SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 033-17921
AIR & WATER TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3418759
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
U.S. HIGHWAY 22 WEST AND STATION ROAD 08876
BRANCHBURG, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code: (908) 685-4600
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: No change.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No __
The number of shares outstanding of the registrant's Class A
Common Stock, par value $.001 per share, was 185,176,527 as of June 12,
1998.
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 30, OCTOBER 31,
1998 1997
---------- -----------
(UNAUDITED)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents............................................ $ 22,185 $ 12,089
Accounts receivable, less allowance for doubtful accounts............ 69,832 76,681
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................................. 36,459 33,557
Inventories.......................................................... 1,791 1,893
Prepaid expenses and other current assets............................ 8,351 4,460
Net current assets of discontinued operations........................ 4,032 --
------------- ----------
Total current assets............................................. 142,650 128,680
Property, plant and equipment, net........................................ 11,034 13,388
Investments in environmental treatment facilities......................... 21,533 21,817
Goodwill, net............................................................. 161,766 164,337
Other assets.............................................................. 29,030 30,391
Net non-current assets of discontinued operations......................... 18,145 24,452
------------- ----------
Total assets..................................................... $ 384,158 $ 383,065
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt............................... $ 411 $ 398
Accounts payable..................................................... 97,645 80,007
Accrued expenses..................................................... 83,133 86,681
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................................. 14,719 15,320
Income taxes payable................................................. 1,601 1,485
Net current liabilities of discontinued operations................... -- 591
------------- ----------
Total current liabilities........................................ 197,509 184,482
------------- ----------
Long-term debt............................................................ 119,686 307,845
------------- ----------
Commitments and contingencies (Note 6) -- --
Stockholders' equity (deficit):
Preferred stock, par value $.01,authorized 2,500,000
shares; issued none as of April 30, 1998;
issued 1,200,000 shares, liquidation value $60,000,
as of October 31, 1997........................................... -- 12
Common stock, par value $.001, authorized 260,000,000
shares; issued 185,266,429 shares as of April 30,
1998; issued 32,109,156 shares as of October 31, 1997 ........... 185 32
Additional paid-in capital........................................... 631,603 427,036
Accumulated deficit.................................................. (564,748) (535,214)
Common stock in treasury, at cost.................................... (108) (108)
Cumulative currency translation adjustment........................... 31 (1,020)
------------- ----------
Total stockholders' equity (deficit)........................ 66,963 (109,262)
------------- ----------
Total liabilities and stockholders' equity (deficit)........ $ 384,158 $ 383,065
============= ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS
ENDED APRIL 30, 1998 AND 1997 (IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . $ 111,802 $ 108,631 $ 222,076 $ 215,268
Cost of sales . . . . . . . . . . . . . . . . 98,750 101,109 195,523 190,576
---------- ---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . 13,052 7,522 26,553 24,692
Selling, general and administrative expenses . 16,880 29,467 31,132 46,589
Depreciation and amortization . . . . . . . . . 3,886 5,428 7,882 9,314
---------- ---------- ---------- ----------
Operating loss from continuing
operations . . . . . . . . . . . . . . . . (7,714) (27,373) (12,461) (31,211)
Interest expense, net . . . . . . . . . . . . (3,708) (5,893) (9,730) (11,776)
Other income (expense), net . . . . . . . . . (165) 55 (824) 2
---------- ---------- ---------- ----------
Loss from continuing operations before
income taxes . . . . . . . . . . . . . . (11,587) (33,211) (23,015) (42,985)
Income tax expense . . . . . . . . . . . . . . (269) (93) (514) (111)
---------- ---------- ---------- ----------
Loss from continuing operations . . . . . (11,856) (33,304) (23,529) (43,096)
Discontinued operations:
Loss from discontinued segment . . . . . . (6,000) (30,682) (6,000) (33,420)
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . (17,856) (63,986) (29,529) (76,516)
Preferred stock dividend . . . . . . . . . . . --- (825) --- (1,650)
---------- ---------- ---------- ----------
Net loss applicable to common
stockholders . . . . . . . . . . . . . . $ (17,856) $ (64,811) $ (29,529) $ (78,166)
=========== =========== ========== ===========
Basic and diluted loss per common share
(after preferred stock dividend):
Continuing operations . . . . . . . . . . $ (.09) $ (1.07) $ (.27) $ (1.40)
Discontinued operations . . . . . . . . .
(.04) (.95) (.07) (1.04)
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . $ (.13) $ (2.02) $ (.34) $ (2.44)
========= ========== =========== ===========
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . 140,490 32,019 87,753 32,019
========= ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
<TABLE>
<CAPTION>
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED APRIL 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
APRIL 30,
----------------
1998 1997
----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss.............................................................................. $(29,529) $ (76,516)
Adjustments to reconcile net loss to net cash used for continuing operations--
Discontinued operations............................................................. 6,000 33,420
Depreciation and amortization....................................................... 7,882 9,314
Other............................................................................... 380 2,156
Changes in assets and liabilities, excluding effects of divestitures--
(Increase) decrease in assets--
Accounts receivable................................................................. 6,761 210
Costs and estimated earnings in excess of billings on uncompleted contracts......... (2,902) 8,827
Inventories......................................................................... 102 (805)
Prepaid expenses and other current assets........................................... (3,785) (257)
Other assets........................................................................ 107 6,068
Increase (decrease) in liabilities--
Accounts payable.................................................................... 17,670 4,586
Accrued expenses.................................................................... (3,526) 6,384
Billings in excess of costs and estimated earnings on uncompleted contracts......... (601) 4
Income taxes........................................................................ 177 527
-------- --------
Net cash used for continuing operations........................................... (1,264) (6,082)
Net cash provided by (used for) discontinued operations........................... (4,101) 6,559
Net cash provided by (used for) operating activities............................. (5,365) 477
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment....................................................... 668 --
Capital expenditures.................................................................. (1,383) (3,183)
Investment in environmental treatment facilities...................................... 139 234
Start up costs and other.............................................................. (2,476) (3,277)
Discontinued operations............................................................... (265) (683)
-------- --------
Net cash used for investing activities............................................ (3,317) (6,599)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................................ 208,025 --
Payments of notes payable and long-term debt ......................................... (125,146) (133)
Net borrowings (repayments) under credit facilities................................... (63,000) 8,700
Cash dividends paid on preferred stock................................................ -- (1,650)
Other................................................................................. (2,179) (206)
Discontinued operations.............................................................. 1,078 580
-------- --------
Net cash provided by financing activities......................................... 18,778 7,291
-------- --------
Net increase in cash and cash equivalents......................................... 10,096 1,169
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................... 12,089 12,667
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................................. $ 22,185 $ 13,836
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................................................. $ 10,969 $ 11,389
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The interim consolidated financial statements and the following
notes should be read in conjunction with the notes to the Consolidated
Financial Statements of Air & Water Technologies Corporation and its
consolidated subsidiaries (the "Company" or "AWT"), which are included in
its Annual Report on Form 10-K for the fiscal year ended October 31, 1997
filed with the Securities and Exchange Commission. The interim information
reflects all adjustments, including normal recurring accruals, which are,
in the opinion of management, necessary for a fair presentation of the
results for the interim period. Results for the interim period are not
necessarily indicative of results to be expected for the full year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 interim presentation.
Loss per share
The Company's loss per share for the three and six month periods
ended April 30, 1998 and 1997 has been calculated in accordance with the
new Financial Accounting Standard No. 128 "Earnings Per Share". This
statement requires that the Company report "basic" and "diluted" earnings
per share instead of "primary" and "fully diluted" earnings per share
previously as reported. The key difference is that "basic" earnings per
share does not adjust for common stock equivalents. The adoption of this
statement had no effect on the Company's per share data. The numerator and
denominator for basic and diluted per share data are the same due to the
antidilutive effects of the Company's common stock equivalents and
convertible securities.
(3) RECAPITALIZATION
Exchange
On January 28, 1998, pursuant to the terms of the Recapitalization
Agreement, dated as of September 24, 1997, as amended as of January 26,
1998 (the "Recapitalization Agreement"), among the Company, Vivendi
(formerly named Compagnie Generale des Eaux, a French company and the
Company's largest stockholder), and Vivendi's indirectly wholly-owned
subsidiary, Anjou International Company, a Delaware corporation ("Anjou"),
the Company exchanged (the "Exchange") the outstanding 1,200,000 shares of
its 5 1/2% Series A Convertible Exchangeable Preferred Stock, par value
$.01 per share (the "Series A Preferred Stock"), held by Vivendi and its
subsidiaries (representing all of the issued and outstanding shares of
Series A Preferred Stock) for 34,285,714 shares of its Class A Common
Stock, par value $.001 per share (the "Class A Common Stock"). The Series A
Preferred Stock reacquired by the Company in the Exchange has been retired
and is not available for reissuance. Immediately following the Exchange,
Vivendi beneficially owned in the aggregate approximately 72.2% of the
outstanding Class A Common Stock and voting power of the Company.
The Company did not declare the September 30, 1997 and December
31, 1997 quarterly dividends aggregating $1,650,000 on the Series A
Preferred Stock, all of which was held by Vivendi, due to its concerns over
liquidity and the adequacy of its surplus. The dividends in arrears on the
Series A Preferred Stock have not been paid and were extinguished pursuant
to the Exchange.
Rights Offering
On January 26, 1998, the Board of Directors of the Company
declared a dividend to holders of record of its Class A Common Stock as of
the close of business on January 29, 1998 of 120,000,000 transferable
subscription rights (the "Rights") which allowed Rights holders to
subscribe for and purchase shares of its common stock and also allowed
subscribers (other than Vivendi and Anjou) in the Rights Offering to
receive transferable three-year warrants (the "Warrants") to purchase
shares of Class A Common Stock (the "Rights Offering"). The terms of the
Rights Offering are set forth in the Company's Prospectus dated January 30,
1998.
The Rights Offering expired on March 4, 1998. In the Rights
Offering, 98,160,427 Rights were exercised to purchase 99,840,089 shares of
Class A Common Stock, of which 1,679,662 shares were purchased pursuant to
an oversubscription privilege. In accordance with the terms of the
Recapitalization Agreement, Vivendi and Anjou each exercised its basic
subscription privilege in full for an aggregate basic subscription of
86,682,816 shares of Class A Common Stock, and Vivendi subscribed for and
purchased 19,031,470 additional shares of Class A Common Stock available as
a result of unexercised Rights in the Rights Offering, for a total
aggregate subscription of $185 million.
In addition, 3,949,099 Warrants to acquire in the aggregate
3,949,099 shares of Class A Common Stock were issued to subscribers (other
than Vivendi and Anjou) in the Rights Offering. In accordance with the
terms of the Rights Offering, neither Vivendi nor Anjou received any
Warrants. On March 12, 1998, the Company was notified that the Warrants had
been approved for listing on the American Stock Exchange, Inc. (the
"AMEX"). The Warrants currently trade on the AMEX under the symbol
"AWT.WS."
The Company received gross proceeds of approximately $208 million
from the Rights Offering, including approximately $23 million of publicly
raised proceeds. The Company used a portion of the gross proceeds from the
Rights Offering to repay a $125 million unsecured term loan from Vivendi
and borrowings under a $60 million credit facility with Anjou. The
remaining $23 million of proceeds, representing all of the publicly-raised
proceeds, will be retained for general corporate purposes, including a
reduction in borrowings under the Bank Credit Facility (as defined
hereinafter) and fees related to the Recapitalization. See Note
5--Financing Arrangements.
Following the Rights Offering, Vivendi beneficially owns an
aggregate of 153,609,975 shares of Class A Common Stock, representing
approximately 83.0% of the issued and outstanding Class A Common Stock. The
pro forma loss per share from continuing operations for the six months
ended April 30, 1998 and 1997 was $.10 and $.20 per share, respectively,
after giving effect to the aforementioned issuance of shares of Class A
Common Stock in the Exchange and the Rights Offering and repayment of debt,
as if such events had occurred as of the beginning of such periods.
Consent Solicitation
Concurrently with the Rights Offering, pursuant to the terms of
the Recapitalization Agreement, the Company solicited the consent (the
"Consent Solicitation") of the holders of at least a majority in principal
amount (the "Requisite Consents") of the Company's 8% Convertible
Subordinated Debentures due 2015 (the "Convertible Debentures") to amend a
certain provision of the indenture (the "Indenture") governing the
Convertible Debentures permitting the holders to require the Company to
repurchase the Convertible Debentures if any person acquires beneficial
ownership of 75% or more of the voting power of the Company (the "Change of
Control Provision").
On February 23, 1998, the Consent Solicitation expired. In the
Consent Solicitation, the Company received the consent of $105,937,000
aggregate principal amount of the outstanding Convertible Debentures,
representing approximately 92.1% of the outstanding principal amount of the
Convertible Debentures, to amend the Change of Control Provision. On
February 23, 1998, the Company and The Chase Manhattan Bank, as Trustee,
executed a Supplemental Indenture (the "Supplemental Indenture"), which
amended the Indenture to exempt acquisitions by Vivendi or any of its
Affiliates (as defined therein) of voting power equal to or greater than
75% from the application of the Change of Control Provision. Following the
execution of the Supplemental Indenture and pursuant to the terms of the
Consent Solicitation, the Company made an aggregate payment of
approximately $477,000 to holders of Convertible Debentures who provided
their consents.
Charter Amendment
In connection with the Rights Offering, on January 26, 1998, the
Board of Directors of the Company adopted a resolution setting forth
proposed amendments to the Restated Certificate of Incorporation of the
Company (the "Charter Amendment"). On February 6, 1998, Vivendi and Anjou,
beneficial owners of an aggregate of approximately 72.2% of the outstanding
Class A Common Stock and voting power of the Company provided their written
consent to the Charter Amendment. The consent of Vivendi and Anjou was
sufficient to adopt the Charter Amendment without any further vote of the
Company's stockholders. On March 2, 1998, the Company filed a certificate
of amendment to its Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware which increased the number of
shares of Class A Common Stock that the Company is authorized to issue from
95,000,000 shares to 255,000,000 shares. The Charter Amendment became
effective upon such filing.
As of January 31, 1998, the Company had authorized for issuance
100,000,000 shares of common stock, par value $.001 per share, of which
95,000,000 shares were shares of Class A Common Stock and 5,000,000 shares
were shares of its Class B Common Stock, par value $.001 per share (the
"Class B Common Stock"). The terms of the Class B Common Stock and the
Class A Common Stock are identical in all respects except that the Class B
Common Stock is not entitled to vote. Following the filing of the Charter
Amendment, the Company is authorized to issue 260,000,000 shares of common
stock, par value $.001 per share, of which 255,000,000 shares are shares of
Class A Common Stock and 5,000,000 shares are shares of Class B Common
Stock.
(4) RESEARCH-COTTRELL
On December 2, 1997, as part of the implementation of its revised
business strategy, the Company announced that it will divest its
Research-Cottrell business segment which provides air pollution control
technologies and services.
On June 6, 1998, the Company entered into an agreement with Hamon
& Cie, pursuant to which Hamon will acquire certain assets and assume
certain liabilities related to the air pollution control operations of
Research-Cottrell, Thermal Transfer Corporation and Custodis-Cottrell,
including the stock of certain related European subsidiaries. The
transaction, which is subject to regulatory approvals and the receipt of
certain consents, is expected to close by July 31, 1998. The purchase price
is expected to be in cash and notes and is subject to certain adjustments
including adjustments related to cash flows from May 1, 1998 through
closing. The Company will continue to pursue negotiations with other
parties regarding the divestiture of its three remaining air pollution
control businesses (Flex-Kleen, REECO and KVB) in order to fully implement
the decision to exit this business segment.
In connection with the above, the Company has revised its
estimated loss on disposal and has provided an additional $6.0 million loss
during the current quarter. Although management currently believes that
such provision for Research-Cottrell is adequate, the estimated loss on
disposal and losses through disposition may change in the near-term based
on the final sales prices and proceeds received from a complete sale of the
Research-Cottrell operations, the timing of the anticipated sales
transactions, actual results through disposition and final resolution of
any retained liabilities.
(5) FINANCING ARRANGEMENTS
The Company maintains a $70.0 million secured bank credit facility
(the "Bank Credit Facility") which expires December 11,1998. As of April
30, 1998, the Company had $22.6 million of outstanding letters of credit
and no borrowings under the Bank Credit Facility (unused capacity of $47.4
million).
As of October 31, 1997, the Company had outstanding borrowings of
$125 million under an unsecured term loan from Vivendi (the "Vivendi Note")
and $60 million under a fully-utilized seven-year revolving credit facility
with Anjou (the "Anjou Note"). Pursuant to the terms of the
Recapitalization Agreement, the Company repaid the Vivendi Note and Anjou
Note with a portion of the gross proceeds from the Rights Offering and
terminated the related credit agreements. For a discussion of the Rights
Offering, see Note 3--Recapitalization--Rights Offering.
(6) COMMITMENTS AND CONTINGENCIES
DOJ Investigation
In connection with a broad investigation by the U.S. Department of
Justice (the "DOJ") into alleged illegal payments by various persons to
members of the Houston City Council, the Company's subsidiary, Professional
Services Group ("PSG"), received a federal grand jury subpoena on May 31,
1996 requesting documents regarding certain PSG consultants and
representatives that had been retained by PSG to assist it in advising the
City of Houston regarding the benefits that could result from the
privatization of Houston's water and wastewater system (the "DOJ
Investigation"). PSG has cooperated and continues to cooperate with the DOJ
which has informed the Company that it is reviewing transactions among PSG
and its consultants. The Company promptly initiated its own independent
investigation into these matters and placed PSG's then Chief Executive
Officer on administrative leave of absence with pay. The PSG Chief
Executive Officer, who has denied any wrongdoing, resigned from PSG on
December 4, 1996. In the course of its ongoing investigation, the Company
became aware of questionable financial transactions with third parties and
payments to certain PSG consultants and other individuals, the nature of
which requires further investigation. The Company has brought these matters
to the attention of the DOJ and continues to cooperate fully with its
investigation. No charges of wrongdoing have been brought against PSG or
any PSG executive or employee by any grand jury or other government
authority. However, since the government's investigation is still underway
and is conducted largely in secret, no assurance can be given as to whether
the government authorities will ultimately determine to bring charges or
asset claims resulting from this investigation that could implicate or
reflect adversely upon or otherwise have a material adverse effect on the
financial position or results of operations of PSG or the Company taken as
a whole.
Bremerton Litigation
The City of Bremerton, Washington brought a contribution and
contract action against Metcalf & Eddy Services, Inc. ("M&E Services"), the
operator of a City-owned wastewater treatment plant from 1987 until late
1995. The action arises from two prior lawsuits against the City for
alleged odor nuisances brought by two groups of homeowners neighboring the
plant. In the first homeowners' suit, the City paid $4.3 million in cash
and approximately $5 million for odor control technology to settle the
case. M&E Services understands the odor control measures generally have
been successful and the odors have been reduced as a result. M&E Services
was not a party to the first homeowners' suit, which has been dismissed
with prejudice as to all parties. In the settlement of the second
homeowners' case, the City of Bremerton paid the homeowners $2.9 million,
and M&E Services contributed $0.6 million to the settlement without
admitting liability. All claims raised by the homeowners in the second suit
have been resolved. All claims by and between M&E Services and the City in
the second homeowners' suit were expressly reserved.
At trial which commenced on March 2, 1998, the City sought to
recover the amounts it expended on the two settlements, damages for M&E
Services' alleged substandard operation of the plant, and attorneys' fees.
The damages claimed exceeded $14 million. On April 22, 1998, the jury
returned a verdict against M&E Services and in favor of the City in the net
amount of approximately $0.6 million. The City filed a post-trial motion
asking the trial court to enter judgment against M&E Services in the amount
of $8.1 million notwithstanding the jury's verdict. On June 5, 1998, the
trial court denied the City's request to increase the amount of the jury's
award in its favor, but granted the City's motion to reduce the amount
awarded on M&E Services' counterclaim for unpaid invoices. Accordingly, the
net judgment against M&E Services and in favor of the City is approximately
$0.75 million. On June 11, 1998, the City filed a motion for a new trial.
No assurances can be given that, in the event of a new trial, 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. In the event a
new trial is not granted, further proceedings in the litigation, including
possible appeals, could increase or decrease the judgment by $2 million or
more.
R-C Belgium Litigation
On October 14, 1997, Research-Cottrell, Inc. and its subsidiary,
Research-Cottrell Belgium, S.A. ("R-C Belgium"), were named in a lawsuit by
N.V. Seghers Engineering ("Seghers") filed in the Commercial Court in
Mechelen, Belgium. Seghers is R-C Belgium's joint venture partner on two
large pollution control projects. The suit claims damages of approximately
$13 million allegedly resulting from R-C Belgium's breach of contract and
substandard performance. Damages claimed in the lawsuit consist not only of
Seghers' alleged cost to repair the R-C Belgium equipment, but also lost
profits, damages to business reputation, theft of employees (R-C Belgium
hired two former Seghers' employees), increased costs arising out of the
failure to gain timely acceptance of the two plants, excessive payments to
R-C Belgium due to alleged unfair pricing practices by R-C Belgium and
other miscellaneous interest charges and costs. The case involves complex
technical and legal issues and is in its 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.
Other Matters
The Company and its subsidiaries are parties to various other
legal actions, government audits and investigations arising in the normal
course of their businesses, some of which involve claims for substantial
sums. The Company believes that the disposition of such actions, audits and
investigations, individually or in the aggregate, will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company taken as a whole.
The Company currently maintains various types of insurance,
including workers' compensation, general and professional liability and
property coverages and believes that it presently maintains adequate
insurance coverages for all of its present operational activities. It has
been both a Company policy and a requirement of many of its clients that
the Company maintain certain types and limits of insurance coverage for the
services and products it offers, provided that such types and limits can be
obtained on commercially reasonable terms. In addition to existing
coverages, the Company has been successful in obtaining commercially
reasonable coverage for certain pollution risks, though coverage has been
on a claims made rather than occurrence basis due to the professional
nature of some of the Company's exposures. Claims made policies provide
coverage to the Company only for claims reported during the policy period.
The Company's general liability and other insurance policies have
historically contained absolute pollution exclusions, brought about in
large measure because of the insurance industry's adverse claims experience
with environmental exposures. Accordingly, there can be no assurance that
environmental exposures that may be incurred by the Company and its
subsidiaries will continue to be covered by insurance, or that the limits
currently provided or that may be obtained in the future will be sufficient
to cover such exposures. A successful claim or claims in an amount in
excess of the Company's insurance coverage or for which there is no
coverage could have a material adverse effect on the Company.
The Company is often required to procure bid and performance bonds
from surety companies, particularly for clients in the public sector. A bid
bond guarantees that the Company will enter into the contract under
consideration at the price bid and a performance bond guarantees
performance of the contract. The Company 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 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. Anjou has
entered into an agreement with United States Fidelity and Guaranty Company
and certain of its affiliates ("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 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 continue to provide
bid and performance bonds to the Company without a guarantee from Vivendi
or one of its affiliates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company operates principally in two segments: Professional
Services Group ("PSG") which is focused on the operation of water and
wastewater treatment facilities and Metcalf & Eddy which is focused on
engineering consulting in the areas of water/wastewater and hazardous waste
remediation. On December 2, 1997, the Company announced its decision to
divest Research-Cottrell. Research-Cottrell designs and develops products
and technologies targeted at specific client needs such as air pollution
control equipment. See "Financial Condition".
DEPENDENCE ON KEY PROJECTS AND GOVERNMENT CONTRACTS
In any given period, a substantial percentage of the Company's
sales is dependent upon several large projects. To the extent that these
projects are canceled or substantially delayed and not replaced, it could
have a material adverse impact on the Company's sales and earnings.
Approximately 85% of the Company's sales during the three month
period ended April 30, 1998 were derived from contracts with federal,
state, municipal and other governmental agencies. The termination of any of
the Company's significant contracts with such governmental agencies, or the
failure to obtain either extensions or renewals of certain existing
contracts or additional contracts with such governmental agencies, could
have a material adverse effect on the Company's earnings and business.
During the six month period ended April 30, 1998, the contract of
PSG's wholly owned subsidiary, PS Group of Puerto Rico, Inc. ("PSG Puerto
Rico"), with the Puerto Rico Aqueduct and Sewer Authority ("PRASA")
accounted for 37% of PSG's total sales and 22% of the Company's total
sales. Operations were initiated under the contract on September 1, 1995.
The contract has a five-year term but PRASA may cancel the contract for any
reason on August 31, 1998. Pursuant to the contract, PSG Puerto Rico
manages 69 wastewater plants, 152 water treatment plants and related
collection and distribution systems and pumping stations in Puerto Rico.
The contract's profitability is contingent upon achieving certain contract
incentives. In addition, at April 30, 1998, PSG Puerto Rico had receivables
of $38.0 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. 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 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
Sales:
<S> <C> <C> <C> <C>
Professional Services Group . . . . . . $ 67,415 $ 67,139 $ 133,284 $ 129,727
Metcalf & Eddy . . . . . . . . . . . . . 45,468 41,908 91,021 86,499
Other and eliminations . . . . . . . . (1,081) (416) (2,229) (958)
----------- ----------- ---------- ----------
$ 111,802 $ 108,631 $ 222,076 $ 215,268
========== ========== ========== ==========
Cost of Sales:
Professional Services Group . . . . . . $ 63,256 $ 62,830 $ 124,410 $ 120,789
Metcalf & Eddy . . . . . . . . . . . . 36,575 38,695 73,342 70,745
Other and eliminations . . . . . . . . . (1,081) (416) (2,229) (958)
----------- ----------- ---------- ----------
$ 98,750 $ 101,109 $ 195,523 $ 190,576
=========== ========== ========== ==========
Selling, General and Administrative Expenses:
Professional Services Group . . . . . . $ 4,941 $ 9,307 $ 8,917 $ 13,128
Metcalf & Eddy. . . . . . . . . . . . . 9,425 18,074 17,525 29,126
Corporate (unallocated) . . . . . . . . 2,514 2,086 4,690 4,335
------------ ----------- ---------- ----------
$ 16,880 $ 29,467 $ 31,132 $ 46,589
=========== ========== ========== ==========
Depreciation and Amortization:
Professional Services Group . . . . . . $ 2,021 $ 2,047 $ 4,139 $ 4,093
Metcalf & Eddy . . . . . . . . . . . . 1,734 3,251 3,485 4,963
Corporate (unallocated) . . . . . . . . 131 130 258 258
----------- ----------- ----------- -----------
$ 3,886 $ 5,428 $ 7,882 $ 9,314
============ =========== =========== ===========
Operating Loss:
Professional Services Group . . . . . . $ (2,803) $ (7,045) $ (4,182) $ (8,283)
Metcalf & Eddy . . . . . . . . . . . . (2,266) (18,112) (3,331) (18,335)
Corporate (unallocated) . . . . . . . . (2,645) (2,216) (4,948) (4,593)
----------- ----------- ----------- -----------
$ (7,714) $ (27,373) $ (12,461) $ (31,211)
=========== =========== =========== ===========
Interest expense, net . . . . . . . . . . . . $ (3,708) $ (5,893) $ (9,730) $ (11,776)
Other income (expense), net . . . . . . . . . . (165) 55 (824) 2
Income tax expense . . . . . . . . . . . . . . (269) (93) (514) (111)
----------- ---------- ----------- -----------
Loss from continuing operations . . . . . . . (11,856) (33,304) (23,529) (43,096)
Loss from discontinued operations . . . . . . . (6,000) (30,682) (6,000) (33,420)
----------- ---------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . $ (17,856) $ (63,986) $ (29,529) $ (76,516)
=========== =========== =========== ===========
</TABLE>
THREE AND SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE AND SIX MONTHS
ENDED APRIL 30, 1997
Overview
The operating loss during the three and six month periods ended
April 30, 1998 decreased by $19.7 million and $18.8 million from the
comparable prior periods due to $28.7 million of provisions and asset
write-offs reflected in the prior periods. Excluding the effect of these
charges, the operating loss during the three and six month periods ended
April 30, 1998 increased by $7.3 million and $9.9 million from the
comparable prior periods due to lower gross margins resulting from higher
than anticipated costs on several projects in both segments, pricing
pressures and an unfavorable business mix shift from self-performed work to
sub-contracted work at Metcalf & Eddy. Sales increased modestly by $3.2 and
$6.8 million (approximately 3%) from the comparable prior periods, with
increases for both PSG and Metcalf & Eddy. On December 2, 1997, as part of
the implementation of its revised business strategy, the Company announced
that it will divest its Research-Cottrell business segment which provides
air pollution control technologies and services. The Company believes that
most of these businesses will be sold within the next several months, but
in any event no later than November 30, 1998, and has reported its results
of operations and financial condition as a discontinued operation.
Professional Services Group
Sales during the three and six month periods ended April 30, 1998,
increased by $.3 million and $3.6 million (.4% and 2.7%, respectively) from
the comparable prior periods primarily due to sales from two new contracts
which were received during the latter half of fiscal 1997. Gross margin
rates decreased slightly by .2% in both periods due to higher direct
project costs required for initial first year contracts partially off-set
by lower cost requirements under the PRASA contract. The decrease in
selling, general and administrative expenses of $4.4 million and $4.2
million during the aforementioned periods was due to higher operating
charges and asset write-offs reflected in the comparable prior periods
which were related to marketing consultants, the DOJ investigation and
certain litigation matters and revised collectibility estimates for certain
non-current note receivables.
Metcalf & Eddy
Sales during the three and six month periods ended April 30, 1998
increased by $3.6 million and $4.5 million (8.5% and 5.2%) from the
comparable prior periods, due to increases in the water/wastewater markets
partially off-set by the decline in hazardous waste sales. Gross margins
increased by $5.7 million and $1.9 million during the aforementioned
periods which reflected an increase in gross margin rates of 11.9% and
1.2%. The comparable prior periods included certain operating charges and
asset write-offs of $19.4 million related to the increase in reserves for
the collectibility of certain receivables, litigation, professional
liability and certain project contingencies; equipment write-offs; a lease
cancellation penalty and other direct and indirect costs. The prior
period's cost of sales, selling general and administrative expenses and
depreciation and amortization include $8.0 million, $10.1 million and $1.3
million of these charges, all of which with the exception of a first
quarter $1.7 million lease cancellation penalty were reflected during
fiscal 1997's second quarter. Excluding the impact of the aforementioned
charges reflected in cost of sales during the prior periods, the gross
margin rates decreased by 7.2% and 8.1% as a result of pricing pressures
and a business mix shift from self-performed work to subcontract work,
higher than anticipated costs on several projects and favorable pricing
adjustments reflected in the prior period. Excluding the impact of the
aforementioned charges reflected in the prior period, selling, general and
administrative expenses decreased by $.3 million and $1.5 million during
the three and six month periods ended April 30, 1998 due to lower bid and
proposal and other related selling costs. The decrease in depreciation and
amortization resulted from the impact of the aforementioned charges
reflected in the prior period.
Corporate and Other
The unallocated corporate costs for the three and six month
periods ended April 30, 1998 were $.4 million higher than the comparable
prior periods due to costs in connection with the anticipated corporate
office relocation to Wakefield, Massachusetts. The repayment of the
borrowings from Vivendi and Anjou and to a lessor extent the Bank Credit
Facility with proceeds from the Rights Offering resulted in a $2.2 million
and $2.0 million reduction in interest expense during the three and six
month periods ended April 30, 1998 from the prior comparable periods.
Increases in other non-operating expenses of $.2 million and $.8 million
were due to foreign currency transaction losses related to a Metcalf & Eddy
project in Thailand, bond support fees and a gain on PSG equipment sold in
the prior period.
Research-Cottrell
Also reflected in the comparable prior period were significant
operating losses from the discontinued operations of Research-Cottrell
which the Company has decided to divest and for which the estimated loss on
disposal and losses through disposition were provided for during the fourth
quarter of the prior fiscal year.
On June 6, 1998, the Company entered into an agreement with Hamon
& Cie, pursuant to which Hamon will acquire certain assets and assume
certain liabilities related to the air pollution control operations of
Research-Cottrell, Thermal Transfer Corporation and Custodis-Cottrell,
including the stock of certain related European subsidiaries. The
transaction, which is subject to regulatory approvals and the receipt of
certain consents, is expected to close by July 31, 1998. The purchase price
is expected to be in the form of cash and notes, and is subject to certain
adjustments including adjustments related to cash flows from May 1, 1998
through closing. The Company will continue to pursue negotiations with
other parties regarding the divestiture of its three remaining air
pollution control businesses (Flex-Kleen, REECO and KVB) in order to fully
implement the decision to exit this business segment.
In connection with the above, the Company has revised its
estimated loss on disposal and has provided an additional $6.0 million loss
during the current quarter. Although management currently believes that
such provision for Research-Cottrell is adequate, the estimated loss on
disposal and losses through disposition may change in the near-term based
on the final sales prices and proceeds received from a complete sale of the
Research-Cottrell operations, the timing of the anticipated sales
transactions, actual results through disposition and final resolution of
any retained liabilities.
FINANCIAL CONDITION
During the six month period ended April 30, 1998, operating
activities used $5.4 million of cash after interest payments of $11.0
million. The $17.7 million increase in payables were primarily related to
delays in the payment of certain power costs to the Puerto Rico Electric
Power Authority ("PREPA") ($44.6 million at April 30, 1998). The delay in
these payments is associated with PSG Puerto Rico's contract with PRASA
under which certain receivables including unreimbursed costs paid on behalf
of PRASA have not been collected ($38.0 million at April 30, 1998). 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. On January 16, 1998, the complaint was withdrawn by PREPA
without prejudice. Management believes that the receivables will be fully
collected and will be used to pay the power costs due to PREPA. The cash
requirements of the discontinued operations were $4.1 million due to
payment of certain Research-Cottrell liabilities during the period. The
Company typically has receivables in which the ultimate realizability is
dependent upon the successful negotiation or resolution of contractual
issues or disputes, government audits as well as the client's ability to
fund and pay the amounts due. Historically, significant charges have been
reflected as provisions for receivable reserves and write-offs. Management
believes that adequate provisions have been made to the receivable balances
reflected in the April 30, 1998 financial statements; however, additional
provisions may be required in the future based on new developments which
may arise in the near term related to the factors discussed above.
Investment activities required $3.3 million of cash during the six
month period ended April 30, 1998. Investments related to the start up of
operations, maintenance and management of treatment facilities within the
PSG segment were $2.5 million. Capital expenditures of $1.4 million were
made in the PSG and Metcalf & Eddy segments primarily for computer and
field equipment. Proceeds of $0.7 million from the sale of certain PSG
equipment were also received during the period. As discussed more fully
below, significant investments may be required in the near term due to
current growth initiatives.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the years ended October 31,
1997, 1996 and 1995 total capital expenditures were $5.0 million, $6.3
million and $5.4 million, respectively. At April 30, 1998, the Company had
no material outstanding purchase commitments for capital expenditures,
however, the Company anticipates it will require additional financial
resources to develop and support PSG and Metcalf & Eddy, to undertake
related long-term capital expenditures or other investments and to
participate in the emerging privatization market in the wastewater
management industry. Vivendi has informed the Company that it intends to
work with the Company to explore various ways to develop such financial
resources for these purposes, including, among others, the raising by
Vivendi of an investment fund or other off-balance sheet vehicle which
would invest, on a case-by-case basis, in various project financings
undertaken by the Company. It is anticipated that any such vehicle would
invest in such project finance activities of the Company on terms which are
commercially reasonable. As a result, Vivendi and the Company and possibly
others, investing either directly through such vehicle or otherwise, would
share in the returns on such projects pro rata in relation to their
respective equity investments.
Financing activities provided $18.8 million of cash during the six
month period ended April 30, 1998 primarily due to the effects of the
Rights Offering discussed more fully below.
The Company entered into the Recapitalization Agreement, dated as
of September 24, 1997, amended as of January 26, 1998 (the
"Recapitalization Agreement"), with Vivendi, and Vivendi's indirect
wholly-owned subsidiary, Anjou International Company, a Delaware
corporation ("Anjou"). On January 28, 1998, pursuant to the terms of the
Recapitalization Agreement, the Company exchanged (the "Exchange") the
outstanding shares of its 5 1/2% Series A Convertible Exchangeable
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"),
held by Vivendi and its subsidiaries (representing all of the issued and
outstanding shares of Series A Preferred Stock) for 34,285,714 shares of
its Class A Common Stock, par value $.001 per share (the "Class A Common
Stock").
On or about January 30, 1998, pursuant to the terms of the
Recapitalization Agreement, the Company distributed a dividend to holders
of record of its Class A Common Stock as of the close of business on
January 29, 1998 of 120,000,000 transferable subscription rights which
allowed Rights holders to subscribe for and purchase shares of its common
stock and also allowed subscribers (other than Vivendi and Anjou) in the
Rights Offering to receive transferable three-year warrants (the
"Warrants") to purchase shares of Class A Common Stock (the "Rights
Offering"). The terms of the Rights Offering are set forth in the Company's
Prospectus dated January 30, 1998. The Rights Offering expired on March 4,
1998.
The Company received gross proceeds of approximately $208 million
from the Rights Offering. The Company used a portion of the gross proceeds
from the Rights Offering to repay borrowings under the $125 million Vivendi
Note and the $60 million Anjou Note after which the related credit
agreements were terminated. The remaining $23 million of proceeds,
representing all of the publicly-raised proceeds, were retained for general
corporate purposes, including a reduction in borrowings under the Bank
Credit Facility (as defined hereinafter). As a result of the consummation
of the Exchange and the Rights Offering and the other transactions
contemplated by the Recapitalization Agreement (collectively, the
"Recapitalization"), the Company's annual interest expense is expected to
be reduced by approximately $12.4 million and $3.3 million of annual
dividends on the Series A Preferred Stock have been eliminated.
The Company maintains a $70 million senior secured Bank Credit
Facility, dated as of March 10, 1995 which expires December 11, 1998, with
Societe Generale, New York Branch ("Societe Generale"). As of April 30,
1998, the Company had $22.6 million of outstanding letters of credit and no
borrowings under the Bank Credit Facility (unused capacity of $47.4
million). The Company intends to enter into discussions regarding the
establishment of a new credit facility prior to the maturity of the Bank
Credit Facility. Vivendi also has reaffirmed to Societe Generale the terms
of Vivendi's existing credit support of the Company, including a commitment
by Vivendi to maintain a minimum 48% voting equity ownership interest and
to check to ensure that the Company will have sufficient financial
resources to meet its obligations under the Bank Credit Facility. In
addition, Vivendi has a right to designate at least 48% of the Company's
Board of Directors as well as to appoint the Chief Executive Officer and
the Chief Financial Officer of the Company. The Company compensates Vivendi
for its support in an amount equal to 0.95% per annum of the outstanding
commitment of its credit facilities.
The Bank Credit Facility is primarily designed to finance working
capital requirements, subject to certain limitations, and provide for the
issuance of letters of credit, and is secured by a first security interest
in substantially all of the assets of the Company. Of the total commitment,
borrowings are limited to the lesser of $70.0 million or the sum of a
percentage of certain eligible receivables, inventories, net property,
plant and equipment and costs and estimated earnings in excess of billings,
and bear interest at LIBOR plus 1.25% (6.9% at April 30, 1998), or at a
defined bank rate approximating prime (8.5% at April 30, 1998). The Bank
Credit Facility also allows for certain additional borrowings, including,
among other things, project financing and foreign borrowing facilities,
subject to limitations, and contains certain financial and other
restrictive covenants, including, among other things, the maintenance of
certain financial ratios, and restrictions on the incurrence of additional
indebtedness, acquisitions, the sale of assets, the payment of dividends
and the repurchase of subordinated debt.
As of June 11, 1998, the Company had $23.2 million of outstanding
letters of credit and no borrowings under the Bank Credit Facility. In
addition to its $5.6 million of short-term investments and the $46.8
million of unused capacity under its Bank Credit Facility at June 11, 1998,
the Company believes it can finance its ongoing operations in the near term
(including additional working capital requirements if a growth in sales
occurs, but excluding the significant investments discussed below) through
improved working capital management by focusing on Metcalf & Eddy's past
due receivables, planned divestitures related to the Research-Cottrell
segment and reduction of financing costs through the strengthening of its
current capital structure as a result of the Recapitalization. A
significant amount of planned divestiture proceeds is expected to fund the
related retained liabilities, however, the cash outlays may occur during
different periods.
The Company is often required to procure bid and performance bonds
from surety companies, particularly for clients in the public sector. A bid
bond guarantees that the Company will enter into the contract under
consideration at the price bid and a performance bond guarantees
performance of the contract. Anjou has entered into an agreement with
United States Fidelity and Guaranty Company and certain of its affiliates
("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 continue to provide bid and
performance bonds to the Company without a guarantee from Vivendi or one of
its affiliates.
The realizability of goodwill and other long lived assets is the
result of an estimate based on the underlying assets remaining estimated
useful lives and projected operating cash flows. It is possible that this
estimate will change as a consequence of further deterioration in market
conditions and operating results. The effect of a change, if any, would be
material to the financial condition or results of operations. At April 30,
1998, unamortized goodwill was $161.8 million.
YEAR 2000 ISSUE
Based on a preliminary study by management, the Company expects to
incur approximately $3 million during 1998 and 1999 to modify its
information systems appropriately to accurately process information in the
year 2000 and beyond. The Company continues to evaluate appropriate courses
of corrective action, including replacement of certain systems whose
associated costs would be recorded as assets and amortized. Management
expects that the costs to convert the Company's information systems to year
2000 compliance will not have a material impact on the Company's
consolidated financial statements. The Company has not yet initiated formal
communications with all of its significant suppliers and clients to
determine the extent to which the Company may be vulnerable to such third
parties' failure to remediate their own year 2000 issues.
FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements so long as those statements
are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement.
Included herein are certain forward-looking statements concerning the
Company's operations, economic performance and financial condition,
including, in particular, forward-looking statements regarding the
Company's expectation of future performance following implementation of its
revised business strategy. Such statements are subject to various risks and
uncertainties. Accordingly, the Company hereby identifies the following
important factors that could cause the Company's actual financial results
to differ materially from those projected, forecasted, estimated or
budgeted by the Company in such forward-looking statements:
o The Company's highly competitive marketplace.
o Changes in as well as enforcement levels of federal,
state and local environmental legislation and regulations
that change demand for a significant portion of the
Company's services.
o Adverse developments in the DOJ Investigation.
Dependency on key projects, customers and contracts.
o The ability to obtain new contracts (some of which are
significant) from existing and new clients.
o The ability of the Company to obtain new bid and
performance bonds.
o The execution of expected new projects and those
projects in backlog within the most recent cost
estimates.
o Adverse resolution of litigation matters and existing
claims arising in the ordinary course of business.
o The ability of the Company to access capital (through an
investment fund, off-balance sheet vehicle or otherwise)
and to effect and finance future investments.
o The ability of the Company to successfully implement its
revised business strategy.
o The ability of the Company to obtain any necessary
waivers, extensions or renewals of the Bank Credit
Facility.
o The acceptance by the Company's current and prospective
customers of the Company's financial position following
the Recapitalization.
o The effectiveness of the new business planning committee
of the Board of Directors, established in connection with
the Recapitalization, in identifying strategies aimed at
increasing stockholder value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1998, the City of Bremerton, Washington brought a
contribution and contract action against Metcalf & Eddy Services, Inc.
("M&E Services"), the operator of a City-owned wastewater treatment plant
from 1987 until late 1995. The action arises from two prior lawsuits
against the City for alleged odor nuisances brought by two groups of
homeowners neighboring the plant. In the first homeowners' suit, the City
paid $4.3 million in cash and approximately $5 million for odor control
technology to settle the case. M&E Services understands the odor control
measures generally have been successful and the odors have been reduced as
a result. M&E Services was not a party to the first homeowners' suit, which
has been dismissed with prejudice as to all parties. In the settlement of
the second homeowners' case, the City of Bremerton paid the homeowners $2.9
million, and M&E Services contributed $0.6 million to the settlement
without admitting liability. All claims raised by the homeowners in the
second suit have been resolved. All claims by and between M&E Services and
the City in the second homeowners' suit were expressly reserved.
At trial which commenced on March 2, 1998, the City sought to
recover the amounts it expended on the two settlements, damages for M&E
Services' alleged substandard operation of the plant, and attorneys' fees.
The damages claimed exceeded $14 million. On April 22, 1998, the jury
returned a verdict against M&E Services and in favor of the City in the net
amount of approximately $0.6 million. The City filed a post-trial motion
asking the trial court to enter judgment against M&E Services in the amount
of $8.1 million notwithstanding the jury's verdict. On June 5, 1998, the
trial court denied the City's request to increase the amount of the jury's
award in its favor, but granted the City's motion to reduce the amount
awarded on M&E Services' counterclaim for unpaid invoices. Accordingly, the
net judgment against M&E Services and in favor of the City is approximately
$0.75 million. On June 11, 1998, the City filed a motion for a new trial.
No assurances can be given that, in the event of a new trial, 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. In the event a
new trial is not granted, further proceedings in the litigation, including
possible appeals, could increase or decrease the judgment by $2 million or
more.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Exchange and Retirement of Series A Preferred Stock
On January 28, 1998, all of the issued and outstanding shares of
Series A Preferred Stock (all of which were held by Vivendi) were exchanged
for 34,285,714 shares of Class A Common Stock. The Series A Preferred Stock
reacquired by the Company in the Exchange has been retired and is not
available for reissuance.
Supplemental Indenture
Concurrently with the Rights Offering, pursuant to the terms of
the Recapitalization Agreement, the Company solicited the consent (the
"Consent Solicitation") of the holders of at least a majority in principal
amount (the "Requisite Consents") of the Company's 8% Convertible
Subordinated Debentures due 2015 (the "Convertible Debentures") to amend a
certain provision of the indenture (the "Indenture") governing the
Convertible Debentures permitting the holders to require the Company to
repurchase the Convertible Debentures if any person acquires beneficial
ownership of 75% or more of the voting power of the Company (the "Change of
Control Provision").
On February 23, 1998, following the expiration of the Consent
Solicitation and as a result of the receipt of the Requisite Consents, the
Company and The Chase Manhattan Bank, as Trustee, executed the Supplemental
Indenture which amended the Indenture to exempt acquisitions by Vivendi or
any of its Affiliates (as defined therein) of voting power equal to or
greater than 75% from the application of the Change of Control Provision.
Charter Amendment
On March 2, 1998, the Company filed a certificate of amendment to
its Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware which increased the number of shares of Class A
Common Stock that the Company is authorized to issue from 95,000,000 shares
to 255,000,000 shares. The Charter Amendment became effective upon such
filing. Following the filing of the Charter Amendment, the Company is
authorized to issue 260,000,000 shares of common stock, par value $.001 per
share, of which 255,000,000 shares are shares of Class A Common Stock and
5,000,000 shares are shares of the Company's Class B Common Stock, par
value $.001 per share (the "Class B Common Stock"). The terms of the Class
B Common Stock and the Class A Common Stock are identical in all respects
except that the Class B Common Stock is not entitled to vote.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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 Vivendi, 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 issued and outstanding
shares of Series A Preferred Stock (all of which was held by Vivendi) 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Concurrently with the Rights Offering, pursuant to the terms of
the Recapitalization Agreement, the Company conducted the Consent
Solicitation to solicit the Requisite Consents of holders of its
Convertible Debentures to implement certain amendments to the Indenture to
limit the applicability of the Change of Control Provision. A Consent
Solicitation Statement dated January 30, 1998 was mailed to registered
holders of the Convertible Debentures as of the close of business on
January 26, 1998.
On February 23, 1998, the Consent Solicitation expired. As a
result of the Consent Solicitation, the Company received the consent of
$105,937,000 aggregate principal amount, representing approximately 92.1%
of the outstanding principal amount, of the Convertible Debentures. On
February 23, 1998, the Company and The Chase Manhattan Bank, as Trustee,
executed the Supplemental Indenture, which amended the Indenture to exempt
acquisitions by Vivendi or any of its Affiliates (as defined therein) of
voting power equal to or greater than 75% from the application of the
Change of Control Provision.
ITEM 5. OTHER INFORMATION
The Rights Offering expired on March 4, 1998. In the Rights
Offering, 98,160,427 Rights were exercised to purchase 99,840,089 shares of
Class A Common Stock, of which 1,679,662 shares were purchased pursuant to
an oversubscription privilege. In accordance with the terms of the
Recapitalization Agreement, Vivendi and Anjou each exercised its basic
subscription privilege in full for an aggregate basic subscription of
86,682,816 shares of Class A Common Stock, and Vivendi subscribed for and
purchased 19,031,470 additional shares of Class A Common Stock available as
a result of unexercised Rights in the Rights Offering, for a total
aggregate subscription of $185 million.
In addition, 3,949,099 Warrants to acquire in the aggregate
3,949,099 shares of Class A Common Stock were issued to subscribers (other
than Vivendi and Anjou) in the Rights Offering. In accordance with the
terms of the Rights Offering, neither Vivendi nor Anjou received any
Warrants. On March 12, 1998, the Company was notified that the Warrants had
been approved for listing on the American Stock Exchange, Inc. (the
"AMEX"). The Warrants currently trade on the AMEX under the symbol
"AWT.WS."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- ----------------------------
(*) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended April 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AIR & WATER TECHNOLOGIES CORPORATION
Date: June 15, 1998 By: /S/ ALAIN BRUNAIS
-----------------
Alain Brunais
Senior Vice President, Chief
Financial Officer and
Director (Principal
Accounting Officer)
(Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- -------------------------
(*) Filed herewith.
<TABLE>
<CAPTION>
EXHIBIT 11
AIR & WATER TECHNOLOGIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
BASIC EARNINGS (LOSS) PER SHARE:
<S> <C> <C> <C> <C>
1. Loss from continuing operations . . . . . . . . . $ (11,856) $ (33,304) $ (23,529) $ (43,096)
2. Less preferred dividends . . . . . . . . . . . . -- (825) -- (1,650)
3. Loss from continuing operations applicable to
common stockholders . . . . . . . . . . . . . . (11,856) (34,129) (23,529) (44,746)
4. Loss from discontinued operations . . . . . . . (6,000) (30,682) (6,000) (33,420)
5. Net loss applicable to common stockholders .. . . $ (17,856) $ (64,811) $ (29,529) $ (78,166)
6. Weighted average shares outstanding . . . . . . 140,490 32,019 87,753 32,019
7. Loss per share from continuing operations (3/6) $ (.09) $ (1.07) $ (.27)$ (1.40)
8. Loss per share from discontinued operations
(4/6) . . . . . . . . . . . . . . . . . . . . . (.04) (.95) (.07) (1.04)
9. Net loss per share . . . . . . . . . . . . . . . $ (.13) $ (2.02) $ (.34) $ (2.44)
DILUTED EARNINGS (LOSS) PER SHARE (1):
10. Line 3 above . . . . . . . . . . . . . . . . . . $ (11,856) $ (34,129) $ (23,529) $ (44,746)
11. Add back preferred dividends . . . . . . . . . . -- 825 -- 1,650
12. Add back interest, on assumed conversion of the
Company's 8% Convertible Debentures . . .. . . 2,300 2,300 4,600 4,600
13. Loss from continuing operations . . . . . . . . . (9,556) (31,004) (18,929) (38,496)
14. Loss from discontinued operations . . . . . . . (6,000) (30,682) (6,000) (33,420)
15. Net loss . . . . . . . . . . . . . . . . . . . . $ (15,556) $ (61,686) $ (24,929) $ (71,916)
16. Weighted average shares outstanding (Line 6) . . 140,490 32,019 87,753 32,019
17. Add additional shares issuable upon assumed
conversion of preferred shares from
date of issuance . . . . . . . . . . . . . . . -- 4,800 -- 4,800
18. Add additional shares issuable upon assumed
conversion of the Company's 8% Convertible
Debentures . . . . . . . . . . . . . . . . . . 3,833 3,833 3,833 3,833
19. Adjusted weighted average shares outstanding . . . 144,323 40,652 91,586 40,652
20. Loss per share from continuing operations (13/19) $ (.07) $ (.76) $ (.20) $ (.95)
21. Loss per share from discontinued operations
(14/19) . . . . . . . . . . . . . . . . . . . . . (.04) (.76) (.07) (.82)
22. Net loss per share . . . . . . . . . . . . . . . $ (.11) $ (1.52) $ (.27) $ (1.77)
</TABLE>
- --------------
(1) Diluted earnings (loss) per share are not presented as the Company's
common stock equivalents and the assumed conversion of the Company's 8%
Convertible Debentures are anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information
extracted from the consolidated balance sheets and
consolidated statements of operations and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 22,185
<SECURITIES> 0
<RECEIVABLES> 72,871
<ALLOWANCES> 3,039
<INVENTORY> 1,791
<CURRENT-ASSETS> 142,650
<PP&E> 29,657
<DEPRECIATION> 18,623
<TOTAL-ASSETS> 384,158
<CURRENT-LIABILITIES> 197,509
<BONDS> 119,686
0
0
<COMMON> 185
<OTHER-SE> 66,855
<TOTAL-LIABILITY-AND-EQUITY> 384,158
<SALES> 222,076
<TOTAL-REVENUES> 222,076
<CGS> 195,523
<TOTAL-COSTS> 195,523
<OTHER-EXPENSES> 7,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,730
<INCOME-PRETAX> (23,015)
<INCOME-TAX> 514
<INCOME-CONTINUING> (23,529)
<DISCONTINUED> (6,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,529)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.27)
</TABLE>
