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 January 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 033-17921
AIR & WATER TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3418759
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 March 16, 1998.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1998 AND OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 7,973 $ 12,089
Accounts receivable, less allowance for doubtful accounts.... 74,222 76,681
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... 39,212 33,557
Inventories.................................................. 1,822 1,893
Prepaid expenses and other current assets.................... 5,856 4,460
Net current assets of discontinued operations................ 392 --
--------- ---------
Total current assets...................................... 129,477 128,680
Property, plant and equipment, net.............................. 12,227 13,388
Investments in environmental treatment facilities............... 21,617 21,817
Goodwill, net................................................... 163,052 164,337
Other assets.................................................... 30,055 30,391
Net non-current assets of discontinued operations............... 24,302 24,452
--------- ---------
Total assets.............................................. $ 380,730 $ 383,065
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt....................... $ 14,704 $ 398
Accounts payable............................................. 87,374 80,007
Accrued expenses............................................. 78,160 86,681
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... 15,499 15,320
Income taxes payable......................................... 1,345 1,485
Net current liabilities of discontinued operations........... -- 591
--------- ---------
Total current liabilities................................. 197,082 184,482
--------- ---------
Long-term debt.................................................. 304,766 307,845
--------- ---------
Commitments and contingencies (Note 6) -- --
Stockholders' deficit:
Preferred stock, par value $.01, authorized 2,500,000
shares; issued none as of January 31, 1998; issued
1,200,000 shares, liquidation value $60,000,
as of October 31, 1997..................................... -- 12
Common stock, par value $.001, authorized 100,000,000
shares; issued 66,394,870 shares as of January 31,
1998; issued 32,109,156 shares as of October 31, 1997...... 66 32
Additional paid-in capital................................... 427,014 427,036
Accumulated deficit.......................................... (546,892) (535,214)
Common stock in treasury, at cost............................ (108) (108)
Cumulative currency translation adjustment................... (1,198) (1,020)
--------- ---------
Total stockholders' deficit............................ (121,118) (109,262)
--------- ---------
Total liabilities and stockholders' deficit........... $ 380,730 $ 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 MONTHS ENDED JANUARY 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Sales.................................................... $ 110,274 $ 106,637
Cost of sales............................................ 96,773 89,467
--------- ---------
Gross margin.......................................... 13,501 17,170
Selling, general and administrative expenses............. 14,252 17,122
Depreciation and amortization............................ 3,996 3,886
--------- ---------
Operating loss from continuing operations............. (4,747) (3,838)
Interest expense, net.................................... (6,022) (5,883)
Other expense, net....................................... (659) (53)
--------- ---------
Loss from continuing operations before income taxes .. (11,428) (9,774)
Income tax expense....................................... (245) (18)
--------- ---------
Loss from continuing operations....................... (11,673) (9,792)
Discontinued operations:
Loss from operations of discontinued segment.......... -- (2,738)
--------- ---------
Net loss.............................................. (11,673) (12,530)
Preferred stock dividend................................. -- (825)
--------- ---------
Net loss applicable to common stockholders............ $ (11,673) $ 13,355)
========= =========
Loss per common share (after preferred stock dividend):
Continuing operations................................. $ (.35) $ (.33)
Discontinued operations............................... -- (.09)
--------- ---------
Net loss.............................................. $ (.35) $ (.42)
========= =========
Weighted average number of shares outstanding......... 33,150 32,019
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these financial statements.
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(11,673) $(12,530)
Adjustments to reconcile net loss to net cash used for
continuing operations--
Discontinued operations ............................. -- 2,738
Depreciation and amortization ....................... 3,996 3,886
Other ............................................... 187 178
Changes in assets and liabilities, excluding effects
of divestitures--
(Increase) decrease in assets--
Accounts receivable ................................. 2,371 4,300
Costs and estimated earnings in excess of billings
on uncompleted contracts .......................... (5,655) (1,403)
Inventories ......................................... 71 (438)
Prepaid expenses and other current assets ........... (1,686) 106
Other assets ........................................ 78 353
Increase (decrease) in liabilities--
Accounts payable .................................... 7,399 (2,478)
Accrued expenses .................................... (8,468) (7,436)
Billings in excess of costs and estimated earnings
on uncompleted contracts .......................... 179 (616)
Income taxes ........................................ (79) 400
-------- --------
Net cash used for continuing operations .......... (13,280) (12,940)
Net cash provided by (used for) discontinued
operations .................................... (189) 6,289
-------- --------
Net cash used for operating activities ............ (13,469) (6,651)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ....................... 639 --
Capital expenditures .................................. (785) (1,424)
Investment in environmental treatment facilities ...... 173 69
Start up costs and other .............................. (1,419) (1,693)
Discontinued operations ............................... (192) (323)
-------- --------
Net cash used for investing activities ............. (1,584) (3,371)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable and long-term debt .......... (73) (66)
Net borrowings under credit facilities ................ 11,300 8,200
Cash dividends paid on preferred stock ................ -- (825)
Other ................................................. (899) (513)
Discontinued operations ............................. 609 --
-------- --------
Net cash provided by financing activities .......... 10,937 6,796
-------- --------
Net decrease in cash and cash equivalents .......... (4,116) (3,226)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .......... 12,089 12,667
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................ $ 7,973 $ 9,441
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ............................... $ 9,381 $ 8,106
======== ========
</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 month periods ended
January 31, 1998 and 1997 has been calculated in accordance with the new
Financial Accounting Standard No. 128--"Earnings Per Share." This statement
requires that the Company report "basic" and "diluted" earnings per share
instead of "primary" and "fully diluted" earnings per share previously
reported by the Company. 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, Compagnie
Generale des Eaux, a French company and the Company's largest stockholder
("CGE"), and CGE'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 CGE and its subsidiaries (representing
all of the issued and outstanding shares of Series A Preferred Stock) for
34,285,714 shares of its Class A Common Stock, par value $.001 per share
(the "Class A Common Stock"). Immediately following the Exchange and as of
January 31, 1998, CGE 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 CGE, 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 CGE 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, CGE 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 CGE 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 CGE
and Anjou) in the Rights Offering. In accordance with the terms of the
Rights Offering, neither CGE 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 CGE 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). See
Note 5--Financing Arrangements.
Following the Rights Offering, CGE 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 three months ended
January 31, 1998 and 1997 was $.05 and $.04 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 CGE 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, CGE 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 CGE 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. 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, but in any event no later than
November 30, 1998. The results of operations and financial condition of
Research-Cottrell are reported as discontinued operations for all periods
presented.
(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 January
31, 1998, the Company's borrowings under the Bank Credit Facility totaled
$14.3 million and outstanding letters of credit under the Bank Credit
Facility totaled $21.5 million (unused capacity of $34.2 million).
As of January 31, 1998, the Company had outstanding borrowings of
$125 million under an unsecured term loan from CGE (the "CGE 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 CGE 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
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 after the city's contribution action,
which commenced in early, 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 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 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 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 CGE 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 January 31, 1998 were derived from contracts with federal,
state, municipal and other governmental agencies. The termination of any of
the Company's significant contracts with such governmental agencies, or the
failure to obtain either extensions or renewals of certain existing
contracts or additional contracts with such governmental agencies, could
have a material adverse effect on the Company's earnings and business.
During the three month period ended January 31, 1998, the contract of
PSG's wholly owned subsidiary, PS Group of Puerto Rico, Inc. ("PSG Puerto
Rico"), with the Puerto Rico Aqueduct and Sewer Authority ("PRASA")
accounted for 37% of PSG's total sales and 22% of the Company's total
sales. Operations were initiated under the contract on September 1, 1995.
The contract has a five-year term but PRASA 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 January 31, 1998, PSG Puerto Rico had
receivables of $43.0 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).
THREE MONTHS ENDED
-------------------------
JANUARY 31, JANUARY 31,
----------- -----------
SALES:
Professional Services Group................... $ 65,869 $ 62,588
Metcalf & Eddy................................ 45,553 44,591
Other and eliminations........................ (1,148) (542)
--------- ---------
$ 110,274 $ 106,637
COST OF SALES:
Professional Services Group................... $ 61,154 $ 57,959
Metcalf & Eddy................................ 36,767 32,050
Other and eliminations........................ (1,148) (542)
--------- ---------
$ 96,773 $ 89,467
--------- ---------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Professional Services Group................... $ 3,976 $ 3,821
Metcalf & Eddy................................ 8,100 11,052
Corporate (unallocated)....................... 2,176 2,249
--------- ---------
$ 14,252 $ 17,122
DEPRECIATION AND AMORTIZATION:
Professional Services Group................... $ 2,118 $ 2,046
Metcalf & Eddy................................ 1,751 1,712
Corporate (unallocated)....................... 127 128
--------- ---------
$ 3,996 $ 3,886
--------- ---------
OPERATING LOSS:
Professional Services Group................... $ (1,379) $ (1,238)
Metcalf & Eddy................................ (1,065) (223)
Corporate (unallocated)....................... (2,303) (2,377)
--------- ---------
$ (4,747) $ (3,838)
Interest expense, net............................... $ (6,022) $ (5,883)
Other expense, net.................................. (659) (53)
Income tax expense.................................. (245) (18)
--------- ---------
Loss from continuing operations..................... (11,673) (9,792)
Loss from discontinued operations................... -- (2,738)
--------- ---------
Net loss............................................ $ (11,673) $ (12,530)
--------- ---------
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1997
Overview
The loss from continuing operations increased by $1.9 million from
the comparable prior period to $11.7 million due to higher non-operating
expenses and operating losses at Metcalf & Eddy. Sales for the three month
period ended January 31, 1998 increased modestly by $3.6 million, or 3.4%,
from the comparable prior period, 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 is currently in negotiations with
several interested parties and 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
The operating loss of $1.4 million sustained during the three month
period ended January 31, 1998 was $0.1 million higher than the comparable
prior period. The results reflect higher gross margins of $0.1 million due
to a $3.3 million increase in sales as a result of two new contracts
received during the latter half of fiscal 1997 and lower gross margin rates
of 0.2% due to higher than anticipated costs on several projects. The
higher gross margins were partially offset by a $0.2 million increase in
selling, general and administrative expenses and higher amortization of
start-up costs.
Metcalf & Eddy
The $1.1 million operating loss sustained during the three month
period ended January 31, 1998 was $0.8 million higher than that sustained
during the comparable prior period. The change in results from the three
month period ended January 31, 1997 reflects a modest 2.2% sales increase,
a reduction of 8.8 percentage points in gross margin rates and a $2.9
million reduction in selling, general and administrative expenses. The
lower gross margin rates were a result of pricing pressures and a business
mix shift from self-performed work to subcontracted work, higher than
anticipated costs on several projects and favorable pricing adjustments
reflected in the prior period. The lower selling, general and
administrative expenses were a result of reduced personnel costs and a
prior year cancellation penalty for a high-cost leased facility.
Corporate and Other
The unallocated corporate costs for the three month period ended
January 31, 1998 were $0.1 million less than the comparable prior period
due to lower facility and insurance costs. Non-operating expenses increased
by $0.9 million from the comparable prior period due to foreign currency
transaction losses related to a Metcalf & Eddy project in Thailand,
slightly higher interest rates and credit support fees, higher state and
foreign taxes and a gain on PSG equipment sold in the prior period. Also
reflected in the comparable prior period were operating losses of $2.7
million 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. Although management currently believes that such
provisions for Research-Cottrell are still 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 sale of the
Research-Cottrell operations, the timing of the anticipated sales
transactions, actual results through disposition and final resolution of
any retained liabilities. The Company is currently in negotiations with
several interested parties and expects that most of the businesses operated
through Research-Cottrell will be sold within the next several months.
FINANCIAL CONDITION
During the three month period ended January 31, 1998, cash used by
operating activities was $13.5 million after interest payments of $9.4
million. The $5.7 million increase in costs and estimated earnings in
excess of billings and $7.4 million increase in payables were primarily
related to PSG Puerto Rico's contract with PRASA under which certain
receivables including unreimbursed costs paid on behalf of PRASA have not
been collected ($43.0 million at January 31, 1998), and the payment of
certain power costs to the Puerto Rico Electric Power Authority ("PREPA")
($37.5 million at January 31, 1998) 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,
following receipt of such amount from PRASA as a partial payment against
previously unreimbursed costs. 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 $8.5 million reduction in accrued expenses was primarily
related to the timing of certain payments including personnel related
costs, interest and credit support fees. The cash requirements of the
discontinued operations of Research-Cottrell were minimal 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 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 January 31, 1998 financial statements; however, additional
provisions may be required in the future based on new developments which
may arise in the near term related to the factors discussed above.
Investment activities required $1.6 million of cash during the three
month period ended January 31, 1998 including $0.2 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 $1.4 million. Capital expenditures of $0.8 million
were made in the PSG and Metcalf & Eddy segments primarily for computer and
field equipment. Proceeds of $0.6 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.
Financing activities provided $10.9 million of cash during the three
month period ended January 31, 1998 primarily due to additional borrowings
under credit facilities of $11.3 million discussed more fully below.
As of January 31, 1998, the Company had outstanding borrowings of
$125 million under an unsecured term loan from CGE (the "CGE 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 CGE Note and Anjou Note with a portion of
the gross proceeds from the Rights Offering and terminated the related
credit agreements.
On September 24, 1997, the Company entered into the Recapitalization
Agreement, dated as of September 24, 1997, as amended as of January 26,
1998 (the "Recapitalization Agreement"), with Compagnie Generale des Eaux,
a French company and the Company's largest stockholder ("CGE"), and CGE'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 CGE 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 CGE 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 CGE Note and the
Anjou Note. 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).
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 also maintains a $70 million three-year senior secured
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"). As of January 31, 1998, the Company's borrowings under
the Bank Credit Facility totaled $14.3 million and outstanding letters of
credit under the Bank Credit Facility totaled $21.5 million (unused
capacity of $34.2 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 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. The Company intends to enter into discussions regarding the
establishment of a new credit facility prior to 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.
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 January 31, 1998), or at a
defined bank rate approximating prime (8.5% at January 31, 1998). The Bank
Credit Facility also allows for certain additional borrowings, including,
among other things, project financing and foreign borrowing facilities,
subject to limitations, and contains certain financial and other
restrictive covenants, including, among other things, the maintenance of
certain financial ratios, and restrictions on the incurrence of additional
indebtedness, acquisitions, the sale of assets, the payment of dividends
and the repurchase of subordinated debt. 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.
As of March 16, 1998, the Company had $22.7 million of outstanding
letters of credit and no borrowings under the Bank Credit Facility. In
addition to its $10.2 million of short-term investments and the $47.3
million of unused capacity under its Bank Credit Facility at March 16,
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 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 January 31, 1998, the Company
had no material outstanding purchase commitments for capital expenditures,
however, following the Recapitalization, 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. 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.
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 CGE 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 January
31, 1998, unamortized goodwill was $163.0 million.
YEAR 2000 ISSUE
Based on a preliminary study by management, the Company expects to
incur approximately $3 million during 1998 and 1999 to modify its
information systems appropriately to accurately process information in the
year 2000 and beyond. The Company continues to evaluate appropriate courses
of corrective action, including replacement of certain systems whose
associated costs would be recorded as assets and amortized. Management
expects that the costs to convert the Company's information systems to year
2000 compliance will not have a material impact on the Company's
consolidated financial statements. The Company has not yet initiated formal
communications with all of its significant suppliers and clients to
determine the extent to which the Company may be vulnerable to such third
parties' failure to remediate their own year 2000 issues.
FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. Included herein
are certain forward-looking statements concerning the Company's operations,
economic performance and financial condition, including, in particular,
forward-looking statements regarding the Company's expectation of future
performance following implementation of its revised business strategy. Such
statements are subject to various risks and uncertainties. Accordingly, the
Company hereby identifies the following important factors that could cause
the Company's actual financial results to differ materially from those
projected, forecasted, estimated or budgeted by the Company in such
forward-looking statement:
o The Company's highly competitive marketplace.
o Changes in as well as enforcement levels of federal, state and
local environmental legislation and regulations that change
demand for a significant portion of the Company's services.
o Adverse developments in the DOJ Investigation.
o Dependency on key projects, customers and contracts.
o The ability to obtain new contracts (some of which are
significant) from existing and new clients.
o The ability of the Company to obtain new bid and performance
bonds.
o The execution of expected new projects and those projects in
backlog within the most recent cost estimates.
o Adverse resolution of litigation matters and existing claims
arising in the ordinary course of business.
o The ability of the Company to access capital (through an
investment fund, off-balance sheet vehicle or otherwise) and to
effect and finance future investments.
o The ability of the Company to successfully implement its
revised business strategy.
o The ability of the Company to obtain any necessary waivers,
extensions or renewals of the Bank Credit Facility.
o The acceptance by the Company's current and prospective
customers of the Company's financial position 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 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 CGE) 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 CGE 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 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 issued and outstanding
shares of Series A Preferred Stock (all of which was held by CGE) 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 CGE 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, CGE 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 CGE 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 CGE
and Anjou) in the Rights Offering. In accordance with the terms of the
Rights Offering, neither CGE 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
------- ----------------------- --------
3.01(a) Certificate of Retirement of 51/2% Series A Convertible *
Exchangeable Preferred Stock Filed February 6, 1998
3.01(b) Certificate of Amendment of the Restated Certificate of (1)
Incorporation of the Registrant filed March 2, 1998
4.01 Supplemental Indenture, dated as of February 23, 1998, *
between the Registrant and The Chase Manhattan Bank,
as Trustee
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- --------------
(1) Incorporated herein by reference to Exhibit 3.01(e) to the Company's
Form 8-A filed March 11, 1998.
(*) Filed herewith.
(b) Reports on Form 8-K
During the quarter ended January 31, 1998, the Company filed the
following reports on Form 8-K:
DATE OF REPORT
(DATE OF EARLIEST
EVENT REPORTED) ITEM REPORTED DATE FILED
----------------- ------------- ----------
October 31, 1997 Item 5--Other Events. October 31, 1997
December 2, 1997 Item 5--Other Events. December 3, 1997
December 12, 1997 Item 5--Other Events. December 16, 1997
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: March 17, 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
------- ----------------------- --------
3.01(a) Certificate of Retirement of 51/2% Series A Convertible *
Exchangeable Preferred Stock filed February 6, 1998
3.01(b) Certificate of Amendment of the Restated Certificate of (1)
Incorporation of the Registrant filed March 2, 1998
4.01 Supplemental Indenture, dated as of February 23, 1998, *
between the Registrant and The Chase Manhattan Bank,
as Trustee
11 Statement re: computation of per share earnings *
27 Financial Data Schedule *
- ------------------
(1) Incorporated herein by reference to Exhibit 3.01(e) to the Company's
Form 8-A filed March 11, 1998.
(*) Filed herewith.
EXHIBIT 3.01(a)
CERTIFICATE OF RETIREMENT
OF 5 1/2% SERIES A CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK
OF AIR & WATER TECHNOLOGIES CORPORATION
Air & Water Technologies Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Company"), in accordance with the provisions of Section 103 thereof,
hereby certifies as follows:
FIRST: That the Certificate of Designation (the "Certificate of
Designation") of the 5 1/2% Series A Convertible Exchangeable Preferred
Stock, par value $.01 per share (the "Series A Preferred Stock"), provides
that shares of Series A Preferred Stock which have been issued and
reacquired by the Company in any manner shall (upon compliance with any
applicable provisions of the laws of the State of Delaware) be canceled and
shall not be available for reissue or redesignation.
SECOND: That pursuant to the Certificate of Designation, the Company
is authorized to issue 1,200,000 shares of Series A Preferred Stock, all of
which have been issued.
THIRD: That the Company has reacquired 1,200,000 shares of Series A
Preferred Stock, representing all of the issued and outstanding shares of
Series A Preferred Stock.
FOURTH: That the Company hereby retires the 1,200,000 shares of
Series A Preferred Stock reacquired, reducing to zero the number of
authorized shares of Series A Preferred Stock.
IN WITNESS WHEREOF, Air & Water Technologies Corporation, pursuant to
Section 243(b) of the General Corporation Law of the State of Delaware, has
caused this Certificate to be executed and acknowledged by its duly
authorized officers, this 6th day of February 1998.
AIR & WATER TECHNOLOGIES CORPORATION
By: /s/Douglas A. Satzger
-------------------------------------
Name: Douglas A. Satzger
Title: Senior Vice President, General
Counsel and Secretary
EXHIBIT 4.01
AIR & WATER TECHNOLOGIES CORPORATION
AND
THE CHASE MANHATTAN BANK
-------------------------------------------
SECOND SUPPLEMENTAL INDENTURE
DATED AS OF FEBRUARY 23, 1998
------------------------------------------
TO
THE INDENTURE DATED AS OF MAY 15, 1990,
AS AMENDED PURSUANT TO THE SUPPLEMENTAL
INDENTURE DATED OCTOBER 8, 1996,
BETWEEN AIR & WATER TECHNOLOGIES CORPORATION AND
THE CHASE MANHATTAN BANK (FORMERLY KNOWN AS
CHEMICAL BANK AND SUCCESSOR TRUSTEE TO
MIDLANTIC NATIONAL BANK) AS TRUSTEE, RELATING TO
$115 MILLION AGGREGATE PRINCIPAL AMOUNT AT MATURITY
OF 8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2015
SUPPLEMENTAL INDENTURE
THIS SECOND SUPPLEMENTAL INDENTURE (the "Supplemental Indenture") is
made as of the 23rd day of February, 1998, between Air & Water Technologies
Corporation (the "Company") and The Chase Manhattan Bank (formerly known as
Chemical Bank and successor Trustee to Midlantic National Bank), as trustee
(the "Trustee").
WHEREAS, the Company and the Trustee heretofore executed and
delivered an Indenture, dated as of May 15, 1990 and amended pursuant to a
Supplemental Indenture dated October 8, 1996 (the "Indenture"); and
WHEREAS, pursuant to the Indenture, the Company issued and the
Trustee authenticated and delivered $115 million aggregate principal amount
at maturity of the Company's 8% Convertible Subordinated Debentures due
2015 (the "Debentures"); and
WHEREAS, Section 902 of the Indenture provides that with the consent
of the Holders of not less than a majority in principal amount of the
Outstanding Debentures at the time outstanding, the Company, when
authorized by Board Resolution, and the Trustee may enter into an indenture
or indentures supplemental thereto for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Indenture or of modifying in any manner the rights of Holders subject to
certain exceptions identified therein; and
WHEREAS, the Holders of not less than a majority in principal amount
of the Outstanding Debentures have duly consented to proposed modifications
set forth in this supplemental indenture (the "Supplemental Indenture") in
accordance with Section 902; and
WHEREAS, the Company has heretofore delivered or is delivering
contemporaneously herewith to the Trustee (i) a copy of Board Resolutions
authorizing the execution, delivery and performance of this Supplemental
Indenture, (ii) evidence of the written consent of the Holders set forth in
the immediately preceding paragraph and (iii) an Opinion of Counsel in
compliance with and to the effect set forth in Sections 903 and 102 of the
Indenture; and
WHEREAS, all conditions necessary to authorize the execution and
delivery of this Supplemental Indenture and to make this Supplemental
Indenture valid and binding have been complied with or have been done or
performed;
NOW, THEREFORE, in consideration of the foregoing and notwithstanding
any provision of the Indenture which, absent this Supplemental Indenture,
might operate to limit such action, the Company and the Trustee agree as
follows for the equal and ratable benefit of the Holders of the Debentures:
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL. For all purposes of the Indenture and this
Supplemental Indenture, except as otherwise expressly provided or unless
the context otherwise requires:
(a) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to the Indenture and this Supplemental Indenture as a
whole and not to any particular Article, Section or subdivision; and
(b) capitalized terms used but not defined herein shall have the
meanings assigned to them in the Indenture.
ARTICLE II
AMENDMENT OF THE INDENTURE
SECTION 2.01. AMENDMENT OF THE INDENTURE. Subject to Section 3.01
hereof, the Indenture is hereby amended in the following respects:
(a) The definition of Change in Control in Section 1503(e) of the
Indenture is hereby amended by inserting "(other than Compagnie Generale
des Eaux and any of its Affiliates)" immediately following the word
"Person" in the second line of such paragraph 1503(e).
(b) Section 1503(e) of the Indenture as amended pursuant to this
Supplemental Indenture shall read as follows:
(e) a "Change in Control" of the Company shall be deemed to have
occurred at such time as any Person (other than Compagnie Generale des
Eaux and any of its Affiliates) is or becomes the beneficial owner,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of capital stock of
the Company entitling such Person to exercise 75% or more of the total
voting power of all shares of capital stock of the Company entitled to
vote in elections of directors, provided that a Change in Control shall
not be deemed to have occurred if either (i) the Quoted Price of Common
Stock for any five trading days during the 10 trading day period
immediately preceding the Change in Control shall equal or exceed 105%
of the Conversion Price in effect on such day or (ii) all of the
consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Change in Control consists
of shares of common stock traded on a national securities exchange or
through NASDAQ or another comparable quotation system and as a result
of such transaction or transactions the Debentures become convertible
for such common stock.
ARTICLE III
MISCELLANEOUS
SECTION 3.01. EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution
and delivery of this Supplemental Indenture by the Company and the Trustee,
the Indenture shall be supplemented in accordance herewith, and this
Supplemental Indenture shall form a part of the Indenture for all purposes,
and every Holder of Debentures heretofore or hereafter authenticated and
delivered under the Indenture shall be bound thereby.
SECTION 3.02. INDENTURE REMAINS IN FULL FORCE AND EFFECT. Except as
supplemented hereby, all provisions in the Indenture shall remain in full
force and effect.
SECTION 3.03. INDENTURE AND SUPPLEMENTAL INDENTURE CONSTRUED
TOGETHER. This Supplemental Indenture is an indenture supplemental to and
in implementation of the Indenture, and the Indenture and this Supplemental
Indenture shall henceforth be read and construed together.
SECTION 3.04. CONFIRMATION AND PRESERVATION OF INDENTURE. The
Indenture as supplemented by this Supplemental Indenture is in all respects
confirmed and preserved.
SECTION 3.05. CONFLICT WITH TRUST INDENTURE ACT. If any provision of
this Supplemental Indenture limits, qualifies or conflicts with any
provision of the Trust Indenture Act that is required under the Trust
Indenture Act to be part of and govern any provision of this Supplemental
Indenture, the provision of the Trust Indenture Act shall control. If any
provision of this Supplemental Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the
provision of the Trust Indenture Act shall be deemed to apply to the
Indenture as so modified or to be excluded by this Supplemental Indenture,
as the case may be.
SECTION 3.06. SEVERABILITY. In case any provision in this
Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
SECTION 3.07. HEADINGS. The Article and Section headings of this
Supplemental Indenture have been inserted for convenience of reference
only, are not to be considered a part of this Supplemental Indenture and
shall in no way modify or restrict any of the terms or provisions hereof.
SECTION 3.08. BENEFITS OF SUPPLEMENTAL INDENTURE, ETC. Nothing in
this Supplemental Indenture or the Debentures, express or implied, shall
give to any Person, other than the parties hereto and thereto and their
successors hereunder and thereunder and the Holders of the Debentures, any
benefit of any legal or equitable right, remedy or claim under the
Indenture, this Supplemental Indenture or the Debentures.
SECTION 3.09. SUCCESSORS. All agreements of the Company in this
Supplemental Indenture shall bind its successors. All agreements of the
Trustee in this Supplemental Indenture shall bind its successors.
SECTION 3.10. TRUSTEE NOT RESPONSIBLE FOR RECITALS. The recitals
contained herein shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness. The Trustee shall
not be liable or responsible for the validity or sufficiency of this
Supplemental Indenture.
SECTION 3.11. CERTAIN DUTIES AND RESPONSIBILITIES OF THE TRUSTEE. In
entering into this Supplemental Indenture, the Trustee shall be entitled to
the benefit of every provision of the Indenture relating to the conduct or
affecting the liability or affording protection to the Trustee, whether or
not elsewhere herein so provided.
SECTION 3.12. GOVERNING LAW. The internal law of the State of New
York shall govern and be used to construe this Supplemental Indenture.
SECTION 3.13. COUNTERPART ORIGINALS. The parties may sign any number
of copies of this Supplemental Indenture. Each signed copy shall be an
original, but all of them together represent the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date and year
first above written.
AIR & WATER TECHNOLOGIES CORPORATION
By: /s/ Alain Brunais
---------------------------------
Name: Alain Brunais
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, AS TRUSTEE
By: /s/ R.J. Halleran
---------------------------------
Name: R.J. Halleran
Title: Second Vice President
EXHIBIT 11
AIR & WATER TECHNOLOGIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997
---- ----
BASIC EARNINGS (LOSS) PER SHARE:
1. Loss from continuing operations............... $ (11,673) $ (9,792)
2. Less preferred dividends...................... -- (825)
3. Loss from continuing operations applicable
to common stockholders...................... (11,673) (10,617)
4. Loss from discontinued operations............. -- (2,738)
5. Net loss applicable to common stockholders.... $ (11,673) $ (13,355)
6. Weighted average shares outstanding........... 33,150 32,019
7. Loss per share from continuing
operations (3 - 6).......................... $ (.35) $ (.33)
8. Income (loss) per share from discontinued
operations (4 - 6).......................... -- (.09)
9. Net loss per share............................ $ (.35) $ (.42)
DILUTED EARNINGS (LOSS) PER SHARE (1):
10. Line 3 above................................. $ (11,673) $ (10,617)
11. Add back preferred dividends................. -- 825
12. Add back interest, on assumed conversion of
the Company's 8% Convertible Debentures.... 2,300 2,300
13. Loss from continuing operations.............. (9,373) (7,492)
14. Income (loss) from discontinued operations... -- (2,738)
15. Net loss..................................... $ (9,373) $ (10,230)
16. Weighted average shares outstanding
(Line 6)................................... 33,150 32,019
17. Add additional shares issuable upon
assumed conversion of preferred shares
from date of issuance...................... -- 4,800
18. Add additional shares issuable upon
assumed conversion of the Company's
8% Convertible Debentures.................. 3,833 3,833
19. Adjusted weighted average shares
outstanding................................ 36,983 40,652
20. Loss per share from continuing
operations (13 - 19)....................... $ (.25) $ (.18)
21. Income (loss) per share from
discontinued operations (14 - 19).......... -- (.07)
22. Net loss per share........................... $ (.25) $ (.25)
- ------------
(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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 7,973
<SECURITIES> 0
<RECEIVABLES> 77,126
<ALLOWANCES> 2,904
<INVENTORY> 1,822
<CURRENT-ASSETS> 129,477
<PP&E> 29,927
<DEPRECIATION> 17,700
<TOTAL-ASSETS> 380,730
<CURRENT-LIABILITIES> 197,082
<BONDS> 304,766
0
0
<COMMON> 66
<OTHER-SE> (119,878)
<TOTAL-LIABILITY-AND-EQUITY> 380,730
<SALES> 110,274
<TOTAL-REVENUES> 110,274
<CGS> 96,773
<TOTAL-COSTS> 96,773
<OTHER-EXPENSES> 3,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,022
<INCOME-PRETAX> (11,428)
<INCOME-TAX> 245
<INCOME-CONTINUING> (11,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,673)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.25)
</TABLE>
