SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number: 033-17921
AIR & WATER TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3418759
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30 HARVARD MILL SQUARE 01880
WAKEFIELD, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code: (781) 246-5200
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: No change.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's Class A Common
Stock, par value $.001 per share, was 185,176,527 as of September 11, 1998.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
--------- -----------
Unaudited
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 16,225 $ 12,089
Accounts receivable, less allowance for doubtful accounts............... 64,533 76,681
Costs and estimated earnings in excess of billings on
uncompleted contracts................................................ 41,636 33,557
Inventories............................................................. 1,740 1,893
Prepaid expenses and other current assets............................... 7,690 4,460
Net current assets of discontinued operations........................... 6,392 --
--------- ---------
Total current assets................................................ 138,216 128,680
Property, plant and equipment, net.......................................... 10,829 13,388
Investments in environmental treatment facilities........................... 21,762 21,817
Goodwill, net............................................................... 160,483 164,337
Other assets................................................................ 28,669 30,391
Net non-current assets of discontinued operations........................... 14,831 24,452
--------- ---------
Total assets........................................................ $ 374,790 $ 383,065
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................................. $ 426 $ 398
Accounts payable........................................................ 93,050 80,007
Accrued expenses........................................................ 87,442 86,681
Billings in excess of costs and estimated earnings on
uncompleted contracts................................................. 13,610 15,320
Income taxes payable.................................................... 1,603 1,485
Net current liabilities of discontinued operations...................... -- 591
--------- ---------
Total current liabilities........................................... 196,131 184,482
--------- ---------
Long-term debt.............................................................. 119,364 307,845
Commitments and contingencies (Note 6) -- --
Stockholders' equity (deficit):
Preferred stock, par value $.01, authorized 2,500,000 shares;
issued none as of July 31, 1998; issued 1,200,000 shares,
liquidation value $60,000, as of October 31, 1997................... -- 12
Common stock, par value $.001, authorized 260,000,000 shares;
issued 185,266,429 shares as of July 31, 1998; issued
32,109,156 shares as of October 31, 1997............................ 185 32
Additional paid-in capital.............................................. 631,535 427,036
Accumulated deficit..................................................... (572,348) (535,214)
Common stock in treasury, at cost....................................... (108) (108)
Cumulative currency translation adjustment.............................. 31 (1,020)
--------- ---------
Total stockholders' equity (deficit)............................. 59,295 (109,262)
--------- ---------
Total liabilities and stockholders' equity (deficit)............ $ 374,790 $ 383,065
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ........................................ $ 105,708 $ 110,828 $ 327,784 $ 326,096
Cost of sales ................................ 90,425 89,457 285,948 280,033
--------- --------- --------- ---------
Gross margin ............................. 15,283 21,371 41,836 46,063
Selling, general and administrative
expenses ................................... 16,096 13,195 47,228 59,784
depreciation and amortization ................ 3,791 3,645 11,673 12,959
--------- --------- --------- ---------
Operating income (loss) from
continuing operations .................... (4,604) 4,531 (17,065) (26,680)
Interest expense, net ........................ (2,355) (6,150) (12,085) (17,926)
Other income (expense), net .................. (387) (249) (1,211) (247)
--------- --------- --------- ---------
Loss from continuing operations
before income taxes ...................... (7,346) (1,868) (30,361) (44,853)
Income tax expense ........................... (291) (156) (805) (267)
--------- --------- --------- ---------
Loss from continuing operations .......... (7,637) (2,024) (31,166) (45,120)
Discontinued operations:
Loss from discontinued segment ........... -- (2,766) (6,000) (36,186)
--------- --------- --------- ---------
Net loss ................................. (7,637) (4,790) (37,166) (81,306)
Preferred stock dividend ..................... -- (825) -- (2,475)
--------- --------- --------- ---------
Net loss applicable to common
stockholders ............................. $ (7,637) $ (5,615) $ (37,166) $ (83,781)
========= ========= ========= =========
Loss per common share (after preferred
stock dividend):
Continuing operations .................... $ (.04) $ (.09) $ (.26) $ (1.49)
Discontinued operations .................. -- (.09) (.05) (1.13)
--------- --------- --------- ---------
Net loss ................................. $ (.04) $ (.18) $ (.31) $ (2.62)
========= ========= ========= =========
Weighted average number of shares
outstanding .............................. 185,177 32,019 120,347 32,019
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $(37,166) $(81,306)
Adjustments to reconcile net loss to net cash used for
continuing operations--
Discontinued operations.............................................. 6,000 36,186
Depreciation and amortization........................................ 11,673 12,959
Other................................................................ 429 2,450
Changes in assets and liabilities, excluding effects of
divestitures
(Increase) decrease in assets-
Accounts receivable.................................................. 12,060 (3,634)
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................................. (8,079) 10,351
Inventories.......................................................... 153 (1,020)
Prepaid expenses and other current assets............................ (3,230) 1,464
Other assets......................................................... 29 8,229
Increase (decrease) in liabilities-
Accounts payable..................................................... 13,075 12,731
Accrued expenses..................................................... (5,817) (2,365)
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................................. (1,710) (1,108)
Income taxes......................................................... 216 216
-------- --------
Net cash used for continuing operations............................ (12,367) (4,847)
Net cash provided by (used for) discontinued operations............ (3,929) 7,145
-------- --------
Net cash provided by (used for) operating activities............... (16,296) 2,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses....................................... 6,956 1,545
Capital expenditures................................................... (2,128) (4,419)
Investment in environmental treatment facilities....................... (163) 102
Start up costs and other............................................... (2,745) (6,148)
Discontinued operations................................................ (347) (654)
-------- --------
Net cash provided by (used for) investing activities............... 1,573 (9,574)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Gross proceeds from issuance of common stock........................... 208,025 --
Payments of notes payable and long-term debt........................... (125,453) (307)
Net borrowings (repayments) under credit facilities.................... (63,000) 12,700
Cash dividends paid on preferred stock................................. -- (2,475)
Other.................................................................. (2,455) (377)
Discontinued operations.............................................. 1,742 (1,297)
-------- --------
Net cash provided by financing activities.......................... 18,859 8,244
-------- --------
Net increase in cash and cash equivalents.......................... 4,136 968
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 12,089 12,667
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 16,225 $ 13,635
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................................... $ 15,932 $ 19,877
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO INTERIM 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 and its consolidated
subsidiaries (the "Company" or "AWT"), which are included in its Annual
Report on Form 10-K for the fiscal year ended October 31, 1997 filed with
the Securities and Exchange Commission. The interim information reflects
all adjustments, including normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period. Results for the interim period are not necessarily
indicative of results to be expected for the full year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 interim presentation.
Loss per share
The Company's loss per share for the three and nine month periods
ended July 31, 1998 and 1997 has been calculated in accordance with the new
Financial Accounting Standard No. 128 "Earnings Per Share." This statement
requires that the Company report "basic" and "diluted" earnings per share
instead of "primary" and "fully diluted" earnings per share previously as
reported. The key difference is that "basic" earnings per share does not
adjust for common stock equivalents. The adoption of this statement had no
effect on the Company's per share data. The numerator and denominator for
basic and diluted per share data are the same due to the antidilutive
effects of the Company's common stock equivalents and convertible
securities.
(3) RECAPITALIZATION
Exchange
On January 28, 1998, pursuant to the terms of the Recapitalization
Agreement, dated as of September 24, 1997, as amended as of January 26,
1998 (the "Recapitalization Agreement"), among the Company, Vivendi
(formerly named Compagnie Generale des Eaux), a French company and the
Company's largest stockholder ("Vivendi"), and Vivendi's indirectly wholly
owned subsidiary, Anjou International Company, a Delaware corporation
("Anjou"), the Company exchanged (the "Exchange") the outstanding 1,200,000
shares of its 5 1/2% Series A Convertible Exchangeable Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock"), held by Vivendi and
its subsidiaries (representing all of the issued and outstanding shares of
Series A Preferred Stock) for 34,285,714 shares of its Class A Common
Stock, par value $.001 per share (the "Class A Common Stock"). Immediately
following the Exchange and as of January 31, 1998, Vivendi beneficially
owned in the aggregate approximately 72.2% of the outstanding Class A
Common Stock and voting power of the Company.
The Company did not declare the September 30, 1997 and December 31,
1997 quarterly dividends aggregating $1,650,000 on the Series A Preferred
Stock, all of which was held by Vivendi, due to its concerns over liquidity
and the adequacy of its surplus. The dividends in arrears on the Series A
Preferred Stock have not been paid and were extinguished pursuant to the
Exchange.
Rights Offering
On January 26, 1998, the Board of Directors of the Company declared a
dividend to holders of record of its Class A Common Stock as of the close
of business on January 29, 1998 of 120,000,000 transferable subscription
rights (the "Rights") which allowed Rights holders to subscribe for and
purchase shares of its common stock and also allowed subscribers (other
than Vivendi and Anjou) in the Rights Offering to receive transferable
three-year warrants (the "Warrants") to purchase shares of Class A Common
Stock (the "Rights Offering"). The terms of the Rights Offering are set
forth in the Company's Prospectus dated January 30, 1998.
The Rights Offering expired on March 4, 1998. In the Rights Offering,
98,160,427 Rights were exercised to purchase 99,840,089 shares of Class A
Common Stock, of which 1,679,662 shares were purchased pursuant to an
oversubscription privilege. In accordance with the terms of the
Recapitalization Agreement, Vivendi and Anjou each exercised its basic
subscription privilege in full for an aggregate basic subscription of
86,682,816 shares of Class A Common Stock, and Vivendi subscribed for and
purchased 19,031,470 additional shares of Class A Common Stock available as
a result of unexercised Rights in the Rights Offering, for a total
aggregate subscription of $185 million.
In addition, 3,949,099 Warrants to acquire in the aggregate 3,949,099
shares of Class A Common Stock were issued to subscribers (other than
Vivendi and Anjou) in the Rights Offering. In accordance with the terms of
the Rights Offering, neither Vivendi nor Anjou received any Warrants. On
March 12, 1998, the Company was notified that the Warrants had been
approved for listing on the American Stock Exchange, Inc. (the "AMEX"). The
Warrants currently trade on the AMEX under the symbol "AWT.WS."
The Company received gross proceeds of approximately $208 million
from the Rights Offering, including approximately $23 million of publicly
raised proceeds. The Company used a portion of the gross proceeds from the
Rights Offering to repay a $125 million unsecured term loan from Vivendi
and borrowings under a $60 million credit facility with Anjou. The
remaining $23 million of proceeds, representing all of the publicly-raised
proceeds, have been retained for general corporate purposes, including a
reduction in borrowings under the Bank Credit Facility (as defined
hereinafter) and fees related to the Recapitalization.
Following the Rights Offering, Vivendi beneficially owns an aggregate
of 153,609,975 shares of Class A Common Stock, representing approximately
83.0% of the issued and outstanding Class A Common Stock. The pro forma
loss per share from continuing operations for the nine months ended July
31, 1998 and 1997 was $.14 and $.19 per share, respectively, after giving
effect to the aforementioned issuance of shares of Class A Common Stock in
the Exchange and the Rights Offering and repayment of debt, as if such
events had occurred as of the beginning of such periods.
Consent Solicitation
Concurrently with the Rights Offering, pursuant to the terms of the
Recapitalization Agreement, the Company solicited the consent (the "Consent
Solicitation") of the holders of at least a majority in principal amount
(the "Requisite Consents") of the Company's 8% Convertible Subordinated
Debentures due 2015 (the "Convertible Debentures") to amend a certain
provision of the indenture (the "Indenture") governing the Convertible
Debentures permitting the holders 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").
On February 23, 1998, the Consent Solicitation expired. In the
Consent Solicitation, the Company received the consent of $105,937,000
aggregate principal amount of the outstanding Convertible Debentures,
representing approximately 92.1% of the outstanding principal amount of the
Convertible Debentures, to amend the Change of Control Provision. On
February 23, 1998, the Company and The Chase Manhattan Bank, as Trustee,
executed a Supplemental Indenture (the "Supplemental Indenture"), which
amended the Indenture to exempt acquisitions by Vivendi or any of its
Affiliates (as defined therein) of voting power equal to or greater than
75% from the application of the Change of Control Provision.
Following the execution of the Supplemental Indenture and pursuant to the
terms of the Consent Solicitation, the Company made an aggregate payment of
approximately $.5 million to holders of Convertible
Debentures who provided their consents.
Charter Amendment
In connection with the Rights Offering, on January 26, 1998, the
Board of Directors of the Company adopted a resolution setting forth
proposed amendments to the Restated Certificate of Incorporation of the
Company (the "Charter Amendment"). On February 6, 1998, Vivendi and Anjou,
beneficial owners of an aggregate of approximately 72.2% of the outstanding
Class A Common Stock and voting power of the Company provided their written
consent to the Charter Amendment. The consent of Vivendi and Anjou was
sufficient to adopt the Charter Amendment without any further vote of the
Company's stockholders. On March 2, 1998, the Company filed a certificate
of amendment to its Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware which increased the number of
shares of Class A Common Stock that the Company is authorized to issue from
95,000,000 shares to 255,000,000 shares. The Charter Amendment became
effective upon such filing.
As of January 31, 1998, the Company had authorized for issuance
100,000,000 shares of common stock, par value $.001 per share, of which
95,000,000 shares were shares of Class A Common Stock and 5,000,000 shares
were shares of its Class B Common Stock, par value $.001 per share (the
"Class B Common Stock"). The terms of the Class B Common Stock and the
Class A Common Stock are identical in all respects except that the Class B
Common Stock is not entitled to vote. Following the filing of the Charter
Amendment, the Company is authorized to issue 260,000,000 shares of common
stock, par value $.001 per share, of which 255,000,000 shares are shares of
Class A Common Stock and 5,000,000 shares are shares of Class B Common
Stock.
(4) RESEARCH-COTTRELL
On December 2, 1997, as part of the implementation of its revised
business strategy, the Company announced that it would divest its
Research-Cottrell business segment which provides air pollution control
technologies and services.
On June 6, 1998, the Company entered into an agreement with Hamon &
Cie ("Hamon"), pursuant to which Hamon acquired substantially all assets
(excluding certain contracts) and assumed substantially all liabilities
(excluding certain contracts, employee benefits and insurance liabilities)
related to the air pollution control operations of Research-Cottrell,
Thermal Transfer Corporation and Custodis-Cottrell, including the stock of
certain related European subsidiaries. The transaction closed on July 23,
1998 and the Company received $6.8 million. The final purchase price is
expected to be $7.5 million after a $2.3 million payment to Hamon in August
for the cash flows generated by the businesses during the current quarter
and including a $3.0 million hold-back to be released during July, 2000.
The $3.0 million hold-back is subject to adjustment pursuant to possible
indemnification in favor of Hamon under the agreement. The Company is in
negotiations with other parties regarding the divestiture of its three
remaining air pollution control businesses (Flex-Kleen, REECO and KVB) in
order to fully implement the decision to exit this business segment. The
Company expects these transactions to be completed during the fourth
quarter or shortly thereafter.
During the prior quarter, the Company reassessed its estimated loss
on disposal and provided an additional $6.0 million loss. Although
management currently believes that such provisions for Research-Cottrell
are adequate, the estimated loss on disposal and losses through disposition
may change in the near-term based on the final sales prices and proceeds
received from a complete sale of the Research-Cottrell operations, the
timing of the anticipated sales transactions, actual results through
disposition and final resolution of any retained liabilities.
(5) FINANCING ARRANGEMENTS
The Company maintains a $70.0 million secured bank credit facility
(the "Bank Credit Facility") which expires December 11, 1998. As of July
31, 1998, the Company had $19.9 million outstanding letters of credit and
no borrowings under the Bank Credit Facility (unused capacity of $50.1
million).
(6) COMMITMENTS AND CONTINGENCIES
DOJ Investigation
In connection with a broad investigation by the U.S. Department of
Justice (the "DOJ") 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 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 DOJ
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 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 DOJ 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.
Bremerton Litigation
The City of Bremerton, Washington brought a contribution and contract
action against Metcalf & Eddy Services, Inc. ("M&E Services"), the operator
of a City-owned wastewater treatment plant from 1987 until late 1995. The
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 homeowners' 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 have been
resolved. All claims by and between M&E Services and the City in the second
homeowners' suit were expressly reserved.
At trial which commenced on March 2, 1998, the City sought to recover
the amounts it expended on the two settlements, damages for M&E Services'
alleged substandard operation of the plant, and attorneys' fees. The
damages claimed exceeded $14 million. On April 22, 1998, the jury returned
a verdict against M&E Services and in favor of the City in the net amount
of approximately $0.6 million. After considering various motions by the
City challenging the verdict and its amount, on June 26, 1998 the trial
court entered final judgment against M&E Services and in favor of the City
in the net amount of approximately $0.75 million. Both sides have appealed.
The appellate court could increase or decrease the judgment by $2 million
or more or remand the case for a new trial. No assurances can be given
that, as a result of further court proceedings, an adverse judgment would
not have a material adverse effect on the financial position or results of
M&E Services or the Company taken as a whole.
R-C Belgium Litigation
On October 14, 1997, Research-Cottrell, Inc. and its subsidiary,
Research-Cottrell Belgium, S.A. ("R-C Belgium"), were named in a lawsuit by
N.V. Seghers Engineering ("Seghers") filed in the Commercial Court in
Mechelen, Belgium. Seghers is R-C Belgium's joint venture partner on two
large pollution control projects. The suit claims damages of approximately
$13 million allegedly resulting from R-C Belgium's breach of contract and
substandard performance. Damages claimed in the lawsuit consist not only of
Seghers' alleged cost to repair the R-C Belgium equipment, but also lost
profits, damages to business reputation, theft of employees (R-C Belgium
hired two former Seghers' employees), increased costs arising out of the
failure to gain timely acceptance of the two plants, excessive payments to
R-C Belgium due to alleged unfair pricing practices by R-C Belgium and
other miscellaneous interest charges and costs. The case involves complex
technical and legal issues and is in its pretrial stages. The Company
denies liability to Seghers and, based upon the information currently
available, believes Seghers claimed damages are grossly inflated. In
addition, the Company believes it has meritorious counterclaims based upon
Seghers breaches of contract and poor performance which, at least
partially, could offset Seghers' claimed damages.
U.S. Attorney's Office Investigation
The United States Attorney's Office (the "U.S. Attorney's Office") in
Boston, Massachusetts is conducting an investigation of certain
entertainment and travel payments allegedly made to Egyptian officials
between 1994 and 1996 by the Company's subsidiary, Metcalf & Eddy
International (which was merged into its parent, Metcalf & Eddy, Inc.),
while Metcalf & Eddy International was performing services in Egypt
pursuant to contracts with the United States Agency for International
Development. Metcalf & Eddy has cooperated and continues to cooperate fully
with the U.S. Attorney's Office. No charges of wrongdoing have been brought
against Metcalf & Eddy or any Metcalf & Eddy executive or employee by any
grand jury or other government authority. To date, the government has
advised Metcalf & Eddy that it has made no decision as to how it will
proceed.
Other Matters
The Company and its subsidiaries are parties to various other legal
actions, government audits and investigations 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, audits and
investigations, individually or in the aggregate, will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company taken as a whole.
The Company currently maintains various types of insurance, including
workers' compensation, general and professional liability and property
coverages and 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.
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 has entered into an agreement with
the CIGNA Insurance Companies ("CIGNA") to provide bid and performance
bonds when required. The Company also has an agreement with United States
Fidelity and Guaranty Company and certain of its affiliates ("USF&G") to
issue bid and performance bonds. The USF&G agreement not only requires the
full indemnity of the Company but also additional support from Anjou. Anjou
has entered into a separate agreement with USF&G 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. There can be no
assurance that USF&G will be willing to continue to provide bid and
performance bonds to the Company without a guarantee from Vivendi or one of
its affiliates. The CIGNA agreement does not require support from Vivendi
or its affiliates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company operates principally in two segments: Professional
Services Group ("PSG") which is focused on the operation of water and
wastewater treatment facilities and Metcalf & Eddy which is focused on
engineering consulting in the areas of water/wastewater and hazardous waste
remediation. On December 2, 1997, the Company announced its decision to
divest Research-Cottrell, and on July 23, 1998, the Company closed a
transaction pursuant to which Hamon & Cie acquired substantially all assets
and assumed substantially all liabilities of certain Research-Cottrell
businesses. Research- Cottrell designs and develops products and
technologies targeted at specific client needs such as air pollution
control equipment. See "-Financial Condition."
DEPENDENCE ON KEY PROJECTS AND 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 85% of the Company's sales during the nine month period
ended July 31, 1998 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.
During the nine month period ended July 31, 1998, the contract of
PSG's wholly owned subsidiary, PS Group of Puerto Rico, Inc. ("PSG Puerto
Rico") with the Puerto Rico Aqueduct and Sewer Authority ("PRASA")
accounted for 37% of PSG's total sales and 22% 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 has the option to cancel the
contract for any reason on September 15, 1998 pursuant to a fifteen day
extension agreed upon between PRASA and PSG Puerto Rico on August 31, 1998
in order to continue and conclude the negotiation of a replacement contract
for the existing five-year contract. Management currently expects that the
contract with PRASA will not be canceled by PRASA on September 15, but will
remain in effect at least through its original five-year term ending August
2000 with certain amendments. Additionally, the PRASA employees who operate
the PRASA facilities are subject to a collective bargaining agreement which
expired in June 1998, and PSG Puerto Rico is currently negotiating a new
collective bargaining agreement. Pursuant to the contract, PSG Puerto Rico
manages 69 wastewater plants, 152 water treatment plants and related
collection and distribution systems and pumping stations in Puerto Rico.
The contract's profitability is contingent upon achieving certain contract
incentives. In addition, at July 31, 1998, PSG Puerto Rico had receivables
of $35.5 million due from PRASA for certain reimbursable costs.
See"-Financial Condition."
Summarized below is certain financial data including information
relating to the Company's business segments (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 July 31
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Professional Services Group .............. $ 64,343 $ 65,656 $ 197,627 $ 195,383
Metcalf & Eddy ........................... 42,392 45,609 133,413 132,108
Other and eliminations ................... (1,027) (437) (3,256) (1,395)
--------- --------- --------- ---------
$ 105,708 $ 110,828 $ 327,784 $ 326,096
========= ========= ========= =========
Cost of Sales:
Professional Services Group .............. $ 57,233 $ 56,908 $ 181,643 $ 177,697
Metcalf & Eddy ........................... 34,219 32,986 107,561 103,731
Other and eliminations ................... (1,027) (437) (3,256) (1,395)
--------- --------- --------- ---------
$ 90,425 $ 89,457 $ 285,948 $ 280,033
========= ========= ========= =========
Selling, General and Administrative Expenses:
Professional Services Group .............. $ 3,761 $ 3,473 $ 12,678 $ 16,601
Metcalf & Eddy ........................... 9,008 8,311 26,533 37,437
Corporate (unallocated) .................. 3,327 1,411 8,017 5,746
--------- --------- --------- ---------
$ 16,096 $ 13,195 $ 47,228 $ 59,784
========= ========= ========= =========
Depreciation and Amortization:
Professional Services Group .............. $ 2,151 $ 1,935 $ 6,290 $ 6,028
Metcalf & Eddy ........................... 1,513 1,583 4,998 6,546
Corporate (unallocated) .................. 127 127 385 385
--------- --------- --------- ---------
$ 3,791 $ 3,645 $ 11,673 $ 12,959
========= ========= ========= =========
Operating Income (Loss):
Professional Services Group .............. $ 1,198 $ 3,340 $ (2,984) $ (4,943)
Metcalf & Eddy ........................... (2,348) 2,729 (5,679) (15,606)
Corporate (unallocated) .................. (3,454) (1,538) (8,402) (6,131)
--------- --------- --------- ---------
$ (4,604) $ 4,531 $ (17,065) $ (26,680)
========= ========= ========= =========
Interest expense, net .......................... $ (2,355) $ (6,150) $ (12,085) $ (17,926)
Other expense, net ............................. (387) (249) (1,211) (247)
Income tax expense ............................. (291) (156) (805) (267)
Loss from continuing operations ................ (7,637) (2,024) (31,166) (45,120)
Loss from discontinued segment ................. -- (2,766) (6,000) (36,186)
--------- --------- --------- ---------
Net loss ....................................... $ (7,637) $ (4,790) $ (37,166) $ (81,306)
========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
Overview
The net loss during the three month period ended July 31, 1998
increased by $2.8 million to $7.6 million from the comparable prior period.
The results reflect a $9.1 million decrease in operating income partially
off-set by an interest expense reduction of $3.8 million as a result of the
Recapitalization completed earlier this year. See "-Financial Condition."
In addition, the prior period results reflect a $2.8 million loss from the
discontinued Research-Cottrell business segment. The comparable prior
period results were favorably impacted by revised estimates of previously
accrued discretionary and self insured employee benefit costs of $3.2
million. Excluding the impact of these employee benefit costs, the
operating income from continuing operations decreased by $5.9 million
primarily due to lower gross margin rates at Metcalf & Eddy resulting from
higher than anticipated costs on several projects, pricing pressures and an
unfavorable business mix shift from self-performed work to subcontracted
work. Sales decreased by $5.1 million (approximately 4.6%) from the
comparable prior period.
In order to return to profitability following the Recapitalization,
management is currently finalizing the next stages of the revised business
strategy which will consist, in addition to the completion of the
divestiture of Research-Cottrell, of the reorganization and streamlining of
its operations. Once finalized and approved by the Board of Directors, this
reorganization will involve the integration of key functions in all areas
in order to decrease costs, improve efficiencies and optimize business
development. It is expected to result in improved operating performance and
cash flows.
Professional Services Group
Sales decreased by $1.3 million (2.0%) from the comparable prior
period due to a few contracts which were not renewed during the current
fiscal year. Gross margin rates decreased from 13.3% in the prior period to
11.1% in the current period due to higher direct project costs required for
certain initial first year contracts (sludge disposal, utilities and labor
costs) and the PRASA contract which together resulted in lower gross
margins of $1.6 million. With respect to the PRASA contract itself, gross
margin decreased from 5.8% in the prior period to 1.4% in the current
period due primarily to excess chemical costs used in operations.
Management is currently pursuing the recovery of such costs. Selling,
general and administrative expenses and depreciation and amortization were,
respectively, $.3 million and $.2 million higher than the comparable prior
period due to additional legal fees and selling costs related to large
privatization projects.
Metcalf & Eddy
Sales decreased by $3.2 million (7.1%) from the comparable prior
period reflecting increases in the water/wastewater markets which were more
than off-set by a decline in hazardous waste sales. Gross margin rates
decreased from 27.7% in the prior period to 19.3% in the current period as
a result of pricing pressures and a business mix shift from self-performed
work to subcontract work and higher than anticipated costs on several
projects. Selling, general and administrative expenses were $.7 million
higher than the comparable prior period due to higher employee benefit
costs.
Corporate and Other
The unallocated corporate costs were $1.9 million higher than the
prior period due to discretionary and self-insured employee benefits, the
corporate office relocation to Wakefield, Massachusetts and selling costs
related to large privatization projects. The repayment of borrowings from
Vivendi and Anjou and to a lesser extent, the Bank Credit Facility with
proceeds from the Rights Offering resulted in a $3.8 million reduction in
interest expense. See "-Financial Condition."
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
Overview
The operating loss during the nine month period ended July 31, 1998
decreased by $9.6 million due to $28.7 million of provisions and asset
write-offs reflected in the prior period. Excluding the effect of these
charges, the operating loss during the nine month period ended July 31,
1998 increased by $19.1 million due to lower gross margin rates resulting
from higher than anticipated costs on several projects in both segments,
pricing pressures and an unfavorable business mix shift from self-performed
work to sub-contracted work at Metcalf & Eddy. Sales increased modestly by
$1.7 million (approximately .5%) with increases for both PSG and Metcalf &
Eddy. On December 2, 1997, as part of the implementation of its revised
business strategy, the Company announced that it would divest its
Research-Cottrell business segment which provides air pollution control
technologies and services. The Company believes that most of these
businesses will be sold within the next several months, but in any event no
later than November 30, 1998, and has reported its results of operations
and financial condition as a discontinued operation. See
"-Research-Cottrell."
Professional Services Group
Sales during the nine month period ended July 31, 1998, increased by
$2.2 million (1.1%) primarily due to sales from two new contracts which
were started during the latter half of fiscal 1997. Gross margin rates
decreased from 9.1% in the prior period to 8.1% in the current period due
to higher direct project costs required for certain initial first year
contracts (sludge disposal, utilities and labor costs) and the PRASA
contract (excess chemical costs the recovery of which is being pursued by
management). The decrease in selling, general and administrative expenses
of $3.9 million was due to higher operating charges and asset write-offs
reflected in the comparable prior period which were related to marketing
consultants, the DOJ Investigation and certain litigation matters and
revised collectibility estimates for certain non-current note receivables.
Metcalf & Eddy
Sales during the nine month period ended July 31, 1998 increased by
$1.3 million (1.0%) reflecting increases in the water/wastewater markets
partially off-set by the decline in hazardous waste sales. Gross margins
decreased by $2.5 million which reflected a decrease in gross margin rates
from 21.5% in the prior period to 19.4% in the current period. The
comparable prior periods included certain operating charges and asset
write-offs of $19.4 million related to the increase in reserves for the
collectibility of certain receivables, litigation, professional liability
and certain project contingencies; equipment write-offs; a lease
cancellation penalty and other direct and indirect costs. The prior
period's cost of sales, selling general and administrative expenses and
depreciation and amortization include, respectively, $8.0 million, $10.1
million and $1.3 million of these charges. Excluding the impact of the
aforementioned charges reflected in cost of sales during the prior period,
the gross margin rates decreased from 27.5% in the prior period to 19.4% in
the current period as a result of pricing pressures and a business mix
shift from self-performed work to subcontract work, higher than anticipated
costs on several projects and favorable pricing adjustments reflected in
the prior period. Excluding the impact of the aforementioned charges
reflected in the prior period, selling, general and administrative expenses
decreased by $.8 million due to lower bid and proposal and other related
selling costs. The decrease in depreciation and amortization resulted from
the impact of the aforementioned charges reflected in the prior period.
Corporate and Other
The unallocated corporate costs for the nine month period ended July
31, 1998 was $2.3 million higher due to discretionary and self-insured
employee benefits, the corporate office relocation to Wakefield,
Massachusetts and selling costs related to large privatization projects.
The repayment of the borrowings from Vivendi and Anjou and to a lesser
extent the Bank Credit Facility with proceeds from the Rights Offering
resulted in a $5.8 million reduction in interest expense during the nine
month period ended July 31, 1998. See "-Financial Condition." Partially
off-setting the interest savings were increases in other non-operating
expenses of $1.0 million due to foreign currency transaction losses related
to a Metcalf & Eddy project in Thailand, bond support fees and a gain on
PSG equipment sold in the prior period.
Research-Cottrell
Also reflected in the comparable prior period were significant
operating losses from the discontinued operations of Research-Cottrell
which the Company has decided to divest and for which the estimated loss on
disposal and losses through disposition were initially provided for during
the fourth quarter of the prior fiscal year.
On June 6, 1998, the Company entered into an agreement with Hamon &
Cie ("Hamon"), pursuant to which Hamon acquired substantially all assets
(excluding certain contracts) and assumed substantially all liabilities
(excluding certain contracts, employee benefits and insurance liabilities)
related to the air pollution control operations of Research-Cottrell,
Thermal Transfer Corporation and Custodis-Cottrell, including the stock of
certain related European subsidiaries. The transaction closed on July 23,
1998 and the Company received $6.8 million. The final purchase price is
expected to be $7.5 million after a $2.3 million payment to Hamon in August
for the cash flows generated by the businesses during the current quarter
and including a $3.0 million hold-back to be released during July, 2000.
The $3.0 million hold-back is subject to adjustment pursuant to possible
indemnification in favor of Hamon under the agreement. The Company is in
negotiations with other parties regarding the divestiture of its three
remaining air pollution control businesses (Flex-Kleen, REECO and KVB) in
order to fully implement the decision to exit this business segment. The
Company expects these transactions to be completed during the fourth
quarter or shortly thereafter.
During the prior quarter, the Company reassessed its estimated loss
on disposal and provided an additional $6.0 million loss. Although
management currently believes that such provisions for Research-Cottrell
are adequate, the estimated loss on disposal and losses through disposition
may change in the near-term based on the final sales prices and proceeds
received from a complete sale of the Research-Cottrell operations, the
timing of the anticipated sales transactions, actual results through
disposition and final resolution of any retained liabilities.
FINANCIAL CONDITION
During the nine month period ended July 31, 1998, operating
activities used $16.3 million of cash after interest payments of $15.9
million and $3.9 million used by discontinued operations. The $13.1 million
increase in payables were primarily related to delays in the payment of
certain power costs to the Puerto Rico Electric Power Authority ("PREPA")
($43.8 million at July 31, 1998). The delay in these payments is associated
with PSG Puerto Rico's contract with PRASA under which certain receivables
including reimbursable costs paid on behalf of PRASA have not been
collected ($35.5 million at July 31, 1998). Management believes that such
receivables will be fully collected and will be used to pay the power costs
due to PREPA. The cash requirements of the discontinued operations were
$3.9 million due to a reduction of certain Research-Cottrell liabilities
during the period. The Company typically has receivables in which the
ultimate realizability is dependent upon the successful negotiation or
resolution of contractual issues or disputes, government audits as well as
the client's ability to fund and pay the amounts due. Historically,
significant charges have been reflected as provisions for receivable
reserves and write-offs. Management believes that adequate provisions have
been made to the receivable balances reflected in the July 31, 1998
financial statements; however, additional provisions may be required in the
future based on new developments which may arise in the near term related
to the factors discussed above.
Investment activities provided $1.6 million of cash during the nine
month period ended July 31, 1998 including $0.3 million for
Research-Cottrell's capital expenditures. Proceeds of $6.8 million from the
sale of certain Research-Cottrell businesses were received during the
period. Investments related to the start up of operations, maintenance and
management of treatment facilities within the PSG segment were $2.9
million. Capital expenditures of $2.1 million were made in the PSG and
Metcalf & Eddy segments primarily for computer and field equipment. As
discussed more fully below, significant investments may be required in the
near term due to current growth initiatives.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the years ended October 31,
1997, 1996 and 1995 total capital expenditures were $5.0 million, $6.3
million and $5.4 million, respectively. At July 31, 1998, the Company had
no material outstanding purchase commitments for capital expenditures,
however, the Company anticipates it will require additional financial
resources to develop and support 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. Vivendi 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
Vivendi 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 financing activities of the Company on terms which
are commercially reasonable. As a result, Vivendi and the Company and
possibly others, investing either directly through such vehicle or
otherwise, would share in the returns on such projects pro rata in relation
to their respective equity investments.
Financing activities provided $18.9 million of cash during the nine
month period ended July 31, 1998 primarily due to the effects of the Rights
Offering discussed more fully below.
The Company entered into the Recapitalization Agreement, dated as of
September 24, 1997, amended as of January 26, 1998 (the "Recapitalization
Agreement"), with Vivendi, and Vivendi's indirect wholly-owned subsidiary,
Anjou International Company, a Delaware corporation ("Anjou"). On January
28, 1998, pursuant to the terms of the Recapitalization Agreement, the
Company exchanged (the "Exchange") the outstanding shares of its 5 1/2%
Series A Convertible Exchangeable Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), held by Vivendi and its subsidiaries
(representing all of the issued and outstanding shares of Series A
Preferred Stock) for 34,285,714 shares of its Class A Common Stock, par
value $.001 per share (the "Class A Common Stock").
On or about January 30, 1998, pursuant to the terms of the
Recapitalization Agreement, the Company distributed a dividend to holders
of record of its Class A Common Stock as of the close of business on
January 29, 1998 of 120,000,000 transferable subscription rights which
allowed Rights holders to subscribe for and purchase shares of its common
stock and also allowed subscribers (other than Vivendi and Anjou) in the
Rights Offering to receive transferable three-year warrants (the
"Warrants") to purchase shares of Class A Common Stock (the "Rights
Offering"). The terms of the Rights Offering are set forth in the Company's
Prospectus dated January 30, 1998. The Rights Offering expired on March 4,
1998.
The Company received gross proceeds of approximately $208 million
from the Rights Offering. The Company used a portion of the gross proceeds
from the Rights Offering to repay borrowings under the $125 million Vivendi
Note and the $60 million Anjou Note after which the related credit
agreements were terminated. The remaining $23 million of proceeds,
representing all of the publicly-raised proceeds, were retained for general
corporate purposes, including a reduction in borrowings under the Bank
Credit Facility (as defined hereinafter). As a result of the consummation
of the Exchange and the Rights Offering and the other transactions
contemplated by the Recapitalization Agreement (collectively, the
"Recapitalization"), the Company's annual interest expense is expected to
be reduced by approximately $12.4 million and $3.3 million of annual
dividends on the Series A Preferred Stock have been eliminated.
The Company maintains a $70 million senior secured Bank Credit
Facility, dated as of March 10, 1995 which expires December 11, 1998, with
Societe Generale, New York Branch ("Societe Generale"). As of July 31,
1998, the Company had $19.9 million outstanding letters of credit and no
borrowings under the Bank Credit Facility (unused capacity of $50.1
million). Vivendi also has reaffirmed to Societe Generale the terms of
Vivendi's existing credit support of the Company, including a commitment by
Vivendi to maintain a minimum 48% voting equity ownership interest and to
check to ensure that the Company will have sufficient financial resources
to meet its obligations under the Bank Credit Facility. In addition,
Vivendi has a right to designate at least 48% of the Company's Board of
Directors as well as to appoint the Chief Executive Officer and the Chief
Financial Officer of the Company. The Company compensates Vivendi for its
support in an amount equal to 0.95% per annum of the outstanding commitment
of its credit facilities. The Company is in discussions regarding the
establishment of a new credit facility and expects to have such facility in
place prior to the maturity of the Bank Credit Facility.
The Bank Credit Facility is primarily designed to finance working
capital requirements, subject to certain limitations, and provide for the
issuance of letters of credit, and is 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 $70.0 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 1.25% (6.9% at July 31, 1998), or at a
defined bank rate approximating prime (8.5% at July 31, 1998). 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.
As of September 11, 1998, the Company had $20 million of outstanding
letters of credit and no borrowings under the Bank Credit Facility. In
addition to its $1.5 million of short-term investments and the $50 million
of unused capacity under its Bank Credit Facility at September 11, 1998,
the Company believes it can finance its ongoing operations in the near term
(including additional working capital requirements if a growth in sales
occurs, but excluding the potential investments discussed below) through
improved working capital management by focusing on Metcalf & Eddy's past
due receivables, planned divestitures related to the Research-Cottrell
segment and reduction of financing costs through the strengthening of its
current capital structure as a result of the Recapitalization. A
significant amount of planned divestiture proceeds is expected to fund the
related retained liabilities, however, the cash outlays may occur during
different periods.
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 has entered into an agreement with
the CIGNA Insurance Companies ("CIGNA") to provide bid and performance
bonds when required. The Company also has an agreement with United States
Fidelity and Guaranty Company and certain of its affiliates ("USF&G") to
issue bid and performance bonds. The USF&G agreement not only requires the
full indemnity of the Company but also additional support from Anjou. Anjou
has entered into a separate agreement with USF&G 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. There can be no
assurance that USF&G will be willing to continue to provide bid and
performance bonds to the Company without a guarantee from Vivendi or one of
its affiliates. The CIGNA agreement does not require support from Vivendi
or its affiliates.
The realizability of goodwill and other long lived assets is the
result of an estimate based on the underlying assets remaining estimated
useful lives and projected operating cash flows. It is possible that this
estimate will change as a consequence of further deterioration in market
conditions and operating results. The effect of a change, if any, would be
material to the financial condition or results of operations. At July 31,
1998, unamortized goodwill was $160.5 million.
YEAR 2000 ISSUE
Based on a preliminary study by management, the Company expects to
incur approximately $3 million during 1998 and 1999 to modify its
information systems appropriately to accurately process information in the
year 2000 and beyond. The Company continues to evaluate appropriate courses
of corrective action, including replacement of certain systems whose
associated costs would be recorded as assets and amortized. Management
expects that the costs to convert the Company's information systems to year
2000 compliance will not have a material impact on the Company's
consolidated financial statements. The Company has not yet initiated formal
communications with all of its significant suppliers and clients to
determine the extent to which the Company may be vulnerable to such third
parties' failure to remediate their own year 2000 issues.
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, forecasted, estimated or budgeted by the Company in such
forward-looking statement:
o The Company's highly competitive marketplace.
o 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.
o Adverse developments in the DOJ Investigation.
o Dependency on key projects, customers and contracts.
o The ability to obtain new contracts (some of which are
significant) from existing and new clients.
o The ability of the Company to obtain new bid and
performance bonds.
o The execution of expected new projects and those projects
in backlog within the most recent cost estimates.
o Adverse resolution of litigation matters and existing
claims arising in the ordinary course of business.
o The ability of the Company to access capital (through an
investment fund, off-balance sheet vehicle or otherwise)
and to effect and finance future investments.
o The ability of the Company to successfully implement its
revised business strategy.
o The ability of the Company to obtain any necessary
waivers, extensions or renewals of the Bank Credit
Facility.
o The acceptance by the Company's current and prospective
customers of the Company's financial position.
o The effectiveness of the business planning committee of
the Board of Directors, established in connection with
the Recapitalization, in identifying strategies aimed at
increasing stockholder value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bremerton Litigation
As reported in the Company's Quarterly Reports on Form 10-Q for the
quarters ended January 31, 1998 and April 30 ,1998, the City of Bremerton,
Washington brought a contribution and contract action against Metcalf &
Eddy Services, Inc. ("M&E Services"), the operator of a City-owned
wastewater treatment plant from 1987 until late 1995. The 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
homeowners' 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 have been resolved. All claims
by and between M&E Services and the City in the second homeowners' suit
were expressly reserved.
At trial which commenced on March 2, 1998, the City sought to recover
the amounts it expended on the two settlements, damages for M&E Services'
alleged substandard operation of the plant, and attorneys' fees. The
damages claimed exceeded $14 million. On April 22, 1998, the jury returned
a verdict against M&E Services and in favor of the City in the net amount
of approximately $0.6 million. After considering various motions by the
City challenging the verdict and its amount, on June 26, 1998 the trial
court entered final judgment against M&E Services and in favor of the City
in the net amount of approximately $0.75 million. Both sides have appealed.
The appellate court could increase or decrease the judgment by $2 million
or more or remand the case for a new trial. No assurances can be given
that, as a result of further court proceedings, an adverse judgment would
not have a material adverse effect on the financial position or results of
M&E Services or the Company taken as a whole.
U.S. Attorney's Office Investigation
The United States Attorney's Office (the "U.S. Attorney's Office") in
Boston, Massachusetts is conducting an investigation of certain
entertainment and travel payments allegedly made to Egyptian officials
between 1994 and 1996 by the Company's subsidiary, Metcalf & Eddy
International (which was merged into its parent, Metcalf & Eddy, Inc.),
while Metcalf & Eddy International was performing services in Egypt
pursuant to contracts with the United States Agency for International
Development. Metcalf & Eddy has cooperated and continues to cooperate fully
with the U.S. Attorney's Office. No charges of wrongdoing have been brought
against Metcalf & Eddy or any Metcalf & Eddy executive or employee by any
grand jury or other government authority. To date, the government has
advised Metcalf & Eddy that it has made no decision as to how it will
proceed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on June
24, 1998 (the "Annual Meeting").
At the Annual Meeting, the stockholders of the Company elected eight
directors, constituting the entire Board of Directors of the Company:
William V. Kriegel, Jean-Claude Banon, Alain Brunais, Daniel Caille, Martha
O. Hesse, Francois Jobard, Thierry M. Mallet and John W. Morris. The
directors will serve in office until the next annual meeting of
stockholders and until their successors have been elected and qualified or
until their earlier death, resignation or removal from office. Stockholders
voted upon the nominees for director as follows:
Name Votes For Votes Withheld
---- --------- --------------
William V. Kriegel 180,853,269 77,812
Jean-Claude Banon 180,853,469 77,612
Alain Brunais 180,834,070 97,011
Daniel Caille 180,853,019 78.062
Martha O. Hesse 180,853,342 77,739
Francois Jobard 180,833,970 97,111
Thierry M. Mallet 180,853,419 77,662
John W. Morris 180,853,865 77,216
At the Annual Meeting, the stockholders of the Company approved a
proposal to ratify the appointment by the Board of Directors of the Company
of McGladrey & Pullen, LLP as independent auditors for the Company's 1998
fiscal year. At the Annual Meeting, the holders of 180,868,975 shares of
Class A Common Stock present in person or by proxy at the Annual Meeting
voted in favor of such proposal. The holders of 56,674 shares of Class A
Common Stock voted against such proposal and the holders of 5,432 shares of
Class A Common Stock abstained from voting with respect to such proposal.
At the Annual Meeting, the stockholders of the Company also approved
a proposal to amend the Company's Restated Certificate of Incorporation to
change the name of the Company from "Air & Water Technologies Corporation"
to "Aqua Alliance Inc." The proposal was approved by the holders of
180,747,184 shares of Class A Common Stock, representing a majority of the
shares of Class A Common Stock outstanding at the close of business on May
22, 1998, the record date for the Annual Meeting. The holders of 180,342
shares of Class A Common Stock voted against such proposal, and the holders
of 3,555 shares of Class A Common Stock abstained from voting with respect
to such proposal. The change of the Company's name will become effective
upon the filing of a certificate of amendment to the Company's Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed as part of this Quarterly Report
on Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- -----------------------------------
(*) Filed herewith.
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the quarter
ended July 31, 1998:
DATE OF REPORT
(DATE OF EARLIEST
EVENT REPORTED) ITEM REPORTED DATE FILED
July 27, 1998 Item 5--Other Events July 28, 1998
Sale of certain Research-Cottrell
assets to Hamon & Cie
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AIR & WATER TECHNOLOGIES CORPORATION
Date: September 14, 1998 By: /S/ ALAIN BRUNAIS
------------------------------
Alain Brunais
Senior Vice President, Chief
Financial Officer and Director
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- --------------------------------------
(*) Filed herewith.
EXHIBIT 11
AIR & WATER TECHNOLOGIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
BASIC EARNINGS (LOSS) PER SHARE:
<S> <C> <C> <C> <C> <C>
1. Loss from continuing operations . . . . . . . $ (7,637) $ (2,024) $ (31,166) $ (45,120)
2. Less preferred dividends . . . . . . . . . . - (825) - (2,475)
3. Loss from continuing operations applicable
to common stockholders . . . . . . . . . . . (7,637) (2,849) (31,166) (47,595)
4. Loss from discontinued operations . . . . . . - (2,766) (6,000) (36,186)
5. Net loss applicable to common stockholders . . $ (7,637) $ (5,615) $ (37,166) $ (83,781)
6. Weighted average shares outstanding . . . . 185,177 32,019 120,347 32,019
7. Loss per share from continuing operations (3/6) $ (.04) $ (.09) $ (.26) $ (1.49)
8. Loss per share from discontinued
operations (4/6) . . . . . . . . . . . . . - (.09) (.05) (1.13)
9. Net loss per share . . . . . . . . . . . . . . $ (.04) (.18) (.31) (2.62)
DILUTED EARNINGS (LOSS) PER SHARE (1):
10. Line 3 above . . . . . . . . . . . . . . . . . $ (7,637) $ (2,849) $ (31,166) $ (47,595)
11. Add back preferred dividends . . . . . . . . . - 825 - 2,475
12. Add back interest, on assumed conversion of the
Company's 8% Convertible Debentures . . . . . . 2,300 2,300 6,900 6,900
13. Loss from continuing operations . . . . . . . . (5,337) 276 (24,266) (38,220)
14. Loss from discontinued operations . . . . . . - (2,766) (6,000) (36,186)
15. Net loss . . . . . . . . . . . . . . . . . . . $ (5,337) (2,490) (30,266) (74,406)
16. Weighted average shares outstanding (Line 6) . 185,177 32,019 120,347 32,019
17. Add additional shares issuable upon assumed
conversion of preferred shares from
date of issuance . . . . . . . . . . . . . . . - 4,800 - 4,800
18. Add additional shares issuable upon assumed
conversion of the Company's 8% Convertible
Debentures . . . . . . . . . . . . . . . . . 3,833 3,833 3,833 3,833
19. Adjusted weighted average shares outstanding. . 189,010 40,652 124,180 40,652
20. Loss per share from continuing operations
(13/19) . . . . . . . . . . . . . . . . . . . $ (.03) $ .01 $ (.19) $ (.94)
21. Loss per share from discontinued operations
(14/19) . . . . . . . . . . . . . . . . . . . . - (.07) (.05) (.89)
22. Net loss per share . . . . . . . . . . . . . . $ (.03) $ (.06) $ (.24) $ (1.83)
--------------
(1) Diluted earnings (loss) per share are not presented as the
Company's common stock equivalents and the assumed conversion of the
Company's 8% Convertible Debentures are anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 16,225
<SECURITIES> 0
<RECEIVABLES> 67,448
<ALLOWANCES> 2,915
<INVENTORY> 1,740
<CURRENT-ASSETS> 138,216
<PP&E> 30,430
<DEPRECIATION> 19,601
<TOTAL-ASSETS> 374,790
<CURRENT-LIABILITIES> 196,131
<BONDS> 119,364
0
0
<COMMON> 185
<OTHER-SE> 59,187
<TOTAL-LIABILITY-AND-EQUITY> 374,790
<SALES> 327,784
<TOTAL-REVENUES> 327,784
<CGS> 285,948
<TOTAL-COSTS> 285,948
<OTHER-EXPENSES> 11,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,085
<INCOME-PRETAX> (30,361)
<INCOME-TAX> 805
<INCOME-CONTINUING> (31,166)
<DISCONTINUED> (6,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,166)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.24)
</TABLE>
