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THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON FEBRUARY 1, 1999 PURSUANT
TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 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
AQUA ALLIANCE INC.
(FORMERLY AIR & WATER TECHNOLOGIES CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3418759
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
30 HARVARD MILL SQUARE,
WAKEFIELD, MASSACHUSETTS 01880
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (781) 246-5200
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, American Stock Exchange, Inc.
$.001 par value
Warrants to purchase shares of Class American Stock Exchange, Inc.
A Common Stock (expiring March 11, 2001)
Securities registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
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__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of
the registrant was $49,322,737 on January 27, 1999.
The number of outstanding shares of the registrant's Class A Common
Stock, par value $.001 per share, was 185,176,527 on January 27, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
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Part IV--See the Exhibit Index to this Form 10-K, located at page 85
herein.
PART I
ITEM 1. BUSINESS
OVERVIEW
Aqua Alliance Inc., formerly Air & Water Technologies Corporation ("AAI"
or the "Company"), is an integrated single source provider of services and
solutions for the water and wastewater and hazardous waste remediation
markets. The Company through its subsidiaries, provides a comprehensive
range of services and technologies directed principally at providing
complete services for the operation, maintenance and management of water
and wastewater treatment systems; engineering, design and construction of
water and wastewater facilities; and the remediation of hazardous waste.
The Company believes it provides a complement of products and services that
satisfy the environmental and essential services needs of its targeted
client base. The Company markets its products and services through two
widely recognized trade names: Professional Services Group ("PSG") for the
operation, maintenance and management of water and wastewater treatment
systems; and Metcalf & Eddy ("M&E") for water, wastewater and hazardous
waste engineering and consulting services. PSG provides operation,
maintenance and management services for treatment systems in various water,
wastewater, sludge and biosolids waste management markets. M&E provides its
clients with a broad spectrum of environmental consulting services,
including engineering studies and design, project management, site
evaluation, environmental assessment and master planning. On December 2,
1997, the Company announced its decision to divest Research-Cottrell.
Research-Cottrell designs and develops products and technologies targeted
at specific client needs such as air pollution control equipment. During
the course of fiscal 1998, the Company divested a major portion of the
Research-Cottrell business. On January 19, 1999, the Company completed the
divestiture with the sale of REECO. The Company provides its full range of
services to predominantly the following customer sectors: governmental
entities, including municipalities and state and federal agencies; and
specific industrial categories, such as petroleum refining, pulp and paper,
pharmaceutical, chemical, primary and secondary metals, food processing,
and textile manufacture.
REVISED BUSINESS STRATEGY
In fiscal 1998, the Company continued implementing its revised business
strategy to redeploy its capital to PSG and M&E, its core water businesses.
As part of this strategy, on December 2, 1997, the Company announced its
decision to divest Research-Cottrell. Following a strategic analysis, the
Company concluded that the water and wastewater treatment markets, which
are the primary markets for PSG and M&E, offer additional opportunities and
greater forecasted returns on capital than the Research-Cottrell segment.
In addition, management believes that the Company has greater competitive
advantages and market penetration through its PSG and M&E businesses than
what has been achieved by its Research-Cottrell operations. During the
course of fiscal 1998, the Company divested a major portion of the
Research-Cottrell businesses; the divestiture was completed in January
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation."
In addition, in March 1998, the Company completed the recapitalization
(the "Recapitalization") begun in fiscal 1997 pursuant to the
Recapitalization Agreement, dated as of September 24, 1997 (as amended, the
"Recapitalization Agreement"), among Vivendi (formerly Compagnie Generale
des Eaux), a French company and the Company's largest stockholder
("Vivendi"), Vivendi North America Company (formerly Anjou International
Company), a Delaware corporation and indirect wholly-owned subsidiary of
Vivendi ("VNA"), and the Company. The Recapitalization allowed the Company
to sharply reduce debt and focus on developing the plans to grow its PSG
and M&E businesses profitably.
In order to return to profitability following the Recapitalization,
management is continuing to implement the next stages of the revised
business strategy which consists of the reorganization and streamlining of
the Company's operations. This reorganization involves the integration of
key functions in all areas in order to decrease costs, improve efficiencies
and optimize business development. It is expected to result in improved
operating performance and cash flow.
As part of this reorganization, effective October 13, 1998, the
Company's name was changed from "Air & Water Technologies Corporation" to
"Aqua Alliance Inc.," following approval of the proposal by the
stockholders of the Company at the Company's Annual Meeting of Stockholders
held on June 24, 1998. "Aqua Alliance Inc." was selected as the new name
because the Board of Directors of the Company believes that it clearly
states the Company's two greatest strengths: its dedication to the water
business and the relationship formed with its clients. Upon effectiveness
of the name change, the symbol for the Company's Class A Common Stock on
the American Stock Exchange, Inc. (the "AMEX") was changed from "AWT" to
"AAI," and the symbol for the Company's warrants (expiring March 11, 2001)
to purchase shares of Class A Common Stock (the "Warrants") on the AMEX was
changed from "AWT.WS" to "AAI.WS."
Also on October 13, 1998, the Company announced a restructuring and
change of headquarters. The Company is now headquartered in Wakefield,
Massachusetts, and is being organized into four regions operating from
Chicago, Atlanta, Wakefield and San Diego. M&E and PSG corporate functions
are being combined and redundancies eliminated. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition."
THE WATER/WASTEWATER PRIVATIZATION MARKET
The Company believes that its redeployment of capital and revised
business strategy will facilitate the participation of PSG and M&E in the
emerging privatization market in the water and wastewater treatment
industry.
According to industry analysts, the water and wastewater treatment
industry is poised for significant short-term and long-term growth.
Analysts predict growth in annual revenue generation from the issuance of
major new contracts to set the pace for the water industry in the range of
15% over the next four years. Industry growth is the result of several
market factors including cost savings; more reliable and higher quality
private sector delivery of necessary public services; guaranteed
performance and regulatory compliance; relief from day-to-day operational,
management and administrative burdens; enhanced risk management; and
achievement of user rate stabilization and system cost containment.
Additional market factors encouraging the implementation of more
sophisticated public/private partnerships ("PPPs"), include private sector
time/cost efficiencies for the design/build portion of a project; shift of
future responsibility for capital improvements to the private sector; use
of private sector financing to accomplish needed capital improvements; and
the ability to monetize the asset (i.e., secure up-front cash payments).
The Company also believes that the water/wastewater privatization
market has reached a critical juncture in its development. More than ever
before, both small and large municipalities are entering into privatization
arrangements and adopting alternative forms of PPPs. Historically, the
market has been dominated by short-term (three to five-year) operation,
maintenance and management ("OM&M") contracts. However, recently, the
market has shown indications of a potential shift to longer-term contracts.
Two presidential executive orders and an Internal Revenue Service rule
change recently have been issued which generally facilitate the
implementation of PPPs and allow for greater flexibility and creativity in
structuring PPPs. The new regulations make it easier for municipalities to
enter into long-term OM&M contracts.
Long-term partnerships will make it easier for municipalities to assign
responsibility of entire systems to private operators such as PSG whose
core competency is to operate, maintain and manage water and wastewater
treatment systems. As a complete service provider, the Company through PSG
is capable of providing not only standard OM&M services, but also
design/build of treatment facilities through M&E, as well as arranging for
financing for capital improvements, financing capital improvements, and
arranging for financing for up-front capital payments that the community
can apply toward other uses.
The Company believes that PSG is well-positioned to take advantage of
industry growth and the shift to privatization arrangements and to continue
its market leadership role. In addition to being a market leader for
short-term OM&M contracts, PSG is among a few firms pioneering alternative
forms of PPPs. PSG has already converted seven existing contracts into
long-term contracts through contract renewals as a result of the Internal
Revenue Service rule change and continues to pursue additional long-term
contract renewals. Examples of the shift towards other types of PPPs
include the Freeport, Texas design/build/ finance/operate project; the
long-term OM&M agreement in North Brunswick, New Jersey; the Cranston,
Rhode Island twenty-five year lease transaction; and the Taunton,
Massachusetts twenty-year design/build/operate agreements. Freeport,
Cranston, and Taunton are PSG projects.
PSG believes that the Freeport, Texas project and the Cranston, Rhode
Island lease were among firsts in the water and wastewater industry. In the
Freeport, Texas project, the City of Freeport asked PSG to act as a total
service provider and not just a contract operator. PSG was engaged to
operate the City of Freeport's water and wastewater systems and in addition
undertook the design/build of its wastewater facility upgrade to comply
with a consent order. PSG utilized M&E for the design/build portion of the
project, arranged for the financing of the upgrade and managed the process
for the issuance of City of Freeport revenue bonds.
In March 1997, a team including PSG and M&E won the first long-term
lease transaction in the United States water and wastewater industry. PSG
will be the operator for the entire wastewater treatment system in
Cranston, Rhode Island for the next twenty-five years. M&E will provide
design/build services for certain capital improvements which will bring the
city into compliance with environmental regulations at a fraction of the
previously estimated cost.
To compete effectively in the emerging water and wastewater
privatization market, the Company will require access to capital for
expenditures relating to long-term OM&M contracts. Following the completion
in March 1998 of the Recapitalization, the Company is exploring various
means of obtaining the capital required for long-term OM&M contracts,
including through an investment fund or other off-balance sheet vehicle
with the assistance of Vivendi. See "Certain Relationships and Related
Transactions--Recapitalization Agreement."
PROFESSIONAL SERVICES GROUP--OPERATION, MAINTENANCE AND MANAGEMENT OF
TREATMENT SYSTEMS
OVERVIEW
Prior to its acquisition by the Company from VNA on June 14, 1994
pursuant to the Investment Agreement, dated as of March 30, 1994, among the
Company, Vivendi and VNA (as amended, the "Investment Agreement"), PSG had
been a wholly-owned subsidiary of VNA. Since 1978, PSG has been operating,
maintaining and managing water and wastewater treatment systems, sludge and
biosolid waste disposal programs and public works projects, and providing
operations assistance primarily to municipal entities but also to
industrial companies. In the following description, references to PSG are
intended to include, where appropriate, the operation, maintenance and
management services of Metcalf &Eddy Services, Inc. ("M&E Services"), a
subsidiary of the Company involved in substantially identical business as
PSG that has been integrated with PSG subsequent to June 14, 1994. See
"--Metcalf &Eddy--Water and Wastewater Treatment/Hazardous Waste
Remediation."
OPERATION AND MAINTENANCE SERVICES
PSG provides operation, maintenance and management services for
treatment systems in the various water and wastewater and sludge and
biosolid waste management markets. These services range from assisting
owners and operators in addressing individual operating needs to the
assumption by PSG of complete responsibility for operating complex
treatment systems. PSG does not, however, own any treatment facilities
except for a municipal sludge composting facility in Baltimore, Maryland
and two wastewater treatment plants in Auburn, Alabama.
Based on annual revenues, PSG is the market leader in providing OM&M
services for water and wastewater treatment systems and sludge and biosolid
waste management services, particularly in the area of large municipal
waste treatment systems. In size and scope, PSG rivals the largest
municipal wastewater systems in the United States if its projects were
viewed as a single wastewater system.
PSG operates in 35 states, Canada and Puerto Rico and provides services
to approximately 360 facilities (approximately 210 wastewater and 150 water
treatment plants) at over 116 locations. In the United States, PSG
currently has 135 projects, concentrated east of the Mississippi, with the
highest concentration in the Northeast.
The Company believes that PSG's relative size permits it to provide its
clients with a higher caliber of benefits. PSG operates a large number of
facilities and systems, with more employees, than any other company in the
industry. PSG believes that its size allows each client partnership to take
advantage of PSG's collective experiences and best practices. PSG maintains
extensive infrastructure and equipment and provides sophisticated
maintenance practices and programs. As a result, PSG believes that it can
maintain, protect and preserve its clients' large investments in facilities
and equipment in a highly competitive manner. In addition, PSG believes
that through its process control expertise, developed through the hands-on
operation of many complex facilities, PSG can make the cutting edge of
innovation and technology immediately available to all of its clients'
treatment facilities.
In addition, PSG believes that its relationship with Vivendi further
differentiates it from competitors. PSG believes that access to the
technical and financial resources of Vivendi greatly enhances PSG's
competitive position, financial strength and technical capabilities.
Vivendi's research facility has an annual budget of over $40 million, and
Vivendi believes that its facility is one of the world's largest private
research institutions dedicated exclusively to water and wastewater. Year
after year, Vivendi strives to develop innovative, cost-efficient
technology. PSG believes that access to Vivendi's technical expertise is an
important benefit to PSG's clients as they face facility upgrades and
expansions. PSG believes that its clients also benefit from Vivendi's
knowledge and expertise in operating more than 7,000 water and wastewater
facilities worldwide. PSG believes that the experience and support of
Vivendi allows clients to realize further operational efficiencies and
process enhancements.
WATER SUPPLY AND WASTEWATER TREATMENT SERVICES
PSG provides operation, maintenance and management services for water
supply and wastewater treatment systems, primarily for cities,
municipalities and other local governmental entities. PSG also serves the
industrial market and federal and state governments by providing OM&M
services for wastewater treatment systems and groundwater remediation
treatment systems. Typically, under each of PSG's contracts, the client
owns the water supply or wastewater treatment facilities and subcontracts
to PSG, for a fixed annual fee, the provision of staff, supervision and
management for the operation, maintenance and management of the facilities.
In addition, as contract operator, PSG is responsible for the efficient
operation and maintenance of the facilities, for maintaining compliance
with federal, state and local regulations, and for fulfilling all relevant
reporting requirements with respect to the facilities.
In addition to being a service provider under short-term OM&M
contracts, PSG is among a few firms pioneering alternative forms of
public/private partnerships, or PPPs, such as long-term OM&M contracts. See
"--The Water/Wastewater Privatization Market."
Examples of water treatment facilities which PSG operates include
Brockton, Massachusetts; Lynn, Massachusetts; and Alamogordo, New Mexico.
PSG's wastewater treatment facility contracts include Oklahoma City,
Oklahoma; Cranston, Rhode Island; Taunton, Massachusetts; West Haven,
Connecticut; and Kenner, Louisiana.
In addition, the Company operates and manages the water and wastewater
systems for the Commonwealth of Puerto Rico. The contract with the Puerto
Rico Aqueduct & Sewer Authority ("PRASA") is one of the largest OM&M
contracts in the world. The PRASA system serves the 3.8 million residents
of Puerto Rico. The facilities managed by the Company in Puerto Rico
include 69 wastewater plants (capacity 304 mgd), 128 water treatment plants
(capacity 318 mgd) and related collection and distribution systems and
pumping stations.
SLUDGE AND BIOSOLID WASTE MANAGEMENT SERVICES
PSG is among the leading OM&M firms in large, complex biosolids plant
operation and management experience. PSG has experience dealing with both
the planning and implementation of large biosolids management programs. PSG
manages more than 160,000 dry tons of biosolids per year, through a number
of environmentally sound approaches. Methods used by PSG include
landfilling, land application, composting and incineration. PSG also has
significant experience in operating and managing composting facilities, as
discussed more fully below.
PUBLIC WORKS
PSG provides a full range of public works services under contract to
small towns, villages and municipalities, including meter reading,
sanitation services, street maintenance, customer billing and parks and
grounds maintenance. These services are typically provided by PSG under
OM&M contracts with a municipality's public works department for a fixed
annual fee. These contracts typically result in lower cost and reduced
administrative burdens for a municipality's personnel. PSG maintains such
contracts with the following municipalities: Boonville, Indiana; Mustang,
Oklahoma; Hardinsburg, Kentucky; and Pikeville, Kentucky.
COMPOSTING
PSG has experience in operating and maintaining composting facilities
and effectively controlling and reducing offensive odors. Solid waste
composting, along with recycling and source reduction, is utilized by local
governments as a means of reducing landfills. In a composting facility, the
non-decomposable waste is removed, and the organic waste is shredded and
then efficiently broken down by naturally occurring micro-organisms in the
composting process, in which moisture content, aeration and temperature of
the organic waste is controlled so as to accelerate the biological
decomposition. Through further processing, composting produces a fine
humus-like soil product which is sold or otherwise disposed of as a soil
fertilizer or mulch. In Baltimore, Maryland, PSG currently operates one of
the largest facilities that transforms municipal wastewater sludge into a
usable compost product. PSG operates other composting facilities at
Schenectady, New York; Bristol, Tennessee; Sevier County, Tennessee and
Hickory, North Carolina.
PSG's management believes that composting is a viable market and has
positioned PSG to increase its business in this market segment.
METCALF &EDDY--WATER AND WASTEWATER TREATMENT/HAZARDOUS WASTE REMEDIATION
OVERVIEW
M&E's services are directed principally at the protection of public
health and the environment in an efficient, cost-effective manner through
water resources management, hazardous waste remediation and solid waste
disposal. These services include protection, treatment and distribution of
water from surface and groundwater sources; collection, treatment and
disposal of wastewater and its associated by-products such as sludge;
pretreatment of industrial wastewater prior to discharge into a municipal
system or on-site treatment and disposal; remediation of hazardous waste
sites involving contaminated soils and groundwater; monitoring and closure
of sanitary landfills with disposal of associated leachate; and management
and transportation of hazardous waste. In addition, M&E provides expertise
in environmental science, institutional and public policy support,
regulatory compliance and the use of innovative technologies to meet
clients' needs.
M&E receives support from Vivendi's water division in the development
and application of new and innovative technologies worldwide. As the
world's largest water company, Vivendi invests over $40 million annually in
the development of new technologies for water and wastewater treatment.
SERVICES AND TECHNOLOGIES
To address water supply and pollution control problems, M&E provides a
full spectrum of services focusing on design, construction, management and
operation of complex biological, chemical and physical treatment
technologies, as well as waste minimization and alternative disposal
techniques; analyzes and assesses complex aquatic and other environments;
and prepares specifications and designs for treatment facilities, and
collection and distribution systems. M&E prepares permit and license
applications, manages construction and field installation of treatment
facilities, and provides startup, corrective action and rehabilitation
services for those facilities, develops operations and maintenance manuals
for facilities and scheduling and maintenance procedures to ensure their
efficient operation. M&E also provides its clients with the expertise to
address institutional, financial community relations and public policy
challenges which often arise in the development and implementation of
environmental projects.
WATER SUPPLY AND WASTEWATER TREATMENT SERVICES
Since 1907, M&E has conducted extensive hydrologic and geologic
evaluations of hundreds of surface and groundwater supplies for
governmental and industrial clients in the United States and abroad. M&E
has expertise in analyzing the nature of water resource problems, both in
terms of available capacities and the quality of the sources, and in
developing and evaluating different types of cost-effective treatment
technologies. M&E's experience includes the design of over fifty water
treatment facilities, using technologies ranging from simple extraction and
distribution of water to more complex technologies such as ozonation,
carbon absorption, air stripping, desalinization, biologically active
carbon ("BAC") and membrane filtration.
In water system computer modeling, M&E's expertise includes water
system hydraulic and quality aspects and treatment process optimization. In
1998, M&E won a major contract with the Cleveland Water Division to develop
a state-of-the-art hydraulic model for the city's distribution system.
M&E is a partner in the development of water treatment for New York
City. Over the past year, M&E, with its partners, has been conducting
piloting for water treatment processes for New York City's Croton supply
and is currently assisting the City with the process selection, which the
M&E team has been contracted to design.
In the wastewater treatment market, M&E has conducted evaluations of a
broad range of effluents discharged from municipalities and industries,
including petrochemical, petroleum, chemical, pulp and paper,
electroplating, textile, ferrous and non-ferrous industries. M&E has also
conducted numerous studies of controlled and uncontrolled discharges
entering on-site and off-site treatment facilities, lagoons and other
bodies of water. Among the traditional and innovative solutions M&E has
developed for its clients are various biological, chemical and physical
treatment technologies, including activated sludge, trickling filters,
nutrient removal, constructed wetlands and land application. M&E has
designed over 200 wastewater treatment plants, including some of the
largest facilities in the United States, utilizing these technologies. A
major market for M&E's services is the upgrade of treatment facilities that
were built under the Federal Construction Grants Program during the 1970s.
In addition, in fiscal 1998, Vivendi and the Company teamed up to open a
corporate research and development center in Atlanta to address the
technology and expertise needs of M&E and PSG clients. This facility is
operated in partnership with the Georgia Institute of Technology. The
research and development center and its technology transfer programs will
encompass water supply, wastewater management and water reuse.
Since August 1988, M&E has played a vital role in one of the premier
wastewater treatment projects in the world, serving as lead design engineer
for the Massachusetts Water Resources Authority's ("MWRA's") Boston Harbor
Project. Under this contract, M&E has had primary responsibility for
directing the design of the entire primary and secondary treatment
facilities, including a five-mile inter-island tunnel and a nine and one
half mile outfall tunnel/diffuser system. Work on the project included
development of the conceptual design for the entire wastewater treatment
system, preparation of a project design manual, including standard
specifications, development of the MWRA's CADD system, and management of
all project design engineers providing final design services. As lead
design engineer, M&E has also conducted a number of special investigations,
including an air quality/odor control pilot study, a hydroelectric
feasibility study, a stacked clarifier hydraulic model, a disinfection
study, various hydraulic models of the outfall/diffuser system, and a
project-wide geotechnical exploration program. During the ongoing
construction phase, lead engineer services include coordinating interaction
among all construction packages, plant-wide technical submittal review and
instrumentation and control systems.
M&E also provided, as project design engineer, the final design
services and engineering services during construction for the entire
primary treatment portion, a major part of the secondary treatment portion
and miscellaneous support facilities at the plant.
Under a separate contract with the MWRA, M&E completed a master plan
and combined sewer overflow ("CSO") facilities plan. Four communities
served by MWRA, including the City of Boston, were faced with controlling
pollution from over eighty overflow points into Boston Harbor and its
tributary rivers from a sewer system which combines stormwater and sewage.
In one of the largest CSO studies ever undertaken, M&E provided a
comprehensive investigation of the MWRA's collection system and developed a
plan which reduced the estimated cost of a CSO control project from $1.3
billion to $370 million, while achieving the client's goal of protecting
beaches, shellfish beds and other critical resources. The project included
water quality monitoring, strategic system planning, monitoring CSOs and
interceptors, and developing CSO management solutions with the input of
multiple stakeholders. The M&E plan was awarded the 1995 American Academy
of Engineers grand prize, and is used as a national model for
comprehensive, watershed-based solutions for complex wet weather pollution
control challenges. Presently, M&E is conducting detailed design of major
parts of the plan, and assisting the MWRA and the Boston Water and Sewer
Commission with its implementation.
M&E is routinely asked to provide hands-on assistance to numerous water
and wastewater treatment facilities in such operational areas as
maintaining and servicing equipment, mechanical and instrumentation process
control, troubleshooting, training of staff, and facility rehabilitation
and upgrading. One of the most important areas of this assistance is in the
optimization of plant and system operation to maximize the effectiveness at
minimum cost.
HAZARDOUS WASTE MANAGEMENT AND REMEDIATION SERVICES
M&E provides a full range of services for the identification,
characterization, evaluation, design and implementation of cleanup measures
for soil and groundwater contaminated with hazardous and toxic waste.
Diagnostic services include geophysical surveys, surface and subsurface
sampling, hydroelectrical investigations, and modeling. To evaluate and
design remedial measures, M&E performs feasibility studies, public health
and ecological risk assessments, pilot and bench scale treatability studies
and groundwater flow and contaminant transport modeling.
M&E has been awarded several contracts with the Department of Defense
for investigation and remediation of site contamination problems at
military installations under the Base Realignment and Closure ("BRAC")
program, at active installations and formerly-used defense sites under the
Defense Environmental Restoration Program, and at Superfund sites
administered, by the Army Corps of Engineers, for the Environmental
Protection Agency ("EPA"). Contracts covering a wide range of hazardous and
toxic investigation and design services are or were recently held with the
Army Corps of Engineers in New England; Savannah, Georgia; Louisville,
Kentucky and Mobile, Alabama. M&E is performing nationwide contaminated
soil and tank removal assignments for the Air Force Center for
Environmental Excellence at Brooks Air Force Base, under several
subcontracts. M&E is also a major subcontractor on contracts to provide
hazardous waste services for the National Guard Bureau, the Air Force
Mobility Command, and the Bureau of Reclamation at sites nationwide; and
for the Naval Facilities Engineering Command Atlantic Division in the mid-
Atlantic states, and the Air Force Material Command at Wright Patterson and
Kelly Air Force Bases.
M&E provides a broad spectrum of hazardous waste services from
investigation to design to management of remedial measures in several other
government agencies throughout the country. These include various contracts
with the states of Florida and Connecticut and a ten year $40 million
maximum value contract with EPA Region I (covering New England), awarded in
1996.
SLUDGE MANAGEMENT SERVICES
Because of M&E's experience with treatment technologies used for water
supply and wastewater disposal, numerous municipal and industrial clients
have engaged M&E to assist in the management and disposal of the sludge
generated as a by-product of the treatment process. For these clients, M&E
develops programs to minimize the generation of sludge, to alter it to more
environmentally acceptable forms, and to develop and evaluate alternative
processing and disposal technologies such as thickening, anaerobic
digestion, conditioning, dewatering, incineration, composting and land
application. M&E has assessed sludge handling and disposal alternatives,
designed and assisted in the implementation of treatment technologies and
operated sludge management facilities. Working with its clients, M&E has
analyzed and designed innovative technologies and treatment alternatives
for over forty-five sludge management projects and facilities with over
three billion gallons per day of treatment capacity.
M&E has designed and is providing construction support and training
services for the San Diego Municipal Biosolids Center ("MBC"). Completed in
1998, the MBC, which represents San Diego's largest-ever infrastructure
program, is one of the largest, most innovative sludge processing systems
in the United States.
SOLID WASTE MANAGEMENT SERVICES
M&E has assisted numerous clients in the evaluation of solid waste
management needs, including quantification of amounts and type, development
of waste minimization programs and assessment of needed disposal capacity.
M&E is experienced in planning and implementing alternative technologies
and facilities for solid waste management which include landfills,
incinerators, resource recovery plants and recycling.
M&E's services for solid waste management facilities include facility
planning, siting and permitting, design, construction management,
operations and maintenance assistance, closure and post-closure programs
for landfills and the collection and treatment of leachate from landfills.
M&E is also experienced in the installation of monitoring wells and related
sampling and testing procedures for groundwater protection in or about
landfills.
PROGRAM MANAGEMENT SERVICES
M&E has developed extensive program management capabilities through its
experience in the program planning and development, scheduling, financial
planning, contract administration, procurement, construction management,
control and coordination of large and complex projects. These capabilities
enable M&E to effectively manage its own projects as well as to provide
program management services to large environmental development and capital
expenditure programs of others.
M&E has continually expanded its program management expertise and
resources by providing program management services for major national
defense and municipal programs. For example, M&E has been providing long-
term program management services for the upgrade of one of the largest
wastewater facilities in the United States, the Blue Plains advanced
wastewater treatment plant serving Washington, D.C., and for the drinking
water system in Lawrence, Massachusetts. Under contract to the United
States Air Force Logistics Command for the Peace Shield project, M&E
entered into a joint venture with CRSS Inc. to provide program management
services to deliver ground based facilities to support a new air defense
system for the Royal Saudi Arabian Air Force. M&E was primarily responsible
for applying its geotechnical, hydrological and construction management
skills to site and build structures, roads, water and wastewater systems
and other infrastructure to support the complex defense system. The
facilities include underground command and control centers, long range
radar sites, a central command center, a central maintenance facility and
communications sites.
DESIGN/BUILD AND DESIGN/BUILD/OPERATE SERVICES
To expedite project delivery and reduce overall program costs, M&E
offers design/build and, in conjunction with its sister company, PSG,
design/build/operate service packages. The design/build market has grown
tenfold in the last decade and, because of its many advantages, is expected
to be the significant project delivery method in the future. M&E has
recently been awarded several design/build projects in the United States
and overseas, including providing design/build services in connection with
PSG's design/build/finance/operate project in Freeport, Texas, and
providing design/build services for capital improvements in connection with
Triton LLP's Cranston, Rhode Island project. In 1998, the PSG/M&E team won
a design/build/operate project in Taunton, Massachusetts, considered a
significant example of an innovative public/private partnership in the
wastewater market. The Cranston, Rhode Island project involves innovative
financing and long-term operation by PSG. See "--The Water/Wastewater
Privatization Market."
INTERNATIONAL BUSINESS
M&E has provided environmental and engineering services to clients in
more than eighty nations, spanning all seven continents. Presently, M&E is
providing planning, design, program and construction management services on
several large projects in Egypt, Thailand, Singapore, Latin America and
Eastern Europe.
BUSINESS SEGMENTS AND FOREIGN OPERATIONS
Financial information concerning the Company's operations by industry
segment and the Company's foreign and domestic operations is set forth in
Note 13 to the Consolidated Financial Statements of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Financial Statements and
Supplementary Data."
MARKETS AND CUSTOMERS
The Company markets its services and technologies to governmental and
industrial customers throughout the United States, the Caribbean, Canada
and the Pacific Rim. The Company also services customers in the Middle East
and the Far East. A majority of the Company's sales are technical in nature
and involve senior technical and management professionals, supported by the
Company's marketing groups. The Company uses a coordinated system of
in-house sales representatives and marketing managers, organized primarily
by business segments and markets served. In fiscal 1998, sales to
governmental customers approximated 94% and 73% of the Company's PSG and
M&E segment sales, respectively.
Contracts with federal, state, municipal and other governmental
agencies generally may be terminated at any time at the option of the
customer. In fiscal 1998, sales associated with PSG's contract with PRASA
accounted for 24% of the Company's sales for such period and sales to the
federal government approximated 10% of the Company's consolidated sales for
such period. The Company benefits substantially from its long-term
relationships with many of its clients which result in a significant amount
of repeat business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
The Company has experienced no difficulty in obtaining raw materials
used in its operations and relies on a broad range of suppliers, the loss
of any of which would not have a material adverse effect on the Company.
BACKLOG
At October 31, 1998, the Company's total backlog was approximately $1.2
billion, compared to $1.1 billion at October 31, 1997, and consisted of PSG
(82%) and M&E (18%). The Company estimates that approximately $357 million
of the backlog represents work which will be completed in the next twelve
months. The total backlog at October 31, 1998 represents work for which the
Company has entered into a signed agreement or purchase order with respect
thereto or has received an order to proceed with work up to a specified
dollar amount and includes approximately $345 million from the contract
with PRASA. Backlog amounts have historically resulted in revenues;
however, no assurance can be given that all amounts included in backlog
will ultimately be realized, even if covered by written contracts or work
orders. Most of the Company's long-term contracts contain escalation
provisions designed to protect the Company against increases in material
and unit labor costs. The Company's total backlog included approximately
85% of work to be performed for federal, state and municipal governmental
agencies as of October 31, 1998.
COMPETITION
The Company faces substantial competition in each market in which it
operates. The Company competes primarily on its engineering, scientific,
technological and business expertise. To the extent that non-proprietary or
conventional technologies are used, the Company also relies upon its
experience and trade names as a basis for competition. Such trade names
include: "Professional Services Group" and "Metcalf &Eddy" in the water and
wastewater treatment and sludge management markets and "Metcalf &Eddy" in
the hazardous waste remediation market. Many companies, some of which have
greater resources than the Company, participate in the Company's markets
and no assurance can be given that other such companies will not enter its
markets.
Customers for PSG's and M&E's water and wastewater services are
primarily governmental entities and typically award contracts on the basis
of technical qualifications and price. For PSG's treatment system OM&M
contracts, technical qualification is required; however, price is generally
a key determining factor. Treatment system OM&M agreements are generally
for three to five-year periods, with various renewal options up to five
years in duration, and contain certain escalators for inflation. In
addition, recent developments in the water and wastewater treatment markets
have led to longer-term contracts. See "--The Water/Wastewater
Privatization Market." For M&E's design services contracts, the majority of
which are cost-plus-fixed-fee arrangements, technical qualifications are
the primary factor followed by price competitiveness. In the hazardous
waste cleanup market, M&E competes with many local, regional and national
firms on the basis of experience, reputation and price.
PSG typically competes for its contracts under a competitive
procurement process. This process can vary, but typically follows one of
three methods. The first method is the issuance of a Request for
Qualifications ("RFQ") with a selection made on qualifications only.
Negotiations are held only with the most qualified company. The second
method is a two-step procurement process consisting of an RFQ followed by a
short listing of the most qualified firms. The short listed firms are then
requested to provide a proposal, which includes a price proposal, based on
a Request For Proposals ("RFP") and a firm is then selected. The selection
can range from a decision based on the lowest price to a decision based on
price and other factors. The third method is a one-step procurement which
is an RFQ/Price Proposal. The selection is usually based on price and other
factors, but low price is sometimes the only deciding factor. Prospective
clients often will hire consultants or advisors to assist in the
procurement and selection process. The entire procurement and selection
process can range from four months to two years, with larger, more complex
projects taking the longer amount of time. When factors other than price
are considered in the final selection, such factors include technical
qualifications; experience and reputation; financial capabilities necessary
to ensure delivery of services; assumption of risk being required for the
contract; proposed operating and employee transition plans; depth of
corporate resources; and other value added considerations.
In competing for municipal work, M&E most often participates in a
process which involves an RFQ, a short-listing of qualified firms, then an
RFP. In most cases, those firms submitting proposals are asked to make a
presentation to the client selection committee. In the industrial market,
selections are generally made from a limited, pre-qualified list of
consultants, and competition is based on price. Federal procurements are
conducted in accordance with strict federal requirements set forth in the
Federal Acquisition Regulations ("FAR"). Selections are made on a
combination of qualifications and cost criteria, and there is often
competition for assignments among several selected consultants after the
award of a contract.
M&E's competitors fall into several categories. National competitors
include integrated consulting engineering firms (offering several different
services including consulting, design/build and contract operations), along
with single service consulting firms. Regional firms are also competitors,
although many have been acquired by larger firms. Low- cost regional
providers also compete with M&E, particularly in the municipal water and
wastewater market. M&E also competes with specialty construction management
firms, niche players, major A/E firms, construction and utility companies,
investor-owned water utilities, and integrated companies. Depending on the
client's needs, however, M&E often teams with firms which might be
competitors in other settings.
There can be no assurance that the Company will be able to compete
successfully with its existing or any new competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
results of operations and financial condition. In addition, while the
Company has been successful in obtaining new contracts and renewing
existing contracts, there can be no assurance that, due to competitive
pressures, the margins achieved from such contracts will not be decreased.
REGULATION
Over the past twenty-five years, significant environmental laws at the
federal, state and local level have been enacted in response to public
concern over the environment. Those laws and their implementation through
regulation affect numerous industrial and governmental actions and form a
key market driver for the Company's products and services.
The Safe Drinking Water Act of 1974 directs the EPA to set drinking
water standards for the estimated 57,561 community water supply systems in
the United States. In 1996, Congress reauthorized the act through the Safe
Drinking Water Act Amendments of 1996. The amendments have brought
substantial changes to the regulation and financing of water systems. The
changes focused on four elements:
o regulatory improvements, including standards based on better science,
risk assessment, and prioritization of efforts;
o new, stronger programs to prevent contamination of drinking water
sources;
o expanded information for water system consumers, including specific
"right-to-know" provisions; and
o new funding for states and community water systems through a drinking
water state revolving fund program.
The new regulatory framework provides a more manageable program for
community systems to monitor and treat drinking water supplies than the
previous law. Communities therefore will not be as delayed by uncertainty
and will be able to design and install the technologies and systems needed
to achieve regulatory compliance.
The amendments maintain the current process and set a schedule for
implementation of two far-reaching proposals which were promulgated in
1998. The first proposal, the disinfectants and disinfection by-products
rule ("D/DBP"), establishes disinfectant level goals for chlorination and
maximum contaminant level goals for potentially harmful disinfection
byproducts, notably trihalomethanes. The second proposal, the enhanced
surface water treatment rule ("ESWTR"), focuses on treatment requirements
for waterborne disease-causing organisms, or pathogens. Final adoption of
these rules under the new schedule will affect the majority of the
Company's municipal clients who will need to study, design, build and
operate more sophisticated facilities.
Congress established for the first time a major federal financial
assistance program for community water systems, the drinking water state
revolving fund program. The amendments authorize nearly $9.6 billion
through 2003 to be allotted based on need to states to create low interest
loan funds for installing and upgrading drinking water treatment
facilities. Many of the Company's municipal water clients will be in a
position to use these funds for needed capital improvements.
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act")
established a system of standards, permits and enforcement procedures for
the discharge of pollutants from industrial and municipal wastewater
sources. The law set treatment standards for industries and wastewater
treatment plants and provided federal grants to assist municipalities in
complying with the new standards. According to the EPA's survey of
wastewater and sewage treatment needs, as much as $137 billion will be
needed for construction and upgrade of wastewater treatment facilities by
the year 2012. The EPA and/or delegated state agencies are placing some of
these non-complying communities under enforcement schedules. In cases of
noncompliance, the EPA may petition for court-ordered compliance and
penalties. In 1987, the law was amended to phase out federal grants by 1991
and replace them with state revolving funds, with a commitment to provide
federal money through 1994. It is presently expected that federal funding
will continue to be appropriated for state revolving funds.
Key areas for which regulations have been issued include industrial
wastewater pretreatment, surface water toxics control and sewage sludge
disposal. The Clean Water Act requires pretreatment of industrial
wastewater before discharge into municipal systems and gives the EPA the
authority to set pretreatment limits for direct and indirect industrial
discharges. These rules issued by the EPA will increase the need for
facility upgrading and control of industrial discharges. The revised
regulations tighten prohibitions against discharge of toxic wastes, and
subject industries, which discharge into public sewers, to stringent
controls, inspections, monitoring and testing requirements. The surface
water toxics program requires states to identify waters adversely affected
by toxics and propose control strategies. Also under the Clean Water Act,
the EPA published in February 1993, and amended in February 1994, a rule
setting standards for the use and disposal of sludge when it is applied to
land to condition the soil, is disposed on land by placing it in surface
disposal sites, or is incinerated. Final "Stormwater" regulations were
issued in November 1990 and establish management requirements for
municipalities serving populations over 100,000 and industries within
specified categories.
In 1994, the EPA signed a final regulation that outlines the national
Combined Sewer Overflow policy. CSO systems are a combination of rain and
sanitary sewage in sewer systems. CSOs contain pollutants that are present
in the domestic and industrial wastewaters, as well as those in the urban
stormwater runoff that enters the combined sewer system. The CSO plan
impacts 1,100 municipalities, mainly in the Northeast and Midwest. The EPA
estimates the cost associated with improving and upgrading these
sewer-stormwater systems at $41 billion over the next fifteen year period.
The Resource Conservation and Recovery Act of 1976 ("RCRA") provides a
comprehensive scheme for the regulation of generators and transporters of
hazardous waste as well as persons engaged in the treatment, storage and
disposal of hazardous waste. The intent of RCRA is to control hazardous
wastes from the time they are generated by industry until they are disposed
of properly. In addition, RCRA governs the disposal of solid wastes.
Under applicable RCRA regulations, generators who generate more than a
certain amount of hazardous waste per month are required to package and
label shipments of hazardous waste in accordance with detailed regulations
and to prepare a manifest identifying the material and stating its
destination before shipment off-site. Every facility that treats, stores or
disposes of hazardous waste must obtain an RCRA permit from the EPA, or a
state agency which has been authorized by the EPA to administer its state
program, and must comply with certain operating, financial responsibility
and disclosure requirements. RCRA also provides for corrective actions to
remediate contamination resulting from the disposal of hazardous waste.
Regulations issued pursuant to RCRA significantly affect the need for
environmental treatment and services in the following areas: municipal
solid waste disposal, land disposal of hazardous waste, remediation of
environmental contamination, and management of underground storage tanks.
Regulations establishing land disposal restrictions for hazardous wastes
are being published in serial form.
In December 1995 the EPA proposed a new system for exempting
high-volume, low-risk wastes from RCRA hazardous waste management rules.
This new rule, part of the Hazardous Waste Identification Rule ("HWIR"),
would establish a risk-based "floor" for these wastes, encouraging the use
of innovative waste treatment technologies. The EPA is also promoting a
program that encourages RCRA corrective action facilities to meet
performance standards through self-implementing programs. The Company
expects that both of these programs will benefit the Company by hastening
the pace of cleanups and encouraging the use of on-site engineered systems.
However, as a result of a settlement with hazardous waste industry
litigants, the EPA is not required to finalize a HWIR rule for industrial
process wastes until April 2001.
In June 1996, the EPA published its final Risk Management Program (RMP)
rule, 40 Code of Federal Regulations (CFR) 68. Promulgated under the
authority of section 112(r) of the Clean Air Act Amendments (CAAA) of 1990,
the intent of this rule is to prevent accidental releases of regulated
substances to the environment.
Compliance with RMP includes conducting a hazard assessment for
regulating chemicals, developing a prevention program, an emergency
response program, and electronically filing the RMP to the EPA. Information
submitted to the EPA will be available to the public. The deadline for
compliance with this rule is three years after publication in the Federal
Register, or June 21, 1999.
This regulation may benefit the Company through provision of RMP
related services or engineering design services to existing clients and to
other industries and facilities that must comply with the regulation by the
June 1999 deadline.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("Superfund") established the Superfund program to clean up
hazardous waste sites and provides for penalties for noncompliance.
Superfund has been interpreted to impose strict joint and several liability
on owners and operators of facilities, transporters, and persons who
arrange for the disposal or treatment of hazardous substances for the costs
of removal and remediation, other necessary response costs and damages for
injury to natural resources. Where potentially responsible parties cannot
be identified, are without resources or are unresponsive, federal funds may
be used. In addition, the Superfund Amendments and Reauthorization Act of
1986 established more stringent cleanup standards and accelerated mandatory
schedules to ensure rapid and permanent solutions in cleaning up sites.
Superfund was slated for reauthorization, and possible substantial
revision, in 1995, 1996, 1997 and again in 1998. It will be reconsidered in
1999, although it is unclear whether reauthorization will occur due to the
very controversial issues surrounding retroactive liability and natural
resource damage evaluation.
In addition to federal environmental regulations, most states and many
local authorities have enacted laws regulating activities affecting the
environment. Many of these state and local laws have imposed stricter
standards and regulations than their federal counterparts, and as a result
are also an important market driver for the Company's products and
services.
BONDING
The Company is often required to procure bid, performance and/or
payment bonds from surety companies, particularly for clients in the public
sector. A bid bond guarantees that the Company will enter an awarded
contract at the price bid; a performance bond guarantees performance of the
contract by Company; and a payment bond (which may or may not be issued in
conjunction with a performance bond) secures the Company's payment obligations
to its subcontractors and vendors under bonded contracts. The Company
entered into an Agreement of Indemnity (the "Indemnity Agreement"), dated
as of September 15, 1998, with the CIGNA Companies ("CIGNA"). Under the
Indemnity Agreement, CIGNA, through any one or more of its companies, will
provide bid, performance and/or payment bonds in support of the Company's
client contractual requirements. The Indemnity Agreement requires no
additional indemnity or guarantee other than that provided by Company. The
Company also maintains a Master Surety Agreement (the "Master Agreement"),
dated October 31, 1995, with United States Fidelity and Guaranty Company
and certain of its affiliates (collectively "USF&G"). USF&G was recently
acquired by the St. Paul Fire and Marine Insurance Company. Pursuant to the
Master Agreement, USF&G has provided bid, performance and/or payment bonds
in support of the Company's client contractual requirements. VNA has
partially indemnified USF&G under the Master Agreement. There can be no
assurance that USF&G will continue to provide bid, performance and/or
payment bonds without a similar indemnity from Vivendi or one of its
affiliates.
INSURANCE
The Company currently maintains various types of insurance, including
workers' compensation, general and professional liability and property
coverages. The Company believes that it presently maintains adequate
insurance coverages for all of its present operational activities. It has
been both a Company policy and a requirement of many of its clients that
the Company maintain certain types and limits of insurance coverage for the
services and products it offers, provided that such types and limits can be
obtained on commercially reasonable terms. In addition to existing
coverages, the Company has been successful in obtaining commercially
reasonable coverage for certain pollution risks, though coverage has been
on a claims made rather than occurrence basis due to the professional
nature of some of the Company's exposures. Claims made policies provide
coverage to the Company only for claims reported during the policy period.
The Company's general liability and other insurance policies have
historically contained absolute pollution exclusions, brought about in
large measure because of the insurance industry's adverse claims experience
with environmental exposures. Accordingly, there can be no assurance that
environmental exposures that may be incurred by the Company and its
subsidiaries will continue to be covered by insurance, or that the limits
currently provided or that may be obtained in the future will be sufficient
to cover such exposures. A successful claim or claims in an amount in
excess of the Company's insurance coverage or for which there is no
coverage could have a material adverse effect on the Company.
EMPLOYEES
At October 31, 1998, the Company had approximately 2,550 full-time
employees, of whom approximately 1,600 were employed in PSG, 900 were
employed in M&E and 50 were employed in Research-Cottrell. The divestiture
of Research-Cottrell was completed in January 1999. The Company does not
believe that the loss of the services of any person employed by the Company
would have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company believes that its facilities are suitable and adequate for
its current and foreseeable operational and administrative needs. At
October 31, 1998, the principal physical properties of the Company were as
follows:
Approximate Approximate
Square Square
Footage Footage Lease
Location Function Owned Leased Expiration
- -------- -------- ----------- ----------- ----------
Branchburg, NJ........Former Corporate 89,466 on -- --
Office/M&E, 46 acres
Research-
Cottrell and
Aqua Alliance Inc.
Wakefield, MA.........M&E Office and -- 139,687 2005
Current
Corporate Office
Miramar, FL...........M&E Office -- 13,936 2005
Chicago, IL...........M&E Office -- 7,030 2002
Houston, TX...........PSG Corporate Office -- 22,706 2003
Honolulu, HI..........M&E Office -- 15,833 2003
Santa Barbara, CA.....M&E Office -- 4,328 2000
New York, NY..........M&E Office -- 10,413 2004
Columbus, OH..........M&E Office -- 22,515 2004
Atlanta, GA...........M&E Office -- 11,051 2004
San Diego, CA.........M&E Office -- 12,978 2002
In addition, the Company leases space in approximately 39 other domestic
locations and 4 locations in Canada, Europe and the Far East. Also, the
Company operates and provides services from approximately 115 treatment
facilities, two of which it owns. The Company is planning on the closure of
the PSG Corporate Office in Houston, Texas and expansion and relocation of
the Atlanta, Georgia office to accommodate PSG transferred employees as
well as new staffing resulting from the reorganization. The Company has no
other current plans or requirements for additional space.
On January 22, 1999, the Company entered into a Purchase and Sale
Agreement for the Branchburg, New Jersey, building and land.
ITEM 3. LEGAL PROCEEDINGS
DOJ INVESTIGATION
In connection with a broad investigation by the U.S. Department of
Justice (the "DOJ") into alleged illegal payments by various persons to
members of the Houston City Council, the Company's subsidiary, PSG,
received a federal grand jury subpoena on May 31, 1996, requesting
documents regarding certain PSG consultants and representatives who had
been retained by PSG to assist it in advising the City of Houston regarding
the benefits that could result from the privatization of Houston's water
and wastewater system (the "DOJ Investigation"). PSG has cooperated and
continues to cooperate with the DOJ which has informed the Company that it
is reviewing transactions among PSG and its consultants. The Company
promptly initiated its own independent investigation into these matters and
placed PSG's then Chief Executive Officer on administrative leave of
absence with pay. The PSG Chief Executive Officer, who has denied any
wrongdoing, resigned from PSG on December 4, 1996. In the course of its
ongoing investigation, the Company became aware of questionable financial
transactions with third parties and payments to certain PSG consultants and
other individuals, the nature of which requires further investigation. The
Company has brought these matters to the attention of the DOJ and continues
to cooperate fully with its investigation. No charges of wrongdoing have
been brought against PSG or any PSG executive or employee by any grand jury
or other government authority. However, since the government's
investigation is still underway and is conducted largely in secret, no
assurance can be given as to whether the government authorities will
ultimately determine to bring charges or assert claims resulting from this
investigation that could implicate or reflect adversely upon or otherwise
have a material adverse effect on the financial position or results of
operations of PSG or the Company taken as a whole.
BREMERTON LITIGATION
The City of Bremerton, Washington brought a contribution and contract
action against 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 attorney's fees. The
damages claimed exceeded $14 million. On April 22, 1998, the jury returned
a verdict against M&E Services and in favor of the City in the net amount
of approximately $0.6 million. After considering various motions by the
City challenging the verdict and its amount, on June 26, 1998, the trial
court entered final judgement against M&E Services and in favor of the City
in the net amount of approximately $0.75 million. Both sides have appealed.
The appellate court could increase or decrease the judgement by $2.0
million or more or remand the case for a new trial. No assurances can be
given that, as a result of further court proceedings, an adverse judgement
would not have a material adverse effect on the financial position or
results of operations of the Company.
BELGIUM LITIGATION
On October 14, 1997, Research-Cottrell, Inc. (now known as AWT Air
Company, Inc.) and its subsidiary, Research-Cottrell Belgium, S.A., (now
known as AWT Air Company (Belgium) S.A.) ("AWT Belgium") were named in a
lawsuit by N.V. Seghers Engineering ("Seghers") filed in the Commercial
Court in Mechelen, Belgium. Seghers is AWT Belgium's joint venture partner
on two large pollution control projects. The suit claims damages of
approximately $13 million allegedly resulting from AWT Belgium's breach of
contract and substandard performance. Damages claimed in the lawsuit
consist not only of Seghers' alleged cost to repair the AWT Belgium
equipment, but also lost profits, damages to business reputation, theft of
employees (AWT Belgium hired two former Seghers' employees), increased
costs arising out of the failure to gain timely acceptance of the two
plants, excessive payments to AWT Belgium due to alleged unfair pricing
practices by AWT Belgium and other miscellaneous interest charges and
costs. Seghers has also filed a suit in Belgium against AWT Belgium, Hamon
Research-Cottrell (Belgium) S.A., the purchaser of AWT Belgium's assets,
and related entities, claiming that the sale of AWT Belgium would operate
as a fraud and deprive Seghers of its rightful recovery in the litigation.
The cases involve complex technical and legal issues and are in their early
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
counterclaims based upon Seghers' breaches of contract.
U.S. ATTORNEY'S OFFICE INVESTIGATION
The United States Attorney's Office (the "U.S. Attorney's Office") in
Boston, Massachusetts is conducting an investigation of certain
entertainment and travel payments allegedly made to Egyptian officials
between 1994 and 1996 by the Company's subsidiary, Metcalf &Eddy
International, Inc. (which was merged into its parent, M&E), while Metcalf
&Eddy International, Inc. was performing services in Egypt pursuant to
contracts with the United States Agency for International Development. M&E
has cooperated and continues to cooperate fully with the U.S. Attorney's
Office. No charges of wrongdoing have been brought against M&E or any M&E
executive or employee by any grand jury or other government authority. To
date, the government has advised M&E that it has made no decision as to how
it will proceed.
OTHER MATTERS
The Company and its subsidiaries are parties to various other legal
actions and government audits 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 and audits, individually or
in the aggregate, will not have an adverse effect on the consolidated
financial position or results of operations of the Company taken as a
whole. Moreover, as a general matter, providers of services similar to
those provided by the Company may be subject to lawsuits alleging
negligence or other similar claims and environmental liabilities, which may
involve claims for substantial damages. Damages assessed in connection with
and the costs of defending any such actions could be substantial. The
Company's management believes that the levels of insurance coverage are
adequate to cover currently estimated exposures. Although the Company
believes that it will be able to obtain adequate insurance coverage in the
future at acceptable costs, there can be no assurance that the Company will
be able to obtain such coverage or will be able to do so at an acceptable
cost or that the Company will not incur significant liabilities in excess
of policy limits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock, par value $.001 per share, of the Company
(the "Class A Common Stock") began trading publicly on August 10, 1989 at
an initial public offering price of $17.00 per share and is traded on the
American Stock Exchange, Inc. AMEX under the symbol "AAI." On January 27,
1999 there were 564 holders of record of the Company's Class A Common
Stock.
The following table sets forth, for the fiscal periods shown, the high
and low sales prices for the Class A Common Stock as reported on the AMEX.
High Low
---- ---
Fiscal 1997
First Quarter................. $7.500 $5.000
Second Quarter................ $6.500 $4.500
Third Quarter................. $5.250 $2.250
Fourth Quarter................ $4.063 $1.250
Fiscal 1998
First Quarter................. $1.875 $0.938
Second Quarter................ $2.500 $1.438
Third Quarter................. $3.375 $1.625
Fourth Quarter................ $2.875 $1.250
The Company did not declare any cash dividends on its Class A Common
Stock during fiscal 1997 and 1998. Pursuant to the Company's senior secured
bank credit facility (the "Bank Credit Facility"), the Company is
prohibited from declaring or paying cash dividends on its Class A Common
Stock or making other restricted payments, as defined in the Bank Credit
Facility. The Company currently intends to retain its earnings, if any, to
finance the growth and development of its business and to repay outstanding
indebtedness and does not anticipate paying cash dividends on its Class A
Common Stock in the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition."
In its recently completed Rights Offering, the Company issued
transferable three-year Warrants to purchase shares of Class A Common Stock
to subscribers (other than Vivendi and VNA) in the Rights Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition." The Warrants expire on March 11, 2001,
and each Warrant entitles the holder to acquire one share of Class A Common
Stock at an exercise price of $2.50 per share, subject to customary
antidilution adjustments. See "Certain Relationships and Related
Transactions - The Rights Offering." On March 12, 1998, the Warrants were
approved for listing on the AMEX and currently trade on the AMEX under the
symbol "AAI.WS." An aggregate of 3,949,099 Warrants to acquire in the
aggregate 3,949,099 shares of Class A Common Stock were issued in the
Rights Offering. As of January 27, 1999, there were 16 holders of record of
the Company's Warrants and there were outstanding an aggregate of 3,949,099
Warrants to purchase an aggregate of 3,949,099 shares of Class A Common
Stock.
The following table sets forth, for the fiscal periods shown, the high
and low sales prices for the Warrants as reported on the AMEX.
High Low
Fiscal 1998
Second Quarter.......... $1.375 $0.750
Third Quarter........... $1.813 $0.813
Fourth Quarter.......... $1.438 $0.563
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the
Company. The information contained herein should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements of the
Company and related Notes thereto as of and for the years then ended.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------
1998(1) 1997 1996 1995 1994(7)
------- ---- ---- ---- -------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Sales(2) .............................. $ 445,119 $ 456,375 $ 482,091 $ 398,661 $ 309,401
COST OF SALES ......................... 389,737 385,573 394,124 309,496 243,786
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................ 61,379 75,755 62,316 66,697 64,814
DEPRECIATION AND AMORTIZATION ......... 13,110 16,861 13,983 12,279 9,969
UNUSUAL CHARGES (RECOVERY) ............ (3,000) 5,000 -- -- 63,400
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS ............................ (16,107) (26,814) 11,668 10,189 (72,568)
INTEREST INCOME ....................... 509 359 923 1,113 979
INTEREST EXPENSE ...................... (14,899) (24,356) (22,597) (23,925) (24,117)
OTHER EXPENSE, NET .................... (1,273) (502) (2,296) (37) (3,762)
--------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, EXTRAORDINARY
ITEM, AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ..... (31,770) (51,313) (12,302) (12,660) (99,468)
INCOME TAX (EXPENSE) BENEFIT .......... (1,099) (514) 1,246 (587) (1,172)
--------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM .................... (32,869) (51,827 (11,056) (13,247) (100,640)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS(3) ..................... (6,000) (108,754) 5,788 5,262 (153,138)
EXTRAORDINARY ITEM .................... -- -- -- -- (8,000)
CUMULATIVE EFFECT ON PRIOR YEARS
(TO OCTOBER 31, 1997) OF CHANGE
IN THE METHOD OF ACCOUNTING
FOR START-UP COSTS(4) ............ (11,082) -- -- -- --
--------- --------- --------- --------- ---------
NET LOSS ........................ (49,951) (160,581) (5,268) (7,985) (261,778)
PREFERRED STOCK DIVIDENDS(5) .......... -- (3,300) (3,300) (3,300) (1,245)
--------- --------- --------- --------- ---------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ...................... $ (49,951) $(163,881) $ (8,568) $ (11,285) $(263,023)
========= ========= ========= ========= =========
BASIC EARNINGS (LOSS) PER
COMMON SHARE (AFTER PREFERRED
STOCK DIVIDENDS(6):
CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM ........... $ (.24) $ (1.72) $ (.45) $ (.52) $ (3.69)
DISCONTINUED OPERATIONS ....... (.05) (3.40) .18 .17 (5.54)
EXTRAORDINARY ITEM ............ -- -- -- -- (.29)
CUMULATIVE EFFECT ON PRIOR
YEARS (TO OCTOBER 31, 1997)
OF CHANGE IN THE METHOD OF
ACCOUNTING FOR START-UP
COSTS (4) .................... (.08) -- -- -- --
--------- --------- --------- --------- ---------
NET LOSS ........................... (.37) (5.12) (.27) (.35) (9.52)
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING ................... 136,121 32,019 32,018 32,018 27,632
========= ========= ========= ========= =========
AS OF OCTOBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital (deficit) ............. $ (51,503) $ (55,802) $ 7,556 $ (12,568) $ (51,206)
TOTAL ASSETS .......................... 359,352 383,065 496,358 489,318 496,953
GOODWILL .............................. 159,198 164,337 169,578 174,601 177,888(8)
LONG-TERM DEBT ........................ 119,405 307,845 306,542 289,120 245,984
STOCKHOLDERS' EQUITY (DEFICIT)......... 43,520 (109,262) 54,241 63,089 74,381
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) See Note 4 to the Consolidated Financial Statements of the Company for
discussion of the Recapitalization Agreement and see Note 3 to the
Consolidated Financial Statements of the Company for discussion of the
Company's relationship with Vivendi.
(2) See Note 12 to the Consolidated Financial Statements of the Company for
discussion of PSG's contract with PRASA.
(3) See Note 5 to the Consolidated Financial Statements of the Company for
discussion of the Research-Cottrell divestiture and its related losses
reflected in fiscal 1997 and 1998.
(4) See Note 2 to the Consolidated Financial Statements of the Company for
discussion of the Company's adoption of SOP 98-5, "Reporting on the
Costs of Start-Up Activities" issued in April 1998. As permitted
thereunder, the Company has early adopted SOP 98-5 effective November 1,
1997.
(5) The Company did not declare the quarterly dividends aggregating
$1,650,000 due September 30, 1997, and December 31, 1997, on its 5
1/2% Series A Convertible Exchangeable Preferred Stock, par value $.01
per share (the "Series A Preferred Stock"), all of which was held by
Vivendi, due to its concerns over liquidity and adequacy of its
surplus. On January 28, 1998, as part of the Recapitalization, the
Company effected the Exchange (as defined hereinafter) pursuant to
which all of the shares of Series A Preferred Stock held by Vivendi
(representing all of the issued and outstanding shares of Series A
Preferred Stock) were exchanged for shares of Class A Common Stock.
The dividends in arrears on the Series A Preferred Stock were
extinguished pursuant to the Exchange.
(6) The Company has never declared or paid cash dividends on the Class A
Common Stock, and the Bank Credit Facility prohibits the Company from
declaring or paying cash dividends on the Class A Common Stock. The
Company intends to retain its earnings, if any, to finance the growth
and development of its business and to repay outstanding indebtedness
and does not anticipate paying cash dividends on its Class A Common
Stock in the foreseeable future.
(7) The Company's results in 1994 include losses from discontinued
operations including $38.2 million related to its asbestos abatement
business ("Falcon"), $4.6 million related to its natural gas
compressor and power generation system business ("Pamco") and $110.3
million related to Research-Cottrell, its air pollution control
business, including unusual charges of $81.8 million related to among
other items, anticipated divestitures, deferred software and other
asset write-offs and specific contract reserves and project costs
overruns. The $8.0 million extraordinary loss reflected in 1994
resulted from a one-time premium required to retire $100 million
aggregate principal amount of 11.8% Senior Notes with The Prudential
Insurance Company of America. The 1994 results also include unusual
charges to continuing operations of $63.4 million related to among
other items estimated costs to settle pending litigation including
PRASA's dispute with M&E, termination of certain leases and facility
closings, employee termination benefits and various costs and asset
writedowns related to certain businesses and specific projects.
(8) On June 14, 1994, the Company acquired VNA's PSG water/wastewater
management subsidiary for $70.2 million (6,701,500 shares of Class A
Common Stock at the quoted market price at date of issuance, plus
direct acquisition costs of $4.9 million), resulting in goodwill of
$57.8 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company operates principally in two segments: PSG which is focused
on the operation of water and wastewater treatment facilities and M&E 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 which provides air pollution control
technologies and services. The divestiture of Research-Cottrell was
completed on January 19, 1999. See "--Financial Condition."
DEMAND FOR THE COMPANY'S SERVICES AND TECHNOLOGIES
Demand for the Company's services and technologies arises principally
from three sources:
o need for governmental agencies to reduce costs through productivity
improvements and improve the quality
of services;
o upgrade of existing facilities and the need for new capacity at water
and wastewater treatment facilities and various industrial pollution
sources, such as waste incineration and industrial process plants, which
must comply with existing environmental legislation and regulations; and
o regulations mandating new or increased levels of water pollution
control, water supply and solid waste management as well as remediation
of contaminated sites.
DEPENDENCE ON KEY PROJECTS AND GOVERNMENT CONTRACTS
In any given period, a substantial percentage of the Company's sales is
dependent upon several large projects. To the extent that these projects
are canceled or substantially delayed and not replaced, it could have a
material adverse impact on the Company's sales and earnings.
Approximately 86% of the Company's fiscal year 1998 gross revenues were
derived from contracts with federal, state, municipal and other
governmental agencies. The termination of any of the Company's significant
contracts with such governmental agencies, or the failure to obtain either
extensions or renewals of certain existing contracts or additional
contracts with such governmental agencies, could have a material adverse
effect on the Company's earnings and business.
In fiscal year 1998, the contract of PSG's wholly-owned subsidiary, P S
Group of Puerto Rico (PSG), Inc. ("PSG Puerto Rico"), with PRASA accounted
for 39% of PSG's total sales and 24% of the Company's total sales. Under
this contract, PSG Puerto Rico provides for the operation, management,
repair and maintenance of Puerto Rico's water and wastewater sewage
treatment system. The PRASA system serves the 3.8 million residents of
Puerto Rico. Pursuant to the terms of 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.
On September 15, 1998, the Company and a Vivendi subsidiary executed a
replacement contract, which amended and restated the original contract,
with PRASA for a term of approximately three years beginning September 15,
1998. The Company has agreed to function as the agent of Vivendi's water
subsidiary for operations under the new contract through a Puerto Rico
subsidiary of the Company. In addition, the Company, Vivendi and PRASA
agreed to an increase in the scope and fee structure of the original
contract. PRASA has an option to terminate the contract after two years
with a 90-day written notice. Management expects that the contract with
PRASA will not be prematurely cancelled by PRASA but will remain in effect
through its extended term, August 31, 2001. Revenues under the new contract
are expected to reach approximately $125 million per year. As of October
31, 1998, PSG had receivables of $45.7 million due from PRASA for certain
reimbursable costs. See "--Financial Condition."
Additionally, the PRASA employees who operate the PRASA facilities are
subject to a collective bargaining agreement which expired in June 1998.
The Company is currently negotiating a new collective bargaining agreement.
Summarized below is certain financial data including information
relating to the Company's business segments.
Fiscal Years Ended October 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Sales:
Professional Services Group . $ 271,512 $ 271,650 $ 270,640
Metcalf &Eddy ............... 176,007 186,490 215,358
Other and eliminations ...... (2,400) (1,765) (3,907)
--------- --------- ---------
445,119 456,375 482,091
--------- --------- ---------
COST OF SALES:
Professional Services Group . 243,768 241,538 242,225
Metcalf &Eddy ............... 148,369 145,800 155,806
Other and eliminations ...... (2,400) (1,765) (3,907)
--------- --------- ---------
389,737 385,573 394,124
--------- --------- ---------
GROSS MARGIN
Professional Services Group . 27,744 30,112 28,415
Metcalf &Eddy ............... 27,638 40,690 59,552
Other and eliminations ...... -- -- --
--------- --------- ---------
55,382 70,802 87,967
--------- --------- ---------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Professional Services Group . 14,077 20,169 13,657
Metcalf &Eddy ............... 39,961 47,136 39,939
Corporate (unallocated) ..... 7,341 8,450 8,720
--------- --------- ---------
61,379 75,755 62,316
--------- --------- ---------
DEPRECIATION AND AMORTIZATION:
Professional Services Group . 5,439 8,119 7,335
Metcalf &Eddy ............... 7,156 8,227 6,223
Corporate (unallocated) ..... 515 515 425
--------- --------- ---------
13,110 16,861 13,983
--------- --------- ---------
IMPAIRMENT CHARGE (RECOVERY):
Professional Services Group . -- -- --
Metcalf &Eddy ............... -- -- --
Corporate (unallocated) ..... (3,000) 5,000 --
--------- --------- ---------
(3,000) 5,000 --
--------- --------- ---------
OPERATING INCOME (LOSS):
Professional Services Group . 8,228 1,824 7,423
Metcalf &Eddy ............... (19,479) (14,673) 13,390
Other ....................... -- -- --
Corporate (unallocated) ..... (4,856) (13,965) (9,145)
--------- --------- ---------
(16,107) (26,814) 11,668
--------- --------- ---------
Interest expense, net ............. (14,390) (23,997) (21,674)
Other expense, net ................ (1,273) (502) (2,296)
Income tax (expense) benefit ...... (1,099) (514) 1,246
--------- --------- ---------
Loss from continuing operations ... (32,869) (51,827) (11,056)
Income (loss) from discontinued
operations ..................... (6,000) (108,754) 5,788
Cumulative effect on prior years
(to October 31, 1997) of change
in the method of accounting for
start-up costs .................. (11,082) -- --
--------- --------- ---------
Net loss .......................... $ (49,951) $ 160,581) $ (5,268)
========= ========= =========
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER
31, 1997
Overview
The Company's net loss decreased from $160.6 million (including losses
from discontinued operations of $108.8 million) during the year ended
October 31, 1997 to $50.0 million (including a $6.0 million loss from
discontinued operations and an $11.1 million cumulative effect on prior
years of an accounting change) during the year ended October 31, 1998.
These charges are more fully described below and in the Consolidated
Financial Statements of the Company. The fiscal 1998 loss from continuing
operations reflects an improvement of $19.0 million compared to the prior
year. As discussed in more detail with the comparison of each segment,
these results include a $6.4 million increase in operating income for PSG
(partially offset by a $4.8 million increase in M&E's operating loss), a
$3.0 million impairment recovery and a $9.6 million decrease in interest
expense. Sales decreased $11.3 million, primarily in M&E. The Company
continues to be successful in obtaining contract renewals and extensions,
including the PRASA contract extension in September 1998. However, sales
growth was impacted by delays in municipal clients' implementation
schedules, the slowdown in certain international markets and competition.
At October 31, 1998, the Company's backlog was approximately $1.2 billion
compared to $1.1 billion at October 31, 1997, and consisted of PSG (82%)
and M&E (18%).
In October 1998, the Company announced a restructuring and change of
headquarters. The Company is now headquartered in Wakefield, Massachusetts.
Since this reorganization, regional managers have been appointed to
coordinate and develop the Company's activities in each region and
corporate functions have been regrouped to implement synergies and reduce
costs. See "Business -- Revised Business Strategy."
Professional Services Group
Operating income was $8.2 million for the year ended October 31, 1998,
and reflects a $6.4 million increase from the comparable 1997 period. This
improvement is primarily due to the fourth quarter results; the PRASA
contract settlement in September 1998 provided a recovery of approximately
$6.5 million of prior claims and costs, covering the period September 1,
1995 through February 28, 1998, and an increased scope of work thereafter.
See "--Financial Condition" and Note 12 to the Consolidated Financial
Statements for the Company. Additionally, the Company adopted the AICPA
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP-98-5"), resulting in reduced amortization cost of
approximately $3.5 million compared to the prior year. See Note 2 to the
Consolidated Financial Statements of the Company. Partially offsetting
factors include $4.2 million in contract cost charges and higher
professional fees reflected in the 1997 results.
Gross margin rates decreased due primarily to higher direct project
costs (sludge disposal, utilities and labor costs) required for certain
initial first year contracts and the impact of the adoption of SOP 98-5.
These charges were partially offset by the PRASA settlement agreement.
The decrease in selling, general and administrative expenses of $6.1
million was due primarily to higher professional fees of $5.7 million in
1997 related to marketing consultants, the DOJ Investigation and certain
litigation matters and $1.2 million provision from revised collectibility
estimates for non-current note receivables.
The $2.7 million decrease in depreciation and amortization costs
reflects the early adoption of SOP 98-5.
Sales remained comparable to the prior period as a result of the
privatization market developing more slowly than anticipated. Although PSG
has been successful in obtaining contract renewals, it continues to
experience delays in negotiating and closing new business opportunities due
to municipal clients' implementation schedules.
Metcalf &Eddy
The operating loss of $19.5 million for the year ended October 31,
1998, was primarily the result of $14.5 million of charges, including $11.0
million of increases to its accruals for professional liability and certain
project costs due to revised estimates of the expected outcome of certain
unasserted and asserted claims and litigation incurred in the normal course
of business, $0.5 million of equipment write-offs, and other direct costs
of $3.0 million.
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 costs, equipment write-offs, a lease
cancellation penalty and other direct and indirect costs. The prior
period's cost of sales, selling, general and administrative expenses, and
depreciation and amortization include, respectively, $8.0 million, $10.1
million, and $1.3 million of these charges.
In addition to the effect of the aforementioned charges, lower sales
volume and gross margin rates partially offset by lower selling, general
and administrative expenses, reduced the operating results by $4.8 million
from the comparable period ended October 31, 1997. The reduction in sales
volume of $10.5 million during the period reduced the operating results by
$2.3 million due to delays in obtaining task order releases primarily
within the hazardous waste remediation service lines, contracts awarded to
competitors, and delayed procurement in international markets. Recognizing
the trend in lower sales volumes the Company has created a new Business
Development function headed by Mr. Bolton. See "Directors and Executive
Officers of the Registrant."
The lower gross margin rates reduced the operating results by $10.8
million during the period due to pricing pressures and a business mix shift
from self-performed work to subcontracted work and higher than anticipated
costs on certain projects. Partially offsetting the lower margins were
selling, general and administrative expense reductions of $7.2 during the
year ended October 31, 1998, as compared to the comparable 1997 period as a
result of lower personnel related costs, facility costs, and professional
fees. The $1.1 million reduction in depreciation and amortization from the
comparable prior period primarily resulted from the reduction of the
estimated useful lives of computer equipment reflected in the prior period.
Corporate & Other
The $1.1 million decrease in unallocated corporate selling, general and
administrative expenses for the year ended October 31, 1998 reflects a $2.3
million settlement of a certain lawsuit and the reversal of certain
reserves, both related to discontinued operations, partially offset by the
cost of the corporate office relocation to Wakefield, Massachusetts and
selling costs related to large privatization projects.
The impairment recovery of $3.0 million reflects an increase in the
carrying value of the Branchburg, New Jersey land and building, based on a
letter of intent received in October 1998. On January 22, 1999, the Company
entered into a Purchase and Sale Agreement for the Branchburg, New Jersey
land and building.
The repayment of borrowings from Vivendi and VNA, and to a lesser extent
the Bank Credit Facility, with a portion of the gross proceeds from the
Rights Offering, which was completed in March 1998, resulted in a $9.6
million reduction in interest expense. See "--Financial Condition."
Discontinued Operation-Research-Cottrell Divestiture
During the course of fiscal 1998, the Company divested a major portion
of the Research-Cottrell business.
On June 6, 1998, the Company entered into an agreement with Hamon & Cie
("Hamon"), pursuant to which Hamon acquired substantially all assets
(excluding certain contracts) and assumed substantially all liabilities
(excluding certain contracts, employee benefits and insurance liabilities)
related to the air pollution control operations of Research-Cottrell,
Thermal Transfer Corporation and Custodis-Cottrell, including the stock of
certain related European subsidiaries. The transaction closed on July 23,
1998 and the Company received $6.8 million. The final purchase price is
expected to be $7.5 million after a $2.3 million payment to Hamon in August
1998 for the cash flows generated by the businesses during the closing
period and including a $3.0 million deferred payment by Hamon due in July
2000. The $3.0 million deferred payment is subject to adjustment pursuant
to possible indemnification in favor of Hamon under the agreement.
Management does not expect any adjustment to the deferred payment at this
time.
During October 1998, the Company finalized the sale of two additional
units of the air pollution control business (Flex-Kleen & KVB) in two
separate transactions. The sale of these businesses which included the sale
of substantially all of the assets of Flex-Kleen and the common stock of
KVB was accomplished for a total value approximating $14.4 million, after
taking into consideration certain post-closing price adjustments. In
connection with the sale of KVB, the Company accepted $435,000 of notes
payable due in installments through the year 2001.
During 1998, the Company revised its estimated loss on disposal and
recorded an additional $6.0 million charge. Although management believes
that current provisions for the liquidation of Research-Cottrell are
adequate, the estimated loss on disposal and losses through disposition may
change in the near-term based on the final settlements relating to the sale
of the Research-Cottrell operations, actual results through disposition and
final resolution of any retained liabilities. The divestiture of
Research-Cottrell was completed on January 19, 1999 with the sale of REECO
to Durr.
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER
31, 1996
Overview
As discussed in more detail with the comparison of each segment's
results, the Company's net loss increased from $5.3 million during the year
ended October 31, 1996 to $160.6 million (including losses from
discontinued operations of $108.8 million) during the year ended October
31, 1997. This was primarily the result of certain operating charges and
asset write-offs, including charges taken in connection with the planned
Research-Cottrell divestiture, all as more fully described below. Sales
have decreased from $482.1 million to $456.4 million primarily due to lower
M&E sales volumes as a result of delays in awards of new contracts. At
October 31, 1997, the Company's total backlog was approximately $1.1
billion and consisted of PSG (78%) and M&E (22%).
Revised Business Strategy
During the second quarter of 1997, the Company completed a review of its
operations' three year business plans. These plans included a detailed
analysis of markets, growth opportunities and forecasted three year
operating results, cash flows and return on capital employed for each
business segment. As a result of this review, management considered the
actions necessary to redeploy its capital to PSG and M&E, its core water
business. The strategic analysis conducted led to the conclusion that the
Company did not have the overall size and expertise to grow the air
pollution control businesses profitably. Among other factors contributing
to this approach were recent tax law changes which may extend the duration
of OM&M contracts and create additional opportunities within the water and
wastewater treatment markets which are the primary markets for PSG and M&E.
See "Business--The Water/Wastewater Privatization Market."
Furthermore, the returns on capital employed within the PSG and M&E
segments are forecasted to be greater than the returns for the
Research-Cottrell segment. From a competitive standpoint, management also
believes that the Company has greater competitive advantages and market
penetration through its PSG and M&E businesses than what has been achieved
by its Research-Cottrell operations.
As a result of the above, management assessed the impact of
de-emphasizing the Research-Cottrell business segment and redeploying its
capital to its PSG and M&E segments. A financial advisor was retained to
assist the Company in exploring strategic alternatives related to this
redeployment. On December 2, 1997, the Company announced its decision to
divest Research-Cottrell.
Professional Services Group
Operating income was $1.8 million for the year ended October 31, 1997
and reflects a $5.6 million decrease from the comparable 1996 period
primarily due to certain operating costs and asset write-offs which
approximated $6.9 million. These costs were primarily related to
professional fees of $5.7 million related to marketing consultants, the DOJ
Investigation and certain litigation matters, and provisions of $1.2
million for revised collectibility estimates for certain non-current note
receivables. Excluding the effect of the aforementioned charges, the
operating results were $1.3 million higher than the comparable 1996 period
due to the timing of certain contractual incentive clauses realized under
the PRASA project.
Sales remained comparable to the prior period as a result of the
privatization market developing more slowly than anticipated. Although the
Company has been successful in obtaining contract renewals, it continues to
experience delays in negotiating and closing new business opportunities due
to municipal clients' implementation schedules.
Metcalf & Eddy
The operating loss of $14.7 million for the year ended October 31, 1997
was primarily the result of $19.4 million of charges, including $5.5
million of provisions required in order to properly reflect the Company's
revised estimates for the collectibility of certain receivables based on
recent adverse developments in contract negotiations and collection
efforts; $6.0 million of increases to its reserves for litigation,
professional liability and certain project contingencies due to revised
estimates of the expected outcome of certain unasserted and asserted claims
and litigation incurred in the normal course of business; $3.4 million of
equipment write-offs; a $1.7 million charge related to a cancellation
penalty for a high cost leased facility; and other direct and indirect
costs of $2.8 million.
In addition to the effect of the aforementioned charges, lower sales
volume and gross margin rates and higher depreciation expenses, partially
offset by lower selling, general and administrative expenses, reduced the
operating results by $8.7 million from the comparable prior period ended
October 31, 1996. The reduction in sales volume of $28.9 million during the
period reduced the operating results by $8.0 million due to delays in
obtaining task order releases primarily within the hazardous waste
remediation service lines, several contracts which were awarded to
competitors and delayed procurement in international markets. Delays are
increasing due to funding and administrative issues with certain government
agencies (e.g., the Environmental Protection Agency (the "EPA") and the
Department of Defense). The lower gross margin rates reduced the operating
results by $2.9 million during the period primarily due to favorable
pricing adjustments reflected in the prior periods, pricing pressures and a
business mix shift from self-performed work to subcontracted work.
Partially offsetting the lower margins were selling, general, and
administrative expense reductions of $2.9 million during the year ended
October 31, 1997 as compared to the comparable 1996 period as a result of
lower personnel related costs including discretionary and self-insured
employee benefit costs. The $2.0 million increase in depreciation and
amortization from the comparable prior period primarily resulted from the
reduction of the estimated useful lives of computer equipment.
Corporate and Other
The unallocated corporate costs were comparable to the prior period
except for the $5.0 million impairment charge related to the Branchburg,
New Jersey property which is anticipated to be sold. In addition, higher
average borrowings resulted in increased interest expense.
Discontinued Operation--Research-Cottrell
The loss from discontinued operations for the year ended October 31,
1997 was $108.8 million including a loss on disposal of $63.9 million,
significant operating charges of $40.5 million, other operating losses of
$2.9 million and non-operating expenses of $1.5 million. The loss on
disposal was developed using a range of estimated proceeds based on current
negotiations with several potential buyers of the businesses and also
includes estimated future losses of $8.5 million through the estimated
disposal date. The significant operating charges include a $25.0 million
impairment charge recognized during the second quarter primarily related to
a writedown of goodwill and other non-current assets of Ecodyne and KVB,
receivable provisions of $3.4 million at Ecodyne and R-C International,
warranty provisions of $10.0 million at R-C International and Custodis and
$2.1 million of higher than anticipated costs on a specific APCD project.
In addition to the loss on disposal and significant operating charges, the
remaining operating loss was due to lower sales volume and reduced margin
rates as a result of fewer bid opportunities due to delays in issuing new
air quality standards by the EPA, lack of enforcement of existing
standards, price pressures from highly competitive markets and project
execution.
FINANCIAL CONDITION
During the year ended October 31, 1998, cash required for operating
activities was $15.0 million including $6.6 million for discontinued
operations. The operating activities of continuing operations required $8.4
million after interest payments of $16.3 million. The $1.1 million increase
in receivables and $7.6 million increase in payables were primarily related
to PSG Puerto Rico's contract with PRASA. During the term of PSG Puerto
Rico's contract with PRASA, PRASA and the Company have disputed certain
costs paid or incurred by the Company on behalf of PRASA and the payment by
the Company of certain related power costs to the Puerto Rico Electric
Power Authority ("PREPA"). As a result, at October 31, 1997, the Company
had receivables of $34.3 million due from PRASA for these reimbursable
costs and amounts payable to PREPA totaling $33.2 million. In June 1998,
the Company entered into an agreement which addressed the issues relating
to unreimbursed costs, settled any disputed items through February 1998 and
developed procedures to minimize the potential build-up of these costs in
the future. Concurrently, the Company collected $9.6 million in settlement
of prior claims and costs in question and used these proceeds to reduce its
obligations to PREPA. At October 31, 1998, the Company had receivables of
$45.7 million due from PRASA for these unreimbursed costs and amounts
payable to PREPA totaling $35.3 million. Management believes that such
receivables will be fully collected in fiscal 1999 and will be used to pay
the power costs due to PREPA. The cash generated from discontinued
operations was primarily related to various working capital reductions of
Research-Cottrell due to lower sales volume and the sale of certain
businesses. The Company typically has receivables in which the ultimate
realizability is dependent upon the successful negotiation or resolution of
contractual issues or disputes as well as the client's ability to fund and
pay the amounts due. Historically, significant charges have been reflected
as provisions for receivable reserves and write-offs including those
reflected in the current period. Additionally, the Company has experienced
significant charges related to adverse developments in litigation,
professional liability and project execution matters. Management believes
that adequate provisions have been made to the receivable balances
reflected in the October 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 generated $10.8 million of cash during the year
ended October 31, 1998 including proceeds of $17.9 million from the sale of
certain Research-Cottrell operations and other assets. Investments related
to the start up of operations, maintenance and management of treatment
facilities within the PSG segment were $3.0 million. Capital expenditures
of $4.1 million were made in the PSG and M&E segments primarily for
computer equipment and software. 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, 1998, 1997,
and 1996 total capital expenditures were $4.1 million, $5.0 million and
$6.3 million, respectively. At October 31, 1998, the Company had no
material outstanding purchase commitments for capital expenditures,
however, the Company will require additional financial resources to develop
and support PSG and M&E, 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.
However, if the Company is unable to develop such financial resources, it
could limit its participation in the emerging privatization market.
Financing activities generated $14.3 million of cash during the year
ended October 31, 1998 primarily due to the effects of the Rights Offering
discussed more fully below.
On September 24, 1997, the Company, Vivendi and VNA entered into the
Recapitalization Agreement, whereby the Company would retire all of the
outstanding shares of its 5 1/2% Series A Convertible Exchangeable
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock")
and conduct the Rights Offering, the proceeds of which would be used
primarily to restructure the Company's debt.
On January 28, 1998, pursuant to the terms of the Recapitalization
Agreement, the Company exchanged (the "Exchange") the outstanding shares of
its Series A Preferred Stock, all of which was held by Vivendi and its
subsidiaries, for 34,285,714 shares of its 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 (the
"Rights Offering") which allowed rights holders to subscribe for and
purchase shares of its common stock and also allowed subscribers (other
than Vivendi and VNA) in the Rights Offering to receive transferable
three-year Warrants to purchase shares of Class A Common Stock. 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 VNA Note (described below) 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 and for the payment of $5.8 million for expenses related to
the Rights Offering. As a result of the consummation of the Exchange and
the Rights Offering and the other transactions contemplated by the
Recapitalization Agreement, the Company in fiscal 1998 eliminated $3.3
million of annual dividends on the Series A Preferred Stock and reduced its
annual interest expense by the amount of the interest payments on the
Vivendi Note and VNA Note (approximately $12.4 million in fiscal 1997 and
approximately $4.4 million for fiscal 1998, prior to repayment in March
1998).
VNA NOTE
On August 2, 1996, the Company entered into a $60 million seven-year
unsecured revolving credit facility with VNA pursuant to which the Company
received the proceeds of the VNA Note. The facility, which was repaid in
March 1998 with a portion of the gross proceeds from the Rights Offering,
was originally scheduled to mature on August 2, 2003. The VNA Note bore
interest at LIBOR plus 0.6%. The Company incurred approximately $1.3
million, $3.7 million, and $0.7 million of interest on this loan during
fiscal 1998, 1997 and 1996, respectively.
VIVENDI NOTE
In connection with the Investment Agreement, the Company and Vivendi
entered into a Credit Agreement dated as of June 14, 1994 pursuant to which
the Company received the Vivendi Note in a principal amount of $125
million. The Vivendi Note was an unsecured facility bearing interest at a
rate based upon one, two, three or six-month LIBOR, as selected by the
Company, plus 1.25%, and had a final maturity of June 15, 2001. The Vivendi
Note was repaid in March 1998 with a portion of the gross proceeds from the
Rights Offering. The Vivendi Note contained certain financial and other
restrictive covenants with respect to the Company relating to, among other
things, the maintenance of certain financial ratios, and restrictions on
the sale of assets and the payment of dividends on or the redemption,
repurchase, acquisition or retirement of securities of the Company or its
subsidiaries. The Company incurred approximately $3.1 million, $8.7
million, and $8.8 million of interest related to the Vivendi Note during
fiscal 1998, 1997 and 1996, respectively.
BANK CREDIT FACILITY
The Company maintains a senior secured Bank Credit Facility, dated as of
March 10, 1995, with Societe Generale, New York Branch ("Societe
Generale"). As of October 31, 1998, the Company had no borrowings under the
Bank Credit Facility and outstanding letters of credit under the Bank
Credit Facility totaled $19 million (unused capacity of $51 million). The
Bank Credit Facility was decreased, at the Company's request, from $70
million to $50 million as of December 12, 1998.
As of December 12, 1997 the configuration and structure of the Bank
Credit Facility was revised. Societe Generale purchased and assumed from
all of the other lending banks under the Bank Credit Facility all of such
banks' rights and obligations under the Bank Credit Facility, becoming the
sole lending bank thereunder. In addition, the Company and Societe Generale
entered into an amendment to extend the Bank Credit Facility until December
11, 1998. The Bank Credit Facility had been scheduled to expire on March
31, 1998. The amendment waived the Company's compliance with certain
covenants and amended others. The prior amendments and waiver would have
terminated on December 15, 1997, had the Bank Credit Facility not been
amended. As of December 12, 1998, the Company entered into an agreement
with Societe Generale for a short-term extension of the facility and
continued the waiver of the Company's compliance with certain covenants of
the facility until a longer-term extension was developed. As of January 12,
1999, Societe Generale advised the Company of the extension of the existing
Bank Credit Facility, subject to execution of legal documentation, to
December 11, 1999. It is expected that there will be no significant changes
in the terms and conditions contained in the Bank Credit Facility extension
and that the waivers and amendments previously provided to the Company with
regard to certain financial covenants will be continued. It is management's
intent to renegotiate the terms of the existing facility prior to its
maturity in order to replace it with a longer-term 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 $50.0 million or the sum of a
percentage of certain eligible receivables, inventories, net property,
plant and equipment and costs and estimated earnings in excess of billings,
and bear interest at LIBOR plus 1.25% or at a defined bank rate
approximating prime (8.0% at October 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 Vivendi 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 Vivendi for its support in an amount equal
to 0.95% per annum of the outstanding commitment of its credit facilities
($0.9 million and $1.2 million for the years ended October 31, 1998 and
1997, respectively).
As of January 28, 1999, the Company had no borrowings under the Bank
Credit Facility and outstanding letters of credit under the Bank Credit
Facility totaled $18.7 million. In addition to the $31.3 million of unused
capacity under its Bank Credit Facility at January 28, 1999, 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 at all of its operating units. The significant
asset divestiture proceeds realized in 1998 are expected to fund the
related retained liabilities. The replacement of the Bank Credit Facility,
which expires on December 11, 1999, is anticipated to enable the Company to
meet its long-term operating requirements.
The Company is often required to procure bid, performance and/or
payment bonds from surety companies, particularly for clients in the public
sector. A bid bond guarantees that the Company will enter an awarded
contract at the price bid; a performance bond guarantees performance of the
contract by the Company; and a payment bond (which may or may not be issued
in conjunction with a performance bond) secures the Company's payment
obligations to its subcontractors and vendors under bonded contracts. On
September 15, 1998, the Company entered into the Indemnity Agreement with
CIGNA. Under the Indemnity Agreement, CIGNA, through any one or more of its
companies, will provide bid, performance and/or payment bonds in support of
the Company's client contractual requirements. The Indemnity Agreement
requires no additional indemnity or guarantee other than that provided by
the Company. The Company also maintains the Master Agreement with USF&G.
USF&G was recently acquired by the St. Paul Fire and Marine Insurance
Company. Pursuant to the Master Agreement, USF&G has provided bid,
performance and/or payment bonds in support of the Company's client
contractual requirements. VNA has partially indemnified USF&G under the
Master Agreement. There can be no assurance that USF&G will continue to
provide bid, performance and/or payment bonds without a similar indemnity
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 October 31, 1998,
unamortized goodwill was $159.2 million.
YEAR 2000 ISSUE
The Company is actively addressing the Year 2000 ("Y2K") issue and the
potential exposures related to the processing of date information for both
business and financial systems. The scope of this undertaking includes both
internal and external systems and covers both information technology ("IT")
and non-IT computer processes. Through its subsidiaries M&E and PSG, the
Company has developed a comprehensive plan for Y2K compliance. The Company
has a Y2K management team, which meets regularly to monitor the execution
of the plan, includes executive management participation and provides
status updates to the Board of Directors. The plan consists of three basic
phases: inventory, risk assessment, and remediation and testing. For any
given system, the phases occur in sequence.
Inventory Phase
Most of the Company's internal computer systems have been identified and
assessed for Y2K compliance based on surveys which began last year. These
internal computer systems included financial systems, Computer Aided
Designs (CAD) applications, and desktop and network systems. During the
first quarter of 1999, a final survey of all PC users will be conducted to
identify any other systems that may be date sensitive.
With respect to external systems, advisory letters were sent to current
clients, business partners and vendors advising them of the Y2K issue.
Vendors were surveyed to assess their level of Y2K compliance and their
responses are being compiled. Systems interfaces to external systems were
also identified. Furthermore, the Company has revised its standard
technical specifications, subcontracts for services, and purchase orders
for equipment that the Company uses to require Y2K warranties from
contractors and suppliers. Moreover, the Company revised its general
conditions, used in bid packages prepared when M&E assists clients to
procure services or goods, to include Y2K warranties. Finally, the Company
has begun to consider issues related to non-IT systems, specifically those
associated with embedded systems, under both M&E and PSG contracts. The
contract review process and the inventory of embedded systems for PSG
projects has begun and is scheduled for completion in March 1999.
Risk Assessment Phase
Following the identification of date sensitive systems, an assessment of
Y2K compliance was made. The Company has completed the assessment of the
Company's critical internal systems, most notably the financial systems.
The financial systems of M&E and PSG are being replaced and upgraded,
respectively. The Company has contracted with vendors for required
consulting services, hardware and software to replace the financial system
that serves both AAI and M&E. PSG's Aegis Financial Systems is under a
maintenance agreement and is being upgraded.
Assessment of the remaining internal systems, and any interfaces to
external systems, is ongoing. The scheduled completion date for this effort
is the Spring of 1999. The level of assessment of embedded systems will be
determined based on contract requirements. These assessments are scheduled
for completion by the Fall of 1999.
Remediation and Testing Phase
M&E is in the process of migrating to Oracle Financials and Cyborg
Payroll Systems with a "go live" anticipated by the Fall of 1999. PSG's
financial software, Aegis Financial Systems, has been upgraded by Sota
Software, the developer. The testing of PSG's Payroll and Human Resources
components is currently underway. Testing of the remaining modules is
scheduled for completion by the Spring of 1999. The desktop and network
computing environment is being upgraded to satisfy a migration to common
standards, current technology (some of which is client driven) and Y2K
compliance. The Company expects to complete all remediation and testing of
internal systems, and their external interfaces, by the Fall of 1999.
Cost Estimates and Risks
The Company's operating costs to date with respect to Y2K compliance
have not been material. Based on current estimates, the Company expects to
incur approximately $2.0 million during 1999 to evaluate and modify, as
required, both internal and external systems. This estimate could change in
the near-term based on the outcome of the inventory phase scheduled for
completion in the Spring of 1999. 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 Y2K compliance will not have a material impact on the Company's
consolidated financial statements.
It is possible that M&E and PSG may be presented with claims related to
embedded systems contained in components the Company has designed,
installed and/or maintained on client projects. The Company is taking steps
to mitigate its exposure to such claims and to evaluate and
formulate appropriate legal defenses. In addition, PSG is developing
contingency plans for the plants it maintains and operates in an attempt to
mitigate the effects of potential Y2K problems in the event its clients
have failed to bring them into Y2K compliance.
The Company has not developed likely worst case scenarios nor
contingency plans with respect thereto.
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 statements. 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.
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 continue 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 Changes in interest rates causing an increase in the Company's
effective borrowing rate.
o Adverse resolution of litigation matters and existing claims arising
in the ordinary course of business.
o The ability of the Company to access capital (through an investment
fund, off-balance sheet vehicle or otherwise) and to effect and
finance future investments.
o The ability of the Company to successfully implement its revised
business strategy.
o The ability of the Company to obtain any necessary waivers,
extensions or renewals of the Bank Credit Facility.
o The acceptance by the Company's current and prospective customers of
the Company's financial position.
o The effectiveness of the business planning committee of the Board of
Directors, established in connection with the Recapitalization, in
identifying strategies aimed at increasing stockholder value.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AQUA ALLIANCE INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report................................... 37
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1998 AND 1997.... 38
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED 39
OCTOBER 31, 1998, 1997 AND 1996................................
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED OCTOBER 31, 1998, 1997 AND 1996.......................... 40
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
OCTOBER 31, 1998, 1997 AND 1996................................ 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... 42
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Aqua Alliance Inc.
We have audited the accompanying consolidated balance sheets of Aqua
Alliance Inc. and its Subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended October 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aqua
Alliance Inc. and its Subsidiaries as of October 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three
years in the period ended October 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements,
effective November 1, 1997, the Company changed its method of accounting
for start-up costs.
MCGLADREY & PULLEN, LLP
New York, New York
January 12, 1999
AQUA ALLIANCE INC.
CONSOLIDATED BALANCE SHEETS
As of October 31, 1998 and 1997
(In thousands, except share data)
OCTOBER 31,
----------------------
1998 1997
---- ----
ASSETS
Current Assets:
Cash and cash equivalents, including restricted
cash of $587 and $413 in 1998 and 1997,
respectively ................................... $ 22,197 $ 12,089
Accounts receivable, less allowance for doubtful
accounts of $4,909 and $3,300 in 1998 and 1997,
respectively ................................... 77,776 76,681
Costs and estimated earnings in excess of
billings on uncompleted contracts .............. 33,559 33,557
Inventories ...................................... 1,470 1,893
Prepaid expenses and other current assets ........ 8,521 4,460
Net current assets of discontinued operations .... 1,401 --
--------- ---------
Total current assets ..................... 144,924 128,680
--------- ---------
Property, plant and equipment, net .................. 9,768 13,388
Investments in environmental treatment facilities ... 21,651 21,817
Goodwill, net ....................................... 159,198 164,337
Other assets ........................................ 20,572 30,391
Net non-current assets of discontinued operations ... 3,239 24,452
--------- ---------
Total assets ............................ $ 359,352 $ 383,065
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ........... 443 398
Accounts payable ................................. 87,557 80,007
Accrued expenses ................................. 92,135 86,681
Billings in excess of costs and estimated
earnings on incompleted contracts ............. 13,484 15,320
Income taxes payable ............................. 2,325 1,485
Net current liabilities of discontinued operations
total current liabilities ............... 483 591
--------- ---------
196,427 184,482
--------- ---------
Long-term debt ...................................... 119,405 307,845
--------- ---------
Commitments and contingencies (note 15) ............. -- --
Stockholders' equity (deficit):
Preferred stock, par value $.01, authorized 2,500,000
shares; issued 0 shares and
1,200,000 shares in 1998 and 1997,
respectively; liquidation value $0
and $60,000 in 1998 and 1997, respectively .... -- 12
Common stock, par value $.001, authorized 260,000,000
shares and 100,000,000 shares in 1998 and
1997, respectively; issued 185,266,429
shares and 32,109,156 shares in 1998 and 1997,
respectively .................................. 185 32
Additional paid-in capital ....................... 629,130 427,036
Accumulated deficit .............................. (585,165) (535,214)
Common stock in treasury, at cost ................ (108) (108)
Cumulative currency translation adjustment ....... (522) (1,020)
--------- ---------
Total stockholders' equity (deficit) .......... 43,520 (109,262)
--------- ---------
Total liabilities and stockholders' equity
(deficit) ................................... $ 359,352 $ 383,065
========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTs.
AQUA ALLIANCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31,
-------------------------------------
1998 1997 1996
---- ---- ----
Sales ................................. $ 445,119 $ 456,375 $ 482,091
Cost of sales ......................... 389,737 385,573 394,124
--------- --------- ---------
Gross margin ....................... 55,382 70,802 87,967
Selling, general and administrative
expenses ........................... 61,379 75,755 62,316
Depreciation and amortization ......... 13,110 16,861 13,983
Impairment charge (recovery) .......... (3,000) 5,000 --
--------- --------- ---------
Operating income (loss) from
continuing operations ............ (16,107) (26,814) 11,668
Interest income ....................... 509 359 923
Interest expense ...................... (14,899) (24,356) (22,597)
Other expense, net .................... (1,273) (502) (2,296)
--------- --------- ---------
Loss from continuing operations
before income taxes and
cumulative effect of a change
in accounting principle ........... (31,770) (51,313) (12,302)
Income tax (expense) benefit .......... (1,099) (514) 1,246
--------- --------- ---------
Loss from continuing operations .... . (32,869) (51,827) (11,056)
Discontinued operations:
Income (loss) from operations
of discontinued segment .......... -- (44,854) 5,788
Loss from disposal of
discontinued segment ............. (6,000) (63,900) --
Cumulative effect on prior years
(to October 31, 1997) of change
in the method of accounting for
start-up costs (note 2) ............ (11,082) -- --
--------- --------- ---------
Net loss ........................... (49,951) (160,581) (5,268)
Preferred stock dividends ............. -- (3,300) (3,300)
--------- --------- ---------
Net loss applicable to common
stockholders ..................... (49,951) (163,881) (8,568)
========= ========= =========
Basic income (loss) per common share
(after preferred stock dividends):
Continuing operations .............. (.24) (1.72) (.45)
Discontinued operations ............ (.05) (3.40) .18
Cumulative effect on prior years
(to October 31, 1997) of
change in the method of accounting
for start-up costs (note 2) ...... (.08) -- --
--------- --------- ---------
Net loss ........................... $ (.37) $ (5.12) $ (.27)
========= ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
AQUA ALLIANCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
Series A Class A
Preferred Stock Common Stock Class A Common Cumulative
$.01 Par Value $.001 Par Value Additional Treasury Stock Currency
------------------ ------------------- Paid-In Accumulated --------------- Translation
Shares Amount Shares Amount Capital Deficit Shares Amount Adjustment Total
------- ------- ------------------- ---------- ----------- ------- ------ ---------- -----
Balance, October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1,200,000 $ 12 32,107,906 $ 32 $ 427,028 $(363,865) (89,902) $ (108) $ (10) $ 63,089
Net loss ........... -- -- -- -- -- (5,268) -- -- -- (5,268)
Cash dividends,
Series A
Preferred Stock . -- -- -- -- -- -- (3,300) -- -- (3,300)
Exercise of stock
options .......... -- -- 1,250 -- 8 -- -- -- -- 8
Currency translation
adjustment ....... -- -- -- -- -- -- -- -- (288) (288)
---------- ------- ------------ ------ --------- --------- ------- ------ ------- ---------
Balance, October 31,
1996 1,200,000 12 32,109,156 32 427,036 (372,433) (89,902) (108) (298) 54,241
Net loss ........... -- -- -- -- -- (160,581) -- -- -- (160,581)
Cash dividends,
Series A
Preferred Stock .. -- -- -- -- -- (2,200) -- -- -- (2,200)
Currency translation
adjustment ...... -- -- -- -- -- -- -- -- (722) (722)
---------- ------- ------------ ------ --------- --------- ------- ------ ------- ---------
Balance, October 31,
1997 1,200,000 12 32,109,156 32 427,036 (535,214) (89,902) (108) (1,020) (109,262)
Net loss ........... -- -- -- -- -- (49,951) -- -- -- (49,951)
Exchange of Series A 34
Preferred Stock . (1,200,000 (12) 34,285,714 34 (22) -- -- -- -- --
Issuance of Common
Stock ............ -- -- 118,871,559 119 202,116 -- -- -- -- 202,235
Currency translation
adjustment ...... -- -- -- -- -- -- -- -- 498 498
---------- ------- ------------ ------ --------- --------- ------- ------ ------- ---------
Balance, October 31,
1998 -- $-- $185,266,429 $ 185 $ 629,130 $(585,165) (89,902) (108) $ (522) 43,520
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
AQUA ALLIANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
YEARS ENDED OCTOBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss ................................. $ (49,951) $(160,581) $ (5,268)
Adjustments to reconcile net loss to
net cash provided by (used for)
continuing operations--
Discontinued operations ................ 6,000 108,754 (5,788)
Cumulative effect on prior years
(to October 31, 1997) of change
in the method of Accounting for
start-up costs (note 2) .............. 11,082 -- --
Depreciation and amortization .......... 13,110 16,861 13,983
Other .................................. 528 7,865 890
Changes in assets and liabilities,
excluding effects of divestitures--
(Increase) decrease in assets--
Accounts receivable ................ (1,095) (14,988) (2,318)
Costs and estimated earnings
in excess of billings on
uncompleted contracts ............ (2) 3,880 (7,383)
Inventories ........................ 423 28 (1,199)
Prepaid expenses and other
current assets ................... (4,061) 3,418 (798)
Other assets ....................... 3,568 8,100 (380)
Increase (decrease) in liabilities--
Accounts payable ................... 7,550 23,061 11,240
Accrued expenses ................... 5,454 2,266 (7,317)
Billings in excess of costs and
estimated earnings on
uncompleted contracts ............ (1,836) 2,800 (681)
Income taxes payable ............... 840 (357) (600)
--------- --------- ---------
Net cash provided by (used for)
continuing operations ......... (8,390) 1,107 (5,619)
Net cash provided by (used for)
discontinued operations ....... (6,604) 13,887 6,507
--------- --------- ---------
Net cash provided by (used for)
operating activities .......... (14,994) 14,994 888
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses ......... 17,920 2,015 6,186
Capital expenditures ..................... (4,082) (4,949) (6,276)
Investment in environmental
treatment facilities ................... (124) 123 530
Start-up costs, investments in
new contracts, and other ............... (2,969) (8,400) (11,122)
Discontinued operations .................. 21 (978) (1,206)
--------- --------- ---------
Net cash provided by (used for)
investing activities ................ 10,766 (12,189) (11,888)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common
stock .................................. 202,235 -- 8
Payments of notes payable and
long-term debt ......................... (125,397) (377) (366)
Net borrowings (repayments) under
credit facilities ...................... (63,000) 1,700 17,800
Cash dividends paid on preferred
stock .................................. -- (2,475) (3,300)
Other .................................... 498 (2,231) (1,643)
--------- --------- ---------
Net cash provided by (used for)
financing activities ................ 14,336 (3,383) 12,499
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents ................ 10,108 (578) 1,499
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ................................... 12,089 12,667 11,168
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR ...................................... $ 22,197 $ 12,089 $ 12,667
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest ................... $ 16,320 $ 23,599 $ 22,417
========= ========= =========
Cash paid for income taxes ............... $ 323 $ 1,468 $ 1,292
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
AQUA ALLIANCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Aqua
Alliance Inc., formerly Air & Water Technologies Corporation ("AAI" or the
"Company") and all majority-owned subsidiaries. The Company markets its
products and services through two widely recognized trade names:
Professional Services Group ("PSG") for the operation, maintenance and
management of water and wastewater treatment systems; and Metcalf &Eddy
("M&E") for water, wastewater and hazardous waste engineering and consulting
services. All significant intercompany transactions have been eliminated.
Investments in joint ventures, which are 50% or less owned, are accounted
for using the equity method, while the Company's share of joint venture
results of operations are included pro rata in "sales," "cost of sales" and
"selling, general and administrative expenses" in the accompanying
consolidated statements of operations.
Use of accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash equivalents
Cash equivalents consist of investments in short-term highly liquid
securities having an original maturity of three months or less.
Revenue recognition
The Company follows the practice of accruing income from long-term
contracts using the percentage-of-completion method. Under this method, the
Company primarily recognizes as profit that proportion of the total
anticipated profit which the cost of work completed bears to the estimated
total cost of the work covered by the contract, including estimated
warranty and performance guarantee costs. As contracts extend over one or
more years, revisions of cost and profit estimates are made periodically
and are reflected in the accounting period in which they are determined. If
the estimate of total costs on a contract indicates a loss, the total
anticipated loss is recognized immediately. Revenues related to the
operations, maintenance and management services within the PSG operating
segment are generally recognized in the contract year as the related
services are provided.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents contract costs incurred plus earned
margin in excess of amounts billed and includes unbilled retentions which
result from performance of work on contracts in progress in advance of
billings pursuant to certain contract terms. Substantially all of the costs
and estimated earnings in excess of billings on uncompleted contracts are
expected to be collected in fiscal year 1999. At October 31, 1998, the
balance of $33,559,000 included $5,852,000 of retainage due from customers
in accordance with applicable retainage provisions of engineering and
construction type contracts which will become billable upon future delivery
of services or completion of such contracts. At October 31, 1997, the
balance of $33,557,000 included retention of $5,603,000. The liability,
"Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of contract costs incurred plus
earned margin.
Inventories
Inventories are stated principally at the lower of cost or market (first
in, first out method) and consists primarily of chemicals and spare parts.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization of property, plant and equipment is primarily computed on the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives are generally 20 to 30 years for buildings and
improvements and 3 to 10 years for machinery, equipment and fixtures.
Leasehold improvements are amortized over the term of the lease. Repair and
maintenance costs are expensed as incurred; major renewals and betterments
are capitalized. Property, plant and equipment at October 31, 1998 and 1997,
respectively, consists of the following (in thousands):
1998 1997
------- -------
Land and land improvements............ $ -- $ 122
Buildings and leasehold improvements.. 4,209 3,899
Machinery, equipment and fixtures..... 29,458 26,324
------- -------
33,667 30,345
Less accumulated depreciation and (23,899) (16,957)
amortization..........................
------- -------
$ 9,768 $13,388
======= =======
In connection with the Research-Cottrell divestiture (See Note 5), the
Company has decided to sell the land and building located in Branchburg,
New Jersey which was primarily occupied by the operations of
Research-Cottrell. The carrying value of approximately $8,100,000, based on
current offers from interested parties, is classified in other non- current
assets. In 1997, the Company recorded an impairment charge of approximately
$5,000,000 based on current offers at that time. In the fourth quarter of
1998, the Company increased the carrying value by $3,000,000 based on a
letter of intent received in October, 1998. The Company expects the sale of
the facility to occur in early 1999.
Goodwill and long-lived assets
Goodwill is being amortized over 40 years under the straight-line
method. Goodwill amortization was $5,139,000, $5,240,000, and $5,025,000
for the years ended October 31, 1998, 1997 and 1996, respectively.
Accumulated amortization of goodwill was $43,512,000 and $38,373,000 at
October 31, 1998 and 1997, respectively. The Company continually evaluates
whether events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill and other long-lived assets may warrant
revision or the remaining balance of goodwill and other long-lived assets
may not be recoverable. When factors indicate that goodwill and other
long-lived assets should be evaluated for possible impairment, the Company
uses an estimate of the related business segment's undiscounted operating
cash flows over the remaining life of the assets in determining whether the
assets are impaired. Any impairment is measured using discounted operating
cash flows or other fair value measures as appropriate. The 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 or operating
results. The effect of a change, if any, would be material to the financial
condition and results of start-up operations.
Deferred costs
Certain direct costs which are incurred for new projects, primarily
related to the start-up of the operations, maintenance and management of
treatment facilities within the PSG operating segment, are deferred and
amortized over the terms of the specific new contract using the
straight-line method. These unamortized deferred costs are included
in other assets and amounted to $4,879,000 and $14,044,000 at October 31,
1998 and 1997, respectively (See Note 2 regarding a change in accounting
for these costs). Deferred debt issuance costs are amortized over the life
of the related debt utilizing the effective interest method. The
unamortized costs were included in other assets and amounted to $2,730,000
and $2,946,000 at October 31, 1998 and 1997, respectively.
Accrued expenses
Accrued expenses included the following as of October 31, 1998 and 1997
(in thousands):
1998 1997
------- -------
Salaries and benefits.................... $ 17,583 $19,736
Self-insured loss reserves............... 31,529 21,863
Retained liabilities of discontinued 20,011 21,000
operations (Note 5)......................
Interest and other financing costs....... 5,507 6,843
Other.................................... 17,505 17,239
------- -------
Total................................. $92,135 $86,681
======= =======
Earnings (loss) per share
The Company's loss per share for the years ended October 31, 1998, 1997
and 1996 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 as previously reported.
The key difference is that "basic" earnings per share does not adjust for
common stock equivalents. The adoption of this statement, in the first
quarter of 1998, 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. The weighted-average number of shares of common
stock used to compute the loss per share was 136,121,000, 32,019,000 and
32,018,000 shares for the years ended October 31, 1998, 1997 and 1996,
respectively.
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation
including the effects of reporting the accounts of the discontinued
operations separate from continuing operations (See Note 5).
Recently issued accounting pronouncements
Following is a description of certain recently issued accounting
pronouncements recently adopted by the Company or not yet adopted by the
Company.
In June 1997, Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting Comprehensive Income," was issued. The statement must be adopted
by the Company in the first quarter of fiscal 1999. Under provisions of
this statement, the Company will be required to include a financial
statement presentation of comprehensive income and its components. As a
consequence of this change, certain reclassifications will be necessary for
previously reported amounts to achieve the required presentation of
comprehensive income. Implementation of this standard will not affect the
Company's financial position or results of operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," was issued. The statement must be adopted by the
Company for fiscal 1999. Under provisions of this statement, the Company
will be required to modify or expand the financial statement disclosures
for operating segments, products and services, and geographic areas.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
In December 1997, SFAS No. 132, "Employer's Disclosure about Pensions
and Other Postretirement Benefits," was issued and is effective for the
Company's 1999 fiscal year. The statement revises current disclosure
requirements for employers' pensions and other retiree benefits.
Implementation of this disclosure standard will not affect the Company's
financial position or results of operations.
(2) CHANGE IN ACCOUNTING
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 provides guidance on the financial
reporting of start-up and organization costs and requires such costs to be
expensed as incurred, with the effect of initial adoption reported as a
cumulative effect of a change in accounting principle. The Company has
early adopted SOP 98-5 effective November 1, 1997, as permitted by the SOP.
The total amount of deferred start-up costs reported as a cumulative
effect of a change in accounting principle is $11,082,000. The impact of
adoption of the SOP on previously reported operating income will be to
change the first quarter 1998 results from an operating loss of $11,673,000
to an operating loss of $10,761,000, the second quarter 1998 from an
operating loss of $11,856,000 to an operating loss of $10,950,000, and the
third quarter 1998 from an operating loss of $7,637,000 to an operating
loss of $6,730,000. The reported loss per share from continuing operations
will change in the first quarter of 1998 from $.35 to $.32, in the second
quarter of 1998 from $.09 to $.08, and was unchanged in the third quarter
1998. The impact of adopting the SOP for the year ended October 31, 1998,
was to decrease the operating loss by $3,632,000 and to decrease the loss
per share by $.03.
(3) VIVENDI RELATIONSHIP
As of October 31, 1998, approximately 83% of the Company's Class A
Common Stock, par value $.001 per share (the "Class A Common Stock"), was
beneficially owned by Vivendi (formerly Compagnie Generale des Eaux), a
French company and the Company's largest stockholder ("Vivendi"). The
Company also has certain financial and other relationships with Vivendi
North America Company, (formerly Anjou International Company), an indirect
wholly-owned subsidiary of Vivendi and a Delaware corporation ("VNA").
Pursuant to a March 1994 Investment Agreement among the Company, Vivendi
and VNA, as amended as of September 24, 1997, by the Recapitalization
Agreement discussed in Note 4, Vivendi received the right to designate a
number of members of the Company's Board of Directors proportionate to the
voting power represented by Vivendi's ownership interest, to designate the
Chairman of the Company's Board of Directors and to appoint the Company's
Chief Executive Officer and Chief Financial Officer. Vivendi has agreed
that, so long as Vivendi and its affiliates are the largest stockholder of
the Company, the Company shall be Vivendi's exclusive vehicle in the United
States, its possessions and its territories for Vivendi's water management
and wastewater management provided that the foregoing shall not apply to
any acquisition or investment by Vivendi (or any of its affiliates) of a
privately-owned, publicly-traded or publicly-owned company in the water
utility sector whose primary business is the production, distribution
and/or sale of potable, fire, bulk, draining or irrigation water, nor to
Vivendi's present or future investment in Philadelphia Suburban
Corporation; provided further, that the foregoing shall have no application
to Kruger, Inc., a distributor of water treatment plant parts and
components and an indirect subsidiary of Omnium Traitement et de
Valorisation, a wholly-owned subsidiary of Vivendi. Vivendi and VNA have
the right, pursuant to the Investment Agreement, to require the Company to
register the shares of Class A Common Stock owned by Vivendi and its
affiliates for sale to the public, with certain exceptions. However,
Vivendi and VNA have not exercised this right.
As of December 31, 1998, the shares of the Company's Class A Common
Stock, which have been owned directly and indirectly by Vivendi (83% of the
outstanding shares of such stock at that date), were transferred to
Vivendi's wholly-owned subsidiary, Vivendi North American Operations, Inc.
("VNAO").
In addition to its direct ownership interest, the Company has benefitted
from certain financial undertakings by Vivendi, including a $125 million
term loan from Vivendi (see Note 8) and a $60 million credit facility with
VNA (see Note 7), both of which were repaid in March 1998 with a portion of
the gross proceeds from the Rights Offering discussed in Note 4. The
Company compensates Vivendi for its support of the Company's credit
facilities (see Note 7), in an amount equal to 0.95% per annum of the
outstanding commitment of its credit facilities, and for other services ,
including $2.0 million for financial advisor and legal fees and expenses
related to the Recapitalization. (Total fees to Vivendi and its
subsidiaries were approximately $6.0 million, $2.3 million and $2.1 million
for the three years ended October 31, 1998, 1997 and 1996, respectively).
At October 31, 1998 and 1997, the Company had accounts payable and accrued
expenses to Vivendi and its subsidiaries of approximately $8,338,000 and
$3,483,000, respectively. In addition, the Company has agreed to function
as the agent of Vivendi's water subsidiary for operations under the amended
and restated contract with the Puerto Rico Aqueduct and Sewer Authority
("PRASA") (see Note 12); Vivendi had previously guaranteed performance of
PSG's original contract with PRASA. VNA also has partially indemnified
certain obligations of the Company relating to the bonding of certain
contracts (see Note 15).
(4) RECAPITALIZATION
Exchange
On January 28, 1998, pursuant to the terms of the Recapitalization
Agreement, dated as of September 24, 1997 (as amended, the
"Recapitalization Agreement"), among the Company, Vivendi, and VNA, 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 the Company's Class A
Common Stock, par value $.001 per share (the "Class A Common Stock").
Immediately following the Exchange, Vivendi beneficially owned in the
aggregate approximately 72.2% of the outstanding Class A Common Stock and
voting control 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 were not paid and were extinguished pursuant to the
Exchange.
Rights Offering
On January 26, 1998, the Board of Directors of the Company declared a
dividend (the "Rights Offering") 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 VNA) in the Rights Offering to
receive transferable three-year warrants (the "Warrants") to purchase
shares of Class A Common Stock at an exercise price of $2.50 per share,
subject to customary antidilution adjustments.
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 VNA 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 VNA) in the Rights Offering. In accordance with the terms of
the Rights Offering, neither Vivendi nor VNA 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 "AAI.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 VNA. 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) and
payment of fees related to the Recapitalization of approximately $5.8
million.
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.
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 control 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 $0.5
million to holders of Convertible Debentures who provided their consents.
Charter Amendment
In connection with the Rights Offering, on January 26, 1998, the Board
of Directors of the Company adopted a resolution setting forth proposed
amendments to the Restated Certificate of Incorporation of the Company (the
"Charter Amendment"). On February 6, 1998, Vivendi and VNA, beneficial
owners as of such date 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
VNA 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.
Prior to the filing of the Charter Amendment, 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. The Company's Bank Credit Facility currently
prohibits dividend payments. (See Note 7.)
(5) RESEARCH-COTTRELL
On December 2, 1997, as part of the implementation of its revised
business strategy, the Company announced that it would divest its
Research-Cottrell business segment which provides air pollution control
technologies and services.
On June 6, 1998, the Company entered into an agreement with Hamon & Cie
("Hamon"), pursuant to which Hamon acquired substantially all assets
(excluding certain contracts) and assumed substantially all liabilities
(excluding certain contracts, employee benefits and insurance liabilities)
related to the air pollution control operations of Research-Cottrell,
Thermal Transfer Corporation and Custodis-Cottrell, including the stock of
certain related European subsidiaries. The transaction closed on July 23,
1998, and the Company received $6.8 million. The final purchase price is
expected to be $7.5 million after a $2.3 million payment to Hamon in August
1998 for the cash flows generated by the businesses during the closing
period and including a $3.0 million deferred payment by Hamon due in July
2000. The $3.0 million deferred payment is subject to adjustment pursuant
to possible indemnification in favor of Hamon under the agreement.
Management does not expect any adjustment to the deferred payment at this
time.
During October 1998, the Company finalized the sale of two additional
units of the air pollution control business (Flex-Kleen & KVB) in two
separate transactions. The sale of these businesses which included the sale
of substantially all of the assets of Flex-Kleen and the common stock of
KVB was accomplished for a total value approximating $14.4 million, after
taking into consideration certain post-closing price adjustments. In
connection with the sale of KVB, the Company accepted $435,000 of notes
payable due in installments through the year 2001.
During 1998, the Company revised its estimated loss on disposal and
recorded an additional $6.0 million charge. Although management believes
that current provisions for the liquidation of Research-Cottrell are
adequate, the estimated loss on disposal and losses through disposition may
change in the near-term based on the final settlements relating to the sale
of the Research-Cottrell operations, actual results through disposition and
final resolution of any retained liabilities.
Summarized balance sheet data of Research-Cottrell, as of October 31,
1998, and October 31, 1997, is as follows (in thousands):
1998 1997
------- -------
Current assets......................... $ 4,431 $ 44,441
Current liabilities.................... 3,513 45,617
------- -------
Net current assets (liabilities)....... 918 (1,176)
------- -------
Goodwill............................... 2,000 20,383
Property, plant and equipment and other 409 4,069
------- -------
Net non-current assets................. 2,409 24,452
------- -------
Net carrying value..................... $ 3,327 $23,276
======= =======
The current assets consist primarily of accounts receivable, costs and
estimated earnings in excess of billings on uncompleted contracts and
inventories. The current liabilities consist primarily of accounts payable,
accrued expenses and billings in excess of costs and estimated earnings on
uncompleted contracts. In addition to the above amounts are estimated
retained liabilities of $20,011,000 related to the estimated losses through
disposition, certain warranty, litigation, lease and other obligations
which are included in accrued expenses at October 31, 1998.
Summarized operations data of Research-Cottrell, for the years ended
October 31, 1998, 1997, and 1996 is as follows (in thousands):
1998 1997 1996
-------- -------- --------
Sales.............................. $ 95,674 $173,140 $219,008
Costs and expenses................. 95,974 211,400 206,910
Depreciation and amortization...... 987 5,101 6,032
-------- -------- --------
Operating income (loss)............ (1,287) (43,361) 6,066
Non-operating income (expense)..... 1,287 (854) 550
-------- -------- --------
Income (loss) before taxes and -- (44,215) 6,616
loss on disposal...................
Income taxes....................... -- (639) (828)
-------- -------- --------
Income (loss) on operations ....... -- (44,854) 5,788
Loss on disposal................... (6,000) (63,900) --
-------- -------- --------
Income (loss) from discontinued
operations......................... $(6,000) $(108,754) $ 5,788
======== ======== ========
Also included in the Company's consolidated balance sheets are the net
assets of the discontinued asbestos abatement operations which amounted to
$830,000 and $585,000 at October 31, 1998 and 1997, respectively.
(6) INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES
In prior years the Company designed and constructed environmental
treatment facilities for certain governmental entities (the "Entities").
The cost of these facilities was primarily funded through the issuance of
tax-exempt Industrial Revenue Bonds by the Entities, the proceeds of which
were loaned to the Company. The Entities have entered into long-term
service agreements with the Company which transfer to them substantially
all risks of ownership and which will generate sufficient revenues to
service the debt and return the Company's investment. Accordingly, these
transactions have been accounted for as sales-type leases. Consistent with
the definition of a legal right of offset (the related agreements provide
for a net settlement of the obligations between the parties, and the
revenues referred to above are legally assigned to payment of debt
service), neither the facilities nor the associated nonrecourse debt
(approximately $27,135,000 and $28,575,000 at October 31, 1998 and 1997,
respectively) is reflected in the accompanying consolidated balance sheets.
These agreements provide for various performance guarantees by the Company.
Management believes that the Company will continue to maintain the
stipulated performance guarantees.
The net investment in these sales-type leases consists of the following
at October 31, 1998 and 1997, respectively (in thousands):
1998 1997
---- ----
Future minimum lease payments...................$ 33,905 $ 35,804
Expected residual value (unguaranteed).......... 9,354 9,354
Unearned income................................. (4,094) (4,607)
------- --------
Net investment in leases........................ 39,165 40,551
Offset--nonrecourse debt, net of available
funds in hands of trustee..................... (22,176) (23,933)
-------- --------
Net investment in leases........................ 16,989 16,618
Facility enhancements, net of depreciation...... 4,662 5,199
-------- --------
Investments in environmental treatment
facilities...................................$ 21,651 $ 21,817
======== ========
The expected residual value is considered a significant estimate which
is subject to change.
At October 31, 1998, minimum lease payments to be received, net of
executory costs for each of the five succeeding fiscal years, are
$2,087,000, $2,199,000, $2,325,000, $2,455,000 and $2,590,000.
(7) FINANCING ARRANGEMENTS:
Since 1996, the Company has maintained a $60.0 million seven-year
revolving credit facility with VNA which was to mature on August 2, 2003.
As of October 31, 1997, the Company's borrowings under the facility totaled
$60.0 million. These borrowings were repaid in full on March 4, 1998 with a
portion of the gross proceeds from the Rights Offering previously
discussed, and the facility was terminated. Interest on the facility was
charged at LIBOR plus 0.6%. Interest expense related to this facility was
$1,293,000, $3,686,000 and $714,000 for the years ended October 31, 1998,
1997 and 1996, respectively.
The Company also maintains a senior secured bank credit facility (the
"Bank Credit Facility"), dated as of March 10, 1995, with Societe Generale,
New York Branch ("Societe Generale"). As of October 31, 1998, the Company
had no borrowings under the Bank Credit Facility and outstanding letters of
credit under the Bank Credit Facility totaled $19.0 million (unused
capacity of $51.0 million subsequently reduced to $31.0 million). The Bank
Credit Facility was decreased, at the Company's request, from $70.0 million
to $50.0 million as of December 12, 1998.
As of December 12, 1997, the configuration and structure of the Bank
Credit Facility was revised. Societe Generale purchased and assumed from
all of the other lending banks under the Bank Credit Facility all of such
banks' rights and obligations under the Bank Credit Facility, becoming the
sole lending bank thereunder. In addition, the Company and Societe
Generale, entered into an amendment to extend the Bank Credit Facility
until December 11, 1998. The amendment waived the Company's compliance with
certain covenants and amended others. As of December 12, 1998, the Company
entered into an agreement with Societe Generale for a short-term extension
of the facility and continued the waiver of the Company's compliance with
certain covenants of the Bank Credit Facility until a longer-term extension
was developed. As of January 12, 1999, Societe Generale advised the Company
of the extension of the existing Bank Credit Facility, subject to execution
of legal documentation, to December 11, 1999. It is expected that there
will be no significant changes in the terms and conditions contained in the
Bank Credit Facility extension and that the waivers and amendments
previously provided to the Company with regard to certain financial
covenants would be continued. It is management's intent to renegotiate the
terms of the existing facility prior to its maturity in order to replace it
with a longer-term 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 $50 million or the sum of a
percentage of certain eligible receivables, inventories, net property,
plant and equipment and costs and estimated earnings in excess of billings,
and bear interest at LIBOR plus 1.25% or at a defined bank rate
approximating prime (8.0% at October 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 Vivendi 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 Vivendi for its support in an amount
equal to 0.95% per annum of the outstanding commitment of its credit
facilities ($0.9 million and $1.2 million for the years ended October 31,
1998 and 1997, respectively).
The gross amount of proceeds from and repayments of working capital
borrowings under these credit facilities consists of the following (in
thousands):
1998 1997 1996
---- ---- ----
Borrowings.......................$ 12,800 $ 1,171 $ 729
Repayment........................ (75,800) (1,169) (711)
-------- ------- -------
Net..............................$(63,000) $ 2 $ 18
========== ======= =======
(8) LONG-TERM DEBT
The Company's long-term debt consists of the following at October 31,
1998 and 1997, respectively (in thousands):
1998 1997
---- ----
Term loan from Vivendi....................$ -- $125,000
Convertible Subordinated Debentures due
May 15, 2015.............................. 115,000 115,000
VNA credit facility (Note 7).............. -- 60,000
Bank Credit Facility (Note 7)............. -- 3,000
Note due July 1, 2007 at 8.5%............. 2,995 3,095
Real estate mortgage loans at 8.75%....... 1,853 2,148
------- -------
119,848 308,243
Less current installments of long-term
debt...................................... (443) (398)
------- -------
Long-term debt............................$119,405 $307,845
======= =======
As of October 31, 1997, the Company had outstanding a $125 million term
loan from Vivendi as an unsecured facility bearing interest at a rate based
upon one, two, three or six-month LIBOR, as selected by the Company, plus
1.25%, which had a final maturity of June 15, 2001. The term loan contained
certain financial and other restrictive covenants with respect to the
Company relating to, among other things, the maintenance of certain
financial ratios, and restrictions on the sale of assets and the payment of
dividends on or the redemption, repurchase, acquisition or retirement of
securities of the Company or its subsidiaries. Interest expense related to
this term loan was $3,059,000, $8,715,000, and $8,884,000 during the years
ended October 31, 1998, 1997 and 1996, respectively. The Company repaid
this loan in full on March 4, 1998, with a portion of the gross proceeds
from the Rights Offering previously discussed and concurrently terminated
the facility.
Interest on the Convertible Debentures is payable semi-annually at 8.0%.
The Convertible Debentures are redeemable in whole or in part at the option
of the Company at any time, at a redemption price of 101.60% of the
principal amount as of October 31, 1998, reducing to 100% of the principal
amount on May 15, 2000, together with accrued interest to the redemption
date. The Convertible Debentures require equal annual sinking fund payments
beginning May 15, 2000, which are calculated to retire 75% of the
Convertible Debentures prior to maturity. The Convertible Debentures are
convertible into shares of Class A Common Stock at a conversion price of
$30.00 per share subject to adjustments as defined. (See Note 4.)
At October 31, 1998, the aggregate maturities of long-term debt for each
of the five succeeding fiscal years and thereafter are approximately $0.4
million, $6.2 million, $6.3 million, $6.3 million, $6.3 million, and $94.3
million.
(9) STOCK OPTION AND PURCHASE PLANS
Under the Company's employee stock purchase plan (the "Stock Purchase
Plan"), officers and other key employees may be granted the right to
purchase up to 1,000,000 shares of the Company's Class A Common Stock. The
Compensation and Stock Option Committee of the Board of Directors
determines the purchase price of shares issuable under the Stock Purchase
Plan. At each of October 31, 1998, 1997 and 1996, approximately 232,000
shares of Class A Common Stock were available for grant under the Stock
Purchase Plan.
The Company established a stock incentive plan (the "Plan") in 1996
under which stock options and awards may be granted to purchase shares of
common stock of the Company. The Plan authorizes the granting of stock
options and restricted stock awards for up to an aggregate of 1,000,000
shares of Class A Common Stock of the Company plus shares remaining
available for award under the prior plan established in 1989. In addition,
during 1996 the Company instituted a "Fresh Start" option program under
which employees could relinquish their rights under outstanding options (at
exercise prices ranging from $11.75 to $29.43) and receive a new option at
$8.00 per share as adjusted using a Black- Scholes pricing model. Under
this program, options to purchase 996,737 shares were forfeited and options
to purchase 447,291 shares were granted. The following is a summary of
certain information pertaining to options under the Plan, all of which were
granted at the fair market value.
1998 1997 1996
---- ---- ----
Outstanding
Beginning of year........ 1,207,334 1,711,331 1,985,120
Granted.................. 1,651,500 60,000 999,177
Exercised................ -- -- (1,250)
Forfeited................ (432,982) (563,997) (1,271,716)
--------- --------- ----------
Outstanding
End of year.............. 2,425,852 1,207,334 1,711,331
========= ========= ==========
At October 31
Exercisable ............. 919,479 934,910 887,952
Available for grant...... 1,324,643 2,543,161 2,039,164
Outstanding Option price
per share:
Weighted average......... $ 4.30 $ 7.91 $ 8.16
Range.................... $ 2.00 $ 4.31 $ 4.25
to to to
$ 28.57 $ 28.57 $ 28.57
Exercised Option price per
share:.................... $ -- $ -- $ 6.00
As permitted under generally accepted accounting principles, grants
under the Plan are accounted for following APB Opinion No. 25 and related
interpretations, and accordingly no compensation cost has been recognized
in the financial statements. Had compensation cost for the Plan been
determined based on the grant date fair values of award (the method
described in FASB statement No. 123), the reported net loss would have been
increased to $50,503,000, $161,671,000 and $6,427,000 in the years ended
October 31, 1998, 1997, and 1996, respectively and the loss per common
share after preferred stock dividend would have been unchanged for the year
ended October 31, 1998 and would have been increased to $5.15, and $0.30 in
the years ended October, 1997, and 1996, respectively. In determining the
pro forma amounts referred to above, the fair value of each grant is
estimated at the grant date using the Black-Scholes option pricing model
with the following weighted average assumptions for grants: zero dividend
rate for 1998, 1997 and 1996, price volatility of 60% for 1998 and 44% for
both 1997 and 1996, expected lives of seven years for 1998 and eight years
for 1997 and 1996, and risk free interest rates of 5.8%, 6.0%, and 6.3% in
1998, 1997, and 1996, respectively.
(10) BENEFIT PLANS
The Company has various retiree benefit plans, the most significant of
which are as follows:
The Company maintains savings and retirement plans in which the Company
matches a fixed percentage of each employee's contribution up to a maximum
of 4% of such employee's compensation. One plan also provides for annual
discretionary Company contributions which are fixed by the Board of
Directors based on the performance of the applicable employee group for
certain eligible employees. The expense charged to continuing operations
applicable to these plans was approximately $2,900,000, $1,700,000 and
$2,200,000 for the years ended October 31, 1998, 1997 and 1996,
respectively.
The Company maintains defined benefit plans which cover certain active
and retired employees, including substantially all of its eligible
employees within the PSG operating segment. The pension costs related to
these plans were determined by actuarial valuations and assumptions
(including discount rates at 7.5%) and approximated $1,600,000, $1,500,000
and $1,300,000 for the years ended October 31, 1998, 1997 and 1996,
respectively. The accrued pension liabilities were approximately
$3,700,000, $2,800,000 and $2,800,000 at October 31, 1998, 1997 and 1996,
respectively.
(11) INVESTMENTS IN JOINT VENTURES
The Company, in the normal conduct of its subsidiaries' businesses, has
entered into certain partnership arrangements, referred to as "joint
ventures." The joint ventures operate primarily in the water and wastewater
engineering industry. The joint venture activities typically include
engineering, design and/or construction management services. Certain joint
ventures are also involved in program management of construction
activities. A separate joint venture is established with respect to each
such project. The joint venture arrangements generally commit each partner
to supply a predetermined proportion of the engineering labor and capital,
and provide each partner a predetermined proportion of income or loss. The
Company is jointly and severally liable for the obligations of the joint
ventures and has rights to the assets in proportion to its share of
ownership. Each joint venture is terminated upon the completion of the
underlying project.
The Company's investment in joint ventures (included in other assets)
amounted to $489,000 and $2,775,000 at October 31, 1998 and 1997,
respectively. In addition, the Company had receivables from the joint
ventures totaling $2,221,000 and $2,581,000 at October 31, 1998 and 1997,
respectively, related to current services provided by the Company to the
joint ventures. The Company's share of its joint venture income (loss)
amounted to $(4,883,000), $(25,000) and $1,127,000 during the years ended
October 31, 1998, 1997 and 1996, respectively.
(12) PUERTO RICO
In September 1995 PSG's wholly-owned subsidiary PS Group of Puerto Rico
(PSG), Inc. ("PSG Puerto Rico") commenced operations under a five year
agreement with the Puerto Rico Water and Sewer Authority ("PRASA"), a
public corporation of the Commonwealth of Puerto Rico, providing for the
operation, management, repair and maintenance of Puerto Rico's water and
sewage treatment system. The PRASA system serves the 3.8 million residents
of Puerto Rico. Pursuant to the terms of 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.
During the term of this contract PRASA and the Company have disputed
certain costs paid or incurred by the Company on behalf of PRASA and the
payment of certain related power costs due to the Puerto Rico Electric
Power Authority ("PREPA") by the Company. As a result, at October 31, 1997
the Company had $34.3 million of these unreimbursed costs outstanding and
amounts payable to PREPA totaling $33.2 million. In June 1998, the Company
entered into an agreement which addressed the issues relating to
unreimbursed costs, settled any disputed items through February 1998 and
developed procedures to minimize the potential build-up of these costs in
the future. Concurrently, the Company collected $9.6 million in settlement
of prior claims and costs in question and used these proceeds to reduce its
obligations to PREPA. On September 15, 1998, the Company and a Vivendi
subsidiary executed a replacement contract, which amended and restated the
original contract, with PRASA for a term of approximately three years
beginning September 15, 1998. The Company has agreed to function as the
agent of Vivendi's water subsidiary for operations under the new contract
through a Puerto Rico subsidiary of the Company. In addition, among the
other terms of the contract, the Company, Vivendi and PRASA agreed to an
increase in the scope and fee structure of the original contract. PRASA has
an option to terminate the contract after two years with ninety-days
written notice. Management expects that the contract with PRASA will not be
prematurely cancelled by PRASA but will remain in effect through its
extended term, August 31, 2001. As of October 31, 1998, the Company's
contract with PRASA accounted for 39% and 24% of PSG and total Company
sales respectively and approximately 41% of the Company's total
reimbursable costs. Revenues under the new contract are expected to reach
approximately $125 million per year. As of October 31,1998, PSG had
receivables of $45.7 million due from PRASA, including amounts for certain
reimbursable costs, which are expected to be collected in fiscal 1999, and
had amounts payable to PREPA totaling $35.3 million.
Additionally, the PRASA employees who operate the PRASA facilities are
subject to a collective bargaining agreement which expired in June 1998.
The Company is currently negotiating a new collective bargaining agreement.
(13) BUSINESS SEGMENTS
Through October 31, 1998, the Company's operations may be categorized in
three business segments:
Professional Services Group provides complete services for the
operation, maintenance and management of treatment facilities in the
various water and wastewater and sludge and biosolids waste management
markets. Sales are primarily to municipal government agencies, including
sales under its contract with PRASA representing 39% of total segment sales
in each of the years 1998, 1997 and 1996. In addition, total receivables
due from PRASA for certain reimbursable costs were $45.7 million and $34.3
million at October 31, 1998 and 1997, respectively. (See Note 12).
Metcalf & Eddy provides a comprehensive range of water related services,
including treatment process design and on-site and off-site remediation of
environmental contamination. Sales to federal, state and municipal
governmental agencies approximated 73% of M&E's sales for the year ended
October 31, 1998, compared to 80% for both years ended October 31, 1997,
and 1996.
Research-Cottrell provides air pollution control technologies and
services. As discussed in Note 5, the Company's Board of Directors has
decided to divest this segment.
Sales to the federal government represented approximately 10%, 10%, and
15% of consolidated sales in the years ended October 31, 1998, 1997, and
1996, respectively. Sales between segments are included within the segment
recording the sales transaction and eliminated for consolidation purposes.
Unallocated corporate expenses includes administrative costs not allocable
to a specific segment. Identifiable assets are those assets used by each
segment in its operation. Corporate assets primarily include cash, fixed
assets, net assets from discontinued operations and deferred debt issuance
costs. Sales and identifiable assets of foreign operations as of and for
the years ended October 31, 1998, 1997, and 1996 were less than 10% of the
consolidated assets and sales.
Information by business segment is as follows (in thousands):
<TABLE>
<CAPTION>
Metcalf Research- Unallocated
PSG & Eddy Cottrell Other Corporate Eliminations Consolidated
---- ------- --------- ----- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended October
31, 1998:
Sales...................... $ 271,512 $ 176,007 $ -- $ -- $ -- $ (2,400) $ 445,119
Costs and expenses......... 257,845 188,330 -- -- 4,341 (2,400) 448,116
Depreciation and
amortization............... 5,439 7,156 -- -- 515 -- 13,110
---------- ---------- -------- -------- ------- --------- ----------
Operating income (loss).... $ 8,228 $ (19,479) $ -- $ -- $(4,856) $ -- $ (16,107)
========== =========== ======== ======== ======== ========= ===========
Identifiable assets as of
October 31, 1998........... $ 166,491 $ 148,555 $ 3,810 $ -- $40,496 $ -- $ 359,352
========== ========== ======= ======= ======= ======== =========
Capital expenditures....... $ 1,247 $ 2,818 $ -- $ -- $ 17 $ -- $ 4,082
=========== ========== ======= ======= ======= ======== =========
Depreciation............... $ 2,467 $ 3,767 $ -- $ -- $ 379 $ -- $ 6,613
========== ========== ======= ====== ====== ======== =========
FOR THE YEAR ENDED OCTOBER
31, 1997:
Sales...................... $ 271,650 $ 186,490 $ -- $ -- $ -- $ (1,765) $ 456,375
Costs and expenses......... 261,707 192,936 -- -- 13,450 (1,765) 466,328
Depreciation and
amortization............... 8,119 8,227 -- -- 515 -- 16,861
---------- ---------- -------- ------- ------- --------- ----------
Operating income (loss).... $ 1,824 $ (14,673) $ -- $ -- $(13,965) $ -- $ (26,814)
=========== =========== ======== ======= ======== ========= ===========
Identifiable assets as of
October 31, 1997 $ 173,041 $ 165,794 $ 24,452 $ 88 $ 19,690 $ -- $ 383,065
========== ========== ======== ======= ======== ========= ==========
Capital expenditures....... $ 2,448 $ 2,479 $ -- $ -- $ 22 $ -- $ 4,949
========== ========== ======== ======= ======== ========= ==========
Depreciation............... $ 1,676 $ 4,785 $ -- $ -- $ 378 $ -- $ 6,839
========== ========== ======== ======= ======== ========= ==========
FOR THE YEAR ENDED OCTOBER
31, 1996:
Sales...................... $ 270,640 $ 215,358 $ -- $ -- $ -- $ (3,907) $ 482,091
Costs and expenses......... 255,882 195,745 -- -- 8,720 (3,907) 456,440
Depreciation and
amortization............... 7,335 6,223 -- -- 425 -- 13,983
--------- ---------- -------- ------- ------ --------- ---------
Operating income (loss).... $ 7,423 $ 13,390 $ -- $ -- $(9,145) $ -- $ 11,668
========== ========== ========= ======= ======= ========= =========
Identifiable assets as of
October 31, 1996........... $ 157,566 $ 188,403 $124,465 $ 154 $25,770 $ -- $ 496,358
========== ========== ======== ====== ======= ======== =========
Capital expenditures....... $ 2,520 $ 3,604 $ -- $ -- $ 152 $ -- $ 6,276
=========== ========== ======== ====== ======= ======== ==========
Depreciation............... $ 1,703 $ 3,083 $ -- $ -- $ 406 $ -- $ 5,192
========== ========== ======== ====== ======= ======== ==========
</TABLE>
(14) INCOME TAXES
At October 31, 1998, the Company had a net deferred tax asset of
$155,600,000 which has been fully reserved by a valuation allowance. The
deferred tax asset is comprised of the tax effects of net operating losses
of $135,660,000, receivable reserves of $3,420,000 accruals not yet
deductible of $18,724,000, and other assets of $1,064,000. A deferred tax
liability is comprised of fixed assets depreciation of $2,508,000 and
inventory reserves of $760,000. At October 31, 1998, the Company had tax
loss carryforwards of approximately $357,000,000. Such carryforwards expire
through 2018.
Loss from continuing operations before income taxes during the years
ended October 31, 1998, 1997 and 1996, respectively, from the United States
was $(31,436,000), $(51,131,000) and $(9,041,000) and from foreign
jurisdictions was $(334,000), $(182,000) and $(3,261,000). The provision
(benefit) for income taxes during the years ended October 31, 1998, 1997,
and 1996, respectively, included foreign taxes of $310,000, $185,000 and
$(1,071,000) and state taxes of $789,000, $329,000 and $(175,000). The
difference between the income tax provision (benefit) computed by applying
the statutory U.S. federal income tax rate to the pretax loss from continuing
operations and the actual tax provision (benefit) is as follows (in
thousands):
1998 1997 1996
------- ------- ------
Statutory U.S. federal benefit.... $(11,120) $(17,960) $(4,306)
State and local taxes net........ 513 214 (114)
Goodwill and other............... 4,774 2,709 2,634
Net operating loss............... 6,505 15,302 470
Foreign operations............... 427 249 70
-------- -------- ---------
$ 1,099 $ 514 $(1,246)
======== ======== =========
(15) COMMITMENTS AND CONTINGENCIES
DOJ Investigation
In connection with a broad investigation by the U.S. Department of
Justice (the "DOJ") into alleged illegal payments by various persons to
members of the Houston City Council, the Company's subsidiary, PSG,
received a federal grand jury subpoena on May 31, 1996, requesting
documents regarding certain PSG consultants and representatives who had
been retained by PSG to assist it in advising the City of Houston regarding
the benefits that could result from the privatization of Houston's water
and wastewater system (the "DOJ Investigation"). PSG has cooperated and
continues to cooperate with the DOJ which has informed the Company that it
is reviewing transactions among PSG and its consultants. The Company
promptly initiated its own independent investigation into these matters and
placed PSG's then Chief Executive Officer on administrative leave of
absence with pay. The PSG Chief Executive Officer, who has denied any
wrongdoing, resigned from PSG on December 4, 1996. In the course of its
ongoing investigation, the Company became aware of questionable financial
transactions with third parties and payments to certain PSG consultants and
other individuals, the nature of which requires further investigation. The
Company has brought these matters to the attention of the DOJ and continues
to cooperate fully with its investigation. No charges of wrongdoing have
been brought against PSG or any PSG executive or employee by any grand jury
or other government authority. However, since the government's
investigation is still underway and is conducted largely in secret, no
assurance can be given as to whether the government authorities will
ultimately determine to bring charges or assert claims resulting from this
investigation that could implicate or reflect adversely upon or otherwise
have a material adverse effect on the financial position or results of
operations of PSG or the Company taken as a whole.
Bremerton Litigation
The City of Bremerton, Washington brought a contribution and contract
action against Metcalf & Eddy Services, Inc. ("M&E Services"), the operator
of a City-owned wastewater treatment plant from 1987 until late 1995. The
action arises from two prior lawsuits against the City for alleged odor
nuisances brought by two groups of homeowners neighboring the plant. In the
first homeowners' suit, the City paid $4.3 million in cash and
approximately $5 million for odor control technology to settle the case.
M&E Services understands the odor control measures generally have been
successful and the odors have been reduced as a result. M&E Services was
not a party to the first homeowners' suit, which has been dismissed with
prejudice as to all parties. In the settlement of the second homeowners'
case, the City of Bremerton paid the homeowners $2.9 million, and M&E
Services contributed $0.6 million to the settlement without admitting
liability. All claims raised by the homeowners in the second suit have been
resolved. All claims by and between M&E Services and the City in the second
homeowners' suit were expressly reserved.
At trial, which commenced on March 2, 1998, the City sought to recover
the amounts it expended on the two settlements, damages for M&E Services'
alleged substandard operation of the plant, and attorney's fees. The
damages claimed exceeded $14 million. On April 22, 1998, the jury returned
a verdict against M&E Services and in favor of the City in the net amount
of approximately $0.6 million. After considering various motions by the
City challenging the verdict and its amount, on June 26, 1998, the trial
court entered final judgement against M&E Services and in favor of the City
in the net amount of approximately $0.75 million. Both sides have appealed.
The appellate court could increase or decrease the judgement by $2.0
million or more or remand the case for a new trail. No assurances can be
given that, as a result of further court proceedings, an adverse judgement
would not have a material adverse effect on the financial position or
results of the Company.
Belgium Litigation
On October 14, 1997, Research-Cottrell, Inc. (now known as AWT Air
Company, Inc.) and its subsidiary, Research-Cottrell Belgium, S.A. (now
known as AWT Air Company (Belgium) S.A.) ("AWT Belgium") were named in a
lawsuit by N.V. Seghers Engineering ("Seghers") filed in the Commercial
Court in Mechelen, Belgium. Seghers is AWT Belgium's joint venture partner
on two large pollution control projects. The suit claims damages of
approximately $13 million allegedly resulting from AWT Belgium's breach of
contract and substandard performance. Damages claimed in the lawsuit
consist not only of Seghers' alleged cost to repair the AWT Belgium
equipment, but also lost profits, damages to business reputation, theft of
employees (AWT Belgium hired two former Seghers employees), increased costs
arising out of the failure to gain timely acceptance of the two plants,
excessive payments to AWT Belgium due to alleged unfair pricing practices
by AWT Belgium and other miscellaneous interest charges and costs. Seghers
has also filed a suit in Belgium against AWT Belgium, Hamon
Research-Cottrell (Belgium) S.A., the purchaser of AWT Belgium's assets,
and related entities, claiming that the sale of AWT Belgium would operate
as a fraud and deprive Seghers of its rightful recovery in the litigation.
The cases involve complex technical and legal issues and are in their early
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
counterclaims based upon Seghers' breaches of contract.
U.S. Attorney's Office Investigation
The United States Attorney's Office (the "U.S. Attorney's Office") in
Boston, Massachusetts is conducting an investigation of certain
entertainment and travel payments allegedly made to Egyptian officials
between 1994 and 1996 by the Company's subsidiary, Metcalf & Eddy
International, Inc. (which was merged into its parent, Metcalf & Eddy,
Inc.), while Metcalf & Eddy International, Inc. was performing services in
Egypt pursuant to contracts with the United Stages Agency for International
Development. M&E has cooperated and continues to cooperate fully with the
U.S. Attorney's Office. No charges of wrongdoing have been brought against
M&E or any M&E executive or employee by any grand jury or other government
authority. To date, the government has advised M&E that it has made no
decision as to how it will proceed.
Other Matters
The Company and its subsidiaries are parties to various other legal
actions and government audits 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 and audits, individually or
in the aggregate, will not have an adverse effect on the consolidated
financial position or results of operations of the Company taken as a
whole. Moreover, as a general matter, providers of services similar to
those provided by the Company may be subject to lawsuits alleging
negligence or other similar claims and environmental liabilities, which may
involve claims for substantial damages. Damages assessed in connection with
and the costs of defending any such actions could be substantial. The
Company's management believes that the levels of insurance coverage are
adequate to cover currently estimated exposures. Although the Company
believes that it will be able to obtain adequate insurance coverage in the
future at acceptable costs, there can be no assurance that the Company will
be able to obtain such coverage or will be able to do so at an acceptable
cost or that the Company will not incur significant liabilities in excess
of policy limits.
The Company and its subsidiaries are obligated under various leases for
office and warehouse facilities and certain machinery, equipment and
fixtures. Lease terms range from under one year to ten years. Certain
leases have renewal or escalation clauses or both. Certain equipment leases
have purchase options. During November 1997, the Company exercised a
cancellation clause for one of its leased facilities which required an
immediate cash payment of $0.4 million. Total rent expense in the periods
ended October 31, 1998, 1997 and 1996 was $13.3 million, $16.9 million, and
$17.1 million, respectively. At October 31, 1998, minimum rental
commitments under all noncancellable leases for the five succeeding fiscal
years, and thereafter, are $8.5 million, $7.9 million, $7.3 million, $6.4
million, $5.6 million and $6.3 million. These minimum rental commitments
are net of noncancellable sub-leases for the four remaining fiscal years of
$1.1 million, $1.1 million, $1.0 million and $0.3 million.
The Company currently maintains various types of insurance, including
workers' compensation, general and professional liability and property
coverages and believes that it presently maintains adequate insurance
coverages for all of its present operational activities. It has been both a
Company policy and a requirement of many of its clients that the Company
maintain certain types and limits of insurance coverage for the services
and products it offers, provided that such types and limits can be obtained
on commercially reasonable terms. In addition to existing coverages, the
Company has been successful in obtaining commercially reasonable coverage
for certain pollution risks, though coverage has been on a claims made
rather than occurrence basis due to the professional nature of some of the
Company's exposures. Claims made policies provide coverage to the Company
only for claims reported during the policy period. The Company's general
liability and other insurance policies have historically contained absolute
pollution exclusions, brought about in large measure because of the
insurance industry's adverse claims experience with environmental
exposures. Accordingly, there can be no assurance that environmental
exposures that may be incurred by the Company and its subsidiaries will
continue to be covered by insurance, or that the limits currently provided
or that may be obtained in the future will be sufficient to cover such
exposures. A successful claim or claims in an amount in excess of the
Company's insurance coverage or for which there is no coverage could have a
material adverse effect on the Company.
In connection with the sale of a manufacturing facility in prior years,
the Company remains contingently liable as guarantor under $1.8 million of
Industrial Revenue Bond financing.
The Company is often required to procure bid, performance and/or payment
bonds from surety companies, particularly for clients in the public sector.
A bid bond guarantees that the Company will enter an awarded contract at
the price bid; a performance bond guarantees performance of the contract by
Company; and a payment bond (which may or may not be issued in conjunction
with a performance bond) secures the Company's payment obligations to its
subcontractors and vendors under bonded contracts. The Company entered into
an Agreement of Indemnity (the "Indemnity Agreement"), dated as of
September 15, 1998, with the CIGNA Companies ("CIGNA"). Under the Indemnity
Agreement, CIGNA, through any one or more of its companies, will provide
bid, performance and/or payment bonds in support of the Company's client
contractual requirements. The Indemnity Agreement requires no additional
indemnity or guarantee other than that provided by Company. The Company
also maintains a Master Surety Agreement (the "Master Agreement"), dated
October 31, 1995, with United States Fidelity and Guaranty Company and
certain of its affiliates (collectively "USF&G"). USF&G was recently
acquired by the St. Paul Fire and Marine Insurance Company. Pursuant to the
Master Agreement, USF&G has provided bid, performance and/or payment bonds
in support of the Company's client contractual requirements. VNA has
partially indemnified USF&G under the Master Agreement.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 By Quarter
--------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Sales........................$110,274 $111,802 $105,708 $117,335 $ 445,119
-------- -------- -------- -------- ----------
Gross margin................. 14,413 13,958 16,190 10,821 55,382
-------- -------- -------- ---------- ----------
Loss from continuing
operations................... (10,761) (10,950) (6,730) (4,428) (32,869)
--------- --------- --------- --------- -----------
Loss from discontinued
operations................... -- (6,000) -- -- (6,000)
-------- --------- -------- --------- ------------
Cumulative effect on prior
years (to October 31,
1997) of change in
method of accounting for
start-up costs (Note 2)... (11,082) -- -- -- (11,082)
--------- --------- -------- --------- -----------
Net loss.....................$(21,843) $(16,950) $ (6,730) $ (4,428) $ (49,951)
========= ========= ========= ========= ===========
Loss per common share
after preferred stock
dividend:
Continuing operations........$ (.32) $ (.08) $ (.04) $ (.02) $ (.24)
--------- ---------- --------- --------- ---------
Discontinued operations...... -- (.04) -- -- (.05)
Cumulative effect on prior
years (to October 31,
1997) of change in
method of accounting for
start-up costs (Note 2)... (.34) -- -- -- (.08)
--------- ---------- --------- --------- ----------
Net loss.....................$ (.66) $ (.12) $ (.04) $ (.02) $ (.37)
========== ========== ========= ======== ==========
1997 By Quarter
------------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
Sales........................$ 106,637 $ 108,631 $ 110,828 $ 130,279 $ 456,375
---------- ---------- --------- ---------- ---------
Gross margin................. 17,170 7,522 21,371 24,739 70,802
---------- ---------- --------- ---------- ---------
Loss from continuing
operations................... (9,792) (33,304) (2,024) (6,707) (51,827)
----------- ----------- ---------- ---------- ----------
Loss from discontinued
operations................... (2,738) (30,682) (2,766) (72,568) (108,754)
---------- ----------- -------- ---------- ----------
Net loss.....................$ (12,530) $ (63,986) $ (4,790) $ (79,275) $(160,581)
=========== =========== ========= ========== ==========
Income (loss) per common
share after preferred
stock dividend:
Continuing operations........$ (.33) $ (1.07) $ (.09) $ (.20) $ (1.72)
----------- ----------- --------- --------- ---------
Discontinued operations...... (.09) (.95) (.09) (2.27) (3.40)
----------- ----------- --------- --------- ---------
Net loss.....................$ (.42) $ (2.02) $ (.18) $ (2.47) $ (5.12)
========== ========== ======== ========= ========
</TABLE>
Note a: Earnings (loss) per share for the full year is not necessarily the
sum of the four quarters due to different average shares outstanding
for each discrete period.
Note b: Significant charges affecting the comparability of the 1997
quarterly loss from continuing operations include a $1.7 million
first quarter charge related to a cancellation penalty for a high
cost leased facility; operating charges of $26.6 million reflected
in the second quarter for professional fees related to marketing
consultants and the DOJ investigation, increases to reserves for
litigation, professional liability and certain project
contingencies, increases to receivable reserves, equipment
write-offs and other direct and indirect costs; a $3.2 million
third quarter reduction in previously accrued discretionary and
self-insured employee benefits; a fourth quarter $5.0 million
asset impairment charge related to the Branchburg facility and a
$0.8 million severance benefit related to the former chief
executive officer.
Note c: Significant charges affecting the comparability of the 1997
quarterly loss from discontinued operations include a $25.0
million impairment charge primarily related to Ecodyne and KVB and
operating charges of $4.0 million related to increases to Ecodyne
receivable and Custodis warranty reserves both of which were
reflected during the second quarter; third quarter operating
charges of $2.3 million primarily related to higher than
anticipated costs on a specific APCD project and increases to
receivable and warranty reserves for R-C International partially
off-set by a reduction of previously accrued discretionary and
self-insured employee benefits; fourth quarter operating charges
of $8.1 million related to additional increases to warranty
reserves at R-C International, additional costs related to an APCD
project and various other reserves for retained assets of
businesses previously sold as well as an estimated loss on the
disposal of the segment of $63.9 million.
Note d: Significant charges affecting the comparability of the 1998 fourth
quarter loss from continuing operations include $4.2 million and
$9.1 million of additional contract reserves for PSG and M&E,
respectively; $4.6 million for potential claims and accounts
receivable reserves; and $1.3 million for the closure of the
Houston office. Partially offsetting these charges are the $3.0
million impairment recovery in the carrying value of the
Branchburg building; a $2.3 million favorable settlement of a
lawsuit related to discontinued operations; a $6.5 million
recovery of prior period claims and costs, as well as a revised
fee structure under the PRASA contract. Also, as a result of the
Recapitalization, interest expense decreased by $3.8 million in
the fourth quarter. The early adoption of SOP 98-5 resulted in a
decrease in amortization expense of approximately $0.9 million in
the fourth quarter. In the second quarter of 1998 the company
recorded an additional $6.0 million change related to discontinued
operations as more fully described in Note 5.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and principal occupations of the
directors and executive officers of the Company as of October 31, 1998:
Name Age Position
- ---- --- ---------
William V. Kriegel 53 Chairman of the Board of Directors
Thierry M. Mallet 38 President, Chief Executive Officer and
Director
Alain Brunais 50 Senior Vice President, Chief Financial
Officer and Director
Neil Lawrence Lane 35 Vice President, General Counsel and
Secretary
Michael A. Szomjassy 47 Acting Executive Vice President and Chief
Operating Officer
Joseph M. Bolton 54 Acting Executive Vice President of Business
Development
Joseph R. Vidal 51 Treasurer
Jeffrey M. Fitzgerald 51 Acting Vice President and Corporate Controller
Gail M. Fulwider 48 Vice President of Human Resources
Robert S. Volland 57 Vice President and Chief Administrative
Officer
Francis X. Ferrara 42 Vice President and Associate General Counsel
Kevin P. Duffy 42 Vice President and Associate General Counsel
Jekabs P. Vittands 62 Senior Vice President
George C. Mammola 58 Senior Vice President and President, AWT
Air Company, Inc.
Jean-Claude Banon 50 Director
Daniel Caille 47 Director
Martha O. Hesse 56 Director
Francois Jobard 46 Director
John W. Morris 77 Director
Mr. Kriegel was elected Chairman of the Board on October 24, 1997 and
has served as a director of the Company since June 14, 1994. Mr. Kriegel
has served as Chairman of the Board, President, Chief Executive Officer and
a director of Sithe Energies, Inc. and all of its subsidiaries since 1981.
Prior to coming to the United States in 1984, Mr. Kriegel co-founded an
unaffiliated French energy company that within three years of its formation
in 1980 became France's largest privately-owned company engaged in the
development of small hydro-electric projects. Since December 1996, Mr.
Kriegel has served as Chairman of the Board and Chief Executive Officer of
VNA. In this capacity, Mr. Kriegel is the representative of Vivendi in the
United States. Mr. Kriegel has been designated by Vivendi as a director of
the Company under the Investment Agreement.
Mr. Mallet was appointed President and Chief Executive Officer of the
Company on October 24, 1997 and a director of the Company on October 26,
1997. Prior to joining the Company, Mr. Mallet served from 1995 as
"'Consejo Delegado" (President and Chief Executive Officer) of Sociedad
Mediterranean de Aguas ("'SMA"') which manages the water and wastewater
business of Vivendi in Spain. Prior to SMA, Mr. Mallet was Charge de
Mission to the General Management of Vivendi in Paris. Mr. Mallet has been
designated by Vivendi as President, Chief Executive Officer and a director
of the Company under the Investment Agreement.
Mr. Brunais was elected Vice President and Chief Financial Officer of
the Company in September 1994, a director in November 1996 and Senior Vice
President in May 1997. Prior to joining the Company, Mr. Brunais was
responsible since 1990 for foreign investment, primarily in the United
Kingdom, under the direction of the Finance Director of Vivendi. From 1983
to 1989 he was responsible for corporate development for Ciments Francais
in the U.S. and Canada. Prior thereto, Mr. Brunais organized a sales and
services network for Aerospatiale General Aviation line of aircraft in
Europe, Africa and North America. Mr. Brunais has been designated by
Vivendi as Chief Financial Officer and a director of the Company under the
Investment Agreement.
Mr. Lane joined the Company in May 1998 as Acting General Counsel and
Secretary. He was elected Vice President, General Counsel and Secretary in
September of 1998. Mr. Lane has also served as Vice President, General
Counsel and Secretary of VNA since January 1998. Prior to joining VNA, Mr.
Lane had been Vice President and Associate General Counsel of Citicorp
Investment Services, beginning in November 1995. Prior to this, Mr. Lane
had been associated with the law firm of Dewey Ballantine, beginning in
September 1989.
Mr. Szomjassy joined the Company in October 1998 as Acting Executive
Vice President and Chief Operating Officer. Prior to joining the Company,
Mr. Szomjassy was employed by OHM Corporation, an environmental services
company, since November 1989 where he served in various senior management
capacities, including Vice President, Eastern Operations. From 1973 to
1989, he was employed by Ebasco Services Incorporated, an engineering,
construction and environmental services firm where his last position was
Regional Manager, Remediation Services.
Mr. Bolton joined the Company on September 15, 1998, as part of the
Company's reorganization. In his capacity as Acting Executive Vice
President of Business Development, he has primary responsibility to develop
sales for PSG and M&E. He has nearly 30 years of experience in the
leadership and executive management of both public and private engineering,
environmental management, and financial organizations. Prior to joining the
Company, Mr. Bolton served as a partner in his own management and
consulting firm, The Lewis & Bolton Company, and has held senior executive
positions with Brown and Caldwell, Greiner Engineering, Earth Technology
Corporation, The Lincoln National Bank Corporation, and Roy F. Weston.
Mr. Vidal was elected Treasurer of the Company in January 1995. Prior to
joining the Company, Mr. Vidal had broad experience in both international
and domestic treasury operations, most recently with American Cyanamid
Company from 1982 to 1995 and prior thereto with Bristol-Myers Squibb. Mr.
Vidal has also had experience as a controller and auditor and began his
professional career with the accounting firm of Arthur Andersen LLP.
Mr. Fitzgerald joined the Company in October 1998 as Acting Vice
President and Corporate Controller. Prior to joining the Company, he served
as the Vice President of Finance with Modus Media International, an $800
million, privately held global provider of supply chain management services
to the information technology industry from 1996 to 1998 and in various
finance and general management positions with R.R. Donnelley & Sons Company
and Subsidiaries from 1986 to 1996. Mr. Fitzgerald began his career with
the accounting firm of KPMG Peat Marwick LLP and is a Certified Public
Accountant.
Ms. Fulwider joined the Company in March 1997 as Vice President of Human
Resources. Prior to joining the Company, Ms. Fulwider was Vice President of
Human Resources at Smith Technologies Corporation from February 1995 until
she joined the Company. Prior to that, Ms. Fulwider served as Vice
President of Human Resources at International Technology Corporation, where
she worked for thirteen years in a wide variety of human resources
management positions.
Mr. Volland was elected Vice President and Chief Administrative Officer
of the Company in June 1994 with oversight responsibility for real estate,
facilities management, procurement, and insurance. Mr. Volland has over
twenty-five years of experience in finance, administration, asset
management, cost control and organizational efficiencies. From 1973 to
1986, Mr. Volland served as Vice President and Treasurer for Commercial
Credit Company. From 1986 to 1993, he served as Vice President and
Treasurer, and Vice President, Corporate Assets, for Primerica Corp. Prior
thereto, he was Senior Vice President of Real Estate for Paine Webber.
Mr. Ferrara joined the Company in February 1993 as Senior Litigation
Counsel. He was elected Vice President and Associate General Counsel in
October 1994. Prior to joining the Company, Mr. Ferrara was a partner in
the Commercial Litigation Group of Carpenter, Bennett & Morrissey, Newark,
New Jersey. Mr. Ferrara commenced his employment with the law firm in June
1980.
Mr. Duffy joined the Company on March 1, 1993 as Labor Counsel and
Director of Compliance. He was elected Vice President and Associate General
Counsel of the Company on October 17, 1994. Prior to joining the Company,
Mr. Duffy was a partner in the law firm of Carpenter, Bennett & Morrissey,
in Newark, New Jersey.
Mr. Vittands was elected Senior Vice President of the Company in May
1997. Mr. Vittands also served as President of Metcalf & Eddy from February
1997 to October 1998. Prior to being named President, he was the branch
manager of M&E's Northeast Region. Mr. Vittands joined M&E in 1963, and has
served in numerous capacities since then, including as client principal for
the Massachusetts Water Resource Authority, with responsibility for the
Boston Harbor Project, and for Washington, D.C., among others.
Mr. Mammola has been the President of Research-Cottrell since December
1994 and was elected Senior Vice President of the Company in May 1997. From
1992 to 1994, he served in various senior management positions for
Research-Cottrell. From 1989 to 1992 he served as Executive Vice President
and General Manager of REECO. Prior to joining REECO, Mr. Mammola served as
Executive Vice President of PPS Inc., an industrial distributor of fluid
and air handling systems. Prior to this, he served in various positions for
Interpace Corporation, a manufacturer and provider of products and services
domestically and internationally to the water and wastewater and utility
industries.
Mr. Banon was elected as a director of the Company on October 9, 1997.
Since 1989, Mr. Banon has been Managing Director of General Utilities PLC,
the holding company for Vivendi's investments in the water industry in the
United Kingdom, and since 1992 he has been Managing Director of Vivendi UK,
Ltd., the holding company for all Vivendi activities in the United Kingdom.
In this capacity, Mr. Banon is the representative of Vivendi in the United
Kingdom. Prior to 1989, Mr. Banon was General Management Delegate
responsible for overseeing the development of Vivendi's business in the
United States. Mr. Banon has been designated by Vivendi as a director of
the Company under the Investment Agreement.
Mr. Caille was elected as a director of the Company on May 29, 1997. Mr.
Caille presently serves as the Chief Executive of Vivendi's worldwide water
business which has annual revenues in excess of $7 billion. Previously, Mr.
Caille served as Chairman of the Board of Vivendi's health care subsidiary,
which he founded in 1987. Mr. Caille joined Vivendi in 1982 as director of
research and development and created Vivendi Recherche, Vivendi's center
for research and development related to its water and wastewater
activities, and he served as Director of Vmichivendi Recherche from 1982 to
1990. Mr. Caille has been designated by Vivendi as a director of the
Company under the Investment Agreement.
Ms. Hesse was elected as a director of the Company on June 24, 1998. Ms.
Hesse is President of Hesse Gas Company, an energy investment company.
Prior to 1999, Hesse Gas Company was also a nationwide natural gas
marketing company. In 1990, Ms. Hesse served as Senior Vice President of
First Chicago Corporation (financial services) and from 1986 to 1989 she
was Chairman of the Federal Energy Regulatory Commission. She is also a
director of Mutual Trust Life Insurance Company, Laidlaw Inc. (Chairman,
Compliance and Ethics Committee), Pinnacle West Capital Corporation, and
Arizona Public Service (Chairman, Audit Committee). She is also a member of
the Beacon Council and the CIGNA Utilities Advisory Board.
Mr. Jobard was elected as a director of the Company on March 23, 1998.
Mr. Jobard presently serves as the Chief Financial Officer of Vivendi's
International Energy Division. Previously, Mr. Jobard served as Chief
Financial Officer of Vivendi's International Water Division and, prior
thereto, was Charge de Mission to Vivendi's Chief Financial Officer. Prior
to joining Vivendi in 1994, Mr. Jobard was a partner in an international
strategy consulting firm from 1987 to 1994 and from 1985 to 1987 served as
Charge de Mission to the General Management of Institut de Developpement
Industriel in France. Mr. Jobard began his career with Texas Instruments
where he served in several international financial executive positions. Mr.
Jobard has been designated by Vivendi as a director of the Company under
the Investment Agreement.
Lieutenant General Morris became a director of the Company in June 1992.
From 1988 to October 1992, Lieutenant General Morris served as a director
of Metcalf &Eddy Companies Inc. Lieutenant General Morris has been
President of J.W. Morris Ltd., an engineering consulting firm, for more
than five years. In addition, he presently serves as President of the
National Waterways Foundation, and until recently, as Chairman of the Water
Resources Congress and Chairman of the Environmental Effects Committee of
the U.S., Committee on Large Dams. From 1986 to 1987, he served as
President and Chairman of the Engineering Group of Planning Research
Corporations. Lieutenant General Morris served as the Chief of Engineers,
U.S. Army Corps of Engineers, from 1976 to 1980. Elected to the National
Academy of Engineering in 1978, he was awarded the Academy's Founders Medal
in 1996. He was named Distinguished Graduate of the United States Military
Academy in 1998.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ended October 31, 1998,
1997 and 1996, the cash compensation paid by the Company, as well as
certain other compensation paid or accrued for those years, to the Chief
Executive Officer of the Company and each of the four most highly
compensated executive officers of the Company other than the Chief
Executive Officer in all capacities in which they served. Messrs. Satzger
and McMahon each ceased to be an executive officer of the Company as of
June 1998 and October 1998, respectively.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary ($) Bonus ($) Award(s) ($) Options (#) Compensation ($)
<S> <C> <C> <C> <C> <C> <C>
THIERRY M. MALLET(1) 1998 222,508 0 0 150,000 (2) 107,589 (3)
PRESIDENT, CHIEF EXECUTIVE 1997 0 0 0 0 0
OFFICER AND DIRECTOR
ALAIN BRUNAIS 1998 218,213 0 0 100,000 (4) 82,655 (5)
SENIOR VICE PRESIDENT, 1997 209,810 0 0 0 75,788 (6)
CHIEF FINANCIAL OFFICER 1996 207,450 75,000 0 18,000 (7) 77,000 (8)
AND DIRECTOR
GEORGE C. MAMMOLA 1998 222,789 0 0 100,000 (9) 108,364 (10)
SENIOR VICE PRESIDENT AND 1997 216,229 0 0 0 15,000 (11)
PRESIDENT, AWT AIR 1996 213,996 55,000 0 35,500(12) 15,750 (13)
COMPANY, INC.
MICHAEL SZOMJASSY(14) 1998 50,004 0 50,000(15) 75,000(15) 2,110 (16)
ACTING EXECUTIVE VICE
PRESIDENT AND CHIEF
OPERATING OFFICER
JOSEPH BOLTON(17) 1998 66,916 0 50,000(18) 50,000(18) 3,243 (19)
ACTING EXECUTIVE VICE
PRESIDENT OF BUSINESS
DEVELOPMENT
DOUGLAS A. SATZGER(20)* 1998 119,498 0 0 0 168,373 (21)
SENIOR VICE PRESIDENT, 1997 206,003 0 0 0 5,970 (22)
GENERAL COUNSEL AND 1996 211,622 32,000 0 41,500(23) 13,750 (24)
SECRETARY
PATRICK L. MCMAHON(25)* 1998 206,003 0 0 0 91,213 (26)
SENIOR VICE PRESIDENT AND 1997 190,784 40,000 0 0 16,650 (27)
PRESIDENT, PROFESSIONAL 1996 170,019 75,000 0 19,000(28) 2,200 (29)
SERVICES GROUP, INC.
</TABLE>
- ----------------
* NO LONGER EMPLOYED BY THE COMPANY.
(1) MR. MALLET WAS APPOINTED PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE
COMPANY ON OCTOBER 24, 1997.
(2) MR. MALLET WAS GRANTED 150,000 OPTIONS EXERCISABLE AT $2.063 PER SHARE
PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN.
(3) "ALL OTHER COMPENSATION" FOR MR. MALLET FOR FISCAL YEAR 1998 CONSISTS
OF APPROXIMATELY $97,306 PAID AS HOUSING ALLOWANCE ON BEHALF OF MR.
MALLET, APPROXIMATELY $10,168 RESULTING FROM AN AUTOMOBILE LEASED FOR
MR. MALLET BY COMPANY AND $385 PAID FOR TAXABLE LIFE INSURANCE. IN
CONNECTION WITH MR. MALLET'S MOVE TO THE UNITED STATES, THE COMPANY
HAS MADE AN EMPLOYEE RELOCATION LOAN TO MR. MALLET. THIS LOAN, DATED
AS OF MARCH 25, 1998, IS A NON-INTEREST BEARING LOAN IN THE AMOUNT OF
$882,000 AND IS DUE MARCH 25, 2013 OR ON TERMINATION OF EMPLOYMENT,
WHICHEVER OCCURS SOONER.
(4) MR. BRUNAIS WAS GRANTED 100,000 OPTIONS EXERCISABLE AT $2.063 PER SHARE
PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN.
(5) "ALL OTHER COMPENSATION" FOR MR. BRUNAIS FOR FISCAL YEAR 1998
CONSISTS OF APPROXIMATELY $73,958 PAID AS A HOUSING ALLOWANCE ON
BEHALF OF MR. BRUNAIS, APPROXIMATELY $7,752 RESULTING FROM AN
AUTOMOBILE LEASED FOR MR. BRUNAIS BY THE COMPANY AND $945 PAID FOR
TAXABLE LIFE INSURANCE.
(6) "ALL OTHER COMPENSATION" FOR MR. BRUNAIS FOR FISCAL YEAR 1997
CONSISTS OF APPROXIMATELY $65,036 PAID AS A HOUSING ALLOWANCE ON
BEHALF OF MR. BRUNAIS, APPROXIMATELY $7,752 RESULTING FROM AN
AUTOMOBILE LEASED FOR MR. BRUNAIS BY THE COMPANY AND $3,000
CONTRIBUTED TO THE COMPANY'S SAVINGS AND RETIREMENT PLAN ON BEHALF OF
MR. BRUNAIS.
(7) MR. BRUNAIS WAS GRANTED 18,000 OPTIONS EXERCISABLE AT $6.563 PER SHARE
PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN.
(8) "ALL OTHER COMPENSATION" FOR MR. BRUNAIS FOR FISCAL YEAR 1996
CONSISTS OF APPROXIMATELY $71,000 PAID AS A HOUSING ALLOWANCE ON
BEHALF OF MR. BRUNAIS AND APPROXIMATELY $6,000 PAID AS AN AUTOMOBILE
ALLOWANCE.
(9) MR. MAMMOLA WAS GRANTED 100,000 OPTIONS EXERCISABLE AT $2.063 PER
SHARE PURSUANT TO THE COMPANY'S LONG- TERM INCENTIVE PLAN.
(10) "ALL OTHER COMPENSATION" FOR MR. MAMMOLA FOR FISCAL YEAR 1998
CONSISTS OF $108,364 PAID BY THE COMPANY TO MR. MAMMOLA PURSUANT TO
THE MAMMOLA RETENTION AGREEMENT.
(11) "ALL OTHER COMPENSATION" FOR MR. MAMMOLA FOR FISCAL YEAR 1997
CONSISTS OF APPROXIMATELY $12,000 PAID AS AN AUTOMOBILE ALLOWANCE AND
$3,000 CONTRIBUTED TO THE COMPANY'S SAVINGS AND RETIREMENT PLAN ON
BEHALF OF MR. MAMMOLA.
(12) MR. MAMMOLA WAS GRANTED 20,157 OPTIONS EXERCISABLE AT $6.563 PER
SHARE PURSUANT TO THE COMPANY'S LONG- TERM INCENTIVE PLAN AND 15,343
OPTIONS EXERCISABLE AT $8.00 PER SHARE PURSUANT TO THE COMPANY'S
"FRESH START" PROGRAM.
(13) "ALL OTHER COMPENSATION" FOR MR. MAMMOLA FOR FISCAL YEAR 1996
CONSISTS OF APPROXIMATELY $12,000 PAID AS AN AUTOMOBILE ALLOWANCE AND
$3,750 CONTRIBUTED TO THE COMPANY'S SAVINGS AND RETIREMENT PLAN ON
BEHALF OF MR. MAMMOLA.
(14) MR. SZOMJASSY WAS APPOINTED ACTING VICE PRESIDENT AND CHIEF OPERATING
OFFICER OF THE COMPANY IN OCTOBER 1998.
(15) ON SEPTEMBER 9, 1998, MR. SZOMJASSY WAS GRANTED 25,000 RESTRICTED STOCK
OPTIONS AND ALSO WAS GRANTED 50,000 OPTIONS EXERCISABLE AT $2.00 PER
SHARE PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN. ON THE DATE
OF THE GRANT, THE MARKET PRICE OF THE COMPANY'S CLASS A COMMON STOCK
WAS $2.00 PER SHARE.
(16) "ALL OTHER COMPENSATION" FOR MR. SZOMJASSY FOR FISCAL YEAR 1998
CONSISTS OF $2,000 RESULTING FROM AN AUTOMOBILE LEASED FOR MR.
SZOMJASSY BY THE COMPANY AND $110 PAID FOR TAXABLE LIFE INSURANCE.
(17) MR. BOLTON WAS APPOINTED ACTING EXECUTIVE VICE PRESIDENT OF BUSINESS
DEVELOPMENT ON SEPTEMBER 15, 1998.
(18) ON SEPTEMBER 9, 1998, MR. BOLTON WAS GRANTED 25,000 RESTRICTED STOCK
OPTIONS AND ALSO WAS GRANTED 25,000 OPTIONS EXERCISABLE AT $2.00 PER
SHARE PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN. ON THE DATE
OF THE GRANT, THE MARKET PRICE OF THE COMPANY'S CLASS A COMMON STOCK
WAS $2.00 PER SHARE.
(19) "ALL OTHER COMPENSATION" FOR MR. BOLTON FOR FISCAL YEAR 1998 CONSISTS
OF $2,800 RESULTING FROM AN AUTOMOBILE LEASED FOR MR. BOLTON BY THE
COMPANY AND $443 PAID FOR TAXABLE LIFE INSURANCE.
(20) IN CONNECTION WITH THE COMPANY'S PENDING MOVE TO WAKEFIELD,
MASSACHUSETTS, MR. SATZGER ENDED HIS TERM AS SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY OF THE COMPANY EFFECTIVE JUNE 1, 1998
AND CONTINUED UNTIL SEPTEMBER 30, 1998 AS A CONSULTANT TO THE
COMPANY. IN ACCORDANCE WITH THE TERMS OF MR. SATZGER'S TERMINATION
AGREEMENT, MR. SATZGER'S RIGHT TO EXERCISE THE EXERCISABLE OPTIONS
HELD BY HIM EXPIRED ON AUGUST 29, 1998 AND MR. SATZGER FORFEITED ALL
RIGHTS TO THE UNEXERCISABLE OPTIONS HELD BY HIM EFFECTIVE AS OF JUNE
1, 1998.
(21) "ALL OTHER COMPENSATION" FOR MR. SATZGER FOR FISCAL YEAR 1998
CONSISTS OF APPROXIMATELY $167,157 IN SEVERANCE AND SPECIAL
COMPENSATION PAYMENTS AND $1,029 RESULTING FROM AN AUTOMOBILE LEASED
FOR MR. SATZGER BY THE COMPANY AND $187 PAID FOR TAXABLE LIFE
INSURANCE.
(22) "ALL OTHER COMPENSATION" FOR MR. SATZGER FOR FISCAL YEAR 1997
CONSISTS OF $2,970 RESULTING FROM AN AUTOMOBILE LEASED FOR MR.
SATZGER BY THE COMPANY AND $3,000 CONTRIBUTED TO THE COMPANY'S
SAVINGS AND RETIREMENT PLAN ON BEHALF OF MR. SATZGER.
(23) MR. SATZGER WAS GRANTED 20,167 OPTIONS EXERCISABLE AT $6.563 PER
SHARE PURSUANT TO THE COMPANY'S LONG-TERM INCENTIVE PLAN AND 21,333
OPTIONS EXERCISABLE AT $8.00 PER SHARE PURSUANT TO THE COMPANY'S
"FRESH START" PROGRAM.
(24) "ALL OTHER COMPENSATION" FOR MR. SATZGER FOR FISCAL YEAR 1996
CONSISTS OF APPROXIMATELY $10,000 PAID TO MR. SATZGER AS AN
AUTOMOBILE ALLOWANCE AND $3,750 CONTRIBUTED TO THE COMPANY'S SAVINGS
AND RETIREMENT PLAN ON BEHALF OF MR. SATZGER.
(25) MR. MCMAHON SERVED AS SENIOR VICE PRESIDENT AND PRESIDENT,
PROFESSIONAL SERVICES GROUP INC. FROM MAY 1995 TO OCTOBER 1998. ON
DECEMBER 16, 1998, MR. MAHON ENDED HIS TERM AS SENIOR VICE PRESIDENT
AND PRESIDENT, PROFESSIONAL SERVICES GROUP, INC. EFFECTIVE OCTOBER
12, 1998 AND CONTINUED UNTIL JANUARY 12, 1999 AS A CONSULTANT TO THE
COMPANY. IN ACCORDANCE WITH THE TERMS OF MR. MCMAHON'S SEPARATION
AGREEMENT (THE "MCMAHON SEPARATION AGREEMENT"), MR. MCMAHON'S RIGHT
TO EXERCISE THE EXERCISABLE OPTIONS HELD BY HIM EXPIRED ON JANUARY
10, 1999, AND MR. MCMAHON FORFEITED ALL RIGHTS TO THE UNEXERCISABLE
OPTIONS HELD BY HIM EFFECTIVE OCTOBER 12, 1998.
(26) "ALL OTHER COMPENSATION" FOR MR. MCMAHON FOR FISCAL YEAR 1998
CONSISTS OF $91,213 PAID BY THE COMPANY TO MR. MCMAHON PURSUANT TO
THE MCMAHON SEPARATION AGREEMENT.
(27) "ALL OTHER COMPENSATION" FOR MR. MCMAHON FOR FISCAL YEAR 1997
CONSISTS OF $8,946 RESULTING FROM AN AUTOMOBILE LEASED FOR MR.
MCMAHON BY THE COMPANY AND $7.704 CONTRIBUTED TO PSG'S PENSION PLAN.
(28) MR. MCMAHON WAS GRANTED 9,000 OPTIONS EXERCISABLE AT $6.563 PER SHARE
PURSUANT TO THE COMPANY'S LONG- TERM INCENTIVE PLAN AND 10,000
OPTIONS EXERCISABLE AT $5.75 PER SHARE PURSUANT TO THE COMPANY'S
"FRESH START" PROGRAM.
(29) "ALL OTHER COMPENSATION" FOR MR. MCMAHON FOR FISCAL YEAR 1996
CONSISTS OF APPROXIMATELY $2,200 RESULTING FROM AN AUTOMOBILE LEASED
FOR MR. MCMAHON BY PSG.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the named
executive officers concerning unexercised options, held as of October 31,
1998. No options were exercised during fiscal 1998 by any of the named
executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS
YEAR-END AT FISCAL
YEAR-END(1)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) (#) (#)
Thierry M. Mallet(2). 0 150,000 0(3) 0(3)
ALAIN BRUNAIS(4)..... 52,800 115,200 0(3) 0(3)
GEORGE C. MAMMOLA(5). 32,477 103,023 0(3) 0(3)
JOSEPH BOLTON(6)..... 0 50,000 0(3) 0(3)
MICHAEL SZOMJASSY(7). 0 75,000 0(3) 0(3)
DOUGLAS A. SATZGER(8)*... 0 0 0 0
PATRICK L. MCMAHON(9)*... 14,250 100,000 0(3) 0(3)
* NO LONGER EMPLOYED BY THE COMPANY.
(1) THE VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR-END
ASSUMES A FAIR MARKET VALUE FOR THE CLASS A COMMON STOCK OF $2.25, THE
CLOSING SALE PRICE PER SHARE OF THE CLASS A COMMON STOCK AS REPORTED ON
THE AMERICAN STOCK EXCHANGE COMPOSITE TAPE FOR OCTOBER 30, 1998.
(2) THE EXERCISE PRICE OF THE OPTIONS HELD BY MR. MALLET IS $2.063 PER
SHARE.
(3) THE EXERCISABLE OPTIONS HELD BY MESSRS. BRUNAIS, MAMMOLA AND MCMAHON
AND THE UNEXERCISABLE OPTIONS HELD BY MESSRS. MALLET, BRUNAIS, MAMMOLA,
BOLTON, SZOMJASSY AND MCMAHON WERE NOT IN-THE-MONEY AS OF OCTOBER 30,
1998.
(4) THE EXERCISE PRICE OF THE OPTIONS HELD BY MR BRUNAIS IS (I) $2.063 PER
SHARE IN THE CASE OF OPTIONS TO PURCHASE 100,000 SHARES GRANTED IN
MARCH 1998, (II) $6.563 PER SHARE IN THE CASE OF HIS OPTION TO PURCHASE
18,000 SHARES GRANTED IN MARCH 1996, OR (III) $8.00 PER SHARE IN THE
CASE OF HIS OPTION TO PURCHASE 50,000 SHARES GRANTED IN AUGUST 1994.
(5) THE EXERCISE PRICE OF THE OPTIONS HELD BY MR. MAMMOLA IS (I) $2.063 PER
SHARE IN THE CASE OF OPTIONS TO PURCHASE 100,000 SHARES GRANTED IN
MARCH 1998, (II) $6.563 PER SHARE IN THE CASE OF HIS OPTION TO PURCHASE
20,157 SHARES GRANTED IN MARCH 1996, OR (III) $8.00 PER SHARE IN THE
CASE OF HIS OPTION TO PURCHASE 15,343 SHARES GRANTED IN JANUARY 1996.
(6) THE EXERCISE PRICE OF THE 25,000 OPTIONS GRANTED TO MR. BOLTON PURSUANT
TO THE COMPANY'S LONG-TERM INCENTIVE PLAN IS $2.00 PER SHARE.
(7) THE EXERCISE PRICE OF THE 50,000 OPTIONS GRANTED TO MR. SZOMJASSY PURSUANT
TO THE COMPANY'S LONG-TERM INCENTIVE PLAN IS $2.00 PER SHARE.
(8) IN CONNECTION WITH THE COMPANY'S PENDING MOVE TO WAKEFIELD,
MASSACHUSETTS, MR. SATZGER ENDED HIS TERM AS SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY OF THE COMPANY EFFECTIVE JUNE 1, 1998 AND
CONTINUED UNTIL SEPTEMBER 30, 1998 AS A CONSULTANT TO THE COMPANY. IN
ACCORDANCE WITH THE TERMS OF MR. SATZGER'S TERMINATION AGREEMENT, MR.
SATZGER'S RIGHT TO EXERCISE THE EXERCISABLE OPTIONS HELD BY HIM EXPIRED
ON AUGUST 29, 1998 AND MR. SATZGER FORFEITED ALL RIGHTS TO THE
UNEXERCISABLE OPTIONS HELD BY HIM EFFECTIVE AS OF JUNE 1, 1998.
(9) THE EXERCISE PRICE OF OPTIONS HELD BY MR. MCMAHON IS (I) $2.063 PER
SHARE IN THE CASE OF HIS OPTIONS TO PURCHASE 100,000 SHARES GRANTED IN
MARCH 1998, (II) $6.563 PER SHARE IN THE CASE OF HIS OPTION TO PURCHASE
9,000 SHARES GRANTED IN MARCH 1996, OR (III) $5.75 PER SHARE IN THE
CASE OF HIS OPTION TO PURCHASE 10,000 SHARES GRANTED IN JUNE 1995. ON
DECEMBER 16, 1998, MR. MCMAHON ENDED HIS TERM AS SENIOR VICE PRESIDENT
AND PRESIDENT, PROFESSIONAL SERVICES GROUP, INC. EFFECTIVE OCTOBER 12,
1998 AND CONTINUED UNTIL JANUARY 12, 1999 AS A CONSULTANT TO THE
COMPANY. IN ACCORDANCE WITH THE TERMS OF THE MCMAHON SEPARATION
AGREEMENT, MR. MCMAHON'S RIGHT TO EXERCISE THE EXERCISABLE OPTIONS HELD
BY HIM EXPIRED ON JANUARY 10, 1999, AND MR. MCMAHON FORFEITED ALL
RIGHTS TO THE UNEXERCISABLE OPTIONS HELD BY HIM EFFECTIVE OCTOBER 12,
1998.
SUPPLEMENTAL PENSION PLAN
The following table shows the estimated annual benefits payable upon
retirement to participants in the Company's Supplemental Pension Plan.
ESTIMATED ANNUAL RETIREMENT BENEFITS
BONUS
REMUNERATION YEARS OF SERVICE
---------------------
15 20 25 30 35
---- --- --- --- ---
$25,000..........$ 5,625 $ 7,500 $ 9,375 $11,250 $13,125
50,000........... 11,250 15,000 18,750 22,500 26,250
75,000........... 16,875 22,500 28,125 33,750 39,375
100,000.......... 22,500 30,000 37,500 45,000 52,500
125,000.......... 28,125 37,500 46,875 56,250 65,625
THE UNFUNDED SUPPLEMENTAL PENSION PLAN PROVIDES ADDITIONAL ANNUAL
RETIREMENT BENEFITS EQUAL TO 1.5% OF THE AVERAGE OF THE PARTICIPANT'S FINAL
FIVE BONUSES MULTIPLIED BY THE PARTICIPANT'S YEARS OF SERVICE, UP TO A
MAXIMUM OF THIRTY-FIVE YEARS. NO SEPARATE ACCOUNTS ARE MAINTAINED AND NO
AMOUNTS ARE VESTED UNTIL A PARTICIPANT REACHES RETIREMENT IN THE EMPLOY OF
THE COMPANY. THE BENEFIT AMOUNTS SET FORTH IN THE TABLE ABOVE ARE NOT
SUBJECT TO REDUCTION FOR SOCIAL SECURITY BENEFITS OR FOR OTHER OFFSETS. AT
THE PRESENT TIME, NONE OF THE NAMED EXECUTIVE OFFICERS IS A PARTICIPANT IN
THE COMPANY'S SUPPLEMENTAL PENSION PLAN.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive an annual fee of
$18,000 for service on the Board of Directors and an additional $7,500 per
annum for service on each Committee thereof. In addition, directors are
reimbursed for out-of-pocket expenses of attending Board and Committee
meetings.
In connection with the Recapitalization, each Special Committee member
has received a total of $100,000 in fees of which $50,000 was received in
1998 plus reimbursement for reasonable expenses.
In addition, pursuant to the Long-Term Incentive Plan, on July 31 of
each year each director who is a member of the Compensation Committee with
responsibility for administering such Plan as of such date is granted a
non-qualified option to purchase either (i) 3,000 shares of Class A Common
Stock, if the director has served less than one year on the Compensation
Committee, or (ii) 500 shares of Class A Common Stock, if the director has
served one year or more on the Compensation Committee. The options granted
vest annually in four equal installments commencing one year from the date
of grant with exercise prices equal to the fair market value of the Class A
Common Stock on the grant date.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), during the fiscal
year ended October 31, 1998, and Form 5 and amendments thereto furnished to
the Company with respect to the fiscal year ended October 31, 1998, the
Company has not identified any persons as having filed a late report under
Section 16(a) of the Exchange Act during the fiscal year ended October 31,
1998, or prior fiscal years.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
EMPLOYMENT CONTRACTS. In November 1998, in connection with the
reorganization of the Company and the resulting senior executive hires of
Mr. Szomjassy and Mr. Bolton, the Company entered into executive severance
agreements with Mr. Szomjassy (the "Szomjassy Severance Agreement") and Mr.
Bolton (the "Bolton Severance Agreement"). The Szomjassy Severance
Agreement provides for severance pay equal to fifty-two weeks of pay in the
event that Mr. Szomjassy's employment is terminated by the Company for any
reason other than death, disability or justifiable cause. The Bolton
Severance Agreement guarantees severance pay equal to fifty-two weeks of
pay in the event that Mr. Bolton's employment is terminated by the Company
for any reason other than death, disability or justifiable cause; provided
that if such termination occurs prior to September 16, 1999, Mr. Bolton
will receive severance pay equal to seventy-eight weeks of pay.
Options. The Company's 1989 Long-Term Incentive Plan and 1996 Stock
Incentive Plan each provides that, upon a "change-in-control" of the
Company (as determined by the Board of Directors), any outstanding options
not theretofore fully exercisable shall immediately become exercisable in
their entirety.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On and prior to June 24, 1998, the Compensation Committee of the Board
of Directors consisted of Mr. Banon, Lieutenant General Morris and Ms.
Carol Lynn Green. Ms. Green resigned from the Board of Directors of the
Company effective June 24, 1998. Ms. Green is a partner at the law firm of
Bryan, Cave LLP, which has performed limited legal services for the Company
from time to time. During her term as a director, Ms. Green did not
personally represent the Company. On June 24, 1998, Ms. Hesse was elected a
director of the Company. Since June 24, 1998, the Compensation Committee
consists of Lt. General Morris, Ms. Hesse and Mr. Banon. Since 1989, Mr.
Banon has been Managing Director of General Utilities PLC, the holding
company for Vivendi's investments in the water industry in the United
Kingdom, and since 1992 he has been Managing Director of General Utilities
Holdings Ltd., the holding company for all Vivendi activities in the United
Kingdom. Mr. Banon has been designated by Vivendi as a director of the
Company under the Investment Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's capital stock as of January 25, 1999 with
respect to (i) each person known by the Company to beneficially own in
excess of 5% of the outstanding shares of Class A Common Stock, (ii) each
of the Company's directors, (iii) each named executive officer of the
Company, and (iv) all directors and executive officers as a group. Unless
otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned.
Number of Percent of
Shares of Shares of
Class A Class A
Common Common
Stock Stock
Name of Person or Group Beneficially Outstanding
Owned
William V. Kriegel..................... 0 *
Thierry M. Mallet...................... 0 *
Jean-Claude Banon...................... 0 *
Daniel Caille.......................... 0 *
Alain Brunais.......................... 53,800(1) *
Martha O. Hesse 10,058(2) *
John W. Morris......................... 3,079 *
Joseph Bolton.......................... 3,000 *
George C. Mammola...................... 33,357(3) *
Douglas A. Satzger**................... 0(4) *
Patrick L. McMahon**................... 0(5) *
Vivendi................................153,609,975(6) 83.0%
42, Avenue de Friedland
75380 Paris Cedex 08
France
All directors and executive officers
as a group (19 persons)............. 167,327(7) *
- ---------------
* Less than 1% ownership
** No longer employed by the Company.
(1) Includes 52,800 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(2) In addition to 8,429 shares of Class A Common Stock, Ms. Hesse holds
1,629 Warrants exercisable for 1,629 shares of Class A Common Stock.
(3) Includes 32,477 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
(4) In connection with the Company's pending move to Wakefield,
Massachusetts, Mr. Satzger ended his term as Senior Vice President,
General Counsel and Secretary of the Company effective June 1, 1998
and continued until September 30, 1998 as a consultant to the Company.
In accordance with the terms of Mr. Satzger's termination agreement,
Mr. Satzger's right to exercise the exercisable options held by him
expired on August 29, 1998 and Mr. Satzger forfeited all rights to the
unexercisable options held by him effective as of June 1, 1998.
(5) In accordance with the terms of the McMahon Separation Agreement,
Mr. McMahon's right to exercise the exercisable options held by him
expired on January 10, 1999, and Mr. McMahon forfeited all rights to
the unexercisable options held by him effective October 12, 1998.
(6) As of December 31, 1998, all such shares are beneficially owned by
Vivendi indirectly through its wholly-owned subsidiary, Vivendi North
America Operations, Inc.
(7) Includes 151,035 shares of Class A Common Stock which may be acquired
within 60 days of the date of the table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LETTER AGREEMENT
Pursuant to a letter agreement dated March 18, 1994, between the Company
and Vivendi, Vivendi purchased 500,000 shares of the Company's Class A
Common Stock, at $10.00 per share for a total purchase price of $5.0
million. Vivendi also agreed in the letter agreement that, subject to
approval by Vivendi, Vivendi would co-sign on a case-by-case basis with the
Company applications for letters of credit with respect to the Company's
water and wastewater management and air pollution projects, which Vivendi
acknowledged could reach or exceed the level of letters of credit carried
by the Company at March 18, 1994.
THE INVESTMENT AGREEMENT
On June 14, 1994, the stockholders of the Company approved the issuance
of Company securities pursuant to the Investment Agreement pursuant to
which, among other things, the Company (i) issued to Vivendi 1,200,000
shares of Series A Preferred Stock, convertible into 4,800,000 shares of
Class A Common Stock, for cash consideration of $60 million, and (ii)
issued to VNA an aggregate of 6,701,500 shares of Class A Common Stock in
connection with the acquisition from VNA of PSG and PSG Canada, Inc., a
Canadian corporation ("PSG Canada"). As a result, Vivendi increased its
ownership interest in the Company to approximately 48% of the total voting
power of the Company's voting securities. In addition, the Company
benefitted from certain financial and other undertakings from Vivendi,
including the $125 million Vivendi Note, and serving as Vivendi's exclusive
vehicle in the United States, its possessions and its territories for
Vivendi's water management and wastewater management and air pollution
activities, subject to certain exceptions, and Vivendi received certain
rights with respect to the Company, in particular, representation on the
Company's Board of Directors and the right to designate the Chairman of the
Company's Board of Directors, the Company's Chief Executive Officer and the
Company's Chief Financial Officer, all as further described below.
CERTAIN COVENANTS OF THE COMPANY
Representation on the Board of Directors; Management. Under the terms of
the Investment Agreement, the Company has agreed that Vivendi will have the
right to designate as members of the Company's Board of Directors at least
that number of directors that is proportionate to the aggregate voting
control represented by the shares of Class A Common Stock and Series A
Preferred Stock beneficially owned by Vivendi (subject to a minimum of
three Independent Directors). For purposes of the Investment Agreement,
"Independent Director" is defined as any director who is not an employee,
agent or representative of the Company, Vivendi or any of their respective
affiliates or associates (as defined in the Investment Agreement) and may
include any person acting as outside counsel or financial advisor for
either the Company or Vivendi or any of their respective Affiliates or
Associates. At the Annual Meeting of Stockholders of the Company held on
June 24, 1998, the stockholders of the Company elected six directors who
were designated by Vivendi (Messrs. Kriegel, Banon, Brunais, Caille, Jobard
and Mallet). The Investment Agreement requires the Company to maintain
three Independent Directors, however, the Company currently has only two
Independent Directors (Ms. Hesse and Lt. General Morris). All Independent
Directors must be satisfactory to Vivendi. The Company has further agreed
that Vivendi will have proportionate representation on all committees of
the Board (other than any special committee of Independent Directors) to
the same extent as Vivendi is entitled to representation on the Board of
Directors.
The Company has also agreed in the Investment Agreement that Vivendi
shall have the right to designate the Chairman of the Company's Board of
Directors, the Company's Chief Executive Officer and the Company's Chief
Financial Officer. In accordance with the terms of the Investment
Agreement, the Board of Directors appointed, as designees of Vivendi, Mr.
Kriegel as Chairman of the Company's Board of Directors, Mr. Mallet as the
Chief Executive Officer of the Company and Mr. Brunais as the Chief
Financial Officer of the Company.
Registration Rights. Pursuant to the terms of the Investment Agreement,
Vivendi and VNA will have the right to require on up to four occasions that
the Company register all shares of Class A Common Stock owned from time to
time by Vivendi and its affiliates for sale to the public under the
Securities Act (a "Demand Registration"), provided that the Company is not
obligated (i) to effect more than one Demand Registration in any six-month
period, (ii) to effect a Demand Registration for less than five percent of
the outstanding Class A Common Stock, (iii) to effect a Demand Registration
within six months of Vivendi or VNA selling any shares of Class A Common
Stock pursuant to a Piggyback Registration (as defined below) or (iv) to
effect a Demand Registration if the Company shall have filed or announced
its intention to file a registration statement of an offering of shares of
Class A Common Stock for its own account and shall be taking steps in
pursuance thereof or if the Company shall have completed such a registered
offering within the immediately preceding ninety days. In addition, Vivendi
and VNA will have the right to participate in registrations by the Company
of its Class A Common Stock (a "Piggyback Registration"). The Company will
pay all registration expenses on behalf of Vivendi and VNA, including
certain related fees and expenses, other than underwriting fees and
discounts.
Access to Books and Records. The Company has agreed that for so long as
Vivendi beneficially owns directly or indirectly at least 26% of the
outstanding shares of Class A Common Stock on a fully-diluted basis,
Vivendi will have access on reasonable terms to the books, records and
employees of the Company and its subsidiaries and to the provision by the
Company of all information reasonably requested by Vivendi, subject to
confidentiality obligations that at the time may be owed by the Company to
third parties and to appropriate confidentiality arrangements and
requirements of law.
CERTAIN COVENANTS OF VIVENDI
Exclusivity. Pursuant to the Recapitalization Agreement and the
Investment Agreement as amended by the Recapitalization Agreement, Vivendi
agreed on behalf of itself and its affiliates that, for so long as Vivendi
(with its affiliates) is the largest stockholder of the Company, the
Company shall be Vivendi's exclusive vehicle in the United States, its
possessions and its territories for its water management and wastewater
management and air pollution activities; provided that the foregoing shall
not apply to any acquisition or investment by Vivendi (or any of its
affiliates) of a privately-owned, publicly-traded or publicly-owned company
in the water utility sector whose primary business is the production,
distribution and/or sale of potable, fire, bulk, draining or irrigation
water ("Water Utility"), nor to Vivendi's present or future investments in
Philadelphia Suburban Corporation (such Water Utilities and Philadelphia
Suburban Corporation hereinafter referred to collectively as the "Water
Businesses").
In addition, Vivendi has agreed to assist (and cause its affiliates to
assist) the Company in developing its water management and wastewater
management and air pollution activities in both Canada and Mexico, subject
to contractual agreements as of March 30, 1994 and taking into account the
respective interests of the Company and Vivendi and its affiliates. Vivendi
also agreed to offer the Company an active participation in any proposed
water management or wastewater management activities by Vivendi (or any of
its affiliates) in the United States (which shall be deemed to exclude the
Water Businesses), which investment is too capital intensive for the
Company to undertake on a stand-alone basis.
In addition, in the event Vivendi (or any of its affiliates) acquires
control of a Water Business which is also engaged in wastewater activities
similar to those conducted by the Company as of the date of the original
Investment Agreement, then Vivendi (or such affiliate) has agreed to use
reasonable efforts to cause, subject to the fiduciary duties of the board
of directors of such Water Business and other applicable regulatory
standards, that Water Business to offer to the Company the opportunity to
obtain "operating and maintenance" contracts with the wastewater management
business of, and the opportunity to obtain engineering contracts with, such
Water Business on terms which are commercially reasonable in the judgment
of such Water Business; provided that the foregoing shall not apply to any
existing business of Philadelphia Suburban Corporation as of the date of
the original Investment Agreement.
In addition, Vivendi (and its affiliates) and the Company agreed to
establish a privileged commercial relationship for the development of air
pollution activities in Europe.
Finally, the Investment Agreement, as amended, provides that the
exclusivity provision shall have no application to Kruger, Inc., a
distributor of water treatment plant parts and components and an indirect
subsidiary of Omnium Traitement et de Valorisation.
Affiliate Transactions. Vivendi has agreed on behalf of itself and its
affiliates that any transactions (or series of related transactions in a
chain) between the Company and any of its affiliates and Vivendi or any of
its affiliates will be on an arm's length basis. Any such transaction (or
such series of transactions) having an aggregate value in excess of
$1,000,000 must be approved by a majority of the Independent Directors or a
special committee thereof acting in a separate meeting or by unanimous
written consent. The Company, Vivendi and VNA have further agreed that all
actions by the Company with respect to any claim by the Company against
Vivendi or its affiliates under the Investment Agreement will be taken only
by majority approval of such Independent Directors or a special committee
thereof, so acting in a separate meeting or by unanimous written consent.
Sales of Shares. Vivendi has also agreed to give the Company one day's
prior written notice of any sale of shares of Class A Common Stock held by
Vivendi or its affiliates if, to the knowledge of Vivendi, such sale would
result in any person beneficially owning more than 15% of the outstanding
shares of Class A Common Stock.
VIVENDI NOTE
In connection with the Investment Agreement, the Company and Vivendi
entered into a Credit Agreement dated as of June 14, 1994, pursuant to
which the Company received the proceeds of the Vivendi Note in a principal
amount of $125 million. The Vivendi Note was an unsecured facility bearing
interest at a rate based upon one, two, three or six-month LIBOR, as
selected by the Company, plus 1.25%, and had a final maturity of June 15,
2001. The Company incurred approximately $3.1 million of interest related
to the Vivendi Note during fiscal 1998. The Vivendi Note was repaid in
March 1998 with a portion of the gross proceeds from the Rights Offering.
INVOLVEMENT OF VIVENDI IN OTHER FINANCING ARRANGEMENTS
The Company maintains a senior secured Bank Credit Facility, dated as of
March 10, 1995, with Societe Generale. On December 12, 1998, the Bank
Credit Facility was decreased at the Company's request from $70 million to
$50 million. As of January 28, 1999, the Company had no borrowings under
the Bank Credit Facility and outstanding letters of credit under the Bank
Credit Facility totaled $18.7 million (unused capacity of $31.3 million).
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Bank Credit Facility." The Bank Credit Facility is
primarily designed to finance working capital requirements and provide for
the issuance of letters of credit, both subject to limitations and secured
by a first security interest in substantially all of the assets of the
Company. Of the total commitment under the terms of the Bank Credit
Facility, borrowings are limited to the lesser of $50 million or the sum of
a percentage of certain eligible receivables, inventories, net property,
plant and equipment and costs and estimated earnings in excess of billings,
and bear interest at LIBOR plus 1.25%, or at a defined bank rate
approximating prime (8.0% at October 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 Vivendi 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 and to check to ensure that the Company will have sufficient
financial resources to meet its obligations under the Bank Credit Facility.
Vivendi has reaffirmed to Societe Generale the terms of Vivendi's existing
credit support 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 ($0.9 million for October 31, 1998).
VNA NOTE
On August 2, 1996, the Company entered into a $60 million seven-year
unsecured revolving credit facility with VNA pursuant to which the Company
received the proceeds of the VNA Note in the amount of $60 million. This
facility, which was repaid on March 4, 1998, with a portion of the gross
proceeds from the Rights Offering, was originally scheduled to mature on
August 2, 2003. The VNA Note bore interest at LIBOR plus 0.6%. The Company
incurred approximately $1.3 million of interest on this loan during fiscal
1998.
RECAPITALIZATION AGREEMENT
THE EXCHANGE
On January 28, 1998, pursuant to the terms of the Recapitalization
Agreement, the Company exchanged the outstanding 1,200,000 shares of 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. 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. The Company paid $2.5 million in dividends on the Series A
Preferred Stock in fiscal 1997.
THE 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 which allowed Rights holders to subscribe for and purchase shares of
its common stock and also allowed subscribers (other than Vivendi and VNA)
in the Rights Offering to receive transferable three-year Warrants to
purchase shares of Class A Common Stock.
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 VNA 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 VNA) in the Rights Offering. In accordance with the terms of
the Rights Offering, neither Vivendi nor VNA 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 "AAI.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 the $125 million Vivendi Note and borrowings under the
$60 million credit facility with VNA. The remaining $23 million of
proceeds, representing all of the publicly-raised proceeds, have been
retained for general corporate purposes, including a reduction in
borrowings under the Bank Credit Facility (as defined hereinafter) and the
payment of fees related to the Recapitalization of approximately $5.8
million, of which approximately $2.0 million were paid to Vivendi.
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.
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 $0.5
million to holders of Convertible Debentures who provided their consents.
CHARTER AMENDMENT
Pursuant to the Recapitalization Agreement 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 VNA,
beneficial owners as of such date 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 VNA 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.
Prior to the filing of the Charter Amendment, 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.
OTHER
Business Planning Committee
In connection with the Recapitalization, the Company established a
business planning committee of the Board of Directors (the "Business
Planning Committee") to review the business strategies prepared by senior
management of the Company and, as appropriate, make recommendations on the
formulation and implementation of those strategies that have as their
objective increasing stockholder value. The Business Planning Committee,
which will remain in place through the end of fiscal year 1999, is
comprised of three Vivendi appointed directors and two directors who are
unaffiliated with and independent of Vivendi.
Among other things, the Business Planning Committee will identify areas
where Vivendi's management expertise and the Company's business may be
effectively integrated. Mr. Caille, Ms. Hesse, Mr. Mallet and Lt. General
Morris currently serve as members of the Business Planning Committee. The
Chairman of the Business Planning Committee is currently Mr. Banon.
Analyst Conferences
The Board of Directors of the Company also has agreed, for as long as
shares of Class A Common Stock of the Company are traded on the AMEX or any
other national securities exchange or national quotation system, to cause
management of the Company to hold semi-annual analyst conferences, conduct
conference calls concurrent with earnings releases, promote analyst
coverage of its stock and initiate a stockholder relations program.
USF&G Bonding Guarantees
Pursuant to the Recapitalization Agreement, Vivendi and the Company had
agreed that from September 30, 1997 and continuing until the consummation
of the Recapitalization, Vivendi (or one of its affiliates) would enter
into guarantees of certain obligations of the Company relating to the
bonding of certain contracts under the Master Agreement between USF&G and
the Company and its subsidiaries. In consideration, Vivendi (or one of its
affiliates) had received assurance from USF&G that, in the event of a
default by the Company, USF&G would assign and transfer to Vivendi (or one
of its affiliates) any and all of USF&G's resultant rights in the bonded
commercial contract (whether arising under the Master Agreement, or by
operation of law, or otherwise). No such assignment nor transfer was made.
VNA has partially indemnified the Company's obligations under the Master
Agreement. 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.
No Short-Form Merger
In addition, in connection with the Recapitalization, Vivendi has agreed
for a period of three years from the closing date of the Recapitalization,
which date occurred on March 9, 1998, not to acquire the Company by way of
a short-form merger without the approval of a majority of the Independent
Directors of the Company.
Clarification of Investment Agreement
The Recapitalization Agreement also amends and restates the exclusivity
provision of the Investment Agreement to clarify that the exclusivity
provision in the original Investment Agreement should apply to both water
management and wastewater management activities, but shall not apply to
certain water utility-related investments, acquisitions or activities by
Vivendi or its affiliates, to Vivendi's present or future investments in
Philadelphia Suburban Corporation or to OTV-Kruger, Inc. See "Certain
Relationships and Related Transactions--The Investment Agreement--Certain
Covenants of Vivendi--Exclusivity."
OTHER VIVENDI RELATED MATTERS
On September 15, 1998, the Company and a Vivendi subsidiary executed a
replacement contract with PRASA for a term of approximately three years
beginning September 15, 1998. The Company has agreed to function as the
agent for Vivendi's subsidiary for operations under the new contract
through a Puerto Rico subsidiary of the Company. Vivendi had previously
guaranteed performance by PSG of PSG's original contract with PRASA. In
fiscal year 1998, PSG's contract with PRASA accounted for 39% of PSG's
total sales and 24% of the Company's total sales, respectively.
Following the Recapitalization, the Company will require additional
financial resources to develop and support each of its businesses at PSG
and M&E, to undertake related long-term capital expenditures 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 or indirectly through such vehicle or
otherwise, would share in the returns on such projects pro rata in relation
to their respective equity investments.
As of December 31, 1998, the approximately 83% of the Company's Class A
Common Stock beneficially owned by Vivendi was transferred by Vivendi to
its wholly-owned subsidiary, Vivendi North America Operations, Inc. ("VNAO").
See "Security Ownership of Certain Beneficial Owners and Management." The
Company will be included in the consolidated federal income tax group
consisting of VNAO, the Company, a second subsidiary ("Sub 2"), and the
subsidiaries of each of them. The Company is included in the consolidated
group since VNAO owns more than 80% of the total voting power and value of
the outstanding capital stock of the Company. Each member of a consolidated
group for federal income tax purposes is liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, the
Company could be liable if any federal tax liability has been incurred, but
not discharged, by other members of the consolidated group. Similar
principles could apply to state and local tax liabilities of the
consolidated group. The Board of Directors of the Company has authorized
the Company to enter into tax allocation arrangements with VNAO and Sub 2.
While the impact of these tax allocation arrangements is expected to be
favorable to the Company, VNAO, Sub2 and the Company have not finalized
these arrangements and, as such, management can give no assurances as
to the impact, likelihood or timing of their finalization.
OTHER RELATED TRANSACTIONS
Ms. Green, a director of the Company from June 1994 through June 24,
1998, is a partner at the law firm of Bryan, Cave LLP. Bryan, Cave LLP has
performed limited legal services for the Company from time to time. During
her term as a director, Ms. Green did not personally represent the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a(1) Financial Statements and Supplementary Data
See "Index to Financial Statements" included in Part II, Item 8
of this Form 10-K.
a(2) Financial Statement Schedule
See "Index to Financial Statements" included in Part II, Item 8
of this Form 10-K.
a(3) Exhibits
Exhibit
Number Description of Document Location
3.01 Restated Certificate of Incorporation of the (1)
Registrant, dated July 10, 1987
3.01(a) Certificate of Amendment of Certificate of (2)
Incorporation of the Registrant, dated
October 27, 1987
3.01(b) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant
filed June 21, 1989
3.01(c) Certificate of Amendment of the Restated Certificate (2)
of Incorporation of the Registrant filed July 5, 1989
3.01(d) Certificate of Amendment of the Restated Certificate (3)
of Incorporation of the Registrant filed August 13,
1990
3.01(e) Certificate of Designation of 5 1/2% Series A (4)
Convertible Exchangeable Preferred Stock filed
June 14, 1994
3.01(f) Certificate of Retirement of 5 1/2% Series A (5)Ex.
Convertible Exchangeable Preferred 3.01(a)
Stock filed February 6, 1998
3.01(g) Certificate of Amendment of the Restated Certificate (6)
of Incorporation of the Registrant filed March 2, 1998
3.01(h) Certificate of Amendment to the Restated Certificate **
of Incorporation of the Registrant filed October 13,
1998
3.02 By-Laws of the Registrant, as amended (1)
4.01 Indenture, dated as of May 15, 1990, between the (7)
Registrant and Midlantic National Bank, as trustee
4.02 Supplemental Indenture, dated as of February 23, (5)Ex.
1998, between the Registrant and The Chase Manhattan 4.01
Bank, as Trustee
4.03 Warrant Agreement, including Form of Warrant (14)Ex.
Certificate included as an exhibit thereto, 4.01
between the Company and the Warrant Agent
10.01 Form of Supplemental Pension Agreement of (1)(Ex.
Research-Cottrell 10.20)*
10.02 1988 Long-Term Incentive Compensation Plan of M&E, (8)*
effective as of September 30, 1988, as amended
September 7, 1989 and March 19, 1990
10.02(a) 1989 Long-Term Compensation Plan of the Registrant, (2)*
effective as of July 31, 1989
10.03 Research-Cottrell Environmental Engineering Profit (9)(Ex.
Sharing Plan, as amended 10.27)
10.04 Research-Cottrell Environmental Thrift Plan (9)(Ex.
10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (10)
March 10, 1995, by and among the Registrant, the
Persons listed on Annex B thereto as Borrowers and
Guarantors, the Banks listed on the signature pages
thereof, the First National Bank of Chicago and
Societe Generale, New York Branch, as Arranging
Agents, the First National Bank of Chicago as
Administrative Agent, and Societe Generale, New York
Branch, as Collateral Agent and Issuing Bank
10.06 Agreement, dated March 13, 1989, between (11)(Ex.
Research-Cottrell and certain of its air 10.31)
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.07 Agreement, dated March 13, 1989, between (11)(Ex.
Research-Cottrell and certain of its water 10.31(A))
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.08 Letter Agreement, dated March 18, 1994, between the (4)
Registrant and Vivendi
10.09 Investment Agreement, dated as of March 30, 1994, (8)
among the Registrant, Vivendi and Vivendi North
America Company
10.10 Credit Agreement, dated as of June 14, 1994, between (4)
the Registrant and Vivendi
10.11 Amended and Restated Subordination Agreement, dated (12)
as of March 10, 1995, as Amended and restated as
of March 10, 1995, as amended and restated as of
November 1995, among Vivendi, the Registrant, the
First National Bank of Chicago and United States
Fidelity and Insurance Company, Fidelity and
Guaranty Insurance Company and Fidelity and
Guaranty Insurance Underwriters, Inc. and any
Affiliate of the foregoing
10.12 Master Surety Agreement made October 31, 1995 by the (12)
Registrant, Research-Cottrell, Inc., M&E, Inc.,
and Professional Services Group, Inc., for the
continuing Benefit of United States Fidelity and
Guaranty Company, Fidelity and Guaranty Insurance
Underwriters, Inc. and Fidelity and Guaranty
Insurance Company and USF&G Insurance Company of
Mississippi
10.13 Revolving Credit Agreement, dated as of August 2, (13)
1996, between the Registrant and Vivendi North
America Company
10.14 Employment Agreement, dated as of November 7, 1996, (13)*
between Robert B. Sheh and the Registrant
10.15 Recapitalization Agreement, dated September 24, (14)
1997, among the Registrant,Vivendi and Vivendi
North America Company
10.15(a) Amendment No. 1 to the Recapitalization Agreement, (15)
dated January 26, 1998, among The Registrant,
Vivendi and Vivendi North America Company
10.16 Separation Agreement, dated as of October 24, 1997, (15)*
between Robert B. Sheh and the Registrant
11 Statement re: computation of per share earnings **
21 List of Subsidiaries of the Registrant **
23 Consent of McGladrey & Pullen, LLP **
27 Financial Data Schedule **
- ------------------
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 33-17833), as amended, which became effective on April
12, 1988.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 33-29568), as amended, which became effective on August
10, 1989.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-4 (No. 33-43143), as filed with the Securities and Exchange
Commission on October 3, 1991.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 21, 1994, as filed with the
Securities and Exchange Commission on January 30, 1995.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998, as filed with the
Securities and Exchange Commission on March 17,1998.
(6) Incorporated by reference to Exhibit 3.01(e) to the Company's Form
8-A filed with the Securities and Exchange Commission on March 11,
1998.
(7) Incorporated by reference to Exhibit 4.05 to the Registrant's
Registration Statement on Form S-1 ( No. 33- 33088), as amended,
filed with the Securities and Exchange Commission on April 24, 1990.
(8) Incorporated by reference to Annex I to the Registrant's Proxy
Statement on Schedule 14A dated May 24, 1994, in connection with its
Annual Meeting of Stockholders held on June 14, 1994.
(9) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to M&E's Registration Statement on Form S-1 (No.
33-24315), as amended, which became effective on October 18, 1988.
(10) Incorporated by reference to Exhibit 1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1995, as
filed with the Securities and Exchange Commission on June 14, 1995.
(11) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to M&E's Registration Statement on Form S-1 (No.
33-28846), as amended, which became effective on June 29, 1989.
(12) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995, as filed with the
Securities and Exchange Commission on January 3, 1996.
(13) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996, as filed with the
Securities and Exchange Commission on January 29, 1997.
(14) Incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of the Registrant, dated September 24, 1997.
(15) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 333-39115), as amended, which became effective on
January 30, 1998.
(*) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10- K.
(**) Filed herewith.
(b) Reports on Form 8-K
The following Reports on Form 8-K have been filed during the last
quarter of the fiscal year ended October 31, 1998.
(1) Report on Form 8-K, Item 5--Other Events, dated September 16, 1998.
(2) Report on Form 8-K, Item 5--Other Events, dated October 13, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AQUA ALLIANCE INC.
By: /S/ ALAIN BRUNAIS
--------------------------------
Alain Brunais
Senior Vice President and
Chief Financial Officer
January 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ WILLIAM V. KRIEGEL Chairman of the Board of January 29, 1999
- ------------------------- Directors
William V. Kriegel
/s/ THIERRY M. MALLET President, Chief Executive January 29, 1999
- ------------------------- Officer and Director
Thierry M. Mallet (Principal Executive Officer)
/s/ ALAIN BRUNAIS Senior Vice President, Chief January 29, 1999
- ------------------------- Financial Officer and Director
Alain Brunais (Principal Accounting Officer)
(Principal Financial Officer)
/s/ JEAN-CLAUDE BANON Director January 29, 1999
- -------------------------
Jean-Claude Banon
/s/ DANIEL CAILLE Director January 29, 1999
- -------------------------
Daniel Caille
/s/ MARTHA O. HESSE Director January 29, 1999
- -------------------------
Martha O. Hesse
/s/ FRANCOIS JOBARD Director January 29, 1999
- -------------------------
Francois Jobard
/s/ JOHN W. MORRIS Director January 29, 1999
- -------------------------
John W. Morris
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT LOCATION
------- ----------------------- --------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of the (1)
Registrant, dated July 10, 1987
3.01(a) Certificate of Amendment of Certificate of (2)
Incorporation of the Registrant, dated
October 27, 1987
3.01(b) Certificate of Amendment to Certificate of (2)
Incorporation of the Registrant filed
June 21, 1989
3.01(c) Certificate of Amendment of the Restated (2)
Certificate of Incorporation of the Registrant
filed July 5, 1989
3.01(d) Certificate of Amendment of the Restated (3)
Certificate of Incorporation of the Registrant
filed August 13, 1990
3.01(e) Certificate of Designation of 5 1/2% Series A (4)
Convertible Exchangeable Preferred Stock filed
June 14, 1994
3.01(f) Certificate of Retirement of 5 1/2% Series A (5)Ex. 3.01(a)
Convertible Exchangeable Preferred Stock filed
February 6, 1998
3.01(g) Certificate of Amendment of the Restated (6)
Certificate of Incorporation of the Registrant
filed March 2, 1998
3.01(h) Certificate of Amendment to the Restated **
Certificate of Incorporation of the Registrant
filed October 13, 1998
3.02 By-Laws of the Registrant, as amended (1)
4.01 Indenture, dated as of May 15, 1990, between the (7)
Registrant and Midlantic National Bank, as trustee
4.02 Supplemental Indenture, dated as of February 23, (5)Ex. 4.01
1998, between the Registrant and The Chase
Manhattan Bank, as Trustee
4.03 Warrant Agreement, including Form of Warrant (14)Ex. 4.01
Certificate included as an exhibit thereto, between
the Company and the Warrant Agent
10.01 Form of Supplemental Pension Agreement of (1)(Ex. 10.20)*
Research-Cottrell
10.02 1988 Long-Term Incentive Compensation Plan of M&E, (8)*
effective as of September 30, 1988, as amended
September 7, 1989 and March 19, 1990
10.02(a) 1989 Long-Term Compensation Plan of the Registrant, (2)*
effective as of July 31, 1989
10.03 Research-Cottrell Environmental Engineering Profit (9)(Ex. 10.27)
Sharing Plan, as amended
10.04 Research-Cottrell Environmental Thrift Plan (9)(Ex. 10.29)
10.05 Senior Guaranteed Credit Agreement, dated as of (10)
March 10, 1995, by and among the Registrant, the
Persons listed on Annex B thereto as Borrowers
and Guarantors, the Banks listed on the signature
pages thereof, the First National Bank of Chicago
and Societe Generale, New York Branch, as
Arranging Agents, the First National Bank of
Chicago as Administrative Agent, and Societe
Generale, New York Branch, as Collateral Agent
and Issuing Bank
10.06 Agreement, dated March 13, 1989, between (11)(Ex. 10.31)
Research-Cottrell and certain of its air
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.07 Agreement, dated March 13, 1989, between (11)(Ex. 10.31(A)
Research-Cottrell and certain of its water
subsidiaries and Reliance Insurance Company,
United Pacific Insurance and Planet Insurance
Company of Federal Way, Washington
10.08 Letter Agreement, dated March 18, 1994, between the (4)
Registrant and Vivendi
10.09 Investment Agreement, dated as of March 30, 1994, (8)
among the Registrant, Vivendi and Vivendi North
America Company
10.10 Credit Agreement, dated as of June 14, 1994, between (4)
the Registrant and Vivendi
10.11 Amended and Restated Subordination Agreement, dated (12)
as of March 10, 1995, as Amended and restated as
of March 10, 1995, as amended and restated as of
November 1995, among Vivendi, the Registrant, the
First National Bank of Chicago and United States
Fidelity and Insurance Company, Fidelity and
Guaranty Insurance Company and Fidelity and
Guaranty Insurance Underwriters, Inc. and any
Affiliate of the foregoing
10.12 Master Surety Agreement made October 31, 1995 by the (12)
Registrant, Research-Cottrell, Inc., M&E, Inc., and
Professional Services Group, Inc., for the
continuing Benefit of United States Fidelity and
Guaranty Company, Fidelity and Guaranty Insurance
Underwriters, Inc. and Fidelity and Guaranty
Insurance Company and USF&G Insurance Company of
Mississippi
10.13 Revolving Credit Agreement, dated as of August 2, (13)
1996, between the Registrant and Vivendi North
America Company
10.14 Employment Agreement, dated as of November 7, 1996, (13)*
between Robert B. Sheh and the Registrant
10.15 Recapitalization Agreement, dated September 24, (14)
1997, among the Registrant,Vivendi and Vivendi
North America Company
10.15(a) Amendment No. 1 to the Recapitalization Agreement, (15)
dated January 26, 1998, among The Registrant,
Vivendi and Vivendi North America Company
10.16 Separation Agreement, dated as of October 24, 1997, (15)*
between Robert B. Sheh and the Registrant
11 Statement re: computation of per share earnings **
21 List of Subsidiaries of the Registrant **
23 Consent of McGladrey & Pullen, LLP **
27 Financial Data Schedule **
</TABLE>
- ------------
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 33-17833), as amended, which became effective on April
12, 1988.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 33-29568), as amended, which became effective on August
10, 1989.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-4 (No. 33-43143), as filed with the Securities and Exchange
Commission on October 3, 1991.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 21, 1994, as filed with the
Securities and Exchange Commission on January 30, 1995.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998, as filed with the
Securities and Exchange Commission on March 17,1998.
(6) Incorporated by reference to Exhibit 3.01(e) to the Company's Form
8-A filed with the Securities and Exchange Commission on March 11,
1998.
(7) Incorporated by reference to Exhibit 4.05 to the Registrant's
Registration Statement on Form S-1 ( No. 33-33088), as amended, filed
with the Securities and Exchange Commission on April 24, 1990.
(8) Incorporated by reference to Annex I to the Registrant's Proxy
Statement on Schedule 14A dated May 24, 1994, in connection with its
Annual Meeting of Stockholders held on June 14, 1994.
(9) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to M&E's Registration Statement on Form S-1 (No.
33-24315), as amended, which became effective on October 18, 1988.
(10) Incorporated by reference to Exhibit 1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1995, as
filed with the Securities and Exchange Commission on June 14, 1995.
(11) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to M&E's Registration Statement on Form S-1 (No.
33-28846), as amended, which became effective on June 29, 1989.
(12) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1995, as filed with the
Securities and Exchange Commission on January 3, 1996.
(13) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 1996, as filed with the
Securities and Exchange Commission on January 29, 1997.
(14) Incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K of the Registrant, dated September 24, 1997.
(15) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on
Form S-1 (No. 333-39115), as amended, which became effective on
January 30, 1998.
(*) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K.
(**) Filed herewith.
EXHIBIT 3.01(H)
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
AIR & WATER TECHNOLOGIES CORPORATION
- ----------------------------------------------------------------------------
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
- ----------------------------------------------------------------------------
Air & Water Technologies Corporation, a Delaware corporation
(the "Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is Air & Water Technologies
Corporation.
SECOND: Effective immediately upon filing of this Certificate
of Amendment and without further action on the part of the Corporation or
its stockholders, the provisions of Article FIRST of the Corporation's
Restated Certificate of Incorporation shall be amended as described herein.
THIRD: That the Restated Certificate of Incorporation of the
Corporation is hereby amended to change the name of the Corporation from
"Air & Water Technologies Corporation" to "Aqua Alliance Inc." and to
delete the current Article FIRST in its entirety and to set forth a new
Article FIRST as follows:
"FIRST: The name of the Corporation is Aqua Alliance Inc."
FOURTH: That this Certificate of Amendment has been duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate
of Amendment to be executed in its corporate name this 12th day of October,
1998.
AIR & WATER TECHNOLOGIES
CORPORATION
By: /s/ Thierry M. Mallet
------------------------------
Name: Thierry M. Mallet
Title: President and Chief
Executive Officer
EXHIBIT 11
AQUA ALLIANCE INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------
1998 1997 1996
---- ---- ---
BASIC EARNINGS (LOSS) PER SHARE:
<S> <C> <C> <C>
1. Loss from continuing operations ......... $ (32,869) $ (51,827) $ (11,056)
2. Less preferred dividends ................ -- (3,300) (3,300)
--------- --------- ---------
3. Loss from continuing operations
applicable to common stockholders .... (32,869) (55,127) (14,357)
4. Income (loss) from discontinued
operations ............................ (6,000) (108,754) 5,788
5. Cumulative effect on prior years
(to October 31, 1997) of change
in the method of accounting for
start-up costs ........................ (11,082) -- --
--------- --------- ---------
6. Net loss applicable to common
stockholders .......................... $ (49,951) $(163,881) $ (8,566)
7. Weighted average shares outstanding ..... 136,121 32,019 32,018
8. Loss per share from continuing
operations (3/7) ...................... $ (.24) $ (1.72) $ (.45)
9. Income (loss) per share from
discontinued operations (4/7) ......... (.05) (3.40) .18
10. Loss per share from cumulative effect
on prior years (to October 31,
1997) of change in the method of
accounting for start-up costs ......... (.08) -- --
--------- --------- ---------
11. Net loss per share ...................... $ (.37) $ (5.12) $ (.27)
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE (1):
12. Line 3 above ............................ $ (32,869) $ (55,127) $ (14,356)
13. Add back preferred dividends ............ -- 3,300 3,300
14. Add back interest, on assumed
conversion of the Company's
8% Convertible Debentures ............. 9,200 9,200 9,200
--------- --------- ---------
15. Loss from continuing operations ......... (23,669) (42,627) (1,856)
16. Income (loss) from discontinued
operations ............................ (6,000) (108,754) 5,788
17. Cumulative effect on prior years
(to October 31, 1997) of change
in the method of accounting for
start-up costs ........................ (11,082) -- --
--------- --------- ---------
18. Net income (loss) ....................... $ (40,751) $(151,381) $ 3,932
========= ========= =========
19. Weighted average shares outstanding
(Line 7) .............................. 136,121 32,019 32,018
20. Add additional shares issuable upon
assumed conversion of preferred
shares from date of issuance .......... -- 4,800 4,800
21. Add additional shares issuable upon
assumed conversion of the
Company's 8% Convertible Debentures ... 3,833 3,833 3,833
--------- --------- ---------
22. Adjusted weighted average shares
outstanding ........................... 139,954 40,652 40,651
========= ========= =========
23. Loss per share from continuing
operations (15/19) .................... $ (.17) $ (1.05) $ (.05)
24. Income (loss) per share from
discontinued operations (16/19) ....... (.04) (2.67) .15
25. Loss per share from cumulative effect
on prior years (to October 31,
1997) of change in the method of
accounting for start-up costs ......... (.08) -- --
--------- --------- ---------
26. Net income (loss) per share .............. $ (.29) $ (3.72) $ (.10)
========= ========= =========
</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.
EXHIBIT 21
LIST OF SUBSIDIARIES OF AQUA ALLIANCE INC.
AS OF OCTOBER 31, 1998
State or Other
Jurisdiction
Company of Incorporation
------- ----------------
AWT Air & Water Technologies Canada, Limited Canada
AWT Capital, Inc. Delaware
Chesapeake Sunrise Marketing Corporation Delaware
Cottrell Environmental Sciences, Inc. New Jersey
Custodis-Cottrell, Inc. New Jersey
Custodis-Cottrell Canada, Inc. Canada
Custodis-Cottrell International, Inc. Delaware
Custodis-Ecodyne, Inc. Delaware
EnviroSolutions, LLC Texas
Falcon Associates, Inc. Pennsylvania
Flex-Kleen Corp. Delaware
Lerman Design Corp. Delaware
M&E Auburn, Inc. Delaware
M&E II, Inc. Delaware
M&E Pacific, Inc. Delaware
M&E Services, Inc. Delaware
MEPAC Services, Inc. Delaware
Merscot Inc. Delaware
Merscot II, Inc. Delaware
Metcalf & Eddy, Inc. Delaware
Metcalf & Eddy of Canada Ltd. Canada
Metcalf & Eddy de Puerto Rico, Inc. Delaware
Metcalf & Eddy International, Inc. Delaware
Metcalf & Eddy Management, P.C. District of
Columbia
Metcalf & Eddy of Massachusetts, Inc. Delaware
Metcalf & Eddy of Michigan, Inc. Michigan
Metcalf & Eddy of New York, Inc. New York
Metcalf & Eddy of Ohio, Inc. Delaware
Metcalf & Eddy Services, Inc. Delaware
Metcalf & Eddy Technologies, Inc. Delaware
PIECO, Inc. Florida
Power Application & Mfg. Co. Delaware
PQ Energy, Inc. Louisiana
Production Rentals, Inc. Louisiana
Professional Services Group, Inc. Minnesota
PSG of Puerto Rico, Inc. Puerto Rico
Regenerative Environmental Equipment Co., Inc. (REECO) New Jersey*
Rental Tools, Inc. Louisiana
Research-Cottrell, Inc. New Jersey
Research-Cottrell (Belgium), S.A. Belgium
Research-Cottrell (Canada) Ltd. Canada
Research-Cottrell Energy Companies, Inc. Delaware
Research-Cottrell Intermediate Holding Corporation Delaware
Research-Cottrell International, Inc. New Jersey
Research-Cottrell Japan Ltd. Japan
Thermal Transfer Corporation Pennsylvania
Utility Services Group Inc. Florida
2815869 Canada, Inc. Canada
Vee-Six, Inc. Delaware
- -------------------
* REECO was sold on January 19, 1999.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Aqua Alliance
Inc. (formerly Air & Water Technologies Corporation) previously filed
Registration Statement on Form S-8 (No. 33-36327) of our report, dated
January 12, 1999, which appears on page 37 of this annual report on Form
10-K.
McGLADREY & PULLEN, LLP
New York, New York
January 28, 1999
<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> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 22,197
<SECURITIES> 0
<RECEIVABLES> 82,685
<ALLOWANCES> 4,909
<INVENTORY> 1,470
<CURRENT-ASSETS> 144,924
<PP&E> 33,667
<DEPRECIATION> 23,899
<TOTAL-ASSETS> 359,352
<CURRENT-LIABILITIES> 196,427
<BONDS> 119,405
0
0
<COMMON> 185
<OTHER-SE> 43,965
<TOTAL-LIABILITY-AND-EQUITY> 359,352
<SALES> 445,119
<TOTAL-REVENUES> 445,119
<CGS> 389,767
<TOTAL-COSTS> 389,767
<OTHER-EXPENSES> 10,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,899
<INCOME-PRETAX> (31,770)
<INCOME-TAX> 1,099
<INCOME-CONTINUING> (32,869)
<DISCONTINUED> (6,000)
<EXTRAORDINARY> 0
<CHANGES> (11,082)
<NET-INCOME> (49,951)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.29)
</TABLE>
