrant Pool under the Recapitalization
Agreement that would be exercisable at any time up to three years from the
date of issuance into shares of Class A Common Stock at a Warrant Exercise
Price of $2.50 per share. If all of the 10,000,000 Warrants available for
issuance were issued and exercised, the Public stockholder's equity position
would increase by approximately 3.6% from 27.8% to 31.4% at a Subscription
Price of $1.75 per share. At a Subscription Price of $2.50 per share, that
figure would increase from 32.9% to 37.3%.
In contrast WP&Co.'s analysis indicated that, under the July 10 Proposal,
Public stockholders would be diluted down to 3.4% under one outcome, taking
into account the proposed dividend and reset mechanism and assuming the
minimum conversion price of $0.50, or 11.4% in the event the reset mechanism
were eliminated.
Pro Forma Implied Value Per Share Estimates. WP&Co. analyzed the pro forma
implied value per Class A Common Stock share under different subscription
prices on holders of the Company's shares of Class A Common Stock. The pro
forma analysis was based on certain assumptions set forth in the WP&Co.
presentation, including the assumption that the Company had a $300 million
enterprise value. The implied value per share to holders immediately after the
Recapitalization (excluding the value of the Warrants) based on WP&Co.'s
estimates ranged from $1.024 to $0.963 depending, respectively, on whether all
or no Public stockholders exercised their rights at an assumed Subscription
Price of $1.75 per share. If the Subscription Price rose to $2.50 per share,
the estimated pro forma implied value per share to holders (excluding the
value of the Warrant) increased to a range of $1.362 to $1.274 depending,
respectively, on whether all or no Public stockholders exercised their rights.
WP&Co. determined that absent the Recapitalization or a comparable
transaction, the intrinsic value per share to the Public stockholders of the
Company presently is zero.
Value per Warrant. WP&Co., using the Black-Scholes options valuation
methodology and assuming 35% volatility, calculated the theoretical value per
Warrant to be $0.193 given the closing price of the Class A Common Stock on
September 23, 1997 of $1.50 per share; at a market price of $2.50 per share,
the theoretical value per Warrant would be $0.776. WP&Co.observed that while
the Black-Scholes options valuation methodology is the generally accepted
theoretical valuation methodology for warrants, there is significant amount of
judgment involved in determining various variables, such as volatility rates,
for the valuations. WP&Co. noted that the actual market value of each Warrant
may be different from the theoretical value implied by the Black-Scholes
model.
Pro Forma Interest Coverage and Debt Ratios. WP&Co. analyzed the pro forma
impact of the Recapitalization on certain interest coverage ratios and debt
ratios of the Company under different cases where none of the Public
stockholders exercised their Rights and where all of the Public stockholders
exercised their Rights. These analyses showed that the Company's debt to
projected 1998 EBITDA ratio improved from 12.3x prior to Recapitalization to
4.2x to 5.2x after the Recapitalization (depending on whether all or none of
the Public stockholders exercised their Rights), regardless of the
Subscription Price range provided in the Recapitalization. Moreover, the
Company's projected 1998 EBITDA to interest coverage ratio improved from 1.1x
prior to the Recapitalization to 2.6x to 2.2x after the Recapitalization
(depending on whether all or none of the Public stockholders exercised their
Rights), regardless of the Subscription Price range provided in the
Recapitalization.
Analysis of the Company's Position in its Respective Industries. WP&Co.
analyzed and discussed with the Special Committee its views regarding the
current and future competitive position of the Company and each of PSG and
Metcalf & Eddy on a stand-alone basis, including industry-wide factors such as
the potential for market growth in the water and waste-water management
industry through privatization of public projects, and the shift to longer-
term contracts.
Strategic Options. In addition to a stand-alone strategy, WP&Co. reviewed
with the Special Committee the advantages and disadvantages of considering
potential merger or acquisition partners in terms of business ramifications,
potential bidder interest and other factors.
Common Stock Performance Analysis. WP&Co.'s analysis of the performance of
the Company's Class A Common Stock consisted of an historical analysis of
average closing prices and trading volumes each quarter
50
<PAGE>
from August 10, 1989, through June 30, 1997. WP&Co. also reviewed average
closing prices and trading on a weekly basis from the week of August 9, 1996
through September 19, 1997. The Company's Class A Common Stock traded down to
$1.438 per share on September 17, 1997, as a result of negative earnings
results and prospects reported in the Company's 10-Q for the fiscal quarter
ended July 31, 1997; as of September 24, 1997, the September 17 price
represented the lowest price of the Class A Common Stock since the Company
went public at $17.00 in August 1989 and down from a peak of $30.00 in June
1990. For the ninety days ended September 19, 1997 the average closing price
per share of the Company's Class A Common Stock was $3.12 and the average
daily volume was 74,652 shares.
Rights Pricing Analysis. WP&Co. compared subscription price discounts for
fifteen rights offerings since July 1996 based on market prices reflecting the
closing market price as of the offering date, the average closing price over a
30-day period after the offering date, and the average closing price over a
90-day period after the offering date in order to evaluate the Subscription
Price.
The summary set forth above does not purport to be a complete description of
the analyses performed by WP&Co. or of WP&Co.'s presentations to the Special
Committee. WP&Co. believes that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all factors and analyses, could create a misleading view
of the process underlying the WP&Co. Opinion. While the conclusions reached in
connection with each analysis were considered carefully by WP&Co. in arriving
at its opinion, WP&Co. made various subjective judgments in arriving at its
opinion and did not consider it practicable to, nor did it attempt to, assign
relative weights to the individual analyses and specific factors considered in
reaching its opinion. In performing its analyses, WP&Co. made numerous
macroeconomic, operating and financial assumptions with respect to industry
performance, general business, regulatory and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates
incorporated in the analyses performed by WP&Co. are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at
which businesses or companies may be sold. Since such estimates are inherently
subject to uncertainty, WP&Co. does not assume any responsibility for their
accuracy. No company analyzed for comparative purposes is identical to the
Company or the business segment for which a comparison is being made.
Accordingly, an analysis of comparative companies and comparative business
combinations is not simply mathematical but rather involves complex
considerations and judgments concerning financial and operating
characteristics of the companies involved and other factors that affect value.
WP&Co. is an investment banking firm engaged in, among other things, the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Special Committee selected
WP&Co. as its financial advisor because WP&Co. is an internationally
recognized investment banking firm and members of WP&Co. have substantial
experience in transactions such as the Recapitalization and in valuing
companies.
Pursuant to the terms of an engagement letter dated July 18, 1997, the
Company, based on the authorization of the Special Committee, agreed to pay
WP&Co. a fee consisting of (i) a monthly advisory fee of $90,000 due and
payable from the execution of the engagement letter through the later of the
consummation of the Recapitalization and December 31, 1997, (ii) an additional
fee of $300,000 in connection with rendering the WP&Co. Opinion (against which
25% of the monthly advisory fee, up to $150,000, may be credited) and (iii) an
additional contingent fee that is related to the preservation of the Public
stockholders' value in the Company and that is limited to a maximum of
$300,000 and contingent upon the consummation of the Recapitalization. The
Company has also agreed to reimburse WP&Co., whether or not the
Recapitalization is consummated, for its reasonable out-of-pocket expenses,
including all reasonable fees, disbursements and other charges of counsel, and
to indemnify WP&Co. and certain related persons against certain liabilities
relating to or arising out of its engagement, including certain liabilities
under the federal securities laws. The terms of the fee arrangement with
WP&Co., which WP&Co. believes are customary in transactions of this nature,
were negotiated at arm's length between the Company and WP&Co. and the
Company's Board of Directors was aware of such arrangement,
51
<PAGE>
including the fact that a significant portion of the aggregate fee payable to
WP&Co. is contingent upon consummation of the Recapitalization.
In the ordinary course of its business, WP&Co. may actively trade the
securities of the Company for the accounts of WP&Co. and for the accounts of
its customers and, accordingly, may at any time hold a long or short position
in such securities.
THE EXCHANGE
In the Exchange, at the close of business on the trading day immediately
preceding the Record Date of the Rights Offering, CGE's 1,200,000 shares of
Series A Preferred Stock (representing all of the issued and outstanding
shares of Series A Preferred Stock of the Company) were automatically
exchanged for shares of Class A Common Stock at an exchange price equal to
the Subscription Price. Immediately following the Exchange, CGE beneficially
owned approximately % of the outstanding Class A Common Stock of the Company.
THE RIGHTS OFFERING
The Recapitalization Agreement provides that the Company will conduct the
Rights Offering and sets forth certain terms thereof, including the number of
Rights to be distributed, the Subscription Price, the Basic Subscription
Privilege, the Oversubscription Privilege, the issuance of Warrants and the
Conditional CGE Subscription. For a description of the Rights Offering, see
"The Rights Offering."
CONSENT SOLICITATION; ISSUANCE OF CLASS B COMMON STOCK
Concurrently with the Rights Offering, the Company is conducting the Consent
Solicitation to eliminate the Change of Control Provision in the Indenture. In
the event the Requisite Consents are not obtained prior to the Expiration Date
and the exercise of the Basic Subscription Privilege or Oversubscription
Privilege or the Conditional CGE Subscription would cause a person's
beneficial ownership of Class A Common Stock to exceed 74%, the Company shall
issue to such person only such number of shares of Class A Common Stock as
would cause such person's beneficial ownership of the Company's voting power
to equal 74% of the outstanding voting power and any additional shares to be
issued thereunder shall be shares of Class B Common Stock. The Class A Common
Stock and the Class B Common Stock are identical in all respects except that
(i) the Class B Common Stock is not entitled to vote and (ii) the Class B
Common Stock converts into Class A Common Stock immediately upon the earlier
of August 1, 2000 or seventy-five days following the termination of the Change
of Control Provision. Based upon the current ownership of Class A Common
Stock, the Company does not believe that any stockholder other than CGE would
be issued Class B Common Stock in the event the Company fails to obtain the
Requisite Consents.
OTHER
Business Planning Committee
In connection with the Recapitalization, the Board of Directors of the
Company has agreed to establish the Business Planning Committee, a five-member
committee of the Board of Directors comprised of three CGE appointed directors
and two directors who are unaffiliated with and independent of CGE, to review
the business strategies prepared by the senior management of the Company and,
as appropriate, make recommendations on the formulation and implementation of
those strategies that have as their objective increasing stockholder value.
Among other things, the Business Planning Committee will identify areas where
CGE's management expertise and the Company's business may be effectively
integrated. The Business Planning Committee will remain in place through the
end of fiscal 1999.
Analyst Conferences
The Board of Directors of the Company also has agreed, for as long as shares
of Class A Common stock of the Company are traded on the AMEX or any other
national securities exchange or national quotation system, to
52
<PAGE>
cause management of the Company to hold semi-annual analyst conferences,
conduct conference calls concurrent with earnings releases, promote analyst
coverage of its stock and initiate a stockholder relations program.
USF&G Bonding Guarantees
CGE and the Company also have agreed that from September 30, 1997 and
continuing until the consummation of the Recapitalization, CGE (or one of its
affiliates) will enter into guarantees of certain obligations of the Company
relating to the bonding of certain contracts under the Master Surety Agreement
dated as of October 31, 1995 between USF&G and the Company and its
subsidiaries. In consideration, CGE (or one of its affiliates) will receive
assurances from USF&G that, in the event of a default by the Company, USF&G
will assign and transfer to CGE (or one of its affiliates) any and all of
USF&G's resultant rights in the bonded commercial contract (whether arising
under the Master Surety Agreement, or by operation of law, or otherwise). Any
such arrangement will be negotiated between CGE and USF&G. See "Summary--
Recent Developments" and "Risk Factors--Bonding."
No Short-Form Merger
In addition, in connection with the Recapitalization, CGE has agreed for a
period of three years from the Closing Date of the Recapitalization not to
acquire the Company by way of a short-form merger without the approval of a
majority of the Independent Directors of the Company (as defined in the
Investment Agreement).
Clarification of Investment Agreement
The Recapitalization Agreement also amends and restates the exclusivity
provision of the Investment Agreement to clarify that the exclusivity
provision in the original Investment Agreement should apply to both water
management and wastewater management activities, but should not apply to those
businesses and contractual arrangements in existence at the time the
Investment Agreement was entered into and or to OTV-Kruger. See "Certain
Relationships and Related Transactions--Covenants of CGE."
Charter Amendment
In order to consummate the Recapitalization, as soon as reasonably
practicable, the Company, acting through the Board, has agreed to duly approve
and adopt an amendment to the Company's Restated Certificate of Incorporation
(i) to increase the number of shares of Class A Common Stock that the Company
is authorized to issue from 100,000,000 shares to 260,000,000 shares, of which
230,000,000 shares would be Class A Common Stock and 30,000,000 shares would
be Class B Common Stock and (ii) to amend the conversion rights of the holders
of the Company's Class B Common Stock to provide for automatic conversion of
shares of Class B Common Stock into Class A Common Stock upon the earlier of
August 1, 2000 or seventy-five days following the termination of the effect of
Section 1501 of the Indenture. In addition, the Company has obtained the
written consent of the Company's stockholders in respect of such amendments to
the Restated Certificate of Incorporation of the Company. CGE and Anjou have
given their written consent to the Company in respect of such amendments.
The Charter Amendment will be effective upon the filing of an appropriate
certificate of amendment with the Secretary of State of the State of Delaware,
which filing is expected to occur as soon as practicable following the
expiration of the twenty calendar day period following the mailing of the
Information Statement.
The obligations of the Company and CGE to consummate the transactions
contemplated by the Recapitalization Agreement are conditioned upon a number
of factors, including, among other things, (i) there being an effective
registration statement under the Securities Act in connection with the Rights
Offering and with respect to the Rights, the Warrants and the Underlying
Shares; (ii) the Company's completion of the Exchange; and (iii) the filing of
any required amendment or amendments to the Restated Certificate of
Incorporation of the Company in connection with the authorization of
additional shares of the Company's common stock and the amendment of the
conversion rights of the holders of the Company's Class B Common Stock.
53
<PAGE>
CAPITALIZATION
The capitalization of the Company at July 31, 1997, as set forth below,
gives effect to the Rights Offering and Exchange as of such date assuming: (i)
that the Exchange has been effected at an exchange price of $1.75 per share,
(ii) a Subscription Price of $1.75 per share, (iii) in the case of the
"Minimum Subscription," no Rights holder other than CGE exercises Rights in
the Rights Offering such that the gross proceeds from the Rights Offering are
$185 million, (iv) that the Requisite Consents are obtained, (v) in the case
of the "Maximum Subscription," full exercise of the Rights by the Public such
that gross proceeds in the Rights Offering are $210 million, (vi) the Charter
Amendment has been effected, (vii) the gross proceeds from the Rights Offering
are used to repay the CGE Note and Anjou Note, and (viii) all fees and
expenses incurred in connection with the Rights Offering are paid out of
available cash of the Company. See "Risk Factors--Indefinite Amount and Use of
Proceeds" and "Use of Proceeds." There can be no assurance that any Public
Rights holder will exercise Rights in the Rights Offering and, consequently,
that gross proceeds in the Rights Offering will exceed $185 million.
The following pro forma capitalization table is presented for informational
purposes only and is not necessarily indicative of the capitalization that
would have occurred if the Rights Offering had been consummated on July 31,
1997, nor is it necessarily indicative of the future capitalization of the
Company.
<TABLE>
<CAPTION>
JULY 31, 1997
--------------------------------------------
AS ADJUSTED AS ADJUSTED
MINIMUM MAXIMUM
HISTORICAL SUBSCRIPTION SUBSCRIPTION
------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term
debt............................ $ 14,391 $ 14,391 $ 14,391
============ ============ ============
Long-term debt:
CGE Note......................... $ 125,000 $ -- $ --
Convertible Debentures .......... 115,000 115,000 115,000
Anjou Note....................... 60,000 -- --
Bank Credit Facility............. 14,000 14,000 14,000
Other............................ 5,313 5,313 5,313
------------ ------------ ------------
319,313 134,313 134,313
Less current portion........... (14,391) (14,391) (14,391)
------------ ------------ ------------
Total long-term debt............... 304,922 119,922 119,922
------------ ------------ ------------
Stockholders' equity (deficit):
Preferred Stock, par value $.01,
authorized 2,500,000 shares;
issued 1,200,000 shares;
liquidation value $60,000....... 12 -- --
Class A Common Stock, par value
$.001, authorized 97,000,000
shares; authorized 230,000,000
shares following the Charter
Amendment; issued 32,109,156
shares (172,109,156 shares, as
adjusted Minimum Subscription;
186,394,870 shares, as adjusted
Maximum Subscription)........... 32 172 186
Class B Common Stock, par value
$.001, authorized 3,000,000
shares; authorized 30,000,000
shares following the Charter
Amendment; issued none.......... -- -- --
Additional paid-in capital....... 427,036 606,908 631,894
Accumulated deficit.............. (456,214) (456,214) (456,214)
Common stock in treasury, at
cost............................ (108) (108) (108)
Cumulative currency translation
adjustment...................... (1,528) (1,528) (1,528)
------------ ------------ ------------
Total stockholders' equity (defi-
cit).............................. (30,770) 149,230 174,230
------------ ------------ ------------
Total capitalization............... $ 274,152 $ 269,152 $ 294,152
============ ============ ============
Book value per common share........ $ (2.83) $ 0.87 $ 0.93
============ ============ ============
</TABLE>
See also the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
54
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements have been prepared by the Company's management from its historical
consolidated financial statements which are contained elsewhere in this
Prospectus. The Unaudited Pro Forma Condensed Consolidated Statements of
Operations of the Company for the nine months ended July 31, 1997 and for the
fiscal year ended October 31, 1996 and the Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of July 31, 1997 have been prepared to
illustrate the estimated effects of the Recapitalization. The Unaudited Pro
Forma Condensed Consolidated Statements of Operations for the nine months
ended July 31, 1997 and for the year ended October 31, 1996 were prepared as
if the Recapitalization was effective as of November 1, 1996 and November 1,
1995, respectively. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet was prepared as if the Recapitalization was effective as of July 31,
1997, assuming, among other things, (i) that the Exchange is effected at an
exchange price of $1.75 per share, (ii) that the Subscription Price is $1.75
per share, (iii) that no Rights holder other than CGE exercises Rights in the
Rights Offering such that gross proceeds from the Rights Offering are $185
million for the "Minimum Subscription" and $210 million for the "Maximum
Subscription," (iv) that the Requisite Consents are obtained, (v) that the
Charter Amendment is effected and (vi) all fees and expenses incurred in
connection with the Rights Offering are paid out of available cash. The pro
forma adjustments described in the accompanying notes are based upon
preliminary estimates and certain assumptions that management of the Company
believes are reasonable in such circumstances. The proceeds of the Rights
Offering have been assumed to be applied as set forth under "Use of Proceeds."
The Rights Offering, however, is not conditioned upon any minimum level of
exercise of Rights by the Public. Consequently, there can be no assurance that
the Rights Offering will raise more than $185 million or that the Public will
participate in the Rights Offering. See "Risk Factors--Indefinite Amount and
Use of Proceeds" and "Use of Proceeds."
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of what the financial position or results of operations
actually would have been if the Recapitalization had occurred on the
applicable dates indicated. Moreover, they are not intended to be indicative
of future results of operations or financial position. Each of the Unaudited
Pro Forma Condensed Consolidated Statements of Operations includes the
historical sales and costs of the Company, adjusted for costs and expenses
which are attributable to the Recapitalization, such as interest expense
impacts resulting from the new capital structure. The unaudited pro forma
condensed consolidated financial statements should be read in conjunction with
the historical consolidated financial statements of the Company and the
related notes thereto which are contained elsewhere in this Prospectus.
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
FOR PRO FORMA FOR PRO FORMA
HISTORICAL MINIMUM MINIMUM MAXIMUM MAXIMUM
COMPANY SUBSCRIPTION SUBSCRIPTION SUBSCRIPTION SUBSCRIPTION
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.......... $ 13,635 $ (5,000)(b) $ 8,635 $25,000(b) $ 33,635
Accounts receivable,
net.................. 93,377 -- 93,377 -- 93,377
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............ 40,425 -- 40,425 -- 40,425
Inventories........... 10,667 -- 10,667 -- 10,667
Prepaid expenses and
other current
assets............... 9,998 -- 9,998 -- 9,998
-------- --------- -------- ------- --------
Total current
assets............. 168,102 (5,000) 163,102 25,000 188,102
Property, plant and
equipment, net......... 29,315 -- 29,315 -- 29,315
Investments in
environmental treatment
facilities............. 21,960 -- 21,960 -- 21,960
Goodwill, net........... 242,179 -- 242,179 -- 242,179
Other assets............ 22,528 -- 22,528 -- 22,528
-------- --------- -------- ------- --------
Total assets........ $484,084 $ (5,000) $479,084 $25,000 $504,084
======== ========= ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Short-term borrowings
and current
installments of long-
term debt............ $ 14,391 -- $ 14,391 -- $ 14,391
Accounts payable...... 88,009 -- 88,009 -- 88,009
Accrued expenses...... 79,840 -- 79,840 -- 79,840
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts............ 25,637 -- 25,637 -- 25,637
Income taxes payable.. 2,055 -- 2,055 -- 2,055
-------- --------- -------- ------- --------
Total current
liabilities........ 209,932 -- 209,932 209,932
Long-term debt.......... 304,922 $(185,000)(a) 119,922 119,922
Total stockholders'
equity (deficit)....... (30,770) 180,000 (b) 149,230 $25,000(b) 174,230
-------- --------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $484,084 $ (5,000) $479,084 $25,000 $504,084
======== ========= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
56
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE-MONTH PERIOD ENDED JULY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL FOR
COMPANY RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
Sales........................... $ 454,173 -- $ 454,173
Cost of sales................... 390,416 -- 390,416
--------- ------ ---------
Gross margin.................. 63,757 -- 63,757
Selling, general and administra-
tive expenses.................. 83,559 -- 83,559
Depreciation and amortization... 16,889 -- 16,889
Impairment charges.............. 25,000 -- 25,000
--------- ------ ---------
Operating loss................ (61,691) -- (61,691)
Interest income................. 346 -- 346
Interest expense................ (18,217) $9,262 (8,955)
Other expense, net.............. (964) -- (964)
--------- ------ ---------
Loss before income taxes...... (80,526) 9,262 (71,264)
Income taxes.................... 780 -- 780
--------- ------ ---------
Loss from continuing opera-
tions........................ $ (81,306) $9,262 $ (72,044)
========= ====== =========
Loss per common share from
continuing operations.......... $ (2.62)(e) $ (.42)(e)
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
FISCAL YEAR ENDED OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL FOR
COMPANY RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
Sales.............................. $701,099 -- $701,099
Cost of sales...................... 567,758 -- 567,758
-------- ------- --------
Gross margin..................... 133,341 -- 133,341
Selling, general and administrative
expenses.......................... 95,592 -- 95,592
Depreciation and amortization...... 20,015 -- 20,015
-------- ------- --------
Operating income................. 17,734 17,734
Interest income.................... 1,049 1,049
Interest expense................... (22,808) $12,654(c) (10,154)
Other expense, net................. (1,661) -- (1,661)
-------- ------- --------
Income (loss) before income tax-
es.............................. (5,686) 12,654 6,968
Income taxes....................... (418) -- (d) (418)
-------- ------- --------
Income (loss) from continuing op-
erations........................ $ (5,268) $12,654 $ 7,386
======== ======= ========
Income (loss) per common share from
continuing operations............. $ (0.27)(e) $ 0.04(e)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
(a) Reflects the impact of changes in long-term debt resulting
from:
Repayment of CGE Note........................................ $125,000
Repayment of Anjou Note...................................... 60,000
--------
$185,000
========
(b) Changes in stockholders' equity resulting from the
Recapitalization:
Sale of 105,714 shares of Class A Common Stock at $1.75... $185,000
Estimated fees on sale of 105,714 shares of Class A Common
Stock paid from available cash.............................. (5,000)
--------
$180,000
========
</TABLE>
The maximum proceeds would result in the Company receiving an additional
$25,000 in gross proceeds to be used for general corporate purposes.
(c) Reflects change in net interest expense resulting from the application
of the gross proceeds of the Recapitalization as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1996 JULY 31,1997
---------------- ------------
<S> <C> <C>
CGE Note (LIBOR plus 1.25%)................ $ 8,884 $ 6,499
Anjou Note (LIBOR plus 0.6%)............... 714 2,763
Bank Credit Facility (LIBOR plus 1.0%)..... 3,056 --
-------- -------
$ 12,654 $ 9,262
======== =======
</TABLE>
The Company has assumed proceeds would have been used to pay down the CGE
Note and the Anjou Note (from date of issuance in August 1996), and the Bank
Credit Facility to the extent proceeds were available after the repayment of
the CGE Note and the Anjou Note.
(d) Due to the Company's tax position, the pro forma adjustments would not
have an impact on the Company's tax provision.
(e) Income (loss) per common share from continuing operations is calculated
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1996 JULY 31, 1997
---------------- -------------
<S> <C> <C>
Average weighted shares outstanding...... 32,018 32,019
Exchange of Series A Preferred Stock at
$1.75
per share............................... 34,286 34,286
Sale of 105,714 new shares of Class A
Common Stock for cash at $1.75 per share
(Minimum Subscription).................. 105,714 105,714
-------- --------
Adjusted weighted average shares (Minimum
Subscription)........................... 172,018 172,019
-------- --------
Sale of 14,286 new shares of Class A Com-
mon Stock for cash at $1.75 per share
(Maximum
Subscription) .......................... 14,286 14,286
-------- --------
Adjusted weighted average shares (Maximum
Subscription)........................... 186,304 186,305
======== ========
Pro Forma Calculation:
Pro forma income (loss) from continuing
operations.............................. $ 7,386 $(72,044)
Income (loss) per share from continuing
operations (Minimum Subscription)....... $ 0.04 $ (0.42)
======== ========
Income (loss) per share for continuing
operations (Maximum Subscription)....... $ 0.04 $ (0.39)
======== ========
</TABLE>
Fully-diluted earnings per share are not presented as the assumed conversion
of the Company's $115 million Convertible Debentures is assumed to be anti-
dilutive to amounts presented herein. The above calculation reflects the
elimination of dividends related to the Series A Preferred Stock assumed to be
exchanged.
59
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data as of and for the nine
months ended July 31, 1997 and 1996 has been derived from, and should be read
in conjunction with, the Company's unaudited consolidated financial statements
for such periods, which are included elsewhere in this Prospectus and which,
in the opinion of the Company's management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the results of operations for such periods. The results for such
interim periods are not necessarily indicative of the results for the full
fiscal year. The following selected consolidated financial data of the Company
as of and for the fiscal year ended October 31, 1996 has been derived from,
and should be read in conjunction with, the consolidated financial statements
and related notes thereto as of and for the year then ended that have been
audited by McGladrey & Pullen, LLP, independent public accountants, and are
included elsewhere in this Prospectus. The following selected consolidated
financial data of the Company as of and for the years ended October 31, 1995,
1994, 1993 and 1992 has been derived from, and should be read in conjunction
with, the consolidated financial statements as of and for the years then ended
that have been audited by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, NINE MONTHS ENDED
-------------------------------------------------- -------------------
JULY 31, JULY 31,
1992 1993 1994 1995 1996 1996 1997
--------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $ 609,404 $575,949 $ 522,573 $618,868 $701,099 $503,861 $ 454,173
Cost of sales........... 486,249 444,879 437,997 480,555 567,758 404,974 390,416
Selling, general and
administrative
expenses............... 93,908 87,529 104,178 103,125 95,592 70,079 83,559
Depreciation and
amortization........... 15,469 13,374 17,702 18,348 20,015 14,806 16,889
Unusual charges......... 7,000 -- 145,200 -- -- -- 25,000
--------- -------- --------- -------- -------- -------- ---------
Operating income (loss)
from continuing
operations............. 6,778 30,167 (182,504) 16,840 17,734 14,002 (61,691)
Interest income......... 1,276 797 1,283 1,201 1,049 700 346
Interest expense........ (21,361) (23,706) (24,386) (24,379) (22,808) (16,964) (18,217)
Other expense, net...... (1,370) (2,386) (4,580) (434) (1,661) (1,445) (964)
--------- -------- --------- -------- -------- -------- ---------
Income (loss) from
continuing operations
before income taxes,
minority interest and
extraordinary item..... (14,677) 4,872 (210,187) (6,772) (5,686) (3,707) (80,526)
Income taxes............ 817 68 998 1,115 (418) 1,001 780
Minority interest....... 265 21 (194) 98 -- -- --
--------- -------- --------- -------- -------- -------- ---------
Income (loss) from
continuing operations
before extraordinary
item................... (15,759) 4,783 (210,991) (7,985) (5,268) (4,708) (81,306)
Discontinued
operations............. 5,723 (10,338) (42,787) -- -- -- --
Extraordinary item...... -- -- (8,000) -- -- -- --
--------- -------- --------- -------- -------- -------- ---------
Net loss................ $ (10,036) $ (5,555) $(261,778) $ (7,985) $ (5,268) $ (4,708) $ (81,306)
========= ======== ========= ======== ======== ======== =========
Earnings (loss) per
common share (after
preferred stock
dividend)
Continuing operations
before extraordinary
item.................. $ (0.63) $ 0.20 $ (7.68) $ (0.35) $ (0.27) $ (0.22) $ (2.62)
Discontinued
operations............ 0.23 (0.42) (1.55) -- -- --
Extraordinary item..... -- -- (0.29) -- --
--------- -------- --------- -------- -------- -------- ---------
Loss per common share.. $ (0.40) $ (0.22) $ (9.52) $ (0.35) $ (0.27) $ (0.22) $ (2.62)
========= ======== ========= ======== ======== ======== =========
Weighted average shares
outstanding............ 24,812 24,815 27,632 32,018 32,018 32,018 32,019
========= ======== ========= ======== ======== ======== =========
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JULY 31,
-------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $113,338 $101,371 $ (51,206) $ (12,568) $ 7,556 $ 875 $ (41,830)
Total assets............ 601,752 594,028 602,938 547,917 538,270 540,053 484,084
Goodwill................ 240,617 235,329 283,638 276,549 265,860 270,349 242,179
Total long-term debt.... 221,048 221,463 245,984 289,120 306,542 304,836 304,922
Stockholders' equity
(deficit).............. 216,447 210,314 74,381 63,089 54,241 55,637 (30,770)
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, NINE MONTHS ENDED
-------------------------------------------------- -------------------
JULY 31, JULY 31,
1992 1993 1994 1995 1996 1996 1997
-------- -------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SEGMENT DATA:
PSG
Sales................... $ 38,489 $ 46,000 $ 83,678 $ 179,713 $270,640 $195,474 $ 195,383
Costs and expenses...... 35,218 38,611 80,252 164,435 255,882 183,624 194,298
Depreciation and
amortization........... 702 711 2,061 5,679 7,335 5,710 6,028
Unusual charges......... -- -- 5,300 -- -- -- --
-------- -------- --------- --------- -------- -------- ---------
Operating income (loss) $ 2,569 $ 6,678 $ (3,935) $ 9,599 $ 7,423 $ 6,140 $ (4,943)
======== ======== ========= ========= ======== ======== =========
METCALF & EDDY
Sales................... $297,836 $246,824 $ 219,106 $ 216,852 $215,358 $150,663 $ 132,108
Costs and expenses...... 282,206 222,309 211,173 200,125 195,745 136,404 141,168
Depreciation and
amortization........... 6,751 5,429 5,780 5,691 6,223 4,489 6,546
Unusual charges......... 7,000 -- 38,700 -- -- -- --
-------- -------- --------- --------- -------- -------- ---------
Operating income
(loss)................. $ 1,879 $ 19,086 $ (36,547) $ 11,036 $ 13,390 $ 9,770 $ (15,606)
======== ======== ========= ========= ======== ======== =========
RESEARCH-COTTRELL
Sales................... $266,899 $276,584 $ 213,172 $ 220,207 $219,008 $160,615 $ 128,077
Costs and expenses...... 250,799 258,272 234,295 208,207 207,630 152,742 134,698
Depreciation and
amortization........... 6,231 6,338 7,733 6,069 6,032 4,283 3,930
Unusual charges......... -- -- 81,800 -- -- -- 25,000
-------- -------- --------- --------- -------- -------- ---------
Operating income
(loss)................. $ 9,869 $ 11,974 $(110,656) $ 5,931 $ 5,346 $ 3,590 $ (35,551)
======== ======== ========= ========= ======== ======== =========
CORPORATE (UNALLOCATED)
Sales................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Costs and expenses...... 5,948 7,694 9,559 8,854 8,000 5,174 5,206
Depreciation and
amortization........... 1,148 326 1,602 602 425 324 385
Unusual charges......... -- -- 15,200 -- -- -- --
-------- -------- --------- --------- -------- -------- ---------
Operating income
(loss)................. $ (7,096) $ (8,020) $ (26,361) $ (9,456) $ (8,425) $ (5,498) $ (5,591)
======== ======== ========= ========= ======== ======== =========
OTHER
Sales................... $ 6,180 $ 6,541 $ 6,617 $ 2,096 $ (3,907) $ (2,891) $ (1,395)
Costs and expenses...... 5,986 5,522 6,896 2,059 (3,907) (2,891) (1,395)
Depreciation and
amortization........... 637 570 526 307 -- -- --
Unusual charges......... -- -- 4,200 -- -- -- --
-------- -------- --------- --------- -------- -------- ---------
Operating income
(loss)................. $ (443) $ 449 $ (5,005) $ (270) $ -- $ -- $ --
======== ======== ========= ========= ======== ======== =========
</TABLE>
61
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) See Note 2 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for
information regarding the Company's transaction with CGE in 1994.
(2) See Note 3 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for further
explanation of the unusual charges and extraordinary item incurred in the
fiscal year ended October 31, 1994.
(3) See Note 4 to the Consolidated Financial Statements as of and for the year
ended October 31, 1996 contained elsewhere in this Prospectus for
information regarding the PSG acquisition in 1994.
(4) See Notes 6 and 7 to the Unaudited Consolidated Financial Statements as of
and for the nine-month period ended July 31, 1997 contained elsewhere in
this Prospectus for further explanation of the unusual charges incurred in
the nine-month period ended July 31, 1997.
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The Company was organized by an investment group including Odyssey Partners,
L.P., Allen & Company Incorporated ("Allen & Company") and affiliates of First
Chicago Corporation to make a cash tender offer to purchase all of the
outstanding shares of capital stock of Research-Cottrell, Inc. and its various
subsidiaries, including Metcalf & Eddy, Inc. The Research-Cottrell acquisition
was completed on July 13, 1987 (the "Acquisition"). As a result of the
Acquisition, the Company incurred approximately $250 million in debt and
recorded approximately $200 million in goodwill. The Company's results of
operations since the Acquisition have been adversely affected by the interest
expense related to the Acquisition debt, which was refinanced in 1990, and the
amortization of goodwill. See "--Financial Condition" and the Notes to the
accompanying Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Company operates principally in three segments: PSG which is focused on
the operation of water and wastewater treatment facilities; Metcalf & Eddy
which is focused on engineering consulting in the areas of water/wastewater
and hazardous waste remediation; and Research-Cottrell which is focused on
designing, supplying and servicing air pollution control equipment.
DEMAND FOR THE COMPANY'S SERVICES AND TECHNOLOGIES
Demand for the Company's services and technologies arises principally from
four sources:
. need for governmental agencies to reduce costs through productivity
improvements and improve the quality of services;
. upgrade of existing facilities and the need for new capacity at electric
generating facilities, water and wastewater treatment facilities and
various industrial pollution sources, such as waste incineration and
industrial process plants, which must comply with existing environmental
legislation and regulations;
. regulations mandating new or increased levels of air and water pollution
control, water supply and solid waste management as well as remediation
of contaminated sites; and
. need for maintenance, repair, rebuilding and upgrading of existing
pollution control equipment and facilities.
DEPENDENCE ON KEY PROJECTS/GOVERNMENT CONTRACTS
In any given period, a substantial percentage of the Company's sales is
dependent upon several large projects. To the extent that these projects are
canceled or substantially delayed and not replaced, it could have a material
adverse impact on the Company's sales and earnings.
Approximately 62% of the Company's fiscal year 1996 gross revenues were
derived from contracts with federal, state, municipal and other governmental
agencies. The termination of any of the Company's significant contracts with
such governmental agencies, or the failure to obtain either extensions or
renewals of certain existing contracts or additional contracts with such
governmental agencies, could have a material adverse effect on the Company's
earnings and business.
In fiscal year 1996, PSG's contract with PRASA accounted for 39% of PSG's
total sales and 15% of the Company's total sales. Operations were initiated
under the contract on September 1, 1995. The contract has a five-year term but
PRASA may cancel the contract for any reason after August 31, 1998. Pursuant
to the contract, PSG manages 69 wastewater plants, 128 water treatment plants
and related collection and distribution systems and pumping stations in Puerto
Rico. The contract's profitability is contingent upon achieving and/or
successful negotiations of certain incentive revenues and operating
efficiencies, as well as the collection of its normal operating fee and
certain unreimbursed costs which totaled $24.2 million as of July 31, 1997.
63
<PAGE>
NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS ENDED JULY 31, 1996
Overview
As discussed in more detail with the comparison of each segment's results,
the Company's net loss increased from $4.7 million during the nine-month
period ended July 31, 1996 to $81.3 million during the nine-month period ended
July 31, 1997. This was primarily the result of certain operating charges and
asset write-offs, including a $25.0 million impairment charge taken in
connection with a review of certain of the Research-Cottrell businesses, all
as more fully described below. Sales have decreased from $503.9 million to
$454.2 million primarily due to lower sales volumes of Metcalf & Eddy and
Research-Cottrell as a result of delays in awards of new contracts. At July
31, 1997, the Company's total backlog was approximately $1.2 billion and
consisted of PSG (75%), Metcalf & Eddy (19%) and Research-Cottrell (6%). At
July 31, 1996, the Company's total backlog was approximately $1.1 billion and
consisted of PSG (70%), Metcalf & Eddy (21%) and Research-Cottrell (9%).
Professional Services Group
The operating loss sustained during the nine-month period ended July 31,
1997 was $4.9 million and was primarily the result of certain operating
charges and asset write-offs which approximated $9.3 million. These charges
were primarily related to revised estimates of direct project costs of $2.8
million required under the PRASA contract; professional fees of $5.3 million
related to marketing consultants, the DOJ Investigation and certain litigation
matters; and provisions of $1.2 million for revised collectibility estimates
for certain non-current note receivables.
Excluding the effect of the aforementioned charges, the operating results
were $1.8 million lower than the comparable 1996 period due to additional
direct project costs including certain higher non-recoverable costs resulting
from competitive pricing pressures and timing of certain contractual incentive
clauses for the PRASA project and revised estimates for self insured employee
benefits.
Sales 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 contract renewals, it continues to
experience delays in negotiating and closing new business opportunities due to
municipal clients' implementation schedules. Results are expected to improve
moderately during the fourth quarter from the most recent three-month period
due to new contracts and certain contractual incentive clauses which are
expected to be realized.
Metcalf & Eddy
The operating loss of $15.6 million sustained during the nine-month period
ended July 31, 1997 was primarily the result of $19.4 million of certain
operating charges, including $5.4 million of provisions required in order to
properly reflect the Company's revised estimates for the collectibility of
certain receivables based on recent adverse developments in contract
negotiations and collection efforts; $6.3 million of increases to its reserves
for litigation, professional liability and certain project contingencies due
to revised estimates of the expected outcome of certain unasserted and
asserted claims and litigation incurred in the normal course of business; $3.4
million of equipment write-offs; a $1.7 million charge related to a
cancellation penalty for a high cost leased facility; and other direct and
indirect costs of $2.6 million.
In addition to the effect of the aforementioned charges, lower sales volume
and gross margin rate, offset by lower selling, general and administrative
expenses, reduced the operating results by $6.0 million in the nine- month
comparable prior period ended July 31, 1996. The reduction in sales volume of
$18.6 million during the period reduced the operating results by $5.4 million
due to delays in obtaining task order releases primarily within the hazardous
waste remediation service lines, several contracts which were awarded to
competitors, and delayed procurement in international markets. Delays are
increasing due to funding and administrative issues with certain government
agencies (e.g., EPA and Department of Defense). The lower gross margin rate
reduced the operating results by $2.1 million during the nine-month period
primarily due to favorable pricing adjustments reflected in the prior period,
pricing pressures and a business mix shift from self-performed work to
64
<PAGE>
subcontracted work. Partially off-setting the lower margins was a selling,
general, and administrative expense reduction of $2.3 million during the nine-
month period ended July 31, 1997 as compared to the comparable 1996 period as
a result of lower personnel related costs including certain employee benefit
costs discussed below.
The fourth quarter results are expected to be lower than the most recent
three-month period due to the $1.4 million third quarter effect of revised
estimates of previously accrued discretionary and self insured employee
benefit costs. Full year sales levels are expected to be approximately 15%
below the comparable prior year period due to continuing delays in work
releases.
Research-Cottrell
The operating loss of $35.6 million sustained during the nine-month period
ended July 31, 1997 was primarily the result of a $25.0 million impairment
charge and other receivable and warranty provisions of $4.0 million related to
its Ecodyne and Custodis operations due to recent adverse developments on two
specific projects. See "--Revised Business Strategy." In addition, the nine-
month results were impacted in the third quarter by higher than anticipated
costs on a specific Air Pollution Control Division ("APCD") project by $1.0
million, receivable and warranty provisions of $2.3 million related to the R-C
International operations and partially off-set by revised estimates of $1.0
million of previously accrued discretionary and self insured employee
benefits.
In addition to the effect of the aforementioned charges, lower sales volume
and reduced margin rates, to a lesser extent, contributed to the operating
results being $6.8 million lower than the nine-month comparable period ended
July 31, 1996. The lower sales volume of $32.5 million during the
aforementioned period reduced the operating income by $6.6 million. The lower
sales volume was reflected primarily in the REECO, Ecodyne, APCD and KVB
operations which approximated 74% of the variance in the nine-month period.
These operations are experiencing reduced volume as a result of fewer bid
opportunities due to delays in issuing new air quality standards by the EPA,
lack of enforcement of existing standards and price pressures from highly
competitive markets. The gross margin rate adjusted for the previously
mentioned charges, has also decreased by 2.3% ($2.9 million) during the nine-
month period due to price pressures, unfavorable product line mix and project
execution. The unfavorable trend compared to the prior period related to
volume and margin rates is expected to continue due to the reasons previously
stated.
Corporate and Other
The unallocated corporate costs were comparable to the nine-month prior
period. In addition, higher average borrowings resulted in increased interest
expense.
Revised Business Strategy
During the second quarter of fiscal year 1997 the Company completed a review
of its operations' three year business plans. These plans included a detailed
analysis of markets, growth opportunities and forecasted three year operating
results, cash flows and return on capital employed for each business segment.
As a result of this review, management is considering the actions necessary
to redeploy its capital to its core water business (PSG and Metcalf & Eddy).
This approach reflects management's assessment of the greater market
opportunities and growth potential in the water and wastewater markets
compared to the air pollution markets. Among other factors contributing to
this approach were recent tax law changes which may expand the duration of
OM&M contracts and create additional opportunities within the water and
wastewater treatment markets which are the primary markets for PSG and Metcalf
& Eddy. These enhanced opportunities are in contrast to the air pollution
control market where continuing delays in issuing new air quality standards by
the EPA and lack of enforcement of existing standards are expected to limit
the growth opportunities within the air pollution control market targeted by
Research-Cottrell. See "Business--The Water/Wastewater Privatization Market."
65
<PAGE>
Furthermore, the returns on capital employed within the PSG and Metcalf &
Eddy segments are forecasted to be greater than the returns for the Research-
Cottrell segment. From a competitive standpoint, management also believes that
the Company has greater competitive advantages and market penetration through
its PSG and Metcalf & Eddy businesses than what has been achieved by its
Research-Cottrell operations.
As a result of the above, management is assessing the impact of de-
emphasizing the Research-Cottrell business segment and redeploying its capital
to its PSG and Metcalf & Eddy segments. A financial advisor has been retained
to assist the Company in exploring strategic alternatives related to this
redeployment. The successful implementation of a redeployment program could
include the divestiture of portions or substantially all of the Research-
Cottrell segment, although no such definitive decision to divest has been made
by the Company's Board of Directors at this time. The Company is currently in
discussions with several parties regarding the potential divestiture of this
business.
Based on the recent downturn in the operating performance of certain of the
Research-Cottrell businesses, the Company reviewed the expected future cash
flows of these businesses and reassessed their fair value. In connection with
this review, the Company reflected a $25.0 million impairment charge including
a goodwill writedown of $17.4 million related to the Ecodyne and KVB
businesses during the second quarter of fiscal 1997. The Ecodyne operation was
sold during July 1997 for approximately $2.0 million. The impairment was
determined in accordance with Statement of Financial Accounting Standards No.
121 by taking into consideration the operations' fair values based on expected
future cash flows discounted at a rate commensurate with the risks involved.
The realizability of goodwill and other long lived assets is the result of
an estimate based on the underlying assets' remaining estimated useful lives,
projected operating cash flows and ultimate disposition assumption (held for
use or held for sale). It is reasonably possible that this estimate will
change in the near term as a consequence of further deterioration in market
conditions and operating results or the divestiture of all or part of the
Research- Cottrell segment. The effect of the change would be material to the
financial statements since a significant additional charge may be required. At
July 31, 1997, Research-Cottrell's total assets and net carrying value were
$136.5 million and $84.4 million, respectively, including unamortized goodwill
of $76.6 million.
FISCAL YEAR ENDED OCTOBER 31, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1995
Overview
As discussed in more detail with the comparison of each segment's results,
the Company's net loss decreased from $8.0 million during the year ended
October 31, 1995 to $5.3 million during the year ended October 31, 1996. The
results for the year reflected decreases in operating margins (primarily in
PSG and Research-Cottrell) due to the highly competitive marketplace and
increases in selling and marketing expenses (primarily PSG) which were
partially offset by overhead reductions within Metcalf & Eddy, Research-
Cottrell and Corporate. Sales increased from $618.9 million to $701.1 million
primarily due to increased service revenues associated with PSG's contract
with PRASA. At October 31, 1996, the Company's backlog was approximately $1.1
billion and consisted of PSG (75%), Metcalf & Eddy (19%) and Research-Cottrell
(6%).
Comparable operating results in the next fiscal year are contingent upon the
level and timing of additional contracts in each segment, the achievement of
the expected sales level increases, cost control, the execution of expected
new projects and those projects in the backlog within the most recent cost
estimates as well as the favorable resolution of claims arising in the
ordinary course of business.
Professional Services Group
Operating income was $7.4 million for the year ended October 31, 1996 and
reflects a $2.2 million decrease from the comparable prior period due to
additional selling, general and administrative expenses as well as
depreciation and amortization related to growth initiatives which were
partially off-set by higher gross margins. The increase in PSG's sales is a
result of the PRASA contract which began September 1, 1995 and has not had a
66
<PAGE>
proportional impact on operating income. Although negotiations are progressing
slower than previously expected, PSG continues to pursue new business
opportunities and currently has several proposals pending or under negotiation
which if obtained, would significantly increase future sales.
Metcalf & Eddy
Although sales have remained comparable to the prior year, Metcalf & Eddy's
operating income increased by $2.4 million during the year ended October 31,
1996. The higher operating income was attributable primarily to personnel,
facilities and insurance cost reductions which resulted in a decrease in
selling, general and administrative expenses of $2.1 million. In addition,
estimated favorable pricing adjustments partially offset the impact of
unfavorable sales mix to more design/build and construction type projects.
Research-Cottrell
Operating income decreased by $0.6 million during the year ended October 31,
1996 from the comparable prior period. The changes in operating income reflect
the decreases in margin rates in most business units caused by price pressures
from highly competitive markets, unfavorable product line mix and project
execution. Partially off-setting the reduced margins are lower selling,
general and administrative expenses of $3.2 million during the year ended
October 31, 1996 (primarily at its APCD and KVB operations). International
sales volume has continued to increase by $10.7 million due to improved market
penetration during the aforementioned period, however the higher sales related
to international activities were more than offset by lower sales volume in KVB
of $11.0 million during the year ended October 31, 1996. KVB's lower volume,
compared with the prior period, is due to the fulfillment of orders for
equipment required by utility customers to comply with the Clean Air Act
Amendments of 1990 (the "CAAA").
Corporate and Other
The corporate (unallocated) selling, general and administrative expenses
decreased by $0.9 million during the year ended October 31, 1996 due to cost
reduction efforts, including personnel related costs and professional fees.
The results for the year compared to the prior year were also favorably
impacted by slightly lower financing costs and the favorable resolution of
several pending tax issues.
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1994
Overview
As discussed in more detail with the comparison of each segment's results,
the net loss was reduced by $253.8 million to $8.0 million during the year
ended October 31, 1995. Excluding the $196.0 million impact of unusual
charges, losses from discontinued operations and the extraordinary loss, the
$57.8 million improvement of results reflects primarily a $54.1 million
increase in operating income. This was achieved through better project
execution resulting in higher gross margins on stable sales levels within the
Metcalf & Eddy and Research-Cottrell segments. In addition, the June 1994
acquisition of PSG, CGE's water/wastewater management subsidiary, and new
contract awards resulted in a $96.0 million sales increase generating higher
operating income in the PSG segment. Various cost reduction efforts also
improved results which are reflected in a $1.1 million reduction in selling,
general and administrative expenses despite the effects of the PSG acquisition
and providing for improved employee fringe benefits including retirement and
incentive plans. Backlog levels also increased to over $1.2 billion due to the
$450 million five-year contract with PRASA to operate, maintain and manage
Puerto Rico's water and wastewater treatment facilities.
Professional Services Group
Excluding the impact of the $5.3 million prior period unusual charges and
the $1.5 million pro forma operating income impact assuming the June 1994 PSG
acquisition occurred on November 1, 1993, operating income increased during
the year ended October 31, 1995 by $6.7 million. The increase in operating
income
67
<PAGE>
during the year was primarily due to new business development which resulted
in additional service contracts and cost reductions attained in connection
with the consolidation of the Metcalf & Eddy Services and PSG operations.
Sales increased by $96.0 million during the year ended October 31, 1995. The
increase during the year is attributable to the pro forma sales impact of the
PSG acquisition ($55.6 million) and new business development which resulted in
additional service contract revenues ($40.4 million), including revenues of
$15.7 million related to the new PRASA contract.
On September 1, 1995, PSG initiated operations under its five-year contract
with PRASA to operate, maintain and manage Puerto Rico's water and wastewater
treatment facilities. This contract is expected to generate annual revenues in
excess of $90 million and its profitability thereunder is contingent upon
achieving certain incentive revenues and operating efficiencies in which a
significant amount is expected to be realized during the later years of the
contract. PRASA has the right to cancel the contract after three years.
Metcalf & Eddy
Excluding the impact of the $38.7 million prior period unusual charges,
operating income increased by $8.9 million during the year ended October 31,
1995. The improved performance resulted from higher margin sales related to
work executed directly by Metcalf & Eddy excluding its sub-contractors and
other favorable mix impacts as well as improved execution on several projects
as a result of obtaining contractual amendments and lower than previously
anticipated direct project costs. Selling, general and administrative expenses
decreased by $1.6 million primarily due to various cost reductions including
facility, insurance and administrative overhead related costs partially off-
set by increased bid and proposal and other related selling costs as well as
higher employee fringe benefits.
Sales decreased by $2.3 million during the year ended October 31, 1995
primarily due to changes in pass-through sales volume, including its Peace
Shield project, representing direct project costs passed through to the
client. The higher margin sales related to work executed directly by Metcalf &
Eddy excluding its sub-contractors increased by $9.1 million during the year.
Research-Cottrell
Excluding the impact of the $81.8 million prior period unusual charges,
operating income increased by $34.8 million during the year ended October 31,
1995. The increase resulted from higher gross margins of $30.2 million
primarily due to better execution resulting in the avoidance of additional
costs required in the prior year to complete particulate and acid gas control
systems, chimneys and emissions monitoring systems ($21.5 million) as well as
higher gross margins within the international and cooling tower operations
primarily due to higher sales volumes and to a lesser extent improved
execution ($7.5 million). Also impacting the favorable results were lower
selling, general and administrative expenses ($2.9 million) due to cost
reductions in substantially all product lines primarily within the particulate
and acid gas control equipment, emissions monitoring systems and cooling tower
product lines which were partially off-set with higher international selling
activities.
Sales increased by $7.0 millon during the year ended October 31, 1995. The
increase resulted from higher international sales of particulate and acid gas
control systems due to better geographical market penetration in Europe and
the Far East ($21.0 million) and higher sales from the cooling tower
operations driven by higher orders ($9.4 million). Also contributing to the
increase were higher sales of VOC control systems due to higher demands driven
by the requirements under the CAAA ($12.3 million). Partially offsetting these
increases were lower sales of emission monitors ($19.1 million) and chimney
products and services ($12.3 million) primarily due to the timing of the
demand requirements under the CAAA.
In light of improvements in its current market climate and anticipated
financial performance, management decided to retain the Company's cooling
tower, heat transfer and certain service operations. The Company had
68
<PAGE>
previously contemplated selling these businesses and had recorded a charge for
the difference between their net carrying value and management's estimate of
the anticipated net sales proceeds. The Company resolved software issues
related to its emissions monitoring systems previously shipped to certain
utilities. The software issues had created problems in collecting receivables
due to claims and back-charges from certain utilities. The Company incurred
additional software, warranty and project close-out costs in resolving this
situation. Management believes that the previously provided reserves for the
contemplated divestitures and emissions monitoring operations were adequate in
the aggregate, therefore these issues did not have a significant effect on the
Company's consolidated financial position or results of its operations, taken
as a whole as of October 31, 1995 and for the year then ended.
Corporate and Other
The corporate (unallocated) selling, general and administrative expenses and
depreciation and amortization decreased by $1.7 million during the year ended
October 31, 1995 due to cost reduction efforts, including reductions in
unallocated promotional and facility related costs. The Company sold its
hazardous waste transfer station operations during October 1995 and as a
result a $1.4 million gain was recognized and included in other expense, net.
Additional charges reflected in the prior year include unusual charges of
$19.4 million, losses from the discontinued asbestos abatement operations
($38.2 million) and Pamco operations ($4.6 million) and a $8.0 million
extraordinary loss on the early retirement of the 11.1% Senior Notes with the
Prudential Insurance Company of America.
FINANCIAL CONDITION
Net financial debt (debt less cash) increased by $11.4 million during the
nine month period ended July 31, 1997. In addition to the Series A Preferred
Stock dividend payment of $2.5 million, the Company utilized $11.1 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.
In connection with the Investment Agreement, the Company maintains a $125
million unsecured term loan with CGE. The CGE Note bears interest at one, two,
three or six-month LIBOR, as selected by the Company, plus 1.25% and has a
final maturity of June 15, 2001. The CGE Note contains certain financial and
other restrictive covenants with respect to the Company relating to, among
other things, the maintenance of certain financial ratios, and restrictions on
the sale of assets and the payment of dividends on or the redemption,
repurchase, acquisition or retirement of securities of the Company or its
subsidiaries. The Company expects to repay the CGE Note with a portion of the
gross proceeds from the Rights Offering. See "Use of Proceeds."
The Company also maintains a $60.0 million seven-year unsecured revolving
credit facility with Anjou. The facility matures on August 2, 2003. As of July
31, 1997, the Company's borrowings under the facility totaled $60.0 million.
The Anjou Note bears interest at LIBOR plus 0.6%. The Company expects to repay
the Anjou Note with a portion of the gross proceeds from the Rights Offering.
See "Use of Proceeds."
The Company also maintains the three-year senior secured Bank Credit
Facility which was increased by $20.0 million to $70.0 million as of April 28,
1997. As of July 31, 1997, the Company's borrowings under the Bank Credit
Facility totaled $14.0 million and outstanding letters of credit under the
Bank Credit Facility totaled $23.7 million (unused capacity of $32.3 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 lesser of $70 million or 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 plus 1.0%
or at a defined bank rate
69
<PAGE>
approximating prime. 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 at
least 40% of the Company's Board of Directors as well as to appoint the Chief
Executive Officer and Chief Financial Officer of the Company. The Company
compensates CGE for its support in an amount equal to 0.95% per annum of the
outstanding commitment of its credit facilities. The Bank Credit Facility
expires March 31, 1998. The Company will need to replace this facility at that
time.
On October 30, 1997, the Company entered into the Amendment in respect of
the Bank Credit Facility pursuant to which the Lending Banks waived the
Company's compliance for the period beginning on October 31, 1997 with certain
covenants in the Bank Credit Facility through the earlier of the consummation
of the transactions contemplated by the Recapitalization Agreement or March
22, 1998. In addition, the Amendment provides for amendments to certain
covenants contained in the Bank Credit Facility. The waiver and amendments
provided for in the Amendment shall terminate if the Bank Credit Facility is
not extended on or prior to December 15, 1997 beyond the current maturity date
of March 31, 1998. The Company is currently in discussion with the Lending
Banks regarding the extension of the Bank Credit Facility beyond its currently
scheduled maturity at March 31, 1998 for a period of approximately one year.
Following the Recapitalization, the Company intends to enter into discussions
regarding the establishment of a new senior secured credit facility following
the expiration of the Bank Credit Facility. While there can be no assurance
that the Company will have access to a new credit facility following March 31,
1998 even if the Rights Offering is completed, management believes that it
could obtain alternative sources of funding for its cash requirements
following expiration of the Bank Credit Facility.
The Company's ability to comply with the financial and other covenants in
such agreements beyond November 1, 1997 is substantially dependent upon the
completion of the Rights Offering. Failure to complete the Rights Offering may
require additional waivers or amendments to the Bank Credit Facility. There
can be no assurance that such waivers or amendments could be obtained. In the
absence of a waiver or amendment, the Lending Banks under the Bank Credit
Facility would have the right to refuse any further extensions of credit and
the right to accelerate payment of all outstanding amounts under the Bank
Credit Facility. In addition, substantially all of the Company's long-term
debt and certain other financial and non-financial obligations contain cross-
default or acceleration provisions. In the event the Company were required to
repay accelerated outstanding amounts under the Bank Credit Facility and other
obligations, the Company does not believe that it will have financial
resources adequate to repay such amounts and to satisfy its ongoing working
capital requirements. Therefore, the failure to complete the Rights Offering
could have a material adverse effect on the Company's business prospects and
on its financial condition and liquidity.
The businesses of the Company have not historically required significant
ongoing capital expenditures. For the nine month period ended July 31, 1997,
and the years ended October 31, 1996 and 1995 total capital expenditures were
$5.1 million, $7.5 million and $7.9 million, respectively. At July 31, 1997,
the Company had no material outstanding purchase commitments for capital
expenditures. As of October 28, 1997, the Company has Bank Credit Facility
borrowings of $10.5 million, and outstanding letters of credit under the Bank
Credit Facility of $22.9 million. Management is addressing its on-going cash
requirements through a series of programs, for which there is no assurance of
success, directed at improving working capital management by focusing on,
among other things, collection of unreimbursed costs on certain significant
contracts, including the PRASA contract ($24.2 million), Metcalf & Eddy past
due receivables, increased emphasis on capital redeployment and asset
divestitures and the restructuring and strengthening of its current capital
structure.
The Company's future results and financial conditions are dependent on the
successful implementation of its revised business strategy. The Company's
revised business plans include assumptions relating to growth initiatives
related to longer term OM&M contracts which may require significant up-front
investments including
70
<PAGE>
capital improvements, upgrades, concession payments or other investments. In
addition, new capital may be required to be invested in the Metcalf & Eddy
segment in order to achieve its growth targets through geographical expansion
and/or acquisitions. The Company's ability to access capital for these
requirements may have a significant impact on the successful implementation of
its business plans. While the Company believes that this strategy will enable
it to improve its financial results, there can be no assurance that this
revised strategy will be successful, that the anticipated benefits of this
revised strategy will be realized, that management will be able to implement
such strategy on a timely basis, that the Company will return to profitability
or that losses will not continue in the future. See "Risk Factors--Redeployment
of Capital; Revised Business Strategy."
On September 24, 1997, the Company, CGE and Anjou entered into the
Recapitalization Agreement, whereby the Company would restructure its debt and
retire all of the outstanding shares of Series A Preferred Stock. The
Recapitalization is comprised of two primary elements: (i) the exchange of the
Series A Preferred Stock for shares of Class A Common Stock and (ii) the Rights
Offering pursuant to which the Company would receive a minimum of $185 million
in gross proceeds for the minimum subscription by CGE. Pursuant to the
Recapitalization Agreement, the Company, CGE and Anjou also entered into
agreements with respect to certain other matters, including the Consent
Solicitation, the Charter Amendment and CGE's agreement to work with the
Company to enhance the Company's participation in the emerging privatization
market in the wastewater management industry. The consummation of the
transactions contemplated by the Recapitalization Agreement will reduce the
Company's annual interest expense by approximately $12.5 million and eliminate
$3.3 million of dividends on the Series A Preferred Stock.
The Company is often required to procure bid and performance bonds from
surety companies, particularly for clients in the public sector. A bid bond
guarantees that the Company will enter into the contract under consideration at
the price bid and a performance bond guarantees performance of the contract. In
August 1997, USF&G notified the Company that it would suspend the renewal and
issuance of new bid and performance bonds as of September 30, 1997, due to the
Company's operating performance and resulting financial condition as reported
at the end of the fiscal quarter ended April 30, 1997, unless it received
indemnification from CGE or Anjou for at least 20% of all future bond requests
including renewals. Anjou has entered into an agreement with USF&G regarding an
arrangement pursuant to which, until terminated at Anjou's discretion, Anjou
will enter into guarantees of certain obligations of the Company relating to
the bonding of certain contracts under the Master Surety Agreement dated as of
October 31, 1995 between USF&G and the Company and its subsidiaries. Such
guarantees would cover, in each instance, 30% of the aggregate amount of the
bonds executed, procured or provided on behalf of the Company or its
subsidiaries on or after October 1, 1997, and certain penalty amounts, up to
$45 million. There can be no assurance that USF&G will be willing to provide
bid bonds to the Company following the Recapitalization without a guarantee
from CGE (or one of its affiliates) and there can be no assurance that CGE
would be willing to provide such a guarantee following the Recapitalization.
See "--Dependency on Key Projects and Government Contracts."
FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the statement. Included herein are certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, in particular, forward-looking
statements regarding the Company's expectation of future performance following
implementation of its revised business strategy. Such statements are subject to
various risks and uncertainties. Accordingly, the Company hereby identifies the
following important factors that could cause the Company's actual financial
results to differ materially from those projected, forecast, estimated or
budgeted by the Company in such forward-looking statement:
71
<PAGE>
. 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.
. Adverse developments in the DOJ Investigation.
. Dependency on key projects, customers and contracts.
. 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.
. Changes in interest rates causing an increase in the Company's effective
borrowing rate.
. Adverse resolution of litigation matters and existing claims arising in
the ordinary course of business.
. The extent of public participation in the Rights Offering.
. The failure to consummate the Rights Offering by the end of the second
quarter of fiscal 1998.
. The ability of the Company to access capital (through an investment fund,
off-balance sheet vehicle or otherwise) and to effect and finance future
acquisitions.
. The ability of the Company to obtain any necessary waivers, extensions or
renewals of the Bank Credit Facility.
. The acceptance by the Company's current and prospective customers of the
Company's financial position following the Recapitalization.
. The effectiveness of the Business Planning Committee in identifying
strategies aimed at increasing stockholder value.
72
<PAGE>
BUSINESS
OVERVIEW
Air & Water Technologies Corporation, through its subsidiaries, provides a
comprehensive range of services and technologies directed principally at
providing complete services for the operation, maintenance and management of
water and wastewater treatment systems; engineering, design and construction
of water and wastewater facilities; the remediation of hazardous waste; and
services and technologies for controlling air pollution. The Company believes
it provides a complement of products and services that satisfy the
environmental and essential services needs of its targeted client base. The
Company markets its products and services through three renowned trade names:
Professional Services Group for the operation, maintenance and management of
water and wastewater treatment systems; Metcalf & Eddy for water, wastewater
and hazardous waste engineering and consulting services; and Research-Cottrell
for air pollution control related products and services. PSG provides its
clients with complete services for the operation, maintenance and management
of treatment systems in various water, wastewater, sludge and biosolids waste
management markets. Metcalf & Eddy provides its clients with a broad spectrum
of environmental consulting services, including engineering studies and
design, project management, site evaluation, environmental assessment and
master planning. Research-Cottrell designs and develops products and
technologies targeted at specific client needs such as air pollution control
equipment. The Company provides its full complement of products and services
to predominantly four major customer sectors: the electric generating
industry; the solid waste incineration industry; governmental entities,
including municipalities and state and federal agencies; and specific
industrial categories, such as petroleum refining, pulp and paper,
pharmaceutical, chemical, primary and secondary metals, food processing,
printing and furniture manufacture.
PSG provides its clients with complete services for the operation,
maintenance and management of treatment systems in the various water and
wastewater and sludge and biosolid waste management markets. These services
range from assisting owners and operators in addressing individual operating
needs to the assumption by PSG of complete responsibility for operating
complex treatment systems. PSG provides operation, maintenance and management
services for water supply and wastewater treatment systems, primarily for
cities, municipalities and other local governmental entities. PSG also serves
the industrial market and federal and state governments by providing OM&M
services for wastewater treatment systems and groundwater remediation
treatment systems. PSG has significant experience dealing with the planning
and implementation of large biosolids management programs, including
composting facilities.
Metcalf & Eddy's services are directed principally at the protection of
public health and the environment in an efficient, cost-effective manner
through sound water resources management, hazardous waste remediation and
solid waste disposal. These services include protection, treatment and
distribution of water from surface and groundwater sources; collection,
treatment and disposal of wastewater and its associated by-products such as
sludge; pretreatment of industrial wastewater prior to discharge into a
municipal system or on-site treatment and disposal; remediation of hazardous
waste sites involving contaminated soils and groundwater; monitoring and
closure of sanitary landfills with disposal of associated leachate; and
management and transportation of hazardous waste. In addition, Metcalf & Eddy
provides expertise in environmental science, institutional and public policy
support, regulatory compliance and the use of innovative technologies to meet
clients' needs.
Research-Cottrell's air pollution control related technologies and services
are directed principally at cost-effectively reducing air pollution, treating
thermal discharges, dispersing airborne contaminants, continuously monitoring
emissions and providing expertise in regulatory and engineering services for a
wide range of industrial processing plants and power generation facilities in
the United States and internationally. Research-Cottrell's services include
identifying and analyzing air pollution control problems and recommending
effective and cost-efficient control options; designing and engineering
treatment facilities and equipment; procuring, fabricating, constructing and
installing air pollution control equipment; and providing overall project
management. In addition, Research-Cottrell provides high quality replacement
parts and expert maintenance and repair services for its own base of installed
equipment as well as equipment provided by others on a routine
73
<PAGE>
outage and emergency response basis. Research-Cottrell's wide range of air
pollution control technologies includes electrostatic precipitators; fabric
filters; NOx and acid gas control technologies; concrete chimneys and steel
stacks; industrial dust collector systems; continuous emissions monitoring
devices; technologies for the destruction or capture of volatile organic
compounds, or VOCs and heat exchangers, fired heaters and recuperators. These
technologies are provided separately or can be combined into an integrated
pollution control system.
THE WATER/WASTEWATER PRIVATIZATION MARKET
The Company believes that its redeployment of capital and revised business
strategy will facilitate the participation of PSG and Metcalf & Eddy in the
emerging privatization market in the water and wastewater treatment industry.
The Company believes that the water/wastewater privatization market has
reached a critical juncture in its development. More than ever before, both
small and large municipalities are entering into privatization arrangements
and adopting alternative forms of public/private partnerships ("PPPs").
Historically, the market has been dominated by short-term (three to five-year)
OM&M contracts. However, in the past few years, the market has begun to shift
to longer-term contracts. Recently, two Presidential Executive Orders and an
IRS Rule Change have been issued which generally facilitate the implementation
of PPPs and allow for greater flexibility and creativity in structuring PPPs.
The new regulations make it easier for municipalities to enter into long-term
OM&M contracts.
Long-term partnerships will make it easier for municipalities to assign
responsibility of entire systems to private operators such as PSG whose core
competency is to operate, maintain and manage water and wastewater treatment
systems. As a complete service provider, the Company through PSG will be
capable of providing not only standard OM&M services, but also design/build of
treatment facilities through Metcalf & Eddy, as well as arranging for
financing for capital improvements or arranging for financing for up-front
capital payments that the community can apply toward other uses.
The water and wastewater privatization market is estimated to be, on an
annual basis, a $1.1 billion market. Revenues of the top seven companies total
approximately $600 billion or 55% of the total market. Among the top seven
companies, PSG has a 45% share of that market segment. Overall, PSG commands a
25% share of the total $1.1 billion market.
According to industry analysts, the water and wastewater treatment industry
is poised for significant short-term and long-term growth. Analysts predict
growth in annual revenue generation from the issuance of major new contracts
to set the pace for the water industry at 15-25% over the next four years.
Industry growth is the result of several market factors including cost
savings; more reliable and higher quality private sector delivery of necessary
public services; guaranteed performance and regulatory compliance; relief from
day-to-day operational, management and administrative burdens; enhanced risk
management; and achievement of user rate stabilization and system cost
containment. Additional market factors encouraging the implementation of more
sophisticated PPPs include private sector time/cost efficiencies for the
design/build portion of a project; shift of future responsibility for capital
improvements to the private sector; use of private sector financing to
accomplish needed capital improvements; and the ability to monetize the asset
(i.e., secure up-front cash payments).
The Company believes that PSG is well-positioned to take advantage of
industry growth and continue its market leadership role. In addition to being
a market leader for short-term OM&M contracts, PSG is among a few firms
pioneering alternative forms of PPPs. PSG has already converted four existing
contracts into long-term contracts through contract renewals as a result of
the IRS Rule Change and currently is pursuing several additional long-term
contract renewals. Examples of the shift towards other types of PPPs include
the Franklin, Ohio asset sale to a private sector company; Franklin, Ohio's
PPP for the design/construction/finance/operation and ownership of a new water
treatment facility; the Freeport, Texas design/build/finance/operate project;
the long-term OM&M agreement in North Brunswick, New Jersey; and the Cranston,
Rhode Island 25-year lease transaction. Freeport and Cranston are PSG
projects.
74
<PAGE>
PSG believes that the Freeport, Texas project and Cranston, Rhode Island
lease were firsts in the water and wastewater industry. In the Freeport, Texas
project, the City of Freeport asked PSG to act as a total service provider and
not just a contract operator. PSG was engaged to operate the City of
Freeport's water and wastewater systems and in addition undertook the
design/build of its wastewater facility upgrade to comply with a consent
order. PSG utilized Metcalf & Eddy for the design/build portion of the
project, arranged for the financing of the upgrade and managed the process for
the issuance of City of Freeport revenue bonds.
In March 1997, a team including PSG and Metcalf & Eddy won the first long-
term lease transaction in the United States water and wastewater industry. PSG
will be the operator for the entire wastewater treatment system in Cranston,
Rhode Island for the next twenty-five years. Metcalf & Eddy will provide
design/build services for certain capital improvements which will bring the
city into compliance with environmental regulations at a fraction of the
previously estimated cost.
To compete effectively in the emerging water and wastewater privatization
market, the Company will require access to capital for expenditures relating
to long-term OM&M contracts. Following the Recapitalization the Company will
explore various means of obtaining such capital, including through an
investment fund or other off-balance sheet vehicle with the assistance of CGE.
See "Certain Relationships and Related Transactions-- Recapitalization
Agreement; Other CGE Related Matters."
PROFESSIONAL SERVICES GROUP-OPERATION, MAINTENANCE AND MANAGEMENT OF TREATMENT
SYSTEMS
OVERVIEW
Prior to its acquisition by the Company from CGE pursuant to the Investment
Agreement, PSG had been a wholly-owned subsidiary of Anjou. Since 1978, PSG
has been operating, maintaining and managing water and wastewater treatment
systems, sludge and biosolid waste disposal programs and public works
projects, and providing operations assistance primarily to municipal entities
but also to industrial companies. In the following description, references to
PSG are intended to include, where appropriate, the operation, maintenance and
management services of Metcalf & Eddy Services, a subsidiary of the Company
involved in the substantially identical business as PSG that has been
integrated with PSG subsequent to June 14, 1994. See "--Metcalf & Eddy-Water
and Wastewater Treatment/Hazardous Waste Remediation."
OPERATION AND MAINTENANCE SERVICES
PSG provides its clients with complete services for the operation,
maintenance and management of treatment systems in the various water and
wastewater and sludge and biosolid waste management markets. These services
range from assisting owners and operators in addressing individual operating
needs to the assumption by PSG of complete responsibility for operating
complex treatment systems. PSG does not, however, own any treatment facilities
except for a municipal sludge composting facility in Baltimore, Maryland and
two wastewater treatment plants in Auburn, Alabama. Based on annual revenues,
PSG is the market leader in providing operation, maintenance and management
services for water and wastewater treatment systems and sludge and biosolid
waste management services, particularly in the area of large municipal waste
treatment systems. In size and scope, PSG would be one of the largest
municipal wastewater companies in the United States if its projects were
viewed as a single wastewater system. PSG operates in thirty-five states,
Canada and Puerto Rico and it provides services to approximately 385
facilities (approximately 220 wastewater and 165 water treatment plants) at
over 115 locations. In the United States, PSG currently has 135 projects,
concentrated east of the Mississippi, with the highest concentration in the
Northeast. See Figure 1.1 which depicts the geographic presence of PSG. PSG on
a daily basis treats approximately 590 million gallons of water and 630
million gallons of wastewater. PSG's services reach over eight million people
per day. PSG operates and maintains more than 17,000 miles of piping systems
and more than 2,400 pumping stations. PSG manages more than 160,000 dry tons
of biosolids per year, through a number of environmentally sound approaches.
The Company believes that PSG's relative size permits it to provide its
clients with a substantially higher caliber of benefits. PSG operates a large
number of facilities and systems, with more employees, than any other
75
<PAGE>
company in the industry. PSG believes that its size allows each client
partnership to take advantage of PSG's collective experiences and best
practices. PSG maintains extensive infrastructure and equipment and provides
sophisticated maintenance practices and programs. As a result, PSG believes
that it can maintain, protect and preserve its clients' large investments in
facilities and equipment in a highly competitive manner. In addition, PSG
believes that through its process control expertise, developed through the
hands-on operation of many complex facilities, PSG can make the cutting edge
of innovation and technology immediately available to all of its clients'
treatment facilities.
In addition, PSG believes that its relationship with CGE further
differentiates it from competitors. PSG believes that access to the technical
and financial resources of CGE greatly enhances PSG's competitive position,
financial strength and technical capabilities. With an annual budget of over
$40 million, CGE's research facility is the world's largest private research
institution dedicated exclusively to water and wastewater. Year after year,
CGE strives to develop innovative, cost-efficient technology. PSG believes
that access to CGE's technical expertise is an important benefit to PSG's
clients as they face facility upgrades and expansions. PSG believes that its
clients also benefit from CGE's knowledge and expertise in operating more than
7,000 water and wastewater facilities worldwide. PSG believes that the
experience and support of CGE allows clients to realize further operational
efficiencies and process enhancements.
[Figure 1.1 to come]
Figure 1.1 is a map of the United States that depicts the location and
geographic dispersion of PSG Projects throughout the continental United
States, Hawaii and Puerto Rico, with an inset map depicting the concentration
in the Northeast.
WATER SUPPLY AND WASTEWATER TREATMENT SERVICES
PSG provides operation, maintenance and management services for water supply
and wastewater treatment systems, primarily for cities, municipalities and
other local governmental entities. PSG also serves the industrial market and
federal and state governments by providing OM&M services for wastewater
treatment systems and groundwater remediation treatment systems. Typically,
under each of PSG's contracts, the client owns the water supply or wastewater
treatment facilities and subcontracts to PSG, for a fixed annual fee, the
provision of staff, supervision, and management for the operation, maintenance
and management of the facilities. In addition, as contract operator, PSG is
responsible for the efficient operation and maintenance of the facilities, for
maintaining compliance with federal, state and local regulations, and for
fulfilling all relevant reporting requirements with respect to the facilities.
In addition to being a service provider under short-term OM&M contracts, PSG
is among a few firms pioneering alternative forms of public/private
partnerships, or PPPs, such as long-term OM&M contracts. See "--The
Water/Wastewater Privatization Market."
The water and wastewater privatization market is estimated to be, on an
annual basis, a $1.1 billion market. The top seven companies total about $600
million in revenues or 55% of the total market. Among the top seven companies,
PSG has a 45% share of that market segment. Overall, PSG commands a 25% market
share of the total $1.1 billion market.
Examples of water treatment facilities which PSG operates include Newark,
New Jersey; Brockton, Massachusetts; and Alamogordo, New Mexico. PSG's
wastewater treatment facility contracts include New Orleans, Louisiana;
Oklahoma City, Oklahoma; Cranston, Rhode Island; West Haven, Connecticut; and
Kenner, Louisiana. In addition, PSG operates and manages the water and
wastewater systems for the Commonwealth of Puerto Rico. PSG's PRASA contract
is one of the largest OM&M contracts in the world. The facilities managed by
PSG in Puerto Rico include sixty-nine wastewater plants (capacity 304 mgd),
128 water treatment plants (capacity 318 mgd), and related collection and
distribution systems and pumping stations.
76
<PAGE>
SLUDGE AND BIOSOLID WASTE MANAGEMENT SERVICES
PSG has significant experience dealing with the planning and implementation
of large biosolids management programs. Compared to other OM&M firms, PSG is
among the leaders in large, complex biosolids plant operation and management
experience. PSG manages more than 16,000 dry tons of biosolids per year,
through a number of environmentally sound approaches. Methods used by PSG
include landfilling, land application, composting and incineration. PSG also
has significant experience in operating and managing composting facilities.
PUBLIC WORKS
PSG provides a full range of public works services under contract to small
towns, villages and municipalities, including meter reading, sanitation
services, street maintenance, customer billing and parks and grounds
maintenance. These services are typically provided by PSG under OM&M contracts
with a municipality's public works department for a fixed annual fee. These
contracts typically result in lower cost and reduced administrative burdens
for a municipality's personnel. PSG maintains such contracts with the
following municipalities: Moore, Oklahoma; Mustang, Oklahoma; and Pikeville,
Kentucky.
COMPOSTING
PSG has experience in operating and maintaining composting facilities and
effectively controlling and reducing offensive odors. Solid waste composting,
along with recycling and source reduction, is utilized by local governments as
a means of reducing landfills. In a composting facility, the non-decomposable
waste is removed, and the organic waste is shredded and then efficiently
broken down by naturally occurring micro-organisms in the composting process,
in which moisture content, aeration and temperature of the organic waste is
controlled so as to accelerate the biological decomposition. Through further
processing, composting produces a fine humus-like soil product which is sold
or otherwise disposed of as a soil fertilizer or mulch. In Baltimore,
Maryland, PSG currently operates one of the largest facilities that transforms
municipal wastewater sludge into a usable compost product. PSG operates other
composting facilities at Schenectady, New York; Bristol, Tennessee; and
Hickory, North Carolina. PSG's management believes that composting is a viable
market and has positioned PSG to increase its business in this market segment.
METCALF & EDDY--WATER AND WASTEWATER TREATMENT/HAZARDOUS WASTE REMEDIATION
OVERVIEW
Metcalf & Eddy provides a comprehensive range of environmental services to
clients in industry and government, aimed principally at the protection of
public health and the environment in a cost-effective manner, including
planning, engineering, design and construction management, as well as on-site
and off-site remediation of environmental contamination. Metcalf & Eddy's
clients are faced with projects involving the protection, treatment and
distribution of drinking water; the collection, treatment and disposal of
wastewater and by-products such as sludge; the treatment and disposal of
hazardous wastes; and the management of solid waste.
Metcalf & Eddy receives support from CGE in the development and application
of new and innovative technologies worldwide. As the world's largest water
company, CGE invests over $40 million annually in the development of new
technologies for water and wastewater treatment.
SERVICES AND TECHNOLOGIES
To address water pollution problems, Metcalf & Eddy provides a full spectrum
of services focusing on design, construction, management and operation of
complex biological, chemical and physical treatment technologies, as well as
waste minimization and alternative disposal techniques; analyzes and assesses
complex aquatic and other environments; and prepares specifications and
designs for treatment systems. Metcalf & Eddy prepares permit and license
applications, manages construction and field installation of treatment
facilities, and provides startup, corrective action and rehabilitation
services for those facilities. Metcalf & Eddy also develops
77
<PAGE>
operations and maintenance manuals for facilities and develops scheduling and
maintenance procedures to ensure their efficient operation. Metcalf & Eddy
also provides its clients with the expertise to address institutional,
financial and public policy challenges which often arise in the development
and implementation of environmental projects.
WATER SUPPLY AND WASTEWATER TREATMENT SERVICES
Since 1907, Metcalf & Eddy has conducted extensive hydrologic and geologic
evaluations of hundreds of surface and groundwater supplies for governmental
and industrial clients in the United States and abroad. Metcalf & Eddy has
expertise in analyzing the nature of water resource problems, both in terms of
available capacities and the quality of the sources, and in developing and
evaluating different types of cost-effective treatment technologies. Metcalf &
Eddy's experience includes the design of over fifty water treatment
facilities, using technologies ranging from simple extraction and distribution
of water to more complex technologies such as ozonation, carbon absorption,
air stripping, desalinization, biologically active carbon ("BAC") and membrane
filtration. Metcalf & Eddy has also evaluated and investigated over 250 dams,
conducted groundwater contamination studies at over thirty sites and conducted
computerized analyses on over 100 water distribution systems. In water system
computer modeling, Metcalf & Eddy's expertise includes water system hydraulic
and quality aspects and treatment process optimization.
Metcalf & Eddy is a partner in the development of water treatment for New
York City. Over the past year, Metcalf & Eddy, with its partners, has been
conducting piloting for water treatment processes for New York City's Croton
supply and is currently assisting the City with the process selection, which
the Metcalf & Eddy team has been contracted to design.
In the wastewater treatment market, Metcalf & Eddy has conducted evaluations
of a broad range of effluents discharged from municipalities and industries,
including petrochemical, petroleum, chemical, pulp and paper, electroplating,
textile, ferrous and non-ferrous industries. Metcalf & Eddy has also conducted
numerous studies of controlled and uncontrolled discharges entering on-site
and off-site treatment facilities, lagoons and other bodies of water. Among
the traditional and innovative solutions Metcalf & Eddy has developed for its
clients are various biological, chemical and physical treatment technologies,
including activated sludge, trickling filters, nutrient removal, constructed
wetlands and land application. In conjunction with CGE, Metcalf & Eddy has
established a research center in the United States for the development of
technologies for water reuse. Metcalf & Eddy has designed over 200 wastewater
treatment plants, including some of the largest facilities in the United
States, utilizing these technologies. A major market for Metcalf & Eddy's
services is the upgrade of treatment facilities that were built under the
Federal Construction Grants Program during the 1970s.
Since August 1988, Metcalf & Eddy has played a vital role in one of the
premier wastewater treatment projects in the world, serving as lead design
engineer for the Massachusetts Water Resources Authority's ("MWRA's") Boston
Harbor Project. Under this contract, Metcalf & Eddy has had primary
responsibility for directing the design of the entire primary and secondary
treatment facilities, including a five-mile inter-island tunnel and a nine and
one half mile outfall tunnel/diffuser system. Work on the court-ordered
project included development of the conceptual design for the entire
wastewater treatment system, preparation of a project Design Manual, including
standard specifications, development of the MWRA's CADD system, and management
of all project design engineers providing final design services. As lead
engineer, Metcalf & Eddy has also conducted a number of special
investigations, including an air quality/odor control pilot study, a
hydroelectric feasibility study, a stacked clarifier hydraulic model, a
disinfection study, various hydraulic models of the outfall/diffuser system,
and a project-wide geotechnical exploration program. During the ongoing
construction phase, lead engineer services include coordinating interaction
among all construction packages, plant-wide technical submittal review an
instrumentation and control systems.
Metcalf & Eddy also provided, as project design engineer, the final design
services and engineering services during construction for the entire primary
treatment portion, a major part of the secondary treatment portion and
miscellaneous support facilities at the plant. Under a separate contract
awarded in 1993, Metcalf & Eddy has
78
<PAGE>
provided training to MWRA management staff and the tools they need to train
plant operations and maintenance staff on an ongoing basis. The long-term
training contract has been considered a critical element to MWRA's ability to
operate and maintain the new facility, and to protect the $3.4 billion
investment of public funds in the project. Major portions of the plant,
including the new primary treatment facilities, are now on-line. In August
1997, MWRA celebrated the successful start-up of the first portion of the
secondary treatment facilities and the revitalization of a critical natural
resource.
Under a separate contract with the MWRA, Metcalf & Eddy completed a master
plan and combined sewer overflow ("CSO") facilities plan. Four communities
served by MWRA, including the City of Boston, were faced with controlling
pollution from over 80 overflow points into Boston Harbor and its tributary
rivers from a sewer system which combines stormwater and sewage. In one of the
largest CSO studies ever undertaken, Metcalf & Eddy provided a comprehensive
investigation of the MWRA's collection system and developed a plan which
reduced the estimated cost of a CSO control project from $1.3 billion to $370
million, while achieving the client's goal of protecting beaches, shellfish
beds and other critical resources. The project included water quality
monitoring, strategic system planning, monitoring CSOs and interceptors, and
developing CSO management solutions with the input of multiple stakeholders.
The Metcalf & Eddy plan was awarded the 1995 American Academy of Engineers
grand prize, and is used as a national model for comprehensive, watershed-
based solutions for complex wet weather pollution control challenges.
Presently, Metcalf & Eddy is conducting detailed design of major parts of the
plan, and will continue to assist the MWRA with its implementation.
Metcalf & Eddy is routinely asked to provide hands-on assistance to numerous
water and wastewater treatment facilities in such operational areas as
maintaining and servicing equipment, mechanical and instrumentation process
control, troubleshooting, training of staff, and facility rehabilitation and
upgrading. One of the most important areas of this assistance is in the
optimization of plant and system operation to maximize the effectiveness at
minimum cost.
HAZARDOUS WASTE MANAGEMENT AND REMEDIATION SERVICES
Metcalf & Eddy provides a full range of services for the identification,
characterization, evaluation, design and implementation of cleanup measures
for soil and groundwater contaminated with hazardous and toxic waste.
Diagnostic services include geophysical surveys, surface and subsurface
sampling, hydroelectrical investigations, analytical laboratory services and
underground storage tank testing. To evaluate and design remedial measures,
Metcalf & Eddy performs feasibility studies, public health and ecological risk
assessments, pilot and bench scale treatability studies and groundwater
modeling. Metcalf & Eddy applies a broad range of proven and innovative
technologies for soil and groundwater cleanup, including soil venting,
bioremediation, air stripping, heavy metals precipitation, activated carbon
absorption, UV-oxidation and ion exchange.
Metcalf & Eddy has been awarded several contracts with the Department of
Defense for investigation and remediation of site contamination problems at
military installations under the Base Realignment and Closure ("BRAC")
program, at active installations and formerly-used defense sites under the
Defense Environmental Restoration Program, and at Superfund sites administered
by the Army Corps of Engineers for the EPA. Turnkey design, construct and
operate contracts are currently held with the Army Corps of Engineers for
groundwater cleanup projects. Contracts covering a wide range of hazardous and
toxic investigation and design services are or were recently held with the
Army Corps of Engineers in New England; Savannah, Georgia; Louisville,
Kentucky and Mobile, Alabama; with the Army Environmental Center for Total
Environmental Program Support nationwide; and with the Air Force Material
Command at Wright Patterson and Kelly Air Force Bases. Metcalf & Eddy is
performing nationwide contaminated soil and tank removal assignments under
contract to the Air Force Center for Environmental Excellence at Brooks Air
Force Base, remediation of petroleum oils and lubricants under subcontract
with the Naval Energy and Environmental Support Activity at Fort Hueneme,
California, and has been selected for environmental compliance services by
both the Naval Facilities Engineering Command's Southern and Western Divisions
and by the Air Force Mobility Command for a major nationwide subcontract role.
79
<PAGE>
In recent years, Metcalf & Eddy has focused on the in-field remediation
portion of the hazardous waste market. To meet client needs for expedited and
cost-effective cleanup, Metcalf & Eddy has brought several new technologies to
the marketplace, providing its clients with engineered solutions tailored to
their site needs. Technologies introduced by Metcalf & Eddy include HYDRO-
SEP(SM) soil washing system, GEMEP(SP) mercury removal system and NoVOCs(SM)
in-well vapor stripping system. Metcalf & Eddy has taken an active role in the
brownfields redevelopment market, partnering with nationwide real estate
management and development firms.
Metcalf & Eddy is a remediation contractor for the State of Florida, a
remedial investigation and feasibility study contractor for the states of
Massachusetts and Connecticut, and a contractor to the EPA for a full spectrum
of services from investigation to design and implementation of remedial
measures in the six New England states. Metcalf & Eddy was selected by the EPA
for a Response Action Contract ("RAC") covering New England. The maximum value
of this contract is approximately $400 million over a ten-year contract term.
In 1996, Metcalf & Eddy was one of four vendors selected to participate on
projects valued at $190 million to provide remediation, pollution prevention,
and BRAC services over a five-year period at McClellan Air Force Base in
Sacramento, California.
SLUDGE MANAGEMENT SERVICES
Because of Metcalf & Eddy's experience with treatment technologies used for
water supply and wastewater disposal, numerous municipal and industrial
clients have engaged Metcalf & Eddy to assist in the management and disposal
of the sludge generated as a by-product of the treatment process. For these
clients, Metcalf & Eddy develops programs to minimize the generation of
sludge, to alter it to a more environmentally acceptable forms, and to develop
and evaluate alternative processing and disposal technologies such as
thickening, anaerobic digestion, conditioning, dewatering, incineration,
composting and land application. Metcalf & Eddy has assessed sludge handling
and disposal alternatives, designed and assisted in the implementation of
treatment technologies and operated sludge management facilities. Working with
its clients, Metcalf & Eddy has analyzed and designed innovative technologies
and treatment alternatives for over forty-five sludge management projects and
facilities with over 3 billion gallons per day of treatment capacity.
Metcalf & Eddy has designed and is providing construction support and
training services for the San Diego Municipal Biosolids Center ("MBC"). When
completed, the MBC, which represents San Diego's largest-ever infrastructure
program, will be one of the largest, most innovative sludge processing systems
in the United States.
SOLID WASTE MANAGEMENT SERVICES
Metcalf & Eddy has assisted numerous clients in the evaluation of solid
waste management needs including quantification of amounts and type,
development of waste minimization programs and assessment of needed disposal
capacity. Metcalf & Eddy is experienced in planning and implementing
alternative technologies and facilities for solid waste management which
include landfills, incinerators, resource recovery plants and recycling.
Metcalf & Eddy's services for solid waste management facilities include
facility planning, siting and permitting, design, construction management,
operations and maintenance assistance, closure and post-closure programs for
landfills and the collection and treatment of leachate from landfills. Metcalf
& Eddy is also experienced in the installation of monitoring wells and related
sampling and testing procedures for groundwater protection in or about
landfills.
Metcalf & Eddy has been responsible for the final design of nine waste-to-
energy facilities, including a major solid waste resource recovery facility
located in Chicago, Illinois, and has assisted various communities in
activities associated with resource recovery implementation, including
evaluating and monitoring air emission control equipment programs. In
addition, Metcalf & Eddy has designed landfills and ashfills in accordance
with regulatory requirements.
80
<PAGE>
PROGRAM MANAGEMENT SERVICES
Metcalf & Eddy has developed extensive program management capabilities
through its experience in the program planning and development, scheduling,
financial planning, contract administration, procurement, construction
management, control and coordination of large and complex projects. These
capabilities enable Metcalf & Eddy to effectively manage its own projects as
well as to provide program management services to large environmental
development and capital expenditure programs of others.
Metcalf & Eddy has continually expanded its program management expertise and
resources by providing program management services for major national defense
and municipal programs. For example, Metcalf & Eddy has been providing long-
term program management services for the upgrade of one of the largest
wastewater facilities in the United States, the Blue Plains advanced
wastewater treatment plant serving Washington, D.C., and for the drinking
water system in Lawrence, Massachusetts. Under contract to the United States
Air Force Logistics Command for the Peace Shield project, Metcalf & Eddy
entered into a joint venture with CRSS Inc. to provide program management
services to deliver ground based facilities to support a new air defense
system for the Royal Saudi Arabian Air Force. Metcalf & Eddy was primarily
responsible for applying its geotechnical, hydrological and construction
management skills to site and build structures, roads, water and wastewater
systems and other infrastructure to support the complex defense system. The
facilities include underground command and control centers, long range radar
sites, a central command center, a central maintenance facility and
communications sites.
DESIGN/BUILD AND DESIGN/BUILD/OPERATE SERVICES
To expedite project delivery and reduce overall program costs, Metcalf &
Eddy offers design/build and, in conjunction with its sister company, PSG,
design/build/operate service packages. The design/build market has grown
tenfold in the last decade and, because of its many advantages, is expected to
be the dominant project delivery method by the year 2000. During 1996 and
1997, Metcalf & Eddy was awarded several design/build projects in the United
States and overseas, including providing design/build services in connection
with PSG's design/build/finance/operate project in Freeport, Texas, and
providing design/build services for capital improvements in connection with
PSG's Cranston, Rhode Island lease transaction. The Cranston, Rhode Island
project involves innovative financing and long-term operation by PSG. See "--
The Water/Wastewater Privatization Market."
INTERNATIONAL BUSINESS
Metcalf & Eddy has provided environmental and engineering services to
clients in more than eighty nations, spanning all seven continents. Presently,
Metcalf & Eddy is providing planning, design, program and construction
management services on several large projects in Egypt, Thailand, Singapore,
Latin America and Eastern Europe.
COMPETITION
Metcalf & Eddy's competitors fall into several categories. National
competitors include integrated consulting engineering firms (offering several
different services including consulting, design/build and contract
operations), along with single service consulting firms. Regional firms are
also competitors, although many have been acquired by larger firms. Low-cost
regional providers also compete with Metcalf & Eddy, particularly in the
municipal water and wastewater market. Metcalf & Eddy also competes with
specialty construction management firms, niche players, major A/E firms,
construction and utility companies, investor-owned water utilities, and
integrated companies. Depending on the client's needs, however, Metcalf & Eddy
often teams with firms which might be competitors in other settings.
In the dynamic market for environmental services, Metcalf & Eddy is well
positioned to answer clients' needs for cost-effective delivery of public
service, management of environmental risk, and the development and employment
of innovative technologies. Working with its sister companies and global
partners, Metcalf & Eddy believes that it can offer an array of solutions and
approaches which few competitors can match.
81
<PAGE>
RESEARCH-COTTRELL--AIR POLLUTION CONTROL
Research-Cottrell is a widely-known and respected name in the air pollution
control business. Research- Cottrell is comprised of six companies, each a
leading participant in its respective industry: Air Pollution Control
Division, Custodis, Flex-Kleen, KVB, REECO and Thermal Transfer Corporation.
Research-Cottrell's air pollution control-related technologies and services
are directed principally at cost-effectively reducing air pollution, treating
thermal discharges, dispersing airborne contaminants, continuously monitoring
emissions, and providing expertise in regulatory and engineering services for
industrial process plants and power generation facilities. Research-Cottrell
operates throughout North America and Europe through its wholly-owned
subsidiaries, and has licensed technologies to companies in Asia, Latin
America and Denmark. Research-Cottrell's services include identifying and
analyzing air pollution control problems and recommending effective and cost-
efficient control options; designing and engineering treatment facilities and
equipment; procuring, fabricating, constructing, and installing air pollution
control and related equipment; and providing overall project management. In
addition, Research-Cottrell supplies high quality replacement parts, expert
maintenance and repair services, preventive maintenance and major
upgrade/rebuild strategies for its own base of installed equipment as well as
competitor equipment on a routine outage and emergency response basis.
Research-Cottrell believes that it is one of the few companies in the industry
with the resources and experience to provide the full scope of services
required to design and install original equipment and provide a wide range of
aftermarket services.
Research-Cottrell markets its air pollution control technologies through
some of the oldest and most respected names in the air pollution control
industry. The products sold by the Research-Cottrell companies are: RESEARCH-
COTTRELL air pollution control systems, including electrostatic precipitators,
fabric filters and DOUBLE-LOOP flue gas desulfurization systems; CUSTODIS
concrete chimneys and steel stacks; FLEX-KLEEN fabric and cartridge dust
collectors; KVB continuous emissions monitoring systems; REECO RE-THERM(R) and
UNITHERM(R) regenerative thermal oxidizers and FluiSorb(TM) absorber/desorber
concentrator systems; and TTC recuperators and fired heaters. Research-
Cottrell is licensed to market a number of technologies to its industrial
process and utility clients, including the Alcoa A-398 fluoride recovery
process; NOxOUT(R), Thermal DeNOx(R) and SONOX(R), products used to reduce NOx
and SO/2/ emissions from boiler exhaust systems; KVB/MIP Laser Opacity
Monitor; and Compact Hybrid Particulate Collector, a retrofit technology used
to increase collection efficiencies from utility and industrial exhaust
streams. Research-Cottrell's products are sold as stand-alone equipment or may
be combined into an integrated system.
Research-Cottrell estimates that it has sold over 5,200 Research-Cottrell
electrostatic precipitators, over 100,000 Flex-Kleen dust collectors, 10 FGD
systems, over 10,000 Custodis concrete chimneys and steel stacks, over 250
REECO RE-THERM regenerative thermal oxidizers, over 1,150 KVB continuous
emissions monitoring systems, and over 1,750 TTC recuperators and fired
heaters. Research-Cottrell believes its installed base of chimneys,
electrostatic precipitators, RTOs, fabric/baghouse systems and continuous
emissions monitoring systems provides a ready market for its aftermarket
parts, maintenance and repair services.
Demand for Research-Cottrell's air pollution control equipment, technologies
and services arises principally from the expansion and modification of
existing industrial/manufacturing plants and power generation facilities and
the construction of new facilities. Environmental laws, both domestically and
abroad, enhance the demand for Research-Cottrell's products. As legislation
and regulations grow more strict, particularly the CAAA and associated
regulations, many older facilities will require significant retrofitting
(upgrading control equipment through new or improved components) in order to
comply with new or more strictly enforced emissions control standards. The
ability to recover valuable industrial products can also increase demand for
Research-Cottrell products, such as Flex-Kleen fabric filter systems. In
addition, as pollution control systems or major components are rendered too
small as plant capacity expands, they often require rebuilding, upgrading, and
replacement, and Research-Cottrell believes that it is highly adept at
providing proven aftermarket strategies to meet these needs.
Research-Cottrell believes that its diversified customer base provides a
significant advantage in offsetting the cyclical nature of industrial
businesses. Research-Cottrell provides equipment and services for coal-fired
82
<PAGE>
power generation utilities and industrial process plants such as pulp and
paper, cement, steel, petroleum refining, chemical processing, wood products,
pharmaceuticals, consumer products, glass manufacturing, aluminum production,
municipal solid waste incineration and IPPs, direct reduced iron ore
production, food processing, printing, coating and surface finishing, among
many others.
Research-Cottrell is structured to allow each of its operating groups to
individually market their products and services, develop and refine new and
existing products, and manage competitive forces to take advantage of their
own unique strengths and capabilities. In addition, Research-Cottrell believes
that there are often significant opportunities to jointly market Research-
Cottrell products from different operating groups to its shared customer base,
and Research-Cottrell makes every effort to maximize this synergy.
Each of the Research-Cottrell operating groups participates in the
aftermarket services sector. The companies provide expert inspections,
emergency repairs, preventive maintenance, routine service, upgrades,
rebuilds, equipment modernization and expansions, replacement parts and
demolition services. Each Research-Cottrell company provides these services
for its own installed base of equipment as well as for equipment designed and
installed by other air pollution control equipment vendors. In most cases,
these services are available 24 hours per day, 365 days per year to support
its customers.
BUSINESS SEGMENTS AND FOREIGN OPERATIONS
For financial information concerning the Company's operations by industry
segment and the Company's foreign and domestic operations, see "Selected
Consolidated Financial Data," Note 10 to the Company's Unaudited Consolidated
Financial Statements and Note 13 to the Company's Consolidated Financial
Statements, included elsewhere in this Prospectus.
MARKETS AND CUSTOMERS
The Company markets its services and technologies to governmental and
industrial customers throughout the United States, the Caribbean, Canada and
the Pacific Rim. The Company also services customers in Europe, the Middle
East, Central and South America and the Far East. A majority of the Company's
sales are technical in nature and involve senior technical and management
professionals, supported by the Company's marketing groups. The Company uses a
coordinated system of in-house sales representatives and marketing managers,
organized primarily by business segments and markets served. In fiscal 1996,
sales to governmental customers approximated 97%, 81% and 1% of the Company's
PSG, Metcalf & Eddy and Research-Cottrell segment sales, respectively.
Contracts with federal, state, municipal and other governmental agencies
generally may be terminated at any time at the option of the customer. In
fiscal 1996, sales associated with PSG's contract with PRASA accounted for 15%
of the Company's sales for such period and sales to the Federal government
approximated 11% of the Company's consolidated sales for such period. The
Company benefits substantially from its long-term relationships with many of
its clients which result in a significant amount of repeat business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has experienced no difficulty in obtaining raw materials used in
its operations and relies on a broad range of suppliers, the loss of any of
which would not have a material adverse effect on the Company.
BACKLOG
At July 31, 1997, the Company's total backlog was approximately $1.2 billion
as compared to approximately $1.1 billion at October 31, 1996, and consisted
of PSG (75%), Metcalf & Eddy (19%) and Research-Cottrell (6%). The Company
estimates that approximately $400 million of the backlog represents work which
will be completed in the next 12 months. The total backlog at July 31, 1997
represents work for which the Company has entered into a signed agreement or
purchase order with respect thereto or has received an order to proceed with
work up to a specified dollar amount and includes approximately $300 million
from PSG's
83
<PAGE>
contract with PRASA. As of October 31, 1996, total backlog for the Company was
approximately $1.1 billion as compared to approximately $1.2 billion as of
October 31, 1995 and includes approximately $375 million from PSG's contract
with PRASA. Backlog amounts have historically resulted in revenues; however,
no assurance can be given that all amounts included in backlog will ultimately
be realized, even if covered by written contracts or work orders. Most of the
Company's long-term contracts contain escalation provisions designed to
protect the Company against increases in material and unit labor costs. The
Company's total backlog as of July 31, 1997, October 31, 1996 and 1995
included approximately 88%, 87% and 89%, respectively, of work to be performed
for federal, state and municipal governmental agencies.
COMPETITION
The Company faces substantial competition in each market in which it
operates. The Company competes primarily on its engineering, scientific and
technological expertise. To the extent that non-proprietary or conventional
technologies are used, the Company also relies upon its experience and trade
names as a basis for competition. Such trade names include: "Professional
Services Group" and "Metcalf & Eddy" in the water and wastewater treatment and
sludge management markets and "Metcalf & Eddy" in the hazardous waste
remediation market; "Research-Cottrell" and "Flex-Kleen" in the air pollution
control equipment market; "Custodis" in the chimney market; "KVB/Analect" in
the market for continuous emission monitors; and "REECO" in the market for
controlling emissions of volatile organic compounds. Many companies, some of
which have greater resources than the Company, participate in the Company's
markets and no assurance can be given that such other companies will not enter
its markets. See "--Professional Services Group--Operation, Maintenance and
Management of Treatment Systems--Water Supply and Wastewater Treatment
Services" and "--Metcalf & Eddy--Water and Wastewater Treatment/Hazardous
Waste Remediation--Competition."
Customers for PSG's and Metcalf & Eddy's water and wastewater services are
primarily governmental entities and typically award contracts on the basis of
technical qualifications and price. For PSG's treatment system OM&M contracts,
technical qualification is required; however, price is generally a key
determining factor. Treatment system OM&M agreements are generally for three
to five-year periods, with various renewal options up to five years in
duration, and contain certain escalators for inflation. In addition, recent
developments in the water and wastewater treatment markets may lead to longer-
term contracts. See "--The Water/Wastewater Privatization Market." For Metcalf
& Eddy's design services contracts, the majority of which are cost-plus-
fixed-fee arrangements, technical qualifications are the primary factor
followed, by price competitiveness. In the hazardous waste clean-up market,
Metcalf & Eddy competes with many local, regional and national firms on the
basis of experience, reputation and price.
PSG typically competes for its contracts under a competitive procurement
process. This process can vary, but typically follows one of three methods.
The first method is the issuance of a Request for Qualifications ("RFQ") with
a selection made on qualifications only. Negotiations are held only with the
most qualified company. The second method is a two-step procurement process
consisting of an RFQ followed by a short listing of the most qualified firms.
The short listed firms are then requested to provide a proposal, which
includes a price proposal, based on a Request For Proposals ("RFP") and a firm
is then selected. The selection can range from a decision based on the lowest
price to a decision based on price and other factors. The third method is a
one-step procurement which is an RFQ/Price Proposal. The selection is usually
based on price and other factors, but low price is sometimes the only deciding
factor. Prospective clients often will hire consultants or advisors to assist
in the procurement and selection process. The entire procurement and selection
process can range from four months to two years, with larger, more complex
projects taking the longer amount of time. When factors other than price are
considered in the final selection, such factors include technical
qualifications; experience and reputation; financial capabilities necessary to
ensure delivery of services; assumption of risk being required for the
contract; proposed operating and employee transition plans; depth of corporate
resources; and other value added considerations.
In competing for municipal work, Metcalf & Eddy most often participates in a
process which involves an RFQ, short-listing of qualified firms, then an RFP.
In most cases, those firms submitting proposals are asked to
84
<PAGE>
make a presentation to the client selection committee. Due to its extensive
experience, client relationships and reputation in the field, Metcalf & Eddy
is generally short-listed in municipal election processes, and wins
approximately 30% of the projects it pursues. In the industrial market,
selections are generally made from a limited, pre-qualified list of
consultants, and competition is based on price. Metcalf & Eddy believes that
its strategic alliance with Betz-Dearborn will enable it to leverage the
access of Betz's 2,500 person sales force to aggressively pursue opportunities
in the rapidly growing market for outsourcing of industrial water, wastewater
and hazardous waste management. Federal procurements are conducted in
accordance with strict federal requirements set forth in the Federal
Acquisition Regulations ("FAR"). Selections are made on a combination of
qualifications and cost criteria, and there is often competition for
assignments among several selected consultants after the award of a contract.
Almost all contracts for the Company's air pollution control services and
technologies are obtained through competitive bidding. Electric utilities,
government and industrial customers typically purchase these services and
technologies after a thorough evaluation of price, service, experience and
quality. Although price is an important factor, it is not necessarily the
determining factor because contracts are often awarded in part on the basis of
the efficiency or reliability of products or services.
There can be no assurance that the Company will be able to compete
successfully with its existing or any new competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
results or operations and financial condition. In addition, while the Company
has been successful in obtaining new contracts and renewing existing
contracts, there can be no assurance that due to competitive pressures the
margins achieved from such contracts will not be decreased.
REGULATION
Over the past twenty-five years, significant environmental laws at the
federal, state and local level have been enacted in response to public concern
over the environment. Those laws and their implementation through regulation
affect numerous industrial and governmental actions and form a key market
driver for the Company's products and services.
The Clean Air Act ("CAA"), and the federal and state regulations that
implement it, play an important role in the size and timing of the investments
industrial process and power generation facilities make in the Company's air
pollution control technologies. In 1990, Congress substantially amended the
CAA, incorporating control standards that would affect thousands of industrial
sources that were little touched by the original 1970 CAA. The four primary
titles of the amended CAA are:
. Title I--covering emission sources in areas of the U.S. designated as
being in "non-attainment" (i.e. do not meet specific federal ambient air
quality standards);
. Title III--covering sources that emit compounds listed as "hazardous air
pollutants;"
. Title IV--covering almost all coal-fired electric generating plants,
whose emissions contribute to acid rain; and,
. Title V--requiring thousands of sources to obtain federally-enforceable
permits in order to continue to operate.
Extensive public attention was given to the CAA's Title IV impact on
electric utilities regarding the installation of scrubber systems and other
air pollution control technologies to meet new emissions standards, as well as
continuous emissions monitoring systems ("CEMs") to verify compliance with
these standards. The EPA established a ten-year implementation schedule, which
included the following milestone dates for compliance: 1993 (installation of
CEMs), 1995 (Phase I utilities reductions) and 2000 (Phase II utilities
reductions). Title IV will continue to play a role in the Company's business
opportunities regarding new air pollution control equipment, and upgrades and
repairs to existing control systems and CEMs.
85
<PAGE>
Title III provisions for controlling Hazardous Air Pollutants ("HAPs") also
received considerable attention. Title III lists 189 chemical compounds as
"hazardous"; all "major" sources that emit these chemicals in amounts from 10
tons per year (tpy) of any one pollutant, or 25 tpy of any combination of
these pollutants, must obtain operating permits, even if these sources are not
subject--by virtue of their size or location--to other CAA provisions. The CAA
requires the EPA to regulate all such sources according to their industrial
category or process, under a statutory schedule that mandates promulgation of
HAPs emission standards, defined as Maximum Achievable Control Technology
("MACT"), for all 189 HAPs in all industrial source categories by the year
2000. Promulgation of these regulations has moved more slowly than originally
expected. However, each MACT regulation designates several control
technologies, many of which are offered by the Company.
Title I provisions set deadlines for areas of the country classified as
"non-attainment" (i.e. not achieving federal health-related standards for
ambient air for specified pollutants). The United States is divided into Air
Quality Control Regions ("AQCRs") that are generally coterminous with
Consolidated Metropolitan Statistical Areas in populated areas of the country.
Under the CAA, most states have prepared and are implementing State
Implementation Plans ("SIPs") that mandate source emissions limitations or
other control techniques to ensure attainment of the relevant health standards
by statutory dates. Sources emitting as little as 5 tpy of regulated
pollutants may be required to adopt control techniques. The SIPs provide a
method for states to achieve compliance schedules for the AQCR. The SIP
programs will in turn require facilities to install air pollution control
equipment to achieve attainment. In areas of the country where ambient air
quality meets health standards, statutory provisions for Prevention of
Significant Deterioration could require new, expanded, or modified facilities
to install Best Available Control Technology ("BACT"). In addition, new or
modified sources in certain industrial categories nationwide must comply with
New Source Performance Standards, which the EPA is required to update
periodically.
Title V provides the vehicle for the EPA--or the States to which the EPA has
delegated the authority--to stipulate enforceable permit conditions under
which each affected source must conduct its operations. These operating
permits generally establish facility-wide emission limits for affected sources
and extensive record-keeping and reporting requirements. As new federally-
mandated control requirements are promulgated, these operating permits must be
periodically revised to incorporate the new regulations.
More than 34,000 "major" sources or facilities in the U.S. are estimated to
require operating permits incorporating requirements of one or more CAA
titles. With the EPA's streamlined Title V program, affected sources have been
provided additional flexibility in their approach to CAA compliance.
The Company's clients affected by the CAA include industries in segments
such as electric generating, petroleum, petrochemical and chemical,
pharmaceutical, pulp and paper, cement and rock products, food processing,
primary and secondary ferrous and nonferrous metals, coating and printing,
waste-to-energy and incineration, and private and governmental facilities such
as wastewater treatment plants. For these and other clients, the Company
provides consulting services (for designing compliance strategies and
obtaining permits) and on-line pollution control and monitoring equipment, as
well as parts, rebuilds/upgrades and service and maintenance for its own
equipment and that of other suppliers.
The Safe Drinking Water Act of 1974 directs the EPA to set drinking water
standards for the estimated 57,561 community water supply systems in the
United States. In 1996, Congress reauthorized the act through the Safe
Drinking Water Act Amendments of 1996. The amendments will bring substantial
changes to the regulation and financing of water systems. The changes focus on
four elements:
. regulatory improvements, including standards based on better science,
risk assessment, and prioritization of efforts;
. new, stronger programs to prevent contamination of drinking water
sources;
. expanded information for water system consumers, including specific
"right-to-know" provisions; and
. new funding for states and community water systems through a drinking
water state revolving fund program.
86
<PAGE>
The new regulatory framework provides a more manageable program for
community systems to monitor and treat drinking water supplies than the
previous law. Communities therefore will not be as delayed by uncertainty and
will be able to design and install the technologies and systems needed to
achieve regulatory compliance.
The amendments maintain the current process and set a schedule for
implementation of two far-reaching proposals the EPA made in 1994. The first
proposal, the disinfectants and disinfection byproducts rule ("D/DBP"),
establishes disinfectant level goals for chlorination and maximum contaminant
level goals for potentially harmful disinfection byproducts, notably
trihalomethanes. The second proposal, the enhanced surface water treatment
rule ("ESWTR"), focuses on treatment requirements for waterborne disease-
causing organisms, or pathogens. Final adoption of these rules under the new
schedule will affect the majority of the Company's municipal clients who will
need to study, design, build and operate more sophisticated facilities.
Congress established for the first time a major federal financial assistance
program for community water systems, the drinking water state revolving fund
program. The amendments authorize nearly $9.6 billion through 2003 to be
allotted based on need to states to create low interest loan funds for
installing and upgrading drinking water treatment facilities. Many of the
Company's municipal water clients will be in a position to use these funds for
needed capital improvements.
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act")
established a system of standards, permits and enforcement procedures for the
discharge of pollutants from industrial and municipal wastewater sources. The
law set treatment standards for industries and wastewater treatment plants and
provided federal grants to assist municipalities in complying with the new
standards. According to the EPA's survey of wastewater and sewage treatment
needs, as much as $137 billion will be needed for construction and upgrade of
wastewater treatment facilities by the year 2012. The EPA and/or delegated
state agencies are placing some of these non-complying communities under
enforcement schedules. In cases of non-compliance, the EPA may petition for
court-ordered compliance and penalties. In 1987, the law was amended to phase
out federal grants by 1991 and replace them with state revolving funds, with a
commitment to provide federal money through 1994. It is presently expected
that federal funding will continue to be appropriated for state revolving
funds.
Key areas for which regulations have been issued include industrial
wastewater pretreatment, surface water toxics control and sewage sludge
disposal. The Clean Water Act requires pretreatment of industrial wastewater
before discharge into municipal systems and gives the EPA the authority to set
pretreatment limits for direct and indirect industrial discharges. These rules
issued by the EPA will increase the need for facility upgrading and control of
industrial discharges. The revised regulations tighten prohibitions against
discharge of toxic wastes, and subject industries, which discharge into public
sewers, to stringent controls, inspections, monitoring and testing
requirements. The surface water toxics program requires states to identify
waters adversely affected by toxics and propose control strategies. Also under
the Clean Water Act, the EPA published, in February 1993 and amended in
February 1994, a rule setting standards for the use and disposal of sludge
when it is applied to land to condition the soil, is disposed on land by
placing it in surface disposal sites, or is incinerated. Final "Stormwater"
regulations were issued in November 1990 and establish management requirements
for municipalities serving populations over 100,000 and industries within
specified categories.
In 1994, the EPA signed a final regulation that outlines the national
Combined Sewer Overflow ("CSO") policy. CSO systems are a combination of rain
and sanitary sewage in sewer systems. CSOs contain pollutants that are present
in the domestic and industrial wastewaters, as well as those in the urban
stormwater runoff that enters the combined sewer system. The CSO plan impacts
1,100 municipalities, mainly in the Northeast and Midwest. The EPA estimates
the cost associated with improving and upgrading these sewer-stormwater
systems at $41 billion over the next fifteen year period.
The Resource Conservation and Recovery Act of 1976 ("RCRA") provides a
comprehensive scheme for the regulation of generators and transporters of
hazardous waste as well as persons engaged in the treatment, storage and
disposal of hazardous waste. The intent of RCRA is to control hazardous wastes
from the time they
87
<PAGE>
are generated by industry until they are disposed of properly. In addition,
RCRA governs the disposal of solid wastes.
Under applicable RCRA regulations, generators who generate more than a
certain amount of hazardous waste per month are required to package and label
shipments of hazardous waste in accordance with detailed regulations and to
prepare a manifest identifying the material and stating its destination before
shipment off-site. Every facility that treats, stores or disposes of hazardous
waste must obtain a RCRA permit from the EPA, or a state agency which has been
authorized by the EPA to administer its state program, and must comply with
certain operating, financial responsibility and disclosure requirements. RCRA
also provides for corrective actions to remediate contamination resulting from
the disposal of hazardous waste.
Regulations issued pursuant to RCRA significantly affect the need for
environmental treatment and services in the following areas: municipal solid
waste disposal, land disposal of hazardous waste, remediation of environmental
contamination, and management of underground storage tanks. Regulations
establishing lead disposal restrictions for hazardous wastes are being
published in serial form.
In December 1995 the EPA proposed a new system for exempting high-volume,
low-risk wastes from RCRA hazardous waste management rules. This new rule,
part of the Hazardous Waste Identification Rule, would establish a risk-based
"floor" for these wastes, encouraging the use of innovative waste treatment
technologies. The EPA is also promoting a program that encourages RCRA
corrective action facilities to meet performance standards through self-
implementing programs. The Company expects that both of these programs will
benefit the Company by hastening the pace of cleanups and encouraging the use
of on-site engineered systems.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("Superfund") established the Superfund program to clean up hazardous
waste sites and provides for penalties for noncompliance. Superfund has been
interpreted to impose strict, joint and several liability on owners and
operators of facilities, transporters, and persons who arrange for the
disposal or treatment of hazardous substances for the costs of removal and
remediation, other necessary response costs and damages for injury to natural
resources. Where potentially responsible parties cannot be identified, are
without resources or are unresponsive, federal funds may be used. In addition,
the Superfund Amendments and Reauthorization Act of 1986 established more
stringent cleanup standards and accelerated mandatory schedules to ensure
rapid and permanent solutions in cleaning up sites. Superfund was slated for
reauthorization, and possible substantial revision, in 1994, 1995, 1996 and
again in 1997. It will be reconsidered in 1998, although it is unclear whether
reauthorization will occur due to the very controversial issues surrounding
retroactive liability and natural resource damage evaluation.
The exodus of U.S. industry from inner-city or other industrial locations
during the past thirty years has left behind thousands of former manufacturing
and commercial sites, many of which have been abandoned because of
contamination and associated liability to owners and/or operators. These
sites, known as "brownfields", number more than 500,000 nationwide. In 1995,
the Clinton Administration introduced the Brownfields Initiative, which was
designed to encourage inner-city economic development and property reuse by
resolving the cleanup and liability issues associated with contaminated
industrial properties. To date, the EPA and state agencies in 35 states have
initiated targeted efforts under this Initiative. These efforts have included
funding for pilot programs, legislation geared at limiting owner and lender
liability, and relaxed cleanup standards that balance potential environmental
and public health risk with future site use. Brownfields continue to be a high
priority for the Administration and this initiative is being expanded in scope
and funding. The Company is well-positioned to serve the market, which
includes current property owners and potential buyers, through its management
and cleanup capabilities and its long-term relationships with both
governmental and industrial clients.
In addition to federal environmental regulations, most states and many local
authorities have enacted laws regulating activities affecting the environment.
Many of these state and local laws have imposed similar stricter
88
<PAGE>
standards and regulations than their federal counterparts, and as a result are
also an important market driver for the Company's products and services.
BONDING
The Company is often required to procure bid and performance bonds from
surety companies, particularly for clients in the public sector. A bid bond
guarantees that the Company will enter into the contract under consideration
at the price bid and a performance bond guarantees performance of the
contract. The Company is required to indemnify surety companies providing bid
and performance bonds for any payments the sureties are required to make under
the bonds.
The Company and its subsidiaries obtain bid and performance bonds pursuant
to a Master Surety Agreement with USF&G. The Company also has outstanding bid
and performance bonds pursuant to agreements with Reliance Insurance Company,
United Pacific Insurance Company and Planet Insurance Company of Federal Way,
Washington, although no bonds have been obtained under this agreement since
June 27, 1995, and the Company anticipates that all of its foreseeable future
bonding requirements will be provided by USF&G. In addition, the Company's
Bank Credit Facility provides for issuance of letters of credit for purposes
which include direct or indirect fulfillment of bid and performance bond
requirements by the Company and its subsidiaries. The Company has never
forfeited a bid or a performance bond and no project sponsor has ever called
and drawn a bond issued in support of the Company's contract obligations.
In August 1997, USF&G notified the Company that it would suspend the renewal
and issuance of new bid and performance bonds as of September 30, 1997, due to
the Company's operating performance and resulting financial condition as
reported at the end of the fiscal quarter ended April 30, 1997, unless it
received indemnification from CGE or Anjou for at least 20% of all future bond
requests including renewals. Anjou has entered into an agreement with USF&G
regarding an arrangement pursuant to which, until terminated at Anjou's
discretion, Anjou will enter into guarantees of certain obligations of the
Company relating to the bonding of certain contracts under the Master Surety
Agreement dated as of October 31, 1995 between USF&G and the Company and its
subsidiaries. Such guarantees would cover, in each instance, 30% of the
aggregate amount of the bonds executed, procured or provided on behalf of the
Company or its subsidiaries on or after October 1, 1997, and certain penalty
amounts, up to $45 million. There can be no assurance that USF&G will be
willing to provide bid bonds to the Company following the Recapitalization
without a guarantee from CGE (or one of its affiliates) and there can be no
assurance that CGE would be willing to provide such a guarantee following the
Recapitalization. See "Risk Factors--Bonding"; "--Dependency on Key Projects
and Government Contracts."
INSURANCE
The Company currently maintains various types of insurance, including
workers' compensation, general and professional liability and property
coverages. The Company believes that it presently maintains adequate insurance
coverages for all of its present operational activities. It has been both a
Company policy and a requirement of many of its clients that the Company
maintain certain types and limits of insurance coverage for the services and
products it offers, provided that such types and limits can be obtained on
commercially reasonable terms. In addition to existing coverages, the Company
has been successful in obtaining commercially reasonable coverage for certain
pollution risks, though coverage has been on a claims made rather than
occurrence basis due to the professional nature of some of the Company's
exposures. Claims made policies provide coverage to the Company only for
claims reported during the policy period. The Company's general liability and
other insurance policies have historically contained absolute pollution
exclusions, brought about in large measure because of the insurance industry's
adverse claims experience with environmental exposures. Accordingly, there can
be no assurance that environmental exposures that may be incurred by the
Company and its subsidiaries will continue to be covered by insurance, or that
the limits currently provided or that may be obtained in the future will be
sufficient to cover such exposures. A successful claim or claims in an amount
in
89
<PAGE>
excess of the Company's insurance coverage or for which there is no coverage
could have a material adverse effect on the Company.
PROPERTIES
The Company believes that its facilities are suitable and adequate for its
current and foreseeable operational and administrative needs. At October 30,
1997 the principal physical properties of the Company were as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
SQUARE FOOTAGE SQUARE FOOTAGE LEASE
LOCATION FUNCTION OWNED LEASED EXPIRATION
- -------- -------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Branchburg, NJ.......... Corporate Office/Metcalf 89,466 on -- --
& Eddy Office and 46 acres
Research-Cottrell Office
Monroeville, PA......... Research-Cottrell 43,035 on -- --
Office and Manufacturing 3 acres
facility
Wakefield, MA........... Metcalf & Eddy Office -- 139,687 2005
Palo Alto, CA........... Metcalf & Eddy Office -- 17,672 2005
Miramar, FL............. Metcalf & Eddy Office -- 13,936 2005
Itasca, IL.............. Research-Cottrell Office -- 13,759 2002
Houston, TX............. PSG Corporate Office -- 22,706 2003
Honolulu, HI............ Metcalf & Eddy Office -- 15,833 2003
Santa Barbara, CA....... Metcalf & Eddy Office -- 4,328 2000
New York, NY............ Metcalf & Eddy Office -- 10,413 2004
Columbus, OH............ Metcalf & Eddy Office -- 22,515 2004
Irvine, CA.............. Research-Cottrell -- 80,561 1999
Office & Manufacturing
Atlanta, GA............. Metcalf & Eddy Office -- 11,051 2004
San Diego, CA........... Metcalf & Eddy Office -- 12,978 2002
Hardeng Geognies, -- 7,632 2000
Belgium................ Research-Cottrell Office
Koln, Germany........... Research-Cottrell Office -- 14,350 2003
</TABLE>
In addition, the Company leases or owns space in approximately 50 other
domestic locations and 17 locations in Canada, Europe and the Middle East. The
Company has no current plans or requirements for additional space. Also, the
Company operates and provides services from approximately 115 treatment
facilities, two of which it owns.
EMPLOYEES
At October 30, 1997, the Company had approximately 2,900 full-time
employees, of which approximately 1,600 are employed in PSG, 900 are employed
in Metcalf & Eddy and 400 are employed in Research-Cottrell.
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 it in
advising the City of Houston regarding the benefits
90
<PAGE>
that could result from the privatization of Houston's water and wastewater
systems. PSG has cooperated and continues to cooperate with the Department of
Justice 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 then Chief Executive
Officer, on administrative leave of absence with pay. The former PSG Chief
Executive Officer, 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.
The City of Bremerton, Washington brought a contribution action against M&E
Services, the operator of a city-owned wastewater treatment plant from 1987
until late 1995. The contribution action arises from two prior lawsuits
against the City for alleged odor nuisances brought by two groups of
homeowners neighboring the plant. In the first homeowners' suit, the City paid
$4.3 million in cash and approximately $5 million for odor control technology
to settle the case. M&E Services understands the odor control measures
generally have been successful and the odors have been reduced as a result.
M&E Services was not a party to the first homeowner's suit, which has been
dismissed with prejudice as to all parties. In the settlement of the second
homeowners' case, the City of Bremerton paid the homeowners $2.9 million, and
M&E Services contributed $0.6 million to the settlement without admitting
liability. All claims raised by the homeowners in the second suit (except for
two recalcitrant homeowners) were resolved. All claims by and between M&E
Services and the City in the second homeowner's suit were expressly reserved
and will be tried after the City's contribution action, which is currently
scheduled for trial in March 1998. The City is seeking to recover the amounts
it expended on the two settlements, damages for M&E Services' alleged
substandard operation of the plant, and attorneys' fees. M&E Services denies
any liability to the City and believes it has meritorious defenses to the
claim. However, no assurances can be given that an adverse judgment would not
have a material adverse effect on the financial position or results of
operations of M&E Services or the Company 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. Moreover, as a general matter, providers of services
similar to those provided by the Company may be subject to lawsuits alleging
negligence or other similar claims and environmental liabilities, which may
involve claims for substantial damages. Damages assessed in connection with,
and the costs of defending any such actions could be substantial. The
Company's management believes that the levels of coverage are adequate to
cover currently estimated exposures. Although the Company believes that it
will be able to obtain adequate insurance coverage in the future at acceptable
costs, there can be no assurance that the Company will be able to obtain such
coverage or will be able to do so at an acceptable cost or that the Company
will not incur significant liabilities in excess of policy limits.
91
<PAGE>
MANAGEMENT
Set forth below are the names, ages and principal occupations of the
directors and executive officers of the Company as of October 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William Kriegel............. 52 Chairman of the Board of Directors
Thierry Mallet.............. 38 President, Chief Executive Officer and Director
Alain Brunais............... 49 Senior Vice President, Chief Financial Officer and Director
Douglas A. Satzger.......... 46 Senior Vice President, General Counsel and Secretary
Joseph R. Vidal............. 50 Treasurer
Jekabs P. Vittands.......... 61 Senior Vice President and President, Metcalf & Eddy, Inc.
George C. Mammola........... 57 Senior Vice President and President, Research-Cottrell, Inc.
Patrick L. McMahon.......... 49 Senior Vice President and President, Professional Services
Group, Inc.
Jean-Claude Banon........... 49 Director
Daniel Caille............... 46 Director
Carol Lynn Green............ 50 Director
John W. Morris.............. 76 Director
</TABLE>
Mr. Kriegel was elected Chairman of the Board in October 1997 and has served
as a director of the Company since June 14, 1994. Mr. Kriegel has served as
Chairman of the Board, President, Chief Executive Officer and a Director of
Sithe Energies, Inc. and all of its subsidiaries since 1981. Prior to coming
to the United States in 1984, Mr. Kriegel co-founded an unaffiliated French
energy company that within three years of its formation in 1980 became
France's largest privately-owned company engaged in the development of small
hydro-electric projects. Since December 1996, Mr. Kriegel has served as
Chairman of the Board and Chief Executive Officer of Anjou, the United States
holding company subsidiary of CGE. In this capacity, Mr. Kriegel is the
representative of CGE in the United States. Mr. Kriegel has been designated by
CGE as a director of the Company under the Investment Agreement.
Mr. Mallet was appointed President and Chief Executive officer of the
Company on October 24, 1997 and director of the Company on October 26, 1997.
Prior to joining the Company, Mr. Mallet served from 1995 as "Consejo
Delegado" (President and CEO) of Sociedad Mediterranea de Aguas ("SMA") which
manages the water and wastewater business of CGE in Spain. Prior to SMA, Mr.
Mallet was Charge de Mission to the General Management of CGE in Paris. Mr.
Mallet has been designated by CGE as President, Chief Executive Officer and
director of the Company under the Investment Agreement.
Mr. Brunais was elected Vice President and Chief Financial Officer of the
Company in September 1994, a director in November 1996 and Senior Vice
President in May 1997. Prior to joining the Company, Mr. Brunais was
responsible since 1990 for foreign investment, primarily in the United Kingdom
under the direction of the Finance Director of CGE. From 1983 to 1989 he was
responsible for corporate development for Ciments Francdis in the U.S. and
Canada. Prior thereto, Mr. Brunais organized a sales and services network for
Aerospatiale General Aviation line of aircraft in Europe, Africa and North
America. Mr. Brunais has been designated by CGE as Chief Financial Officer and
a director of the Company under the Investment Agreement.
Mr. Satzger joined the Company in June 1991 as Deputy General Counsel. He
was elected Senior Vice President, General Counsel and Secretary in July 1993.
Prior to joining the Company, Mr. Satzger was a partner in the law firm
Richards & O'Neil, New York, New York, from April 1985 to June 1991.
Mr. Vidal was elected Treasurer of the Company in January 1995. Prior to
joining the Company, Mr. Vidal had broad experience in both international and
domestic treasury operations, most recently with American
92
<PAGE>
Cyanamid Company from 1982 to 1995 and prior thereto with Bristol-Myers
Squibb. Mr. Vidal has also had experience as a controller and auditor and
began his professional career with the accounting firm of Arthur Andersen LLP.
Mr. Vittands was elected President of Metcalf & Eddy in February 1997 and
Senior Vice President of the Company in May 1997. Prior to being named
President, he was the branch manager of Metcalf & Eddy's Northeast Region. Mr.
Vittands joined Metcalf & Eddy in 1963, and has served in numerous capacities
since then, including as client principal for the Massachusetts Water Resource
Authority with responsibility for the Boston Harbor Project and for
Washington, D.C., among others.
Mr. Mammola has been the President of Research-Cottrell since December 1994
and was elected Senior Vice President of the Company in May 1997. From 1992 to
1994, he served in various senior management positions for Research-Cottrell.
From 1989 to 1992 he served as Executive Vice President and General Manager of
REECO. Prior to joining REECO, Mr. Mammola served as Executive Vice President
of PPS Inc., an industrial distributor of fluid and air handling systems.
Prior to this, he served in various positions for Interpace Corporation, a
manufacturer and provider of products and services domestically and
internationally to the water and wastewater and utility industries.
Mr. McMahon joined PSG in May 1995 as Senior Vice President and Chief
Operating Officer. He served as President and CEO on an interim basis from
August 1996 to December 1996, when he was named President of PSG by the
Company. He was elected Senior Vice President of the Company in May 1997.
During the nine-month period immediately prior to joining PSG, Mr. McMahon
served as Vice President of National Accounts at International Technology
Corporation. Before joining PSG, Mr. McMahon spent 23 years in a number of
management positions at Brown & Root, Inc., where his responsibilities
included strategic planning, international business development and
operations.
Mr. Banon was elected as a director of the Company on October 9, 1997. Since
1989, Mr. Banon has been Managing Director of General Utilities PLC, the
holding company for CGE's investments in the water industry in the United
Kingdom, and since 1992 he has been Managing Director of General Utilities
Holdings Ltd. the holding company for all CGE activities in the United
Kingdom. In this capacity, Mr. Banon is the representative of CGE in the
United Kingdom. Prior to 1989, Mr. Banon was General Management Delegate
responsible for overseeing the development of CGE's business in the United
States. Mr. Banon has been designated by CGE as a director of the Company
under the Investment Agreement.
Mr. Caille was elected as a director of the Company on May 29, 1997. Mr.
Caille presently serves as the Chief Executive of CGE's worldwide water
business which has annual revenues in excess of $7 billion. Previously, Mr.
Caille served as Chairman of the Board of Compagnie Generale de Sante, CGE's
health care subsidiary which he founded in 1987. Mr. Caille joined CGE in 1982
as director of research and development and created Anjou Recherche, CGE's
center for research and development related to its water and wastewater
activities, and he served as Director of Anjou Recherche from 1982 to 1990.
Mr. Caille has been designated by CGE as a director of the Company under the
Investment Agreement.
Ms. Green was elected as a director of the Company on June 14, 1994. Ms.
Green is a Partner in the Washington, D.C. law office of Bryan, Cave LLP where
she has practiced environmental law since 1986. Prior thereto, Ms. Green
served at the United States Department of Justice from 1980 to 1986 as the
first Assistant Chief of the Environmental Enforcement Section. At the Justice
Department, Ms. Green was liaison with the EPA on Clean Water Act enforcement
and worked with the EPA in developing the First Superfund settlement policy
and designing some of the early Superfund generator settlements. She currently
serves on the National Environmental Policy Institute's panel to reinvent the
EPA's enforcement and compliance programs.
Lieutenant General Morris became director of the Company in June 1992. From
1988 to October 1992, General Morris served as a director of Metcalf & Eddy
Companies Inc. Lieutenant General Morris has been President of J.W. Morris
Ltd., an engineering consulting firm, for more than five years. In addition,
he presently
93
<PAGE>
serves as President of the National Waterways Foundation, Chairman of the
Water Resources Congress and Chairman of the Environmental Effects Committee
of the U.S. Committee on Large Dams. From 1986 to 1987 he served as President
and Chairman of the Engineering Group of Planning Research Corporations.
Lieutenant General Morris served as the Chief of Engineers, U.S. Army Corps of
Engineers, from 1976 to 1980.
BOARD OF DIRECTORS AND COMMITTEES
General. Directors are elected annually and executive officers hold office
for such terms as may be determined by the Board of Directors.
Board Meetings. During the Company's fiscal year ended October 31, 1996, the
Board of Directors of the Company held a total of eight meetings. During the
fiscal year ended October 31, 1996, each director attended at least 75% of the
aggregate number of meetings of the Board of Directors and committees on which
he or she served during the period he or she served on the Board of Directors.
Committees of the Board. The Board of Directors of the Company has an Audit
Committee and a Compensation and Stock Option Committee, and, in connection
with the Recapitalization, has established a Business Planning Committee.
The Audit Committee of the Board of Directors met five times during the
fiscal year ended October 31, 1996. Ms. Green and Lieutenant General Morris
currently serve as members of the Audit Committee, which reviews the
engagement of the Company's independent auditors, reviews annual financial
statements, considers matters relating to accounting policy and internal
controls and reviews the scope of annual audits.
The Compensation and Stock Option Committee of the Board of Directors met
once during the fiscal year ended October 31, 1996. Lieutenant General Morris
and Ms. Green are currently members of the Compensation and Stock Option
Committee, which reviews, approves and makes recommendations on the Company's
compensation policies, practices and procedures to ensure that legal and
fiduciary responsibilities of the Board of Directors are carried out and that
such policies, practices and procedures contribute to the success of the
Company. The Compensation and Stock Option Committee also administers the
Company's 1989 Long-Term Incentive Compensation Plan ("Long-Term Incentive
Plan").
The Company does not have a standing Nominating Committee.
In connection with the Recapitalization, the Company has established a
Business Planning Committee to review the business strategies prepared by
senior management and, as appropriate, make recommendations on the formulation
and implementation of those strategies that have as their objectives
increasing stockholder value. The Business Planning Committee, which will
remain in place through the end of fiscal year 1999, is comprised of three CGE
appointed directors and two directors who are unaffiliated with and
independent of CGE. Among other things, the Business Planning Committee will
identify areas where CGE's management expertise and the Company's business may
be effectively integrated. The Chairman of the Business Planning Committee is
currently Daniel Caille, the Chief Executive of CGE's worldwide water
business.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company or any of its affiliated
companies receive an annual fee of $18,000 for service on the Board of
Directors and an additional $7,500 per annum for service on each Committee
thereof. In addition, directors are reimbursed for out-of-pocket expenses of
attending Board and Committee meetings.
Each Special Committee member is entitled to receive a flat fee of $50,000
for his or her service on the Special Committee and its work through October
1, 1997 and is entitled to reimbursement for reasonable expenses. The Company
and the Special Committee have not reached any agreement with respect to
compensation for Special Committee work performed or to be performed after
October 1, 1997.
94
<PAGE>
In addition, pursuant to the Long-Term Incentive Plan, on July 31 of each
year each director who is a member of the Compensation and Stock Option
Committee with responsibility for administering such Plan as of such date is
granted a non-qualified option to purchase either (i) 3,000 shares of Class A
Common Stock, if the director has served less than one year on the Committee,
or (ii) 500 shares of Class A Common Stock, if the director has served one
year or more on the Committee. The options granted vest annually in four equal
installments commencing one year from the date of grant with exercise prices
equal to the fair market value of the Class A Common Stock on the grant date.
The Long-Term Incentive Plan provides that, upon a "change-in-control" of the
Company (as determined by the Board of Directors), any outstanding options not
theretofore fully exercisable shall immediately become exercisable in their
entirety.
95
<PAGE>
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended October 31, 1996, 1995
and 1994, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to each of the five most highly
compensated executive officers of the Company in all capacities in which they
served. Messrs. Elia, Houdaille, Deieso and Stump each ceased to be an
executive officer of the Company as of April 1996, November 1996, February
1997 and December 1996, respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- ------------------------
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARD(S) ($) OPTIONS (#) ($)
--------------------------- ---- ---------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Claudio Elia*.......... 1996 157,606 300,000 0 60,000(1) 0
Chairman of the Board 1995 275,000 300,000 0 0 1,500(2)
and Chief Executive 1994 99,429(3) 0 2,500(4) 100,000(5) 0
Officer
Alain Houdaille (6)*... 1996 106,121 195,000 0 0 45,840(7)
President and Chief
Executive Officer
Alain Brunais.......... 1996 207,450 75,000 0 18,000(1) 77,000(8)
Senior Vice President, 1995 203,674 85,000 0 0 74,000(9)
Chief Financial 1994 39,168 17,000 0 50,000(10) 40,000(11)
Officer and Director
Donald A. Deieso*...... 1996 213,896 85,000 0 46,500(1) 35,250(12)
President and Chief 1995 210,000 170,000 0 0 23,500(13)
Executive Officer, 1994 195,023 0 0 0 0
Metcalf & Eddy, Inc.
George C. Mammola...... 1996 213,996 55,000 0 35,500(1) 15,750(14)
Senior Vice President 1995 210,000 110,000 0 0 8,868(15)
and President, 1994 184,080 0 0 0 693(16)
Research-Cottrell,
Inc.
Michael M. Stump*...... 1996 234,060 0 0 20,000(1) 22,579(17)
President and Chief 1995 220,000 180,000 0 0 13,600(18)
Executive Officer, 1994 65,824(19) 110,000 0 40,000(5) 0
Professional Services
Group, Inc.
Patrick L. McMahon..... 1996 170,019 75,000 0 12,000(1) 2,200(20)
Senior Vice President 1995 66,003(21) 60,000 0 10,000(22) 1,100(23)
and President,
Professional Services
Group, Inc.
</TABLE>
- --------
* No longer employed by the Company.
(1) Mr. Elia was granted 60,000 options exercisable at $6.563 per share
pursuant to the Company's Long-Term Incentive Plan. Mr. Brunais was
granted 18,000 options exercisable at $6.563 per share pursuant to the
Company's Long-Term Incentive Plan. Mr. Deieso was granted 20,129 options
exercisable at $6.563 per share pursuant to the Company's Long-Term
Incentive Plan and 26,371 options exercisable at $8.00 per share pursuant
to the Company's "Fresh Start" program. Mr. Mammola was granted 20,157
options exercisable at $6.563 per share pursuant to the Company's Long-
Term Incentive Plan and 15,343 options exercisable at $8.00 per share
pursuant to the Company's "Fresh Start" program. Mr. Stump was granted
20,000 options exercisable at $6.563 per share pursuant to the Company's
Long-Term Incentive Plan. Mr. McMahon was granted 12,000 options at $6.563
per share pursuant to the Company's Long-Term Incentive Plan.
96
<PAGE>
(2) "All Other Compensation" for Mr. Elia for fiscal year 1995 consists of
$1,500 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Elia.
(3) Represents amounts paid to Mr. Elia during fiscal year 1994 since joining
the Company on June 14, 1994. Mr. Elia was paid a base salary of $275,000.
(4) As of October 31, 1995, Mr. Elia held 2,500 shares of restricted Class A
Common Stock, vesting over a four-year period, with an aggregate value of
$12,500. The Company's Long-Term Incentive Plan provides that, upon a
"change-in-control" of the Company (as determined by the Board of
Directors), all restrictions on these shares will lapse.
(5) In August 1994, Mr. Elia was granted options to purchase 100,000 shares of
Class A Common Stock and Mr. Stump was granted options to purchase 40,000
shares of Class A Common Stock. The options vest over four years, 25% of
the options vesting on each anniversary of the issuance date.
(6) Mr. Houdaille served as President and Chief Executive Officer of the
Company from May 1996 to November 1996.
(7) "All Other Compensation" for Mr. Houdaille for fiscal year 1996 consists
of $45,840 of housing expenses paid on behalf of Mr. Houdaille.
(8) "All Other Compensation" for Mr. Brunais for fiscal year 1996 consists of
approximately $71,000 paid as a housing allowance on behalf of Mr. Brunais
and approximately $6,000 paid as an automobile allowance.
(9) "All Other Compensation" for Mr. Brunais for fiscal year 1995 consists of
approximately $71,000 paid as a housing allowance on behalf of Mr. Brunais
and approximately $3,000 paid as an automobile allowance.
(10) Mr. Brunais was granted 50,000 options exercisable at $8.00 per share
pursuant to the Company's Long-Term Incentive Plan.
(11) "All Other Compensation" for Mr. Brunais for fiscal year 1994 consists of
$40,000 paid as a housing allowance on behalf of Mr. Brunais.
(12) "All Other Compensation" for Mr. Deieso for fiscal year 1996 consists of
approximately $12,000 paid as an automobile allowance, $3,750 contributed
to the Company's Savings and Retirement Plan on behalf of Mr. Deieso, and
$19,500 credited to the Company's Supplemental Pension Plan on behalf of
Mr. Deieso.
(13) "All Other Compensation" for Mr. Deieso for fiscal year 1995 consists of
$3,750 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Deieso, $12,750 credited to the Company's Supplemental Pension
Plan on behalf of Mr. Deieso, and $7,000 paid to Mr. Deieso as an
automobile allowance.
(14) "All Other Compensation" for Mr. Mammola for fiscal year 1996 consists of
approximately $12,000 paid as an automobile allowance and $3,750
contributed to the Company's Savings and Retirement Plan on behalf of Mr.
Mammola.
(15) "All Other Compensation" for Mr. Mammola for fiscal year 1995 consists of
$4,055 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Mammola and $4,813 paid to Mr. Mammola as an automobile allowance.
(16) "All Other Compensation" for Mr. Mammola for fiscal year 1994 consists of
$693 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Mammola.
(17) "All Other Compensation" for Mr. Stump for fiscal year 1996 consists of
$9,065 paid to PSG's Pension Plan on behalf of Mr. Stump, $9,100 of life
insurance paid on behalf of Mr. Stump, $4,164 paid as an automobile
allowance, and $250 of country club subscriptions paid on behalf of Mr.
Stump.
(18) "All Other Compensation" for Mr. Stump for fiscal year 1995 consists of
$3,000 contributed to Mr. Stump's 401(k) Plan as a matching contribution,
$6,000 contributed to PSG's Pension Plan on behalf of Mr. Stump, $4,236
paid to Mr. Stump as an automobile allowance, $232 of country club
subscriptions paid on behalf of Mr. Stump, and $132 of other compensation
paid to or on behalf of Mr. Stump.
(19) Represents amounts paid to Mr. Stump during fiscal year 1994 since
joining the Company on June 14, 1994. Mr. Stump was paid a base salary of
$177,171 per annum for fiscal year 1994.
(20) "All Other Compensation" for Mr. McMahon during fiscal year 1996 consists
of approximately $2,200 resulting from an automobile leased for Mr.
McMahon by PSG.
(21) Represents amounts paid to Mr. McMahon during fiscal year 1995 since
joining PSG in May 1995. Mr. McMahon was paid a base salary of $170,000.
(22) Mr. McMahon was granted 10,000 options exercisable at $5.75 per share in
June 1995.
(23) "All Other Compensation" for Mr. McMahon during fiscal year 1995 consists
of approximately $1,100 resulting from an automobile leased for Mr.
McMahon by PSG.
97
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the named
executives concerning unexercised options, held as of October 31, 1996. No
options were exercised during fiscal 1996 by any of the named executive
officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) (#) (#)
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Claudio Elia (Estate)(3)*.. 83,000 77,000 0(2) 0(2)
Alain Brunais(4)........... 34,900 33,100 0(2) 0(2)
Donald A. Deieso(5)*....... 24,256 22,244 0(2) 0(2)
George C. Mammola(6)....... 18,758 16,742 0(2) 0(2)
Michael M. Stump(7)*....... 31,000 29,000 0(2) 0(2)
Patrick L. McMahon(8)...... 9,100 12,900 0(2) 0(2)
</TABLE>
- --------
* No longer employed by the Company.
(1) The value of unexercised in-the-money options at fiscal year-end assumes a
fair market value for the Class A Common Stock of $6.375, the closing sale
price per share of the Class A Common as reported on the American Stock
Exchange Composite Tape for October 31, 1996.
(2) The exercisable and unexercisable options held by Messrs. Elia (Estate),
Brunais, Deieso, Mammola, Stump and McMahon were not in-the-money as of
October 31, 1996.
(3) Effective April 3, 1996, Mr. Elia ceased to be an executive of the Company
due to his death, and the options held by Mr. Elia as of such date are
currently held and exercisable by his estate. The exercise price of the
options held by Mr. Elia is (i) $6.563 per share in the case of his option
to purchase 60,000 shares granted in March 1996 or (ii) $8.00 per share in
the case of his option to purchase 100,000 shares granted in August 1994.
(4) The exercise price of the options held by Mr. Brunais is (i) $6.563 per
share in the case of his option to purchase 18,000 shares granted in March
1996 or (ii) $8.00 per share in the case of his option to purchase 50,000
shares granted in August 1994.
(5) The exercise price of the options held by Mr. Deieso is (i) $6.563 per
share in the case of his option to purchase 20,129 shares granted in March
1996 or (ii) $8.00 per share in the case of his option to purchase 26,371
shares granted in January 1996. Mr. Deieso resigned as President and Chief
Executive Officer of Metcalf & Eddy on February 26, 1997. The options held
by Mr. Deieso as of the date of this table expired as of May 26, 1997.
(6) The exercise price of the options held by Mr. Mammola is (i) $6.563 per
share in the case of his option to purchase 20,157 shares granted in March
1996 or (ii) $8.00 per share in the case of his option to purchase 15,343
shares granted in January 1996.
(7) The exercise price of the options held by Mr. Stump is (i) $6.563 per
share in the case of his option to purchase 20,000 shares granted in March
1996 or (ii) $8.00 per share in the case of his option to purchase 40,000
shares granted in August 1994. Pursuant to the Stump Separation Agreement,
each of the options held by Mr. Stump was terminated as of December 16,
1996.
(8) The exercise price of options held by Mr. McMahon is (i) $6.563 per share
in the case of his option to purchase 12,000 shares granted in March 1996
or (ii) $5.75 per share in the case of his option to purchase 10,000
shares granted in August 1994.
98
<PAGE>
SUPPLEMENTAL PENSION PLAN
The following table shows the estimated annual benefits payable upon
retirement to participants in the Company's Supplemental Pension Plan.
ESTIMATED ANNUAL RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE
BONUS ---------------------------------------
REMUNERATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 25,000........................ $ 5,625 $ 7,500 $ 9,375 $11,250 $13,125
50,000........................ 11,250 15,000 18,750 22,500 26,250
75,000........................ 16,875 22,500 28,125 33,750 39,375
100,000........................ 22,500 30,000 37,500 45,000 52,500
125,000........................ 28,125 37,500 46,875 56,250 65,625
</TABLE>
The unfunded Supplemental Pension Plan provides additional annual retirement
benefits equal to 1.5% of the average of the participant's final five bonuses
multiplied by the participant's years of service, up to a maximum of 35 years.
No separate accounts are maintained and no amounts are vested until a
participant reaches retirement in the employ of the Company. The benefit
amounts set forth in the Table above are not subject to reduction for social
security benefits or for other offsets. During the fiscal year ended October
31, 1996, Donald A. Deieso, who is named in the Summary Compensation Table,
was the only active employee participating in the Supplemental Pension Plan.
By reason of Mr. Deieso's resignation from his employment with the Company on
February 26, 1997, he forfeited all benefits under the Supplemental Pension
Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Employment Contracts. On December 4, 1996, Mr. Stump resigned as President
and Chief Executive Officer of PSG. PSG and Mr. Stump have entered into an
agreement dated December 16, 1996 (the "Stump Separation Agreement") relating
to their relationship following the termination of his employment, which
supersedes all rights and obligations (other than obligations imposed upon Mr.
Stump pertaining to confidentiality, non-compete, and intellectual property)
outstanding pursuant to the Employment Agreement with Mr. Stump. Under the
terms of the Stump Separation Agreement: (a) Mr. Stump agreed not to compete
with PSG and Metcalf & Eddy during the period beginning on December 4, 1996
and ending on December 31, 1997; (b) Mr. Stump released the Company, all of
its affiliated entities (including PSG, Metcalf & Eddy, and Research-
Cottrell), and others (collectively, the "Releasees") from any and all claims
which he has or had against each or any of the Releasees regarding all events
that have occurred through and including December 16, 1996; (c) PSG agreed to
pay Mr. Stump $269,175.20 prior to January 4, 1997; (d) PSG agreed to pay
$9,381.25 to Mr. Stump's lawyers; (e) all stock options held by Mr. Stump at
the time of the termination of his employment were canceled; (f) PSG agreed to
forgive a loan to Mr. Stump in the amount of $90,375.19 (including accrued
interest) and an advance of $20,000.00; (g) Mr. Stump agreed to cooperate
fully with the Company and PSG with respect to any civil litigation, civil
investigation, or civil governmental proceeding now pending or hereafter
instituted; and (h) Mr. Stump agreed to indemnify and hold each and all of the
Releasees harmless from and against any and all claims arising out of any
breach of the Stump Separation Agreement by Mr. Stump.
On November 7, 1996 the Company entered into an employment agreement (the
"Employment Agreement") with Robert B. Sheh, pursuant to which Mr. Sheh served
as Chief Executive Officer and President of the Company. Consistent with the
terms of the Investment Agreement, Mr. Sheh was appointed Chief Executive
Officer and President pursuant to CGE's right to designate the Chief Executive
Officer of the Company. The Employment Agreement provided for an annual base
salary of $400,000, with such increases as determined by the Board of
Directors of the Company from time to time in its sole discretion. In
addition, the Employment Agreement provided that Mr. Sheh would be eligible to
receive a supplemental bonus of up to 60% of Mr. Sheh's base salary in each
fiscal year, which bonus would be determined by the Board of Directors of the
Company. Mr. Sheh was awarded 50,000 fully vested options upon commencement of
employment, with 50,000 options to be awarded each year at the beginning of
the second, third, fourth and fifth fiscal year of his service. If Mr. Sheh's
employment was terminated by the Company for cause, the Employment Agreement
provided that the Company would pay to Mr. Sheh only his base salary through
the date of termination. If Mr. Sheh's employment was terminated without cause
(absent death or disability), the Employment Agreement provided for Mr. Sheh
to receive certain payments for a period of two years from the date of
termination.
99
<PAGE>
On October 24, 1997, Mr. Sheh and the Company jointly entered into an
agreement (the "Sheh Separation Agreement"), which terminated the Employment
Agreement and provided for the following: (i) except for certain non-
competition and confidentiality provisions which shall survive, the
termination of the Employment Agreement, (ii) the resignation of Mr. Sheh as a
director of the Company, and (iii) the payment of certain amounts to Mr. Sheh
over a two-year period.
Termination of Employment. On February 26, 1997, Mr. Deieso resigned as
President and Chief Executive Officer of Metcalf & Eddy to pursue other
interests. Pursuant to the terms of the Company's Long-Term Incentive Plan,
the stock options held by Mr. Deieso as of February 26, 1997 expired as of May
26, 1997. The Company has appointed Jekabs P. Vittands as President of Metcalf
& Eddy to replace Mr. Deieso. Mr. Vittands previously was a Senior Vice
President of Metcalf & Eddy.
Change in Senior Management. On October 24, 1997, Mr. Sheh was succeeded by
Thierry Mallet as President and Chief Executive Officer of the Company, and
the Board of Directors of the Company appointed then serving director Mr.
William Kriegel as Mr. Sheh's successor as Chairman of the Board of the
Company. On October 26, 1997, the Board also named Mr. Mallet as a director of
the Company. Mr. Kriegel has been a Director of AWT since 1994. Since December
1996, he has served as Chairman and Chief Executive Officer of Anjou. Mr.
Kriegel is also Chairman, President and Chief Executive Officer of Sithe
Energies, Inc. and all of its subsidiaries. Prior to his appointment, Mr.
Mallet served as Chief Executive Officer of CGE's water and wastewater
activities in Spain.
Options. The Company's Long-Term Incentive Plan provides that, upon a
"change-in-control" of the Company (as determined by the Board of Directors),
any outstanding options not theretofore fully exercisable shall immediately
become exercisable in their entirety. The Board of Directors has determined
that the consummation of the transactions contemplated by the Investment
Agreement constituted a "change-in-control" for purposes of such plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On and prior to August 12, 1996, the Compensation and Stock Option Committee
(the "Compensation Committee") of the Board of Directors consisted of Messrs.
Deschamps and Senior, Lieutenant General Morris and Ms. Green. Mr. Senior
resigned from the Board of Directors of the Company on August 12, 1996. Mr.
Deschamps resigned from the Board of Directors of the Company on January 21,
1997. Since January 21, 1997, the Compensation Committee consists of
Lieutenant General Morris and Ms. Green. Mr. Deschamps is Adjunct Director
General of CGE. Mr. Enrique Senior, a former director of the Company, is a
Managing Director of Allen & Company, which has performed investment banking
and other services for the Company from time to time including serving as
financial advisor to the Company in connection with the transactions
contemplated by the Investment Agreement. Ms. Green is a partner at the law
firm of Bryan, Cave, LLP, which has performed limited legal services for the
Company from time to time. Ms. Green has not personally represented the
Company.
100
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth information regarding the beneficial
ownership of the Company's capital stock as of , 1997 and on a pro forma
basis assuming that the Requisite Consents are obtained, the Charter Amendment
is effected and, in the case of the "Maximum Subscription," that each Rights
holder exercises its Basic Subscription Privilege in full, and, in the case of
the "Minimum Subscription," that CGE is the only stockholder exercising Rights
in the Rights Offering in each case at the Subscription Price, with respect to
(i) each person known by the Company to beneficially own in excess of 5% of
the outstanding shares of Class A Common Stock, (ii) each of the Company's
Directors, (iii) each named executive officer of the Company, and (iv) all
Directors and executive officers as a group. Unless otherwise indicated, each
of the stockholders has sole voting and investment power with respect to the
shares beneficially owned.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NUMBER OF PRO FORMA NUMBER OF PRO FORMA
SHARES OF PERCENT OF SHARES OF PERCENT OF
NUMBER OF CLASS A SHARES OF CLASS A SHARES OF
SHARES OF PERCENT OF COMMON STOCK CLASS A COMMON STOCK CLASS A
CLASS A SHARES OF BENEFICIALLY COMMON STOCK BENEFICIALLY COMMON STOCK
COMMON STOCK CLASS A OWNED OUTSTANDING OWNED OUTSTANDING
BENEFICIALLY COMMON STOCK MAXIMUM MINIMUM MINIMUM MINIMUM
NAME OF PERSON OR GROUP OWNED OUTSTANDING SUBSCRIPTION EXERCISE SUBSCRIPTION SUBSCRIPTION
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Carol L. Green............ 0 *
William Kriegel........... 0 *
John W. Morris............ 3,079 *
Robert B. Sheh............ 50,000(1) *
Alain Brunais............. 35,900(2) *
Donald A. Deieso.......... 500(3) *
George C. Mammola......... 18,759(4) *
Michael M. Stump.......... 1,000(5) *
Patrick L. McMahon........ 7,000(6) *
Jekabs P. Vittands........ 20,272(7) *
Compagnie Generale
des Eaux................. 18,409,975(8) 50.0009
52 Rue d'Anjou
75384 Paris Cedex 08
France
State of Wisconsin
Investment Board......... 3,116,775(9) 9.7
P.O. Box 7842
Madison, Wisconsin 53207
U.S. Bancorp and Qualivest
Capital Management, Inc... 2,829,300(10) 8.8
111 S.W. Fifth Avenue
Portland, Oregon 97204
All directors and officers
as a group (14 persons).. 18,610,049(11) 50.3
</TABLE>
- --------
* Less than 1% ownership
(1) Represents 50,000 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table. On October 24, 1997, Mr. Sheh and
the Company terminated the Employment Agreement dated November 7, 1996,
and entered into the Sheh Separation Agreement relating to their
relationship following the termination of his employment.
(2) Includes 34,900 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(3) On February 26, 1997, Mr. Deieso resigned from his position as President
and Chief Executive Officer of Metcalf & Eddy. Pursuant to the terms of
the Company's Long-Term Incentive Plan, the options held by Mr. Deieso to
acquire 24,258 shares of Class A Common Stock expired on May 26, 1997.
101
<PAGE>
(4) Represents 18,759 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(5) On December 4, 1996, Mr. Stump resigned as President and Chief Executive
Officer of PSG. PSG and Mr. Stump have entered into the Stump Separation
Agreement dated December 16, 1996 relating to their relationship following
the termination of his employment. Under the terms of the Stump Separation
Agreement, all stock options held by Mr. Stump at the time of the
termination of his employment were canceled.
(6) Represents 7,000 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(7) Includes 14,790 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(8) Includes 6,702,500 shares of Class A Common Stock owned indirectly through
Anjou. Includes 4,800,000 shares of Class A Common Stock underlying the
1,200,000 shares of the Series A Preferred Stock beneficially owned by
CGE. CGE owns all of the outstanding shares of the Series A Preferred
Stock.
(9) As reported by the State of Wisconsin Investment Board in a Report on
Schedule 13G filed with the Commission.
(10) As reported by U.S. Bancorp and Qualivest Capital Management, Inc., a
wholly-owned subsidiary of U.S. Bancorp, in a Report on Schedule 13G for
the year ended December 31, 1996, filed with the Commission on February
14, 1997. Pursuant to such Schedule 13G, U.S. Bancorp reports that it has
sole power to vote or direct the vote of 2,781,500 shares, sole power to
dispose or direct the disposition of 1,338,700 shares and shared power to
dispose or direct the disposition of 77,000 shares.
(11) Includes 185,613 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table. Includes 18,409,975 shares of
Class A Common Stock beneficially owned by CGE.
102
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INITIAL CGE INVESTMENT; LETTER AGREEMENT
Pursuant to a letter agreement dated March 18, 1994 between the Company and
CGE, CGE purchased 500,000 shares of the Company's Class A Common Stock, at
$10.00 per share for a total purchase price of $5,000,000. CGE also agreed in
the letter agreement that, subject to approval by CGE, CGE would co-sign on a
case-by-case basis with the Company applications for letters of credit with
respect to the Company's water and wastewater management and air pollution
projects, which CGE acknowledged could reach or exceed the level of letters of
credit carried by the Company at March 18, 1994.
THE INVESTMENT AGREEMENT
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, the Company (i) issued to CGE 1,200,000 shares of Series A
Preferred Stock, convertible into 4,800,000 shares of Class A Common Stock,
for cash consideration of $60 million, 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 and PSG Canada. As a result, CGE increased its ownership
interest in the Company to approximately 48% of the total voting power of the
Company's voting securities. In addition, the Company benefitted from certain
financial undertakings from CGE, including the $125 million CGE Note and
became CGE's exclusive vehicle in the United States, its possessions and its
territories for CGE's water management and waste water management and air
pollution activities, subject to certain exceptions. CGE also has
representation on the Company's Board of Directors and the right to designate
the Company's Chief Executive Officer and Chief Financial Officer all as
further described below. In August 1996, the Company entered into a seven-year
$60 million unsecured revolving credit facility with Anjou. On September 24,
1997, the Company, CGE and Anjou entered into the Recapitalization Agreement,
whereby the Company would effect the Exchange and the Rights Offering and use
a portion of the gross proceeds from the Rights Offering to repay the CGE Note
and the Anjou Note. See "The Recapitalization." Pursuant to the
Recapitalization Agreement, the Company, CGE and Anjou also entered into
agreements with respect to certain other matters, including the Consent
Solicitation, the Charter Amendment and certain other strategic business
issues. See "The Recapitalization--Consent Solicitation" and "The
Recapitalization--Other." On , 1997, CGE and the Company effected the
Exchange pursuant to which all of the shares of Series A Preferred Stock held
by CGE were exchanged for shares of Class A Common Stock at an exchange price
equal to the Subscription Price.
CERTAIN COVENANTS OF THE COMPANY
Representation on the Board of Directors; Management. Under the terms of the
Investment Agreement, the Company has agreed that CGE will have the right to
designate as members of the Company's Board of Directors at least that number
of directors that is proportionate to the aggregate voting power represented
by the Shares of Class A Common Stock and Series A Preferred Stock
beneficially owned by CGE (subject to a minimum of three Independent
Directors). Although the Investment Agreement requires the Company to maintain
three Independent Directors, the Company currently has only two Independent
Directors. The Company has further agreed that CGE will have proportionate
representation on all Committees of the Board (other than any Special
Committee of Independent Directors) to the same extent as CGE is entitled to
representation on the Board of Directors. For purposes of the Investment
Agreement, "Independent Director" is defined as "any Director who is not an
employee, agent or representative of AWT, CGE or any of their respective
Affiliates or Associates (as defined in the Investment Agreement) and may
include any person acting as outside counsel or financial advisor for either
AWT or CGE or any of their respective Affiliates or Associates." Any director
must be satisfactory to CGE.
The Company has also agreed in the Investment Agreement that CGE shall have
the right to designate the Chief Executive Officer and the Chief Financial
Officer of the Company.
At the Annual Meeting held on May 29, 1997, stockholders of the Company
elected three directors who were designated by CGE (Messrs. Sheh, Brunais and
Kriegel). Also in accordance with the terms of the Investment Agreement, the
Board of Directors appointed, as designees of CGE, Mr. Sheh as Chairman of the
103
<PAGE>
Board of Directors, President and Chief Executive Officer and Mr. Alain
Brunais as Senior Vice President and Chief Financial Officer. At meetings of
the Board held on May 29, 1997 and October 9, 1997, the Board of Directors
appointed Messrs. Caille and Banon, respectively, to fill the vacancies on the
Board. On October 24, 1997, the Board of Directors of the Company appointed
CGE's designee Mr. Kriegel as Mr. Sheh's replacement as Chairman of the Board
and also appointed CGE's designee Mr. Mallet, as Mr. Sheh's successor as
President and Chief Executive Officer of the Company on October 26, 1997. Mr.
Mallet was appointed to the Board of Directors as CGE's designee on October
24, 1997.
Registration Rights. Pursuant to the terms of the Investment Agreement, CGE
and Anjou will have the right to require on up to four occasions that the
Company register all shares of Class A Common Stock, Series A Preferred Stock
or Convertible Debt (as defined hereinafter) owned from time to time by CGE
and its affiliates for sale to the public under the Securities Act (a "Demand
Registration"), provided that the Company is not obligated (i) to effect more
than one Demand Registration in any six-month period, (ii) to effect a Demand
Registration for less than five percent of the outstanding Class A Common
Stock or (iii) to effect a Demand Registration within six months of CGE or
Anjou selling any shares pursuant to a Piggyback Registration (as defined
below). In addition, CGE and Anjou will have the right to participate in
registrations by the Company of its Class A Common Stock (a "Piggyback
Registration"). The Company will pay all registration expenses on behalf of
CGE and Anjou, including certain related fees and expenses, other than
underwriting fees and discounts.
Access to Books and Records. The Company has agreed that for so long as CGE
beneficially owns directly or indirectly at least 26% of the outstanding
shares of Class A Common Stock on a fully-diluted basis, CGE will have access
on reasonable terms to the books, records and employees of the Company and its
subsidiaries and to the provision by the Company of all information reasonably
requested by CGE, subject to confidentiality obligations that may be owed at
the time by the Company to third parties and to appropriate confidentiality
arrangements and requirements of law.
CERTAIN COVENANTS OF CGE
Exclusivity. Under the terms of the original Investment Agreement CGE agreed
that, for so long as CGE (with its affiliates) is the largest stockholder of
the Company, the Company would be 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 agreed to assist the Company
in developing its water and wastewater management and air pollution activities
in both Canada and Mexico, subject to existing contractual agreements and
taking into account the respective interests of the Company and CGE and its
affiliates. In addition, CGE agreed to offer the Company active participation
in any new water management investments by CGE (or its affiliates) in the
United States which are too capital intensive for the Company to undertake on
a stand-alone basis.
Pursuant to the Recapitalization Agreement, the Investment Agreement, as
amended, provides that for so long as CGE (with its affiliates) is the largest
stockholder of the Company, the Company shall be CGE's exclusive vehicle in
the United States, its possessions and its territories for its water
management and wastewater management and air pollution activities; provided
that the foregoing shall not apply to any acquisition or investment by CGE (or
any of its affiliates) of a privately-owned, publicly-traded or publicly-owned
company in the water utility sector whose primary business is the production,
distribution and/or sale of potable, fire, bulk, draining or irrigation water
("Water Utility"), nor to CGE's present or future investments in Consumers
Water Company and Philadelphia Suburban Corporation (such Water Utilities,
Consumers Water Company and Philadelphia Suburban Corporation hereinafter
referred to collectively as the "Water Businesses").
In addition, CGE (and its affiliates) has agreed to assist the Company in
developing its water management and wastewater management and air pollution
activities in both Canada and Mexico, subject to contractual agreements as of
March 30, 1994 and taking into account the respective interests of the Company
and CGE and its affiliates. CGE also agreed to offer the Company an active
participation in any proposed water management or wastewater management
activities by CGE (or any of its affiliates) in the United States (which shall
be deemed to exclude the Water Businesses), which investment is deemed too
capital intensive for the Company to undertake on a stand-alone basis.
104
<PAGE>
In addition, in the event CGE (or any of its affiliates) acquires control of
a Water Business which is also engaged in wastewater activities similar to
those conducted by the Company as of the date of the original Investment
Agreement, then CGE (or its affiliate) has agreed to use reasonable efforts to
cause, subject to the fiduciary duties of the board of directors of such Water
Business and other applicable regulatory standards, that Water Business to
offer to the Company the opportunity to obtain "operating and maintenance"
contracts with the wastewater management business of, and the opportunity to
obtain engineering contracts with, such Water Business on terms which are
commercially reasonable in the judgment of such Water Business; provided that
the foregoing shall not apply to any existing business of Consumers Water
Company or Philadelphia Suburban as of the date of the original Investment
Agreement.
Finally, the Investment Agreement, as amended, provides that the exclusivity
provision shall have no application to Kruger, Inc., a distributor of water
treatment plant parts and components and an indirect subsidiary of Omnium
Traitement et de Valorisation.
Affiliate Transactions. CGE has agreed on behalf of itself and its
affiliates that any transactions (or series of related transactions) between
the Company and any of its affiliates and CGE or any of its affiliates will be
on an arm's length basis. Any such transaction (or series of related
transactions) having an aggregate value in excess of $1,000,000 must be
approved by a majority of the Independent Directors or a special committee
thereof. The Company, CGE and Anjou have further agreed that all claims by the
Company against CGE or its affiliates under the Investment Agreement may be
taken only by majority approval of such independent directors or a special
committee thereof.
Sales of Shares. CGE has also agreed to give the Company one day's prior
written notice of any sale of Company securities by CGE if, to the knowledge
of CGE, such sale would result in any party's beneficially owning more than
15% of the outstanding shares of Class A Common Stock.
ISSUANCE OF SERIES A PREFERRED STOCK
Pursuant to the terms of the Investment Agreement, the Company issued to CGE
1,200,000 shares of Series A Preferred Stock, convertible into 4,800,000
shares of Class A Common Stock, for an aggregate cash purchase price of
$60,000,000. The Series A Preferred Stock is exchangeable at the option of the
Company for the Company's 5 1/2% Convertible Subordinated Notes with a
maturity of ten years from the date of issuance of such notes (the
"Convertible Debt"). See "Description of Capital Stock." The Series A
Preferred Stock was exchanged for shares of Class A Common Stock in the
Exchange at an exchange price equal to the Subscription Price. During fiscal
year 1996 the Company paid $3.3 million in dividends to CGE on the Series A
Preferred Stock, for the nine months ended July 31, 1997 had paid $2.5 million
in dividends to CGE on the Series A Preferred Stock.
CGE NOTE
In connection with the Investment Agreement, the Company and CGE entered
into a Credit Agreement dated as of June 14, 1994 pursuant to which the
Company received the CGE Note in a principal amount of $125 million. The CGE
Note is an unsecured facility bearing interest at a rate based upon one, two,
three or six-month LIBOR, as selected by the Company, plus 1.25% and has a
final maturity of June 15, 2001. The CGE Note contains certain financial and
other restrictive covenants with respect to the Company relating to, among
other things, the maintenance of certain financial ratios, and restrictions on
the sale of assets and the payment of dividends on or the redemption,
repurchase, acquisition or retirement of securities of the Company or its
subsidiaries. On June 14, 1994, the Company utilized a substantial portion of
the proceeds from the CGE Note to retire its 11.18% Senior Notes with The
Prudential Insurance Company of America. The Company had incurred
approximately $8.9 million and $6.5 million of interest related to the CGE
Note during fiscal 1996 and the nine months ended July 31, 1997, respectively.
The Company expects to repay the CGE Note with a portion of the gross proceeds
from the Rights Offering. See "Use of Proceeds."
105
<PAGE>
INVOLVEMENT OF CGE IN OTHER FINANCING ARRANGEMENTS
On March 10, 1995, the Company entered into the Bank Credit Facility with
The First National Bank of Chicago and Societe Generale, New York Branch,
acting as co-agents for a syndicate which includes seven additional banks. As
of July 31, 1997, the Company's borrowings under the Bank Credit Facility
totaled $14.0 million and outstanding letters of credit under the Bank Credit
Facility totaled $23.7 million (unused capacity of $32.3 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 under the terms of the Bank Credit
Facility, as amended, borrowings are limited to the lesser of $70 million or
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 plus 1.0% or at a defined bank rate
approximating prime. 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 at
least 40% on the Company's Board of Directors, as well as to appoint the Chief
Executive Officer and Chief Financial Officer of the Company. The Company
compensates CGE for its support in an amount equal to 0.95% per annum of the
outstanding commitment of its credit facilities ($1.2 million and $0.8 million
for the years ended October 31, 1996 and 1995, respectively, and $0.8 million
for the nine months ended July 31, 1997).
ANJOU CREDIT AGREEMENT
On August 2, 1996, the Company entered into a $60 million seven-year
unsecured revolving credit facility with Anjou pursuant to which the Company
received the Anjou Note. The facility matures on August 2, 2003. The Anjou
Note bears interest at LIBOR plus 0.6%. In conjunction with this new financing
the Company reduced its more expensive $130 million Bank Credit Facility to
$50 million. As of July 31, 1997, the Company's outstanding borrowings under
the Anjou Note totaled $60 million. The Company had incurred approximately
$0.7 million and $2.8 million of interest on this loan during fiscal 1996 and
for the nine months ended July 31, 1997, respectively. The Company expects to
repay the Anjou Note with a portion of the proceeds from the Rights Offering.
See "Use of Proceeds."
RECAPITALIZATION AGREEMENT; OTHER CGE RELATED MATTERS
On September 24, 1997, the Company, CGE and Anjou entered into a
Recapitalization Agreement whereby the Company would, among other things,
effect the Exchange, and conduct the Rights Offering. See "The
Recapitalization--General." Pursuant to the Recapitalization Agreement, the
Company, CGE and Anjou also entered into agreements with respect to certain
other matters, including the Consent Solicitation, the Charter Amendment and
CGE's agreement to work with the Company to enhance the Company's
participation in the emerging privatization market in the wastewater
management industry. See"The Recapitalization--Consent Solicitation" and "The
Recapitalization--Other."
Pursuant to the Recapitalization Agreement, immediately prior to the Record
Date, CGE and the Company effected the Exchange pursuant to which the shares
of Series A Preferred Stock held by CGE were automatically exchanged for
shares of Class A Common Stock. In addition, CGE has agreed to exercise in
full its Basic Subscription Privilege and has agreed to the Conditional CGE
Subscription, up to a maximum aggregate subscription of $185 million. As a
result, if no other Rights are exercised, CGE will acquire shares of Class
A Common Stock. Consequently, immediately after the Recapitalization, CGE
would own approximately % of the total outstanding Class A Common Stock of
the Company. See "Risk Factors--Controlling Stockholder; Ability of
Controlling Stockholder to Increase Ownership."
106
<PAGE>
Anjou has entered into an agreement with USF&G regarding an arrangement
pursuant to which, until terminated at Anjou's discretion, Anjou will enter
into guarantees of certain obligations of the Company relating to the bonding
of certain contracts under the Master Surety Agreement dated as of October 31,
1995 between USF&G and the Company and its subsidiaries. Such guarantees would
cover, in each instance, 30% of the aggregate amount of the bonds executed,
procured or provided on behalf of the Company or its subsidiaries on or after
October 1, 1997, and certain penalty amounts, up to $45 million. CGE will
receive a fee of 1% of the lesser of (i) 30% of the aggregate amount of the
bonds executed, procured or provided on behalf of the Company or its
subsidiaries on or after October 1, 1997, and certain penalty amounts, or (ii)
$45 million.
The Company did not declare the quarterly dividend of $825,000 due September
30, 1997 on the Series A Preferred Stock, all of which was held by CGE, due to
its concerns over liquidity and the adequacy of its surplus. The Company
currently intends to pay such quarterly dividend in arrears in connection with
the Recapitalization.
Following the Recapitalization, the Company will require additional
financial resources to develop and support each of its businesses at PSG and
Metcalf & Eddy, to undertake related long-term capital expenditures and to
participate in the emerging privatization market in the wastewater management
industry. CGE has informed the Company that it intends to work with the
Company to explore various ways to develop such financial resources for these
purposes, including, among others, the raising by CGE of an investment fund or
other off-balance sheet vehicle which would invest, on a case-by-case basis,
in various project financings undertaken by the Company. It is anticipated
that any such vehicle would invest in such project finance activities of the
Company on terms which are commercially reasonable. As a result, CGE and the
Company and possibly others, investing either directly or indirectly through
such vehicle or otherwise, would share in the returns on such projects pro
rata in relation to their respective equity investments.
OTHER RELATED TRANSACTIONS
Ms. Green, a Director of the Company since June 1994, is a partner at the
law firm of Bryan, Cave LLP. Bryan, Cave LLP has performed limited legal
services for the Company from time to time. Ms. Green has not personally
represented the Company.
107
<PAGE>
THE RIGHTS OFFERING
THE RIGHTS
The Company is hereby distributing transferable Rights at no cost to each
Recordholder of outstanding shares of Class A Common Stock as of the close of
business on the Record Date of , 1997. Each Recordholder of Class A
Common Stock at the close of business on the Record Date will receive
approximately Rights for each share of Class A Common Stock owned of
record at the close of business on such date. The Rights will be evidenced by
transferable Rights Certificates. Each Right allows the holder thereof to
subscribe for one Underlying Share of Class A Common Stock at the Subscription
Price, subject to the Company's obligation to issue Class B Common Stock in
the event the Requisite Consents are not obtained and issuing Class A Common
Stock to any individual stockholder would cause such person to beneficially
own more than 74% of the voting power of the Company. Each holder of Rights
other than CGE and its subsidiaries who elects to exercise the Basic
Subscription Privilege may also subscribe at the Subscription Price for Excess
Shares of Class A Common Stock pursuant to the Oversubscription Privilege. An
aggregate of shares of Class A Common Stock are being offered in the Rights
Offering, subject to the Company's obligation to issue shares of Class B
Common Stock in certain circumstances. In addition, the Company will issue on
a pro rata basis to Rights holders other than CGE who purchase shares in the
Rights Offering an aggregate number of Warrants to purchase shares of Class A
Common Stock at an exercise price of $2.50 per share, equal to the Warrant
Pool. See "Description of Warrants"
No fractional Rights or cash in lieu thereof will be issued or paid.
Instead, the number of Rights distributed to each Recordholder will be rounded
to the nearest whole number, with such adjustments as may be necessary to
ensure that if all Rights are exercised, gross proceeds to the Company will
equal $210 million.
Because the number of Rights distributed to each Recordholder will be
rounded to the nearest whole number, with such adjustments as may be necessary
to ensure that no more than shares of Class A Common Stock, subject to the
Company's obligation to issue shares of Class B Common Stock in certain
circumstances, are issued hereunder, beneficial owners of Class A Common Stock
who are also Recordholders of their shares may receive more Rights under
certain circumstances than beneficial owners of Class A Common Stock who are
not Recordholders of their shares and who do not obtain (or cause the record
holder of their shares of Class A Common Stock to obtain) a separate Rights
Certificate with respect to the shares beneficially owned by them, including
shares held in an investment advisory or similar account. To the extent that
Recordholders of Class A Common Stock or beneficial owners of Class A Common
Stock who obtain a separate Rights Certificate receive more Rights, they will
be able to subscribe for more shares pursuant to the Basic Subscription
Privilege and, in the event shares subscribed for pursuant to the
Oversubscription Privilege are prorated, such Recordholders or beneficial
owners will be able to subscribe for more shares pursuant to the
Oversubscription Privilege. See "--Method of Subscription--Exercise of
Rights."
EXPIRATION DATE
The Rights will expire, if not exercised, at 5:00 p.m., New York City time,
on , 1998, unless extended for up to ten days in the sole discretion of
the Company. After the Expiration Date, unexercised Rights will be null and
void. The Company will not be obligated to honor any purported exercise of
Rights received by the Subscription Agent after 5:00 p.m., New York City time,
on the Expiration Date, regardless of when the documents relating to such
exercise were sent, except pursuant to the Guaranteed Delivery Procedures
described below. The Company may extend the Expiration Date by giving oral or
written notice to the Subscription Agent on or before the Expiration Date,
followed by a press release no later than 9:00 a.m., New York City time on the
next business day after the previously scheduled Expiration Date.
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. Each Right will allow the holder thereof to
receive, upon payment of the Subscription Price, one Underlying Share of Class
A Common Stock, subject to the Company's obligation to
108
<PAGE>
issue shares of Class B Common Stock in certain circumstances. The
certificates representing shares of Class A Common Stock and shares of Class B
Common Stock, if any, purchased pursuant to the Basic Subscription Privilege
will be delivered to subscribers as soon as practicable after the Expiration
Date.
Oversubscription Privilege. Subject to availability and proration as
described below and the Company's obligation to issue shares of Class B Common
Stock in certain circumstances, Rights holders who exercise the Basic
Subscription Privilege will be eligible to subscribe, at the Subscription
Price, for additional shares of Class A Common Stock.
Shares of Class A Common Stock will be available for purchase pursuant to
the Oversubscription Privilege only to the extent that any Underlying Shares
are not subscribed for through the Basic Subscription Privilege. The Excess
Shares will be allocated pro rata (subject to the elimination of fractional
shares) among those Rights holders who exercise their Oversubscription
Privilege, in proportion, not to the number of shares requested pursuant to
the Oversubscription Privilege, but to the number of shares each beneficial
holder exercising the Oversubscription Privilege has purchased pursuant to the
Basic Subscription Privilege; provided, however, that if such pro rata
allocation results in any Rights holder being allocated a greater number of
Excess Shares than such holder subscribed for pursuant to the exercise of such
holder's Oversubscription Privilege, then such holder will be allocated only
such number of Excess Shares as such holder subscribed for and the remaining
Excess Shares will be allocated among all other holders exercising the
Oversubscription Privilege on the same pro rata basis outlined above; such
proration will be repeated until all Excess Shares have been allocated to the
full extent of the Oversubscription Privilege; provided further, however, that
CGE will not be allocated any Excess Shares pursuant to the Conditional CGE
Subscription until all other Rights holders exercising the Oversubscription
Privilege have been allocated the number of Excess Shares for which they
oversubscribed. Payment for oversubscription will be deposited upon receipt by
the Subscription Agent pending a final determination of the number of
Underlying Shares to be issued pursuant to such Oversubscription Privilege. If
a proration of the Excess Shares results in a Rights holder receiving fewer
Excess Shares than such Rights holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that holder at the
Subscription Price for shares not issued will be returned by mail without
interest or deduction promptly after the expiration date and after all
prorations and adjustments contemplated by the Rights Offering have been
effected. Certificates representing shares of Class A Common Stock purchased
pursuant to the Oversubscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date and after all prorations and
adjustments contemplated by the terms of the Rights Offering have been
effected.
Banks, brokers and other nominee Rights holders who exercise the Basic
Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and the Company, in connection with the exercise of the Oversubscription
Privilege, as to the aggregate number of Rights that have been exercised and
the number of Underlying Shares that are being subscribed for pursuant to the
Oversubscription Privilege by each beneficial owner of Rights on whose behalf
such nominee holder is acting.
Conditional CGE Subscription. CGE, the beneficial owner of approximately %
of the Class A Common Stock currently outstanding, has agreed to exercise in
full its Basic Subscription Privilege to subscribe for shares of Class A
Common Stock. In addition, in the event that all Underlying Shares are not
purchased pursuant to the Rights Offering (including pursuant to the
Oversubscription Privilege), CGE will subscribe for and purchase at the
Subscription Price an additional number of shares of Class A Common Stock. The
total number of shares subscribed for by CGE and its subsidiaries pursuant to
the Conditional CGE Subscription will be no greater than (i) the total number
of shares of Class A Common Stock available to be purchased by the Public in
the Rights Offering, minus (ii) the total number of shares of Class A Common
Stock actually purchased by the Public in the Rights Offering, and in no event
will the gross proceeds resulting from CGE's and its subsidiaries' Basic
Subscription Privilege and the Conditional CGE Subscription exceed $185
million. As a result, if no other Rights holder exercises Rights in the Rights
Offering, CGE will purchase shares of Class A Common Stock in the Rights
Offering.
109
<PAGE>
SUBSCRIPTION PRICE
The Subscription Price means the price per share of Class A Common Stock
equal to 82% of the average daily Closing Prices of the Class A Common Stock
for the ten consecutive Trading Days ending five days prior to the Record
Date; provided, however, that in no event shall the Subscription Price be less
than $1.75 per share of Class A Common Stock or exceed $2.50 per share of
Class A Common Stock.
The Subscription Price represents a discount of 18% from the average daily
closing price of $ for the Class A Common Stock as reported on the AMEX for
the ten consecutive trading day period ending five days prior to the Record
Date, and a discount of % from the average daily closing price of $ for
the Class A Common Stock as reported on the AMEX for the 60 day trading period
ending on , 1997, the Record Date. There can be no assurance that the
Class A Common Stock will trade at prices above the Subscription Price. See
"Risk Factors--Market Risks Associated with the Class A Common Stock."
The Subscription Price was determined through arm's-length negotiation
between the Special Committee and CGE and has been approved and adopted by the
Company's Board of Directors. In making this determination, the material
factors considered by the Company were the amount of proceeds that the Company
needs to raise, the average market price of the Class A Common Stock, the
intrinsic value of the Class A Common Stock, the exchange price for the Series
A Preferred Stock, the pro rata nature of the offering and pricing policies
customary for transactions of this type. The Subscription Price should not be
considered an indication of the actual value of the Company or the Class A
Common Stock.
NO BOARD OR SPECIAL COMMITTEE RECOMMENDATION
An investment in the Class A Common Stock and the Warrants must be made
pursuant to each investor's evaluation of such investor's best interests.
Accordingly, neither the Board of Directors of the Company nor the Special
Committee makes any recommendation to Rights holders regarding whether they
should exercise their Rights.
METHOD OF SUBSCRIPTION--EXERCISE OF RIGHTS
The Basic Subscription Privilege and the Oversubscription Privilege may be
exercised by delivering to (the "Subscription Agent"), at or prior to 5:00
p.m., New York City time, on the Expiration Date, the properly completed and
executed Rights Certificate evidencing such Rights with any signatures
required to be guaranteed so guaranteed, together with payment in full of the
Subscription Price for each Underlying Share subscribed for pursuant to the
Basic Subscription Privilege and the Oversubscription Privilege. Payment of
the Subscription Price will be held in a segregated account to be maintained
by the Subscription Agent. All payments must be by (a) check or bank draft
drawn upon a U.S. bank or postal or express money order payable to , as
Subscription Agent, or (b) by wire transfer of same-day funds, to the account
maintained by the Subscription Agent for purposes of accepting subscriptions
in the Rights Offering at ABA No. , Acct. No. , (the "Subscription
Account"). Payments will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, (ii) receipt by the
Subscription Agent of any certified check or bank draft upon a U.S. bank or of
any postal or express money order or (iii) receipt of good funds in the
Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED
PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTS HOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
110
<PAGE>
The Rights Certificate and payment of the Subscription Price or, if
applicable, Notices of Guaranteed Delivery, as defined below, must be
delivered to the Subscription Agent by one of the methods described below:
by Mail:
by Hand:
by Overnight Courier:
Delivery to an address other than those above does not constitute valid
delivery.
The Company will pay all fees and expenses of the Subscription Agent and has
also agreed to indemnify the Subscription Agent from certain liabilities which
it may incur in connection with the Rights Offering. All commissions, fees and
other expenses (including brokerage commissions and transfer taxes) incurred
in connection with the purchase, sale or exercise of Rights will be for the
account of the transferor of the Rights, and none of such commissions, fees or
expenses will be paid by the Company or the Subscription Agent.
If a Rights holder wishes to exercise Rights, but time will not permit such
holder to cause the Rights Certificate or Rights Certificates evidencing such
Rights to reach the Subscription Agent on or prior to the Expiration Date,
such Rights may nevertheless be exercised if all of the following conditions
(the "Guaranteed Delivery Procedures") are met:
(i) the Rights holder has caused payment in full of the Subscription
Price for each Underlying Share being subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege to be received
(in the manner set forth above) by the Subscription Agent on or prior to
the Expiration Date;
(ii) the Subscription Agent receives, on or prior to the Expiration Date,
a guarantee notice ("Notice of Guaranteed Delivery"), substantially in the
form provided with the instructions as to use of Air & Water Technologies
Corporation Rights Certificates (the "instructions") distributed with the
Rights Certificates, from a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers,
Inc. ("NASD"), or from a commercial bank or trust company having an office
or correspondent in the United States or from a bank, stockbroker, savings
and loan association or credit union with membership in an approved
signature guarantee medallion program, pursuant to Rule 17Ad-15 of the
Exchange Act (each, an "Eligible Institution"), stating the name of the
exercising Rights holder, the number of Rights represented by the Rights
Certificate or Rights Certificates held by such exercising Rights holder,
the number of Underlying Shares being subscribed for pursuant to the Basic
Subscription Privilege and the number of Underlying Shares, if any, being
subscribed for pursuant to the Oversubscription Privilege, and guaranteeing
the delivery to the Subscription Agent of any Rights Certificate evidencing
such Rights within five business days following the Expiration Date; and
(iii) the properly completed Rights Certificate evidencing the Rights
being exercised, with any signatures required to be guaranteed so
guaranteed, is received by the Subscription Agent within five business days
following the Expiration Date. The Notice of Guaranteed Delivery may be
delivered to the Subscription Agent in the same manner as Rights
Certificates at the address set forth above, or may be transmitted to the
Subscription Agent by facsimile transmission (Telecopy No.: . Additional
copies
111
<PAGE>
of the form of Notice of Guaranteed Delivery are available upon request
from the Information Agent, whose address and telephone number are set
forth under "Information Agent."
Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege will be held in a
segregated account to be maintained by the Subscription Agent pending issuance
of such Excess Shares. If the aggregate Subscription Price paid by an
exercising Rights holder is insufficient to purchase the number of Underlying
Shares that the Rights holder indicates are being subscribed for, or if no
number of Underlying Shares to be purchased is specified, then the Rights
holder will be deemed to have exercised the Basic Subscription Privilege to
purchase Underlying Shares to the full extent of the payment price tendered.
If the aggregate Subscription Price paid by an exercising Rights holder
exceeds the amount necessary to purchase the number of Underlying Shares for
which the Rights holder has indicated an intention to subscribe, then the
Rights holder will be deemed to have exercised the Oversubscription Privilege
to the full extent of the excess payment tendered, and any remaining amount
shall be returned to such Rights holder and any remaining amount shall be
returned to such Rights holder by mail without interest or deduction as soon
as practicable after the Expiration Date and after all prorations and
adjustments contemplated by the terms of the Rights Offering have been
effected.
Unless a Rights Certificate (i) provides that the shares to be issued
pursuant to the exercise of Rights represented thereby are to be delivered to
the Recordholder of such Rights or (ii) is submitted for the account of an
Eligible Institution, signatures on such Rights Certificate must be guaranteed
by an Eligible Institution or other eligible guarantor institution which is a
member of or a participant in a medallion guarantee program acceptable to the
Subscription Agent.
Persons holding shares of Class A Common Stock beneficially and receiving
the Rights distributable with respect thereto, through a broker, dealer,
commercial bank, trust company or other nominee, as well as persons holding
certificates of Class A Common Stock directly who would prefer to have such
institutions effect transactions relating to the Rights on their behalf,
should contact the appropriate institution or nominee and request it to effect
the transactions for them. If a beneficial owner wishes to obtain a separate
Rights Certificate, such beneficial owner should contact the nominee as soon
as possible and request that a separate Rights Certificate be issued. A
nominee may request any Rights Certificate held by it to be split into such
smaller denominations as it wishes, provided that the Rights Certificate is
received by the Subscription Agent, properly endorsed, no later than 11:00
a.m., New York City time, on , 1998.
The instructions accompanying the Rights Certificates should be read
carefully and followed in detail. RIGHTS CERTIFICATES SHOULD BE SENT WITH
PAYMENT TO THE SUBSCRIPTION AGENT. DO NOT SEND RIGHTS CERTIFICATES TO THE
COMPANY.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE
STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR
CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Company determines in its
112
<PAGE>
sole discretion. Neither the Company, the Subscription Agent, nor the
Information Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of Rights Certificates or incur
any liability for failure to give such notification.
Any questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus, the Instructions
or the Notice of Guaranteed Delivery should be directed to the Information
Agent, , at the address and telephone number set forth below:
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE OR
THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. RIGHTS NOT
EXERCISED PRIOR TO THE EXPIRATION DATE WILL EXPIRE.
PROCEDURES FOR BOOK ENTRY TRANSFER FACILITY PARTICIPANTS
The Company anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Basic Subscription Privilege (but not
the Oversubscription Privilege) may be effected through, the facilities of the
Depository Trust Company and Philadelphia Depository Trust Company
(collectively, the "Book Entry Facilities"; Rights exercised through any such
facility are referred to as "Book Entry Exercised Rights"). The holder of a
Book Entry Exercised Right may exercise the Oversubscription Privilege in
respect of such Book Entry Exercised Right by properly executing and
delivering to the Subscription Agent, at or prior to 5:00 p.m., New York City
time, on the Expiration Date, a "Nominee Holder Oversubscription Form,"
together with payment of the Subscription Price for the number of Underlying
Shares for which the Oversubscription Privilege is to be exercised. Copies of
the Nominee Holder Oversubscription Form may be obtained from the Subscription
Agent.
EFFECTS OF RIGHTS OFFERING ON OTHER SECURITIES AND STOCK OPTIONS OF THE
COMPANY AND COMPANY PLANS
The number of shares covered by certain stock options and the option prices
thereunder are subject to adjustment in accordance with the provisions
thereof. The Company's stock option plan or, in certain cases, the stock
option agreements evidencing awards made thereunder, require the Compensation
Committee of the Board of Directors to make appropriate adjustments to the
outstanding options or other awards in the event of any split-ups, stock
dividends, recapitalizations, mergers, consolidations, combination, exchanges
of shares and the like (each an "Adjustment Event"). The Compensation
Committee, whose determination shall be conclusive, has discretion to
determine the nature and extent of the adjustments to be made in order to make
the outstanding options or awards, immediately after such Adjustment Event,
equivalent to such options or awards immediately prior to such Adjustment
Event.
The Compensation Committee will meet to determine whether the Rights
Offering is an Adjustment Event and if so, what adjustment to make.
FOREIGN AND CERTAIN OTHER STOCKHOLDERS
Rights Certificates will not be mailed to Holders whose addresses are
outside the United States or who have an APO or FPO address, but will be held
by the Subscription Agent for their accounts. To exercise such Rights, such
holders must notify the Subscription Agent, and must take all other steps
which are necessary to exercise the Rights on or prior to 11:00 a.m., New York
City time, on , 1998. If the procedures set forth in the preceding sentence
are not followed prior to the Expiration Date, the Rights will expire.
OTHER MATTERS
The Rights Offering is not being made in any state or other jurisdiction in
which it is unlawful to do so, nor is the Company selling or accepting any
offers to purchase any shares of Class A Common Stock from Rights
113
<PAGE>
holders who are residents of any such state or other jurisdiction. The Company
may delay the commencement of the Rights Offering in certain states or other
jurisdictions, or change the terms of the Rights Offering, in order to comply
with the securities law requirements of such states or other jurisdictions. It
is not anticipated that there will be any changes in the terms of the Rights
Offering. If any such change is made that is material and has an adverse
effect on any holder that has previously exercised Rights, such holder will be
provided the opportunity to revoke such exercise. The Company, if it so
determines in its sole discretion, may decline to make modifications to the
terms of the Rights Offering requested by certain states or other
jurisdictions, in which event Rights holders resident in those states or
jurisdictions will not be eligible to participate in the Rights Offering.
114
<PAGE>
DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") by and between the Company and as warrant agent (the
"Warrant Agent"). The following summary of certain provisions of the Warrant
Agreement and the Warrants does not purport to be complete and is qualified in
its entirety by reference to the Warrant Agreement and the Warrants, including
the definitions therein of certain terms. The Warrant Agreement will be
substantially in the form of the Warrant Agreement filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The Company has available for issue up to 10,000,000 Warrants, which when
exercised, would entitle the holders thereof to purchase, in the aggregate, up
to 10,000,000 shares of Class A Common Stock. The Company will issue that
percentage of 10,000,000 Warrants equivalent to the percentage of the total
number of Underlying Shares purchased by the Public in the Rights Offering
relative to the total number of Underlying Shares issuable upon full exercise
of Rights by the Public in the Rights Offering. See "The Rights Offering--The
Rights."
The Company will issue to each Public subscriber in the Rights Offering such
number of Warrants to purchase shares of Class A Common Stock equal to the
product of the Warrant Pool multiplied by a fraction the numerator of which is
the total number of Underlying Shares purchased by such holder in the Rights
Offering and the denominator is the total number of Underlying Shares
purchased by all Public subscribers in the Rights Offering.
Each Warrant, when exercised, will entitle the holder thereof to acquire, at
any time from time to time prior to the Warrant Expiration Date, one Warrant
Share at an exercise price of $2.50 per share. The Warrant Exercise Price was
determined through arm's-length negotiation between CGE and the Special
Committee. The Warrant Exercise Price represents a premium of approximately
66.7% over the last sale price of the Class A Common Stock on the AMEX on the
last trading day immediately prior to the announcement of the Recapitalization
and a premium of approximately % over the Subscription Price. The Warrant
Exercise Price and the number of Warrant Shares issuable on exercise of a
Warrant are both subject to adjustment in certain cases referred to below. The
Warrants are exercisable only if a registration statement relating to the
Warrant Shares is then in effect, or the exercise is exempt from the
registration requirements of the Securities Act and such securities are
qualified for sale or exempt from qualification under the applicable state
blue sky laws. Unless exercised, the Warrants will expire on the Warrant
Expiration Date which is three years from the date of issuance.
The Warrants may be exercised at any time (so long as a registration
statement relating to the Warrant Shares is then in effect, or the exercise of
such Warrants is exempt from the Securities Act's registration requirements
and such securities are qualified for sale or exempt from qualification under
the applicable state blue sky laws) by surrendering to the Company at the
office of the Warrant Agent the Warrant certificates evidencing such Warrants
with the accompanying form of election to purchase properly completed and
executed, together with payment of the Warrant Exercise Price. Payment of the
Warrant Exercise Price may be made in the form of cash or a certified or
official bank check payable to the order of the Company or upon the surrender
of additional Warrants. Upon surrender of the Warrant certificate and payment
of the Warrant Exercise Price, the Warrant Agent will deliver or cause to be
delivered, to or upon the written order of such holder, a stock certificate
representing the number of whole Warrant Shares or other securities or
property to which such holder is entitled under the Warrant Agreement and the
Warrants. If less than all of the Warrants evidenced by a Warrant certificate
are to be exercised, a new Warrant certificate will be issued for the
remaining number of Warrants.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or a specified portion thereof), the
Company shall pay an amount in cash equal to the current market price per
Warrant Share, as determined on the day immediately preceding the date the
Warrant is presented for exercise, multiplied by such fraction, computed to
the nearest whole U.S. cent; provided that Warrant holders may elect to
purchase full shares of Class A Common Stock by delivering an appropriate
amount of cash.
115
<PAGE>
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration, transfer or exchange of Warrant
certificates.
Warrant holders will not, by virtue of being such holders, have any rights
as stockholders of the Company. Warrant holders have no right to vote on
matters submitted to the stockholders of the Company and have no right to
receive dividends. Warrant holders are not entitled to share in the assets of
the Company in the event of liquidation, dissolution or winding up of the
Company's affairs.
In the event of taxable distribution to holders of Class A Common Stock
which results in an adjustment to the number of Warrant Shares or other
consideration for which a Warrant may be exercised, Warrant holders may, in
certain circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. See "Certain Federal Income
Tax Considerations."
ADJUSTMENTS
The number of shares of Class A Common Stock purchasable upon the exercise
of the Warrants and the Warrant Exercise Price both will be subject to
adjustment in certain events (subject to certain exceptions) including (i) the
payment by the Company of dividends (and other distributions) on Class A
Common Stock payable in Class A Common Stock or other shares of the Company's
capital stock, (ii) subdivisions, combinations, exchanges, split-ups and
reclassifications of Class A Common Stock, (iii) the issuance of rights,
options or warrants to subscribe for Class A Common Stock or of securities
convertible into or exchangeable for Class A Common Stock, for a consideration
per share of Class A Common Stock which is less than the current market price
per share of Class A Common Stock and (iv) the distribution to all holders of
Class A Common Stock of any of the Company's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends).
No adjustment in the Warrant Exercise Price will be required unless such
adjustment would require an increase or decrease of at least one percent (1%)
in the Warrant Exercise Price; provided, however, that any adjustment which is
not made will be carried forward and taken into account in any subsequent
adjustment.
If the Company consolidates or merges with or into, or transfers or leases
all or substantially all of its assets to, any person, upon consummation of
such transaction, the Warrants will automatically become exercisable for the
kind and amount of securities, cash or other assets which the Warrant holder
would have owned immediately after the consolidation, merger, transfer or
lease if the holder had exercised the Warrant immediately before the effective
date of the transaction. No such consolidation, merger, transfer or lease will
be effected unless the successor company, if other than the Company, assumes
by written instrument the obligation to issue securities, cash or other assets
as aforesaid.
REGISTRATION OF WARRANT SHARES
Warrant holders will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then in effect, or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act and such securities are qualified for sale or exempt from
qualification under the applicable state blue sky laws. Subject to Black Out
Periods, at such time as the average daily Closing Price of the Class A Common
Stock is greater than or equal to 85% of the Warrant Exercise Price ($2.125)
for twenty consecutive Trading Days, the Company will prepare, file and use
its best efforts to cause to become effective a registration statement in
respect of all of the Warrant Shares and the Company will use its commercially
reasonable efforts to keep such registration statement continuously effective
under the Securities Act in order to permit the prospectus included therein to
be lawfully delivered. Notwithstanding the foregoing, the Company will not be
required to amend or supplement the registration statement, any related
prospectus or any document incorporated therein by reference, for a period (a
"Black Out Period") not to exceed the shorter of (x) the period ending on
116
<PAGE>
the date the information responsible for the Black Out Period is disclosed to
the public and (y) 60 days (provided that no two Black Out Periods will occur
during any period of 135 consecutive days) in the event that (i) an event
occurs and is continuing as a result of which the registration statement, any
related prospectus or any document incorporated therein by reference as then
amended or supplemented would, in the Company's good faith judgment, contain
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and (ii)(A) the
Company determines in its good faith judgment that the disclosure of such
event at such time would have a material adverse effect on the business,
operations or prospects of the Company or (B) the disclosure otherwise relates
to a material business transaction which has not yet been publicly disclosed;
provided that no Black Out Period may be in effect during the six months prior
to the Warrant Expiration Date and there will be no more than three Black Out
Periods during the term of the Warrants. See "Risk Factors--Ability to
Exercise Warrants."
TRANSFER RESTRICTIONS; LISTING
The Warrants will be freely transferrable and freely tradable. The Company
will use its commercially reasonable efforts to secure the listing of the
Warrants and the Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which the shares of Class A Common
Stock are then listed and will use its commercially reasonable efforts to
maintain such listing, so long as any other shares of Class A Common Stock
will be so listed or quoted. See "Description of Warrants--Transfer
Restrictions; Listing" and "Risk Factors--No Prior Market for the Rights or
Warrants."
AUTHORIZED SHARES
The Company has authorized for issuance such number of shares of Class A
Common Stock as shall be issuable upon the full exercise of all outstanding
Warrants. The Company is required to reserve a sufficient number of authorized
shares of Class A Common Stock to permit the exercise of all the Warrants
issued. Such shares of Class A Common Stock, when paid for and issued, will be
duly and validly issued, fully paid and non-assessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof (other than any such tax, lien, charge or
security interest imposed upon or granted by the holder of the Class A Common
Stock).
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the Warrant holders, may amend or supplement the Warrant Agreement for certain
purposes, including curing defects or inconsistencies or making changes that
do not materially adversely affect the rights of any holder. Any amendment or
supplement to the Warrant Agreement that has a material adverse effect on the
interests of the Warrant holders shall require the written consent of the
holders of a majority of the then outstanding Warrants (excluding Warrants
held by the Company or any of its affiliates). The consent of each holder of
the Warrants affected shall be required for any amendment pursuant to which
the Warrant Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (other than pursuant
to adjustments provided in the Warrant Agreement).
GOVERNING LAW
The Warrant Agreement and the Warrants will be governed by, and construed in
accordance with, the laws of the State of New York without regard to the
principles of conflicts of law thereof.
117
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following general summary of the capital stock summarizes certain
material elements of the Company's Restated Certificate of Incorporation, as
amended (the "Certificate of Incorporation"). Such summary is not necessarily
complete and is qualified in its entirety by reference to the Certificate of
Incorporation, a copy of which is on file with the Commission. See "Available
Information."
The Company is authorized by the Certificate of Incorporation to issue
100,000,000 shares of Common Stock, par value $.001 per share, and 2,500,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock").
As of , 1997, shares of Class A Common Stock were issued and
outstanding. Pursuant to the Exchange, the Company exchanged all of the
outstanding shares of Series A Preferred Stock for shares of Class A
Common Stock. See "The Recapitalization--The Exchange."
There are currently insufficient shares of Class A Common Stock authorized
to permit issuance of Class A Common Stock upon the exercise of Rights or
Warrants. In order to consummate the Recapitalization, as soon as reasonably
practicable, the Company, acting through the Board, has agreed to duly approve
and adopt an amendment to the Company's Certificate of Incorporation (i) to
increase the number of shares of Common Stock that the Company is authorized
to issued from 100,000,000 shares to 260,000,000 shares, of which 230,000,000
shares would be Class A Common Stock and 30,000,000 shares would be Class B
Common Stock and (ii) to amend the conversion rights of the holders of the
Company's Class B Common Stock to provide for automatic conversion of shares
of Class B Common Stock into Class A Common Stock immediately upon the earlier
of August 1, 2000 or seventy-five days following the termination of the effect
of Section 1501 of the Indenture. In addition, CGE and Anjou, the holders of a
majority of the voting power of the Company, have agreed to provide their
written consent for the requisite approval of the Company's stockholders in
respect of such amendments to the Certificate of Incorporation. See "Risk
Factors--Insufficient Authorized Capital to Permit Exercise of Rights and
Warrants."
VOTING RIGHTS AND POWERS
Holders of issued and outstanding shares of Class A Common Stock are
entitled to one vote for each share they hold. Holders of Series A Preferred
Stock are entitled to that number of votes equal to the number of votes to
which the shares of Class A Common Stock issuable upon conversion of such
shares of Series A Preferred Stock would have been entitled if such shares of
Class A Common Stock had been outstanding on the record date. In addition, the
Series A Preferred Stock votes separately as a class on any amendments to the
Certificate of Incorporation or By-Laws of the Company, whether by merger,
consolidation, combination, reclassification or otherwise, which would alter
or circumvent the voting powers, rights and preferences of the Series A
Preferred Stock. No amendment or alteration of the dividends payable,
liquidation preference or par value of the Series A Preferred Stock may be
effected without the consent of each holder of Series A Preferred Stock.
Following the Exchange, there are currently no issued and outstanding shares
of Series A Preferred Stock.
DIVIDENDS
Holders of the Class A Common Stock are entitled to receive dividends as may
from time to time be declared by the Board of Directors of the Company. The
Company has not paid cash dividends on the Class A Common Stock in recent
years, and does not expect to pay dividends in the foreseeable future. In
addition, the Bank Credit Facility prohibits the Company from declaring or
paying cash dividends on the Class A Common Stock.
The holders of shares of the Series A Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cumulative dividends at an annual rate of $2.75
per share, payable in cash quarterly in arrears in equal amounts on March 31,
June 30, September 30 and December 31 of each year (each a "Dividend Payment
Date"). Holders of the Series A Preferred Stock are entitled to receive all
accrued dividends in preference to and priority over dividends on the Class A
Common Stock, and no distribution in respect of the Class A Common Stock and
no redemption, purchase, retirement or acquisition for value of the Class A
Common Stock may occur, or money be set apart therefor, unless all
118
<PAGE>
dividends accrued on the Preferred Stock through the immediately preceding
Dividend Payment Date have been declared and paid.
RANKING; LIQUIDATION PREFERENCES
The Class A Common Stock ranks junior to the Series A Preferred Stock with
respect to dividend rights and rights on liquidation, winding up and
dissolution. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, holders of shares of
the Preferred Stock will be entitled to be paid out of the assets of the
Company available for distribution to its stockholders an amount in cash equal
to $50.00 for each share outstanding, plus accrued and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding up, whether
or not declared to the date of such payment, before any payment shall be made
or any assets distributed to the holders of the Common Stock.
CLASS B COMMON STOCK
Following effectiveness of the Charter Amendment, the Class B Common Stock
will be identical in all respects except that (i) the Class B Common Stock
will not be entitled to vote and (ii) the Class B Common Stock will
automatically convert into Class A Common Stock immediately upon the earlier
of August 1, 2000 or seventy-five days following the termination of the Change
of Control Provision.
CONVERSION OF CONVERTIBLE DEBENTURES
Currently $115 million principal amount of Convertible Debentures of the
Company are outstanding. Any Convertible Debenture or any portion of the
principal amount thereof which is $1,000 or an integral multiple of $1,000 may
be converted into shares of Class A Common Stock at a conversion price of
$30.00 per share, subject to adjustments. As a result of the Rights Offering,
the conversion price for such Convertible Debentures will be $ per share.
The beneficial ownership by a person of 75% or more of the outstanding
voting securities of the Company following the Rights Offerings could permit
the holders of the Convertible Debentures to require the Company to redeem
outstanding Convertible Debentures following the Rights Offering at a
redemption price of 100% of the principal amount, together with accrued
interest to the redemption date. At the option of the Company, if such put
right is triggered and exercised, the Company may repurchase such Convertible
Debentures with a cash payment or by delivery of shares of Class A Common
Stock. See "Risk Factors--Change of Control Provision of Convertible
Debentures." The Convertible Debentures are redeemable in whole or in part at
the option of the Company for cash at a redemption price of 102.4% of the
principal amount in 1997 reducing to 100% of the principal amount in 2000,
together with accrued interest to the redemption date. The Convertible
Debentures require equal annual sinking fund payments beginning May 15, 2000,
which are calculated to retire 75% of the Convertible Debentures prior to
maturity.
Prior to or concurrently with the consummation of the Rights Offering and in
connection with the Recapitalization, the Company has agreed to conduct a
Consent Solicitation to seek the consent of the holders of not less than a
majority in aggregate principal amount of the Convertible Debentures
outstanding in order to delete Section 1501 from the Indenture governing such
Convertible Debentures. See "The Recapitalization-- Consent Solicitation;
Issuance of Class B Common Stock."
CLASS A COMMON STOCK OUTSTANDING AFTER RECAPITALIZATION
CGE received approximately shares of Class A Common Stock in the
Exchange. In addition, approximately shares of Class A Common Stock will
be issued to Rights holders in connection with the Rights Offering assuming
exercise of all Rights. Based on the shares of Class A Common Stock
outstanding as of , 1997, the issuance of such shares would result (on a
pro forma basis as of such date) in a % increase in the amount of Class A
Common Stock.
The outstanding shares of the Class A Common Stock are listed on the AMEX
under the symbol "AWT".
The transfer agent and registrar for the Class A Common Stock is First
Chicago Trust Company of New York.
119
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the material United States federal income
tax consequences of the receipt, ownership, exercise and disposition of the
Rights and the Warrants to the United States holders described herein under
present law. This summary is based on the Internal Revenue Code of 1986, as
amended to the date hereof (the "Code"), administrative pronouncements,
judicial decisions and existing and proposed Treasury Regulations, changes to
any of which subsequent to the date of this Prospectus may affect the tax
consequences described herein. This summary does not discuss all aspects of
United States federal income taxation that may be relevant to a particular
investor or to certain types of investors subject to special treatment under
the United States federal income tax laws (for example, persons deemed to hold
directly or indirectly 10% or more of Company's stock, banks, dealers in
securities, life insurance companies, tax exempt organizations and foreign
taxpayers), nor does it discuss any aspect of state, local or foreign tax
laws.
THE RIGHTS
Holders of Class A Common Stock will not recognize taxable income in
connection with the receipt or exercise of the Rights and, except as provided
in the following sentence, the basis of the Rights received by a stockholder
as a distribution with respect to such stockholder's Class A Common Stock will
accordingly be zero. If either (i) the fair market value of the Rights on the
date of issuance is 15% or more of the fair market value (on the date of
issuance) of the Class A Common Stock with respect to which they are received
or (ii) the stockholder elects, in his or her federal income tax return for
the taxable year in which the Rights are received, to allocate part of the
basis of such Class A Common Stock to the Rights, then upon exercise or
transfer of the Rights, the stockholder's basis in such Class A Common Stock
will be allocated between the Class A Common Stock and the Rights in
proportion to the fair market values of each on the date of Issuance. The
holding period of a stockholder with respect to the Rights received as a
distribution on such stockholder's Class A Common Stock will include the
stockholder's holding period for the Class A Common Stock with respect to
which the Rights were issued.
A stockholder who sells Rights received in the Rights Offering prior to
exercise will recognize gain or loss equal to the difference between the sale
proceeds and such stockholder's basis (if any) in the Rights sold. Such gain
or loss will be long-term capital gain or loss if such stockholder's holding
period in the Rights (as discussed above) exceeds one year. The excess of net
long-term capital gains over net short-term capital losses is taxed at a lower
rate than ordinary income for certain non-corporate taxpayers. Such rate is
further reduced for sales or exchanges of capital assets held by certain non-
corporate taxpayers for more than eighteen months. The distinction between
capital gain or loss and ordinary income is also relevant for purposes of,
among other things, limitations on the deductibility of capital losses.
Stockholders who allow the Rights received by them in the Rights Offering to
lapse will not recognize any gain or loss, and no adjustment will be made to
the basis of the Class A Common Stock, if any, owned by such holders of the
Rights.
Rights holders will not recognize any gain or loss upon the exercise of such
Rights. The aggregate basis of the Class A Common Stock and Warrants acquired
through exercise of the Rights will be equal to the sum of the Subscription
Price therefor and the Rights holder's basis in such Rights (if any) as
described above. Such aggregate basis will be allocated between such Class A
Common Stock and Warrants based upon their respective fair market values at
the time such Rights are exercised. The holding period for the Class A Common
Stock acquired through exercise of the Rights will begin on the date the
Rights are exercised.
THE WARRANTS
Upon the exercise of a Warrant, a Warrant holder will not recognize gain or
loss (except to the extent of cash, if any, received in lieu of the issuance
of fractional shares) and will have a tax basis in the Warrant Shares acquired
(including fractional Warrant Shares in lieu of which cash is received)
pursuant to such exercise equal to such holder's tax basis in the exercised
Warrant (which, in the case of an initial holder, will equal the portion of
the Subscription Price properly allocable to such Warrant, as described above,
plus the Warrant Exercise Price.
120
<PAGE>
The holding period of such Warrant Shares so acquired will commence on the day
after the date of exercise of the Warrant. If any cash is received in lieu of
fractional shares, the Warrant holder will recognize gain or loss, the amount
and character of which will be determined as if such holder had received such
fractional shares and then immediately had them redeemed by the Company for
cash. Similarly, upon the sale of Warrant Shares received upon exercise of a
Warrant, a Warrant holder will generally recognize capital gain or loss equal
to the difference between the amount realized upon the sale and such holder's
tax basis in the Warrant Shares. Such capital gain or loss will be long-term
capital gain or loss if, at the time of sale or exchange, such Warrant
holder's holding period in the Warrant Shares (as discussed above) exceeds one
year. The excess of net long-term capital gains over net short-term capital
losses is taxed at a lower rate than ordinary income for certain non-corporate
taxpayers. Such rate is further reduced for sales or exchanges of capital
assets held by certain non-corporate taxpayers for more than eighteen months.
The distinction between capital gain or loss and ordinary income is also
relevant for purposes of, among other things, limitations on the deductibility
of capital losses. Warrant holders should consult with their own tax advisors
with respect to the particular federal, state, local and foreign tax
consequences to them of the ownership of Warrants or Warrant Shares.
The sale of a Warrant will generally result in the recognition of capital
gain or loss to the Warrant holder in an amount equal to the difference
between the amount realized and such holder's tax basis in the Warrant (which,
in the case of an initial Warrant holder, will equal the portion of the
Subscription Price properly allocable to the Warrant, as described above).
Such capital gain or loss will be long-term if, at the time of sale or
exchange, the Warrant was held for more than one year.
If a Warrant expires unexercised, a Warrant holder will recognize a capital
loss equal to such holder's tax basis in the Warrant. Such capital loss will
be long-term if, at the time of expiration, the Warrant was held for more than
one year.
Under Section 305 of the Code, adjustments to the exercise price or
conversion ratio of the Warrants which may occur under certain circumstances,
or the failure to make such adjustments, may result in the receipt of taxable
constructive dividends by a Warrant holder to the extent of the Company's
current or accumulated earnings and profits, regardless of whether there is a
distribution of cash or property.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY,
EACH RIGHTS HOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING ON HIS OR HER OWN
PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the authorization and issuance of the securities offered
hereby is being passed upon by Douglas A. Satzger, Esq., Senior Vice
President, General Counsel and Secretary of the Company.
EXPERTS
The consolidated financial statements as of and for the year ended October
31, 1996 included in this Prospectus and elsewhere in this Registration
Statement have been audited by McGladrey & Pullen, LLP, independent public
accountants, and are included herein in reliance upon such report and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements included in this Prospectus and
elsewhere in this Registration Statement as of October 31, 1995 and for the
years ended October 31, 1995 and 1994 have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing, in giving said report.
121
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of July 31, 1997 (Unaudited) and October
31, 1996................................................................. F-2
Consolidated Statements of Operations for the Nine Months Ended July 31,
1997 and 1996 (Unaudited) ............................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the Year
Ended October 31, 1996 and for the Nine Months Ended July 31, 1997
(Unaudited).............................................................. F-4
Consolidated Statements of Cash Flows for the Nine Months Ended July 31,
1997 and 1996 (Unaudited)................................................ F-5
Notes to Consolidated Financial Statements (Unaudited).................... F-6
Report of Independent Public Accountants.................................. F-14
Report of Independent Public Accountants.................................. F-15
Consolidated Balance Sheets as of October 31, 1996 and 1995............... F-16
Consolidated Statements of Operations for the Years Ended October 31,
1996, 1995 and 1994...................................................... F-17
Consolidated Statements of Stockholders' Equity for the Years Ended
October 31, 1996, 1995 and 1994.......................................... F-18
Consolidated Statements of Cash Flows for the Years Ended October 31,
1996, 1995 and 1994...................................................... F-19
Notes to Consolidated Financial Statements................................ F-20
</TABLE>
F-1
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 (UNAUDITED) AND OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 13,635 $ 12,667
Accounts receivable, net............................. 93,377 100,933
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 40,425 48,097
Inventories.......................................... 10,667 11,319
Prepaid expenses and other current assets............ 9,998 12,027
--------- ---------
Total current assets............................... 168,102 185,043
Property, plant and equipment, net..................... 29,315 35,432
Investments in environmental treatment facilities...... 21,960 22,062
Goodwill, net.......................................... 242,179 265,860
Other assets........................................... 22,528 29,873
--------- ---------
Total assets....................................... $ 484,084 $ 538,270
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current installments of
long-term debt...................................... $ 14,391 $ 378
Accounts payable..................................... 88,009 73,951
Accrued expenses..................................... 79,840 76,656
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 25,637 23,995
Income taxes payable................................. 2,055 2,507
--------- ---------
Total current liabilities.......................... 209,932 177,487
--------- ---------
Long-term debt......................................... 304,922 306,542
--------- ---------
Commitments and contingencies (Note 2)
Stockholders' equity (deficit):
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 shares.................... 32 32
Additional paid-in capital........................... 427,036 427,036
Accumulated deficit.................................. (456,214) (372,433)
Common stock in treasury, at cost.................... (108) (108)
Cumulative currency translation adjustment........... (1,528) (298)
--------- ---------
Total stockholders' equity (deficit)............... (30,770) 54,241
--------- ---------
Total liabilities and stockholders' equity (deficit)... $ 484,084 $ 538,270
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Sales..................................................... $454,173 $503,861
Cost of sales............................................. 390,416 404,974
-------- --------
Gross margin............................................ 63,757 98,887
Selling, general and administrative expenses.............. 83,559 70,079
Depreciation and amortization............................. 16,889 14,806
Impairment charges........................................ 25,000 --
-------- --------
Operating income (loss)................................. (61,691) 14,002
Interest expense.......................................... (18,217) (16,964)
Interest income........................................... 346 700
Other expense, net........................................ (964) (1,445)
-------- --------
Loss before income taxes................................ (80,526) (3,707)
Income taxes.............................................. 780 1,001
-------- --------
Net loss.................................................. $(81,306) $ (4,708)
======== ========
Net loss per common share (after preferred stock
dividends)............................................... $ (2.62) $ (.22)
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A CLASS A
PREFERRED STOCK COMMON STOCK CLASS A COMMON CUMULATIVE
$.01 PAR VALUE $.001 PAR VALUE ADDITIONAL TREASURY STOCK CURRENCY
---------------- ----------------- PAID-IN ACCUMULATED --------------- TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT ADJUSTMENT TOTAL
--------- ------ ---------- ------ ---------- ----------- ------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance October 31,
1995................. 1,200,000 $12 32,107,906 $32 $427,028 $(363,865) (89,902) $(108) $ (10) $ 63,089
Net loss.............. -- -- -- -- -- (5,268) -- -- -- (5,268)
Cash dividends,
Series A
Preferred Stock...... -- -- -- -- -- (3,300) -- -- -- (3,300)
Exercise of stock
options.............. -- -- 1,250 -- 8 -- -- -- -- 8
Currency translation
adjustment........... -- -- -- -- -- -- -- -- (288) (288)
--------- --- ---------- --- -------- --------- ------- ----- ------- --------
Balance,
October 31, 1996..... 1,200,000 12 32,109,156 32 427,036 (372,433) (89,902) (108) (298) 54,241
Net loss.............. -- -- -- -- -- (81,306) -- -- -- (81,306)
Cash dividends,
Series A
Preferred Stock...... -- -- -- -- -- (2,475) -- -- -- (2,475)
Exercise of stock
options.............. -- -- -- -- -- -- -- -- -- --
Currency translation
adjustment........... -- -- -- -- -- -- -- -- (1,230) (1,230)
--------- --- ---------- --- -------- --------- ------- ----- ------- --------
Balance, July 31,
1997................. 1,200,000 $12 32,109,156 $32 $427,036 $(456,214) (89,902) $(108) $(1,528) $(30,770)
========= === ========== === ======== ========= ======= ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(81,306) $ (4,708)
Adjustments to reconcile net loss to net cash provided by
(used for) continuing operations
Depreciation and amortization............................ 16,889 14,806
Impairment charges and other, net........................ 27,732 621
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable, net................................ 7,432 3,837
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 7,067 (1,635)
Inventories............................................. (812) (828)
Prepaid expenses and other current assets............... 1,952 (2,362)
Other assets............................................ 8,342 755
Increase (decrease) in liabilities
Accounts payable........................................ 14,037 (52)
Accrued expenses........................................ (1,173) (13,319)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,642 572
Income taxes payable.................................... (449) 49
-------- --------
Net cash provided by (used for) continuing operations..... 1,353 (2,264)
Net cash provided by discontinued operations.............. 945 149
-------- --------
Net cash provided by (used for) operating activities...... 2,298 (2,115)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business............................ 1,545 2,353
Capital expenditures...................................... (5,129) (5,281)
Investment in environmental treatment facilities.......... 102 582
Other, net................................................ (6,092) (8,835)
-------- --------
Net cash used for investing activities................... (9,574) (11,181)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt............... (307) (295)
Net borrowings under credit facilities.................... 12,700 16,000
Cash dividends paid on preferred stock.................... (2,475) (2,475)
Other, net................................................ (1,674) (1,008)
-------- --------
Net cash provided by financing activities................ 8,244 12,222
-------- --------
Net increase (decrease) in cash and cash equivalents....... 968 (1,074)
Cash and cash equivalents at beginning of period........... 12,667 11,168
-------- --------
Cash and cash equivalents at end of period................. $ 13,635 $ 10,094
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................. $ 19,877 $ 18,869
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 ("AWT" or the "Company") and its
consolidated subsidiaries for the fiscal year ended October 31, 1996, which
are included elsewhere in this Prospectus. The interim information reflects
all adjustments, including normal recurring adjustments, which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods. Results for the interim periods are not necessarily
indicative of results to be expected for the full year.
(2) COMMITMENTS AND CONTINGENCIES
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, Professional Services Group ("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 Department of Justice
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.
The City of Bremerton, Washington brought a contribution action against
Metcalf & Eddy Services, Inc. ("M&E Services"), the operator of a City-owned
wastewater treatment plant from 1987 until late 1995. The contribution action
arises from two prior lawsuits against the city for alleged odor nuisances
brought by two groups of homeowners neighboring the plant. In the first
homeowners' suit, the City paid $4.3 million in cash and approximately $5
million for odor control technology to settle the case. M&E Services
understands the odor control measures generally have been successful and the
odors have been reduced as a result. M&E Services was not a party to the first
homeowner's suit, which has been dismissed with prejudice as to all parties.
In the settlement of the second homeowners' case, the City of Bremerton paid
the homeowners $2.9 million, and M&E Services contributed $.6 million to the
settlement without admitting liability. All claims raised by the homeowners in
the second suit (except for two recalcitrant homeowners) were resolved. All
claims by and between M&E Services and the City in the second homeowner's suit
were expressly reserved and will be tried after the City's contribution
action, which is currently scheduled for trial in March 1998. The City is
seeking to recover the amounts it expended on the two settlements, damages for
M&E Services' alleged substandard operation of the plant, and attorneys' fees.
M&E Services denies any liability to the City and believes it has meritorious
defenses to the claim. However, no assurances can be given that an adverse
judgment would not have a material adverse effect on the financial position or
results of operations of M&E Services or the Company taken as a whole.
F-6
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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.
(4) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement 128: "Earnings Per Share"--This statement requires that the
Company begin to report "basic" and "diluted" earnings per share which would
replace "primary" and "fully diluted" earnings per share currently reported by
the Company. The key difference is that "basic" earnings per share does not
adjust for common stock equivalents. Statement 128 is effective for the
Company beginning with the first quarter of fiscal 1998 (the three-month
period ending January 31, 1998) and requires restatement of all prior-period
earnings per share data. Adoption of Statement 128 is not expected to have a
material effect.
(5) RECENT DEVELOPMENTS
In August 1997, United States Fidelity and Guaranty Company and certain of
its affiliates ("USF&G") notified the Company that it would suspend the
renewal and issuance of new bid and performance bonds as of September 30,
1997, due to the Company's current operating performance and resulting
financial condition, unless it receives indemnification from CGE or Anjou
International Company ("Anjou"), an affiliated company, for at least 20% of
all future bond requests including renewals.
A bid bond guarantees that the Company will enter into the contract under
consideration at the price bid and a performance bond guarantees performance
of the contract. In order to procure new contracts and maintain its existing
contracts, the Company is often required to provide such bonds to its clients.
CGE has informed USF&G and the Company that, pending the outcome of its
discussions with the Special Committee it is not prepared at this time to
provide the requested indemnification support. If new bonds are not issued, it
will be difficult for Professional Services Group and the Company's other
segments, to a lesser extent, to obtain new contracts, and if existing bonds
are not renewed, the Company may lose a material portion of its existing
Professional Services Group contracts within the next twelve months. The
Company believes that its inability to obtain such bonds is likely to have a
material adverse effect on its ability to conduct its businesses and on its
financial condition. No assurance can be given that the Company will be able
to procure new bonds for new projects or renewal of bonds for existing
projects from USF&G or any other surety.
(6) SIGNIFICANT OPERATING CHARGES
The operating loss sustained by the Professional Services Group during the
nine month period ended July 31, 1997 was primarily the result of certain
operating charges and asset write-offs which approximated $9.3 million. These
charges were primarily related to revised estimates of direct project costs of
$2.8 million required under the PRASA contract; professional fees of $5.3
million related to marketing consultants, the DOJ Investigation and certain
litigation matters; and provisions of $1.2 million for revised collectibility
estimates for certain non-current note receivables.
The operating loss sustained by Metcalf & Eddy during the nine month period
ended July 31, 1997 was primarily the result of $19.4 million of charges,
including $5.4 million of provisions required in order to property
F-7
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
reflect the Company's revised estimates for the collectibility of certain
receivables based on recent adverse developments in contract negotiations and
collection efforts; $6.3 million of increases to its reserves for litigation,
professional liability and certain project contingencies due to revised
estimates of the expected outcome of certain unasserted and asserted claims
and litigation incurred in the normal course of business; $3.4 million of
equipment write-offs; a $1.7 million charge related to a cancellation penalty
for a high cost leased facility; and other direct and indirect costs of $2.6
million.
The operating loss sustained by Research-Cottrell during the nine month
period ended July 31, 1997 was primarily the result of a $25.0 million
impairment charge as discussed in Note 7--Revised Business Strategy, and other
receivable and warranty provisions of $4.0 million related to its Ecodyne and
Custodis operations due to recent adverse developments on two specific
projects. In addition, the nine month results were impacted in the third
quarter by higher than anticipated costs on a specific APCD project by $1.0
million, receivable and warranty provisions of $2.3 million related to the R-C
International operations and partially off-set by revised estimates of $1.0
million of previously accrued discretionary and self insured employee
benefits.
(7) REVISED BUSINESS STRATEGY
During the second quarter the Company completed a review of its operations'
three-year business plans. These plans included a detailed analysis of
markets, growth opportunities and forecasted three-year operating results,
cash flows and return on capital employed for each business segment.
As a result of this review, management is considering the actions necessary
to redeploy its capital to its core water business (PSG and Metcalf & Eddy).
This approach reflects management's assessment of the greater market
opportunities and growth potential in the water and wastewater treatment
markets compared to the air pollution markets. Among other factors
contributing to this approach were recent tax law changes which may expand the
duration of operations, maintenance and management contracts and create
additional opportunities within the water and wastewater treatment markets
which are the primary markets for Professional Services Group and Metcalf &
Eddy. These enhanced opportunities are in contrast to the air pollution
control market where continuing delays in issuing new air quality standards by
the EPA and lack of enforcement of existing standards are expected to limit
the growth opportunities within the air pollution control markets targeted by
Research-Cottrell.
Furthermore, the returns on capital employed within the Professional
Services Group and Metcalf & Eddy segments are forecasted to be greater than
the returns for the Research-Cottrell segment. From a competitive standpoint,
management also believes that the Company has greater competitive advantages
and market penetration through its Professional Services Group and Metcalf &
Eddy businesses than what has been achieved by its Research-Cottrell
operations.
As a result of the above, management is assessing the impact of de-
emphasizing the Research-Cottrell business segment and redeploying its capital
to its Professional Services Group and Metcalf & Eddy segments. A financial
advisor has been retained to assist the Company in exploring strategic
alternatives related to this redeployment. The successful implementation of a
redeployment program could include the divestiture of portions or
substantially all of the Research-Cottrell segment, although no such
definitive decision to divest has been made by the Company's Board of
Directors at this time. The Company is currently in discussions with several
parties regarding the potential divestiture of this business.
Based on the recent downturn in the operating performance of certain of the
Research-Cottrell businesses, the Company reviewed the expected future cash
flows of these businesses and reassessed their fair value. In connection with
this review, the Company reflected a $25.0 million impairment charge including
a goodwill writedown of $17.4 million related to the Ecodyne and KVB
businesses during the second quarter of fiscal 1997.
F-8
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The Ecodyne operation was sold during July 1997 for approximately $2.0
million. The impairment was determined in accordance with Statement of
Financial Accounting Standards No. 121 by taking into consideration the
operations' fair values based on expected future cash flows discounted at a
rate commensurate with the risks involved.
The realizability of goodwill and other long lived assets is the result of
an estimate based on the underlying assets' remaining estimated useful lives,
projected operating cash flows and ultimate disposition assumption (held for
use or held for sale). It is reasonably possible that this estimate will
changer in the near term as a consequence of further deterioration in market
conditions and operating results or the divestiture of all or part of the
Research-Cottrell segment. The effect of the change would be material to the
financial statements since a significant additional charge may be required. At
July 31, 1997, Research-Cottrell's total assets and net carrying value were
$136.5 million and $84.4 million, respectively, including unamortized goodwill
of $76.6 million.
(8) FINANCIAL CONDITION
The Company maintains a $60.0 million seven-year unsecured revolving credit
facility with Anjou (the "Anjou Note"). The facility matures on August 2,
2001. As of July 31, 1997, the Company's borrowings under the Anjou Note
totaled $60.0 million The Anjou Note bears interest at LIBOR plus .6 %. The
Company paid $584,246.90 to Anjou as interest on the Anjou Note during fiscal
1996.
The Company also maintains a three-year senior secured credit facility (the
"Bank Credit Facility") which was increased by $20.0 million to $70.0 million
as of April 28, 1997. As of July 31, 1997, the Company's borrowings under the
Bank Credit Facility totaled $14.0 million (unused capacity of $32.3 million)
and outstanding letters of credit under the Bank Credit Facility totaled $23.7
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 under the Bank Credit
Facility, as amended, borrowings are limited to the lesser of $50 million or
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 plus 1.0% or at a defined bank rate
approximating prime. 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 at
least 40% of the Company's Board of Directors as well as to appoint the Chief
Executive Officer and Chief Financial Officer of the Company. The Company
compensates CGE For its support in an amount equal to .95% per annum of the
outstanding commitment of its credit facilities. The Bank Credit Facility
expires March 31, 1998. The Company will need to replace this facility at that
time.
The Company's forecasts indicate that it may be in violation of several
covenants at October 31, 1997 and, as a result, will need to obtain a waiver
or amendment of the Bank Credit Facility. The Company is currently in
discussion with the Lending Banks regarding (i) a waiver of a default under
and the amendment of certain covenants contained in the Bank Credit Facility
in the event the Company violates certain of the covenants contained therein
at October 31, 1997 and (ii) the extension of the Bank Credit Facility beyond
its currently scheduled maturity at March 31, 1998 for a period of
approximately one year. Following the Recapitalization the Company also
intends to enter into discussions regarding the establishment of a new senior
secured credit facility following the expiration of the Bank Credit Facility.
While there can be no assurance that the Company will have access to a new
credit facility following March 31, 1998 even if the Rights Offering is
completed,
F-9
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
management believes that it could obtain alternative sources of funding for
its cash requirements following expiration of the Bank Credit Facility.
In the absence of a waiver or amendment, the Lending Banks under the Bank
Credit Facility would have the right to refuse any further extensions of
credit and the right to accelerate payment of all outstanding amounts under
the Bank Credit Facility. In addition, substantially all of the Company's
long-term debt and certain other financial and non-financial obligations
contain cross-default or acceleration provisions. In the event the Company
were required to repay accelerated outstanding amounts under the Bank Credit
Facility and other obligations, the Company does not believe that it will have
financial resources adequate to repay such amounts and to satisfy its ongoing
working capital requirements. Therefore, the failure to complete the Rights
Offering could have a material adverse effect on the Company's business
prospects and on its financial condition and liquidity.
The businesses of the Company have not historically required significant
ongoing capital expenditures. For the nine month period ended July 31, 1997,
and the years ended October 31, 1996 and 1995 total capital expenditures were
$5.1 million, $7.5 million and $7.9 million, respectively. At July 31, 1997,
the Company had no material outstanding purchase commitments for capital
expenditures. As of September 12, 1997, the Company reduced its Bank Credit
Facility borrowings by $4.0 million. Current cash flow forecasts reflect
additional borrowing requirements of approximately $6.0 million and additional
letters of credit requirements of $10.0 million during the remainder of fiscal
year 1997, which is within the Company's credit capacity. Management is
addressing its on-going cash requirements through a series of programs, for
which there is no assurance of success, directed at improving working capital
management by focusing on, among other things, collection of unreimbursed
costs on certain significant contracts, including the PRASA contract ($24.2
million), Metcalf & Eddy past due receivables, increased emphasis on capital
redeployment and asset divestitures and the restructuring and strengthening of
its current capital structure.
The Company's future results and financial conditions are dependent on the
successful implementation of its new business strategy. The Company's revised
business plans include assumptions relating to growth initiatives related to
longer term OM&M contracts which may require significant up-front investments
including capital improvements, upgrades, concession payments or other
investments. In addition, new capital may be required to be invested in the
Metcalf & Eddy segment in order to achieve its growth targets through
geographical expansion and/or acquisitions. The Company's ability to access
capital for these requirements may have a significant impact on the successful
implementation of its business plans. While the Company believes that this
strategy will enable it to improve its financial results, there can be no
assurance that this new strategy will be successful, that the anticipated
benefits of this new strategy will be realized, that management will be able
to implement such strategy on a timely basis, that the Company will return to
profitability or that losses will not continue in the future.
The Company is often required to procure bid and performance bonds from
surety companies, particularly for clients in the public sector. A bid bond
guarantees that the Company will enter into the contract under consideration
at the price bid and a performance bond guarantees performance of the
contract. In August 1997, USF&G notified the Company that it would suspend the
renewal and issuance of new bid and performance bonds as of September 30,
1997, due to the Company's operating performance and resulting financial
condition as reported at the end of the fiscal quarter ended April 30, 1997,
unless it received indemnification from CGE or Anjou for at least 20% of all
future bond requests including renewals. CGE is currently in discussions with
USF&G regarding an arrangement pursuant to which, until the closing of the
Recapitalization, CGE (or one of its affiliates) will enter into guarantees of
certain obligations of the Company relating to the bonding of certain
contracts under the Master Surety Agreement dated as of October 31, 1995
between USF&G and the Company and its subsidiaries of 30% of the bonds issued
or renewed up to $45 million. USF&G has issued bonds to the Company based on
the ongoing good faith negotiations between the Company and USF&G. There can
be no
F-10
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
assurances that USF&G will continue to do so without definitive guarantees
from CGE or that CGE and USF&G will come to a mutually acceptable agreement
with respect to any such guarantees, or that CGE's willingness to provide such
guarantees will continue. In addition, there can be no assurance that USF&G
will be willing to provide bid bonds to the Company following the
Recapitalization without a guarantee from CGE (or one of its affiliates) and
there can be no assurance that CGE would be willing to provide such a
guarantee following the Recapitalization.
(9) CONVERTIBLE DEBENTURE DELISTING
On August 13, 1997, the Company's 8% Convertible Debentures were delisted
from the Nasdaq SmallCap Market as a consequence of the Company's capital and
surplus not meeting the requirements of the Marketplace Rule 4310(c)(03).
(10) BUSINESS SEGMENTS
PSG provides complete services for the operations, maintenance and
management of treatment facilities in the various water and wastewater, and
sludge and biosolids waste management markets. Sales are primarily to
municipal government agencies.
Metcalf & Eddy provides a comprehensive range of water related services,
including treatment process design and on-site and off-site remediation of
environmental contamination. Sales are primarily to federal, state and
municipal governmental agencies.
Research-Cottrell services include the initial analysis of air/thermal
pollution problems, consultation, design and installation of the appropriate
treatment technologies including electrostatic precipitators, fabric filters,
chimneys, dry emission control systems, continuous emission monitors and
thermal oxidizers. In addition, this segment provides parts, repairs, service
and maintenance for its own base of installed equipment as well as competitor
equipment. Sales are primarily to electric utilities and industrial entities
within the petrochemical, pharmaceutical, pulp and paper and steel industries.
Sales between segments are included within the segment recording the sales
transaction and eliminated for consolidation purposes. Unallocated corporate
expenses includes administrative costs not allocable to a specific segment.
Identifiable assets are those assets used by each segment in its operation.
Corporate assets primarily include cash, fixed assets, net assets from
discontinued operations and deferred debt issuance costs. Sales and
identifiable assets of foreign operations as of and for the nine months ended
July 31, 1997 and 1996 were less than 10% of the consolidated assets and
sales.
F-11
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Summarized below is certain financial information relating to the core
segments of the Company (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Sales:
Professional Services Group............................ $195,383 $195,474
Metcalf & Eddy......................................... 132,108 150,663
Research-Cottrell...................................... 128,077 160,615
Other and eliminations................................. (1,395) (2,891)
-------- --------
$454,173 $503,861
======== ========
Cost of sales:
Professional Services Group............................ $177,697 $172,871
Metcalf & Eddy......................................... 103,731 106,758
Research-Cottrell...................................... 110,383 128,236
Other and eliminations................................. (1,395) (2,891)
-------- --------
$390,416 $404,974
======== ========
Selling, general and administrative expense
Professional Services Group............................ $ 16,601 $ 10,753
Metcalf & Eddy......................................... 37,437 29,646
Research-Cottrell...................................... 24,315 24,506
Corporate (unallocated)................................ 5,206 5,174
-------- --------
$ 83,559 $ 70,079
======== ========
Depreciation and amortization:
Professional Services Group............................ $ 6,028 $ 5,710
Metcalf & Eddy......................................... 6,546 4,489
Research-Cottrell...................................... 3,930 4,283
Corporate (unallocated)................................ 385 324
-------- --------
$ 16,889 $ 14,806
======== ========
Impairment charges:
Research-Cottrell...................................... $ 25,000 $ --
======== ========
Operating income (loss):
Professional Services Group............................ $ (4,943) $ 6,140
Metcalf & Eddy......................................... (15,606) 9,770
Research-Cottrell...................................... (35,551) 3,590
Corporate (unallocated)................................ (5,591) (5,498)
-------- --------
$(61,691) $ 14,002
======== ========
</TABLE>
F-12
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the nine months ended July 31, 1997
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 BY QUARTER
----------------------------
FIRST SECOND THIRD NINE MONTHS*
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Sales........................... $146,959 $148,275 $158,939 $454,173
Gross margin.................... 24,204 11,679 27,874 63,757
Net loss........................ (12,530) (63,986) (4,790) (81,306)
Loss per common share (after
preferred stock dividends).....
Net loss per common share....... (.42) (2.02) (.18) (2.62)
</TABLE>
- --------
* Loss per share for the nine month period is not necessarily the sum of the
three quarters due to different average shares outstanding for each discrete
period.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors ofAir & Water Technologies
Corporation:
We have audited the accompanying consolidated balance sheet of Air & Water
Technologies Corporation and its subsidiaries as of October 31, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Air & Water Technologies
Corporation and its subsidiaries as of October 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 8, 1997,except
for the first paragraph
of Note 8 as to which
the date is January 24,
1997
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Air & Water Technologies Corporation:
We have audited the accompanying consolidated balance sheet of Air & Water
Technologies Corporation (a Delaware corporation) and subsidiaries as of
October 31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended October 31, 1995 and
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Air & Water Technologies
Corporation and subsidiaries as of October 31, 1995 and the results of their
operations and their cash flows for the years ended October 31, 1995 and 1994,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
December 8, 1995
F-15
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$849 and $1,664 in 1996 and 1995, respectively........ $ 12,667 $ 11,168
Accounts receivable, less allowance for doubtful
accounts of $5,000 and $8,300 in 1996 and 1995,
respectively.......................................... 100,933 102,360
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 48,097 44,730
Inventories............................................ 11,319 13,047
Prepaid expenses and other current assets.............. 12,027 11,835
--------- ---------
Total current assets................................. 185,043 183,140
Property, plant and equipment, net..................... 35,432 37,498
Investments in environmental treatment facilities...... 22,062 22,545
Goodwill, net.......................................... 265,860 276,549
Other assets........................................... 29,873 28,185
--------- ---------
Total assets........................................... $ 538,270 $ 547,917
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt................. $ 378 $ 366
Accounts payable....................................... 73,951 65,425
Accrued expenses....................................... 76,656 101,278
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 23,995 25,862
Income taxes payable................................... 2,507 2,777
--------- ---------
Total current liabilities............................ 177,487 195,708
--------- ---------
Long-term debt........................................... 306,542 289,120
--------- ---------
Commitments and contingencies (Note 15)
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 in
1996 and 1995, respectively........................... 32 32
Additional paid-in capital............................. 427,036 427,028
Accumulated deficit.................................... (372,433) (363,865)
Common stock in treasury, at cost...................... (108) (108)
Cumulative currency translation adjustment............. (298) (10)
--------- ---------
Total stockholders' equity........................... 54,241 63,089
--------- ---------
Total liabilities and stockholders' equity............... $ 538,270 $ 547,917
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-16
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------- -----------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales............................... $701,099 $618,868 $ 522,573
Cost of sales....................... 567,758 480,555 437,997
-------- -------- ---------
Gross margin...................... 133,341 138,313 84,576
Selling, general and administrative
expenses........................... 95,592 103,125 104,178
Depreciation and amortization....... 20,015 18,348 17,702
Unusual charges..................... -- -- 145,200
-------- -------- ---------
Operating income (loss) from
continuing operations............ 17,734 16,840 (182,504)
Interest income..................... 1,049 1,201 1,283
Interest expense.................... (22,808) (24,379) (24,386)
Other expense, net.................. (1,661) (434) (4,580)
-------- -------- ---------
Loss from continuing operations
before income taxes, minority
interest and extraordinary item.. (5,686) (6,772) (210,187)
Income taxes........................ (418) 1,115 998
Minority interest................... -- 98 (194)
-------- -------- ---------
Loss from continuing operations
before extraordinary item........ (5,268) (7,985) (210,991)
Loss from discontinued operations... -- -- (42,787)
Extraordinary item.................. -- -- (8,000)
-------- -------- ---------
Net loss.......................... $ (5,268) $ (7,985) $(261,778)
======== ======== =========
Loss per common share (after
preferred stock dividends)
Continuing operations before
extraordinary item............... $ (0.27) $ (0.35) $ (7.68)
Discontinued operations........... -- -- (1.55)
Extraordinary item................ -- -- (0.29)
-------- -------- ---------
Net loss per common share......... $ (0.27) $ (0.35) $ (9.52)
======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-17
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A CLASS A
PREFERRED STOCK COMMON STOCK CLASS A COMMON CUMULATIVE
$.01 PAR VALUE $.001 PAR VALUE ADDITIONAL TREASURY STOCK CURRENCY
---------------- ------------------ PAID-IN ACCUMULATED --------------- TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT ADJUSTMENT TOTAL
--------- ------ ---------- ------ ---------- ----------- ------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31,
1993................ -- $-- 24,908,183 $ 25 $301,048 $ (89,557) (89,902) $(108) $(1,094) $ 210,314
Net loss............. -- -- -- -- -- (261,778) -- -- -- (261,778)
Issuance of Common
Stock............... -- -- 7,201,500 7 69,933 -- -- -- -- 69,940
Issuance of Series A
Preferred Stock..... 1,200,000 12 -- -- 55,513 -- -- -- -- 55,525
Cash dividends,
Series A Preferred
Stock............... -- -- -- -- -- (1,245) -- -- -- (1,245)
Grant, forfeiture and
amortization of
restricted stock.... -- -- (1,777) -- 534 -- -- -- -- 534
Currency translation
adjustment.......... -- -- -- -- -- -- -- -- 1,091 1,091
--------- ---- ---------- ---- -------- --------- ------- ----- ------- ---------
Balance, October 31,
1994................ 1,200,000 12 32,107,906 32 427,028 (352,580) (89,902) (108) (3) 74,381
Net loss............. -- -- -- -- -- (7,985) -- -- -- (7,985)
Cash dividends,
Series A Preferred
Stock............... -- -- -- -- -- (3,300) -- -- -- (3,300)
Currency translation
adjustment.......... -- -- -- -- -- -- -- -- (7) (7)
--------- ---- ---------- ---- -------- --------- ------- ----- ------- ---------
Balance October 31,
1995................ 1,200,000 12 32,107,906 32 427,028 (363,865) (89,902) (108) (10) 63,089
Net loss............. -- -- -- -- -- (5,268) -- -- -- (5,268)
Cash dividends,
Series A Preferred
Stock............... -- -- -- -- -- (3,300) -- -- -- (3,300)
Exercise of stock
options............. -- -- 1,250 -- 8 -- -- -- -- 8
Currency translation
adjustment.......... -- -- -- -- -- -- -- -- (288) (288)
--------- ---- ---------- ---- -------- --------- ------- ----- ------- ---------
Balance, October 31,
1996................ 1,200,000 $ 12 32,109,156 $ 32 $427,036 $(372,433) (89,902) $(108) $ (298) $ 54,241
========= ==== ========== ==== ======== ========= ======= ===== ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-18
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (5,268) $ (7,985) $(261,778)
Adjustments to reconcile net loss to net cash
provided by (used for) continuing operations
Discontinued operations........................ -- -- 42,787
Depreciation and amortization.................. 20,015 18,348 17,702
Other.......................................... (185) (717) 849
Extraordinary item............................. -- -- 8,000
Changes in assets and liabilities, net of
effects from acquisitions and divestitures
(Increase) decrease in assets
Accounts receivable.......................... (2,491) (7,361) (1,307)
Costs and estimated earnings in excess of
billings on uncompleted contracts........... (2,101) 10,356 22,230
Inventories.................................. 193 780 2,271
Prepaid expenses and other current assets.... (667) (1,381) 10,934
Other assets................................. (1,077) 14,594 6,196
Increase (decrease) in liabilities
Accounts payable............................. 9,013 17,411 (5,712)
Accrued expenses............................. (15,553) (27,408) 64,716
Billings in excess of costs and estimated
earnings on uncompleted contracts........... (650) (6,295) 5,152
Income taxes................................. (281) 1,062 (2,962)
Other liabilities............................ -- -- 42,700
-------- -------- ---------
Net cash provided by (used for) continuing
operations.................................... 948 11,404 (48,222)
Net cash provided by (used for) discontinued
operations.................................... (60) 1,579 (17,294)
-------- -------- ---------
Net cash provided by (used for) operating
activities.................................... 888 12,983 (65,516)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses............... 6,186 12,962 --
Capital expenditures........................... (7,458) (7,895) (5,523)
Investment in environmental treatment
facilities.................................... 530 798 (1,020)
Software development........................... -- -- (2,659)
Start up costs and other, net.................. (11,146) (6,577) (243)
-------- -------- ---------
Net cash used for investing activities......... (11,888) (712) (9,445)
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from issuances of common and preferred
stock......................................... 8 -- 63,194
Proceeds from issuance of notes payable and
long-term debt................................ -- -- 125,000
Payments of notes payable and long-term debt... (366) (654) (110,605)
Net borrowings under credit facilities......... 17,800 14,500 970
Accounts receivable repurchased................ -- (20,000) --
Cash dividends paid on preferred stock......... (3,300) (3,300) (970)
Other, net..................................... (1,643) (2,670) 769
-------- -------- ---------
Net cash provided by (used for) financing
activities.................................... 12,499 (12,124) 78,358
-------- -------- ---------
Net increase in cash and cash equivalents....... 1,499 147 3,397
Cash and cash equivalents at beginning of year.. 11,168 11,021 7,624
-------- -------- ---------
Cash and cash equivalents at end of year........ $ 12,667 $ 11,168 $ 11,021
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest......................... $ 22,417 $ 24,879 $ 23,853
Cash paid for income taxes..................... 1,292 604 976
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-19
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Air & Water
Technologies Corporation ("AWT" or the "Company") and all majority-owned
subsidiaries. All significant intercompany transactions have been eliminated.
Investments in joint ventures, which are 50% or less owned, are accounted for
using the equity method, while the Company's share of joint venture results of
operations are included pro rata in "sales", "cost of sales" and "selling,
general and administrative expenses" in the accompanying consolidated
statements of operations.
Use of accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents
Cash equivalents consist of investments in short-term highly liquid
securities having an original maturity of three months or less and primarily
include investments in bank time deposits.
Revenue recognition
The Company follows the practice of accruing income from long-term contracts
using the percentage-of-completion method. Under this method, the Company
primarily recognizes as profit that proportion of the total anticipated profit
which the cost of work completed bears to the estimated total cost of the work
covered by the contract, including estimated warranty and performance
guarantee costs. As contracts extend over one or more years, revisions of cost
and profit estimates are made periodically and are reflected in the accounting
period in which they are determined. If the estimate of total costs on a
contract indicates a loss, the total anticipated loss is recognized
immediately. Estimated warranty and performance guarantee costs on completed
contracts are included in accrued expenses and amounted to $4,300,000 and
$11,400,000 at October 31, 1996 and 1995.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents contract costs incurred plus earned margin
in excess of amounts billed and includes unbilled retentions which result from
performance of work on contracts in progress in advance of billings pursuant
to certain contract terms. Approximately $45,100,000 of costs and estimated
earnings in excess of billings on uncompleted contracts is expected to be
collected in fiscal year 1997. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
contract costs incurred plus earned margin.
Inventories
Inventories are stated principally at the lower of weighted average cost or
market. Inventories at October 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials................................................ $ 5,207 $ 4,270
Work in process.............................................. 869 449
Components and parts......................................... 5,243 8,328
------- -------
$11,319 $13,047
======= =======
</TABLE>
F-20
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization of property, plant and equipment is primarily computed on the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives are generally 20 to 30 years for buildings and
improvements and 3 to 12 years for machinery, equipment and fixtures. Repair
and maintenance costs are expensed as incurred; major renewals and betterments
are capitalized. Property, plant and equipment at October 31 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and land improvements............................... $ 4,836 $ 5,080
Buildings and improvements............................... 15,423 17,099
Machinery, equipment and fixtures........................ 45,098 49,789
-------- --------
65,357 71,968
Less accumulated depreciation and amortization........... (29,925) (34,470)
-------- --------
$ 35,432 $ 37,498
======== ========
</TABLE>
Goodwill and long-lived assets
Goodwill is being amortized over 40 years under the straight-line method.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill and
other long-lived assets may warrant revision or the remaining balance of
goodwill and other long-lived assets may not be recoverable. When factors
indicate that goodwill and other long-lived assets should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's undiscounted operating income over the remaining life of the assets
in determining whether the assets are impaired. The realizability of goodwill
and other long-lived assets associated with a business segment might be
significantly impacted if that business were to be divested. Goodwill
amortization was $8,266,000, $8,233,000 and $7,738,000 for the years ended
October 31, 1996, 1995 and 1994. Accumulated amortization of goodwill was
$60,578,000 and $52,881,000 at October 31, 1996 and 1995.
Deferred costs
Certain direct costs which are incurred for new projects primarily related
to the start up of the operations, maintenance and management of treatment
facilities within the PSG operating segment are deferred and amortized over
the terms of the specific new contract using the straight-line method. These
unamortized deferred charges are included in other assets and amounted to
$13,767,000 and $7,494,000 at October 31, 1996 and 1995. Deferred debt
issuance costs are amortized over the life of the related debt utilizing the
effective interest method. The unamortized costs were included in other assets
and amounted to $3,147,000 and $3,334,000 at October 31, 1996 and 1995.
Loss per common share
The loss per common share was computed by dividing the net loss after
preferred stock dividends by the weighted average number of common shares
outstanding each period. The weighted average number of shares outstanding was
32,018,000 in 1996 and 1995 and 27,632,000 in 1994. Common stock equivalents
(stock options) and the Company's 8% Convertible Debentures have not been
included in the income (loss) per share calculation since the effect is
antidilutive.
F-21
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
(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 the Company, CGE, and Anjou, pursuant
to which, among other things, the Company (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 PSG Canada, Inc., a Canadian corporation
(hereinafter collectively "Professional Services Group" or "PSG"). As a
result, CGE increased its ownership interest in the Company to approximately
48% of the total voting power of the Company's voting securities. In addition,
the Company benefitted from certain financial undertakings from CGE, including
a $125 million unsecured term loan from CGE (the "CGE Note") 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 subject
to certain exceptions. CGE also has representation on the Company's Board of
Directors and has designated the Company'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 (a related party) for financial advisory services. The estimated fees
and expenses have been allocated to the PSG acquisition ($4,875,000),
preferred stock issuance ($4,475,000), common stock issuance ($400,000) and
the CGE Note ($50,000).
(3) UNUSUAL CHARGES
During 1994, the Company recorded unusual charges of approximately
$145,200,000. These charges related to various cost reduction programs, new
management's de-emphasis of certain product lines which provided 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 transactions contemplated by the Investment
Agreement (as discussed more fully in Note 2).
Included in the unusual charges are (a) a $42,500,000 valuation charge which
primarily relates to certain businesses that were initially believed to no
longer meet strategic objectives and were anticipated to be divested, and
which primarily consisted of the Company's cooling tower product line, and
certain manufacturing and service operations and properties which diverted
management attention from the Company's core products and services provided by
PSG, Metcalf & Eddy and Research-Cottrell; (b) various termination benefits of
$10,200,000, of which $4,600,000 relates to the Company's former Chairman
under the terms of an employment
F-22
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contract, which were triggered by the CGE Transaction and include a $2,300,000
loan forgiveness, certain tax payments and other payments; (c) approximately
$8,000,000 of costs associated with the termination of certain leases and the
closing of certain facilities; (d) approximately $11,200,000 related to
litigation involving the Puerto Rico Aqueduct and Sewer Authority ("PRASA")
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 represent appropriate charges and revised estimates of collectibility
given the complexity of the litigation and the continuing deferral of a trial
date (see Note 15); (e) approximately $18,500,000 of estimated costs to settle
pending litigation primarily within the Metcalf & Eddy segment; (f)
approximately $9,700,000 primarily to write-off substantially all of the
Company's capitalized software costs reflecting a shift in focus to a standard
industrial continuous emission monitor; (g) approximately $37,400,000 of costs
and asset write-downs associated primarily with warranty and other claims in
the Company's electrostatic precipitator and continuous emission monitor
("CEM") product lines; and (h) approximately $7,700,000 for other items
primarily representing revised estimates for potential insurance claims.
During 1995, in light of improvements in its current market climate and
anticipated financial performance, management decided to retain the Company's
cooling tower, heat transfer and certain service operations. The Company had
previously contemplated selling these businesses and had recorded a charge for
the difference between their net carrying value and management's estimate of
the anticipated net sales proceeds during fiscal 1994. The Company also had
significant software issues related to its emissions monitoring systems
previously shipped to certain utilities which had created problems in
collecting receivables due to claims and back-charges and resulted in the
incurrence of additional software, warranty and project close-out costs in
resolving this situation. The previously provided reserves for the Company's
contemplated divestitures and emissions monitoring operations were adequate in
the aggregate, therefore these issues have not had a significant effect on the
Company's consolidated financial position or results of its operations, taken
as a whole as of October 31, 1996 and 1995 and for the years then ended.
During 1996, the reserves to be utilized in future periods decreased to
$18,100,000 as a result of asset write-offs of $13,100,000 and cash outlays of
$13,100,000 and are included in the allowance for doubtful accounts
($2,700,000), inventory ($200,000) and accrued expenses ($15,200,000) at
October 31, 1996. These related reserves are included in the allowance for
doubtful accounts ($5,900,000), costs and estimated earnings in excess of
billings on uncompleted contracts ($3,400,000), inventory ($600,000) and
accrued expenses ($34,400,000) at October 31, 1995.
(4) ACQUISITIONS
In connection with the transactions contemplated by the Investment
Agreement, the Company on June 14, 1994 acquired CGE's PSG water/wastewater
management subsidiary. The acquisition was 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 direct acquisition costs. The purchase price
was assigned to tangible assets of $26,072,000 and liabilities of $13,607,000
acquired at an estimate of their fair value. The excess of the purchase price
over PSG's tangible net assets acquired of $57,750,000 has been recorded as
goodwill and is being amortized over 40 years.
F-23
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 per share data):
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1994
----------------
(UNAUDITED)
<S> <C>
Sales....................................................... $ 578,178
Loss from continuing operations............................. (209,146)
Net loss.................................................... (260,737)
Loss per share:
Continuing operations..................................... $ (6.53)
Net loss.................................................. (8.14)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the period 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) DISCONTINUED OPERATIONS
Asbestos Abatement
The Company on May 13, 1994 announced that it had decided to liquidate its
asbestos abatement business. The remaining net assets from this business were
$1,669,000 and $1,609,000 as of October 31, 1996 and 1995. Sales applicable to
this business were $1,658,000 and $48,696,000 for the periods ended October
31, 1995 and 1994. Other selected financial data from this business is as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ --------
<S> <C> <C>
Operating loss............................................ $ -- $(15,988)
Loss on disposition....................................... -- (22,241)
------ --------
Total loss.............................................. -- (38,229)
Depreciation and amortization............................. -- 716
Changes in working capital................................ 2,416 15,627
Goodwill write-off........................................ -- 4,425
Capital expenditures...................................... -- --
Payment of long-term debt................................. (38) (367)
Other, net................................................ -- 368
------ --------
Net cash flow........................................... $2,378 $(17,460)
====== ========
</TABLE>
F-24
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pamco
On November 18, 1994, the Company sold substantially all of the net assets
of its natural gas compressor and power generation systems operations
("Pamco") for cash of $12,962,000. Sales applicable to this business were
$1,364,000 and $40,025,000 for the periods ended October 31, 1995 and 1994.
Other selected financial data from this business are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
----- -------
<S> <C> <C>
Operating loss.............................................. $ -- $(1,758)
Loss on disposition......................................... -- (2,800)
----- -------
Total loss................................................ -- (4,558)
Depreciation and amortization............................... -- 430
Changes in working capital.................................. (799) 4,881
Capital expenditures........................................ -- (209)
Payment of long-term debt................................... -- (369)
Other, net.................................................. -- (9)
----- -------
Net cash flow............................................. $(799) $ 166
===== =======
</TABLE>
(6) INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES
The Company designs and constructs environmental treatment facilities for
certain governmental entities (the "entities"). The cost of these facilities
was primarily funded through the issuance of tax-exempt Industrial Revenue
Bonds by the entities, the proceeds of which were loaned to the Company. The
entities have entered into long-term service agreements with the Company which
transfers to them substantially all risks of ownership and which will generate
sufficient revenues to service the debt and return the Company's investment.
Accordingly, these transactions have been accounted for as sales-type leases.
Consistent with the definition of a legal right of offset (the related
agreements provide for a net settlement of the obligations between the
parties, and the revenues referred to above are legally assigned to payment of
debt service), neither the facilities nor the associated debt (approximately
$29,925,000 and $31,185,000 at October 31, 1996 and 1995) is reflected in the
accompanying consolidated balance sheets. These agreements provide for various
performance guarantees by the Company. Management believes that the Company
will continue to maintain the stipulated performance guarantees.
The net investment in these sales-type leases consists of the following at
October 31 (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Future minimum lease payments............................... $ 38.1 $ 39.5
Expected residual value (unguaranteed)...................... 9.3 9.3
Unearned income............................................. (5.5) (5.6)
------ ------
Net investment in leases.................................... 41.9 43.2
Offset-nonrecourse debt of $29.9 million and $31.2 million,
respectively, in 1996 and 1995, net of available funds in
hands of trustee........................................... (25.6) (26.8)
------ ------
Net investment in leases.................................... 16.3 16.4
Facility enhancements, net of depreciation.................. 5.7 6.1
------ ------
Investments in environmental treatment facilities........... $ 22.0 $ 22.5
====== ======
</TABLE>
At October 31, 1996, minimum lease payments to be received, net of executory
costs for each of the five succeeding fiscal years, are $1,941,000,
$1,961,000, $2,069,000, $2,216,000 and $2,306,000.
F-25
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) FINANCIAL ARRANGEMENTS
During August 1996, the Company entered into a seven-year $60 million
unsecured revolving credit facility with Anjou (the "Anjou Note"). 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 Bank Credit Facility to $50 million. As of October 31, 1996,
the Company's outstanding borrowings under the Anjou Note totaled $60 million.
On March 10, 1995, the Company entered into the three-year Bank Credit
Facility with First Chicago and Societe Generale acting as co-agents for a
syndicate which includes seven additional banks (the "Lending Banks"). The
Bank Credit Facility replaced at a reduced cost the previous $70 million
credit agreement and the $20 million Accounts Receivable Purchase Agreement
(which was fully utilized at October 31, 1994). 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
under the terms of the Bank Credit Facility as of October 31, 1996, 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 plus .725% or at a
defined bank rate approximating prime. The Bank Credit Facility also allows
for certain additional borrowings, including, among other things, project
financing and foreign borrowing facilities, subject to limitations. The Bank
Credit Facility 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 agreement requires CGE to maintain its
support of the Company, including a minimum 40% ownership interest in the
Company and its right to designate at least 40% of the Company's Board of
Directors as well as the 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 ($1.2 million and $.8
million for the years ended October 31, 1996 and 1995). Under the Bank Credit
Facility at October 31, 1996, the Company had no outstanding borrowings
(capacity of $22.2 million) and outstanding letters of credit of $27.8
million. The gross amount of proceeds from and repayments of working capital
borrowings under these credit facilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Borrowings.................................. $ 728,900 $ 509,000 $ 213,535
Repayments.................................. (711,100) (494,500) (212,565)
--------- --------- ---------
Net......................................... $ 17,800 $ 14,500 $ 970
========= ========= =========
</TABLE>
F-26
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) LONG-TERM DEBT
The Company's long-term debt consists of the following at October 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CGE Note............................................... $125,000 $125,000
8% Convertible Subordinated Debentures due May 15,
2015.................................................. 115,000 115,000
Anjou Note............................................. 60,000 --
Bank Credit Facility................................... -- 43,500
Note due July 1, 2007 at 8.5%.......................... 3,200 3,300
Real estate mortgage loans at 8.75%.................... 2,420 2,670
Other.................................................. 1,300 16
-------- --------
306,920 289,486
Less current installments of long-term debt............ (378) (366)
-------- --------
Long-term debt......................................... $306,542 $289,120
======== ========
</TABLE>
The $125 million CGE Note is an unsecured facility bearing interest at a
rate based upon one, two, three or six-month LIBOR, as selected by the
Company, plus 1.25% (6.88% at October 31, 1996), as defined, and has a final
maturity of June 15, 2001. The CGE Note contains certain financial and other
restrictive covenants with respect to the Company relating to, among other
things, the maintenance of certain financial ratios, and restrictions on the
sale of assets and the payment of dividends on or the redemption, repurchase,
acquisition or retirement of securities of the Company or its subsidiaries.
Interest expense related to the CGE Note was $8,884,000, $9,142,000 and
$2,887,000 during the years ended October 31, 1996, 1995 and 1994. The Company
has obtained waivers relating to violations of certain financial covenants
under the CGE Note, Bank Credit Facility and the bonding agreement with
Reliance Insurance Company (see Note 15) through November 1, 1997.
On June 14, 1994, the Company utilized a portion of the proceeds from the
$125 million CGE Note to retire its 11.18% Senior Notes with The Prudential
Insurance Company of America. The difference between the redemption price of
$107,500,000 in cash plus unamortized debt issuance costs of $500,000 and the
$100,000,000 carrying value of the debt has been recorded as an extraordinary
loss.
During 1990, the Company completed the public offering of $115 million of 8%
Convertible Subordinated Debentures (the "Convertible Debentures"). Interest
on the Convertible Debentures is payable semiannually. The Convertible
Debentures are redeemable in whole or in part at the option of the Company at
any time on or after May 15, 1993, at a redemption price of 104.8% of the
principal amount in 1994 reducing to 100% of the principal amount in 2000,
together with accrued interest to the redemption date. The Convertible
Debentures require equal annual sinking fund payments beginning May 15, 2000,
which are calculated to retire 75% of the Convertible Debentures prior to
maturity. The Convertible Debentures are convertible into shares of Class A
Common Stock at a conversion price of $30.00 per share subject to adjustments
as defined. In addition, each holder of Debentures has the right to require
the Company to repurchase outstanding Convertible Debentures at a repurchase
price of 100% of the principal amount of the Convertible Debentures, together
with accrued interest to the repurchase date, if any person becomes the
beneficial owner of 75% or more of the total voting power of all shares of
capital stock of the Company entitled to vote in the election of directors.
At October 31, 1996, the aggregate maturities of long-term debt for each of
the five succeeding fiscal years and thereafter are approximately $.4 million,
$1.7 million, $.4 million, $6.2 million, $131.3 million and $166.9 million.
F-27
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) COMMON AND PREFERRED STOCK
The Company has authorized 2,500,000 shares of Preferred Stock which the
Board of Directors may allocate to any class or series of preferred stock and
determine the relative rights and preferences for each class or series
designated.
As discussed in Note 2, the Company issued 1,200,000 shares of its 5 1/2%
Series A Convertible Exchangeable Preferred Stock (the "Series A Preferred
Stock") for $60,000,000. At the option of the Company, the Series A Preferred
Stock is exchangeable for the Company's 5.5% Convertible Subordinated Notes
(the "Convertible Notes") with a maturity of 10 years from the date of
issuance of the Convertible Notes at $50.00 per share. The Convertible Notes
and Series A Preferred Stock are convertible at $12.50 per share into shares
of Class A Common Stock, subject to adjustments as defined.
Each holder of outstanding shares of Class A Common Stock at the date of the
Company's initial public stock offering in August 1989 is subject to an
Amended and Restated Stockholder Agreement dated June 13, 1989 (the
"Stockholder Agreement"), by and among the Company and such stockholders. This
agreement grants certain demand registration rights to Institutional Investors
(as defined therein) and certain piggy-back registration rights to all
stockholders with respect to Class A Common Stock. The Stockholder Agreement
expired on July 13, 1997.
(10) STOCK OPTION AND PURCHASE PLANS
Under the Company's employee stock purchase plan (the "Stock Purchase
Plan"), officers and other key employees may be granted the right to purchase
up to 1,000,000 shares of the Company's Class A Common Stock. The Compensation
and Stock Option Committee of the Board of Directors determines the purchase
price of shares issuable under the Stock Purchase Plan. At October 31, 1996
and 1995, approximately 232,000 shares of Class A Common Stock were available
for grant under the Stock Purchase Plan.
The Company established a stock incentive plan (the "Plan") in 1996 under
which stock options and awards may be granted to purchase shares of Common
Stock of the Company. The Plan authorizes the granting of stock options and
restricted stock awards for up to an aggregate of 1,000,000 shares of Class A
Common Stock of the Company plus shares remaining available for award under
the prior plan established in 1989. In addition, the Company instituted a
fresh start option program, under which employees could relinquish their
rights under outstanding options (at exercise prices ranging from $11.75 to
$29.43) and receive a new option at $8.00 per share as adjusted using a Black-
Scholes pricing model. Under this program, option to purchase 996,737 shares
were forfeited and options to purchase 447,291 shares were granted. The
following is a summary of certain information pertaining to options under the
Plan, all of which were granted at the fair market value.
F-28
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Outstanding
Beginning of year...................... 1,985,120 2,291,347 2,350,152
Granted................................ 999,177 129,200 560,200
Exercised.............................. (1,250) -- --
Forfeited.............................. (1,271,716) (435,427) (619,005)
---------- --------- ---------
End of year............................ 1,711,331 1,985,120 2,291,347
========== ========= =========
At October 31
Exercisable............................ 887,952 1,375,493 1,816,847
Options and restricted stock available
for grant............................. 2,039,164 766,625 470,034
Option price range per share
Outstanding............................ $4.25 to $4.31 to $7.38 to
$28.57 $31.43 $31.43
Exercised.............................. $6.00 $-- $--
</TABLE>
In December 1991, the Company granted 78,070 restricted shares to its
employees in accordance with the terms of the Plan described above at the then
prevailing market price of the Company's Class A Common Stock of $18.50. The
aggregate fair market value of the shares granted was recorded as unearned
compensation expense and amortized over the restricted period. The unamortized
unearned compensation value is shown as a reduction of shareholders' equity
and $534,000 was amortized to expense during the year ended October 31, 1994.
(11) BENEFIT PLANS
The Company has various retiree benefit plans, the most significant of which
are as follows:
The Company maintains savings and retirement plans in which the Company
matches a fixed percentage of each employee's contribution up to a maximum of
4% of such employee's compensation. One plan also provides for annual
discretionary Company contributions which are fixed by the Board of Directors
based on the performance of the applicable employee group for certain eligible
employees within the Metcalf & Eddy and Research-Cottrell segments. The
expenses applicable to these plans were approximately $3,200,000, $2,900,000
and $1,400,000 for the years ended October 31, 1996, 1995 and 1994.
The Company maintains defined benefit plans which cover certain active and
retired employees, including substantially all of its eligible employees
within the PSG operating segment. The pension costs related to these plans
were determined by actuarial valuations and assumptions (including discount
rates at 7.5%) and approximated $1,300,000, $1,000,000 and $300,000 for the
years ended October 31, 1996, 1995 and 1994. The accrued pension liabilities
were approximately $3,700,000, $3,300,000 and $1,500,000 at October 31, 1996,
1995 and 1994. During the year ended October 31, 1995, the accrued pension
cost related to the PSG defined benefit plan was increased by $1,016,000 with
a corresponding increase to goodwill due to the difference between the accrued
benefit obligation which was funded by Anjou and the $2,276,000 projected
benefit obligation.
In addition to the above plans, the Company makes contributions to union
sponsored plans in accordance with negotiated labor contracts. Information on
the actuarial present value of accumulated plan benefits and net assets
available for benefits related to these plans is not available. Contributions
to all such plans were approximately $1,000,000, $1,100,000 and $1,600,000 for
the years ended October 31, 1996, 1995 and 1994.
Certain employees within the Research-Cottrell segment retiring from the
Company and between the ages of 55 and 62 who have rendered the requisite
number of years of service (generally 25 years) are entitled to post-
retirement health care coverage. These benefits are subject to deductibles,
co-payment provisions and other
F-29
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
limitations. The Company reserves the right to change or terminate the
benefits at any time. During 1994, the Company adopted the Financial
Accounting Standards Board ("FASB") pronouncement on accounting for post-
retirement benefits. The Company is amortizing the catch-up effect over
participants' future service periods and as a result the new prescribed
accounting for post-retirement benefits has not had a significant effect on
the Company's reported consolidated financial position and results of
operations. The total cost of these post-retirement benefits charged to the
results of operations approximated $300,000 for each of the three years in the
period ended October 31, 1996.
(12) INVESTMENTS IN JOINT VENTURES
The Company, in the normal conduct of its subsidiaries' businesses, 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.
The Company's investment in joint ventures (included in other assets)
includes capital contributed to the joint ventures and the Company's share of
undistributed earnings, and amounted to $5,050,000 and $2,260,000 at October
31, 1996 and 1995. In addition, the Company had receivables from the joint
ventures totaling $3,848,000 and $2,540,000 at October 31, 1996 and 1995,
related to current services provided by the Company to the joint ventures. The
Company's share of its joint venture income amounted to $1,407,000, $3,167,000
and $2,452,000 during the years ended October 31, 1996, 1995 and 1994. The
data presented above primarily represent Metcalf & Eddy's investment in a 43%-
owned joint venture with CRSS Inc., providing services to the U.S. Air Force
in Saudi Arabia, which is essentially completed.
(13) BUSINESS SEGMENTS
PSG provides complete services for the operations, maintenance and
management of treatment facilities in the various water and wastewater, and
sludge and biosolids waste management markets. Sales are primarily to
municipal government agencies, including sales under its PRASA contract
representing 39% and 12% of the total sales in 1996 and 1995.
Metcalf & Eddy provides a comprehensive range of water related services,
including treatment process design and on-site and off-site remediation of
environmental contamination. Sales to federal, state and municipal
governmental agencies approximated 80% of Metcalf & Eddy's sales for each of
the three years ended October 31, 1996.
Research-Cottrell services include the initial analysis of air/thermal
pollution problems, consultation, design and installation of the appropriate
treatment technologies including electrostatic precipitators, fabric filters,
chimneys, dry emission control systems, continuous emission monitors and
thermal oxidizers. In addition, this segment provides parts, repairs, service
and maintenance for its own base of installed equipment as well as competitor
equipment. Sales are primarily to electric utilities and industrial entities
within the petrochemical, pharmaceutical, pulp and paper and steel industries.
The Company's other activities were primarily related to its hazardous waste
transfer station which was sold on October 27, 1995.
Sales to the federal government represented approximately 11%, 11% and 15%
of consolidated sales in the years ended October 31, 1996, 1995 and 1994.
Sales between segments are included within the segment recording the sales
transaction and eliminated for consolidation purposes. Unallocated corporate
expenses includes administrative costs not allocable to a specific segment.
Identifiable assets are those assets used by each segment in its operation.
Corporate assets primarily include cash, fixed assets, net assets from
discontinued operations and deferred debt issuance costs. Sales and
identifiable assets of foreign operations as of and for the years ended
October 31, 1996, 1995 and 1994 were less than 10% of the consolidated assets
and sales.
F-30
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information by business segment is as follows (in thousands):
<TABLE>
<CAPTION>
METCALF & RESEARCH- CORPORATE
PSG EDDY COTTRELL OTHER (UNALLOCATED) ELIMINATIONS CONSOLIDATED
-------- --------- --------- ------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
OCTOBER 31, 1996:
Sales................... $270,640 $215,358 $ 219,008 -- -- $ (3,907) $ 701,099
Costs and expenses...... 255,882 195,745 207,630 -- $ 8,000 (3,907) 663,350
Depreciation and
amortization........... 7,335 6,223 6,032 -- 425 -- 20,015
-------- -------- --------- ------- -------- -------- ---------
Operating income
(loss)................. $ 7,423 $ 13,390 $ 5,346 -- $ (8,425) -- $ 17,734
======== ======== ========= ======= ======== ======== =========
Identifiable assets as
of October 31, 1996.... $157,566 $188,403 $ 172,556 $ 154 $ 19,591 -- $ 538,270
======== ======== ========= ======= ======== ======== =========
Depreciation............ $ 1,703 $ 3,083 $ 2,132 -- $ 406 -- $ 7,324
======== ======== ========= ======= ======== ======== =========
Capital Expenditures.... $ 2,520 $ 3,604 $ 1,177 -- $ 157 -- $ 7,458
======== ======== ========= ======= ======== ======== =========
FOR THE YEAR ENDED
OCTOBER 31, 1995:
Sales................... $179,713 $216,852 $ 220,207 $ 6,133 -- $ (4,037) $ 618,868
Costs and expenses...... 164,435 200,125 208,207 6,096 $ 8,854 (4,037) 583,680
Depreciation and
amortization........... 5,679 5,691 6,069 307 602 -- 18,348
-------- -------- --------- ------- -------- -------- ---------
Operating income
(loss)................. $ 9,599 $ 11,036 $ 5,931 $ (270) $ (9,456) -- $ 16,840
======== ======== ========= ======= ======== ======== =========
Identifiable assets of
October 31, 1995....... $148,402 $181,590 $ 192,034 $ 3,037 $ 22,854 -- $ 547,917
======== ======== ========= ======= ======== ======== =========
Depreciation............ $ 1,660 $ 2,747 $ 1,806 $ 241 $ 584 -- $ 7,038
======== ======== ========= ======= ======== ======== =========
Capital expenditures.... $ 2,135 $ 2,818 $ 2,493 -- $ 449 -- $ 7,895
======== ======== ========= ======= ======== ======== =========
FOR THE YEAR ENDED
OCTOBER 31, 1994:
Sales................... $ 83,678 $219,106 $ 213,172 $ 6,617 -- -- $ 522,573
Costs and expenses...... 80,252 211,173 234,295 6,896 $ 9,559 -- 542,175
Depreciation and
amortization........... 2,061 5,780 7,733 526 1,602 -- 17,702
Unusual items........... 5,300 38,700 81,800 4,200 15,200 -- 145,200
-------- -------- --------- ------- -------- -------- ---------
Operating income
(loss)................. $ (3,935) $(36,547) $(110,656) $(5,005) $(26,361) -- $(182,504)
======== ======== ========= ======= ======== ======== =========
Identifiable assets as
of October 31, 1994.... $133,885 $205,589 $ 217,460 $ 6,769 $ 39,235 -- $ 602,938
======== ======== ========= ======= ======== ======== =========
Depreciation............ $ 580 $ 2,188 $ 1,795 $ 526 $ 1,122 -- $ 6,211
======== ======== ========= ======= ======== ======== =========
Capital expenditures.... $ 1,095 $ 2,069 $ 1,026 $ 293 $ 1,040 -- $ 5,523
======== ======== ========= ======= ======== ======== =========
</TABLE>
(14) INCOME TAXES
At October 31, 1996, the Company has a net deferred tax asset of
$115,400,000 which has been fully reserved by a valuation allowance. The
deferred tax asset is comprised of the tax effects of net operating losses
($105,100,000), receivable reserves ($1,800,000), inventory reserves
($900,000), other assets ($2,400,000) and accruals not yet deductible
($11,800,000). A deferred tax liability of $6,600,000 is comprised of fixed
assets depreciation. At October 31, 1996, the Company had tax loss
carryforwards of approximately $300,000,000. Such carryforwards expire through
2011.
Income (loss) from continuing operations before income taxes, minority
interest and extraordinary item for the years ended October 31 was (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ---------
<S> <C> <C> <C>
United States................................... $(4,289) $(9,154) $(206,191)
Foreign......................................... (1,397) 2,382 (3,996)
------- ------- ---------
$(5,686) $(6,772) $(210,187)
======= ======= =========
</TABLE>
F-31
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Provision (benefit) for income taxes for the years ended October 31 includes
the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
U.S. Federal:
Currently payable.................................... $ -- $ -- $ --
Deferred............................................. -- -- --
Foreign................................................ (662) 543 (274)
State.................................................. 244 572 1,272
----- ------ ------
$(418) $1,115 $ 998
===== ====== ======
</TABLE>
The difference between the income tax provision (benefit) computed by
applying the statutory federal income tax rate to pretax income (loss) and the
actual tax provision (benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Statutory provision (benefit)................... $(1,990) $(2,370) $(73,565)
State income taxes.............................. 159 372 827
Goodwill and other.............................. 3,768 2,882 2,708
Impact of net operating loss.................... (2,182) 522 69,903
Impact of foreign operations.................... (173) (291) 1,125
------- ------- --------
$ (418) $ 1,115 $ 998
======= ======= ========
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
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 it 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 Department of Justice 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 had 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.
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.
F-32
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and its subsidiaries are obligated under various leases for
office and manufacturing facilities and certain machinery, equipment and
fixtures. Lease terms range from under one year to ten years. Certain leases
have renewal or escalation clauses or both. Certain equipment leases have
purchase options. During December 1996, the Company exercised a cancellation
clause for one of its leased facilities. This transaction required an
immediate cash payment of approximately $2.2 million and will be reflected in
the operating results during the three month period ended January 31, 1997.
Total rent expense in the periods ended October 31, 1996, 1995 and 1994, was
$26.5 million, $21.2 million and $21.2 million, respectively. At October 31,
1996, minimum rental commitments under all noncancellable leases for the five
succeeding fiscal years, and thereafter, are $12.6 million, $10.0 million,
$8.6 million, $6.8 million, $5.7 million and $17.8 million. These minimal
rental commitments are net of noncancellable subleases of approximately $1.0
million for each of the five succeeding fiscal years.
The Company currently maintains various types of insurance, including
workers' compensation, general and professional liability and property
coverages. The Company believes that it presently maintains adequate insurance
coverages for all of its present operational activities. It has been both a
Company policy and a requirement of many of its clients that the Company
maintain certain types and limits of insurance coverage for the services and
products it offers, provided that such types and limits can be obtained on
commercially reasonable terms. In addition to existing coverages, the Company
has been successful in obtaining commercially reasonable coverage for certain
pollution risks, though coverage has been on a claims made rather than
occurrence basis due to the professional nature of some of the Company's
exposures. Claims made policies provide coverage to the Company only for
claims reported during the policy period. The Company's general liability and
other insurance policies have historically contained absolute pollution
exclusions, brought about in large measure because of the insurance industry's
adverse claims experience with environmental exposures. Accordingly, there can
be no assurance that environmental exposures that may be incurred by the
Company and its subsidiaries will continue to be covered by insurance, or that
the limits currently provided or that may be obtained in the future will be
sufficient to cover such exposures. A successful claim or claims in an amount
in excess of the Company's insurance coverage or for which there is no
coverage could have a material adverse effect on the Company.
In connection with the sale of two manufacturing facilities in prior years,
the Company remains contingently liable as guarantor under $3,195,000 of
Industrial Revenue Bond financing.
Until June 27, 1995, the Company and its subsidiaries obtained bid and
performance bonds pursuant to agreements with Reliance Insurance Company and
certain of its affiliates (collectively, "Reliance"). Subsequently, the
Company and its subsidiaries entered into an agreement with United States
Fidelity and Guaranty Company and certain of its affiliates (collectively,
"USF&G") pursuant to which USF&G also agreed to issue bid and performance
bonds on behalf of the Company and its subsidiaries.
On May 26, 1995, Metcalf & Eddy settled litigation with PRASA that was
initiated in September 1990. Pursuant to the terms of the settlement, Metcalf
& Eddy was to receive aggregate payments of $17.5 million, plus interest.
Metcalf & Eddy received payment of $4.5 million on June 26, 1995, at which
time a Stipulation of Dismissal with Prejudice was filed with the United
States District Court for the District of Puerto Rico formally terminating the
lawsuit. Metcalf & Eddy also received two $6.5 million negotiable promissory
notes bearing interest at market rates and maturing in May 1998 and August
2000, respectively. On September 1, 1995, Metcalf & Eddy sold the two notes
and received net proceeds of $12.8 million of cash, after applicable fees and
expenses.
On August 20, 1990, the Board of Directors of the Company made a one-year,
interest-free, unsecured loan of $2,300,000 to its then Chief Executive
Officer of the Company, so that he could satisfy certain personal financial
obligations without having to sell a substantial portion of his equity
investment in the Company. During
F-33
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1991, the terms and conditions of this loan were amended, among other things,
to extend the term of the loan. Interest has been imputed on the loan at
approximately 8%. Subsequent to the termination of such officer's employment
with the Company as of June 14, 1994 as a result of the transactions
contemplated by the Investment Agreement, the Company and such officer entered
into an agreement dated November 21, 1994 (the "Termination Agreement")
relating to all aspects of their relationship following such termination of
employment (see Note 3).
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1996 BY QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH YEAR**
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales....................... $159,206 $167,491 $177,164 $197,238 $701,099
Gross margin................ 30,782 33,991 34,114 34,454 133,341
Net income (loss)........... (2,945) (1,305) (458) (560) (5,268)
Earnings (loss) per common
share after preferred stock
dividends
Net income (loss) per
common share............. (0.12) (0.07) (0.04) (0.04) (0.27)
<CAPTION>
1995 BY QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH YEAR**
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales....................... $148,451 $155,832 $146,174 $168,411 $618,868
Gross margin................ 29,107 33,103 36,932 39,171 138,313
Net income (loss)........... (7,393) (3,581) 105 2,884 (7,985)
Earnings (loss) per common
share after preferred stock
dividends
Net income (loss) per
common share............. (0.26) (0.14) (0.02) 0.06 (0.35)
</TABLE>
- --------
** Earnings (loss) per share for the full year is not necessarily the sum of
the four quarters due to different average shares outstanding for each
discrete period.
F-34
<PAGE>
ANNEX A
[LETTERHEAD OF WASSERSTEIN PERELLA & CO., INC.]
September 24, 1997
Special Committee of the
Board of Directors
Air & Water Technologies Corporation
U.S. Highway 22 West and Station Road
Branchburg, New Jersey 08876
Members of the Special Committee:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders (other than the Compagnie Generale des
Eaux ("CGE") or its affiliates) of the Class A common stock, par value $.001
per share (the "Common Stock"), of Air & Water Technologies Corporation ("AWT"
or the "Company") of the financial terms of the transactions, taken as a
whole, described in items 1 through 5 of the next paragraph below
(collectively the "Recapitalization Transactions"), pursuant to the terms of
the Recapitalization Agreement, dated as of September 24, 1997, among the
Company, CGE and Anjou International Company (the "Recapitalization
Agreement"). Capitalized terms used herein without definition have the
meanings assigned thereto in the Recapitalization Agreement.
Pursuant to the Recapitalization Agreement, the following Recapitalization
Transactions will occur:
1. CGE will exchange 1,200,000 shares of 5 1/2% Series A Convertible
Exchangeable Preferred Stock of AWT for a number of newly issued shares of
Common Stock (the "Exchange Shares") equal to the quotient obtained by
dividing 60,000,000 by the Subscription Price, all as more fully described
in Section 1.1 of the Recapitalization Agreement.
2. AWT will declare a dividend on the Record Date to all holders of
Common Stock of transferable Rights entitling the holders to purchase at
the Subscription Price in the aggregate such number of shares of Common
Stock which, when multiplied by the Subscription Price, will equal
$210,000,000 in gross proceeds, with each Right being exercisable at the
Subscription Price for one share of Common Stock and, in the case of each
shareholder other than CGE and its subsidiaries, a number of Warrants
referred to in paragraph 3 below, all as more fully described in Section
1.2 of the Recapitalization Agreement.
3. Each person (other than CGE and its subsidiaries) that exercises a
Right will be entitled to receive a number of Warrants (having the terms
set forth on Exhibit A to the Recapitalization Agreement) equal to its pro
rata portion of the Warrant Pool, all as more fully described in Section
1.2 of the Recapitalization Agreement.
4. CGE will agree to exercise in full all Rights issued to it in the
Rights Offering and, in addition, CGE will subscribe for and purchase the
shares of Common Stock underlying Rights that are not exercised in the
Rights Offering subject to a limitation on CGE's investment pursuant to the
Rights Offering and the Conditional CGE Subscription of $185,000,000, as
more fully described in Section 1.3 of the Recapitalization Agreement.
5. The proceeds from the Rights Offering will be used to repay
$185,000,000 aggregate principal amount of indebtedness owed to CGE and its
affiliates, except that the first $25,000,000 of gross proceeds received
pursuant to the Rights Offering from holders of Rights in the Rights
Offering (other than CGE and its subsidiaries), shall be retained by AWT
for general corporate purposes, all as more fully described in Section 1.4
of the Recapitalization Agreement.
A-1
<PAGE>
In connection with rendering our opinion, we have reviewed a draft dated
September 24, 1997 of the Recapitalization Agreement, and for purposes hereof,
we have assumed that the final form of this document will not differ in any
material respect from the draft provided to us. In addition, we have assumed
that the terms of the definitive agreement evidencing the Warrants will
reflect the terms of the Warrants as set forth on Exhibit A to the
Recapitalization Agreement but note that we have not been provided with any
drafts of such definitive agreement. We understand that prior to completing
the Rights Offering, the Company will have adopted an amendment to its
Certificate of Incorporation in the form of Exhibit B to the Recapitalization
Agreement (the "Charter Amendment"). We have also reviewed and analyzed
certain publicly available business and financial information relating to the
Company for recent years and interim periods to date, as well as certain
internal financial and operating information, including financial forecasts,
analyses and projections prepared by or on behalf of the Company and provided
to us for purposes of our analysis, and we have met with management of the
Company to review and discuss such information and, among other matters, the
Company's business, operations, assets, financial condition and future
prospects as well as its current financial distress, liquidity constraints,
difficulty in funding operations in the ordinary course and contingent
liabilities identified in its public filings. In evaluating the Company's
financial condition and prospects, we have been apprised of certain
limitations placed by the Company's banks on its ability to borrow amounts
otherwise available under its banking facilities and the necessity of seeking
waivers in order to avoid an event of default under the Company's bank credit
agreement, the possible suspension of certain USF&G bonding arrangements as of
September 30, 1997 in the absence of the timely consummation of a transaction
such as the Recapitalization Transactions or receipt of financial support of
CGE, the possibility of seeking bankruptcy protection as a possible
alternative to the Recapitalization Transactions, the pending investigation by
the Department of Justice with regard to certain activities of Professional
Services Group, the involuntary cessation of quotation of the Company's
Convertible Subordinated Debentures due 2015 on NASDAQ and the recent
notification by the American Stock Exchange ("AMEX") that the Company no
longer meets certain requirements for its Common Stock to be listed on the
AMEX.
We have reviewed and considered certain financial and stock market data
relating to the Company, and we have compared that data with similar data for
certain other companies, the securities of which are publicly traded, that we
believe may be relevant or comparable in certain respects to the Company or
one or more of its businesses or assets. We have also performed such other
studies, analyses, and investigations and reviewed such other information as
we considered appropriate for purposes of this opinion.
In our review and analysis and in formulating our opinion, with your
consent, we have assumed and relied upon the accuracy and completeness of all
the financial and other information provided to or discussed with us or
publicly available, and we have not assumed any responsibility for independent
verification of any such information and have relied upon the reasonableness
and accuracy of the financial projections, forecasts and analyses provided to
us and we have assumed that such projections, forecasts and analyses (as such
were modified by management of the Company in the course of our subsequent
discussions with them) were reasonably prepared in good faith and on bases
reflecting the best currently available judgments and estimates of the
Company's management, and we express no opinion with respect to such
projections, forecasts and analyses or the assumptions upon which they are
based. In addition, we have not reviewed any of the books and records of the
Company, or assumed any responsibility for conducting a physical inspection of
the properties or facilities of the Company, or for making or obtaining an
independent valuation or appraisal of the assets or liabilities of the
Company. We have assumed that the Recapitalization Transactions and the other
agreements and matters described in the Recapitalization Agreement will be
consummated on the terms set forth or provided for therein, without material
waiver or modification. Our opinion is necessarily based on economic and
market conditions and other circumstances as they exist and can be evaluated
by us as of the date hereof. Nothing contained in this opinion shall be
construed as creating or imposing upon us any undertaking or obligation to
advise any person of any change in any fact or matter affecting our opinion of
which we become aware after the date hereof. In rendering this opinion, we are
not expressing any opinion as to the price at which the shares of Common
Stock, Rights or Warrants will actually trade at any time, neither are we
expressing any opinion as to the fairness to any
A-2
<PAGE>
shareholder or the Company of the Subscription Price or the exercise price of
the Warrants, other than in connection with our consideration of the
Recapitalization Transactions taken as a whole.
We were engaged by the Special Committee of the Board of Directors of AWT
(the "Special Committee") in July of 1997 to assist it in evaluating the terms
of and responding to a recapitalization proposal from CGE and we will receive
a fee for our services, a portion of which is contingent upon the consummation
of the Recapitalization Transactions, as well as a fee for rendering this
opinion. In the ordinary course of our business, we may actively trade
securities of AWT for our own account and for the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities. We were not authorized to and did not (i) solicit bids or conduct
an auction for the sale of the Company or (ii) solicit alternative proposals
to the Recapitalization Transactions from any person other than CGE. This
opinion does not address the relative merits of the Recapitalization
Transactions, any other agreements or matters provided for or contemplated by
the Recapitalization Agreement or any other transaction that may be or have
been available as an alternative to the Recapitalization Transactions, whether
or not any such alternative could be or have been achieved, or the terms upon
which any such alternative transaction could be or may have been achieved.
Further, this opinion does not address the fairness of any individual term of
the Recapitalization Transactions other than the fairness, from a financial
point of view, of the financial terms of the Recapitalization Transactions
taken as a whole, to the holders of Common Stock (other than CGE and its
affiliates). Our opinion does not address the Company's or Special Committee's
underlying business decision to effect the Recapitalization Transactions.
It is understood that this letter is for the benefit and use of the Special
Committee of the Board of Directors of the Company in its consideration of the
Recapitalization Transactions, and, except for inclusion in its entirety in a
registration statement relating to the Rights Offering and a proxy statement
relating to the Charter Amendment (or the press release announcing the
Recapitalization Transactions in a form approved by us), may not be quoted,
used or reproduced for any other purpose without our prior written consent.
This opinion does not constitute a recommendation to any shareholder with
respect to how such holder should vote with respect to the Recapitalization
Transactions (including, without limitation, with respect to the Charter
Amendment) or whether any shareholder should exercise, purchase or sell, as
the case may be, any securities of the Company, including but not limited to
shares of Common Stock, Rights or Warrants, and should not be relied upon by
any shareholder as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date
hereof, the financial terms of the Recapitalization Transactions, taken as a
whole, are fair from a financial point of view to the holders of the Common
Stock (other than CGE and its affiliates).
Very truly yours,
Wasserstein Perella & Co., Inc.
A-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN SANCTIONED OR AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICI-
TATION BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 19
Use of Proceeds.......................................................... 28
Price Range of Class A Common Stock and Dividend Policy.................. 29
Dilution................................................................. 30
The Recapitalization..................................................... 31
Capitalization........................................................... 53
Unaudited Pro Forma Condensed
Consolidated Financial Statements....................................... 54
Selected Consolidated Financial Data..................................... 59
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 62
Business................................................................. 72
Management............................................................... 91
Ownership of Capital Stock............................................... 99
Certain Relationships and Related Transactions........................... 101
The Rights Offering...................................................... 106
Description of Warrants.................................................. 113
Description of Capital Stock............................................. 116
Certain United States Federal Income Tax Consequences.................... 118
Legal Matters............................................................ 119
Experts.................................................................. 119
Index to Financial Statements............................................ F-1
Opinion of Wasserstein Perella & Co..................................... Annex A
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AIR & WATER
TECHNOLOGIES
CORPORATION
SHARES OF
COMMON STOCK
AND
WARRANTS TO PURCHASE SHARES
OF CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
DATED , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered. All amounts shown are
estimated, except the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $63,637
Subscription Agent's fees and expenses........................... *
Information Agent's fees and expenses............................ *
Accounting fees.................................................. *
Legal fees and expenses (including Blue Sky fees and expenses)... *
Printing and engraving fees...................................... *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") grants each corporation organized thereunder the power to indemnify
its directors and officers against liabilities for certain of their acts.
Article VIII of the Company's By-Laws, a copy of which is filed as Exhibit
3.02 to this Registration Statement, provides, in substance, that directors,
officers, employees and agents shall be indemnified to the fullest extent
permitted by Section 145 of the DGCL.
The Company's Restated Certificate of Incorporation, a copy of which is
filed as Exhibit 3.01 to this Registration Statement, provides that no
director shall be liable to the Company or its stockholders for monetary
damages for breaches of fiduciary duty as a director (the "Indemnity
Provision"). This indemnification does not cover liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) pursuant to Section 174 of the DGCL
(liability for unlawful payment of dividend or unlawful stock purchase or
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit. The repeal or modification of the Indemnity
Provision by the stockholders shall not adversely affect any right or
protection of a director which exists at the time of such repeal or
modification with respect to acts or omissions which occurred prior to such
repeal or modification. In addition, the directors and officers of the Company
are beneficiaries under directors' and officers' insurance policies.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<C> <S> <C>
3.01 Restated Certificate of Incorporation of the (1)
Registrant, dated July 10, 1987
3.01(a) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant dated October
27, 1987
3.01(b) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant filed June 21,
1989
3.01(c) Certificate of Amendment to Restated Certificate (2)
of Incorporation of the Registrant filed July 5,
1989
3.01(d) Certificate of Designation of 5 1/2% Series A (11)
Convertible Exchangeable Preferred Stock filed
June 14, 1994
3.02 By-Laws of the Registrant, as amended (1)
4.01 Warrant Agreement between the Registrant and the *
Warrant Agent
5.01 Opinion of Douglas A. Satzger re: validity of *
securities
10.01 Form of Supplemental Pension Agreement of (1)(Ex. 10.20)
Research-Cottrell
10.02 1988 Long-Term Incentive Compensation Plan of (10)
Metcalf & Eddy, effective as of September 30,
1988, as amended September 7, 1989 and March 19,
1990
10.02(a) 1989 Long-Term Compensation Plan of the (2)
Registrant, effective as of July 31, 1989
10.03 Research-Cottrell Environmental Engineering (3)(Ex. 10.27)
Profit Sharing Plan, as amended
10.04 Research-Cottrell Environmental Thrift Plan (3)(Ex. 10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (7)
March 10, 1995, by and among the Registrant, the
Persons listed on Annex B thereto as Borrowers
and Guarantors, the Banks listed on the
signature pages thereof, the First National Bank
of Chicago as Arranging Agents, the First
National Bank of Chicago as Administrative
Agent, and Societe Generale, New York Branch, as
Collateral Agent and Issuing Bank
10.06 Agreement, dated March 13, 1989, between (4)(Ex. 10.31)
Research-Cottrell and certain of its air
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.07 Agreement, dated March 13, 1989, between (4)(Ex. 10.31(A))
Research-Cottrell and certain of its water
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.08 Letter Agreement, dated March 18, 1994, between (11)
the Registrant and Compagnie Generale des Eaux
10.09 Investment Agreement, dated as of March 30, (11)
1994, among the Registrant, Compagnie Generale
des Eaux and Anjou International Company
10.10 Credit Agreement, dated as of June 14, 1994, (11)
between the Registrant and Compagnie Generale
des Eaux
10.11 Amended and Restated Subordination Agreement, (12)
dated as of March 10, 1995, as amended and
restated as of March 10, 1995, as amended and
restated as of November 1995, among Compagnie
Generale des Eaux, the Registrant, the First
National Bank of Chicago and United States
Fidelity and Insurance Company, Fidelity and
Guaranty Insurance Company and Fidelity and
Guaranty Insurance Underwriters, Inc. and any
affiliate of the foregoing
10.12 Employment Agreement, dated as of October 15, (12)
1995, between Michael M. Stump and Professional
Services Group, Inc.
10.13 Master Surety Agreement made October 31, 1995 by (12)
the Registrant, Research-Cottrell, Inc., Metcalf
& Eddy, Inc., and Professional Services Group,
Inc., for the continuing benefit of United
States Fidelity and Guaranty Company, Fidelity
and Guaranty Insurance Underwriters, Inc. and
Fidelity and Guaranty Insurance Company and
USF&G Insurance Company of Mississippi
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<C> <S> <C>
10.14 Revolving Credit Agreement, dated as of August 2, 1996, (13)
between the Registrant and Anjou International Company
10.15 Employment Agreement, dated as of November 7, 1996, between (13)
Robert B. Sheh and the Registrant
10.16 Separation Agreement, dated as of December 16, 1996, (13)
between Michael M. Stump and Professional Services Group,
Inc.
10.17 Recapitalization Agreement, dated September 24, 1997, among (14)
the Registrant, Compagnie Generale des Eaux and Anjou
International Company.
11 Statement re: computation of per share earnings (13)
21 List of Subsidiaries of the Registrant (13)
23.1 Consent of McGladrey & Pullen, LLP **
23.2 Consent of Arthur Andersen LLP **
23.3 Consent of Douglas A. Satzger (included in Exhibit 5.01) *
24.1 Power of attorney (included in the signature page to the **
Registration Statement)
99.1 Form of Rights Certificate *
99.2 Form of Instructions for Rights Certificates *
99.3 Form of Notice of Guaranteed Delivery *
99.4 Form of Subscription Agency Agreement *
99.5 Form of Nominee Holder Oversubscription Exercise Form *
99.6 Form of Nominee Holder Certification *
99.7 Important Tax Information *
</TABLE>
- --------
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-17833), as amended, which became effective on April 12, 1988.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated to the Registrant's Registration Statement on Form S-
1 (No. 33-29568), as amended, which became effective on August 10, 1989.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to Metcalf & Eddy's Registration Statement on Form
S-1 (No. 33-24315) as amended, which became effective on October 18,
1988.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to Metcalf & Eddy's Registration Statement on Form
S-1 No. 33-28846), as amended, which became effective on June 29, 1989.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-33088), as amended, which became effective on May 15, 1990.
(6) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-35421), as amended, which became effective on July 5, 1990.
(7) Incorporated by reference to Exhibit 1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1995, as filed
with the Securities and Exchange Commission on June 14, 1995.
(8) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992, as filed with the Securities and
Exchange Commission on January 29, 1993.
(9) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1993, as filed with the Securities and
Exchange Commission on January 31, 1994.
(10) Incorporated by reference to Annex I to the Registrant's Proxy Statement
on Schedule 14A dated May 24, 1994, in connection with its Annual Meeting
of Stockholders held on June 14, 1994.
(11) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 21, 1994, as filed with the Securities and
Exchange Commission on January 30, 1995.
II-3
<PAGE>
(12) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1995, as filed with the Securities and
Exchange Commission on January 3, 1996.
(13) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996, as filed with the Securities and
Exchange Commission on January 29, 1997
(14) Incorporated by reference to exhibit 10.1 to the Current Report on Form
8-K of the Registrant, dated September 24, 1997.
(*) To be filed by amendment.
(**)Filed herewith.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereby, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BRANCHBURG, STATE OF
NEW JERSEY, ON OCTOBER 30, 1997.
Air & Water Technologies Corporation
By: /s/ Alain Brunais
----------------------------------
ALAIN BRUNAIS SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Alain Brunais and Douglas A. Satzger, Esq. and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ William Kriegel Chairman of the October 30,
- ------------------------------------- Board of Directors 1997
WILLIAM KRIEGEL
/s/ Thierry Mallet President, Chief October 30,
- ------------------------------------- Executive Officer 1997
THIERRY MALLET and Director
(Principal
Executive Officer)
/s/ Alain Brunais Senior Vice October 30,
- ------------------------------------- President, Chief 1997
ALAIN BRUNAIS Financial Officer
and Director
(Principal
Accounting Officer)
(Principal
Financial Officer)
/s/ Jean-Claude Banon Director October 30,
- ------------------------------------- 1997
JEAN-CLAUDE BANON
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ Daniel Caille Director October 30,
- ------------------------------------- 1997
DANIEL CAILLE
/s/ Carol Lynn Green Director October 30,
- ------------------------------------- 1997
CAROL LYNN GREEN
/s/ John W. Morris Director October 30,
- ------------------------------------- 1997
JOHN W. MORRIS
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<C> <S> <C>
3.01 Restated Certificate of Incorporation of the (1)
Registrant, dated July 10, 1987
3.01(a) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant dated October 27,
1987
3.01(b) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant filed June 21,
1989
3.01(c) Certificate of Amendment to Restated Certificate (2)
of Incorporation of the Registrant filed July 5,
1989
3.01(d) Certificate of Designation of 5 1/2% Series A (11)
Convertible Exchangeable Preferred Stock filed
June 14, 1994
3.02 By-Laws of the Registrant, as amended (1)
4.01 Warrant Agreement between the Registrant and the *
Warrant Agent
5.01 Opinion of Douglas A. Satzger re: validity of *
securities
10.01 Form of Supplemental Pension Agreement of (1)(Ex. 10.20)
Research-Cottrell
10.02 1988 Long-Term Incentive Compensation Plan of (10)
Metcalf & Eddy, effective as of September 30,
1988, as amended September 7, 1989 and March 19,
1990
10.02(a) 1989 Long-Term Compensation Plan of the (2)
Registrant, effective as of July 31, 1989
10.03 Research-Cottrell Environmental Engineering (3)(Ex. 10.27)
Profit Sharing Plan, as amended
10.04 Research-Cottrell Environmental Thrift Plan (3)(Ex. 10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (7)
March 10, 1995, by and among the Registrant, the
Persons listed on Annex B thereto as Borrowers
and Guarantors, the Banks listed on the signature
pages thereof, the First National Bank of Chicago
as Arranging Agents, the First National Bank of
Chicago as Administrative Agent, and Societe
Generale, New York Branch, as Collateral Agent
and Issuing Bank
10.06 Agreement, dated March 13, 1989, between (4)(Ex. 10.31)
Research-Cottrell and certain of its air
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.07 Agreement, dated March 13, 1989, between (4)(Ex. 10.31(A))
Research-Cottrell and certain of its water
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.08 Letter Agreement, dated March 18, 1994, between (11)
the Registrant and Compagnie Generale des Eaux
10.09 Investment Agreement, dated as of March 30, 1994, (11)
among the Registrant, Compagnie Generale des Eaux
and Anjou International Company
10.10 Credit Agreement, dated as of June 14, 1994, (11)
between the Registrant and Compagnie Generale des
Eaux
10.11 Amended and Restated Subordination Agreement, (12)
dated as of March 10, 1995, as amended and
restated as of March 10, 1995, as amended and
restated as of November 1995, among Compagnie
Generale des Eaux, the Registrant, the First
National Bank of Chicago and United States
Fidelity and Insurance Company, Fidelity and
Guaranty Insurance Company and Fidelity and
Guaranty Insurance Underwriters, Inc. and any
affiliate of the foregoing
10.12 Employment Agreement, dated as of October 15, (12)
1995, between Michael M. Stump and Professional
Services Group, Inc.
10.13 Master Surety Agreement made October 31, 1995 by (12)
the Registrant, Research-Cottrell, Inc., Metcalf
& Eddy, Inc., and Professional Services Group,
Inc., for the continuing benefit of United States
Fidelity and Guaranty Company, Fidelity and
Guaranty Insurance Underwriters, Inc. and
Fidelity and Guaranty Insurance Company and USF&G
Insurance Company of Mississippi
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<C> <S> <C>
10.14 Revolving Credit Agreement, dated as of August 2, 1996, (13)
between the Registrant and Anjou International Company
10.15 Employment Agreement dated, as of November 7, 1996, between (13)
Robert B. Sheh and the Registrant
10.16 Separation Agreement, dated as of December 16, 1996, (13)
between Michael M. Stump and Professional Services Group,
Inc.
10.17 Recapitalization Agreement, dated September 24, 1997, among (14)
the Registrant, Compagnie Generale des Eaux and Anjou
International Company.
11 Statement re: computation of per share earnings (13)
21 List of Subsidiaries of the Registrant (13)
23.1 Consent of McGladrey & Pullen, LLP **
23.2 Consent of Arthur Andersen LLP **
23.3 Consent of Douglas A. Satzger (included in Exhibit 5.01) *
24.1 Power of attorney (included in the signature page to the **
Registration Statement)
99.1 Form of Rights Certificate *
99.2 Form of Instructions for Rights Certificates *
99.3 Form of Notice of Guaranteed Delivery *
99.4 Form of Subscription Agency Agreement *
99.5 Form of Nominee Holder Oversubscription Exercise Form *
99.6 Form of Nominee Holder Certification *
99.7 Important Tax Information *
</TABLE>
- --------
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-17833), as amended, which became effective on April 12, 1988.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated to the Registrant's Registration Statement on Form S-
1 (No. 33-29568), as amended, which became effective on August 10, 1989.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to Metcalf & Eddy's Registration Statement on Form
S-1 (No. 33-24315) as amended, which became effective on October 18,
1988.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to Metcalf & Eddy's Registration Statement on Form
S-1 No. 33-28846), as amended, which became effective on June 29, 1989.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-33088), as amended, which became effective on May 15, 1990.
(6) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-1 (No. 33-35421), as amended, which became effective on July 5, 1990.
(7) Incorporated by reference to Exhibit 1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1995, as filed
with the Securities and Exchange Commission on June 14, 1995.
(8) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1992, as filed with the Securities and
Exchange Commission on January 29, 1993.
(9) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1993, as filed with the Securities and
Exchange Commission on January 31, 1994.
(10) Incorporated by reference to Annex I to the Registrant's Proxy Statement
on Schedule 14A dated May 24, 1994, in connection with its Annual Meeting
of Stockholders held on June 14, 1994.
II-8
<PAGE>
(11) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 21, 1994, as filed with the Securities and
Exchange Commission on January 30, 1995.
(12) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1995, as filed with the Securities and
Exchange Commission on January 3, 1996.
(13) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996, as filed with the Securities and
Exchange Commission on January 29, 1997.
(14) Incorporated by reference to exhibit 10.1 to the Current Report on Form
8-K of the Registrant, dated September 24, 1997.
(*) To be filed by amendment.
(**) Filed herewith.
II-9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement of our report, dated January 8, 1997, except for the
first paragraph of Note 8 as to which the date is January 24, 1997, relating
to the consolidated financial statements of Air & Water Technologies
Corporation. We also consent to the reference to our Firm under the captions
"Selected Consolidated Financial Data" and "Experts" in such Prospectus.
However, it should be noted that McGladrey & Pullen, LLP has not prepared or
certified such "Selected Consolidated Financial Data".
McGladrey & Pullen, LLP
New York, New York
October 29, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Air & Water Technologies Corporation:
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement filed on Form S-1.
Arthur Andersen LLP
Roseland, New Jersey
October 29, 1997
