<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1998
REGISTRATION NO. 333-39115
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
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 4952 13-3418759
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION
INCORPORATION OR CODE NUMBER) 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, DAVIS POLK & WARDWELL SKADDEN, ARPS, SLATE,
SHRIVER & JACOBSON 450 LEXINGTON AVENUE MEAGHER & FLOM LLP
SUITE 800 NEW YORK, NEW YORK 10017 919 THIRD AVENUE
1001 PENNSYLVANIA AVENUE, (212) 450-4000 NEW YORK, NEW YORK 10022
N.W. (212) 735-3000
WASHINGTON, D.C. 20004
(202) 639-7000
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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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF
SECURITIES TO BE AMOUNT TO PROPOSED MAXIMUM AMOUNT OF
REGISTERED BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C>
Rights.................. (1) N/A None(2)
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Common Stock, par value
$.001 per share........ (3) $235,000,000(4) $71,012(5)
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Warrants................ (3) N/A None
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</TABLE>
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(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 for such
securities equals $210,000,000 and 10,000,000 shares of Class A Common
Stock underlying the maximum number of Warrants as may be issued at a
warrant exercise price of $2.50 per share.
(4) Includes $210,000,000 in gross proceeds from the exercise of the maximum
number of Rights as may be issued and $25,000,000 in gross proceeds from
the exercise of the maximum number of Warrants as may be issued.
(5) A registration fee of $63,637 has been previously paid.
---------------
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.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering (the "Rights Offering") of rights to purchase, at a subscription
price of $1.75 per share, an aggregate of 120,000,000 shares of common stock,
par value $.001 per share, and warrants ("Warrants") to purchase shares of
common stock of Air & Water Technologies Corporation together with separate
Prospectus pages relating to the continuous offering (the "Shelf Offering") of
up to 10,000,000 shares of Class A Common Stock, par value $.001 per share, of
the Company issuable upon the exercise of Warrants. The complete Prospectus
for the Rights Offering follows immediately. After such Prospectus are the
following alternate pages for the Shelf Offering: a front cover page, the
section entitled "Use of Proceeds" and a back cover page. All other pages of
the Prospectus for the Rights Offering are to be used for both the Rights
Offering and the Shelf Offering, except for the following sections:
"Prospectus Summary--The Rights Offering," "Risk Factors--No Prior Market for
Rights or Warrants," "Risk Factors--Ability to Exercise Warrants," "The
Recapitalization," "Unaudited Pro Forma Condensed Consolidated Financial
Statements," "The Rights Offering," "Certain United States Federal Income Tax
Consequences" and "Annex A."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JANUARY 29, 1998.
$210,000,000
[LOGO OF AIR & WATER
TECHNOLOGIES CORPORATION]
AIR & WATER TECHNOLOGIES CORPORATION
120,000,000 SHARES OF COMMON STOCK
AND
10,000,000 WARRANTS TO PURCHASE
SHARES OF CLASS A COMMON STOCK
-----------
Air & Water Technologies Corporation, a Delaware corporation (the "Company")
is distributing in a rights offering (the "Rights Offering") 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 January 29,
1998 (the "Record Date"), transferable subscription rights (the "Rights") to
subscribe for and purchase shares of its Common Stock and Warrants (as such
terms are defined hereinafter). The Rights expire at 5:00 p.m., New York City
time, on March 4, 1998 unless the Company extends such time (as it may be
extended, the "Expiration Date"). In the Rights Offering, each Recordholder
will receive 1.80982 Rights for each share of Class A Common Stock owned of
record at the close of business on the Record Date. The Rights will be
evidenced by transferable rights certificates (the "Rights Certificates").
Subject to the limitations described in this Prospectus, each Right allows the
holder thereof (i) to subscribe (the "Basic Subscription Privilege") at the
cash price of $1.75 per share (the "Subscription Price") for one share of Class
A Common Stock (an "Underlying Share") and (ii) to receive 0.30014 of a
transferable three-year warrant (a "Warrant") for each Underlying Share
subscribed for pursuant to the Basic Subscription Privilege. Each Warrant
allows the holder to purchase one share of Class A Common Stock at an exercise
price of $2.50 per share. See "The Rights Offering" and "Description of
Warrants." Only Rights holders other than Compagnie Generale des Eaux ("CGE"),
the beneficial owner of approximately 72.2% of the outstanding Class A Common
Stock, and Anjou International Company ("Anjou"), a wholly owned subsidiary of
CGE, are eligible to receive Warrants in the Rights Offering. Rights holders
other than CGE and Anjou are referred to herein as "Public Rights holders" or
the "Public."
(continued on next page)
BEFORE MAKING AN INVESTMENT DECISION, POTENTIAL INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 18.
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.
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<TABLE>
<CAPTION>
SUBSCRIPTION DISCOUNTS AND PROCEEDS TO THE
PRICE COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Right Exercised................. $1.75 None $1.75
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Total Maximum Subscription(2)....... $210,000,000 None $210,000,000
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Total Minimum Subscription(3)....... $185,000,000 None $185,000,000
</TABLE>
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(1) Estimated expenses of approximately $6,500,000 by the Company, including
registration fees, legal and accounting fees, subscription and information
agent fees, printing expenses and other miscellaneous fees and expenses
will be paid out of existing cash of the Company.
(2) Assumes that Public subscribers in the Rights Offering exercise Rights
providing at least $25 million of gross proceeds in the Rights Offering.
(3) 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 , 1998.
<PAGE>
(Continued from previous page)
In addition, subject to the limitations described in this Prospectus, Public
Rights holders which exercise their Basic Subscription Privilege also will be
eligible to subscribe (the "Oversubscription Privilege") at the same cash
price of $1.75 per share for shares of Class A Common Stock that are not
otherwise purchased pursuant to the exercise of Rights (the "Excess Shares").
If an insufficient number of Excess Shares is available to satisfy fully all
oversubscriptions, each Public Rights holder exercising the Oversubscription
Privilege will receive a pro rata portion of the Excess Shares available based
upon the number of Underlying Shares it subscribed for pursuant to the Basic
Subscription Privilege. Public Rights holders also will receive 0.30014 of a
Warrant for each Excess Share acquired pursuant to the Oversubscription
Privilege. See "The Rights Offering--Subscription Privileges--Oversubscription
Privilege." A Rights holder cannot revoke the exercise of its Rights. See "The
Rights Offering--No Revocation."
As of the date of this Prospectus CGE beneficially owns an aggregate of
47,895,689 shares of Class A Common Stock, or approximately 72.2% of all of
the outstanding Class A Common Stock. In the Rights Offering, CGE has agreed
to exercise its Basic Subscription Privilege in full. In addition, if Public
Rights holders do not exercise all of their Rights and do not purchase the
total number of Underlying Shares available to be purchased by the Public in
the Rights Offering (including pursuant to the Oversubscription Privilege),
CGE will subscribe for and purchase, at the same cash price of $1.75 per share
(the "Conditional CGE Subscription"), the Underlying Shares not purchased by
the Public in the Rights Offering, provided that the gross proceeds to the
Company from CGE's Basic Subscription Privilege and the Conditional CGE
Subscription shall not exceed $185 million. CGE has agreed that it will not
receive any Warrants in respect of either its Basic Subscription Privilege or
the Conditional CGE Subscription. See "The Rights Offering--Subscription
Privileges--Conditional CGE Subscription."
If Public Rights holders exercise their Rights in full, CGE will
beneficially own an aggregate of 134,578,224 shares of Class A Common Stock,
representing approximately 72.2% of the outstanding shares of Class A Common
Stock. If no Rights holder other than CGE and Anjou exercises Rights in the
Rights Offering, CGE will beneficially own an aggregate of 153,609,974 shares
of Class A Common Stock, representing approximately 89.3% of the outstanding
shares of Class A Common Stock, subject to the Company's obligation to issue
shares of its Class B Common Stock, par value $.001 per share (the "Class B
Common Stock"and together with the Class A Common Stock, the "Common Stock"),
to CGE in certain circumstances described herein.
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 January
28, 1998, the closing sale price of the Class A Common Stock on the AMEX was
$1.625 per share.
The Rights will be admitted to dealings on the AMEX and will trade on the
AMEX under the symbol "AWT. RT" 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 intends to apply for the Warrants to be listed on the
AMEX. The Company does not intend to apply for listing of the Class B Common
Stock.
2
<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.
3
<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; and the remediation of hazardous
waste. 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 two widely
recognized trade names: Professional Services Group ("PSG") for the operation,
maintenance and management of water and wastewater treatment systems and
Metcalf & Eddy for water, wastewater-related and hazardous waste products and
engineering 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.
On December 2, 1997, the Company announced its decision to divest Research-
Cottrell. Research-Cottrell designs and develops products and technologies
targeted at specific client needs such as air pollution control equipment. The
Company is currently in negotiations with several interested parties and
expects that most of the air pollution control businesses operated through
Research-Cottrell will be sold within the next several months.
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 operation, maintenance and management ("OM&M") services for
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 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. In addition,
PSG has experience dealing with the planning and implementation of large
biosolids management programs, including composting facilities. The water and
wastewater privatization market in the United States and its territories is
estimated to be, on the basis of annual revenues, a $1.1 billion market, of
which PSG has approximately a 45% market share among the top seven companies
and approximately a 25% share of the total market. PSG's sales were $270.6
million and $271.7 million during the fiscal years ended October 31, 1996 and
1997, respectively. PSG's operating income was $7.4 million and $1.8 million
for the fiscal years ended October 31, 1996 and 1997, respectively.
4
<PAGE>
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 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 $215.4 million and $186.5 million
during the fiscal years ended October 31, 1996 and 1997, respectively. Metcalf
& Eddy's operating income was $13.4 million for the fiscal year ended October
31, 1996 and its operating loss was $14.7 million for the fiscal year ended
October 31, 1997.
RISK FACTORS
Each prospective purchaser should carefully examine all the information
contained in this Prospectus and should carefully consider the factors set
forth under the caption "Risk Factors" in evaluating an investment in the
securities offered hereby. In particular, investors should consider the factors
that could adversely affect the results of operations and financial condition
of the Company, such as the Company's substantial leverage and the restrictions
imposed by certain of its debt instruments, the Company's history of operating
losses, the Company's ability to implement a revised business strategy or
realize the anticipated benefits of such a strategy and adverse developments in
the DOJ Investigation (as defined hereinafter).
RECENT DEVELOPMENTS
Recapitalization
The Company entered into the Recapitalization Agreement, dated as of
September 24, 1997, amended as of January 26, 1998 (the "Recapitalization
Agreement"), with Anjou and CGE. The purpose of the Recapitalization and
related transactions is to improve the Company's overall liquidity, while
offering Public stockholders the opportunity to participate in the Company's
recovery. The Recapitalization is intended to substantially reduce the
Company's interest and dividend requirements, enhance the Company's ability to
fund its working capital requirements, capital expenditures and other corporate
needs and provide liquidity for Public stockholders in an informed trading
market. See "The Recapitalization--Reasons for the Recapitalization."
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 Exchangeable 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 January 28, 1998, the
Company and CGE effected the Exchange and the Company issued 34,285,714 shares
of Class A Common Stock in exchange for the Series A Preferred Stock. See "The
Recapitalization--The Exchange." Prior to the Exchange, CGE beneficially owned
approximately 50.0009% of the outstanding Class A Common Stock of the Company.
Immediately following the Exchange, CGE beneficially owned approximately 72.2%
of the outstanding Class A Common Stock of the Company. 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
5
<PAGE>
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 defined hereinafter) and were approved by the Board
of Directors of the Company (the "Board") based in part on the recommendation
of the Special 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 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 (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").
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 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 (as defined
hereinafter) which, among other things, in the event the Requisite Consents are
not obtained by the Expiration Date, will 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) a stockholder's 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 date on which the Change of
Control Provision becomes inapplicable (by amendment of the Indenture,
redemption of the Convertible Debentures or otherwise) to such holder. 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. See "The
Recapitalization--Consent Solicitation; Issuance of Class B Common Stock."
Charter Amendment
Prior to the Expiration Date, the Company intends to amend the Restated
Certificate of Incorporation of the Company (the "Charter Amendment") (i) to
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) in the event that the Requisite Consents
are not obtained by the Expiration Date, to amend the terms of the Class B
Common Stock to provide that a stockholder's 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 date on which the Change of
Control provision becomes inapplicable (by amendment of the Indenture,
redemption of the Convertible Debentures or otherwise) to such holder. CGE and
Anjou each has agreed to provide 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 holders. The Charter Amendment will
be effective upon the filing of an appropriate certificate of amendment with
the Secretary of State of the State of
6
<PAGE>
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"). See "The Recapitalization--Other--Charter Amendment."
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 objective 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. See "The
Recapitalization--Other--Business Planning Committee."
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--USF&G Bonding Guarantees."
Bank Credit Facility
The Company maintains a 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 ("Societe Generale"), co-agents
for a syndicate which includes seven additional banks (the "Lending Banks"). On
December 12, 1997, Societe Generale purchased and assumed from all of the other
Lending Banks all of such banks' rights and obligations under the Bank Credit
Facility, becoming the sole lending bank thereunder, and the Company entered
into an amendment (the "Amendment") to extend the Bank Credit Facility until
December 11, 1998. The Bank Credit Facility had been scheduled to expire on
March 31, 1998. The Amendment waives the Company's compliance with certain
covenants and amends others. The prior amendments and waiver would have
terminated on December 15, 1997 had the Bank Credit Facility not been amended.
Following the Recapitalization, the Company intends to enter into discussions
regarding the establishment of a new credit facility following the maturity of
the Bank Credit Facility. CGE also has reaffirmed to Societe Generale the terms
of CGE's existing credit support of the Company, including a commitment by CGE
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.
7
<PAGE>
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 considered the actions necessary to redeploy
its capital to PSG and Metcalf & Eddy, its core water business. The strategic
analysis conducted led to the conclusion that the Company did not have the
overall size and expertise to grow the air pollution control businesses
profitably. Among other factors contributing to this approach were recent tax
law changes which may extend 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. See "Business--The
Water/Wastewater Privatization Market."
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 assessed the impact of de-emphasizing
the Research-Cottrell business segment and redeploying its capital to its PSG
and Metcalf & Eddy segments. A financial advisor was retained to assist the
Company in exploring strategic alternatives related to this redeployment. On
December 2, 1997, the Company announced its decision to divest Research-
Cottrell. The Company is currently in negotiations with several interested
parties and expects that most of the air pollution control businesses operated
through Research-Cottrell will be sold within the next several months.
RELATIONSHIP WITH CGE
As of the date hereof, CGE, directly and indirectly through Anjou,
beneficially owns approximately 72.2% 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 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--
Certain Covenants of the Company--Representation on the Board of Directors;
Management." In addition, the Bank Credit Facility requires CGE to maintain its
support of the Company, including a minimum 48% voting equity ownership
interest in the Company and its right to designate at least 48% 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
8
<PAGE>
maintain a certain voting interest in the Company's common stock. 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."
CGE has unconditionally guaranteed performance by PSG of PSG's contract with
the Puerto Rico Aqueduct & Sewer Authority ("PRASA"). Pursuant to the contract,
PSG manages wastewater plants, water treatment plants and related collection
and distribution systems and pumping stations in Puerto Rico. During the fiscal
years ended October 31, 1996 and 1997, PSG's contract with PRASA accounted for
39% of PSG's total sales and 22% and 23% of the Company's total sales,
respectively. See "Risk Factors--Dependency on Key Projects and Government
Contracts" and "Certain Relationships and Related Transactions--
Recapitalization Agreement; Other CGE Related Matters."
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
34,285,714 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 own an aggregate of 153,609,974 shares of Class A Common
Stock. Consequently, immediately after the Recapitalization, CGE would own
approximately 89.3% of the total outstanding Class A Common Stock of the
Company. If all Rights holders exercise their Rights in the Rights Offering CGE
would own approximately 72.2% of the total outstanding Class A Common Stock of
the Company immediately after the Recapitalization. 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...... The Company is offering (i) an aggregate of
120,000,000 shares of Class A Common Stock in the
Rights Offering, subject to the Company's obligation
to issue Class B Common Stock in certain
circumstances, and (ii) to Public Rights holders who
exercise Rights, an aggregate of 10,000,000 Warrants
to purchase an aggregate of 10,000,000 shares of
Class A Common Stock. The aggregate number of
Warrants actually issued by the Company will depend
on Public participation in the Rights Offering. 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, 1.80982 Rights for each share of Class A
Common Stock owned of record at the close of business
on the Record Date. Each Right will allow the holder
(i) to subscribe at the Subscription Price for one
share of Class A Common Stock, subject to the
Company's obligation to issue shares of Class B
Common Stock in certain circumstances, and (ii) to
receive 0.30014 of a Warrant for each Underlying
Share subscribed for by such holder. 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,
the Company will receive gross proceeds of $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 Public Rights holder 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 Excess 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 number
of shares of Class A Common Stock each Rights holder
subscribed for pursuant to its Basic Subscription
Privilege. In addition, Public Rights holders will
receive 0.30014 of a Warrant for each Excess Share
acquired pursuant to the Oversubscription Privilege.
The Subscription and Information Agent will return
any excess payments by mail without interest or
deduction promptly after the Expiration Date and
after effecting all prorations and adjustments
contemplated by the Rights Offering. See "The Rights
Offering--Subscription Privileges--Oversubscription
Privilege."
Conditional CGE
Subscription........... CGE, the beneficial owner of approximately 72.2% of
the Class A Common Stock currently outstanding, has
agreed to exercise in full its Basic Subscription
Privilege. In addition, if all Underlying Shares are
not purchased in 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 (subject to the Company's obligation to issue
Class B Common
10
<PAGE>
Stock in certain circumstances) pursuant to its
Conditional CGE Subscription. CGE has agreed that it
will not receive any Warrants in respect of either
its Basic Subscription Privilege or the Conditional
CGE Subscription. The total number of shares
subscribed for by CGE and its subsidiaries pursuant
to the Conditional CGE Subscription will not exceed
(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 own an aggregate of
153,609,974 shares of Class A Common Stock
immediately following 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...... $1.75 per share.
Record Date............. January 29, 1998.
Expiration Date......... The Rights will expire, if not exercised, at 5:00
p.m., New York City time, on March 4, 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 may be exercised by a Rights holder
until the Expiration Date. The Rights will be
admitted to dealings on the AMEX and 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, the
Company can give no assurance that a market for the
Rights will develop or, if such a market develops, as
to how long it will continue. See "Risk Factors--No
Prior Market for Rights or Warrants."
Procedure for
Exercising Rights...... To exercise the Basic Subscription Privilege and the
Oversubscription Privilege, a Rights holder should
properly complete and sign the Rights Certificate and
forward it (or follow 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 and
Information Agent. The Subscription and Information
Agent must receive the Rights Certificate or Notice
of Guaranteed Delivery with payment of the
Subscription Price on or prior to the Expiration
Date. Rights holders who use the mail to forward
Rights Certificates 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 an
exercising Rights holder does not specify the number
of Underlying Shares to be purchased, then
11
<PAGE>
the Rights holder will be deemed to have exercised
the Basic Subscription Privilege to the full extent
of the payment 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 who hold shares of Class A Common Stock
beneficially and receive the Rights distributable
with respect to those shares through a broker,
dealer, commercial bank, trust company or other
nominee, as well as persons who hold certificates of
Class A Common Stock directly and 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,
it should contact the nominee as soon as possible and
request that a separate Rights Certificate be issued
by the Subscription and Information Agent. A nominee
may request any Rights Certificate held by it to be
split into such smaller denominations as it wishes,
provided that the Subscription and Information Agent
receives the Rights Certificate, properly endorsed,
no later than 11:00 a.m., New York City time, on
February 26, 1998. See "The Rights Offering--Method
of Subscription--Exercise of Rights."
Procedure for
Exercising Rights by
Foreign and Certain
Other Stockholders..... The Subscription and Information Agent will not mail
Rights Certificates 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 hold the Rights
Certificates for the accounts of such holders. To
exercise their Rights, such holders must notify the
Subscription and Information Agent, and take all
other steps which are necessary to exercise the
Rights, on or prior to the Expiration Date. If such
holders do not follow the procedures set forth in the
preceding sentence 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."
12
<PAGE>
Issuance of Class A
Common Stock........... The Subscription and Information Agent will deliver
certificates representing shares of Class A Common
Stock purchased pursuant to the Basic Subscription
Privilege and Oversubscription Privilege and the
Conditional CGE Subscription 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 Company does not obtain the
Requisite Consents 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 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 shall be shares of Class B Common
Stock. The Subscription and Information Agent will
deliver certificates representing shares of Class B
Common Stock purchased pursuant to the Basic
Subscription Privilege or Oversubscription Privilege
or the Conditional CGE Subscription 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. See "The Recapitalization--Consent
Solicitation; Issuance of Class B Common Stock."
Issuance of Warrants.... Certificates representing the transferable Warrants
acquired in respect of the Basic Subscription
Privilege and Oversubscription Privilege 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
Oversubscubscription Privilege are delivered to
subscribers. See "Description of Warrants--General."
No Board or Special
Committee
Recommendation......... An investment in the Class A Common Stock, the Class
B Common Stock (to the extent applicable), the
Warrants and the Warrant Shares 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. See "The
Rights Offering--No Board or Special Committee
Recommendation."
AMEX Symbol for Class A
Common Stock........... "AWT"
AMEX Symbol for
Rights................. "AWT.RT"
13
<PAGE>
Use of Proceeds......... If no Rights holder other than CGE and Anjou
exercises Rights in the Rights Offering, the gross
cash proceeds to the Company from the sale of
Underlying 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
Underlying 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 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 the Company will retain for general
corporate purposes, the Company will use the gross
proceeds of the Rights Offering, including the
Conditional CGE Subscription, 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 and
Information Agent...... First Chicago Trust Company of New York. See "The
Rights Offering--Method of Subscription--Exercise of
Rights."
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 to purchase, in the aggregate, up
to 10,000,000 shares of Class A Common Stock. The
Company will issue that percentage of the 10,000,000
Warrants equal 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 ("Warrant
Pool"). Each Public subscriber in the Rights Offering
will receive 0.30014 of a Warrant for each Underlying
Share subscribed for by such subscriber pursuant to
the Basic Subscription Privilege and for each Excess
Share acquired by such subscriber pursuant to the
Oversubscription Privilege. 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, subject to
certain conditions, to purchase, at any time and from
time to time prior to the Warrant Expiration Date,
one 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 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 (i)(x) the Registration Statement is
then in effect and the Company has delivered to each
person exercising a Warrant a current prospectus
meeting the requirements of the Securities Act, or
(y) the exercise of such Warrants is exempt from the
registration requirements of the Securities Act, and
(ii) the Warrant Shares are qualified for sale or
exempt from qualification under the applicable state
blue sky laws. Subject to Black Out Periods (as
defined hereinafter) and Postponement Periods (as
defined hereinafter), the Company will use its
commercially reasonable efforts to keep the
Registration Statement continuously effective under
the Securities Act until the expiration or exercise
of all Warrants in order to permit the prospectus
included in the Registration Statement 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 and maintain the listing of the Warrants and
the Warrant Shares upon the AMEX, so long as any
other shares of Class A Common Stock will be listed
or quoted upon the AMEX. See "Description of
Warrants--Transfer Restrictions; Listing" and "Risk
Factors--No Prior Market for Rights or Warrants."
Warrant Agent...........
First Chicago Trust Company of New York. See
"Description of Warrants."
For additional information concerning the Rights, the Warrants and the Common
Stock, see "The Rights Offering," "Description of Warrants" and "Description of
Capital Stock."
15
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Sales..................................... $ 398,661 $ 482,091 $ 456,375
Cost of sales............................. 309,496 394,124 385,573
Selling, general and administrative ex-
penses................................... 66,697 62,316 75,755
Depreciation and amortization............. 12,279 13,983 16,861
Impairment charge......................... -- -- 5,000
---------- ---------- ----------
Operating income (loss) from continuing
operations............................... 10,189 11,668 (26,814)
Interest income........................... 1,113 923 359
Interest expense.......................... (23,925) (22,597) (24,356)
Other expense, net........................ (37) (2,296) (502)
---------- ---------- ----------
Loss from continuing operations before in-
come taxes............................... (12,660) (12,302) (51,313)
Income tax (expense) benefit.............. (587) 1,246 (514)
---------- ---------- ----------
Loss from continuing operations .......... (13,247) (11,056) (51,827)
Income (loss) from discontinued opera-
tions.................................... 5,262 5,788 (108,754)
---------- ---------- ----------
Net loss.................................. (7,985) (5,268) (160,581)
Preferred stock dividend.................. (3,300) (3,300) (3,300)
---------- ---------- ----------
Net loss applicable to common stockhold-
ers...................................... $ (11,285) $ (8,568) $ (163,881)
========== ========== ==========
Earnings (loss) per common share (after
preferred stock dividend):
Continuing operations .................. $ (0.52) $ (0.45) $ (1.72)
Discontinued operations................. 0.17 0.18 (3.40)
---------- ---------- ----------
Net loss................................ $ (0.35) $ (0.27) $ (5.12)
========== ========== ==========
Weighted average shares outstanding....... 32,018 32,018 32,019
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF OCTOBER 31, 1997
------------------ -------------------------
AS ADJUSTED AS ADJUSTED
MINIMUM MAXIMUM
1996 1997 SUBSCRIPTION SUBSCRIPTION
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ 7,556 $ (55,802) $ (60,802) $ (35,802)
Total assets..................... 496,358 383,065 376,565 401,565
Goodwill......................... 169,578 164,337 164,337 164,337
Long-term debt................... 306,542 307,845 122,845 122,845
Stockholders' equity (deficit)... 54,241 (109,262) 69,238 94,238
</TABLE>
16
<PAGE>
NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA
(1) The Company has never declared or paid cash dividends on the Class A Common
Stock, and the Bank Credit Facility prohibits the Company from declaring or
paying cash dividends on the Class A Common Stock. The Company 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.
(2) The Company did not declare the quarterly dividends aggregating $1,650,000
due September 30, 1997 and December 31, 1997 on the Series A Preferred
Stock, all of which was held by CGE, due to its concerns over liquidity and
adequacy of its surplus. On January 28, 1998, the Company effected the
Exchange pursuant to which all of the shares of Series A Preferred Stock
held by CGE (representing all of the issued and outstanding shares of
Series A Preferred Stock) were exchanged for shares of Class A Common
Stock. The dividends in arrears on the Series A Preferred Stock have not
been paid and were extinguished pursuant to the Exchange.
(3) See Note 2 to the Consolidated Financial Statements contained elsewhere in
this Prospectus for discussion of the Recapitalization Agreement and the
Company's relationship with CGE.
(4) See Note 3 to the Consolidated Financial Statements contained elsewhere in
this Prospectus for discussion of the planned Research-Cottrell divestiture
and its related losses reflected in fiscal 1997.
(5) See Note 11 to the Consolidated Financial Statements contained elsewhere in
this Prospectus for discussion of PSG's contract with PRASA.
(6) Pro forma loss per share for the year ended October 31, 1997, after giving
effect to the issuance of approximately 140,000,000 shares of Common Stock
under the Minimum Subscription and the Exchange and approximately
154,286,000 shares of Common Stock under the Maximum Subscription and the
Exchange and the application of the net proceeds necessary to fund the
repayment of the CGE Note and Anjou Note, would be $(0.23) per share and
$(0.21) per share, respectively.
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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 October 31, 1997, the Company's total consolidated long-term
indebtedness (excluding the current portion) was approximately $307.8 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 $12.1 million and its stockholders' deficit was
approximately $109.3 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
$122.8 million. Assuming no Rights holder other than CGE and Anjou 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
$7.5 million and its stockholders' equity would have been approximately $69.6
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 $32.5 million and its stockholders'
equity would have been approximately $94.6 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 materially adverse
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). See "--Reliance on Environmental Regulation; Potential
Environmental Liabilities." 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 "--Redeployment of Capital; Revised
Business Strategy; Liquidity."
RESTRICTIONS IMPOSED BY TERMS OF BANK CREDIT FACILITY
On December 12, 1997, the Company entered into the Amendment to extend the
Bank Credit Facility until December 11, 1998. The Bank Credit Facility had
been scheduled to expire on March 31, 1998. The Amendment waives the Company's
compliance with certain covenants and amends others. The prior amendments and
waiver would have terminated on December 15, 1997 had the Bank Credit Facility
not been amended. Following the Recapitalization, the Company intends to enter
into discussions regarding the establishment of a new credit facility
following the maturity of the Bank Credit Facility.
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.
The Company's ability to comply with the financial and other covenants in
the Bank Credit Facility beyond March 31, 1998 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, Societe Generale would have the right
to refuse any further extensions of credit and the right to accelerate payment
of
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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.
RISK OF FLUCTUATING MARKET CONDITIONS; RISING INTEREST RATES
The ability of the Company to satisfy its obligations under the Bank Credit
Facility 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 1.25%, 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
$160.6 million, $5.3 million, $8.0 million, $261.8 million and $5.6 million
for the fiscal years ended October 31, 1997, 1996, 1995, 1994 and 1993,
respectively. The amount of the Company's net loss for the fiscal year ended
October 31, 1997 is primarily the result of certain operating charges and
asset write-offs taken in connection with the Company's decision to divest the
Research-Cottrell businesses. 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 $224.5 million for such period. 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; LIQUIDITY
As a result of its consideration of a revised business strategy and the
actions necessary to redeploy its capital to the higher growth water and
wastewater businesses that it operates through PSG and Metcalf & Eddy, on
December 2, 1997, the Company announced its decision to divest Research-
Cottrell. The Company is currently in negotiations with several interested
parties and expects that most of the air pollution control businesses operated
through Research-Cottrell will be sold within the next several months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
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. There can be no assurance that such assumptions will be realized,
and the failure to achieve such assumptions could have a material adverse
effect on the Company's ability to implement successfully its revised business
strategy. 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 raised by
CGE, may have a significant impact on the successful implementation of its
business plans. There can be no assurance that the Company will have the
access to capital necessary to implement successfully its revised business
strategy. The
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Company's inability to implement a revised business strategy or realize the
anticipated benefits of such a strategy may have a material adverse effect on
the Company's results of operations and financial condition.
The Company believes it will have sufficient working capital to finance its
on-going operations through improved working capital management, asset
divestitures related to the Research-Cottrell divestiture and reduction of
financing costs through the strengthening of its current capital structure as
contemplated by the Recapitalization, however, there can be no assurance that
the Company will have adequate liquidity to finance its on-going operations.
CONTINUED LISTING OF SECURITIES; MEETING CONTINUED LISTING REQUIREMENTS
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 for approximately five hours in connection with its
review of the Company's press release announcing its third quarter financial
results. Trading in the Class A Common Stock resumed on September 17, 1997.
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. Pursuant to the Recapitalization Agreement, 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 to
secure and maintain the listing of the Warrants thereon, so long as any other
shares of Class A Common Stock will be listed or quoted thereon. There can be
no assurance, however, that the Company will continue to meet the requirements
for continued listing on the AMEX of its Class A Common Stock or that the
Warrants will be approved for listing on the AMEX.
ABILITY TO EXECUTE PROJECTS WITHIN COST ESTIMATES
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
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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
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 (except for two recalcitrant homeowners) were resolved. All
claims by and between M&E Services and the City in the second homeowners' 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.
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 earliest stages. Nevertheless, 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.
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
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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. 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 cleanup market, Metcalf & Eddy
competes with many local, regional and national firms on the basis of
experience, reputation and price.
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 of operations and financial condition. In addition, there can be no
assurance that due to competitive pressures the margins achieved from
contracts obtained and renewed 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. 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 90% of the Company's fiscal year 1997 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 historically has been successful in obtaining most of its OM&M contract
renewals. Approximately thirty-five 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 fiscal years ended October 31, 1997 and 1996, the contract of
PSG's wholly owned subsidiary, PS Group of Puerto Rico, Inc. ("PSG Puerto
Rico"), with PRASA accounted for 39% of PSG's total sales and 23% and 22% 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 Puerto Rico 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 certain
contract incentives. In addition, certain unreimbursed costs paid on behalf of
PRASA have not been collected ($34.3 million at October 31, 1997), and the
payment of certain power costs to the Puerto Rico Electric Power Authority
("PREPA") ($33.2 million at October 31, 1997) has been delayed. On December 9,
1997, PREPA filed a complaint in civil court in Puerto Rico against PSG Puerto
Rico, seeking payment by PSG Puerto Rico of PRASA's power costs. To the
Company's knowledge, process was never served in respect of such suit. PSG
Puerto Rico paid approximately $9.1 million to PREPA on December 23, 1997,
shortly following receipt of such amount from PRASA as a partial payment. On
January 16, 1998, the complaint was withdrawn by PREPA without prejudice.
Management believes that such receivables will be fully collected and will be
used to pay the power costs to PREPA. PSG Puerto Rico is in the process of
negotiations with PRASA regarding a replacement contract for the existing
five-year contract. Management currently expects that the contract with PRASA
will not be canceled by PRASA in August 1998, but will remain in effect
through its original five-year term ending August 2000 or be amended or
replaced with a new contract. Additionally, the PRASA employees who operate
the PRASA facilities are subject to a collective bargaining agreement which
expires in June 1998.
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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, 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 or performance 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 (or one of its affiliates) 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 environmental quality standards and which
impose substantial penalties for noncompliance are a principal factor driving
demand for the Company's services. 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 water
discharged by treatment facilities it operates under contract or the treatment
facilities and water pollution control systems to which it provides its
services, and to the extent the discharged water may not comply with water
pollution control standards established by federal and state regulations due
to factors within the Company's control, the Company may be held liable for
such noncompliance and perhaps for any consequences thereof. See "--Potential
Litigation Liability."
The Company is also subject to regulation under federal, state and local
environmental laws and regulations pertaining to the discharge of materials
into the environment, the handling and disposition of wastes (including solid
and hazardous wastes) or otherwise relating to protection of the environment.
The Company believes that it is currently in compliance with all applicable
material environmental laws and regulations.
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 72.2% 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 the Chief
Financial Officer of the Company. Except for the two current Independent
Directors, the Company's seven person Board of Directors is comprised
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entirely of CGE designees. Furthermore, the Bank Credit Facility requires CGE
to maintain its support of the Company, including a minimum 48% voting equity
ownership interest in the Company and its right to designate at least 48% of
the Company's Board of Directors as well as the Chief Executive Officer and
the Chief Financial Officer of the Company. 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 interest
(26% under the CGE Note and 40% under the Anjou Note) in the Company's common
stock. 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--No Short-Form
Merger."
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 34,285,714 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 of Class A Common Stock (subject to the Company's obligation to issue
Class B Common Stock in certain circumstances). As a result, if no other
Rights are exercised and the Requisite Consents are obtained, CGE would own an
aggregate of 153,609,974 shares of Class A Common Stock. Consequently,
immediately after the Recapitalization, CGE would own approximately 89.3% 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 $1.75 per share of Class A Common Stock represents
a premium of approximately 21.7% over the average closing price of $1.438 for
the Class A Common Stock as reported on the AMEX for the ten consecutive
trading day period ending on January 24, 1998, five days prior to the Record
Date, and a premium of approximately 28.2% over the average closing price of
$1.365 for the Class A Common Stock as reported on the AMEX for the sixty day
trading period ending on January 24, 1998.
The market price of the Company's Class A Common Stock has been volatile in
recent years and on December 1, 1997 reached a 52-week low of $0.938. 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."
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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 after 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 and Information Agent pursuant to the exercise of Rights pending
delivery of Underlying Shares.
NO PRIOR MARKET FOR RIGHTS OR WARRANTS
The Rights and Warrants constitute new issues of securities with no
established trading market. The Rights will be admitted to dealings on the
AMEX and will trade on the AMEX under the symbol "AWT.RT" 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, as to how
long it will continue. The Company has agreed to use its commercially
reasonable efforts to cause the Warrants to be listed on the AMEX, however,
there can be no assurance that the Warrants will be accepted for listing.
Accordingly, no assurance can be given as to the liquidity of, or trading
market for, the Warrants.
ABILITY TO EXERCISE WARRANTS
Holders of Warrants will be able to exercise their Warrants only if (i)(x)
the Registration Statement is then in effect and the Company has delivered to
each person exercising a Warrant a current prospectus meeting the requirements
of the Securities Act, or (y) the exercise of such Warrants is exempt from the
registration requirements of the Securities Act, and (ii) the Warrant Shares
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. Under the terms of the Warrant Agreement (as defined hereinafter),
subject to certain Black-Out Periods and Postponement Periods, the Company is
required to use its commercially reasonable efforts to keep the Registration
Statement continuously effective under the Securities Act until the expiration
or exercise of all Warrants in order to permit the prospectus included in the
Registration Statement to be lawfully delivered. See "Description of
Warrants--Registration of Warrant Shares." There can be no assurance that the
Company will be able to keep the Registration Statement continuously effective
until all of the Warrants have been exercised or have expired.
DILUTION
The consummation of the Recapitalization (including the Exchange and the
Rights Offering) may result in the issuance of up to an additional 154,285,714
shares of Class A Common Stock, assuming full exercise of Rights. If no Rights
holder other than CGE and Anjou exercises Rights in the Rights Offering, the
consummation of the Recapitalization may result in the issuance of up to an
additional 139,999,999 shares of Class A Common Stock if the Requisite
Consents are obtained, or, if the Requisite Consents are not obtained, up to
an additional 113,684,274 shares of Class A Common Stock and an additional
26,315,725 shares of Class B Common Stock. The Class B Common Stock is
identical to the Class A Common Stock except that the Class B Common Stock
does not vote and a stockholder's shares of Class B Common Stock convert
automatically into an equal number of shares of Class A Common Stock
immediately upon the earlier of August 1, 2000 or seventy-five days following
the date on which the Change of Control Provision becomes inapplicable (by
amendment of the Indenture, redemption of the Convertible Debentures or
otherwise) to such holder.
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.
25
<PAGE>
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 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 implement
certain amendments to the Indenture to limit the applicability of 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--Recent Developments--
Consent Solicitation." 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 and Anjou 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, for a total subscription of up to 105,714,285 shares 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 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.
26
<PAGE>
USE OF PROCEEDS
If 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. If no Rights holder other than CGE and Anjou
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 105,714,285 shares 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 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.
27
<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 January 20, 1998 there were 573 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 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.......................................... $4.063 $1.250
Fiscal 1998
First Quarter (through January 28, 1998)................ $1.875 $0.938
</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 January 28, 1998, the closing price
per share on the AMEX for the Class A Common Stock was $ 1.625.
The Company did not declare any cash dividends on its Class A Common Stock
during fiscal 1996 and 1997. Pursuant to the Bank Credit Facility, the Company
is prohibited from declaring or paying cash dividends on its Class A Common
Stock or making 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.
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<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 October 31,
1997 was approximately ($353,982,000) or ($11.06) per share which will change
to ($293,982,000) or ($4.43) per share upon consummation of the Exchange
(assuming an exchange price of $1.75 per share at October 31, 1997). "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 per share, (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 "Minimum 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 October 31, 1997 would have been approximately
($115,482,000), or ($0.67) per share, representing an immediate and
substantial dilution of ($2.42) 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 October 31, 1997 would have been approximately ($90,482,000, or
($0.49) per share, representing an immediate and substantial dilution of
($2.24) 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).................................. $(4.43) $(4.43)
Increase per share attributable to
stockholders exercising Rights............... 3.76 3.94
------ ------
Pro forma net tangible book value per share
after Rights Offering.......................... (0.67) (0.49)
------ ------
Dilution to stockholders exercising Rights(2)... $(2.42) $(2.24)
====== ======
</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 at October 31, 1997.
(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.
29
<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; Issuance of Class B Common Stock" 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 $0.50 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
30
<PAGE>
have 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
31
<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.
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
32
<PAGE>
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. 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
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<PAGE>
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 negotiations of the
Investment Agreement. CGE reiterated its position that water utility
investments were never intended to be encompassed by the Investment Agreement.
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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
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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
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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
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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.
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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 24, 1997, for the
purpose of clarifying the effect of an amendment to the Indenture to eliminate
the Change of Control Provision.
The Company, CGE and Anjou entered into an amendment, dated as of January
26, 1998, to the Recapitalization Agreement (the "Recapitalization Agreement
Amendment") to implement certain technical amendments thereto, including,
among other things, to provide for registration of the Warrants Shares.
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
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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, 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
presentation made by WP&Co. on September 24, 1997 to support its decision as
well as the multiple alternatives considered and rejected by WP&Co. and the
Special Committee. The WP&Co. Opinion (as defined hereinafter), which was
delivered on September 24, 1997, did not address the Recapitalization
Agreement Amendment which was entered into on January 26, 1998.
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.
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(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%).
(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.
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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., 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
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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.
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. Finally, the WP&Co. Opinion, which was delivered on September 24,
1997, did not consider, and therefore expresses no opinion on, the
transactions contemplated by the Recapitalization Agreement Amendment which
was entered into on January 26, 1998.
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," taken as a whole, are fair from a financial
point of view to the
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holders of the Class A Common Stock (other than CGE and its affiliates). The
Recapitalization Transactions are defined in the WP&Co. Opinion to include (i)
the Exchange, (ii) the declaration of a dividend by the Company 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
stockholder other than CGE and its subsidiaries, a number of Warrants referred
to in clause (iii), (iii) the issuance to each person other than CGE and its
subsidiaries that exercises a Right of a number of Warrants equal to such
person's pro rata portion of the Warrant Pool, (iv) the Conditional CGE
Subscription, and (v) the use of proceeds from the Rights Offering to repay
$185,000,000 aggregate principal amount of indebtedness owed to CGE and its
affiliates, other than the first $25,000,000 of gross proceeds received from
holders of Rights in the Rights Offering (other than CGE and its subsidiaries)
which are to be retained by the Company for general corporate purposes.
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."
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
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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 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
WP&Co. performed the following valuation analyses of the Company, as more
fully described below, in order to determine a range of values for the Company
before giving effect to the Recapitalization. WP&Co.'s valuation analyses
included a value for Research-Cottrell of between $30 million and $45 million
which 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 (although there can be no assurances that Research-
Cottrell will be sold for an amount within such range). These valuation
analyses demonstrated a range of values for the Company, before giving effect
to the Recapitalization, of between $207 million and $325 million and
indicated that before giving effect to the Recapitalization the Company's
Common Stock had no intrinsic value per share.
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
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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 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.
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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 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 and the value for
Reseach-Cottrell provided to WP&Co. by Lazard Freres. 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
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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.
Other Analyses of the Company
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 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
48
<PAGE>
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 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. WP&Co.'s analysis confirmed the appropriateness of a subscription price
based, in part, upon a discount to the then current market price of the Common
Stock.
While the foregoing summary describes all analyses and examinations that
WP&Co. deemed material to the preparation of its opinion, it does not purport
to be a comprehensive description of all analyses and examinations actually
conducted by WP&Co. 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,
49
<PAGE>
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, 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 34,285,714 shares of Class A Common Stock at an exchange price
equal to the Subscription Price. Immediately following the Exchange, CGE
beneficially owned approximately 72.2% of the outstanding Class A Common Stock
of the Company.
50
<PAGE>
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 implement certain amendments to the Indenture to limit the
applicability of 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 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. Prior to the Expiration Date, the Company intends to
effect the Charter Amendment which, among other things, in the event the
Requisite Consents are not obtained by the Expiration Date, will amend the
terms of 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 is not entitled to vote and (ii) a stockholder's 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 date on which
the Change of Control Provision becomes inapplicable (by amendment of the
Indenture, redemption of the Convertible Debentures or otherwise) to such
holder. 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 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
51
<PAGE>
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 "Prospectus
Summary--Recent Developments--USF&G Guarantees by CGE" and "Risk Factors--USF&G
Guarantees by CGE."
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 shall not apply to certain water utility-
related investments, acquisitions or activities by CGE or its affiliates, to
CGE's present or future investments in Consumers Water Company and Philadelphia
Suburban Corporation or to OTV-Kruger, Inc. See "Certain Relationships and
Related Transactions--Certain Covenants of CGE--Exclusivity."
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 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) in the event the Requisite Consents are not
obtained by the Expiration Date, to amend the conversion rights of the holders
of the Company's Class B Common Stock to provide for automatic conversion of a
stockholder's shares of Class B Common Stock into Class A Common Stock upon the
earlier of August 1, 2000 or seventy-five days following the date on which the
Change of Control Provision becomes inapplicable (by amendment of the
Indenture, redemption of the Convertible Debentures or otherwise) to such
holder. 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 agreed to give
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, the Underlying Shares
and the Warrant 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 in the event the Requisite Consents are not obtained by the
Expiration Date.
52
<PAGE>
CAPITALIZATION
The capitalization of the Company at October 31, 1997, as set forth below,
gives effect to the Rights Offering and Exchange as of such date assuming: (i)
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 and Anjou exercises Rights in
the Rights Offering such that the gross proceeds from the Rights Offering are
$185 million, (iv) 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 the 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 October 31,
1997, nor is it necessarily indicative of the future capitalization of the
Company.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-------------------------------------
AS ADJUSTED AS ADJUSTED
MINIMUM MAXIMUM
HISTORICAL SUBSCRIPTION SUBSCRIPTION
---------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt....... $ 398 $ 398 $ 398
========= ========= =========
Long-term debt:
CGE Note................................ $ 125,000 $ -- $ --
Convertible Debentures ................. 115,000 115,000 115,000
Anjou Note.............................. 60,000 -- --
Bank Credit Facility.................... 3,000 3,000 3,000
Other................................... 5,243 5,243 5,243
--------- --------- ---------
308,243 123,243 123,243
Less current portion.................. (398) (398) (398)
--------- --------- ---------
Total long-term debt...................... 307,845 122,845 122,845
--------- --------- ---------
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 95,000,000 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 5,000,000 shares; authorized
30,000,000 shares following the Charter
Amendment; issued none................. -- -- --
Additional paid-in capital.............. 427,036 605,408 630,394
Accumulated deficit..................... (535,214) (535,214) (535,214)
Common stock in treasury, at cost....... (108) (108) (108)
Cumulative currency translation
adjustment............................. (1,020) (1,020) (1,020)
--------- --------- ---------
Total stockholders' equity (deficit)...... (109,262) 69,238 94,238
--------- --------- ---------
Total capitalization...................... $ 198,583 $ 192,083 $ 217,083
========= ========= =========
Book value per common share............... $ (5.29) $ 0.40 $ 0.51
========= ========= =========
</TABLE>
See also the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
53
<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 Statement of
Operations of the Company for the fiscal year ended October 31, 1997 and the
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of October 31,
1997 have been prepared to illustrate the estimated effects of the
Recapitalization. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations was prepared as if the Recapitalization was effective as of
November 1, 1996. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
was prepared as if the Recapitalization was effective as of October 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 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. The Unaudited Pro Forma
Condensed Consolidated Statement 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.
54
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF OCTOBER 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.......... $ 12,089 $ (5,000)(b) $ 7,089 $25,000(b) $ 32,089
Accounts receivable,
net.................. 76,681 -- 76,681 -- 76,681
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............ 33,557 -- 33,557 -- 33,557
Inventories........... 1,893 -- 1,893 -- 1,893
Prepaid expenses and
other current
assets............... 4,460 4,460 -- 4,460
-------- --------- -------- ------- --------
Total current
assets............. 128,680 (5,000) 123,680 25,000 148,680
Property, plant and
equipment, net......... 13,388 -- 13,388 -- 13,388
Investments in
environmental treatment
facilities............. 21,817 -- 21,817 -- 21,817
Goodwill, net........... 164,337 -- 164,337 -- 164,337
Other assets............ 30,391 (1,500)(b) 28,891 -- 28,891
Net non-current assets
of discontinued
operations............. 24,452 -- 24,452 -- 24,452
-------- --------- -------- ------- --------
Total assets........ $383,065 $ (6,500) $376,565 $25,000 $401,565
======== ========= ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current installments
of long-term debt.... $ 398 $ -- $ 398 $ -- $ 398
Accounts payable...... 80,007 -- 80,007 -- 80,007
Accrued expenses...... 86,681 -- 86,681 -- 86,681
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts............ 15,320 -- 15,320 -- 15,320
Income taxes payable.. 1,485 -- 1,485 -- 1,485
Net current
liabilities of
discontinued
operations........... 591 -- 591 -- 591
-------- --------- -------- ------- --------
Total current
liabilities........ 184,482 -- 184,482 -- 184,482
Long-term debt.......... 307,845 (185,000)(a) 122,845 -- 122,845
Total stockholders'
equity (deficit)....... (109,262) 178,500 (b) 69,238 25,000(b) 94,238
-------- --------- -------- ------- --------
Total liabilities
and stockholders'
equity............. $383,065 $ (6,500) $376,565 $25,000 $401,565
======== ========= ======== ======= ========
</TABLE>
See also the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS FOR
COMPANY RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
Sales.............................. $456,375 $ -- $456,375
Cost of sales...................... 385,573 -- 385,573
-------- ------- --------
Gross margin..................... 70,802 -- 70,802
Selling, general and administrative
expenses.......................... 75,755 -- 75,755
Depreciation and amortization...... 16,861 -- 16,861
Impairment charge.................. 5,000 -- 5,000
-------- ------- --------
Operating loss from continuing
operations...................... (26,814) -- (26,814)
Interest income.................... 359 -- 359
Interest expense................... (24,356) 12,401(c) (11,955)
Other expense, net................. (502) -- (502)
-------- ------- --------
Loss from continuing operations
before income taxes............. (51,313) 12,401 (38,912)
Income tax expense................. (514) -- (d) (514)
-------- ------- --------
Loss from continuing operations.. $(51,827) $12,401 $(39,426)
======== ======= ========
Loss per common share from
continuing operations........... $ (1.72)(e) $ (0.23)(e)
======== ========
</TABLE>
See also the Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
56
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
SUBSCRIPTION SUBSCRIPTION
------------ ------------
<S> <C> <C>
(a) Reflects the impact of changes in long-term
debt resulting from:
Repayment of CGE Note......................... $125,000 $125,000
Repayment of Anjou Note....................... 60,000 60,000
-------- --------
$185,000 $185,000
======== ========
(b) Changes in stockholders' equity resulting from
the Recapitalization:
Sale of Class A Common Stock at $1.75 per
share...................................... $185,000 $210,000
Estimated fees on sale of Class A Common Stock
paid from available cash, including $1,500
paid as of October 31, 1997 included in other
assets....................................... (6,500) (6,500)
-------- --------
$178,500 $203,500
======== ========
</TABLE>
The maximum proceeds resulting from the sale of an additional 14,286 shares
of Class A Common Stock at $1.75 per share would result in the Company
receiving an additional $25,000 in gross proceeds to be used for general
corporate purposes. Including the 34,286 shares issued in exchange for the
Series A Preferred Stock, the total additional shares issued under the Minimum
Subscription is approximately 140,000 and under the Maximum Subscription is
approximately 154,286.
(c) Reflects change in net interest expense resulting from the application
of the gross proceeds of the Recapitalization as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1997
----------------
<S> <C>
CGE Note (LIBOR plus 1.25%)................................. $ 8,715
Anjou Note (LIBOR plus 0.6%)................................ 3,686
--------
$ 12,401
========
</TABLE>
(d) Due to the Company's tax position, the pro forma adjustments would not
have an impact on the Company's tax provision.
(e) Loss per common share from continuing operations is calculated as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1997
----------------
<S> <C>
Average weighted shares outstanding...................... 32,019
Exchange of Series A Preferred Stock at $1.75 per share.. 34,286
Sale of 105,714 new shares of Class A Common Stock for
cash at $1.75 per share (Minimum Subscription).......... 105,714
---------
Adjusted weighted average shares (Minimum Subscription).. 172,019
---------
Sale of 14,286 new shares of Class A Common Stock for
cash at $1.75 per share (Maximum Subscription) ......... 14,286
---------
Adjusted weighted average shares (Maximum Subscription).. 186,305
=========
Pro Forma Calculation:
Loss from continuing operations.......................... $ (39,426)
=========
Loss per share from continuing operations (Minimum
Subscription)........................................... $ (0.23)
=========
Loss per share from continuing operations (Maximum
Subscription)........................................... $ (0.21)
=========
</TABLE>
Fully-diluted earnings per share are not presented as the assumed conversion
of the Company's $115,000 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.
57
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of the Company as of and
for the fiscal years ended October 31, 1996 and 1997 has been derived from,
and should be read in conjunction with, the consolidated financial statements
and related notes thereto as of and for the years 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, 1993,
1994 and 1995 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,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $ 299,365 $ 309,401 $ 398,661 $ 482,091 $ 456,375
Cost of sales........... 226,600 243,786 309,496 394,124 385,573
Selling, general and
administrative
expenses............... 48,256 64,814 66,697 62,316 75,755
Depreciation and
amortization........... 7,036 9,969 12,279 13,983 16,861
Unusual charges......... -- 63,400 -- -- 5,000
--------- --------- --------- --------- ---------
Operating income (loss)
from continuing
operations............. 17,473 (72,568) 10,189 11,668 (26,814)
Interest income......... 390 979 1,113 923 359
Interest expense........ (23,212) (24,117) (23,925) (22,597) (24,356)
Other expense, net...... (1,861) (3,762) (37) (2,296) (502)
--------- --------- --------- --------- ---------
Loss from continuing
operations before
income taxes and
extraordinary item .... (7,210) (99,468) (12,660) (12,302) (51,313)
Income tax (expense)
benefit................ 433 (1,172) (587) 1,246 (514)
--------- --------- --------- --------- ---------
Loss from continuing
operations before
extraordinary item..... (6,777) (100,640) (13,247) (11,056) (51,827)
Income (loss) from
discontinued
operations............ 1,222 (153,138) 5,262 5,788 (108,754)
Extraordinary item..... -- (8,000) -- -- --
--------- --------- --------- --------- ---------
Net loss............. (5,555) (261,778) (7,985) (5,268) (160,581)
Preferred stock
dividend............... -- (1,245) (3,300) (3,300) (3,300)
--------- --------- --------- --------- ---------
Net loss applicable to
common stockholders.... $ (5,555) $(263,023) $ (11,285) $ (8,568) $(163,881)
========= ========= ========= ========= =========
Earnings (loss) per
common share (after
preferred stock
dividend):
Continuing operations
before extraordinary
item.................. $ (0.27) $ (3.69) $ (0.52) $ (0.45) $ (1.72)
Discontinued
operations............ 0.05 (5.54) 0.17 0.18 (3.40)
Extraordinary item..... -- (0.29) -- -- --
--------- --------- --------- --------- ---------
Net loss .............. $ (0.22) $ (9.52) $ (0.35) $ (0.27) $ (5.12)
========= ========= ========= ========= =========
Weighted average shares
outstanding............ 24,812 27,632 32,018 32,018 32,019
========= ========= ========= ========= =========
<CAPTION>
AS OF OCTOBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 101,371 $ (51,206) $ (12,568) $ 7,556 $ (55,802)
Total assets............ 530,051 496,953 489,318 496,358 383,065
Goodwill................ 126,552 177,888 174,601 169,578 164,337
Long-term debt.......... 221,463 245,984 289,120 306,542 307,845
Stockholders' equity
(deficit).............. 210,314 74,381 63,089 54,241 (109,262)
</TABLE>
58
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) The Company has never declared or paid cash dividends on the Class A
Common Stock, and the Bank Credit Facility prohibits the Company from
declaring or paying cash dividends on the Class A Common Stock. The
Company 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.
(2) The Company did not declare the quarterly dividends aggregating $1,650,000
due September 30, 1997 and December 31, 1997 on the Series A Preferred
Stock, all of which was held by CGE, due to its concerns over liquidity
and adequacy of its surplus. On January 28, 1998, the Company effected the
Exchange pursuant to which all of the shares of Series A Preferred Stock
held by CGE (representing all of the issued and outstanding Shares of
Series A Preferred Stock) were exchanged for shares of Class A Common
Stock. The dividends in arrears on the Series A Preferred Stock have not
been paid and were extinguished pursuant to the Exchange.
(3) See Note 2 to the Consolidated Financial Statements contained elsewhere in
this Prospectus for discussion of the Recapitalization Agreement and the
Company's relationship with CGE.
(4) See Note 3 to the Consolidated Financial Statements contained elsewhere in
this Prospectus for discussion of the planned Research-Cottrell
divestiture and its related losses reflected in fiscal 1997.
(5) On June 14, 1994, the Company acquired CGE's PSG water/wastewater
management subsidiary for $70.2 million (6,701,500 shares of Class A
Common Stock at the quoted market price at date of issuance, plus direct
acquisition costs of $4.9 million), resulting in goodwill of $57.8
million.
(6) See Note 11 to the Consolidated Financial Statements contained elsewhere
in this Prospectus for discussion of PSG's contract with PRASA.
(7) The Company's results in 1994 include losses from discontinued operations
including $38.2 million related to its asbestos abatement business
("Falcon"), $4.6 million related to its natural gas compressor and power
generation system business ("Pamco") and $110.3 million related to its air
pollution control business ("Research-Cottrell") including unusual charges
of $81.8 million related to, among other items, anticipated divestitures,
deferred software and other asset write-offs and specific contract
reserves and project costs overruns. The $8.0 million extraordinary loss
reflected in 1994 resulted from a one-time premium required to retire $100
million aggregate principal amount of 11.8% Senior Notes with The
Prudential Insurance Company of America. The 1994 results also include
unusual charges to continuing operations of $63.4 million related to among
other items estimated costs to settle pending litigation including PRASA's
dispute with Metcalf & Eddy, termination of certain leases and facility
closings, employee termination benefits and various costs and asset
writedowns related to certain businesses and specific projects.
(8) Pro forma loss per share for the year ended October 31, 1997, after giving
effect to the issuance of approximately 140,000,000 shares of Common Stock
under the Minimum Subscription and the Exchange and approximately
154,286,000 shares of Common Stock under the Maximum Subscription and the
Exchange and the application of the net proceeds necessary to fund the
repayment of the CGE Note and Anjou Note, would be $(0.23) per share and
$(0.21) per share, respectively.
59
<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. ("RCI") and its
subsidiaries, (collectively, "Research-Cottrell"), 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 the Notes
to Consolidated Financial Statements, included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company operates principally in two segments: 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. See"--Financial Condition."
DEMAND FOR THE COMPANY'S SERVICES AND TECHNOLOGIES
Demand for the Company's services and technologies arises principally from
three 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 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; and
. regulations mandating new or increased levels of water pollution control,
water supply and solid waste management as well as remediation of
contaminated sites.
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 90% of the Company's fiscal year 1997 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. See "Risk Factors--Dependency on Key Projects and
Government Contracts."
In fiscal year 1997, PSG Puerto Rico's contract with PRASA accounted for 39%
of PSG Puerto Rico's total sales and 23% 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 Puerto Rico 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 certain contract incentives. In
addition, at October 31, 1997 PSG Puerto Rico had receivables of $34.3 million
due from PRASA for certain reimbursable costs. See "--Financial Condition."
PSG Puerto Rico, is in the process of negotiations with PRASA regarding a
replacement contract for the existing five-year contract.
60
<PAGE>
Management currently expects that the contract with PRASA will not be canceled
by PRASA in August 1998, but will remain in effect through its original five-
year term ending August 2000 or be amended or replaced with a new contract.
Additionally, the PRASA employees who operate the PRASA facilities are subject
to a collective bargaining agreement which expires in June 1998.
Summarized below is certain financial data including information relating to
the Company's business segments.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
SALES:
Professional Services Group............... $ 179,713 $ 270,640 $ 271,650
Metcalf & Eddy............................ 216,852 215,358 186,490
Other and eliminations.................... 2,096 (3,907) (1,765)
--------- --------- ----------
$ 398,661 $482,091 $ 456,375
--------- --------- ----------
COST OF SALES:
Professional Services Group............... $ 151,893 $242,225 $ 241,538
Metcalf & Eddy............................ 158,068 155,806 145,800
Other and eliminations.................... (465) (3,907) (1,765)
--------- --------- ----------
$ 309,496 $394,124 $ 385,573
--------- --------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EX-
PENSES:
Professional Services Group............... $ 12,542 $ 13,657 $ 20,169
Metcalf & Eddy............................ 42,057 39,939 47,136
Other..................................... 2,524 -- --
Corporate (unallocated)................... 9,574 8,720 8,450
--------- --------- ----------
$ 66,697 $ 62,316 $ 75,755
--------- --------- ----------
DEPRECIATION AND AMORTIZATION:
Professional Services Group............... $ 5,679 $ 7,335 $ 8,119
Metcalf & Eddy............................ 5,691 6,223 8,227
Other..................................... 307 -- --
Corporate (unallocated)................... 602 425 515
--------- --------- ----------
$ 12,279 $ 13,983 $ 16,861
--------- --------- ----------
IMPAIRMENT CHARGE:
Professional Services Group............... $ -- $ -- $ --
Metcalf & Eddy............................ -- -- --
Other..................................... -- -- --
Corporate (unallocated)................... -- -- 5,000
--------- --------- ----------
$ -- $ -- $ 5,000
--------- --------- ----------
OPERATING INCOME (LOSS):
Professional Services Group............... $ 9,599 $ 7,423 $ 1,824
Metcalf & Eddy............................ 11,036 13,390 (14,673)
Other..................................... (270) -- --
Corporate (unallocated)................... (10,176) (9,145) (13,965)
--------- --------- ----------
$ 10,189 $ 11,668 $ (26,814)
--------- --------- ----------
Interest expense, net....................... $ (22,812) $ (21,674) $ (23,997)
Other expense, net.......................... (37) (2,296) (502)
Income tax (expense) benefit................ (587) 1,246 (514)
--------- --------- ----------
Loss from continuing operations............. (13,247) (11,056) (51,827)
Income (loss) from discontinued operations.. 5,262 5,788 (108,754)
--------- --------- ----------
Net loss.................................... $ (7,985) $ (5,268) $ (160,581)
========= ========= ==========
</TABLE>
61
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
Overview
As discussed in more detail with the comparison of each segment's results,
the Company's net loss increased from $5.3 million during the year ended
October 31, 1996 to $160.6 million (including losses from discontinued
operations of $108.8 million) during the year ended October 31, 1997. This was
primarily the result of certain operating charges and asset write-offs,
including charges taken in connection with the planned Research-Cottrell
divestiture, all as more fully described below. Sales have decreased from
$482.1 million to $456.4 million primarily due to lower Metcalf & Eddy sales
volumes as a result of delays in awards of new contracts. At October 31, 1997,
the Company's total backlog was approximately $1.1 billion and consisted of
PSG (78%) and Metcalf & Eddy (22%).
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 considered the actions necessary to
redeploy its capital to PSG and Metcalf & Eddy, its core water business. The
strategic analysis conducted led to the conclusion that the Company did not
have the overall size and expertise to grow the air pollution control
businesses profitably. Among other factors contributing to this approach were
recent tax law changes which may extend 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. See
"Business--The Water/Wastewater Privatization Market."
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 assessed the impact of de-emphasizing
the Research-Cottrell business segment and redeploying its capital to its PSG
and Metcalf & Eddy segments. A financial advisor was retained to assist the
Company in exploring strategic alternatives related to this redeployment. On
December 2, 1997, the Company announced its decision to divest Research-
Cottrell. The Company is currently in negotiations with several interested
parties and expects that most of the air pollution control businesses operated
through Research-Cottrell will be sold within the next several months.
Professional Services Group
Operating income was $1.8 million for the year ended October 31, 1997 and
reflects a $5.6 million decrease from the comparable 1996 period primarily due
to certain operating charges and asset write-offs which approximated $6.9
million. These charges were primarily related to professional fees of $5.7
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 $1.3 million higher
than the comparable 1996 period due to the timing of certain contractual
incentive clauses realized under the PRASA project.
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.
62
<PAGE>
Metcalf & Eddy
The operating loss of $14.7 million for the year ended October 31, 1997 was
primarily the result of $19.4 million of charges, including $5.5 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; $6.0
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 $2.8 million.
In addition to the effect of the aforementioned charges, lower sales volume
and gross margin rates and higher depreciation expenses, partially offset by
lower selling, general and administrative expenses, reduced the operating
results by $8.7 million from the comparable prior period ended October 31,
1996. The reduction in sales volume of $28.9 million during the period reduced
the operating results by $8.0 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., the Environmental Protection
Agency (the "EPA") and the Department of Defense). The lower gross margin
rates reduced the operating results by $2.9 million during the period
primarily due to favorable pricing adjustments reflected in the prior periods,
pricing pressures and a business mix shift from self-performed work to
subcontracted work. Partially offsetting the lower margins were selling,
general, and administrative expense reductions of $2.9 million during the year
ended October 31, 1997 as compared to the comparable 1996 period as a result
of lower personnel related costs including discretionary and self-insured
employee benefit costs. The $2.0 million increase in depreciation and
amortization from the comparable prior period primarily resulted from the
reduction of the estimated useful lives of computer equipment.
Corporate and Other
The unallocated corporate costs were comparable to the prior period except
for the $5.0 million impairment charge related to the Branchburg, New Jersey
property which is anticipated to be sold. In addition, higher average
borrowings resulted in increased interest expense.
Discontinued Operation--Research-Cottrell
The loss from discontinued operations for the year ended October 31, 1997
was $108.8 million including a loss on disposal of $63.9 million, significant
operating charges of $40.5 million, other operating losses of $2.9 million and
non-operating expenses of $1.5 million. The loss on disposal was developed
using a range of estimated proceeds based on current negotiations with several
potential buyers of the businesses and also includes estimated future losses
of $8.5 million through the estimated disposal date. The significant operating
charges include a $25.0 million impairment charge recognized during the second
quarter primarily related to a writedown of goodwill and other non-current
assets of Ecodyne and KVB, receivable provisions of $3.4 million at Ecodyne
and R-C International, warranty provisions of $10.0 million at R-C
International and Custodis and $2.1 million of higher than anticipated costs
on a specific APCD project. In addition to the loss on disposal and
significant operating charges, the remaining operating loss was due to lower
sales volume and reduced margin rates 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, price pressures from highly competitive
markets and project execution.
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 for
PSG) due to
63
<PAGE>
the highly competitive marketplace and increases in selling and marketing
expenses (primarily for PSG) which were partially offset by overhead
reductions within Metcalf & Eddy and Corporate. Sales increased from $398.7
million to $482.1 million primarily due to increased service revenues
associated with PSG's contract with PRASA. At October 31, 1996, the Company's
backlog was approximately $1.0 billion and consisted of PSG (78%) and Metcalf
& Eddy (22%).
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 offset 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
proportional impact on operating income.
Metcalf & Eddy
Although sales 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.
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.
Research-Cottrell
Income from discontinued operations increased by $0.5 million primarily due
to an increase in non-operating income in 1997 partially offset by a decrease
in operating income. 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 offsetting the reduced margins were
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 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 sales volume, compared with the prior period, was due to the
fulfillment of orders for equipment required by utility customers to comply
with the Clean Air Act Amendments of 1990.
FINANCIAL CONDITION
During the year ended October 31, 1997, cash generated by operating
activities was $15.0 million including $13.9 million from discontinued
operations. The operating activities of continuing operations generated $1.1
million after interest payments of $23.6 million. The $15.0 million increase
in receivables and $23.1 million increase in payables were primarily related
to PSG Puerto Rico's contract with PRASA under which certain unreimbursed
costs paid on behalf of PRASA have not been collected ($34.3 million at
October 31, 1997), and the payment of certain power costs to PREPA ($33.2
million at October 31, 1997) has been delayed. On December 9, 1997 PREPA filed
a complaint in civil court in Puerto Rico against PSG Puerto Rico seeking
payment by PSG Puerto Rico of PRASA's power costs. To the Company's knowledge,
process was never served in respect of such suit. PSG Puerto Rico paid
approximately $9.1 million to PREPA on December 23, 1997, shortly following
receipt of such amount from PRASA as a partial payment. On January 16, 1998,
the complaint was withdrawn by PREPA without prejudice. Management believes
that such receivables will be fully collected and will be used to pay the
power costs due to PREPA. The cash generated from discontinued operations was
primarily related to various working capital reductions of Research-Cottrell
due to lower sales volume and the
64
<PAGE>
sale of certain businesses. The Company typically has receivables in which the
ultimate realizability is dependent upon the successful negotiation or
resolution of contractual issues or disputes 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 including those
reflected in the current period. Management believes that adequate provisions
have been made to the receivable balances reflected in the October 31, 1997
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 required $12.2 million of cash during the year ended
October 31, 1997 including $1.0 million for Research-Cottrell's capital
expenditures. Investments related to the start up of operations, maintenance
and management of treatment facilities within the PSG segment were $7.9
million. Capital expenditures of $4.9 million were made in the PSG and Metcalf
& Eddy segments primarily for computer and field equipment and leasehold
improvements. Proceeds of $2.0 million from the sale of certain Research-
Cottrell operations and other assets were also received during the year. As
discussed more fully below, significant investments may be required in the near
term due to current growth initiatives.
Financing activities required $3.4 million of cash during the year ended
October 31, 1997 primarily due to the payment of cash dividends of $2.5 million
paid on the Series A Preferred Stock and fees of $1.5 million related to the
Recapitalization, partially offset by net borrowings under credit facilities of
$1.7 million discussed more fully below.
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 million seven-year unsecured revolving
credit facility with Anjou. The facility matures on August 2, 2003. As of
October 31, 1997, the Company's outstanding 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 October 31, 1997, the Company's borrowings under the Bank Credit Facility
totaled $3.0 million and outstanding letters of credit under the Bank Credit
Facility totaled $22.5 million (unused capacity of $44.5 million).
As of December 12, 1997, the configuration and structure of the Bank Credit
Facility was revised. As a result of this revision Societe Generale purchased
and assumed from all of the other Lending Banks all of such banks' rights and
obligations under the Bank Credit Facility, becoming the sole lending bank
thereunder, and the Company and Societe Generale entered into the Amendment to
extend the Bank Credit Facility until December 11, 1998. The Bank Credit
Facility had been scheduled to expire on March 31, 1998. The Amendment waives
the Company's compliance with certain covenants and amends others. The prior
amendments and waiver would have terminated on December 15, 1997 had the Bank
Credit Facility not been amended.
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%, 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
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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 48%
voting equity ownership interest in the Company and its 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 CGE for its support in an amount equal to 0.95% per annum of the
outstanding commitment of its credit facilities ($1.2 million, $1.2 million
and $0.8 million for the years ended October 31, 1997, 1996 and 1995,
respectively).
The Company's ability to comply with the financial and other covenants in
such agreements beyond March 31, 1998 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, Societe Generale 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.
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
consummation of the transactions contemplated by the Recapitalization
Agreement will reduce the Company's annual interest expense by approximately
$12.4 million and eliminate $3.3 million of annual dividends on the Series A
Preferred Stock.
As of January 28, 1998, the Company had Bank Credit Facility borrowings of
$10.0 million and outstanding letters of credit under the Bank Credit Facility
of $22.9 million. In addition to the $37.1 million of unused capacity under
its Bank Credit Facility at January 28, 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
significant investments discussed below) through improved working capital
management by focusing on Metcalf & Eddy's past due receivables, asset
divestitures related to the Research-Cottrell segment and reduction of
financing costs through the strengthening of its current capital structure as
contemplated by the Recapitalization. A significant amount of planned asset
divestiture proceeds is expected to fund the related retained liabilities,
however, the cash outlays may occur during different periods.
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 October 31, 1997, the Company had no material
outstanding purchase commitments for capital expenditures, however, following
the Recapitalization, the Company will require additional financial resources
to develop and support each of its business 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 through such vehicle or
otherwise, would share in the returns on such projects pro rata in relation to
their respective equity investments.
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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 and performance 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 "--Results of Operations--
Dependence on Key Projects and Government Contracts, "Risk Factors--Dependency
on Key Projects and Government Contracts" and "Risk Factors--USF&G Guarantees
by CGE."
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 October 31, 1997, unamortized
goodwill was $164.3 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.
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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:
. 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 ability of the Company to obtain new bid and performance bonds
following the Recapitalization.
. The execution of 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
investments.
. The ability of the Company to successfully implement its revised business
strategy.
. 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.
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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 two widely recognized trade
names: Professional Services Group for the operation, maintenance and
management of water and wastewater treatment systems and Metcalf & Eddy for
water, wastewater and hazardous waste engineering and consulting services. PSG
provides operation, maintenance and management services for 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. On
December 2, 1997, the Company announced its decision to divest Research-
Cottrell. Research-Cottrell designs and develops products and technologies
targeted at specific client needs such as air pollution control equipment. The
Company is currently in negotiations with several interested parties and
expects that most of the air pollution control businesses operated through
Research-Cottrell will be sold within the next several months. 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 operation, maintenance and management services
for 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 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. In addition, PSG has 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 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.
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Research-Cottrell's air pollution control technologies include 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, recently, the market has shown indications of a
potential shift to longer-term contracts. Two recent presidential executive
orders and a recent Internal Revenue Service 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, financing 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 in the United States and its
territories is estimated to be, on the basis of annual revenues, a $1.1
billion market. Revenues of the top seven companies total approximately $600
million or 55% of the total market. Among the top seven companies, PSG has
approximately a 45% share of that market segment. Overall, PSG has
approximately 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 Internal Revenue Service 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 twenty-five year lease
transaction. Freeport and Cranston are PSG projects.
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PSG believes that the Freeport, Texas project and Cranston, Rhode Island
lease were among 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 operation, maintenance and management services for 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 OM&M 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 rivals the largest municipal
wastewater systems 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 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 below 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.
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[MAP OF PROJECT LOCATIONS APPEARS HERE]
Figure 1.1
Figure 1.1 depicts the location and geographic dispersion of PSG Projects
throughout the continental United States, Hawaii and Puerto Rico. The inset
depicts the concentration of PSG Projects in the Northeast.
The Company believes that PSG's relative size permits it to provide its
clients with a higher caliber of benefits. PSG operates a large number of
facilities and systems, with more employees, than any other 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
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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.
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 in the United States and its
territories is estimated to be, on the basis of annual revenues, 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
approximately a 45% share of that market segment. Overall, PSG has
approximately 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 69 wastewater plants (capacity 304 mgd), 128 water
treatment plants (capacity 318 mgd) and related collection and distribution
systems and pumping stations.
SLUDGE AND BIOSOLID WASTE MANAGEMENT SERVICES
PSG has 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 160,000 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.
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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 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.
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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 and
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 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 eighty 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.
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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 the Air Force Mobility Command for a major nationwide subcontract role.
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
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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 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 three 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.
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
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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.
DISCONTINUED OPERATION--RESEARCH-COTTRELL--AIR POLLUTION CONTROL
The Company has marketed air pollution control related products and services
through Research-Cottrell. Research-Cottrell is comprised of six companies:
Air Pollution Control Division (APCD), Custodis, Flex-Kleen, KVB, REECO and
Thermal Transfer Corporation. Research-Cottrell's technologies and services
are directed principally at cost-effectively reducing air pollution, treating
thermal discharges, dispersing airborne contaminants, continuously monitoring
emissions, and providing engineering services for industrial process plants
and power generation in the United States and internationally. Research-
Cottrell's services have included 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 has participated in the aftermarket services sector.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations" and Note 11 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,
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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 1997, sales to governmental customers approximated 96% and
83% of the Company's PSG and Metcalf & Eddy 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 1997, sales associated with PSG's contract with PRASA accounted for 23%
of the Company's sales for such period and sales to the federal government
approximated 10% 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--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 October 31, 1997, the Company's total backlog was approximately $1.1
billion, the same level as at October 31, 1996, and consisted of PSG (78%) and
Metcalf & Eddy (22%). The Company estimates that approximately $330 million of
the backlog represents work which will be completed in the next twelve months.
The total backlog at October 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 $275 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 included approximately 95% of work to be performed for federal, state
and municipal governmental agencies as of October 31, 1997.
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. 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," "--Metcalf & Eddy--Water and Wastewater
Treatment/Hazardous Waste Remediation--Competition" and "Risk Factors--Highly
Competitive Industry."
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 cleanup market,
Metcalf & Eddy competes with many local, regional and national firms on the
basis of experience, reputation and price.
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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, a short-listing of qualified firms, then an
RFP. In most cases, those firms submitting proposals are asked to 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.
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 of operations and financial condition. See "Risk Factors--Highly
Competitive Industry." 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 "Risk Factors--Dependency on Key Projects
and Government Contracts."
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 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.
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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 by-products 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 noncompliance, 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
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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 land 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 ("HWIR"), 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. However, as a result of a settlement with
hazardous waste industry litigants, the EPA is not required to finalize a HWIR
rule for industrial process wastes until April 2001.
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 thirty-five
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 stricter standards
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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 these agreements since
June 27, 1995. 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 or performance 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 (or one of its affiliates) would be willing
to provide such a guarantee following the Recapitalization. See "Risk
Factors--USF&G Guarantees by CGE" and "Risk Factors--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 excess of the Company's insurance coverage or for which
there is no coverage could have a material adverse effect on the Company.
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<PAGE>
PROPERTIES
The Company believes that its facilities are suitable and adequate for its
current and foreseeable operational and administrative needs. At October 31,
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
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
Chicago, IL............. Metcalf & Eddy Office -- 7,030 2002
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
</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 31, 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. The Company does
not believe that the loss of the services of any person employed by the
Company would have a material adverse effect on the Company. In addition, the
Company does not maintain employment agreements or key-person insurance for
any of its senior management.
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 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 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,
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<PAGE>
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 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 (except for
two recalcitrant homeowners) were resolved. All claims by and between M&E
Services and the City in the second homeowners' 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.
On October 14, 1997, Research-Cottrell, Inc. and R-C Belgium were named in a
lawsuit by 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 earliest stages. Nevertheless, 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.
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. See "Risk
Factors--Potential Litigation Liability."
85
<PAGE>
MANAGEMENT
Set forth below are the names, ages and principal occupations of the
directors and executive officers of the Company as of October 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William V. Kriegel.......... 52 Chairman of the Board of Directors
Thierry M. Mallet........... 37 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
Gail M. Fulwider............ 49 Vice President of Human Resources
Robert S. Volland........... 56 Vice President and Chief Administrative Officer
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............ 51 Director
John W. Morris.............. 76 Director
</TABLE>
Mr. Kriegel was elected Chairman of the Board on October 24, 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 a director of the Company on October 26, 1997.
Prior to joining the Company, Mr. Mallet served from 1995 as "Consejo
Delegado" (President and Chief Executive Officer) 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 a 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 Francais 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.
86
<PAGE>
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 of
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 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.
Ms. Fulwider joined the Company in March 1997 as Vice President of Human
Resources. Prior to joining the Company, Ms. Fulwider was Vice President of
Human Resources at Smith Technologies Corporation from February 1995 until she
joined the Company. Prior to that, Ms. Fulwider served as Vice President of
Human Resources at International Technology Corporation, where she worked for
thirteen years in a wide variety of human resources management positions.
Mr. Volland was elected Vice President and Chief Administrative Officer of
the Company in June 1994 with oversight responsibility for real estate,
facilities management, procurement, and insurance and management information
systems. Mr. Volland has over twenty-five years of experience in finance,
administration, asset management, cost control and organizational
efficiencies. From 1973 to 1986, Mr. Volland served as Vice President and
Treasurer for Commercial Credit Company. From 1986 to 1993 he served as Vice
President and Treasurer, and Vice President, Corporate Assets, for Primerica
Corp. Prior thereto, he was Senior Vice President of Real Estate for Paine
Webber.
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 Chief Executive Officer 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 twenty-three
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.
87
<PAGE>
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 a director of the Company in June 1992.
From 1988 to October 1992, Lieutenant 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 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, 1997, the
Board of Directors of the Company held a total of thirteen meetings. During
the fiscal year ended October 31, 1997, 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 the Special Committee and the
Business Planning Committee.
The Audit Committee of the Board of Directors met three times during the
fiscal year ended October 31, 1997. 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 (the "Compensation Committee")
of the Board of Directors met three times during the fiscal year ended October
31, 1997. Lieutenant General Morris, Ms. Green and Mr. Banon are currently
members of the Compensation 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 Committee also
administers the Company's 1989 Long-Term Incentive Compensation Plan (the
"Long-Term Incentive Plan").
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<PAGE>
The Company does not have a standing Nominating Committee.
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. See "The Recapitalization--
Background."
In connection with the Recapitalization, the Company has established the
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 objective 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 $50,000
for his or her service on the Special Committee and its work through October
1, 1997 and is entitled to reimbursement for reasonable expenses. The Company
and the Special Committee have not reached any agreement with respect to
compensation for Special Committee work performed or to be performed after
October 1, 1997.
In addition, pursuant to the Long-Term Incentive Plan, on July 31 of each
year each director who is a member of the Compensation Committee with
responsibility for administering such Plan as of such date is granted a non-
qualified option to purchase either (i) 3,000 shares of Class A Common Stock,
if the director has served less than one year on the Compensation Committee,
or (ii) 500 shares of Class A Common Stock, if the director has served one
year or more on the Compensation Committee. The options granted vest annually
in four equal installments commencing one year from the date of grant with
exercise prices equal to the fair market value of the Class A Common Stock on
the grant date.
89
<PAGE>
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended October 31, 1997, 1996
and 1995, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to the Chief Executive Officer
of the Company and each of the four most highly compensated executive officers
of the Company other than the Chief Executive Officer in all capacities in
which they served. Messrs. Houdaille and Sheh each ceased to be an executive
officer of the Company as of November 1996 and October 1997, respectively.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- ------------------------
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARD(S) ($) OPTIONS (#) ($)
--------------------------- ---- ---------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alain Houdaille(1)*.... 1996 106,121 195,000 0 0 45,840(2)
President and Chief
Executive Officer
Robert B. Sheh(3)*..... 1997 407,697 0 0 50,000(4) 523,213(5)
Chairman of the Board
of Directors, President
and Chief Executive
Officer
Thierry M. Mallet(6)... 1997 0 0 0 0 0
President, Chief
Executive Officer and
Director
Alain Brunais.......... 1997 209,810 0 0 0 75,788(7)
Senior Vice President, 1996 207,450 75,000 0 18,000(8) 77,000(9)
Chief Financial 1995 203,674 85,000 0 0 74,000(10)
Officer and Director
George C. Mammola...... 1997 216,229 0 0 0 15,000(11)
Senior Vice President 1996 213,996 55,000 0 35,500(12) 15,750(13)
and President, Research- 1995 210,000 110,000 0 0 8,868(14)
Cottrell, Inc.
Douglas A. Satzger..... 1997 206,003 0 0 0 5,970(15)
Senior Vice President, 1996 211,622 32,000 0 41,500(16) 13,750(17)
General Counsel and 1995 200,013 55,000 0 0 10,750(18)
Secretary
Patrick L. McMahon..... 1997 190,784 40,000 0 0 16,650(19)
Senior Vice President 1996 170,019 75,000 0 19,000(20) 2,200(21)
and President, 1995 66,003(22) 60,000 0 0 1,100(23)
Professional Services
Group, Inc.
</TABLE>
- --------
* No longer employed by the Company.
(1) Mr. Houdaille served as President and Chief Executive Officer of the
Company from May 1996 to November 1996.
(2) "All Other Compensation" for Mr. Houdaille for fiscal year 1996 consists
of $45,840 of housing expenses paid on behalf of Mr. Houdaille.
(3) Mr. Sheh served as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company from November 1996 to October 1997.
(4) Mr. Sheh was granted 50,000 options exercisable at $6.31 per share
pursuant to the Company's Long-Term Incentive Plan.
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<PAGE>
(5) "All Other Compensation" for Mr. Sheh for fiscal year 1997 consists of
$89,415 paid to Mr. Sheh as relocation expenses, approximately $23,077
representing accrued and unpaid vacation, $10,721 resulting from an
automobile leased for Mr. Sheh by the Company and $400,000 payable
pursuant to the Sheh Separation Agreement (as defined hereinafter).
Subject to the terms and conditions of the Sheh Separation Agreement, the
Company also shall pay to Mr. Sheh an aggregate of $400,000 in two equal
installments in fiscal 1998 and 1999.
(6) Mr. Mallet was appointed President and Chief Executive Officer of the
Company on October 24, 1997 and it is presently anticipated that he will
be paid an annual salary of approximately $300,000 per year.
(7) "All Other Compensation" for Mr. Brunais for fiscal year 1997 consists of
approximately $65,036 paid as a housing allowance on behalf of Mr.
Brunais, approximately $7,752 resulting from an automobile leased for Mr.
Brunais by the Company and $3,000 contributed to the Company's Savings and
Retirement Plan on behalf of Mr. Brunais.
(8) Mr. Brunais was granted 18,000 options exercisable at $6.563 per share
pursuant to the Company's Long-Term Incentive Plan.
(9) "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.
(10) "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.
(11) "All Other Compensation" for Mr. Mammola for fiscal year 1997 consists of
approximately $12,000 paid as an automobile allowance and $3,000
contributed to the Company's Savings and Retirement Plan on behalf of Mr.
Mammola.
(12) 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.
(13) "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.
(14) "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.
(15) "All Other Compensation" for Mr. Satzger for fiscal year 1997 consists of
$2,970 resulting from an automobile leased for Mr. Satzger by the Company
and $3,000 contributed to the Company's Savings and Retirement Plan on
behalf of Mr. Satzger.
(16) Mr. Satzger was granted 20,167 options exercisable at $6.563 per share
pursuant to the Company's Long-Term Incentive Plan and 21,333 options
exercisable at $8.00 per share pursuant to the Company's "Fresh Start"
program.
(17) "All Other Compensation" for Mr. Satzger for fiscal year 1996 consists of
approximately $10,000 paid to Mr. Satzger as an automobile allowance and
$3,750 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Satzger.
(18) "All Other Compensation" for Mr. Satzger for fiscal year 1995 consists of
approximately $7,000 paid to Mr. Satzger as an automobile allowance and
$3,750 contributed to the Company's Savings and Retirement Plan on behalf
of Mr. Satzger.
(19) "All Other Compensation" for Mr. McMahon for fiscal year 1997 consists of
$8,946 resulting from an automobile leased for Mr. McMahon by the Company
and $7,704 contributed to PSG's Pension Plan.
(20) Mr. McMahon was granted 9,000 options exercisable at $6.563 per share
pursuant to the Company's Long-Term Incentive Plan and 10,000 options
exercisable at $8.00 per share pursuant to the Company's "Fresh Start"
program.
(21) "All Other Compensation" for Mr. McMahon for fiscal year 1996 consists of
approximately $2,200 resulting from an automobile leased for Mr. McMahon
by PSG.
(22) 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.
(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.
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<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the named
executive officers concerning unexercised options held as of October 31, 1997.
No options were exercised during fiscal 1997 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>
Alain Houdaille(3)*........ 0 0 0 0
Robert B. Sheh(4)*......... 50,000 0 0(2) 0(2)
Thierry M. Mallet(5)....... 0 0 0 0
Alain Brunais(6)........... 52,800 15,200 0(2) 0(2)
George C. Mammola(7)....... 28,642 6,858 0(2) 0(2)
Douglas A. Satzger(8)...... 33,142 8,358 0(2) 0(2)
Patrick L. McMahon(9)...... 11,750 7,250 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 $1.50, the closing sale
price per share of the Class A Common Stock as reported on the American
Stock Exchange Composite Tape for October 31, 1997.
(2) The exercisable and unexercisable options held by Messrs. Sheh, Brunais,
Mammola, Satzger and McMahon were not in-the-money as of October 31, 1997.
(3) Mr. Houdaille served as President and Chief Executive Officer of the
Company from May 1996 to November 1996.
(4) On October 24, 1997, Mr. Sheh and the Company jointly entered into an
agreement, which terminated the Employment Agreement (as defined
hereinafter) dated November 7, 1996, and entered into the Sheh Separation
Agreement relating to their relationship thereafter. The options held by
Mr. Sheh as of such date are currently exercisable at an exercise price of
$6.310 per share. The options were granted in November 1996 pursuant to
the Employment Agreement.
(5) Mr. Mallet was appointed President and Chief Executive Officer of the
Company on October 24, 1997.
(6) 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.
(7) 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.
(8) The exercise price of the options held by Mr. Satzger is (i) $6.563 per
share in the case of his option to purchase 20,167 shares granted in March
1996 or (ii) $8.00 per share in the case of his option to purchase 21,333
shares granted in January 1996.
(9) The exercise price of options held by Mr. McMahon is (i) $6.563 per share
in the case of his option to purchase 9,000 shares granted in March 1996
or (ii) $8.00 per share in the case of his option to purchase 10,000
shares granted in January 1996.
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<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 thirty-
five 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. As of the date hereof, none of
the named executive officers is a participant in the Company's Supplemental
Pension Plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Employment Contracts. 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.
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.
Change in Senior Management. On October 24, 1997, Mr. Sheh was succeeded by
Thierry M. Mallet as President and Chief Executive Officer of the Company, and
the Board of Directors of the Company appointed then serving director William
V. 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 the Company since 1994. Since
December 1996, he has served as Chairman of the Board and Chief Executive
Officer of Anjou. Mr. Kriegel is also Chairman of the Board, President, Chief
Executive Officer and a director of Sithe Energies, Inc. and all of its
subsidiaries. Prior to his appointment, Mr. Mallet served as President and
Chief Executive Officer of CGE's water and wastewater activities in Spain.
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<PAGE>
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On and prior to January 21, 1997, the Compensation Committee of the Board of
Directors consisted of Messr. Deschamps, Lieutenant General Morris and Ms.
Green. Mr. Deschamps resigned from the Board of Directors of the Company on
January 21, 1997. From January 21, 1997 to October 9, 1997, the Compensation
Committee consisted of Lieutenant General Morris and Ms. Green. On October 9,
1997, Mr. Banon was elected as a director of the Company. Since October 9,
1997, the Compensation Committee consists of Lieutenant General Morris, Ms.
Green and Mr. Banon. Mr. Deschamps is Adjunct Director General of CGE. 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. 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. Mr. Banon has been designated by CGE
as a director of the Company under the Investment Agreement.
94
<PAGE>
OWNERSHIP OF CAPITAL STOCK
The following table sets forth information regarding the beneficial ownership
of the Company's capital stock as of January 28, 1998 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 and Anjou are the only stockholders
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 MAXIMUM MINIMUM MINIMUM
NAME OF PERSON OR GROUP OWNED OUTSTANDING SUBSCRIPTION SUBSCRIPTION SUBSCRIPTION SUBSCRIPTION
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William V. Kriegel...... 0 * 0 * 0 *
Thierry M. Mallet....... 0 * 0 * 0 *
Jean-Claude Banon....... 0 * 0 * 0 *
Daniel Caille........... 0 * 0 * 0 *
Alain Brunais........... 53,800 (1) * 55,610 (1) * 53,800 (1) *
Carol Lynn Green........ 0 * 0 * 0 *
John W. Morris.......... 3,079 * 8,651 * 3,079 *
Alain Houdaille(2)**.... 0 * 0 * 0 *
Robert B. Sheh(3)**..... 50,000 (4) * 50,000 (4) * 50,000 (4) *
George C. Mammola....... 29,522 (5) * 31,115 (5) * 29,522 (5) *
Douglas A. Satzger...... 35,142 (6) * 38,762 (6) * 35,142 (6) *
Patrick L. McMahon...... 11,750 (7) * 11,750 (7) * 11,750 (7) *
Joseph R. Vidal......... 5,675 (8) * 6,064 (8) * 5,675 (8) *
Gail M. Fulwider........ 0 * 0 * 0 *
Robert S. Volland....... 34,850 (9) * 40,279 (9) * 34,850 (9) *
Jekabs P. Vittands...... 25,672(10) * 35,593(10) * 25,672(10) *
Compagnie Generale
des Eaux............... 47,895,689(11) 72.2 134,578,224(11) 72.2 153,609,974(11) 89.3
52 Rue d'Anjou
75384 Paris Cedex 08
France
All directors and
officers as a group (14
persons)............... 199,490(12) * 227,824(12) * 199,490(12) *
</TABLE>
- --------
* Less than 1% ownership
** No longer employed by the Company.
95
<PAGE>
(1) Includes 52,800 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(2) Mr. Houdaille served as President and Chief Executive Officer of the
Company from May 1996 to November 1996.
(3) Mr. Sheh served as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company from November 1996 to October 1997.
(4) 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 jointly entered into an agreement, which terminated the
Employment Agreement dated November 7, 1996, and entered into the Sheh
Separation Agreement relating to their relationship thereafter.
(5) Includes 28,642 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(6) Includes 33,142 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(7) Represents 11,750 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(8) Includes 5,460 shares of Class A Common Stock which may be acquired within
60 days of the date of the table.
(9) Includes 31,850 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(10) Includes 20,190 shares of Class A Common Stock which may be acquired
within 60 days of the date of this table.
(11) Includes 6,702,500 shares of Class A Common Stock owned indirectly
through Anjou. Includes 34,285,714 shares of Class A Common Stock issued
in the Exchange. Prior to the Exchange, CGE directly and indirectly
through Anjou beneficially owned approximately 50.0009% of the
outstanding Class A Common Stock of the Company.
(12) Includes 183,834 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $5.0 million. 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, Inc., a Canadian corporation ("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 benefited 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 wastewater 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.
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
the Company, 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 the Company or CGE or any of
their respective Affiliates or Associates. All Independent Directors must be
satisfactory to CGE. The Chairman of the Board of Directors of the Company also
shall be designated by 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
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
97
<PAGE>
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. Mr.
Mallet was appointed to the Board of Directors as CGE's designee on October 26,
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, (iii) to effect a Demand Registration within six months of CGE or Anjou
selling any shares of Class A Common Stock, Series A Preferred Stock or
Convertible Debt (as defined hereinafter), pursuant to a Piggyback Registration
(as defined below) or (iv) to effect a Demand Registration if the Company shall
have filed or announced its intention to file a registration statement of an
offering of shares of Class A Common Stock for its own account and shall be
taking steps in pursuance thereof or if the Company shall have completed such a
registered offering within the immediately preceding ninety days. 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 at the time may
be owed 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
on behalf of itself and its affiliates 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 (and to cause its affiliates 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 (and to cause its
affiliates 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 and the Investment Agreement as
amended by the Recapitalization Agreement, CGE agreed on behalf of itself and
its affiliates 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 has agreed to assist (and cause its affiliates 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
98
<PAGE>
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 too capital intensive for the Company to
undertake on a stand-alone basis.
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 such 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 Corporation as of the date of the original
Investment Agreement.
In addition, CGE (and its affiliates) and the Company agreed to establish a
privileged commercial relationship for the development of air pollution
activities in Europe.
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 in a chain) 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 such series of 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 acting in
a separate meeting or by unanimous written consent. The Company, CGE and Anjou
have further agreed that all actions by the Company with respect to any claim
by the Company against CGE or its affiliates under the Investment Agreement
will be taken only by majority approval of such Independent Directors or a
special committee thereof, so acting in a separate meeting or by unanimous
written consent.
Sales of Shares. CGE has also agreed to give the Company one day's prior
written notice of any sale of shares of Class A Common Stock or Series A
Preferred Stock held by CGE or its affiliates if, to the knowledge of CGE, such
sale would result in any person 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 $60.0 million.
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"). The
Series A Preferred Stock was exchanged for 34,285,714 shares of Class A Common
Stock in the Exchange at an exchange price equal to the Subscription Price.
During fiscal 1996 and 1997, the Company paid $3.3 million and $2.5 million,
respectively, 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
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<PAGE>
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 11.8% Senior Notes with The Prudential Insurance
Company of America. The Company had incurred approximately $8.9 million and
$8.7 million of interest related to the CGE Note during fiscal 1996 and 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."
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 January
28, 1998, the Company's borrowings under the Bank Credit Facility totaled
$10.0 million and outstanding letters of credit under the Bank Credit Facility
totaled $22.9 million (unused capacity of $37.1 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,
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 1.25%, 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 48% voting equity ownership interest in the
Company and its 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. CGE has reaffirmed to Societe Generale the
terms of CGE's existing credit support of the Company, including a commitment
to maintain its 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. 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 for each of the years ended October 31,
1996 and 1997).
ANJOU NOTE
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 October 31, 1997, the Company's outstanding borrowings under the
Anjou Note totaled $60.0 million. The Company had incurred approximately $0.7
million and $3.7 million of interest on this loan during fiscal 1996 and 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. On
January 26, 1998, the Recapitalization
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Agreement was amended to implement certain technical amendments thereto.
See"The Recapitalization--Consent Solicitation; Issuance of Class B Common
Stock" 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
34,285,714 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 of Class
A Common Stock (subject to the Company's obligation to issue Class B Common
Stock in certain circumstances). As a result, if no other Rights are exercised
and the Requisite Consents are obtained, CGE would own an aggregate of
153,609,974 shares of Class A Common Stock. Consequently, immediately after
the Recapitalization, CGE would own approximately 89.3% of the total
outstanding Class A Common Stock of the Company. See "Risk Factors--
Controlling Stockholder; Ability of Controlling Stockholder to Increase
Ownership."
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 dividends aggregating $1,650,000
due September 30, 1997 and December 31, 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. On January 28, 1998, the Company effected the
Exchange pursuant to which all of the shares of Series A Preferred Stock held
by CGE (representing all of the issued and outstanding shares of Series A
Preferred Stock) were exchanged for shares of Class A Common Stock. The
dividends in arrears on the Series A Preferred Stock have not been paid and
were extinguished pursuant to the Exchange.
CGE has unconditionally guaranteed performance by PSG of PSG's contract with
PRASA. During fiscal years ended October 31, 1996 and 1997, PSG's contract
with PRASA accounted for 39% of PSG's total sales and 22% and 23% of the
Company's total sales, respectively.
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.
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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 January 29, 1998. Each Recordholder of Class A
Common Stock at the close of business on the Record Date will receive
approximately 1.80982 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 (i) to
subscribe at the Subscription Price for one share of Class A Common Stock,
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, and (ii) to receive 0.30014 of a
Warrant for each Underlying Share subscribed for pursuant to the Basic
Subscription Privilege. Each Warrant will allow the holder thereof to purchase
one share of Class A Common Stock at an exercise price of $2.50 per share.
Each holder of Rights other than CGE and Anjou who elects to exercise the
Basic Subscription Privilege also may subscribe at the Subscription Price for
Excess Shares of Class A Common Stock pursuant to the Oversubscription
Privilege, subject to availability and proration and the Company's obligation
to issue shares of Class B Common Stock in certain circumstances, and will
receive 0.30014 of a Warrant for each Excess Share acquired pursuant to the
Oversubscription Privilege. 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 120,000,000 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 March 4, 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 and Information 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 and Information
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, (i) one share of Class A
Common Stock, subject to the Company's obligation to issue shares
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of Class B Common Stock in certain circumstances and (ii) 0.30014 of a Warrant
for each Underlying Share subscribed for by such holder. 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 and
after all prorations and adjustments contemplated by the terms of the Rights
Offering have been effected. Certificates representing the transferable
Warrants acquired in respect of the Basic Subscription Privilege 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 are delivered to subscribers.
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 other than CGE and Anjou who
exercise the Basic Subscription Privilege will be eligible to subscribe, at
the Subscription Price, for additional shares of Class A Common Stock and to
receive, in addition, 0.30014 of a Warrant for each such additional share
acquired.
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 and Information 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 and shares
of Class B Common Stock, if any, 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.
Public Rights holders also will receive 0.30014 of a Warrant for each Excess
Share acquired pursuant to the Oversubscription Privilege. Certificates
representing the transferable Warrants acquired in respect of the
Oversubscription Privilege 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 Oversubscription Privilege are delivered to
subscribers.
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
and Information 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.
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Conditional CGE Subscription. CGE, the beneficial owner of approximately
72.2% of the Class A Common Stock currently outstanding, has agreed to
exercise in full its Basic Subscription Privilege to subscribe for
86,682,535 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, subject to the Company's obligation to issue Class B Common
Stock in certain circumstances. CGE has agreed that it will not receive any
Warrants in respect of either its Basic Subscription Privilege or the
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 Underlying Shares available to be
purchased by the Public in the Rights Offering, minus (ii) the total number of
Underlying Shares 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 105,714,285 shares of Class A Common Stock in the
Rights Offering, subject to the Company's obligation to issue Class B Common
Stock in certain circumstances.
SUBSCRIPTION PRICE
The Subscription Price of $1.75 per share was determined pursuant to a
formula set forth in the Recapitalization Agreement which provides that the
Subscription Price in the Rights Offering shall be 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 and Information Agent (as defined hereinafter)
and will be applied to the purchase of Class A Common Stock as provided
herein.
The ten consecutive Trading Day period ending on January 24, 1998, five days
prior to the Record Date, would include January 9, 12, 13, 14, 15, 16, 20, 21,
22 and 23. The daily Closing Prices per share of the Class A Common Stock for
such dates, respectively, were: $1.438, $1.438, $1.375, $1.313, $1.375,
$1.438, $1.375, $1.375, $1.375 and $1.838. The average daily Closing Prices
would be $1.438 per share, and 82% of such average daily Closing Prices would
be $1.179 per share. However, because in no event shall the Subscription Price
be less than $1.75 per share, the Subscription Price would be $1.75 per share
of Class A Common Stock.
The Subscription Price represents a premium of approximately 21.7% over the
average daily closing price of $1.438 for the Class A Common Stock as reported
on the AMEX for the ten consecutive trading day period ending on January 24,
1998, five days prior to the Record Date, and a premium of approximately 28.2%
over the average daily closing price of $1.365 for the Class A Common Stock as
reported on the AMEX for the sixty day trading period ending on January 24,
1998. 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."
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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, the Class B Common Stock (to the
extent applicable), the Warrants and the Warrant Shares 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 First Chicago Trust Company of New York (the
"Subscription and Information Agent"), at or prior to 5:00 p.m., New York City
time, on the Expiration Date, the properly completed and executed Rights
Certificate or Rights Certificates 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 and Information Agent. All payments must be made in U.S.
dollars for the full number of shares being subscribed for (a) by check or
bank draft drawn upon a U.S. bank or postal or express money order payable to
First Chicago Trust Company of New York, as Subscription and Information
Agent, or (b) by wire transfer of same-day funds, to the account maintained by
the Subscription and Information Agent for purposes of accepting subscriptions
in the Rights Offering at First National Bank of Chicago ABA No. 0710-0001-3,
further credit to First Chicago Trust Company of New York, ATTN: AWT
Subscription, Acct. No. 93-00007, (the "Subscription Account"). Payments will
be deemed to have been received by the Subscription and Information Agent only
upon (i) clearance of any uncertified check, (ii) receipt by the Subscription
and Information 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 collected funds in
the Subscription 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.
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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 and Information Agent by one of the methods
described below:
by Mail:
First Chicago Trust Company of New York
Tenders & Exchanges
P.O. Box 2565
Suite 4660
Jersey City, New Jersey 07303-2565
by Hand:
First Chicago Trust Company of New York
ATTN: Tenders & Exchanges
c/o The Depository Trust Company
55 Water Street, DTC TAD Vietnam Veterans Memorial Plaza
New York, New York 10041
by Overnight Courier:
First Chicago Trust Company of New York
Tenders & Exchanges
14 Wall Street, 8th Floor
Suite 4680
New York, New York 10005
Telephone Number for Confirmation:
(201) 222-4707
Telephone Number for Information:
(201) 324-0137
Delivery to an address other than those above does not constitute valid
delivery.
The Company will pay all fees and expenses of the Subscription and
Information Agent and has also agreed to indemnify the Subscription and
Information 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 and Information 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 and Information 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 and Information Agent
on or prior to the Expiration Date;
(ii) the Subscription and Information 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
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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 and Information Agent of any properly completed and
executed Rights Certificate or Rights Certificates evidencing such Rights
within three (3) business days following the date of the Notice of
Guaranteed Delivery; and
(iii) the properly completed Rights Certificate or Rights Certificates
evidencing the Rights being exercised, with any signatures required to be
guaranteed so guaranteed, is received by the Subscription and Information
Agent within three (3) business days following the date of the Notice of
Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered to
the Subscription and Information Agent in the same manner as Rights
Certificates at the address set forth above, or may be transmitted to the
Subscription and Information Agent by facsimile transmission (Telecopy No.:
(201) 222-4720 or (201) 222-4721). Additional copies of the form of Notice
of Guaranteed Delivery are available upon request from the Subscription and
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 and Information 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
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
(such excess being the "Subscription Excess"), then the Rights holder will be
deemed to have exercised the Oversubscription Privilege to the full extent of
the excess payment tendered, to purchase, to the extent available, that number
of whole shares of Class A Common Stock, subject to the Company's obligation
to issue shares of Class B Common Stock in certain circumstances, equal to the
quotient obtained by dividing the Subscription Excess by the Subscription
Price. 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 and Information Agent. A Rights holder 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
and Information Agent, properly endorsed, no later than 11:00 a.m., New York
City time, on February 26, 1998.
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.
The instructions accompanying the Rights Certificates should be read
carefully and followed in detail. RIGHTS CERTIFICATES SHOULD BE SENT WITH
PAYMENT TO THE SUBSCRIPTION AND INFORMATION AGENT. DO NOT SEND RIGHTS
CERTIFICATES TO THE COMPANY.
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THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AND INFORMATION AGENT WILL BE AT THE
ELECTION AND RISK OF THE RIGHTS HOLDER, 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 AND INFORMATION AGENT AND
THE 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 sole discretion. Neither the Company nor the
Subscription and 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 Subscription
and Information Agent at the address and telephone number set forth above.
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
In the case of Rights that are held of record through the Depository Trust
Company (a "Book-Entry Transfer Facility"), exercises of the Basic
Subscription Privilege and the Oversubscription Privilege may be effected by
instructing the Book-Entry Transfer Facility to transfer Rights from the Book-
Entry Facility account of such holder to the Book-Entry Transfer Facility
account of the Subscription and Information Agent, together with certification
as to the aggregate number of Rights exercised and the number of Underlying
Shares thereby subscribed for pursuant to the Basic Subscription Privilege and
the Oversubscription Privilege by each beneficial owner of Rights on whose
behalf such nominee is acting, and payment of the Subscription Price for each
share of Class A Common Stock (subject to the Company's obligation to issue
Class B Common Stock in certain circumstances) subscribed for pursuant to the
Basic Subscription Privilege and Oversubscription Privilege.
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.
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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 and Information Agent for their accounts. To exercise such
Rights, such holders must notify the Subscription and Information Agent, and
must take all other steps which are necessary to exercise the Rights on or
prior to the Expiration Date. 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, subject to the
Company's obligation to issue Class B Common Stock in certain circumstances,
or Warrants from Rights 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.
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DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") by and between the Company and First Chicago Trust Company of New
York 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 to each
Public subscriber in the Rights Offering 0.30014 of a Warrant for each
Underlying Share subscribed for by such subscriber pursuant to the Basic
Subscription Privilege and for each Excess Share acquired by such subscriber
pursuant to the Oversubscription Privilege. See "The Rights Offering--The
Rights."
At a Subscription Price of $1.75 per share, Public Rights holders will
receive an aggregate of approximately 33,317,465 Rights, which upon full
exercise would allow the Public to purchase an aggregate of approximately
33,317,465 Underlying Shares. At a Subscription Price of $1.75 per share, each
Public subscriber in the Rights Offering will be entitled to approximately
0.30014 of a Warrant for each Right exercised by such subscriber in the Rights
Offering, regardless of Public participation in the Rights Offering. The
following table sets forth the aggregate number of Warrants issued and the
fraction of a Warrant issued per each Right distributed to the Public at each
of four levels of assumed Public participation in the Rights Offering.
However, the Rights Offering is not conditioned upon any minimum level of
exercise of Rights by the Public. The levels of Public participation set forth
in the following table are presented for illustrative purposes only and are
not necessarily indicative of the actual level of Public participation, if
any, which may result in the Rights Offering.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF NUMBER OF
PERCENTAGE OF RIGHTS EXERCISED PERCENTAGE OF AGGREGATE WARRANTS ISSUED
PUBLIC (AND UNDERLYING AGGREGATE 10,000,000 NUMBER OF PER RIGHT
PARTICIPATION IN SHARES GROSS PROCEEDS WARRANTS ISSUED WARRANTS ISSUED EXERCISED BY
THE RIGHTS PURCHASED) BY FROM PUBLIC TO PUBLIC TO PUBLIC PUBLIC
OFFERING THE PUBLIC SUBSCRIPTIONS SUBSCRIBERS SUBSCRIBERS SUBSCRIBERS
- ---------------- ---------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
25% 8,329,366 $14,576,391 25% 2,500,000 .30014
50% 16,658,733 $29,152,782 50% 5,000,000 .30014
75% 24,988,099 $43,729,173 75% 7,500,000 .30014
100% 33,317,465 $58,305,564 100% 10,000,000 .30014
</TABLE>
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 42.9% 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 (i)(x) the Registration Statement is then in
effect and the Company has delivered to each person exercising a Warrant a
current prospectus meeting the requirements of the Securities Act, or (y) the
exercise is exempt from the registration requirements of the Securities Act,
and (ii) the Warrant Shares 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.
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The Warrants may be exercised at any time by surrendering to the Company at
the office of the Warrant Agent the certificates evidencing such Warrants (the
"Warrant Certificates") 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,
in the discretion of the Warrant Agent, by wire transfer of immediately
available funds to an account designated by the Warrant Agent. 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 upon 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.
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.
Warrant Certificates 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 United States
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,
reorganizations and reclassifications of Class A Common Stock, (iii) the
issuance of rights, options or warrants to subscribe 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.
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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 (i)(x) the
Registration Statement is then in effect and the Company has delivered to each
person exercising a Warrant a current prospectus meeting the requirements of
the Securities Act, or (y) the exercise of such Warrants is exempt from the
registration requirements of the Securities Act, and (ii) the Warrant Shares
are qualified for sale or exempt from qualification under the applicable state
blue sky laws. Subject to Black Out Periods and Postponement Periods, the
Company will use its commercially reasonable efforts to keep the Registration
Statement continuously effective under the Securities Act until the expiration
or exercise of all Warrants 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, (i) for a period
(a "Black Out Period") not to exceed the shorter of (x) the period ending on
the date the information responsible for the Black Out Period is disclosed to
the public and (y) sixty days (provided that no two Black Out Periods shall
occur during any period of 135 consecutive days) in the event that (1) 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 (2)(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; or (ii) in the event that the Company
determines in its good faith judgment that the current market price per share
of the Class A Common Stock is substantially below the Warrant Exercise Price
such that exercise of the Warrants is unlikely to occur, for a period (a
"Postponement Period") continuing until such time as the Company determines in
its good faith judgment that exercise of the Warrants appears likely; provided
that during the Postponement Period the Company (x) shall monitor the current
market price per share of the Class A Common Stock and (y) shall not permit
the exercise of any Warrant unless the Company shall have delivered to each
person exercising a Warrant a current prospectus meeting the requirements of
Section 10(a) of the Securities Act. See "Risk Factors--Ability to Exercise
Warrants."
TRANSFER RESTRICTIONS; LISTING
The Warrants will be freely transferable 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 "Risk Factors--No Prior Market for Rights or
Warrants."
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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.
113
<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 January 20, 1998, 32,019,254 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 34,285,714 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 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 a stockholder'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 date on which the Change of Control
Provision becomes inapplicable (by amendment of the Indenture, redemption of
the Convertible Debentures or otherwise) to such holder. 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 "The Recapitalization--Other--Charter Amendment."
CLASS A COMMON STOCK
Holders of issued and outstanding shares of Class A Common Stock are
entitled to one vote for each share they hold.
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.
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) a stockholder's shares of 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 date on which
the Change of Control Provision becomes inapplicable (by amendment of the
Indenture, redemption of the Convertible Debentures or otherwise) to such
holder.
PREFERRED STOCK
Shares of Preferred Stock of the Company may be issued from time to time in
one or more classes or series with such designation or title as fixed by the
Board of Directors. Each such class or series of Preferred Stock shall have
such voting powers, full or limited, or no voting powers, and such preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as determined by the
Board of Directors, in accordance with the laws of the State of Delaware.
114
<PAGE>
As a result of the Exchange, there are currently no issued and outstanding
shares of Preferred Stock. Pursuant to the terms of the Series A Preferred
Stock, the shares of Series A Preferred Stock reacquired by the Company
pursuant to the Exchange will (upon compliance with any applicable provisions
of the laws of the State of Delaware) be canceled by the Company and will not
be available for reissuance or redesignation.
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 unchanged.
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 the Change of Control Provision 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 34,285,714 shares of Class A Common Stock in the
Exchange. In addition, 120,000,000 shares of Class A Common Stock will be
issued to Rights holders in connection with the Rights Offering assuming
exercise of all Rights and assuming the Requisite Consents are obtained. Based
on the 32,019,254 shares of Class A Common Stock outstanding as of January 20,
1998, the issuance of such shares would result (on a pro forma basis as of
such date) in approximately a 381.9% 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.
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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, and of the receipt, ownership, and disposition of
Warrant Shares, to United States holders 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, possibly
on a retroactive basis. 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, foreign taxpayers or
persons holding the Company's stock as part of a straddle or conversion
transaction), nor does it discuss any aspect of state, local or foreign income
or other tax laws. This discussion is limited to United States holders of
Class A Common Stock who hold such stock as a capital asset. For purposes of
this discussion, a United States holder is a holder that is (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is subject to United States
federal income taxation regardless of its source, or (iv) a trust if a United
States court is able to exercise primary supervision over the administration
of the trust and one or more United States trustees or fiduciaries have the
authority to control all substantial decisions of the trust.
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 capital gain or loss equal to the difference between
the sale proceeds and such stockholder's basis (if any) in the Rights sold. In
the case of certain non-corporate taxpayers, any such capital gain generally
will be subject to a maximum United States federal income tax rate of (i) 28%
if such holder's holding period is more than one year but not more than
eighteen months and (ii) 20% if such holding period is 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, Class B Common Stock
(to the extent applicable) 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, Class B
Common Stock (to the extent applicable) 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, Class B Common Stock (to the
extent applicable) and Warrants acquired through exercise of the Rights will
begin on the date the Rights are exercised.
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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 in which case the amount and character of which will be
determined as if such holder had received such fractional shares and
immediately had them redeemed by the Company for cash) 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. 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 generally will 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. In the case of certain non-corporate
taxpayers, any such capital gain generally will be subject to a maximum U.S.
Federal income tax rate of (i) 28% if such holder's holding period is more
than one year but not more than eighteen months and (ii) 20% if such holding
period is 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.
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).
If a Warrant expires unexercised, a Warrant holder will recognize a capital
loss equal to such holder's tax basis in the Warrant.
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, OF THE OWNERSHIP,
EXERCISE AND DISPOSITION OF THE RIGHTS AND WARRANTS, AND OF THE RECEIPT,
OWNERSHIP AND DISPOSITION OF WARRANT SHARES 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 years ended October
31, 1996 and 1997 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 statements of operations, stockholders' equity and cash
flows included in this Prospectus and elsewhere in this Registration Statement
for the year ended October 31, 1995 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.
117
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of October 31, 1997 and 1996.............. F-4
Consolidated Statements of Operations for the Years Ended October 31,
1997, 1996 and 1995..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended Octo-
ber 31, 1997, 1996 and 1995............................................. F-6
Consolidated Statements of Cash Flows for the Years Ended October 31,
1997, 1996 and 1995..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Air & Water Technologies Corpo-
ration:
We have audited the accompanying consolidated balance sheets of Air & Water
Technologies Corporation and its Subsidiaries as of October 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years 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 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 its Subsidiaries as of October 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
December 13, 1997, except for
the last paragraph of Note 7
as to which the date is
January 28, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Air & Water Technologies Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Air & Water Technologies Corporation (a
Delaware corporation) and subsidiaries for the year ended October 31, 1995.
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 consolidated statements of operations, stockholders'
equity and cash flows referred to above present fairly, in all material
respects, the results of operations and cash flows of Air & Water Technologies
Corporation and subsidiaries for the year ended October 31, 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
December 8, 1995
F-3
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, including restricted
cash of $413 and $849 in 1997 and 1996, re-
spectively.................................... $ 12,089 $ 12,667
Accounts receivable, less allowance for doubt-
ful accounts of $3,300 and $1,300 in 1997 and
1996, respectively............................ 76,681 61,818
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 33,557 37,437
Inventories.................................... 1,893 1,921
Prepaid expenses and other current assets...... 4,460 7,878
Net current assets of discontinued operations.. -- 21,410
--------- ---------
Total current assets......................... 128,680 143,131
--------- ---------
Property, plant and equipment, net............... 13,388 28,890
Investments in environmental treatment facili-
ties............................................ 21,817 22,062
Goodwill, net.................................... 164,337 169,578
Other assets..................................... 30,391 27,927
Net non-current assets of discontinued opera-
tions........................................... 24,452 104,770
--------- ---------
Total assets................................. $ 383,065 $ 496,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt......... $ 398 $ 378
Accounts payable............................... 80,007 56,914
Accrued expenses............................... 86,681 63,921
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 15,320 12,520
Income taxes payable........................... 1,485 1,842
Net current liabilities of discontinued opera-
tions......................................... 591 --
--------- ---------
Total current liabilities.................... 184,482 135,575
--------- ---------
Long-term debt................................... 307,845 306,542
--------- ---------
Commitments and contingencies (Note 13) -- --
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............................ (535,214) (372,433)
Common stock in treasury, at cost.............. (108) (108)
Cumulative currency translation adjustment..... (1,020) (298)
--------- ---------
Total stockholders' equity (deficit)......... (109,262) 54,241
--------- ---------
Total liabilities and stockholders' equity
(deficit)................................... $ 383,065 $ 496,358
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-4
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales............................. $ 456,375 $ 482,091 $ 398,661
Cost of sales..................... 385,573 394,124 309,496
--------- --------- ---------
Gross margin.................. 70,802 87,967 89,165
Selling, general and
administrative expenses.......... 75,755 62,316 66,697
Depreciation and amortization..... 16,861 13,983 12,279
Impairment charge................. 5,000 -- --
--------- --------- ---------
Operating income (loss) from
continuing operations........ (26,814) 11,668 10,189
Interest income................... 359 923 1,113
Interest expense.................. (24,356) (22,597) (23,925)
Other expense, net................ (502) (2,296) (37)
--------- --------- ---------
Loss from continuing
operations before income
taxes ....................... (51,313) (12,302) (12,660)
Income tax (expense) benefit...... (514) 1,246 (587)
--------- --------- ---------
Loss from continuing
operations................... (51,827) (11,056) (13,247)
Discontinued operations:
Income (loss) from operations
of discontinued segment...... (44,854) 5,788 5,262
Loss from disposal of
discontinued segment......... (63,900) -- --
--------- --------- ---------
Net loss...................... (160,581) (5,268) (7,985)
Preferred stock dividend,
including dividends in arrears of
$1,100 at October 31, 1997....... (3,300) (3,300) (3,300)
--------- --------- ---------
Net loss applicable to common
stockholders................. $(163,881) $ (8,568) $ (11,285)
========= ========= =========
Income (loss) per common share
(after preferred stock dividend):
Continuing operations......... $ (1.72) $ (.45) $ (.52)
Discontinued operations....... (3.40) .18 .17
--------- --------- ---------
Net loss...................... $ (5.12) $ (.27) $ (.35)
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-5
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT 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,
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
Net loss............ -- -- -- -- -- (160,581) -- -- -- (160,581)
Cash dividends,
Series A Preferred
Stock.............. -- -- -- -- -- (2,200) -- -- -- (2,200)
Currency translation
adjustment......... -- -- -- -- -- -- -- -- (722) (722)
--------- --- ---------- --- -------- --------- ------- ------ ------- ---------
Balance, October 31,
1997............... 1,200,000 $12 32,109,156 $32 $427,036 $(535,214) (89,902) $ (108) $(1,020) $(109,262)
========= === ========== === ======== ========= ======= ====== ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-6
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(160,581) $ (5,268) $ (7,985)
Adjustments to reconcile net loss to net cash
provided by (used for) continuing operations--
Discontinued operations........................ 108,754 (5,788) (5,262)
Depreciation and amortization.................. 16,861 13,983 12,279
Other.......................................... 7,865 890 196
Changes in assets and liabilities, excluding
effects of divestitures--
(Increase) decrease in assets--
Accounts receivable........................... (14,988) (2,318) (2,993)
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 3,880 (7,383) (1,213)
Inventories................................... 28 (1,199) 169
Prepaid expenses and other current assets..... 3,418 (798) (1,103)
Other assets.................................. 8,100 (380) 14,827
Increase (decrease) in liabilities--
Accounts payable.............................. 23,061 11,240 19,134
Accrued expenses.............................. 2,266 (7,317) (6,776)
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 2,800 (681) (171)
Income taxes.................................. (357) (600) 3,412
--------- -------- --------
Net cash provided by (used for) continuing
operations.................................. 1,107 (5,619) 24,514
Net cash provided by (used for) discontinued
operations.................................. 13,887 6,507 (11,531)
--------- -------- --------
Net cash provided by operating activities.... 14,994 888 12,983
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses............... 2,015 6,186 12,962
Capital expenditures........................... (4,949) (6,276) (5,402)
Investment in environmental treatment
facilities.................................... 123 530 798
Start up costs and other....................... (8,400) (11,122) (5,501)
Discontinued operations........................ (978) (1,206) (3,569)
--------- -------- --------
Net cash used for investing activities....... (12,189) (11,888) (712)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common and preferred
stock......................................... -- 8 --
Payments of notes payable and long-term debt... (377) (366) (654)
Net borrowings under credit facilities......... 1,700 17,800 14,500
Accounts receivable repurchased................ -- -- (20,000)
Cash dividends paid on preferred stock......... (2,475) (3,300) (3,300)
Other.......................................... (2,231) (1,643) (2,670)
--------- -------- --------
Net cash provided by (used for) financing
activities.................................. (3,383) 12,499 (12,124)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. (578) 1,499 147
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 12,667 11,168 11,021
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 12,089 $ 12,667 $ 11,168
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest......................... $ 23,599 $ 22,417 $ 24,879
========= ======== ========
Cash paid for income taxes..................... $ 1,468 $ 1,292 $ 604
========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-7
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIIES
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. Revenues related to the operations, maintenance and management
services within the PSG operating segment are generally recognized as the
related services are provided.
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. Substantially all of the costs and estimated
earnings in excess of billings on uncompleted contracts are expected to be
collected in fiscal year 1998. 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 cost or market (first in,
first out method) and consists primarily of chemicals and spare parts.
F-8
<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 10 years for machinery, equipment and fixtures.
Leasehold improvements are amortized over the term of the lease. 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>
1997 1996
------- -------
<S> <C> <C>
Land and land improvements............................... $ 122 $ 4,733
Buildings and leasehold improvements..................... 3,899 13,114
Machinery, equipment and fixtures........................ 26,324 31,842
------- -------
30,345 49,689
Less--Accumulated depreciation and amortization.......... (16,957) (20,799)
------- -------
$13,388 $28,890
======= =======
</TABLE>
In connection with the planned Research-Cottrell divestiture (See Note 3),
the Company has decided to sell the land and building located in Branchburg,
New Jersey which was primarily occupied by the operations of Research-
Cottrell. The carrying value was reduced to approximately $5,500,000 after the
recognition of a $5,000,000 impairment charge based on current offers from
interested parties and is classified in other non-current assets.
Goodwill and long-lived assets
Goodwill is being amortized over 40 years under the straight-line method.
Goodwill amortization was $5,240,000, $5,025,000 and $4,987,000 for the years
ended October 31, 1997, 1996 and 1995. Accumulated amortization of goodwill
was $38,373,000 and $33,132,000 at October 31, 1997 and 1996. 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 cash flows over the remaining life of the assets in determining
whether the assets are impaired. Any impairment is measured using discounted
operating cash flows or other fair value measures as appropriate. The
realizablility 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 and results of operations.
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 costs are included in other assets and amounted to
$14,044,000 and $13,767,000 at October 31, 1997 and 1996. 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 $2,946,000 and $3,147,000 at October 31, 1997 and 1996.
F-9
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accrued expenses
Accrued expenses included the following as of October 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Salaries and benefits................................... $19,736 $24,166
Self-insured loss reserves.............................. 21,863 20,700
Retained liabilities of discontinued operations (Note
3)..................................................... 21,000 --
Interest and other financing costs...................... 6,843 5,820
Other................................................... 17,239 13,235
------- -------
Total................................................. $86,681 $63,921
======= =======
</TABLE>
Earnings (loss) per share
The earnings (loss) per share was computed by dividing the net income (loss)
after preferred stock dividends by the weighted average number of common
shares outstanding each period. The weighted average number of shares
outstanding was 32,019,000 in 1997 and 32,018,000 in 1996 and 1995. Common
stock equivalents (stock options) and the Company's 8% Convertible
Subordinated Debentures due 2015 (the "Convertible Debentures") have not been
included in the earnings (loss) per share calculation since the effect is
antidilutive.
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 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation including the effects
of removing the accounts of the discontinued operations from continuing
operations (See Note 3).
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.
(2) CGE RELATIONSHIP
As of October 31, 1997, approximately 43% of the Company's Class A Common
Stock, par value $.001 per share (the "Class A Common Stock"), and all of the
5 1/2% Series A Convertible Exchangeable Preferred Stock (the "Series A
Preferred Stock") comprising approximately 50.0009% of the voting power of the
Company, are owned by Compagnie Generale Des Eaux ("CGE"), a French company.
The Company also has
F-10
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
certain financial and other relationships with Anjou International Company, a
wholly-owned subsidiary of CGE ("Anjou"). Pursuant to a March 1994 Investment
Agreement among the Company, CGE and Anjou, as amended as of September 24,
1997 by the Recapitalization Agreement discussed below, CGE received the right
to designate a number of members of the Company's Board of Directors
proportionate to the voting power represented by CGE's ownership interest and
to appoint the Company's Chief Executive Officer and Chief Financial Officer.
CGE has agreed to make the Company its exclusive vehicle in the United States,
its possessions and its territories for CGE's 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, nor to CGE's
present or future investments in Consumers Water Company and Philadelphia
Suburban Corporation; provided further, that the foregoing 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.
In addition to its direct ownership interest, the Company has benefited from
certain financial undertakings by CGE, including a $125 million term loan from
CGE (See Note 6) and a $60 million credit facility with Anjou (See Note 5). In
connection with a major contract undertaken by PSG in Puerto Rico (See Note
11), CGE has unconditionally guaranteed performance of the contract by PSG.
Anjou has also agreed to guarantee certain obligations of the Company relating
to the bonding of certain contracts (See Note 13). The Company compensates CGE
for its support of the Company's credit facilities (See Note 5) in an amount
equal to 0.95% per annum of the outstanding commitment of its credit
facilities ($1.2 million, $1.2 million and $0.8 million for the years ended
October 31, 1997, 1996 and 1995).
On September 24, 1997, the Company, CGE and Anjou entered into the
Recapitalization Agreement, whereby the Company would repay the CGE note and
the Anjou credit facility and exchange 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 (the "Exchange") and (ii) a rights offering (the "Rights Offering"),
pursuant to which CGE has committed to subscribe to a minimum of $185 million
of common stock, the proceeds of which would be used to reduce the debt to CGE
and Anjou discussed above. The Company has filed a Registration Statement on
Form S-1 in respect of the securities offered pursuant to the Rights Offering.
The pro forma loss per share, for the year ended October 31, 1997, after
giving effect to the issuance of approximately 140,000,000 shares under the
Minimum Subscription and the exchange of the Series A Preferred Stock and
repayment of the $125 million term loan from CGE and $60 million credit
facility with Anjou would be $0.23 per share. Other items included in the
Recapitalization Agreement are as follows: (i) the Company has agreed to
conduct a consent solicitation of its Convertible Debenture holders to amend
certain provisions of the indenture which require the Company to repurchase
the Convertible Debentures if any person acquires more than 75% of the voting
control of the Company (the "Consent Solicitation"); (ii) an amendment to the
Company's charter will be made which would increase the authorized shares of
Class B Common Stock, par value $.001 per share, a class of nonvoting common
stock of the Company, which would be issued to CGE in the event the Company
does not receive the requisite consents in the Consent Solicitation; and (iii)
CGE agreed to further its efforts with the Company to enhance the Company's
participation in the privatization market in the water and wastewater
management industry. The Rights Offering provides for public participation up
to an additional $25 million in gross proceeds. The Recapitalization Agreement
may be terminated by either party if the Recapitalization shall not have been
consummated on or before March 22, 1998.
(3) RESEARCH-COTTRELL
On December 2, 1997, the Company announced that it will divest its Research-
Cottrell business segment which provides air pollution control technologies
and services. The Company is currently in negotiations with several interested
parties and believes that most of these businesses will be sold within the
next several months,
F-11
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
but in any event no later than November 30, 1998, and has reported its results
of operations and financial condition as a discontinued operation. Summarized
financial data of Research-Cottrell is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Current assets.......................................... $44,441 $ 61,607
Current liabilities..................................... 45,617 41,912
------- --------
Net current assets (liabilities)........................ (1,176) 19,695
Goodwill................................................ 20,383 96,282
Property, plant and equipment and other................. 4,069 8,488
------- --------
Net non-current assets.................................. 24,452 104,770
------- --------
Net carrying value...................................... $23,276 $124,465
======= ========
</TABLE>
The current assets consist primarily of accounts receivable, costs and
estimated earnings in excess of billings on uncompleted contracts and
inventories. The current liabilities consist primarily of accounts payable,
accrued expenses and billings in excess of costs and estimated earnings on
uncompleted contracts. In addition to the above amounts are estimated retained
liabilities of $21,000,000 related to the estimated losses through
disposition, certain warranty, litigation, lease and other obligations which
are included in accrued expenses at October 31, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Sales.................................. $ 173,140 $219,008 $220,207
Costs and expenses..................... 211,400 206,910 207,487
Depreciation and amortization.......... 5,101 6,032 6,069
--------- -------- --------
Operating income (loss)................ (43,361) 6,066 6,651
Non-operating income (expense)......... (854) 550 (861)
--------- -------- --------
Income (loss) before taxes and loss on
disposal.............................. (44,215) 6,616 5,790
Income taxes........................... (639) (828) (528)
--------- -------- --------
Loss before loss on disposal .......... (44,854) 5,788 5,262
Loss on disposal....................... (63,900) -- --
--------- -------- --------
Income (loss) from discontinued
operations............................ $(108,754) $ 5,788 $ 5,262
========= ======== ========
</TABLE>
The loss on disposal was developed using a range of estimated proceeds based
on current negotiations with several potential buyers and includes estimated
losses through disposition of $8,500,000. The loss may change in the near-term
based on the ultimate negotiated sale prices and proceeds received, the timing
of the anticipated sale transactions, actual results through disposition and
final resolution of any retained liabilities.
Also included in the Company's consolidated balance sheets are the net
current assets of the discontinued asbestos abatement operations which
amounted to $585,000 and $1,715,000 at October 31, 1997 and 1996.
(4) INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES
The Company designed and constructed 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
transfer to them substantially all risks of ownership and which will generate
sufficient revenues to service the debt and return the Company's investment.
F-12
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 nonrecourse debt
(approximately $28,575,000 and $29,925,000 at October 31, 1997 and 1996) 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 thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Future minimum lease payments........................ $ 35,804 $ 38,099
Expected residual value (unguaranteed)............... 9,354 9,354
Unearned income...................................... (4,607) (5,538)
-------- --------
Net investment in leases............................. 40,551 41,915
Offset--nonrecourse debt, net of available funds in
hands of trustee.................................... (23,933) (25,584)
-------- --------
Net investment in leases............................. 16,618 16,331
Facility enhancements, net of depreciation........... 5,199 5,731
-------- --------
Investments in environmental treatment facilities.... $ 21,817 $ 22,062
======== ========
</TABLE>
At October 31, 1997, minimum lease payments to be received, net of executory
costs for each of the five succeeding fiscal years, are $1,961,000,
$2,069,000, $2,216,000, $2,306,000 and $2,306,000.
(5) FINANCING ARRANGEMENTS:
The Company maintains a $60.0 million seven-year revolving credit facility
with Anjou which matures on August 2, 2003. As of October 31, 1997 and 1996,
the Company's borrowings under the facility totaled $60.0 million. The
facility bears interest at LIBOR plus 0.6% (6.2% at October 31, 1997).
Interest expense related to this facility which was entered into during 1996
was $3,686,000 and $714,000 for the years ended October 31, 1997 and 1996. The
Company expects to repay the outstanding borrowings under the facility with a
portion of the gross proceeds from the Rights Offering discussed in Note 2.
The Company also maintains a secured bank credit facility (the "Bank Credit
Facility") which was increased by $20.0 million to $70.0 million as of April
28, 1997. As of October 31, 1997, the Company's borrowings under the Bank
Credit Facility totaled $3.0 million and outstanding letters of credit under
the Bank Credit Facility totaled $22.5 million (unused capacity of $44.5
million).
As of December 12, 1997 the configuration and structure of the Bank Credit
Facility was revised. Societe Generale purchased and assumed from all of the
other lending banks under the Bank Credit Facility all of such banks' rights
and obligations under the Bank Credit Facility, becoming the sole lending bank
thereunder. In addition, the Company and Societe Generale, entered into an
amendment to extend the $70.0 million credit facility until December 11, 1998.
The facility had been scheduled to expire on March 31, 1998. The amendment
waives the Company's compliance with certain covenants and amends others. The
prior amendments and waiver would have terminated on December 15, 1997 had the
facility not been amended.
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
F-13
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$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
October 31, 1997), or at a defined bank rate approximating prime (8.5% at
October 31, 1997). The Bank Credit Facility also allows for certain additional
borrowings, including, among other things, project financing and foreign
borrowing facilities, subject to limitations, and contains certain financial
and other restrictive covenants, including, among other things, the
maintenance of certain financial ratios, and restrictions on the incurrence of
additional indebtedness, acquisitions, the sale of assets, the payment of
dividends and the repurchase of subordinated debt. In addition, the related
revised agreement requires CGE to maintain its support of the Company,
including a minimum 48% voting equity ownership interest in the Company and
its 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 gross amount of proceeds from and repayments of working capital
borrowings under these credit facilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Borrowings.............................. $ 1,171,000 $ 728,900 $ 509,000
Repayment............................... (1,169,300) (711,100) (494,500)
----------- --------- ---------
Net..................................... $ 1,700 $ 17,800 $ 14,500
=========== ========= =========
</TABLE>
(6) LONG-TERM DEBT
The Company's long-term debt consists of the following at October 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Term loan from CGE...... $125,000 $125,000
Convertible Subordinated
Debentures due May 15,
2015................... 115,000 115,000
Anjou credit facility
(Note 5)............... 60,000 60,000
Bank Credit Facility
(Note 5)............... 3,000 --
Note due July 1, 2007 at
8.5%................... 3,095 3,200
Real estate mortgage
loans at 8.75%......... 2,148 2,420
Other................... -- 1,300
-------- --------
308,243 306,920
Less current
installments of long-
term debt.............. (398) (378)
-------- --------
Long-term debt.......... $307,845 $306,542
======== ========
</TABLE>
The $125 million term loan from CGE 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% (6.9% at October 31, 1997), as defined, and has a
final maturity of June 15, 2001. The term 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. Interest expense related to this term loan was $8,715,000,
$8,884,000 and $9,142,000 during the years ended October 31, 1997, 1996 and
1995. The Company expects to repay the term loan from CGE with a portion of
the gross proceeds from the Rights Offering (see Note 2).
Interest on the Convertible Debentures is payable semi-annually at 8%. The
Convertible Debentures are redeemable in whole or in part at the option of the
Company at any time, at a redemption price of 102.4% of the
F-14
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal amount as of October 31, 1997 reducing to 100% of the principal
amount on May 15, 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 Convertible
Debentures has the right to require the Company to repurchase such holder's
Convertible Debentures at a repurchase price of 100% of the principal amount
of the Convertible Debentures, together with accrued interest to the
repurchase date for cash or common stock (at the option of the Company), 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 an
election of directors (See Note 2 regarding the Consent Solicitation).
At October 31, 1997, the aggregate maturities of long-term debt for each of
the five succeeding fiscal years and thereafter are approximately $0.4
million, $3.4 million, $6.2 million, $131.3 million, $6.3 million, and $160.6
million.
The Company has obtained a waiver relating to violations of certain
financial covenants under the CGE term loan through November 1, 1998.
(7) 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.
At the option of the Company, its Series A Preferred Stock, all of which is
held by CGE, is exchangeable for the Company's 5.5% Convertible Subordinated
Notes with a maturity of 10 years from the date of issuance of such notes at
$50.00 per share. Such 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. The Company did not declare the quarterly dividends aggregating
$1,650,000 due September 30, 1997 and December 31, 1997 on the Series A
Preferred Stock due to its concerns over liquidity and the adequacy of its
surplus. On January 28, 1998, the Company effected the Exchange pursuant to
which all of the shares of Series A Preferred Stock held by CGE (representing
all of the issued and outstanding shares of Series A Preferred Stock) were
exchanged for approximately 34,285,000 shares of Class A Common Stock. The
dividends in arrears on the Series A Preferred Stock have not been paid and
were extinguished pursuant to the Exchange.
(8) 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 each of October 31,
1997 and 1996, 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, during 1996 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, options 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-15
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Outstanding
Beginning of year....................... 1,711,331 1,985,120 2,291,347
Granted................................. 60,000 999,177 129,200
Exercised............................... -- (1,250) --
Forfeited............................... (563,997) (1,271,716) (435,427)
--------- ---------- ---------
Outstanding
End of year............................. 1,207,334 1,711,331 1,985,120
========= ========== =========
At October 31
Exercisable ............................ 934,910 887,952 1,375,493
Available for grant..................... 2,543,161 2,039,164 766,625
Outstanding Option price per share:
Weighted average........................ $ 7.91 $ 8.16 $ 12.76
Range................................... $ 4.31 $ 4.25 $ 4.31
to to to
$ 28.57 $ 28.57 $ 31.43
Exercised Option price per share:........ $ -- $ 6.00 $ --
</TABLE>
As permitted under generally accepted accounting principles, grants under
the Plan are accounted for following APB Opinion No. 25 and related
interpretations, and accordingly no compensation cost has been recognized in
the financial statements. Had compensation cost for the Plan been determined
based on the grant date fair values of awards (the method described in FASB
Statement No. 123), reported net loss would have been increased to
$161,671,000 and $6,427,000 in the years ended October 31, 1997 and 1996 and
the loss per common share after preferred stock dividend would have been
increased to $5.15 and $0.30 in the years ended October 31, 1997 and 1996. In
determining the pro forma amounts referred to above, the fair value of each
grant is estimated at the grant date using the Black-Scholes option pricing
model with the following weighted average assumptions for grants: zero
dividend rate, price volatility of 44% and expected lives of 8 years for both
1997 and 1996, and risk free interest rates of 6.0% and 6.3% in 1997 and 1996,
respectively.
(9) 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
expense charged to continuing operations applicable to these plans was
approximately $1,700,000, $2,200,000 and $2,200,000 for the years ended
October 31, 1997, 1996 and 1995.
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 $1,500,000, $1,300,000 and $1,000,000 for the
years ended October 31, 1997, 1996 and 1995. The accrued pension liabilities
were approximately $2,800,000, $2,800,000 and $2,700,000 at October 31, 1997,
1996 and 1995.
(10) 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." The joint ventures operate primarily in the water and wastewater
F-16
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
engineering industry. The joint venture activities typically include
engineering, design and/or construction management services. Certain joint
ventures are also involved in program management of construction activities. A
separate joint venture is established with respect to each such project. The
joint venture arrangements generally commit each partner to supply a
predetermined proportion of the engineering labor and capital, and provide
each partner a predetermined proportion of income or loss. The Company is
jointly and severally liable for the obligations of the joint ventures and has
rights to the assets in proportion to its share of ownership. Each joint
venture is terminated upon the completion of the underlying project.
The Company's investment in joint ventures (included in other assets)
amounted to $2,775,000 and $5,050,000 at October 31, 1997 and 1996. In
addition, the Company had receivables from the joint ventures totaling
$2,581,000 and $3,848,000 at October 31, 1997 and 1996 related to current
services provided by the Company to the joint ventures. The Company's share of
its joint venture income (loss) amounted to $(25,000), $1,127,000 and
$3,227,000 during the years ended October 31, 1997, 1996 and 1995. 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.
(11) BUSINESS SEGMENTS
Through October 31, 1997, the Company's operation may be categorized in
three business segments:
Professional Services Group 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 contract with PRASA representing 39%, 39% and 12% of
total segment sales in 1997, 1996 and 1995. In addition, total
receivables due from PRASA for certain reimbursable costs were $34.3
million and $16.0 million at October 31, 1997 and 1996. The contract
with PRASA has a five-year term, but PRASA may cancel the contract for
any reason after August 31, 1998. The Company's wholly-owned subsidiary,
PS Group of Puerto Rico, Inc., is in the process of negotiations with
PRASA regarding a replacement contract for the existing five-year
contract. Management currently expects that the contract with PRASA will
not be canceled by PRASA in August 1998, but will remain in effect
through its original five-year term ending August 2000 or be amended or
replaced with a new contract. Additionally, the PRASA employees who
operate the PRASA facilities are subject to a collective bargaining
agreement which expires in June 1998.
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, 1997.
Research-Cottrell provides air pollution control technologies and
services. As discussed in Note 3, the Company's Board of Directors has
decided to divest this segment.
Sales to the federal government represented approximately 10%, 15% and 16%
of consolidated sales in the years ended October 31, 1997, 1996 and 1995.
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, 1997, 1996 and 1995 were less than 10% of the consolidated assets
and sales.
F-17
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information by business segment is as follows (in thousands):
<TABLE>
<CAPTION>
METCALF RESEARCH- UNALLOCATED
PSG & EDDY COTTRELL OTHER CORPORATE ELIMINATIONS CONSOLIDATED
-------- -------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
OCTOBER 31, 1997:
- ------------------------
Sales................... $271,650 $186,490 $ -- $ -- $ -- $(1,765) $456,375
Costs and expenses...... 261,707 192,936 -- -- 13,450 (1,765) 466,328
Depreciation and amorti-
zation................. 8,119 8,227 -- -- 515 -- 16,861
-------- -------- -------- ------ -------- ------- --------
Operating income
(loss)................. $ 1,824 $(14,673) $ -- $ -- $(13,965) $ -- $(26,814)
======== ======== ======== ====== ======== ======= ========
Identifiable assets as
of October 31, 1997.... $173,041 $165,794 $ 24,452 $ 88 $ 19,690 $ -- $383,065
======== ======== ======== ====== ======== ======= ========
Capital expenditures.... $ 2,448 $ 2,479 $ -- $ -- $ 22 $ -- $ 4,949
======== ======== ======== ====== ======== ======= ========
Depreciation............ $ 1,676 $ 4,785 $ -- $ -- $ 378 $ -- $ 6,839
======== ======== ======== ====== ======== ======= ========
FOR THE YEAR ENDED
OCTOBER 31, 1996:
- ------------------------
Sales................... $270,640 $215,358 $ -- $ -- $ -- $(3,907) $482,091
Costs and expenses...... 255,882 195,745 -- -- 8,720 (3,907) 456,440
Depreciation and amorti-
zation................. 7,335 6,223 -- -- 425 -- 13,983
-------- -------- -------- ------ -------- ------- --------
Operating income
(loss)................. $ 7,423 $ 13,390 $ -- $ -- $ (9,145) $ -- $ 11,668
======== ======== ======== ====== ======== ======= ========
Identifiable assets as
of October 31, 1996.... $157,566 $188,403 $124,465 $ 154 $ 25,770 $ -- $496,358
======== ======== ======== ====== ======== ======= ========
Capital expenditures.... $ 2,520 $ 3,604 $ -- $ -- $ 152 $ -- $ 6,276
======== ======== ======== ====== ======== ======= ========
Depreciation............ $ 1,703 $ 3,083 $ -- $ -- $ 406 $ -- $ 5,192
======== ======== ======== ====== ======== ======= ========
FOR THE YEAR ENDED
OCTOBER 31, 1995:
- ------------------------
Sales................... $179,713 $216,852 $ -- $6,133 $ -- $(4,037) $398,661
Costs and expenses...... 164,435 200,125 -- 6,096 9,574 (4,037) 376,193
Depreciation and amorti-
zation................. 5,679 5,691 -- 307 602 -- 12,279
-------- -------- -------- ------ -------- ------- --------
Operating income
(loss)................. $ 9,599 $ 11,036 $ -- $ (270) $(10,176) $ -- $ 10,189
======== ======== ======== ====== ======== ======= ========
Identifiable assets as
of October 31, 1995.... $148,402 $181,590 $127,417 $3,037 $ 28,872 $ -- $489,318
======== ======== ======== ====== ======== ======= ========
Capital expenditures.... $ 2,135 $ 2,818 $ -- $ -- $ 449 $ -- $ 5,402
======== ======== ======== ====== ======== ======= ========
Depreciation............ $ 1,660 $ 2,747 $ -- $ 241 $ 584 $ -- $ 5,232
======== ======== ======== ====== ======== ======= ========
</TABLE>
(12) INCOME TAXES
At October 31, 1997, the Company has a net deferred tax asset of
$139,700,000 which has been fully reserved by a valuation allowance. The
deferred tax asset is comprised of the tax effects of net operating losses
($116,400,000), receivable reserves ($2,900,000), inventory reserves
($300,000), other assets ($1,900,000) and accruals not yet deductible
($22,800,000). A deferred tax liability of $4,600,000 is comprised of fixed
assets depreciation. At October 31, 1997, the Company had tax loss
carryforwards of approximately $333,000,000. Such carryforwards expire through
2012.
Income (loss) from continuing operations before income taxes during the
years ended October 31, 1997, 1996 and 1995, respectively, from the United
States was $(51,131,000), $(9,041,000) and $(12,982,000) and from foreign
jurisdictions was $(182,000), $(3,261,000) and $322,000. The provision
(benefit) for income
F-18
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
taxes during the years ended October 31, 1997, 1996 and 1995, respectively,
included foreign taxes of $185,000, $(1,071,000) and $146,000 and state taxes
of $329,000, $(175,000) and $441,000. The difference between the income tax
provision (benefit) computed by applying the statutory federal income tax rate
to the pretax loss from continuing operations and the actual tax provision
(benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Statutory benefit............................. $(17,960) $(4,306) $(4,431)
State income taxes............................ 214 (114) 287
Goodwill and other............................ 2,709 2,634 1,745
Impact of net operating loss.................. 15,302 470 2,953
Impact of foreign operations.................. 249 70 33
-------- ------- -------
$ 514 $(1,246) $ 587
======== ======= =======
</TABLE>
(13) 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, 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 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 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
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 (except for two recalcitrant homeowners) were resolved. All
claims by and between M&E Services and the City in the second homeowners' suit
were expressly reserved and will be tried
F-19
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 initial response to the suit is due January
20, 1998. The case involves complex technical and legal issues and is in its
earliest stages. Nevertheless, 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 contact and poor
performance.
Other Matters
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.
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 which required an immediate cash
payment of approximately $2.2 million. Total rent expense in the periods ended
October 31, 1997, 1996 and 1995 was $16.9 million, $17.1 million and $16.7
million, respectively. At October 31, 1997, minimum rental commitments under
all noncancellable leases for the five succeeding fiscal years, and
thereafter, are $11.4 million, $10.5 million, $8.5 million, $7.6 million, $6.7
million and $12.5 million. These minimum rental commitments are net of
noncancellable sub-leases for the five succeeding fiscal years of $1.3
million, $1.3 million, $1.2 million $1.1 million and $0.5 million.
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
F-20
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $2.9 million of
Industrial Revenue Bond financing.
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, (collectively, "Reliance") although no
bonds have been obtained under these agreements 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. The Company has
obtained a waiver relating to violations of certain financial covenants
relating to its bonding agreements with Reliance through November 1, 1998.
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 (or one of its affiliates) would be willing to provide such
a guarantee.
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.
F-21
<PAGE>
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 BY QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales...................... $106,637 $108,631 $110,828 $130,279 $ 456,375
-------- -------- -------- -------- ---------
Gross margin............... 17,170 7,522 21,371 24,739 70,802
-------- -------- -------- -------- ---------
Loss from continuing
operations................ (9,792) (33,304) (2,024) (6,707) (51,827)
-------- -------- -------- -------- ---------
Loss from discontinued
operations................ (2,738) (30,682) (2,766) (72,568) (108,754)
-------- -------- -------- -------- ---------
Net loss................... $(12,530) $(63,986) $ (4,790) $(79,275) $(160,581)
======== ======== ======== ======== =========
Loss per common share
after preferred stock
dividend:
Continuing operations...... $ (.33) $ (1.07) $ (.09) $ (.20) $ (1.72)
-------- -------- -------- -------- ---------
Discontinued operations.... (.09) (.95) (.09) (2.27) (3.40)
-------- -------- -------- -------- ---------
Net loss................... $ (.42) $ (2.02) $ (.18) $ (2.47) $ (5.12)
======== ======== ======== ======== =========
<CAPTION>
1996 BY QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales...................... $110,557 $113,165 $119,524 $138,845 $ 482,091
-------- -------- -------- -------- ---------
Gross margin............... 20,623 23,459 22,426 21,459 87,967
-------- -------- -------- -------- ---------
Loss from continuing
operations................ (3,401) (2,963) (1,819) (2,873) (11,056)
-------- -------- -------- -------- ---------
Income from discontinued
operations................ 456 1,658 1,361 2,313 5,788
-------- -------- -------- -------- ---------
Net loss................... $ (2,945) $ (1,305) $ (458) $ (560) $ (5,268)
======== ======== ======== ======== =========
Income (loss) per common
share
after preferred stock
dividend:
Continuing operations...... $ (.13) $ (.12) $ (.08) $ (.12) $ (.45)
-------- -------- -------- -------- ---------
Discontinued operations.... .01 .05 .04 .08 .18
-------- -------- -------- -------- ---------
Net loss................... $ (.12) $ (.07) $ (.04) $ (.04) $ (.27)
======== ======== ======== ======== =========
</TABLE>
- --------
Note a: 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.
Note b: Significant charges affecting the comparability of the 1997 quarterly
loss from continuing operations include a $1.7 million first quarter
charge related to a cancellation penalty for a high cost leased facility;
operating charges of $26.6 million reflected in the second quarter for
professional fees related to marketing consultants and the DOJ
investigation, increases to reserves for litigation, professional
liability and certain project contingencies, increases to receivable
reserves, equipment write-offs and other direct and indirect costs; a $3.2
million third quarter reduction in previously accrued discretionary and
self-insured employee benefits; a fourth quarter $5.0 million asset
impairment charge related to the Branchburg facility and a $0.8 million
severance benefit related to the former chief executive officer.
Note c: Significant charges affecting the comparability of the 1997 quarterly
loss from discontinued operations include a $25.0 million impairment
charge primarily related to Ecodyne and KVB and operating charges of $4.0
million related to increases to Ecodyne receivable and Custodis warranty
reserves both of which were reflected during the second quarter; third
quarter operating charges of $2.3 million primarily related to higher than
anticipated costs on a specific APCD project and increases to receivable
and warranty reserves for R-C International partially off-set by a
reduction of previously accrued discretionary and self-insured employee
benefits; fourth quarter operating charges of $8.1 million related to
additional increases to warranty reserves at R-C International, additional
costs related to an APCD project and various other reserves for retained
assets of businesses previously sold as well as an estimated loss on the
disposal of the segment of $63.9 million.
F-22
<PAGE>
ANNEX A
Wasserstein Perella & Co., Inc.
31 West 52nd Street
New York, New York 10019-6118
Telephone 212-969-2700
[LOGO of Wasserstein Perella & Co] Fax 212-969-7836
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.
New York Chicago Dallas Frankfurt Houston London Los Angeles Paris
San Francisco Tokyo
<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 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.
A-2
<PAGE>
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.................................................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 18
Use of Proceeds.......................................................... 27
Price Range of Class A Common Stock and Dividend Policy.................. 28
Dilution................................................................. 29
The Recapitalization..................................................... 30
Capitalization........................................................... 53
Unaudited Pro Forma Condensed
Consolidated Financial Statements....................................... 54
Selected Consolidated Financial Data..................................... 58
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 60
Business................................................................. 69
Management............................................................... 86
Ownership of Capital Stock............................................... 95
Certain Relationships and Related Transactions........................... 97
The Rights Offering...................................................... 102
Description of Warrants.................................................. 110
Description of Capital Stock............................................. 114
Certain United States Federal Income Tax Consequences.................... 116
Legal Matters............................................................ 117
Experts.................................................................. 117
Index to Financial Statements............................................ F-1
</TABLE>
<TABLE>
<S> <C>
Opinion of Wasserstein Perella &
Co., Inc............................................................... Annex A
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$210,000,000
AIR & WATER
TECHNOLOGIES
CORPORATION
120,000,000 SHARES OF
COMMON STOCK
AND
10,000,000 WARRANTS TO PURCHASE
SHARES OF CLASS A COMMON STOCK
--------------
PROSPECTUS
--------------
DATED , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JANUARY 29, 1998.
[LOGO OF AIR & WATER
TECHNOLOGIES CORP.]
10,000,000 SHARES
AIR & WATER TECHNOLOGIES CORPORATION
CLASS A COMMON STOCK
ISSUABLE UPON THE EXERCISE OF WARRANTS
-----------
Air & Water Technologies Corporation, a Delaware corporation (the "Company")
is offering to holders of Warrants to purchase shares of its Class A Common
Stock, par value $.001 per share (the "Class A Common Stock"), 10,000,000
shares of Class A Common Stock (the Class A Common Stock issuable upon exercise
of the Warrants being referred to herein as the "Warrant Shares"). The Warrants
were issued pursuant to the Recapitalization Agreement (as hereinafter
defined). Pursuant to the terms of the Warrants, the exercise price for the
Warrant Shares is $2.50 per share, subject to adjustment in accordance with the
terms of the Warrant Agreement (as hereinafter defined).
The Class A Common Stock is traded on the American Stock Exchange, Inc. (the
"AMEX") under the symbol "AWT."
BEFORE MAKING AN INVESTMENT DECISION, POTENTIAL INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 18.
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>
WARRANT EXERCISE DISCOUNTS AND PROCEEDS TO THE
PRICE(1) COMMISSIONS COMPANY
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $2.50 None $2.50
- --------------------------------------------------------------------------------
Total............................ $25,000,000 None $25,000,000
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Subject to adjustment as provided in the Warrant Agreement.
-----------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
USE OF PROCEEDS
The Company currently intends to utilize the aggregate gross proceeds of up
to $25 million from the exercise of Warrants to fund working capital
requirements and capital expenditures.
<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.................................................... 3
Prospectus Summary....................................................... 4
Risk Factors............................................................. 18
Use of Proceeds.......................................................... 27
Price Range of Class A Common Stock and Dividend Policy.................. 28
Dilution................................................................. 29
Capitalization........................................................... 53
Selected Consolidated Financial Data..................................... 58
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 60
Business................................................................. 69
Management............................................................... 86
Ownership of Capital Stock............................................... 95
Certain Relationships and Related Transactions........................... 97
Description of Warrants.................................................. 110
Description of Capital Stock............................................. 114
Legal Matters............................................................ 117
Experts.................................................................. 117
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AIR & WATER
TECHNOLOGIES
CORPORATION
10,000,000 SHARES OF
CLASS A COMMON STOCK
ISSUABLE UPON THE EXERCISE OF WARRANTS
---------------
PROSPECTUS
---------------
DATED , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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......................................... $ 71,012
Subscription and Information Agent's fees and expenses....... 10,000
Financial Advisor fees and expenses.......................... 2,000,000
Accounting fees.............................................. 250,000
Legal fees and expenses (including Blue Sky fees and ex-
penses)..................................................... 2,200,000
Printing and engraving fees.................................. 500,000
Special Committee fees and expenses.......................... 150,000
AMEX listing fees............................................ 50,000
Miscellaneous................................................ 1,268,988
----------
Total...................................................... $6,500,000
==========
</TABLE>
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 personally 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 of 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 of the Restated (2)
Certificate of Incorporation of the Registrant
filed July 5, 1989
3.01(d) Certificate of Amendment of the Restated (3)
Certificate of Incorporation of the Registrant
filed August 13, 1990
3.01(e) Certificate of Designation of 5 1/2% Series A (4)
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
4.02 Indenture, dated as of May 15, 1990, between the (5)
Registrant and Midlantic National Bank, as
trustee
4.03 Form of Rights Certificate **
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 (6)
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 (7)(Ex. 10.27)
Profit Sharing Plan, as amended
10.04 Research-Cottrell Environmental Thrift Plan (7)(Ex. 10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (8)
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
and Societe Generale, New York Branch, 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 (9)(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 (9)(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 (4)
the Registrant and Compagnie Generale des Eaux
10.09 Investment Agreement, dated as of March 30, 1994, (6)
among the Registrant, Compagnie Generale des Eaux
and Anjou International Company
10.10 Credit Agreement, dated as of June 14, 1994, (4)
between the Registrant and Compagnie Generale des
Eaux
10.11 Amended and Restated Subordination Agreement, (10)
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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
-------- ----------------------- --------
<C> <S> <C>
10.12 Master Surety Agreement made October 31, 1995 by the (10)
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
10.13 Revolving Credit Agreement, dated as of August 2, 1996, (11)
between the Registrant and Anjou International Company
10.14 Employment Agreement, dated as of November 7, 1996, (11)
between Robert B. Sheh and the Registrant
10.15 Recapitalization Agreement, dated September 24, 1997, (12)
among the Registrant, Compagnie Generale des Eaux and
Anjou International Company
10.15(a) Amendment No. 1 to the Recapitalization Agreement, dated *
January 26, 1998, among the Registrant, Compagnie Generale
des Eaux and Anjou International Company
10.16 Separation Agreement, dated as of October 24, 1997, *
between Robert B. Sheh and the Registrant
11 Statement re: computation of per share earnings **
21 List of Subsidiaries of the Registrant (11)
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)
27 Financial Data Schedule *
99.1 Form of Subscription and Information Agency Agreement *
99.2 Form of Instructions for Rights Certificates **
99.3 Form of Notice of Guaranteed Delivery **
99.4 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 the Registrant's Registration Statement on Form
S-4 (No. 33-43143), as filed with the Securities and Exchange Commission
on October 3, 1991.
(4) 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.
(5) Incorporated by reference to Exhibit 4.05 to the Registrant's
Registration Statement on Form S-1 (No. 33-33088), as amended, filed with
the Securities and Exchange Commission on April 24, 1990.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
II-3
<PAGE>
(10) 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.
(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 31, 1996, as filed with the Securities and
Exchange Commission on January 29, 1997.
(12) Incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of the Registrant, dated September 24, 1997.
(*) Filed herewith.
(**)Previously filed.
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 AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
BRANCHBURG, STATE OF NEW JERSEY, ON JANUARY 29, 1998.
Air & Water Technologies Corporation
/s/ Alain Brunais
By: _________________________________
ALAIN BRUNAIS SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
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
* Chairman of the
- ------------------------------------- Board of Directors January 28,
WILLIAM V. KRIEGEL 1998
* President, Chief
- ------------------------------------- Executive Officer January 28,
THIERRY M. MALLET and Director 1998
(Principal
Executive Officer)
/s/ Alain Brunais Senior Vice
- ------------------------------------- President, Chief January 29,
ALAIN BRUNAIS Financial Officer 1998
and Director
(Principal
Accounting Officer)
(Principal
Financial Officer)
* Director
- ------------------------------------- January 29,
JEAN-CLAUDE BANON 1998
* Director
- ------------------------------------- January 29,
DANIEL CAILLE 1998
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director
- ------------------------------------- January 29,
CAROL LYNN GREEN 1998
* Director
- ------------------------------------- January 29,
JOHN W. MORRIS 1998
/s/ Alain Brunais
*By _________________________________
ATTORNEY-IN-FACT
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 of Certificate of (2)
Incorporation of the Registrant, dated October
27, 1987
3.01(b) Certificate of Amendment of the Certificate of (2)
Incorporation of the Registrant filed June 21,
1989
3.01(c) Certificate of Amendment of the Restated (2)
Certificate of Incorporation of the Registrant
filed July 5, 1989
3.01(d) Certificate of Amendment to Restated Certificate (3)
of Incorporation of the Registrant filed August
13, 1990
3.01(e) Certificate of Designation of 5 1/2% Series A (4)
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
4.02 Indenture, dated as of May 15, 1990, between the (5)
Registrant and Midlantic National Bank, as
trustee
4.03 Form of Rights Certificate **
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 (6)
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 (7)(Ex. 10.27)
Profit Sharing Plan, as amended
10.04 Research-Cottrell Environmental Thrift Plan (7)(Ex. 10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (8)
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
and Societe Generale, New York Branch, 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 (9)(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 (9)(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 (4)
the Registrant and Compagnie Generale des Eaux
10.09 Investment Agreement, dated as of March 30, 1994, (6)
among the Registrant, Compagnie Generale des Eaux
and Anjou International Company
10.10 Credit Agreement, dated as of June 14, 1994, (4)
between the Registrant and Compagnie Generale des
Eaux
10.11 Amended and Restated Subordination Agreement, (10)
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
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<C> <S> <C>
10.12 Master Surety Agreement made October 31, 1995 by the (10)
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
10.13 Revolving Credit Agreement, dated as of August 2, 1996, (11)
between the Registrant and Anjou International Company
10.14 Employment Agreement, dated as of November 7, 1996, (11)
between Robert B. Sheh and the Registrant
10.15 Recapitalization Agreement, dated September 24, 1997, (12)
among the Registrant, Compagnie Generale des Eaux and
Anjou International Company
10.15(a) Amendment No. 1 to the Recapitalization Agreement, dated *
January 26, 1998, among the Registrant, Compagnie Generale
des Eaux and Anjou International Company
10.16 Separation Agreement, dated as of October 24, 1997, *
between Robert B. Sheh and the Registrant
11 Statement re: computation of per share earnings **
21 List of Subsidiaries of the Registrant (11)
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)
27 Financial Data Schedule *
99.1 Form of Subscription and Information Agency Agreement *
99.2 Form of Instructions for Rights Certificates **
99.3 Form of Notice of Guaranteed Delivery **
99.4 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 the Registrant's Registration Statement on Form
S-4 (No. 33-43143), as filed with the Securities and Exchange Commission
on October 3, 1991.
(4) 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.
(5) Incorporated by reference to Exhibit 4.05 to the Registrant's
Registration Statement on Form S-1 (No. 33-33088), as amended, filed with
the Securities and Exchange Commission on April 24, 1990.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
II-8
<PAGE>
(10) 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.
(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 31, 1996, as filed with the Securities and
Exchange Commission on January 29, 1997.
(12) Incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of the Registrant, dated September 24, 1997.
(*) Filed herewith.
(**) Previously filed.
II-9
<PAGE>
EXHIBIT 4.01
================================================================================
Air & Water Technologies Corporation
WARRANT AGREEMENT
Dated as of , 1998
First Chicago Trust Company of New York
Warrant Agent
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Page
SECTION 1. Appointment of Warrant Agent.............................. 1
SECTION 2. Warrant Certificates...................................... 2
SECTION 3. Execution of Warrant Certificates......................... 2
SECTION 4. Registration and Countersignature......................... 2
SECTION 5. Registration of Transfers and Exchanges of Warrants....... 3
SECTION 6. No Rights as Stockholders................................. 4
SECTION 7. Duration and Exercise of Warrants......................... 4
SECTION 8. Payment of Taxes.......................................... 6
SECTION 9. Mutilated or Missing Warrant Certificates................. 6
SECTION 10. Reservation of Warrant Shares............................. 6
SECTION 11. Obtaining Stock Exchange Listings......................... 7
SECTION 12. Adjustment of Warrant Exercise Price and Number of Warrant
Shares Issuable........................................... 7
(a) Adjustment for Change in Common Stock................. 8
(b) Adjustment for Rights Issue.......................... 8
(c) Adjustment for Other Distributions.................... 9
(d) Current Market Price................................ 10
(e) Reorganization of Company........................... 10
(f) When No Adjustment Required......................... 11
(g) When De Minimis Adjustment May Be Deferred........... 11
(h) Notice of Adjustment................................ 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
(i) Voluntary Reduction................................. 12
(j) Company Determination Final......................... 12
(k) Warrant Agent's Disclaimer.......................... 12
(l) When Issuance or Payment May Be Deferred............. 12
(m) Adjustment in Number of Shares....................... 13
(n) Form of Warrants.................................... 13
SECTION 13. Fractional Interests..................................... 13
SECTION 14. Notices to Warrant Holders............................... 14
SECTION 15. Merger, Consolidation or Change of Name of Warrant Agent.. 15
SECTION 16. Warrant Agent............................................. 16
SECTION 17. Change of Warrant Agent................................... 18
SECTION 18. Registration of Warrant Shares............................ 18
SECTION 19. Notices to Company and Warrant Agent...................... 22
SECTION 20. Supplements and Amendments................................ 22
SECTION 21. Successors................................................ 23
SECTION 22. Termination............................................... 23
SECTION 23. Governing Law............................................. 23
SECTION 24. Benefits of This Agreement................................ 23
SECTION 25. Counterparts.............................................. 23
EXHIBITS
Exhibit A. .......................................................... A-1
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT (this "Agreement"), dated as of , 1998 between
Air & Water Technologies Corporation, a Delaware corporation (the
"Company"), and First Chicago Trust Company of New York, a New York trust
company, as warrant agent (the "Warrant Agent").
WHEREAS, the Company, Compagnie Generale des Eaux ("CGE") and its
indirectly wholly-owned subsidiary, Anjou International Company ("Anjou"),
have entered into a recapitalization agreement, dated as of September 24,
1997 (the "Recapitalization Agreement"), pursuant to which the Company will
declare a dividend, as provided in Section 1.2(a) of the Recapitalization
Agreement, of transferable rights (the "Rights"), each Right entitling the
holder thereof to acquire one share of Class A Common Stock, par value
$.001 per share, of the Company (the "Class A Common Stock") (subject to
the Company's obligation to issue shares of its Class B Common Stock, par
value $.001 per share, in certain circumstances) and, for each Rights
holder other than CGE and Anjou, such number of warrants (the "Warrants")
as determined in accordance with Section 1.2(c) of the Recapitalization
Agreement (the "Rights Offering");
WHEREAS, the Company will issue Warrants to purchase up to an
aggregate of shares of Class A Common Stock (the Class A Common
Stock issuable upon exercise of the Warrants being referred to herein as
the "Warrant Shares") at the Warrant Exercise Price (as defined
hereinafter) on the terms and subject to the conditions set forth herein;
and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates (as defined hereinafter) and other matters
as provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby
----------------------------
appoints the Warrant Agent to act as agent for the Company in accordance
with the instructions set forth hereinafter in this Agreement, and the
Warrant Agent hereby accepts such appointment.
<PAGE>
SECTION 2. Warrant Certificates. The certificates representing
--------------------
Warrants (the "Warrant Certificates") to be delivered pursuant to this
Agreement shall be in registered form only and shall be substantially in
the form set forth in Exhibit A attached hereto.
SECTION 3. Execution of Warrant Certificates. (a) The Warrant
---------------------------------
Certificates shall be signed on behalf of the Company by its Chairman of
the Board, its Chief Executive Officer, its Chief Financial Officer or its
Senior Vice President and General Counsel and by its Secretary or an
Assistant Secretary under its corporate seal. Each such signature upon the
Warrant Certificates may be in the form of a facsimile signature of the
present or any future Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, Senior Vice President and General Counsel, Secretary or
Assistant Secretary of the Company and may be imprinted or otherwise
reproduced on the Warrant Certificates and for that purpose the Company may
adopt and use the facsimile signature of any person who shall have been
Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
Senior Vice President and General Counsel, Secretary or Assistant Secretary
of the Company, notwithstanding the fact that at the time the Warrant
Certificates shall be countersigned and delivered or disposed of he or she
shall have ceased to hold such office. The seal of the Company may be in
the form of a facsimile thereof and may be impressed, affixed, imprinted or
otherwise reproduced on the Warrant Certificates.
(b) In case any officer of the Company who shall have signed any of
the Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent
pursuant to Section 4 hereof, or disposed of by the Company, such Warrant
Certificates nevertheless may be countersigned and delivered or disposed of
as though such person had not ceased to be such officer of the Company; and
any Warrant Certificate may be signed on behalf of the Company by any
person who, at the actual date of the execution of such Warrant
Certificate, shall be a proper officer of the Company, although at the date
of the execution of this Warrant Agreement any such person was not such
officer.
(c) Warrant Certificates shall be dated the date of countersignature
by the Warrant Agent pursuant to Section 4 hereof.
SECTION 4. Registration and Countersignature. (a) The Warrant
---------------------------------
Agent, on behalf of the Company, shall number and register the Warrant
Certificates in a register as they are issued by the Company.
2
<PAGE>
(b) Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so
countersigned. The Warrant Agent shall, upon written instructions of the
Chairman of the Board, the Chief Executive Officer, the Chief Financial
Officer, the Senior Vice President and General Counsel, the Treasurer or
the Controller of the Company, initially countersign, issue and deliver
Warrants entitling the holders thereof to purchase not more than the number
of Warrant Shares referred to above in the second recital hereof and shall
countersign and deliver Warrants as otherwise provided in this Agreement.
(c) The Company and the Warrant Agent may deem and treat the
registered holders of the Warrant Certificates as the absolute owners
thereof (notwithstanding any notation of ownership or other writing thereon
made by anyone) for all purposes, and neither the Company nor the Warrant
Agent shall be affected by any notice to the contrary.
SECTION 5. Registration of Transfers and Exchanges of Warrants. (a)
---------------------------------------------------
The Warrant Agent shall from time to time register the transfer of any
outstanding Warrant Certificates upon the records to be maintained by it
for that purpose, upon surrender thereof accompanied by a written
instrument or instruments of transfer in form satisfactory to the Warrant
Agent, duly executed by the registered holder or holders thereof or by the
duly appointed legal representative thereof or by a duly authorized
attorney. Upon any such registration of transfer, a new Warrant
Certificate of like tenor and representing in the aggregate a like number
of Warrants shall be issued to the transferee(s) and the surrendered
Warrant Certificate shall be canceled by the Warrant Agent. Such canceled
Warrant Certificate shall thereafter be disposed of by the Warrant Agent in
a manner satisfactory to the Company.
(b) Warrant Certificates may be exchanged at the option of the
holder(s) thereof, when surrendered to the Warrant Agent at its office
maintained for such purpose, for another Warrant Certificate or other
Warrant Certificates of like tenor and representing in the aggregate a like
number of Warrants. Warrant Certificates surrendered for exchange shall be
canceled by the Warrant Agent. Such canceled Warrant Certificates shall
thereafter be disposed of by the Warrant Agent in a manner satisfactory to
the Company.
(c) The Warrant Agent is hereby authorized to countersign, in
accordance with the provisions of this Section 5 and of Section 4 hereof,
the new Warrant Certificates required pursuant to the provisions of this
Section 5, and for the purpose of any distribution of Warrant Certificates
contemplated by Section 12 hereof.
3
<PAGE>
(d) No service charge shall be made for registration of transfer or
exchange upon surrender of any Warrant Certificate at the office of the
Warrant Agent maintained for such 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.
SECTION 6. No Rights as Stockholders. Nothing contained in this
-------------------------
Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the holders of Warrants the right to vote or to consent or
to receive notice as stockholders in respect of the meetings of
stockholders or the election of directors of the Company or any other
matter, or any rights whatsoever as stockholders of the Company.
SECTION 7. Duration and Exercise of Warrants. (a) The Warrants
---------------------------------
shall expire on , 2001[the date three years from the date of
issuance of the Warrants] (the "Warrant Expiration Date"). Subject to the
terms of this Agreement, on or after the date of this Agreement, each
Warrant holder shall have the right, which may be exercised on any business
day prior to 5:00 p.m., New York City time, on the Warrant Expiration Date,
to purchase from the Company (and the Company shall issue and sell to such
holder) one fully paid and nonassessable Warrant Share at the initial
warrant exercise price of $2.50 per Warrant Share (the "Warrant Exercise
Price"), subject to adjustment as provided in Section 12 hereof; provided
that holders shall be able to exercise their Warrants only if, as provided
in Section 18 hereof, (i)(x) the Registration Statement (as defined
hereinafter) is then in effect and the Company has delivered to each
person exercising a Warrant a current prospectus meeting the requirements
of the Securities Act of 1933, as amended (the "Securities Act"), or (y)
the exercise of such Warrants is exempt from the registration requirements
of the Securities Act, and (ii) the Warrant Shares are qualified for sale
or exempt from qualification under the applicable securities laws of the
states in which the various holders of the Warrants or other persons to
whom it is proposed that the Warrant Shares be issued on exercise of the
Warrants reside. Each Warrant not exercised prior to 5:00 p.m., New York
City time, on the Warrant Expiration Date shall become void and all rights
thereunder and all rights in respect thereof under this Agreement shall
cease as of such time. No adjustments as to cash dividends will be made
upon exercise of the Warrants.
(b) A Warrant may be exercised upon surrender to the Company at the
principal office of the Warrant Agent of the Warrant Certificate or Warrant
Certificates evidencing the Warrants to be exercised with the form of
election to purchase on the reverse thereof duly filled in and signed,
which signature shall be
4
<PAGE>
guaranteed and upon payment to the Warrant Agent for the account of the
Company of the Warrant Exercise Price, as adjusted as herein provided,
together with any cash as provided in Section 13 hereof, for the number of
Warrant Shares in respect of which such Warrants are then exercised.
Payment of the aggregate Warrant Exercise Price shall be made in lawful
money of the United States of America, either in cash or by certified or
official bank check payable to the order of the Company, or, in the
discretion of the Warrant Agent, by wire transfer of immediately available
funds to an account designated by the Warrant Agent.
(c) Subject to the provisions of Section 8 hereof, upon such
surrender of Warrants and payment of the Warrant Exercise Price, the
Warrant Agent shall deliver or cause to be delivered with all reasonable
dispatch, to or upon the written order of the holder and in such name or
names as the Warrant holder may designate, a certificate or certificates
for the number of whole Warrant Shares issuable upon the exercise of such
Warrants or other securities or property to which such holder is entitled
hereunder, together with cash as provided in Section 13 hereof. Such
certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a
holder of record of such Warrant Shares as of the date of the surrender of
such Warrants and payment of the Warrant Exercise Price.
(d) The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that
a Warrant Certificate is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the Warrant
Expiration Date, a new certificate evidencing the remaining Warrant or
Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant
Certificate or Warrant Certificates pursuant to the provisions of this
Section 7 and of Section 5 hereof, and the Company, whenever required by
the Warrant Agent, will supply the Warrant Agent with Warrant Certificates
duly executed on behalf of the Company for such purpose.
(e) All Warrant Certificates surrendered upon exercise of Warrants
shall be canceled by the Warrant Agent. Such canceled Warrant Certificates
shall thereafter be disposed of by the Warrant Agent in a manner
satisfactory to the Company. The Warrant Agent shall account promptly to
the Company with respect to Warrants exercised and concurrently pay to the
Company all monies received by the Warrant Agent for the purchase of the
Warrant Shares through the exercise of such Warrants.
5
<PAGE>
(f) The Warrant Agent shall keep copies of this Agreement and any
notices given or received hereunder available for inspection by the holders
during normal business hours at its office. The Company shall supply the
Warrant Agent from time to time with such numbers of copies of this
Agreement as the Warrant Agent may request.
SECTION 8. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issue of any Warrant Certificates or any
certificates for Warrant Shares in a name other than that of the registered
holder of a Warrant Certificate surrendered upon the exercise of a Warrant,
and the Company shall not be required to issue or deliver such Warrant
Certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
SECTION 9. Mutilated or Missing Warrant Certificates. In case any
-----------------------------------------
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed,
the Company may in its discretion issue and the Warrant Agent may
countersign, in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for the
Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of
like tenor and representing an equivalent number of Warrants, but only upon
receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction of such Warrant Certificate and indemnity,
if requested, also satisfactory to them. Applicants for such substitute
Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company or the
Warrant Agent may prescribe.
SECTION 10. Reservation of Warrant Shares. (a) The Company will at
-----------------------------
all times reserve and keep available, free from preemptive rights, out of
the aggregate of its authorized but unissued Class A Common Stock or its
authorized and issued Class A Common Stock held in its treasury, for the
purpose of enabling it to satisfy any obligation to issue Warrant Shares
upon exercise of Warrants through 5:00 p.m., New York City time, on the
Warrant Expiration Date, the maximum number of shares of Class A Common
Stock which may then be deliverable upon the exercise of all outstanding
Warrants.
6
<PAGE>
(b) The Company or, if appointed, the transfer agent for the Class A
Common Stock (the "Transfer Agent"), and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of
any of the rights of purchase aforesaid will be irrevocably authorized and
directed at all times to reserve such number of authorized shares as shall
be required for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon
the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to
time from such Transfer Agent the stock certificates required to honor
outstanding Warrants upon exercise thereof in accordance with the terms of
this Agreement. The Company will supply such Transfer Agent with duly
executed certificates for such purposes and will provide or otherwise make
available any cash which may be payable as provided in Section 13 hereof.
The Company will furnish such Transfer Agent a copy of all notices of
adjustments, and certificates related thereto, transmitted to each holder
pursuant to Section 14 hereof.
(c) Before taking any action which would cause an adjustment pursuant
to Section 12 hereof to reduce the Warrant Exercise Price below the then
par value of the Warrant Shares, the Company will take any corporate action
which may, in the opinion of its counsel (which may be counsel employed by
the Company), be necessary in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares at the Warrant
Exercise Price as so adjusted.
(d) The Company represents, warrants and covenants that all Warrant
Shares which may be issued upon exercise of the Warrants will, upon
issuance in accordance with the terms of this Agreement, be fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens,
charges, security interests and other encumbrances created by the Company
with respect to the issuance thereof.
SECTION 11. Obtaining Stock Exchange Listings. The Company shall use
---------------------------------
its commercially reasonable efforts to secure the listing of the Warrants
and the Warrant Shares upon each national securities exchange or automatic
quotation system, if any, upon which the shares of Class A Common Stock are
then listed and shall use its commercially reasonable efforts to maintain
such listing, so long as any other shares of Class A Common Stock shall be
so listed or quoted.
SECTION 12. Adjustment of Warrant Exercise Price and Number of
--------------------------------------------------
Warrant Shares Issuable. The Warrant Exercise Price and the number of
-----------------------
Warrant Shares
7
<PAGE>
issuable upon the exercise of each Warrant are subject to adjustment from
time to time upon the occurrence of the events enumerated in this Section
12.
(a) Adjustment for Change in Common Stock. If the Company (i) pays a
-------------------------------------
dividend or makes a distribution on its Class A Common Stock in shares of
its Class A Common Stock, (ii) subdivides its outstanding shares of Class A
Common Stock into a greater number of shares, (iii) combines its
outstanding shares of Class A Common Stock into a smaller number of shares,
(iv) makes a distribution on its Class A Common Stock in shares of its
capital stock other than Class A Common Stock or (v) issues by
reclassification, reorganization, split-up or exchange (except as provided
in Section 12(e) hereof) of its Class A Common Stock any shares of its
capital stock; then the Warrant Exercise Price in effect immediately prior
to such action shall be proportionately adjusted so that the holder of any
Warrant thereafter exercised may receive the aggregate number and kind of
shares of capital stock of the Company which the holder would have owned
immediately following such action if such Warrant had been exercised
immediately prior to such action.
The adjustment shall become effective immediately after the record
date, in the case of a dividend or distribution, and immediately after the
effective date, in the case of a subdivision, combination or
reclassification, reorganization, split-up or exchange of Class A Common
Stock. If, after an adjustment, a holder of a Warrant upon exercise of it
may receive shares of two or more classes of capital stock of the Company,
the Company shall determine the allocation of the adjusted Warrant Exercise
Price between the classes of capital stock. After such allocation, the
exercise privilege and the Warrant Exercise Price of each class of capital
stock shall thereafter be subject to adjustment on terms comparable to
those applicable to Class A Common Stock in this Section 12. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) Adjustment for Rights Issue. If the Company distributes any
---------------------------
rights, options or warrants to all holders of its Class A Common Stock
entitling them for a period expiring within 60 days after the record date
mentioned below to purchase shares of Class A Common Stock at a price per
share less than the Current Market Price (as defined hereinafter) per share
on that record date, the Warrant Exercise Price shall be adjusted in
accordance with the formula:
O + N x P
---------
8
<PAGE>
E' = E x M
-------------------
O + N
where:
E' = the adjusted Warrant Exercise Price.
E = the current Warrant Exercise Price.
O = the number of shares of Class A Common Stock outstanding on the
record date.
N = the number of additional shares of Class A Common Stock offered.
P = the offering price per share (or the consideration received or
deemed received per share) of the additional shares.
M = the Current Market Price per share of Class A Common Stock on the
record date.
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after
the record date for the determination of stockholders entitled to receive
the rights, options or warrants. If at the end of the period during which
such rights, options or warrants are exercisable, not all rights, options
or warrants shall have been exercised, the Warrant Exercise Price shall be
immediately readjusted to what it would have been if "N" in the above
formula had been the number of shares actually issued.
(c) Adjustment for Other Distributions. If the Company distributes
----------------------------------
to all holders of its Class A Common Stock any of its assets, the Warrant
Exercise Price shall be adjusted in accordance with the formula:
E' = E x M - F
-----------
M
where:
E' = the adjusted Warrant Exercise Price.
9
<PAGE>
E = the current Warrant Exercise Price.
M = the Current Market Price per share of Class A Common Stock on the
record date.
F = the fair market value on the record date of the assets to be
distributed in respect of one share of Class A Common Stock. The
Board of Directors of the Company shall determine the fair market
value.
The adjustment shall be made successively whenever any such record
date is fixed; and in the event that such distribution is not so made, the
Warrant Exercise Price shall again be adjusted to be the Warrant Exercise
Price which would then be in effect if such record date had not been fixed.
This Section 12(c) does not apply to cash dividends or cash
distributions paid out of consolidated current or retained earnings as
shown on the books of the Company prepared in accordance with generally
accepted accounting principles.
(d) Current Market Price. As referred to herein, the Current Market
--------------------
Price per share of Class A Common Stock on any date is the average of the
daily Closing Prices of the Class A Common Stock for 30 consecutive trading
days commencing 45 trading days prior to the date in question. The
"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 American Stock Exchange,
Inc. (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.
(e) Reorganization of Company. If the Company consolidates or merges
-------------------------
with or into, or transfers or leases all or substantially all its assets
to, any person, upon consummation of such transaction, the Warrants shall
automatically become exercisable for the kind and amount of securities,
cash or other assets which the holder of a Warrant would have owned
immediately after the consolidation, merger,
10
<PAGE>
transfer or lease if the holder had exercised the Warrant immediately
before the effective date of the transaction. Concurrently with the
consummation of such transaction, the corporation formed by or surviving
any such consolidation or merger if other than the Company, or the person
to which such sale or conveyance shall have been made, shall enter into a
supplemental warrant agreement (a "Supplemental Warrant Agreement") so
providing and further providing for adjustments which shall be as nearly
equivalent as may be practical to the adjustments provided for in this
Section 12(e). No such consolidation, merger, transfer or lease shall 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. The successor company shall mail to Warrant holders a
notice describing the supplemental Warrant Agreement. If the issuer of
securities deliverable upon exercise of Warrants under the Supplemental
Warrant Agreement is an affiliate of the formed, surviving, transferee or
lessee corporation, that issuer shall join in the Supplemental Warrant
Agreement. If this Section 12(e) applies, Sections 12(a), (b) and (c)
hereof do not apply.
(f) When No Adjustment Required. No adjustment need be made for a
---------------------------
transaction referred to in Section 12(a), (b) or (c) hereof, if Warrant
holders are to participate in the transaction on a basis and with notice
that the board of directors of the Company determines to be fair and
appropriate in light of the basis and notice on which holders of Class A
Common Stock participate in the transaction. No adjustment need be made
for (i) rights to purchase Class A Common Stock pursuant to a Company plan
for reinvestment of dividends or interest or (ii) a change in the par
value, or from par value to no par value of the Class A Common Stock. To
the extent the Warrants become convertible into cash, no adjustment need be
made thereafter as to the cash. Interest will not accrue on the cash.
(g) When De Minimis Adjustment May Be Deferred. No adjustment in the
------------------------------------------
Warrant Exercise Price need be made unless the adjustment would require an
increase or decrease of at least 1.0% in the Warrant Exercise Price. Any
adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section
12 shall be made to the nearest whole U.S. cent or to the nearest 1/100th
of a share, as the case may be.
(h) Notice of Adjustment. Whenever the Warrant Exercise Price is
--------------------
adjusted, the Company shall provide the notices required by Section 14
hereof.
11
<PAGE>
(i) Voluntary Reduction. The Company from time to time may reduce
-------------------
the Warrant Exercise Price by any amount for any period of time, if the
period is at least 20 days and if the reduction is irrevocable during the
period; provided that in no event may the Warrant Exercise Price be less
than the par value of the Class A Common Stock. Whenever the Warrant
Exercise Price is reduced, the Company shall mail to Warrant holders a
notice of the reduction. The Company shall mail the notice at least 15
days before the date the reduced Warrant Exercise Price takes effect. The
notice shall state the reduced Warrant Exercise Price and the period in
which it will be in effect. Failure to mail the notice or any defect
therein shall not affect the legality or validity of the reduction. A
reduction of the Warrant Exercise Price does not change or adjust the
Warrant Exercise Price otherwise in effect for purposes of Sections 12(a),
(b) and (c) hereof.
(j) Company Determination Final. Any determination that the Company
---------------------------
or the board of directors of the Company must make pursuant to Section
12(a), (c), (d) or (f) hereof is conclusive.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to
--------------------------
determine when an adjustment under this Section 12 should be made, how it
should be made or what it should be. The Warrant Agent has no duty to
determine whether any provisions of a Supplemental Warrant Agreement under
Section 12(e) hereof are correct. The Warrant Agent makes no
representation as to the validity or value of any securities or assets
issued upon exercise of Warrants. The Warrant Agent shall not be
responsible for the Company's failure to comply with this Section 12.
(l) When Issuance or Payment May Be Deferred. In any case in which
----------------------------------------
this Section 12 shall require that an adjustment in the Warrant Exercise
Price be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event (i) issuing
to the holder of any Warrant exercised after such record date the Warrant
Shares and other capital stock of the Company, if any, issuable upon such
exercise over and above the Warrant Shares and other capital stock of the
Company, if any, issuable upon such exercise on the basis of the Warrant
Exercise Price and (ii) paying to such holder any amount in cash in lieu of
a fractional share pursuant to Section 13 hereof; provided that the Company
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional Warrant Shares,
other capital stock and cash upon the occurrence of the event requiring
such adjustment.
12
<PAGE>
(m) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Warrant Exercise Price pursuant to this Section 12, each Warrant
outstanding prior to the making of the adjustment in the Warrant Exercise
Price shall thereafter evidence the right to receive upon payment of the
adjusted Warrant Exercise Price that number of shares of Class A Common
Stock (calculated to the nearest 1/100th of a share) obtained from the
following formula:
N' = N x E
------------
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Warrant Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise of
a Warrant by payment of the Warrant Exercise Price prior to
adjustment.
E' = the adjusted Warrant Exercise Price.
E = the Warrant Exercise Price prior to adjustment.
(n) Form of Warrants. Irrespective of any adjustments in the Warrant
----------------
Exercise Price or the number or kind of shares purchasable upon the
exercise of the Warrants, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are
stated in the Warrants initially issuable pursuant to this Agreement.
SECTION 13. Fractional Interests. The Company shall not be required
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If any
fraction of a Warrant Share would, except for the provisions of this
Section 13, be issuable on the exercise of any Warrants (or specified
portion thereof), the Company shall pay an amount in cash equal to the
Current Market Price per share of Class A Common Stock, 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 in lieu of receiving cash for such fractional interests
a holder of Warrants may elect to purchase full shares of Class A Common
Stock by delivering to the Warrant Agent, in addition to the Warrant
Exercise Price, an amount in cash
13
<PAGE>
equal to the Current Market Price per share of Class A Common Stock, 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. If more than one Warrant shall be presented for
exercise in full at the same time by the same holder, the number of full
Warrant Shares which shall be issuable upon the exercise thereof shall be
computed on the basis of the aggregate number of Warrant Shares purchasable
on exercise of the Warrants so presented.
SECTION 14. Notices to Warrant Holders. (a) Upon any adjustment of
--------------------------
the Warrant Exercise Price pursuant to Section 12 hereof, the Company shall
promptly thereafter (i) cause to be filed with the Warrant Agent a
certificate of a firm of independent public accountants of recognized
standing selected by the board of directors of the Company (who may be the
regular auditors of the Company) setting forth the Warrant Exercise Price
after such adjustment and setting forth in reasonable detail the method of
calculation and the facts upon which such calculations are based and
setting forth the number of Warrant Shares (or portion thereof) issuable
after such adjustment in the Warrant Exercise Price, upon exercise of a
Warrant and payment of the adjusted Warrant Exercise Price, which
certificate shall be conclusive evidence of the correctness of the matters
set forth therein, and (ii) cause to be given to each of the registered
holders of Warrants at his address appearing on the Warrant register
written notice of such adjustments by first-class mail, postage prepaid.
Where appropriate, such notice may be given in advance and included as a
part of the notice required to be mailed under the other provisions of this
Section 14.
(b) In case:
(i) the Company shall take any action that would require an
adjustment in the Warrant Exercise Price pursuant to Section
12(a), (b) or (c) hereof (subject to Sections 12(f) and (g)
hereof), and the Company does not arrange for Warrant holders to
participate pursuant to Section 12(f) hereof;
(ii) the Company shall take any action that would require a
Supplemental Warrant Agreement pursuant to Section 12(e) hereof;
(iii) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
14
<PAGE>
(iv) the Company proposes to take any action (other than actions of
the character described in Section 14(b)(i), (ii) or (iii)
hereof) which would require an adjustment of the Warrant
Exercise Price pursuant to Section 12 hereof;
then the Company shall cause to be filed with the Warrant Agent and shall
cause to be given to each of the registered holders of Warrants at his
address appearing on the Warrant register, at least 15 days prior to the
applicable record date hereinafter specified, or promptly in the case of
events for which there is no record date, by first-class mail, postage
prepaid, a written notice stating (x) the date as of which the holders of
record of shares of Class A Common Stock to be entitled to receive any such
dividend, rights, options, warrants or distribution are to be determined or
(y) the date on which any such subdivision, combination, reclassification,
reorganization, split-up, exchange, consolidation, merger, transfer, lease,
dissolution, liquidation, winding up or other action or transaction is
expected to become effective or consummated, and the date as of which it is
expected that holders of record of shares of Class A Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such subdivision, combination, reclassification,
reorganization, split-up, exchange, consolidation, merger, transfer, lease,
dissolution, liquidation, winding up or other action or transaction. The
failure to give the notice required by this Section 14 or any defect
therein shall not affect the legality or validity of any such action or
transaction.
SECTION 15. Merger, Consolidation or Change of Name of Warrant Agent.
--------------------------------------------------------
(a) Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any
corporation succeeding to the business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of
any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a
successor warrant agent under the provisions of Section 17 hereof. In case
at the time such successor to the Warrant Agent shall succeed to the agency
created by this Agreement, and in case at that time any of the Warrant
Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent; and in case at that time any of the Warrant
Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name
of the predecessor Warrant Agent or in the name of the successor to the
Warrant Agent; and in all
15
<PAGE>
such cases such Warrant Certificates shall have the full force and effect
provided in the Warrant Certificates and in this Agreement.
(b) In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrant Certificates shall have been
countersigned but not delivered, the Warrant Agent whose name has been
changed may adopt the countersignature under its prior name, and in case at
that time any of the Warrant Certificates shall not have been
countersigned, the Warrant Agent may countersign such Warrant Certificates
either in its prior name or in its changed name, and in all such cases such
Warrant Certificates shall have the full force and effect provided in the
Warrant Certificates and in this Agreement.
SECTION 16. Warrant Agent. The Warrant Agent undertakes the duties
-------------
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by
their acceptance thereof, shall be bound:
(a) The statements contained herein and in the Warrant Certificates
shall be taken as statements of the Company, and the Warrant Agent assumes
no responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of
the Warrant Certificates except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants to be complied with by the
Company contained in this Agreement or in the Warrant Certificates.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
holder of any Warrant Certificate in respect of any action taken, suffered
or omitted by it hereunder in good faith and in accordance with the opinion
or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action
taken in reliance on any Warrant Certificate, certificate of shares,
notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument believed by it to be genuine and to have been
signed, sent or presented by the proper party or parties.
16
<PAGE>
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent in the execution of this Agreement and
to indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs and counsel fees, for anything done
or omitted by the Warrant Agent in the execution of this Agreement except
as a result of its negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more registered holders of
Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as it may consider proper, whether with or without any such security
or indemnity. All rights of action under this Agreement or under any of
the Warrants may be enforced by the Warrant Agent without the possession of
any of the Warrant Certificates or the production thereof at any trial or
other proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant
Agent and any recovery of judgment shall be for the ratable benefit of the
registered holders of the Warrants, as their respective rights or interests
may appear.
(g) The Warrant Agent, and any stockholder, director, officer or
employee of it, may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or for
any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent for the
Company, and its duties shall be determined solely by the provisions
hereof. The Warrant Agent shall not be liable for anything which it may do
or refrain from doing in connection with this Agreement except for its own
negligence or bad faith.
(i) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of any Warrant Certificate to make or cause to
be made any adjustment of the Warrant Exercise Price or number of the
Warrant Shares or other
17
<PAGE>
securities or property deliverable as provided in this Agreement, or to
determine whether any facts exist which may require any such adjustments,
or with respect to the nature or extent of any such adjustments, when made,
or with respect to the method employed in making the same. The Warrant
Agent shall not be accountable with respect to the validity or value or the
kind or amount of any Warrant Shares or of any securities or property which
may at any time be issued or delivered upon the exercise of any Warrant or
with respect to whether any such Warrant Shares or other securities will
when issued be validly issued and fully paid and nonassessable, and makes
no representation with respect thereto.
SECTION 17. Change of Warrant Agent. If the Warrant Agent shall
-----------------------
become incapable of acting as Warrant Agent, the Company shall appoint a
successor to such Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in
writing of such incapacity by the Warrant Agent or by the registered holder
of a Warrant Certificate, then the registered holder of any Warrant may
apply to any court of competent jurisdiction for the appointment of a
successor to the Warrant Agent. Pending appointment of a successor to such
Warrant Agent, either by the Company or by such a court, the duties of the
Warrant Agent shall be carried out by the Company. The holders of a
majority of the unexercised Warrants shall be entitled at any time to
remove the Warrant Agent and appoint a successor to such Warrant Agent.
Such successor to the Warrant Agent need not be approved by the Company or
the former Warrant Agent. After appointment, the successor to the Warrant
Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent
without further act or deed; provided that the former Warrant Agent shall
deliver and transfer to the successor to the Warrant Agent any property at
the time held by it hereunder and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Failure to
give any notice provided for in this Section 17, however, or any defect
therein, shall not affect the legality or validity of the removal of the
Warrant Agent or the appointment of a successor to the Warrant Agent, as
the case may be.
SECTION 18. Registration of Warrant Shares. (a) The Warrants and the
------------------------------
Warrant Shares have been registered for public distribution under the
Securities Act pursuant to a Registration Statement on Form S-1 (No. 333-
39115) (together with any amendments thereto, the "Registration Statement")
filed by the Company on October 30, 1997, with the Securities and Exchange
Commission (the "Commission"). Holders shall be able to exercise their
Warrants only if (i)(x) the Registration Statement is then in effect
18
<PAGE>
and the Company has delivered to each person exercising a Warrant a current
prospectus meeting the requirements of the Securities Act, or (y) the
exercise of such Warrants is exempt from the registration requirements of
the Securities Act, and (ii) the Warrant Shares are qualified for sale or
exempt from qualification under the applicable securities laws of the
states in which the various holders of the Warrants or other persons to
whom it is proposed that the Warrant Shares be issued on exercise of the
Warrants reside.
(b) Subject to Black Out Periods (as defined hereinafter) and
Postponement Periods (as defined hereinafter), the Company shall use its
commercially reasonable efforts to keep such Registration Statement
continuously effective under the Securities Act until the expiration or
exercise of all Warrants in order to permit the prospectus included therein
to be lawfully delivered by the Company to the holders exercising the
Warrants and by holders of Warrants to prospective purchasers of such
Warrants. Notwithstanding the foregoing, the Company shall not be
required to amend or supplement the Registration Statement, any related
prospectus or any document incorporated therein by reference,
(i) for a period (a "Black Out Period") not to exceed, for so long as
this Agreement is in effect, the shorter of (x) the period ending
on 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 shall occur during any period of 135
consecutive days) in the event that (1) 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 (2)(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 shall be no more than three
Black Out Periods during the term of the Warrants; or
(ii) in the event that the Company determines in its good faith
judgment that the Current Market Price per share of the Class A
Common Stock is
19
<PAGE>
substantially below the Warrant Exercise Price
such that exercise of the Warrants is unlikely to occur, for a
period (a "Postponement Period") continuing until such time as
the Company determines in its good faith judgment that exercise
of the Warrants appears likely; provided that during the
Postponement Period the Company (x) shall monitor the Current
Market Price per share of the Class A Common Stock and (y) shall
not permit the exercise of any Warrant unless the Company shall
have delivered to each person exercising a Warrant a current
prospectus meeting the requirements of Section 10(a) of the
Securities Act.
(c) The Company shall cause any amendment or supplement to the
Registration Statement or the related prospectus, as of the effective date
of the Registration Statement, amendment or supplement, (i) to comply in
all material respects with the applicable requirements of the Securities
Act and the rules and regulations of the Commission and (ii) not to contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(d) The Company shall give prompt written notice to the Warrant Agent
of (i) the effectiveness of any post-effective amendment to the
Registration Statement, (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation or threatening of any proceedings for that purpose, (iii) the
receipt by the Company or its legal counsel of any notification with
respect to the suspension of the qualification of the Warrant Shares for
sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose, (iv) the happening of any event that requires the Company
to make changes in the Registration Statement or the prospectus in order to
make the statements therein not misleading and (v) the commencement and
termination of any Black Out Period or Postponement Period.
(e) The Company shall use its best efforts to prevent the issuance or
obtain the withdrawal of any order suspending the effectiveness of the
Registration Statement at the earliest possible time.
(f) Upon the occurrence of any event contemplated by Section
18(d)(iv) hereof or upon the termination of any Black Out Period or
Postponement Period the Company shall promptly prepare and file a post-
effective amendment to the Registration Statement or a supplement to the
related prospectus or file any other
20
<PAGE>
required document so that, as thereafter delivered to holders of the
Warrants, the prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and will contain the current information required by the
Securities Act.
(g) The Company will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the
Registration Statement and will make generally available to its securities
holders (or otherwise provide in accordance with Section 11(a) of the
Securities Act) an earnings statement satisfying the provisions of Section
11(a) of the Securities Act, no later than 45 days (plus any extension
permitted by Rule 12b-25 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) after the end of a 12-month period (or 90
days, if such period is a fiscal year (plus any extension permitted by Rule
12b-25 under the Exchange Act)) beginning with the first month of the
Company's first fiscal quarter commencing after the effective date of the
Registration Statement, which statement shall cover such 12-month period.
(h) The Company shall register or qualify or cooperate with the
holders in connection with the registration or qualification of the Warrant
Shares for offer and sale by the Company upon exercise of the Warrants
under the securities or blue sky laws of such states of the United States
as any holder reasonably requests and do any and all other acts or things
necessary or advisable to enable such offer and sale in such jurisdictions;
provided that the Company shall not be required to (i) qualify to do
business in any jurisdiction in which it is not then so qualified or (ii)
take any action which would subject it to general service of process or to
taxation in any jurisdiction in which it is not then so subject.
(i) The Company shall bear all expenses incurred by it in connection
with the performance of its obligations under this Section 18.
(j) The Company acknowledges and agrees that any remedy at law for
breach of any provision of this Section 18 will be inadequate and that, in
addition to any other remedies that the holder may have, the holders shall
be entitled to the remedy of specific performance to ensure the Company
performs its obligations under this Section 18. The election of any one or
more remedies by the holders hereunder shall not constitute a waiver of the
right to pursue other available remedies.
21
<PAGE>
SECTION 19. Notices to Company and Warrant Agent. Any notice or
------------------------------------
demand authorized by this Agreement to be given or made by the Warrant
Agent or by the registered holder of any Warrant to or on the Company shall
be sufficiently given or made when and if deposited in the mail, first-
class or registered, postage prepaid, addressed (until another address is
filed in writing by the Company with the Warrant Agent) as follows:
Air & Water Technologies Corporation
U.S. Highway 22 West and Station Road
Branchburg, New Jersey 08876
Telephone No.: (908) 685-4600
Telecopier No.: (908) 685-4029
Attention: Senior Vice President and General Counsel
In case the Company shall fail to maintain such office or agency or
shall fail to give such notice of the location or of any change in the
location thereof, presentations may be made and notices and demands may be
served at the principal office of the Warrant Agent.
Any notice pursuant to this Agreement to be given by the Company or by
the registered holders of any Warrant to the Warrant Agent shall be
sufficiently given when and if deposited in the mail, first-class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company) to the Warrant Agent as
follows:
First Chicago Trust Company of New York
P.O. Box 2565, Suite 4660
Jersey City, New Jersey 07303-2565
Telephone No.: (201) 222-4707
Telecopier No.: (201) 222-4720 or (201) 222-4721
Attention: Tenders & Exchanges
SECTION 20. Supplements and Amendments. The Company and the Warrant
--------------------------
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective
or inconsistent with any other provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which
shall not in any way adversely affect the interests
22
<PAGE>
of the holders of Warrants. Any amendment or supplement to this Agreement
that has a material adverse effect on the interests of the holders of
Warrants 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 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 this Agreement).
SECTION 21. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 22. Termination. This Agreement shall terminate at 5:00
-----------
p.m., New York City time, on the Warrant Expiration Date. Notwithstanding
the foregoing, this Agreement will terminate on any earlier date if all
Warrants have been exercised. The provisions of Section 16 hereof shall
survive such termination.
SECTION 23. Governing Law. This Agreement and each Warrant
-------------
Certificate issued hereunder shall be governed by, and construed in
accordance with, the laws of the State of New York (without giving effect
to the conflict of laws principles thereof). All actions and proceedings
arising out of or relating to this Agreement shall be heard and exclusively
determined in any New York state or federal court sitting in the County of
New York and the Warrant Agent, the Company and any other obligor in
respect of the Warrants and the holders of the Warrants hereby consent to
the jurisdiction of such courts in any such action or proceeding.
SECTION 24. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of Warrants any legal
or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered holders of Warrants.
SECTION 25. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
AIR & WATER TECHNOLOGIES CORPORATION
By __________________________________________________
Attest:
__________________________
FIRST CHICAGO TRUST COMPANY
OF NEW YORK
By __________________________________________________
Attest:
__________________________
24
<PAGE>
EXHIBIT A
FORM OF WARRANT CERTIFICATE
[Face of Warrant Certificate]
Warrants
Warrant Certificate
Air & Water Technologies Corporation
This Warrant Certificate certifies that , or registered assigns,
is the registered holder of Warrants expiring on , 2001
[the date three years from the date of issuance] (the "Warrants") to purchase
shares of Class A Common Stock, par value $.001 per share (the "Class A Common
Stock"), of Air & Water Technologies Corporation, a Delaware corporation (the
"Company"). Each Warrant entitles the holder upon exercise to purchase from the
Company until 5:00 p.m., New York City time, on , 2001 [the date three
years from the date of issuance] (the "Warrant Expiration Date") fully paid and
nonassessable shares of Class A Common Stock (the "Warrant Shares") at the
initial exercise price (the "Warrant Exercise Price") of $2.50 per Warrant Share
payable in lawful money of the United States of America upon surrender of this
Warrant Certificate and payment of the Warrant Exercise Price at the office or
agency of the Warrant Agent, but only subject to the conditions set forth herein
and in the Warrant Agreement referred to on the reverse hereof. The Warrant
Exercise Price and number of Warrant Shares issuable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events set
forth in the Warrant Agreement.
No Warrant may be exercised after 5:00 p.m., New York City time, on the
Warrant Expiration Date, and to the extent not exercised by such time such
Warrants shall become void. Reference is hereby made to the further provisions
of this Warrant Certificate set forth on the reverse hereof and such further
provisions shall for all purposes have the same effect as though fully set forth
at this place. This Warrant Certificate shall not be valid unless countersigned
by the Warrant Agent, as such term is used in the Warrant Agreement. This
Warrant Certificate shall be governed and construed in accordance with the
internal laws of the State of New York.
A-1
<PAGE>
IN WITNESS WHEREOF, Air & Water Technologies Corporation has caused this
Warrant Certificate to be signed by its and by its [Assistant]
Secretary and has caused its corporate seal to be affixed hereunto or imprinted
hereon.
Dated: , 1998
AIR & WATER TECHNOLOGIES CORPORATION
By:________________________________
Name:
Title:
By:________________________________
Name:
Title: [Assistant] Secretary
Countersigned:
First Chicago Trust Company of New York,
as Warrant Agent
By:________________________________
Name:
Title:
A-2
<PAGE>
FORM OF WARRANT CERTIFICATE
[Reverse of Warrant Certificate]
Air & Water Technologies Corporation
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on , 2001 [the date three years from
the date of issuance] (the "Warrant Expiration Date") entitling the holder on
exercise to purchase one share of Class A Common Stock, par value $.001 per
share, of the Company (the "Class A Common Stock," and the Class A Common Stock
issuable upon exercise of the Warrants being referred to herein as the "Warrant
Shares"), and are issued or to be issued pursuant to a Warrant Agreement dated
as of , 1998 (the "Warrant Agreement"), duly executed and delivered
by the Company to First Chicago Trust Company of New York, a New York trust
company, as warrant agent (the "Warrant Agent"), which Warrant Agreement is
hereby incorporated by reference in and made a part of this instrument and is
hereby referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Warrant Agent, the Company
and the holders (the words "holders" or "holder" meaning the registered holders
or registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time from time to time on or before 5:00
p.m., New York City time, on the Warrant Expiration Date; provided that holders
shall be able to exercise their Warrants only if (i)(x) the Registration
Statement (as defined hereinafter) is then in effect and the Company has
delivered to each person exercising a Warrant a current prospectus meeting the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or (y) the exercise of such Warrants is exempt from the registration
requirements of the Securities Act, and (ii) the Warrant Shares are qualified
for sale or exempt from qualification under the applicable securities laws of
the states in which the various holders of the Warrants, or other persons to
whom it is proposed that the Warrant Shares be issued on exercise of the
Warrants, reside. The holder of Warrants evidenced by this Warrant Certificate
may exercise them by surrendering this Warrant Certificate, with the form of
election to purchase set forth hereon properly completed and executed, together
with payment of the Warrant Exercise Price in lawful money of the United States
of America, either in cash or by certified or official bank check payable to the
order of the Company, at the office of the Warrant Agent. In the event that upon
any exercise of Warrants evidenced hereby the number of Warrants exercised shall
be less than the total number of Warrants evidenced hereby, there shall be
issued to the holder hereof or such holder's assignee a new Warrant Certificate
evidencing the number of Warrants not exercised. No adjustment shall be made for
any cash dividends on any Class A Common Stock issuable upon exercise of this
Warrant.
The Warrant Agreement provides that upon the occurrence of certain events the
Warrant Exercise Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Warrant Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares
A-3
<PAGE>
of Class A Common Stock issuable upon the exercise of each Warrant shall be
adjusted. No fractions of a share of Class A Common Stock will be issued upon
the exercise of any Warrant, but the Company will pay the cash value thereof
determined as provided in the Warrant Agreement; provided that holders of
Warrants may elect to purchase full shares of Class A Common Stock by delivering
to the Warrant Agent, in addition to the Warrant Exercise Price, an appropriate
amount of cash as provided in the Warrant Agreement.
The Warrants and the Warrant Shares have been registered for public
distribution under the Securities Act pursuant to a Registration Statement on
Form S-1 (No. 333-39115) (together with any amendments thereto, the
"Registration Statement") filed by the Company on October 30, 1997, with the
Securities and Exchange Commission (the "Commission"). The Company has agreed
under the terms of the Warrant Agreement, subject to Black Out Periods and
Postponement Periods, to use its commercially reasonable efforts to keep the
Registration Statement effective under the Securities Act.
Warrant Certificates, when surrendered at the office of the Warrant Agent by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant Certificate
at the office of the Warrant Agent a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered holder(s)
thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, of any distribution to the holder(s) hereof, and
for all other purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary. Neither the Warrants nor this Warrant
Certificate entitles any holder hereof to any rights of a stockholder of the
Company.
A-4
<PAGE>
Form of Election to Purchase
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to receive shares of Class A Common
Stock and herewith tenders payment for such shares to the order of Air & Water
Technologies Corporation in the amount of $ in accordance with the terms
hereof. In addition, if applicable, the undersigned hereby irrevocable elects
to purchase full shares of Class A Common Stock by tendering an additional
amount equal to the cash value of any fractional share to which the undersigned
would be entitled, as determined below. The undersigned requests that a
certificate for such shares be registered in the name of , whose
address is and that such shares be delivered to
, whose address is
. If said number of shares
is less than all of the shares of Class A Common Stock purchasable hereunder,
the undersigned requests that a new Warrant Certificate representing the
remaining balance of such shares be registered in the name of ,
whose address is , and that such Warrant Certificate
be delivered to , whose address is .
Date: ......................
[Social Security Box]
Name of holder of Warrant Certificate:
..............................................
(Please print)
Address: .................................
.................................
Signature: ...........................
Note: The above signature must correspond with the name
as written upon the face of this Warrant Certificate
in every particular, without alteration or
enlargement or any change whatsoever, and if the
certificate representing the shares of Class A
Common Stock is to be registered in a name other
than that in which this Warrant Certificate is
registered, the signature of the holder hereof must
be guaranteed.
Signature Guaranteed:
A-5
<PAGE>
Rounding Up of Fractional Shares
If the holder hereof is entitled to receive a fractional share of Class A
Common Stock upon exercise of a Warrant and desires to round up the number of
shares of Class A Common Stock to be received in lieu of receiving cash in lieu
of such fractional share, please complete the following and include the
Fractional Share Purchase Price Amount determined below along with the aggregate
Warrant Exercise Price.
Current Market Price (as determined below) per share: $___________
One (1) minus fractional share to which holder is entitled: x 0.________
Fractional Share Purchase Price Amount: ____________
For purposes of determining the Fractional Share Purchase Price Amount,
"Current Market Price" per share means the average of the daily Closing Prices
of the Class A Common Stock for 30 consecutive trading days commencing 45
trading days prior to the day immediately preceding the date of presentation of
this form election of purchase. The "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
American Stock Exchange, Inc. (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.
A-6
<PAGE>
Exhibit 5.01
[LETTERHEAD OF AIR & WATER TECHNOLOGIES CORPORATION]
January 29, 1998
Board of Directors
Air & Water Technologies Corporation
P.O. Box 1500
Somerville, NJ 08876
Re: Air & Water Technologies Corporation
Registration Statement on Form S-1
(File No. 333-39115)
-------------------------------------
Dear Ladies and Gentlemen:
I am Senior Vice President, General Counsel and Secretary of Air & Water
Technologies Corporation, a Delaware corporation (the "Company"), and have acted
as such in connection with the Company's Registration Statement on Form S-1
(File No. 333-39115) (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") on October 30, 1997, as amend ed by
Amendment No. 1 thereto filed with the Commission on December 23, 1997 and
Amendment No. 2 thereto filed with the Commission on January 29, 1998, under the
Securities Act of 1933, as amended (the "Act"), relating to the registration of
(i) such currently indeterminable number of transferable rights (the "Rights")
entitling the holders thereof to purchase shares of common stock, par value
$.001 per share, of the Company (the "Common Stock"), (ii) such currently
indeterminable number of shares of the Company's Common Stock issuable upon the
exercise of Rights (the "Underlying Shares"), (iii) such currently
indeterminable number of transferable warrants (the "Warrants") entitling the
holders thereof to purchase shares of the Company's Common Stock and (iv)
10,000,000 shares of the Company's Common Stock underlying the maximum number of
Warrants as may be issued (the "Warrant Shares").
<PAGE>
Board of Directors
Air & Water Technologies Corporation
January 29, 1998
Page 2
This opinion is delivered in accordance with the requirements of Item
601(b)(5) of Regulation S-K promulgated under the Act.
In connection with this opinion, I have examined and I am familiar with
(i) the Registration Statement; (ii) the Form of Rights Certificate attached
as Exhibit 4.03 to the Registration Statement and the Form of Instructions for
Rights Certificates attached as Exhibit 99.2 to the Registration Statement;
(iii) the Form of Warrant Agreement attached as Exhibit 4.01 to the Registration
Statement (the "Warrant Agreement"); (iv) the Form of Warrant Certificate
included as an exhibit to the Warrant Agreement; (v) the Restated Certificate of
Incorporation and By-Laws of the Company, each as amended and as currently in
effect; (vi) resolutions of the Board of Directors of the Company relating to,
among other things, the approval of the Rights Offering (as defined in the
Registration Statement) and the registration of the Rights, Underlying Shares,
Warrants and Warrant Shares; and (vii) such other agreements, certificates of
public officials and officers of the Company, records and documents that I
deemed necessary or appropriate as a basis for the opinions set forth herein.
In my examination, I have assumed the legal capacity of natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to me as originals, the conformity to original documents of all documents
submitted to me as certified or photostatic copies and the authenticity of the
originals of such copies. In making my examination of documents executed by
parties other than the Company, I have assumed that such parties had the
power, corporate or other, to enter into and perform all obligations thereunder
and have also assumed the due authorization by all requisite action, corporate
or other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof on such parties.
I am admitted to the bar of the State of New York and I express no opinion
as to the laws of any other
<PAGE>
Board of Directors
Air & Water Technologies Corporation
January 29, 1998
Page 3
jurisdiction except for the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing and to the qualifications,
limitations, and exceptions contained herein, I am of the opinion that, subject
to the Registration Statement being declared effective:
(a) The Rights, Underlying Shares, Warrants and Warrant Shares have been
duly authorized for issuance by requisite corporate action on the part of the
Company.
(b) The Rights, when issued in accordance with the terms of the Rights
Offering, will be validly issued.
(c) The Warrants, when issued in accordance with the terms of the Rights
Offering and the Warrant Agreement, will be validly issued.
(d) The Underlying Shares, when issued in accordance with the terms of the
Rights Offering, will be validly issued, fully paid and nonassessable.
(e) The Warrant Shares, when issued in accordance with the terms of the
Warrants and the Warrant Agreement, will be validly issued, fully paid and
nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name in the Registration Statement
under the caption "Legal Matters." In giving such consent, I do not hereby
admit that I come into the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
Douglas A. Satzger, Esq.
<PAGE>
Senior Vice President,
General Counsel and
Secretary
<PAGE>
EXHIBIT 10.15(a)
AMENDMENT NO. 1 TO RECAPITALIZATION AGREEMENT
Amendment No. 1 (this "Amendment"), dated as of January 26, 1998, amending
---------
the Recapitalization Agreement, dated as of September 24, 1997 (the
"Recapitalization Agreement"), among Air & Water Technologies Corporation, a
- ---------------------------
Delaware corporation ("AWT"), Compagnie Generale des Eaux, a company organized
---
under the laws of the Republic of France ("CGE"), and its indirect wholly-owned
---
subsidiary, Anjou International Company, a Delaware corporation ("Anjou").
-----
WHEREAS, the parties hereto desire to amend the hereby amend and supplement
the Recapitalization Agreement in certain respects;
NOW, THEREFORE, the parties hereto hereby agree as follows:
Section 1. Definitions. Capitalized terms used herein but not otherwise
-----------
defined herein shall have the meanings assigned to such terms in the
Recapitalization Agreement.
Section 2. Recapitalization Agreement Amendments. As of the date hereof,
-------------------------------------
the Recapitalization Agreement is amended as follows:
(a) Section 1.2(a) is amended and restated in its entirety to read as
follows:
"(a) On a date (the "Record Date") to be determined by the Board in
-----------
accordance with the Certificate of Incorporation and Bylaws of AWT and
the applicable rules of the American Stock Exchange (the "AMEX"), AWT
----
shall declare a dividend (subject to the Registration Statement (as
hereinafter defined) becoming effective) to all holders of Class A
Common Stock of record as of the Record Date of such number of
transferable rights (a "Right"), which when multiplied by the
-----
Subscription Price shall equal $210,000,000 in gross proceeds. As
soon as practicable following the effective date of the Registration
Statement, AWT will distribute such Rights to such holders of Class A
Common Stock."
(b) Section 1.2(b) is amended and restated in its entirety to read as
follows:
<PAGE>
"(b) Each Right shall entitle the holder thereof to
acquire (the "Basic Subscription Privilege"), at the Subscription
----------------------------
Price, one share of Class A Common Stock (an "Underlying Share")
----------------
(subject to AWT's obligation to issue shares of Class B Common Stock,
par value $.001 per share (the "Class B Common Stock"), in certain
--------------------
circumstances) and, for each holder other than CGE and Anjou, such
number of Warrants (as hereinafter defined) determined in accordance
with Section 1.2(c). All holders of Rights (other than CGE and Anjou)
who exercise the Basic Subscription Privilege may also subscribe for
additional Underlying Shares that are not otherwise purchased pursuant
to the exercise of Rights ("Excess Shares") at the Subscription
-------------
Price, if any, subject to AWT's obligation to issue Class B Common
Stock (in certain circumstances) (the "Oversubscription Privilege").
--------------------------
If an insufficient number of Excess Shares are available to satisfy
fully all elections to exercise the Oversubscription Privilege, the
available Excess Shares shall be prorated among holders who exercise
their Oversubscription Privilege. CGE hereby agrees to exercise its
Basic Subscription Privilege in full. The "Rights Offering" means the
---------------
offering of Underlying Shares to holders of Rights pursuant to (i) the
Basic Subscription Privilege, (ii) the Oversubscription Privilege and
(iii) the Conditional CGE Subscription (as defined hereinafter)."
(c) Section 1.2(c) is amended by adding the following as the last sentence
thereof:
"'Warrant Shares' means the shares of Class A Common Stock issuable upon
--------------
exercise of the Warrants."
(d) Section 1.2(f)(i) is amended and restated in its entirety to read as
follows:
"(i) elect to adopt as a term of the Rights Offering and this Agreement
a provision which provides that in the event AWT fails to obtain the
Requisite Consents (as hereinafter defined) and any person's beneficial
ownership of the voting power of the capital stock of AWT entitled to vote
in the election of directors would, upon the exercise of such holder's
Basic Subscription Privilege or Oversubscription Privilege or pursuant to
Section 1.3 of this Agreement, exceed 74% of the total voting power then
outstanding, then AWT shall issue to such
2
<PAGE>
person only such number of shares of Class A Common Stock as would cause
such person's aggregate beneficial ownership of the then outstanding
voting power of AWT to equal 74% and any additional shares to be issued
thereunder to such person shall be shares of Class B Common Stock, par
value $.001 per share (the "Non-Voting Common Stock"), of AWT which shall
-----------------------
be non-voting shares of common stock of AWT and which shares shall
automatically convert into Shares of Class A Common Stock immediately upon
the earlier of August 1, 2000 or seventy five days following termination
of (by amendment of the Indenture (as hereinafter defined), redemption of
the Convertible Debentures (as hereinafter defined) or otherwise) of
Section 1501 of the Indenture; or"
(e) Section 5.1 is amended by restating the first sentence therein to read as
follows:
"As soon as reasonably practicable, AWT shall file with the SEC a
registration statement (the "Registration Statement") under the Securities
----------------------
Act in connection with the Rights Offering and with respect to the Rights,
the Underlying Shares, the Warrants and the Warrant Shares and shall use
its best efforts to effect the registration of the Rights, the Underlying
Shares, the Warrants and the Warrant Shares."
(f) Section 5.2 is amended by restating paragraph (a) therein to read as
follows:
"(a) In order to consummate the Recapitalization, AWT, acting through
the Board, shall, as promptly as reasonably practicable, in accordance
with applicable Law and AWT's Certificate of Incorpo-
3
<PAGE>
ation and Bylaws, duly approve and adopt an amendment to AWT's
Certificate of Incorporation (the "Charter Amendment") substantially in
-----------------
the form of Exhibit B to this Agreement (i) to increase the authorized
capital stock of AWT in order to permit the consummation of the
transactions contemplated by this Agreement and (ii) in the event the
Requisite Consents are not obtained, to amend the conversion rights of
holders of the 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 (A) August 1, 2000 or (B) seventy-five days following the termination
of the application of Section 1501 of the Indenture (as hereinafter
defined) to such holder. CGE and Anjou agree to vote for or give their
written consent to AWT, as applicable, in respect of the Charter Amendment
and any other amendment to the Restated Certificate of Incorporation
necessary to consummate the transactions contemplated by this Agreement."
(g) Section 5.9 is amended by restating the first sentence therein to read as
follows:
"Prior to or concurrently with the commencement of the Rights Offering,
AWT shall commence a solicitation (the "Consent Solicitation") of consents
--------------------
to amendments to the Indenture, dated as of May 15, 1990, between AWT and
Midlantic National Bank, as Trustee, governing the Convertible Debentures
(the "Indenture") from the holders of not less than a majority in
---------
aggregate principal amount of the Convertible Debentures outstanding (the
consents from such holders, the "Requisite Consents") in order to exempt
------------------
CGE and its affiliates from the application of Section 1501 of the
Indenture."
(h) Exhibit A is amended by amending and restating the paragraph captioned
"Registration of Warrant Shares" to read as follows:
"Holders of Warrants shall be able to exercise their Warrants only if
(i)(x) a registration statement relating to the Warrant Shares is then in
effect, and the Company has delivered to each person exercising a
Warrant a current prospectus meeting the requirements of the Securities
Act, or (y) the exercise of such Warrants is exempt from the registration
requirements of the Securities Act, and (ii) such securities are qualified
for sale or exempt from qualification under the applicable state blue sky
laws, AWT shall prepare, file and use its best efforts to cause to become
effective under the Securities Act a registration statement in respect of
all of the Warrant Shares. Subject to Black Out Periods (as hereinafter
defined) and Postponement Periods (as hereinafter defined), AWT shall 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, AWT shall not be required to amend or supplement the
registration statement, any related prospectus or any document
incorporated therein by reference
4
<PAGE>
(i) for a period (a "Black Out Period") not to exceed the shorter of
----------------
(x) the period ending on 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 shall occur during any period of 135 consecutive
days) in the event that (1) 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 AWT'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 (2)(A) AWT 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 AWT 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 shall be no more than three Black Out Periods
during the term of the Warrants; or
(ii) in the event that the Company determines in its good faith
judgment that the current market price per share of the Class A Common
Stock is substantially below the Warrant Exercise Price such that
exercise of the Warrants is unlikely to occur, for a period (a
"Postponement Period") continuing until such time as the Company
-------------------
determines in its good faith judgment that exercise of the Warrants
appears likely; provided that during the Postponement Period the Company
(x) shall monitor the current market price per share of the Class A Common
Stock and (y) shall not permit the exercise of any Warrant unless the
Company shall have delivered to each person exercising a Warrant a current
prospectus meeting the requirements of Section 10(a) of the Securities
Act."
(i) Exhibit B is amended by restating Paragraph (iii) of Article THIRD to read
as follows:
5
<PAGE>
(iii) Paragraph 3A of Paragraph B.3 of Article FOURTH is hereby deleted
in its entirety and the following paragraph is inserted in lieu thereof:
3A. Conversion of Class B Common. On the Conversion Date (as
----------------------------
such term is defined below), a holder's shares of Class B Common
shall automatically convert into the same number of shares of Class
A Common. For purposes of this Paragraph 3, the "Conversion Date"
shall mean the date which is the earlier of (i) August 1, 2000 or,
(ii) seventy-five days following the date on which the "Right to
Require Repurchase" provided in Section 1501 of the Indenture
governing the Corporation's 8% Convertible Subordinated Debentures
due 2015 (the "Debentures") which grants holders the right to
require the corporation to repurchase the Debentures when any person
becomes the beneficial owner of 75% or more of the voting stock of
the Corporation becomes inapplicable with respect to such holder.
Section 2 Parties in Interest. This Amendment shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this Amendment,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Amendment.
Section 3 Governing Law. This Amendment shall be governed by, and construed
-------------
in accordance with, the laws of the State of New York (without regard to
conflicts of laws principle thereof). All actions and proceedings arising out
of or relating to this Amendment shall be heard and exclusively determined in
any New York state or federal court sitting in the County of New York and the
parties hereto hereby consent to the jurisdiction of such courts in any such
action or proceeding.
Section 4 Headings. The descriptive headings contained in this Amendment are
--------
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Amendment.
Section 5 Counterparts. This Amendment may be executed in one or more
------------
counterparts (including by facsimile transmission), and by the different parties
hereto in separate counterparts, each of which when executed shall be deemed to
be an
6
<PAGE>
original but all of which taken together shall constitute one and the same
agreement.
7
<PAGE>
IN WITNESS WHEREOF, CGE, Anjou and AWT have caused this Amendment to be
executed as of the date first written above by their respective officers
hereunto duly authorized.
COMPAGNIE GENERALE DES EAUX
By /s/ Francois Jobard
___________________________________
Name: Francois Jobard
Title: Charge de Mission a la Direction Financiere
ANJOU INTERNATIONAL COMPANY
By /s/ Michael Avenas
____________________________________
Name: Michel Avenas
Title: President
AIR & WATER TECHNOLOGIES CORPORATION
By /s/ Douglas A. Satzger
___________________________________
Name: Douglas A. Satzger
Title: Senior Vice President
<PAGE>
EXHIBIT 10.16
EXECUTION COPY
TERMINATION AGREEMENT
---------------------
TERMINATION AGREEMENT (this "Agreement"), dated as of October 24, 1997 (the
"Termination Date"), by and between Robert B. Sheh (the "Executive" ) and Air &
Water Technologies Corporation, a Delaware corporation (the "Company").
WHEREAS, the Executive has been employed by the Company pursuant to an
employment agreement, dated as of November 7, 1996 (the "Employment Agreement");
and
WHEREAS, the employment of the Executive terminated effective as of
the Termination Date; and
WHEREAS, the Executive and the Company desire to set forth their
agreement as to the amounts to which Executive is entitled in connection with
the termination of Executive's employment and certain related matters;
NOW, THEREFORE, in consideration of the promises and of the release,
representations, covenants and obligations herein contained, the parties hereto
agree as follows;
1. Termination of Employment Agreement;
------------------------------------
Resignation as Director.
-----------------------
(a) The Executive and the Company hereby agree that the Employment
Term (as defined in the Employment Agreement) and the Employment Agreement
terminated effective as of the Termination Date and, except as set forth herein,
the Employment Agreement shall have no further force and effect.
(b) Executive hereby resigns as a director of the Company, effective
as of the Termination Date.
<PAGE>
2. Noncompetition; Confidentiality; Specific Performance
-----------------------------------------------------
The provisions of Sections 10 and 1l of the Employment Agreement
shall continue in full force and effect during the respective time periods set
forth therein, and the rights of the Company set forth in Section 12 of the
Employment Agreement shall continue in full force and effect
3. Contract Payments
-----------------
(a) In connection with the termination of Executive's employment, the
Company shall pay or shall cause to be paid to the Executive the following
amounts:
i) The Company shall pay to the Executive (or his estate,
heirs and personal representative should the Executive die or
become legally incompetent) an aggregate of $800,000, one-half of
such amount (i.e. $400,000) to be payable on the seventh business
---
day following the date of execution of this Agreement, and the
remainder of such amount to be payable in two equal installments
of $200,000, payable on the first and second anniversaries of the
Termination Date, provided that the Executive has complied with
the provisions of Section 10 and 11 of the Employment Agreement;
and
(ii) The Company shall pay to the Executive on the seventh
business day following the date of execution of this Agreement
additional amounts actually incurred by Executive in relocating
from California to New Jersey (against documented expenses),
provided that, such reimbursement shall not exceed the difference
between his $100,000 relocation allowance provided for in the
Employment Agreement and any amounts paid to Executive to date
pursuant thereto; and $23,076.92 (representing accrued but unpaid
vacation).
2
<PAGE>
(b) All of the foregoing payments and benefits shall be subject to
any applicable federal, state and local tax withholding.
(c) It is understood and agreed that the Executive shall receive no
bonus payments with respect to his employment up to and including the
Termination Date.
(d) Executive shall be reimbursed for previously unreimbursed
business expenses incurred through the Termination Date which are (i) reasonable
in amount and (ii) substantiated by appropriate documentation.
4. Return of Company Property. Executive shall return on the first
--------------------------
business day following execution of this Agreement, all equipment purchased by
the Company for his use, including without limitation, the following: car, and
other office equipment, telephones, etc.
5. Arbitration: Notices.
--------------------
(a) Any and all claims arising out of or relating to this Agreement
shall be settled by arbitration in the manner set forth in Section 13 of the
Employment Agreement
(b) For the purposes of this Agreement, notices, demands and all
other communications required or permitted in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified mail, return receipt requested,
postage prepaid, addressed, if to the Executive, to the address set forth in the
final page of this Agreement and, if to the Company, as follows:
Air & Water Technologies Corporation
P.O. Box 1500
Somerville, New Jersey 08876
Attn: General Counsel
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
3
<PAGE>
6. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect; provided, however, that if any one or more of the terms incorporated in
-------- -------
Section 2 of this Agreement by reference to Section 10 of the Employment
Agreement shall for any reason be held to be excessively broad with regard to
time, duration, geographic scope or activity, that term shall not be deleted but
shall be reformed and construed in a manner to enable it to be enforced to the
extent compatible with applicable law.
7. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
8. Governing Law. The validity, interpretation construction and
-------------
performance of this Agreement shall be governed by the laws of the State of New
Jersey without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
AIR & WATER TECHNOLOGIES CORPORATION
By: /s/ Douglas A. Satzger
-------------------------
Name: Douglas A. Satzger
Title: Senior Vice President
Agreed and Accepted:
/s/ Robert B. Sheh
- ---------------------
Robert B. Sheh
- ---------------------
- ---------------------
Address
4
<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 December 13, 1997, except for the
last paragraph of Note 7 as to which the date is January 28, 1998, 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
January 28, 1998
<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 File No. 333-39115.
Arthur Andersen LLP
Roseland, New Jersey
January 26, 1998
<TABLE> <S> <C>
<PAGE>
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 12,089
<SECURITIES> 0
<RECEIVABLES> 79,981
<ALLOWANCES> 3,300
<INVENTORY> 1,893
<CURRENT-ASSETS> 128,680
<PP&E> 30,345
<DEPRECIATION> 16,957
<TOTAL-ASSETS> 383,065
<CURRENT-LIABILITIES> 184,482
<BONDS> 307,845
0
12
<COMMON> 32
<OTHER-SE> (108,178)
<TOTAL-LIABILITY-AND-EQUITY> 383,065
<SALES> 456,375
<TOTAL-REVENUES> 456,375
<CGS> 385,573
<TOTAL-COSTS> 385,573
<OTHER-EXPENSES> 21,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,854
<INCOME-PRETAX> (51,313)
<INCOME-TAX> 514
<INCOME-CONTINUING> (51,827)
<DISCONTINUED> (108,754)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (160,581)
<EPS-PRIMARY> (5.12)
<EPS-DILUTED> (3.72)
</TABLE>
<PAGE>
EXHIBIT 99.1
SUBSCRIPTION AND INFORMATION AGENCY AGREEMENT
---------------------------------------------
First Chicago Trust Company of New York
525 Washington Boulevard
Suite 4660
Jersey City, New Jersey 07310
Dear Sir/Madam:
This letter sets forth the terms and conditions pursuant to which First
Chicago Trust Company of New York, a New York corporation, agrees to act as
subscription and information agent (the "Subscription and Information Agent") in
connection with an offering (the "Rights Offering") by Air & Water Technologies
Corporation, a Delaware corporation (the "Company"), to its stockholders of
rights (the "Rights") to acquire shares of its Class A Common Stock, par value
$.001 per share (the "Class A Common Stock"), subject to the Company's
obligation to issue shares of its Class B Common Stock, par value $.001 per
share (the "Class B Common Stock" and together with the Class A Common Stock,
the "Common Stock") in certain circumstances.
Section 1. The Rights Offering. The Rights Offering will be conducted in the
-------------------
manner and upon the terms set forth in the final prospectus (the "Prospectus")
constituting a part of the Company's Registration Statement on Form S-1 (No.
333-39115) (as amended from time to time, the "Registration Statement") relating
to the Rights Offering (as hereinafter defined) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act").
The Subscription and Information Agent acknowledges receipt of copies of the
Registration Statement and all pre-effective amendments thereto. The
Registration Statement became effective on the date of this Agreement. A copy
of the Prospectus meeting the applicable requirements of Section 10 under the
Act will be delivered to the Subscription and Information Agent as promptly as
practicable following the effective date of the Registration Statement (the
"Effective Date").
Section 2. Appointment of Subscription and Information Agent. The
-------------------------------------------------
Subscription and Information Agent is hereby appointed as subscription and
information agent to effect the Rights Offering in accordance with the
Prospectus and the Subscription and Information Agent hereby accepts such
appointment. The Subscription and Information Agent presently service as
transfer agent (the "Transfer Agent") and registrar (the "Registrar") of the
Class A Common Stock and will serve as Transfer Agent and Registrar for the
Rights. Each reference to the Subscription and Information Agent in this
Agreement is to the Subscription and Information Agent in its capacity as
subscription and information agent unless the context indicates otherwise.
Section 3. Mailing of Rights Offering Materials.
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(a) The Subscription and Information Agent shall mail or cause to be mailed,
as soon as possible after the Effective Date, via first-class mail to each
holder of record (a "Recordholder") of Class A Common Stock as of January 29,
1998 (the "Record Date") whose address of record is within the continental
United States and is not an APO or FPO address, (i) a certificate representing
Rights (a "Rights Certificate") dated as of the date of issuance thereof by the
Subscription and Information Agent evidencing the Rights to which such
Recordholder is entitled, (ii) a copy of the Prospectus, (iii) a letter of
transmittal, (iv) instructions for use and exercise of the Rights Certificates
in the form attached as an exhibit to the Registration Statement and (v) a
return envelope addressed to the Subscription and Information Agent.
(b) The Subscription and Information Agent shall mail or cause to be mailed
via air-mail or courier to Recordholders whose addresses are outside the United
States or who have an APO or FPO address a transmittal letter from the Company
addressed to such Recordholders and a Prospectus. The Subscription and
Information Agent shall not mail Rights Certificates to such Recordholders but
shall hold the Rights Certificates for the accounts of such holders.
(c) The Subscription and Information Agent shall make reasonable efforts to
identify which of the Recordholders are likely to be nominee holders and include
a separate transmittal letter for Recordholders who are nominees with such
Recordholders' mailings. The Subscription and Information Agent shall make
copies of a separate transmittal letter addressed to beneficial holders
available upon request.
(d) Prior to mailing, the Subscription and Information Agent, as Transfer
Agent and Registrar for the Rights, will cause to be issued Rights Certificates
in the names of the Recordholders and for the number of Rights to which they are
each entitled, as determined in accordance with Section 3(e). The Subscription
and Information Agent shall either manually sign or affix a duly authorized
facsimile signature on all Rights Certificates. Subsequent to their original
issuance, no Rights Certificates shall be issued except Rights Certificates
issued upon any division or combination pursuant to Section 4(a) below, issued
upon partial exercise of a Rights Certificate pursuant to Section 4(d) below or
issued in replacement of a mutilated, destroyed, lost or stolen Rights
Certificate pursuant to Section 4(h) below.
(e) On or about the Record Date, the Subscription Agent shall create and
maintain from the stock ledger and register it maintains in its capacities as
Transfer Agent and Registrar of the Class A Common Stock a record of the names,
addresses and, where available, taxpayer identification numbers of the
Recordholders and the number of Rights each such Recordholder is entitled to
receive in the Rights Offering (the "Rights Record"). The Rights Record shall
also include the number of the Rights Certificate, the number of Rights
evidenced on the face of the Rights Certificate and the date of the Rights
Certificate issued to each Recordholder. The Recordholders shall be established
as of the close of business on the Record Date.
Section 4. Duties of the Subscription and Information Agent.
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(a) The Subscription and Information Agent is authorized and directed to
effect divisions and combinations of Rights Certificates at the request of the
holders thereof, in the manner and subject to the terms and conditions set forth
in the Rights Certificate and the Prospectus; provided that a Rights Certificate
may not be divided in such a manner as would permit the Rights holder to
subscribe for a greater number of Underlying Shares than the number for which
such Rights holder would be entitled to subscribe under the original Rights
Certificate.
(b) The Subscription and Information Agent is authorized and directed to
accept subscriptions upon the exercise of Rights in accordance with the terms of
the Rights Certificates and the Prospectus, up to 5:00 p.m., New York City time,
on the Expiration Date (except as such earlier time may be set forth in the
Prospectus), provided that the Subscription Agent receives, in the manner and
subject to the terms and conditions set forth in the Prospectus:
(i) payment in an amount equal to the Subscription Price multiplied by
the total number of shares of Class A Common Stock ("Underlying
Shares") subscribed for pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege; provided that 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 an
exercising Rights holder does not specify the number of Underlying
Shares to be purchased, then the Rights holder will be deemed to
have exercised the Basic Subscription Privilege (as defined in the
Prospectus) to the full extent of the payment tendered; provided
further, that 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 (as
defined in the Prospectus) to the full extent of the excess
payment tendered, for such number of shares determined in
accordance with the terms of the Prospectus, and any remaining
amount will be returned to such Rights holder as provided in
Section 4(f)(iv) below and in the manner and subject to the terms
and conditions set forth in the Prospectus;
(ii) either (x) the properly completed and executed Rights Certificate
or Rights Certificates evidencing the Rights being exercised with
any signatures required to be guaranteed so guaranteed, or (y) if
the Guaranteed Delivery Procedures (as defined in the Prospectus)
are being followed, a duly completed guarantee notice ("Notice of
Guaranteed Delivery") in substantially the form provided with the
instructions as to use of the Rights Certificates attached as an
exhibit to the Registration Statement; and
(iii) to the extent applicable, (x) proper evidence of authority of the
person executing the Rights Certificate, unless, for good cause,
the Subscription and Information Agent dispenses with proof of
authority, if a person signs the Rights Certificate
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in a representative or other fiduciary capacity or the Rights
Certificate is executed by a person other than the holder named on
the face of the Rights Certificate, and (y) a signature guarantee
by an Eligible Institution (as defined in the Prospectus) unless a
Rights Certificate provides that the Underlying Shares are to be
delivered to the Recordholder of such Rights, or is submitted for
the account of an Eligible Institution; provided that in the
instances set forth in clauses (A), (B), (C) and (D) below, the
Subscription and Information Agent may accept subscriptions
satisfying the requirements of paragraphs (i) and (ii) of this
Section 4(b) without further authorization from the Company,
without procuring supporting legal papers or other proof of
authority to sign (including proof of appointment of a fiduciary
or other person acting in a representative capacity), and without
signatures of fiduciaries, if:
(A) the Rights Certificate is registered in the name of a
fiduciary, the Rights Certificate is executed by such
fiduciary, and the Underlying Shares are to be issued in the
name of the registered owner of the Rights Certificate;
(B) the Rights Certificate is in the name of a corporation or a
partnership and the Rights Certificate is executed by an
officer or general partner thereof, and the Underlying Shares
are to be issued in the name of such corporation or
partnership;
(C) the Rights Certificate is registered in the name of a decedent
and the Rights Certificate is executed by a subscriber
purporting to act as the decedent's executor or administrator,
the Underlying Shares are to be registered in the name of the
subscriber as executor or administrator of the estate of the
deceased registered owner, and there is no evidence indicating
that the subscriber is not the duly authorized representative
that such subscriber purports to be; or
(D) the Rights Certificate is executed, as agent for the
subscriber, by an Eligible Institution, where the Rights
Certificate is registered in the name of the subscriber and
the Underlying Shares are to be issued in the name of the
registered owner of the Rights Certificate.
(c) In the case of Rights that are held of record through the
Depository Trust Company or the Philadelphia Depository Trust Company (each, a
"Book-Entry Transfer Facility"), exercises of the Basic Subscription Privilege
and Oversubscription Privilege may be effected by instructing the Book-Entry
Transfer Facility to transfer Rights from the Book-Entry Transfer Facility
account of such holder to the Book-Entry Transfer Facility account of the
Subscription and Information Agent, in the manner and subject to the terms and
conditions set forth in the Prospectus.
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<PAGE>
(d) The Subscription and Information Agent is authorized and directed
to issue a new Rights Certificate to a Rights holder who subscribes for fewer
than all of the shares represented by its Rights Certificate(s), upon the terms
and conditions set forth in the Prospectus.
(e) The Subscription and Information Agent will refer to the Company
for specific instructions as to acceptance or rejection of subscriptions
received after the Expiration Date, subscriptions not authorized to be accepted
pursuant to this Section 4 and subscriptions otherwise failing to comply with
the requirements set forth in the Prospectus and the terms of the Rights
Certificate. All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company, whose
determination 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. Rights Certificates 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 sole
discretion. Neither the Subscription and Information Agent nor the Company 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. To the extent that any Rights Certificates
remain unexercised, outstanding or not transferred to the Subscription and
Information Agent's account at a Book-Entry Facility at 5:01 p.m., New York
time, on the Expiration Date (other than those subject to the Guaranteed
Delivery Procedures), such outstanding Rights Certificates shall be null and
void. The Company will not be obligated to honor any purported exercise of
Rights received by the Subscription and Information Agent or transfer of Rights
to the Subscription and Information Agent's account at a Book-Entry Facility
after the Expiration Date, regardless of when the documents relating to that
exercise were sent, except pursuant to the Guaranteed Delivery Procedures.
(f) As soon as possible following the Expiration Date, upon acceptance
of subscriptions, the Subscription and Information Agent shall:
(i) hold all funds received in payment for the Underlying Shares
subscribed for pursuant to the Basic Subscription Privilege and
Oversubscription Privilege in the account maintained by the
Subscription and Information Agent for purposes of accepting
subscriptions in the Rights Offering at First National Bank of
Chicago ABA No. 0710-0001-3, Account No. 93-00007 (the
"Subscription Account"), and three (3) days following the
Expiration Date, pay to the Company or to such other person as the
Company may direct, by wire transfer, certified or bank check or
other method acceptable to the Company, the amount of all funds in
the Subscription Account;
(ii) make available to the Company, upon the Company's request, the
following information: (A) the number of Underlying Shares validly
subscribed for; (B) the number of Underlying Shares subject to
guaranteed exercises; (C) the number of Underlying Shares for
which defective subscriptions have been
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<PAGE>
received; and (D) the amounts of collected and uncollected funds
in the Subscription Account established under this Agreement;
(iii) as promptly as possible, but in any event on or before 5:00 p.m.,
New York City time, on the first full business day following the
Expiration Date, or upon the request from the Company from time to
time thereafter, certify in writing to the Company the cumulative
totals through the Expiration Date of all the information set
forth in (ii)(A) through (D) above; and
(iv) allocate Underlying Shares not required to satisfy Rights
exercised pursuant to the Basic Subscription Privilege to those
Recordholders who have subscribed for Excess Shares (as defined in
the Prospectus) pursuant to the Oversubscription Privilege in
accordance with the terms of and the procedures set forth in the
Prospectus, and as promptly as practicable after the Expiration
Date, and after all prorations and adjustments contemplated by the
terms of the Rights Offering have been effected, but in any event
no later than three (3) business days following the Expiration
Date, return by mail any excess payments received pursuant to the
exercise of the Oversubscription Privilege to subscribers.
(g) The Subscription and Information Agent shall, as promptly as
practicable after the Expiration Date, and after all prorations and adjustments
contemplated by the terms of the Rights Offering have been effected, but in any
event no later than three (3) business days following the Expiration Date, issue
certificates as Transfer Agent and Registrar representing Underlying Shares
subscribed for pursuant to the Basic Subscription Privilege and Oversubscription
Privilege, countersigned with the signature of an employee of the Subscription
and Information Agent, having authority to sign on its behalf as Registrar, and
registered in the names specified by the subscribers, and thereafter, the
Subscription and Information Agent shall mail or deliver such certificates as
instructed by the subscriber as soon as practicable in accordance with the terms
of the Prospectus and the rules of the National Association of Securities
Dealers, Inc. after collection of remittances for subscriptions.
(h) Upon the receipt by the Subscription and Information Agent and
the Company of evidence reasonably satisfactory to them of the loss, theft,
destruction or mutilation of a Rights Certificate, and upon receipt of indemnity
or security reasonably satisfactory to them and reimbursement of all expenses
incidental thereto, and upon surrender and cancellation of the Rights
Certificate if mutilated, the Subscription and Information Agent will deliver a
new Rights Certificate of like tenor to the registered owner in lieu of the
Rights Certificate so lost, stolen, destroyed or mutilated. The Subscription
and Information Agent may, at the direction of the Company and with the consent
of the Rights holder of the lost, stolen or destroyed Rights Certificate, permit
the exercise of the Rights evidenced by such certificate without a replacement
of such certificate; provided that such lost, stolen or destroyed Rights
Certificate is not presented for exercise prior to the Expiration Date.
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<PAGE>
(i) All Rights Certificates surrendered for the purpose of exercise,
subdivision, combination or replacement shall, upon surrender to the
Subscription and Information Agent be canceled by it, and no Rights Certificates
shall be issued in lieu thereof except as expressly permitted by any of the
provisions of this Agreement. The Subscription and Information Agent (A) may
deliver all canceled Rights Certificates to the Company, and if delivered, the
Company shall make available to the Subscription and Information Agent the
canceled Rights Certificates for its inspection, or (B) shall, at the written
request of the Company, destroy such Rights Certificates and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 5. Payment of Taxes. The Company covenants and agrees that
----------------
it will pay when due and payable all documentary, stamp and other taxes, if any,
which may be payable in respect of the issuance or delivery of any Rights
Certificate or of the Underlying Shares; provided, however, that the Company
shall not be liable for any tax liability arising out of any transaction which
results in, or is deemed to be, an exchange of Rights or Underlying Shares or a
constructive dividend with respect to the Rights or Underlying Shares and
provided further that the Company shall not be required to pay any tax or other
governmental charge which may be payable in respect of any transfer involved in
the transfer or delivery of any Rights Certificate or the issuance or delivery
of certificates representing the Underlying Shares in a name other than that of
the Recordholder of such Rights Certificate evidencing the Rights exercised or
transferred, and the Subscription and Information Agent shall not register any
such transfer or issue any such certificate representing the Underlying Shares
until such tax or governmental charge, if required, shall have been paid.
Section 6. Payment of Expenses. Except for the fees charged by the
-------------------
Subscription Agent described in Section 7 below (which will be paid by the
Company) and taxes described in Section 5 above, 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 and Information Agent.
Section 7. Subscription and Information Agent Compensation. The
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Company agrees that it will pay to the Subscription and Information Agent
compensation for the Subscription and Information Agent's services as such in
accordance with Schedule A attached hereto. The Subscription and Information
Agent agrees that such compensation shall include its services as Transfer Agent
and Registrar for the Underlying Shares. The Company further agrees that it
will reimburse the Subscription and Information Agent for its reasonable and
necessary expenses incurred in the performance of its duties under this
Agreement.
Section 8. Instructions. The Subscription and Information Agent will
------------
be entitled to rely upon any instructions or directions furnished to it in
writing by the Chairman of the Board, Chief Executive Officer, Chief Financial
Officer or the Senior Vice President and General Counsel of the Company (each, a
"Designated Officer"), and will be entitled to treat as genuine, and as the
document it purports to be any letter or other document furnished to it by any
Designated Officer.
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Section 9. Indemnification.
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(a) The Company will indemnify, protect and hold harmless the
Subscription and Information Agent (acting as Subscription and Information
Agent, Transfer Agent and Registrar under this Agreement) from any and all
liability, cost or expense resulting from any act, omission, delay or refusal,
made by the Subscription and Information Agent in reliance upon any signature,
endorsement, assignment, certificate, order, request, notice, instructions or
other instrument or document believed by the Subscription and Information Agent
in good faith to be valid, genuine and sufficient, and in accepting any
subscription believed by the Subscription and Information Agent in good faith to
have been duly authorized, or in delaying or refusing in good faith to accept
any subscription. The Company will also indemnify and hold harmless the
Subscription and Information Agent from and against any and all claims, demands,
expenses and liabilities, including reasonable attorney's fees, which the
Subscription and Information Agent may sustain or incur or which may be asserted
against the Subscription and Information Agent in connection with the
performance of its obligations under this Agreement, except for any loss, damage
or expense arising out of Subscription and Information Agent's negligence, bad
faith or willful misconduct, or the negligence, bad faith or willful misconduct
of any of the Subscription and Information Agent's agents, servants or
employees.
(b) The Subscription and Information Agent shall, in issuing the
Rights Certificates and in issuing and registering the shares of Common Stock as
Transfer Agent and Registrar pursuant to duly exercised Rights; be liable for
and shall indemnify and hold the Company harmless from any and all liability,
cost or expense as a result of or arising out of the Subscription and
Information Agent's own negligence, bad faith or willful misconduct, or that of
its agents, servants or employees. The Subscription and Information Agent
further agrees that, with respect to its use on the Subscription Certificate of
the facsimile signature of the authorized employee of the Subscription and
Information Agent, it will indemnify, protect, and hold harmless the Company
from any and all liability, cost or expense for anything done or omitted to be
done by the Subscription and Information Agent with respect to the use of such
facsimile signature, where such act or omission constitutes negligence, bad
faith or willful misconduct on the part of the Subscription and Information
Agent.
(c) The indemnities contained herein shall be continuing obligations
of the parties herein, and their respective successors and permitted assigns,
notwithstanding the termination of this Agreement.
(d) Notwithstanding anything contained herein to the contrary, the
aggregate amount of all liabilities, costs and expenses to which either party
hereto (including any and all other parties claiming by or through either party
hereto) shall be entitled to as the result of any claim against the other party
hereunder (regardless of whether such claims are based on contract, tort,
including negligence, warranty, or other legal or equitable grounds) shall be
limited to an amount equal to the actual amount of such liabilities, costs, or
expenses.
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Section 10. Amendments. This Agreement may only be amended,
----------
supplemented or otherwise modified by a written instrument executed and
delivered by a duly authorized representative of the Company and the
Subscription and Information Agent.
Section 11. Governing Law. This Agreement will be governed by, and
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construed and interpreted in accordance with, the laws of the State of New York.
Section 12. Counterparts. This Agreement may be executed by the
------------
parties hereto on separate counterparts, which counterparts taken together will
be deemed constitute one and the same instrument.
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If the foregoing is acceptable to you, please indicate your acceptance
of your appointment as Agent upon the terms set forth above by signing and
returning to us one copy of this Agreement.
Very truly yours,
AIR & WATER TECHNOLOGIES CORPORATION
By: __________________________________
Name: __________________________________
Title: __________________________________
Accepted and agreed to
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
10
