FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1994
----------------
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the transition period from _______________ to_____________
Commission File Number 033-17921
---------------------------------
Air & Water Technologies Corporation
__________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3418759
------------ -----------
(State or other Jurisdiction (I.R.S. Employer
of Corporation) Identification Number)
U.S. Highway 22 West and Station Road, Branchburg, NJ 08876
------------------------------------------------------------
(Address of Principal Executive Offices)
Telephone: (908) 685-4600
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 1994.
Class A
$.001 Par Value Common Stock 24,818,281
- ----------------------------- ----------------------------
(Title of Class) (Number of Shares Outstanding)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 1994 AND OCTOBER 31, 1993
(in thousands , except share data)
----------------------------------
ASSETS 1994 1993
------ ------ ------
(unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents $ 7,215 $ 7,624
Accounts receivable, less allowance for doubtful
accounts of $3,800 and $3,100 in 1994 and 1993 104,350 115,131
Costs and estimated earnings in excess of
billings on uncompleted contracts 71,990 80,966
Inventories 30,579 30,140
Prepaid expenses and other current assets 18,792 17,548
Net current assets of discontinued operations 21,193 18,487
------- -------
Total current assets 254,119 269,896
PROPERTY, PLANT AND EQUIPMENT, net 45,266 45,441
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 19,277 18,323
DEFERRED DEBT ISSUANCE COSTS 4,033 4,084
GOODWILL 235,283 237,002
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 6,908 6,269
OTHER ASSETS 19,494 20,275
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Total assets $584,380 $601,290
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 39,354 $ 28,240
Current installments of long-term debt 1,525 3,455
Accounts payable 43,579 56,499
Accrued expenses 73,554 51,359
Billings in excess of costs and estimated
earnings on uncompleted contracts 27,544 24,229
U.S. and foreign income taxes 3,646 4,743
------- -------
Total current liabilities 189,202 168,525
LONG-TERM DEBT 221,738 221,906
MINORITY INTEREST IN AFFILIATES 407 545
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 authorized,
2,500,000 shares;none issued - -
Common stock par value $.001 authorized 100,000,000
shares;issued 24,908,183 shares in 1994 and 1993 25 25
Additional paid-in capital 301,136 301,048
Accumulated deficit (126,954) (89,557)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (1,066) (1,094)
------- -------
Total stockholders' equity 173,033 210,314
------- -------
Total liabilities and stockholders' equity $584,380 $601,290
======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDING JANUARY 31, 1994 AND 1993
(in thousands, except per share data)
(unaudited)
-------------------------------------
1994 1993
--------- ---------
SALES $ 132,227 $ 161,099
COST OF SALES 106,211 119,132
-------- ---------
Gross Margin 26,016 41,967
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 34,669 33,348
AMORTIZATION OF GOODWILL 1,719 1,708
PROVISION FOR ASSET VALUATION 17,300 -
-------- --------
Operating Income (loss) (27,672) 6,911
INTEREST EXPENSE (6,304) (6,111)
INTEREST INCOME 393 157
OTHER EXPENSE, NET (745) (474)
-------- --------
Income (loss) from continuing operations
before income taxes and minority interest (34,328) 483
INCOME TAX PROVISION (BENEFIT) (22) 121
MINORITY INTEREST (138) 83
-------- --------
Net income (loss) from
continuing operations (34,168) 279
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,229) 100
-------- --------
NET INCOME (LOSS) $(37,397) $ 379
======== ========
EARNINGS (LOSS) PER SHARE:
Continuing operations $ (1.38) $ .01
Discontinued operations (.13) .01
-------- --------
NET INCOME (LOSS) PER SHARE $ (1.51) $ .02
======== ========
Weighted average number of shares outstanding 24,818 24,823
======== ========
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDING JANUARY 31, 1994 AND 1993
(in thousands)
(unaudited)
-------------
1994 1993
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(37,397) $ 379
Adjustments to reconcile net income (loss)
to net cash provided by (used for) continuing operations -
Discontinued operations 3,229 (100)
Depreciation and amortization 4,135 4,322
Minority interest (138) 83
--------- ---------
(30,171) 4,684
Changes in working capital, net of effects from acquisitions -
(Increase) decrease in current assets -
Accounts receivable 10,781 3,159
Costs and estimated earnings in excess
of billings on uncompleted contracts 8,976 16,481
Inventories (439) (493)
Prepaid expenses and other current assets (1,414) (229)
Increases (decrease) in current liabilities -
Accounts payable (12,920) (27,321)
Accrued expenses 22,195 2,157
Billings in excess of costs and
estimated earnings on uncompleted contracts 3,315 (12,302)
Income taxes (1,097) (62)
Other assets 935 119
--------- ---------
Net cash provided by (used for) continuing operations 161 (13,807)
Net cash used for discontinued operations (6,574) (4,529)
--------- ---------
Net cash used for operating activities (6,413) (18,336)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (907) (1,434)
Investment in environmental treatment facilities (954) (118)
Software development (970) -
Other, net (209) (1,048)
--------- ---------
Net cash used for investing activities (3,040) (2,600)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt (2,098) (1,768)
Net borrowings under line of credit 11,114 15,946
Change in cumulative currency translation adjustment 28 (198)
--------- ---------
Net cash provided by financing activities 9,044 13,980
--------- ---------
Net decrease in cash and cash equivalents (409) (6,956)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,624 10,121
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,215 $3,165
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $7,157 $5,255
========= =========
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(unaudited)
-----------
The interim consolidated financial statements and the following notes should be
read in conjunction with the notes to the consolidated financial statements of
the Company as included in its Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended October 31, 1993. The interim information
reflects all adjustments, including normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim period. Results for the interim period are not necessarily indicative
of results to be expected for the full year.
(1) Cash Equivalents:
----------------
Cash equivalents consist of investments in short-term highly liquid
securities having an original maturity at the date of acquisition of three
months or less and primarily include investments in bank time deposits at
January 31, 1994 and October 31, 1993.
(2) Net Income (Loss) Per Share:
---------------------------
Net income (loss) per share is computed by dividing the net income (loss)
by the weighted average number of common and common equivalent shares
outstanding. Fully diluted earnings per share are not presented as the
assumed conversion of the Company's $ 115,000,000 of 8% Convertible
Debentures is antidilutive to per share amounts presented herein. The
debentures are convertible into shares of Class A Common Stock at a
conversion price of $ 30.00 per share.
(3) Sale of Accounts Receivable:
---------------------------
Through an accounts receivable purchase agreement with the First National
Bank of Chicago ("the Institution"), the Company may sell eligible accounts
receivable, at its option, on an ongoing basis, to the Institution, up to
$20,000,000 until expiration of the agreement on January 31, 1995. Sales
of accounts receivable under the agreement are subject to limited recourse.
As needed, the Company replaces accounts receivable previously sold when
they are collected. As of January 31, 1994 and October 31, 1993,
$20,000,000 of accounts receivable were outstanding under the agreement
and, accordingly, excluded from accounts receivable.
(4) Investments in Joint Ventures:
-----------------------------
The Company, in the normal conduct of its subsidiaries' business, has
entered into certain partnership arrangements, referred to as "joint
ventures," for engineering and program management projects. A separate
joint venture is established with respect to each such project. The joint
venture arrangements generally commit each venturer to supply a
predetermined proportion of the engineering labor and capital, and provide
each venturer a predetermined proportion of income or loss. Each joint
venture is terminated upon the completion of the underlying project.
Summary financial information for joint ventures accounted for on the
equity method for the three month periods ending January 31, 1994 and 1993
follows:
Company share of joint ventures: 1994 1993
------ ------
Sales $ 6,939 $ 14,742
Cost of sales 5,315 12,740
General and administrative expenses 1,115 1,479
------ ------
Income $ 509 $ 523
====== ======
Investment at January 31 $ 78 $ 3,147
====== ======
The Company's share of joint venture income presented above includes
general and administrative expenses incurred by the joint ventures.
General and administrative expenses incurred by the Company attributed to
the management and administration of the joint ventures are not included.
The Company's investment in joint ventures includes capital contributed to
the joint ventures and the Company's share of undistributed earnings
(included in other assets). In addition, the Company had receivables from
the joint ventures totaling $2,848,000 at January 31, 1994 and $2,783,000
at October 31, 1993, relating to current services provided by the Company
to the joint ventures.
The data presented above primarily represents the Company's investment in a
43% owned joint venture with CRSS, Inc. providing services to the U. S. Air
Force in Saudi Arabia.
(5) Provision for Asset Valuation:
-----------------------------
Certain businesses no longer meeting strategic objectives are anticipated
to be divested in connection with a contemplated capital transaction (see
Note 7). These businesses primarily consist of certain manufacturing
operations and properties which do not fit with the Company's strategy of
becoming a full-service environmental company and diverts management
attention from its core products and services. The aggregate net book
values of these operations are approximately $37,000,000. Total assets
approximate $45,000,000 of which goodwill represents approximately
$5,500,000. As a result of the anticipated divestitures, the Company has
recorded a $17,300,000 charge to reduce the related net book values of
these operations to their estimated realizable values based on management's
estimate of the anticipated sales proceeds.
(6) Commitments and Contingencies:
-----------------------------
At January 31, 1994 and October 31, 1993, approximately $37,400,000 in
delinquent payments on the Puerto Rico Aqueduct and Sewer Authority
("PRASA") contract were outstanding. The Company, through Metcalf & Eddy,
Inc. ("M&E"), has filed an action seeking payment of these delinquent
payments and related damages as described below. In September 1990, M&E
filed an action in United States District Court in San Juan, Puerto Rico,
seeking $52 million in damages from PRASA. M&E's suit initially sought $27
million in damages for payment of goods and services M&E sold and rendered
to PRASA under a contract to rehabilitate PRASA's wastewater treatment
system and provide related program management services. In July 1991, M&E
amended its action to seek $37.4 million in damages for these delinquent
payments, which represented the total account receivable with respect to
the PRASA contract as of that date. The suit also claims damages for
anticipated claims by suppliers to M&E with respect to the PRASA contract,
violations of good faith and fair dealing under the contract and loss of
business reputation. On December 18, 1990, M&E announced that it had
suspended all work under the contract pending resolution of the litigation
between the parties. The matter is complex litigation. No assurance as to
the final outcome of the litigation can be given.
PRASA has been withholding payments under its contract with M&E. An audit
of the contract, dated November 16, 1990, performed by a governmental
affiliate of PRASA, questioned up to $39,988,200 of billings for possible
technical violations of equipment procurement procedures under the contract
and charges outside the contract. PRASA had denied the allegations of the
complaint and challenged the jurisdiction of the United States District
Court. The trial court denied PRASA's jurisdictional motions and the
United States Court of Appeals for the First Circuit dismissed PRASA's
appeal on procedural grounds. PRASA then filed a petition for a writ of
certiorari in the United States Supreme Court asking that court to review
that procedural dismissal, and the Supreme Court granted that petition.
The trial court stayed all proceedings pending disposition by the Supreme
Court of the appeal of the procedural issue. On January 12, 1993, the
Supreme Court decided this appeal in PRASA's favor and remanded the case to
the First Circuit for disposition on the merits of the jurisdictional
issue. On May 3, 1993, the First Circuit ruled against PRASA and in favor
of Metcalf & Eddy on the merits of the jurisdictional issue. Discovery in
this matter is nearing completion and a July 7, 1994 trial date has been
scheduled.
The Company disputes the findings of the PRASA audit. The Company believes
that substantially all of the billings questioned by the audit represent
appropriate charges under the contract for goods and services provided to
PRASA by M&E.
In October 1992, the Supreme Court of the Commonwealth of Puerto Rico ruled
on a separate action entitled "Colegio de Ingenieros vs. Autoridad de
Acueductos y Metcalf & Eddy, Inc." which could impact the Company's action
against PRASA. This ruling held that certain portions of a multi-year
contract to repair, rehabilitate or decommission 82 sewage treatment plants
between M&E and PRASA that pertained to design engineering were invalid as
contrary to Puerto Rican law insofar as they called for the practice of
engineering by M&E. This action, originally filed in September 1986 by the
Puerto Rico College of Engineers( the "Colegio"), an island-wide
professional engineering organization, sought a declaratory judgment that
the engineering design portion of M&E's contract violated a Puerto Rico law
prohibiting corporations from practicing engineering. The Company has
filed a Motion for Reconsideration that remains undecided.
The Colegio decision complicates further what is complex commercial
litigation between the Company and PRASA. In particular, uncertainty
exists as to how the Federal District Court in the PRASA case will
interpret and apply the Colegio decision to the facts before it. Because
of this uncertainty, at this time the Company is unable to determine with
any specificity what impact the Colegio decision will have on its efforts
to recover monies from PRASA. As a result of these developments and the
status of the litigation with PRASA to date, the Company in its fourth
quarter ended October 31, 1992 recorded a $7,000,000 pre-tax charge ($.28
per share) to earnings reflecting costs associated with the PRASA
litigation. The Company has consulted with counsel as to its obligations
under the contract and the course of the litigation generally. Based on
its considerations of all of the foregoing and the status of litigation to
date, the Company believes that it has performed substantially in
accordance with the terms of the contract and that, ultimately, at least a
majority of all sums due M&E pursuant to the contract will be realized. If
the Company were to recover less than all of the account receivable owed it
by PRASA, the Company would recognize a corresponding reduction in income
(less any unutilized portion of the $7,000,000 in costs accrued for) and
accounts receivable for, and as of the end of, the period in which a final
determination of the amount to be recovered is reached.
The Company and its subsidiaries are parties to various other legal actions
arising in the normal course of their businesses, some of which involve
claims for substantial sums. The Company believes that the disposition of
such actions, individually or in the aggregate, will not have a material
adverse effect on the consolidated financial position or results of
operations of the Company taken as a whole.
(7) Subsequent Event:
-----------------
On March 17, 1994, the Company announced that it had entered into a letter
agreement with its largest stockholder, Compagnie Generale des Eaux
("CGE"), designed to strengthen the Company's competitive and financial
position and increase its working capital availability. Under the terms of
the agreement, the Company will: (i) issue for cash $60,000,000 of a new
series of convertible exchangeable preferred stock with a dividend yield of
5.5%, convertible at $12.50 per share of Class A Common Stock; (ii) acquire
CGE's U.S. water management subsidiary, Professional Service Group, Inc.
("PSG"), in exchange for 6,500,000 newly issued shares of Class A Common
Stock. (For the year ended December 31, 1993, PSG had total revenue of
approximate $80,000,000); (iii) benefit from certain financial undertakings
from CGE which include assistance and support in obtaining $125,000,000 of
bank debt to repay the Prudential Notes (and assistance and support in
obtaining $125,000,000 of bridge financing to repay the Company's
Prudential Notes if the transactions contemplated by the letter agreement
have not been consummated on or before June 14, 1994, and the Company has
been unable to obtain debt financing to repay the Prudential Notes by that
date); and (iv) become CGE's exclusive vehicle in the United States, its
possessions and territories for CGE's water and wastewater management and
air pollution activities.
In connection with the letter agreement, the Company issued 500,000 of
Class A Common Stock to CGE for $5,000,000 in cash. As a result of such
issuance, CGE's beneficial ownership of the Company has increased to 24.5%,
and the Company has invited two individuals designated by CGE to join its
Board of Directors. Upon consummation of the proposed transactions, CGE
will become a 40% common shareholder and will have 48% of the total voting
power. CGE will also be entitled to proportionate representation on the
Company's Board of Directors.
The agreement is subject to the execution of definitive documentation,
regulatory approval, the receipt by the Company of a fairness opinion from
its financial advisors, and a favorable vote of the Company's stockholders
at the Company's 1994 Annual Meeting of Stockholders.
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
interim consolidated financial statements and the notes thereto included in this
Quarterly Report and the audited financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended October 31, 1993.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the core
environmental segments of the Company (in thousands).
Three Months Ending January 31,
-------------------------------
1994 1993
-------- --------
Sales:
Research - Cottrell $ 54,550 $ 67,344
Metcalf & Eddy 68,203 83,093
Residuals Management Group 9,474 10,569
Eliminations/Other - 93
-------- --------
$132,227 $161,099
======== ========
Cost of Sales:
Research - Cottrell $ 52,899 $ 54,165
Metcalf & Eddy 45,888 57,193
Residuals Management Group 7,435 7,681
Eliminations/Other (11) 93
-------- --------
$106,211 $119,132
======== ========
Selling, General and Administrative Expenses:
Research - Cottrell $ 9,740 $ 9,141
Metcalf & Eddy 20,183 20,065
Residuals Management Group 2,481 2,348
Eliminations/Other (4) 10
Corporate Unallocated 2,269 1,784
-------- --------
$ 34,669 $ 33,348
======== ========
Amortization of Goodwill:
Research - Cottrell $ 784 $ 793
Metcalf & Eddy 913 905
Residuals Management Group 22 10
-------- --------
$ 1,719 $ 1,708
======== ========
Provision for Asset Valuation:
Corporate Unallocated $ 17,300 $ -
======== ========
Operating Income:
Research - Cottrell $(8,873) $ 3,245
Metcalf & Eddy 1,219 4,930
Residuals Management Group (464) 530
Other 15 (10)
Corporate Unallocated (19,569) (1,784)
--------- --------
$(27,672) $ 6,911
========= ========
Three Months Ended January 31, 1994 Compared to
Three Months Ended January 31, 1993
- --------------------------------------
Consolidated sales of $132,227,000 for the three months ended January 31,
1994 reflected a decline from $161,099,000 in the prior comparable period.
The decline is attributed to lower sales volumes in all three segments.
Sales at Research-Cottrell decreased $12,794,000 compared to the prior
comparable period. The decrease was principally attributable to the level
of work derived from the Company's backlog of which lower volumes of
approximately $10,764,000 were recorded in Research-Cottrell's original
equipment product lines primarily with respect to particulate control
equipment which remain negatively impacted as customers are continuing to
evaluate both compliance options and the enforcement framework related to
the Clean Air Act Amendments of 1990 ("Clean Air Act"), as well as their
capital spending plans in view of the economic climate. The Company
believes there will be an improved pace of progress by the government in
reducing the compliance uncertainties relative to the requirements of the
Clean Air Act which have permeated the market over the last couple of
years. These requirements specify various compliance deadlines between
1993 and 2000. Lower volume of $4,293,000 from Research-Cottrell's cooling
tower service and maintenance business also contributed to the decrease.
The decline in cooling tower work resulted from the Company's focus on
higher margin services. Metcalf & Eddy sales decreased $14,890,000
primarily from lower pass-through sales of approximately $9,089,000
representing direct project costs passed through to the Company's clients
and planned reductions in its water/wastewater and general engineering
services of $3,895,000 which are expected to be offset by growth in the
hazardous waste remediation. The Residuals Management Group recorded a
decrease in sales of $1,095,000 attributable to lower volume in natural gas
compressors and other related systems.
Cost of sales decreased $12,921,000 to $106,211,000 from $119,132,000 in
1993. For Research-Cottrell, cost of sales decreased by $1,266,000 to
$52,899,000 primarily as a result of lower sales volume partially offset by
a $8,200,000 charge for advanced software and field applications related to
its emissions monitoring and particulate control equipment. At Metcalf &
Eddy costs of sales decreased $11,305,000 to $45,888,000 primarily due to
lower sales volume described above principally in low margin pass-through
sales. Cost of sales in the Residuals Management Group decreased slightly
as a result of the decreased sales volume described above.
Selling, general and administrative expenses of $34,669,000 increased
$1,321,000 from $33,348,000 in the prior period. Selling, general and
administrative expenses at Research-Cottrell increased $599,000 compared to
the prior period. The increase relates to shifting the business focus from
large utility projects to continuous emissions monitors, air toxics control
systems and its service and maintenance business. Metcalf & Eddy's
selling, general and administrative expenses increased by $118,000 due in
part to an additional $1,000,000 of legal fees offset by lower sales
volumes. Increases in selling, general and administrative expenses for the
Residual Management Group were due to higher levels of expenses from
expanding service related product lines.
Certain businesses no longer meeting strategic objectives are anticipated
to be divested in connection with a contemplated capital transaction (see
Note 7). These businesses primarily consist of certain manufacturing
operations and properties which do not fit with the Company's strategy of
becoming a full-service environmental company and diverts management
attention from its core products and services. The aggregate net book
values of these operations are approximately $37,000,000. Total assets
approximate $45,000,000 of which goodwill represents approximately
$5,500,000. As a result of the anticipated divestitures, the Company has
recorded a $17,300,000 charge to reduce the related net book values of
these operations to their estimated realizable values based on management's
estimate of the anticipated sales proceeds.
Interest income increased $236,000 and interest expense increased $193,000
primarily as a result of a favorable state tax settlement and higher levels
of short-term borrowings during the current period compared to the prior
period.
In January 1994, the Company announced that it would discontinue its
asbestos abatement operations. Accordingly, the asbestos abatement
business, as of the Company's 1993 fiscal year, has been considered a
discontinued operation for financial reporting purposes. The Company made
its determination to discontinue this business after an operational review,
prompted by increasing negative cash flows during fiscal 1993. The review,
which was initiated during the fourth quarter of 1993, has led to a more
extensive investigation of among other things, recorded financial results
and other internal operating and accounting controls within the asbestos
abatement operations, after the discovery of accounting irregularities.
Certain members of the senior management team within the asbestos abatement
operations have been replaced. The investigation is continuing as of the
date of the filing of the Quarterly Report on Form 10-Q. During the
current period, the asbestos abatement operations incurred a loss of
$3,229,000 primarily due to costs to complete revisions on existing
contracts.
Financial Condition
- -------------------
Cash provided by continuing operations for the three months ended January
31, 1994 amounted to $161,000. In addition, during the fiscal quarter
ended January 31, 1994, the Company's discontinued asbestos abatement
operations utilized $6,574,000 of cash, resulting in net cash used for
operating activities of $6,413,000. The Company also utilized $3,040,000
of cash for capital expenditures, investment in environmental treatment
facilities, software development and other investment activities during the
first fiscal quarter. An additional $2,098,000 of cash was used for the
payment of notes and long-term debt during this period. These cash
requirements were funded principally in increased borrowings under the
Company's Credit Agreement amounting to $11,114,000. This situation
resulted in a reduction in available capacity under the Company's existing
bank lines of credit as of January 31, 1994. Further erosion of the
Company's cash position has occurred during the second fiscal quarter.
The Company's principal sources of liquidity to meet short-term working
capital needs, in addition to its existing cash balances ($7,215,000 at
January 31, 1994) and funds generated from operations, consisted of its
$70,000,000 Credit Agreement with a syndicate of banks represented by The
First National Bank of Chicago ("First Chicago") and its $20,000,000
Accounts Receivable Purchase Agreement with First Chicago, both of which
facilities expire on January 31, 1995. Under the credit Agreement, the
Company may borrow up to $40,000,000 for working capital loans. As of
January 31, 1994, letters of credit issued under the facility totaled
$29,200,000, leaving little available for further credit support. Foreign
borrowing facilities were supported by $18,650,000 of the letters of
credit, under which $13,854,000 was borrowed at January 31, 1994. As of
such date $25,500,000 was outstanding under the working capital loan
portion of the credit facility (up from $14,000,000 at October 31, 1993),
resulting in $15,300,000 of available capacity. This amount has been
reduced by additional borrowings during the second fiscal quarter to
$11,700,000 as of March 22, 1994. In addition, the Company's Accounts
Receivable Purchase Agreement continues to be fully utilized, with
$20,000,000 of accounts receivable sold to First Chicago thereunder.
The decreased availability of working capital under the Company's credit
facilities have resulted in the prospect of a cash deficiency during the
second quarter unless both interim and longer term measures are taken by
the Company. To address the near-term need for cash, the Company has
negotiated a temporary, $10,000,000 increase in its Accounts Receivable
Purchase Agreement with First Chicago, which facility will terminate on the
earlier of the Company's receipt of proceeds from a capital raising
transaction or May 31, 1994.
In an effort to address longer term liquidity needs, the Company has
focused on the desirability of retiring its $100,000,000 Senior Notes with
the Prudential Insurance Company of America ("the Prudential Notes") in
order to eliminate limitations on the Company's ability to grant liens on
certain assets of the Company. If such restrictive covenants are
terminated, the Company believes that it would be able to pledge such
assets to secure expanded borrowing capacity from its existing or new
lenders. During the latter part of fiscal 1993 and the first quarter of
fiscal 1994, the Company has analyzed various capital raising transactions
which, if consummated, could allow the Company to prepay the Prudential
Notes. The Company has also obtained Prudential's agreement in an
amendment to the Prudential Notes to allow its prepayment on or before June
15, 1994, at a price of $105,000,000 (subject to adjustment if the five-
year U.S. Treasury rate falls below 5.06%) plus accrued interest, together
with a prepayment fee of $2,500,000 payable in cash or Class A Common Stock
of the Company. Thereafter, the price at which such notes could be retired
is governed by the original Note agreement unless the Company and
Prudential otherwise agree.
The Company has also continued to concentrate on both controlling its
selling, general and administrative expenditures, as well as on reducing
the amount of its working capital invested in customer projects which
totaled approximately $170,000,000 at January 31, 1994.
On March 17, 1994, the Company announced that it had entered into a letter
agreement with its largest stockholder, Compagnie Generale des Eaux
("CGE"), designed to strengthen the Company's competitive and financial
position and increase its working capital availability. Under the terms of
the agreement, the Company will: (i) issue for cash $60,000,000 of a new
series of convertible exchangeable preferred stock with a dividend yield of
5.5%, convertible at $12.50 per share of Class A Common Stock; (ii) acquire
CGE's U.S. water management subsidiary, Professional Service Group, Inc.,
in exchange for 6,500,000 newly issued shares of Class A Common Stock;
(iii) benefit form certain financial undertakings from CGE which include
assistance and support in obtaining $125,000,000 of bank debt to repay the
Prudential Notes (and assistance and support in obtaining $125,000,000 of
bridge financing to repay the Prudential Notes if the transactions
contemplated by the letter agreement have not been consummated on or before
June 14, 1994, and the Company has been unable to obtain debt financing to
repay the Prudential Notes by that date); and (iv) become CGE's exclusive
vehicle in the United States, its possessions and territories for CGE's
water and wastewater management and air pollution activities.
In connection with the letter agreement, the Company issued 500,000 shares
of Class A Common Stock to CGE for $5,000,000 in cash. As a result of such
issuance, CGE's beneficial ownership of the Company has increased to 24.5%,
and the Company has invited two individuals designated by CGE to join its
Board of Directors. Upon consummation of the proposed transactions, CGE
will become a 40% common shareholder and will have 48% of the total voting
power. CGE will also be entitled to proportionate representation on the
Company's Board of Directors.
The agreement is subject to the execution of definitive documentation,
regulatory approvals, the receipt by the Company of a fairness opinion from
its financial advisors, and a favorable vote of the Company's stockholders
at the Company's 1994 Annual Meeting of Stockholders. While no assurance
can be given that the proposed transactions with CGE will be consummated,
the Company believes that their completion will result in a substantial
infusion of cash into the Company and provide an opportunity for the
Company to seek more expanded credit capacity to address its liquidity
needs. Should the proposed transactions with CGE not be consummated, the
Company will be required to seek other sources of capital to permit it to
repay the Prudential Notes and finance its operations.
PRASA Litigation
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At January 31, 1994, approximately $37,400,000 in delinquent payments on
the Puerto Rico Aqueduct and Sewer Authority ("PRASA") contract were
outstanding. The Company, through Metcalf & Eddy, Inc. ("M&E") has filed
an action seeking payment of these delinquent payments and related damages
as described below. In September 1990, M&E filed an action in United
States District Court in San Juan, Puerto Rico, seeking $52 million in
damages from PRASA. M&E's suit initially sought $27 million in damages for
payment of goods and services M&E sold and rendered to PRASA under a
contract to rehabilitate PRASA's wastewater treatment system and provide
related program management services. In July 1991, M&E amended its action
to seek $37.4 million in damages for these delinquent payments, which
represented the total account receivable with respect to the PRASA contract
as of that date. The suit also claims damages for anticipated claims by
suppliers to M&E with respect to the PRASA contract, violations of good
faith and fair dealing under the contract and loss of business reputation.
On December 18, 1990, M&E announced that it had suspended all work under
the contract pending resolution of the litigation between the parties. The
matter is complex litigation. No assurance as to the final outcome of the
litigation can be given.
PRASA has been withholding payments under its contract with M&E. An audit
of the contract, dated November 16, 1990, performed by a governmental
affiliate of PRASA, questioned up to $39,988,200 of billings for possible
technical violations of equipment procurement procedures under the contract
and charges outside the contract. PRASA had denied the allegations of the
complaint and challenged the jurisdiction of the United States District
Court. The trial court has denied PRASA's jurisdictional motions and the
United States Court of Appeals for the First Circuit dismissed PRASA's
appeal on procedural grounds. PRASA then filed a petition for a writ of
certiorari in the United States Supreme Court asking that court to review
that procedural dismissal, and the Supreme Court granted that petition. The
trial court stayed all proceedings pending disposition by the Supreme Court
of the appeal of the procedural issue. On January 12, 1993, the Supreme
Court decided this appeal in PRASA's favor and remanded the case to the
First Circuit for disposition on the merits of the jurisdictional issue.
On May 3, 1993 the First Circuit ruled against PRASA and in favor of
Metcalf & Eddy on the merits of the jurisdictional issue. Discovery in
this matter is nearing completion and a July 7, 1994 trial date has been
scheduled.
The Company disputes the findings of the PRASA audit. The Company believes
that substantially all of the billings questioned by the audit represent
appropriate charges under the contract for goods and services provided to
PRASA by M&E .
In October 1992, the Supreme Court of the Commonwealth of Puerto Rico ruled
on a separate action entitled "Colegio de Ingenieros vs. Autoridad de
Acueductos y Metcalf & Eddy, Inc." which could impact the Company's action
against PRASA. This ruling held that certain portions of a multi-year
contract to repair, rehabilitate or decommission 82 sewage treatment plants
between M&E and PRASA that pertained to design engineering were invalid as
contrary to Puerto Rican law insofar as they called for the practice of
engineering by M&E. This action, originally filed in September 1986 by the
Puerto Rico College of Engineers (the "Colegio"), an island-wide
professional engineering organization, sought a declaratory judgment that
the engineering design portion of M&E's contract violated a Puerto Rico law
prohibiting corporations from practicing engineering. The Company has
filed a Motion for Reconsideration.
The Colegio decision complicates further what is complex commercial
litigation between the Company and PRASA. In particular, uncertainty
exists as to how the Federal District Court in the PRASA case will
interpret and apply the Colegio decision to the facts before it. Because
of this uncertainty, at this time the Company is unable to determine with
any specificity what impact the Colegio decision will have on its efforts
to recover monies from PRASA. As a result of these developments and the
status of the litigation with PRASA to date, the Company in its fourth
quarter ended October 31, 1992 recorded a $7,000,000 pre-tax charge ( $.28
per share ) to earnings reflecting costs associated with the PRASA
litigation. The Company has consulted with counsel as to its obligations
under the contract and the course of the litigation generally. Based on
its considerations of all of the foregoing and the status of litigation to
date, the Company believes that it has performed substantially in
accordance with the terms of the contract and that, ultimately, at least a
majority of all sums due M&E pursuant to the contract will be realized. If
the Company were to recover less than all of the account receivable owed it
by PRASA, the Company would recognize a corresponding reduction in income
(less any unutilized portion of the $7,000,000 in costs accrued for) and
accounts receivable for, and as of the end of, the period in which a final
determination of the amount to be recovered is reached.
The businesses of the Company have not historically required significant
ongoing capital expenditures. For the three months ended January 31, 1994
and for the years ended October 31, 1993 and 1992 total capital
expenditures were $907,000 and $5,188,000 and $8,145,000, respectively.
Such amounts, however, do not include investments by the Company made in
connection with the Company's total project delivery services. The Company
has been able to obtain satisfactory financing in connection with such
services and believes, although no assurance can be given, that it will be
able to continue to obtain such financing in the future. At January 31,
1994, the Company had no material outstanding purchase commitments for
capital expenditures.
PART II. OTHER INFORMATION
ITEM I. Legal Proceedings
Reference is made to Part I Item I (Note 6 to the Interim Consolidated
Financial Statements) for discussion of a legal matter involving the
Company's lawsuit in Puerto Rico against PRASA.
There are no reportable items under Part II., items II. through VI.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf, by the
undersigned thereunto duly authorized.
AIR & WATER TECHNOLOGIES CORPORATION
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(registrant)
Date March 22, 1994 /s/ Anthony DiMichele
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Anthony DiMichele
Vice President
Chief Financial Officer