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 April 30, 1994
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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
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Air & Water Technologies Corporation
__________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3418759
-------- ----------
(State or other Jurisdiction (I.R.S. Employer Identification
of Corporation) Number)
U.S. Highway 22 West and Station Road, Branchburg, NJ 08876
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(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 April 30, 1994.
Class A
$.001 Par Value Common Stock 25,318,281
- - ---------------------------- -----------------------------
(Title of Class) (Number of Shares Outstanding)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1994 AND OCTOBER 31, 1993
- - -----------------------------------------------------------------
(in thousands , except share data)
--------------------------------
ASSETS 1994 1993
------ ---- ----
(unaudited)
---------
CURRENT ASSETS:
Cash and cash equivalents $ 3,173 $ 7,624
Accounts receivable, less allowance for doubtful
accounts of $2,600 and $3,100 in 1994 and 1993 107,431 115,131
Costs and estimated earnings in excess of
billings on uncompleted contracts 76,337 80,966
Inventories 30,423 30,140
Prepaid expenses and other current assets 18,043 17,548
Net current assets of discontinued operations _ 18,487
-------- --------
Total current assets 235,407 269,896
PROPERTY, PLANT AND EQUIPMENT, net 44,342 45,441
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 20,230 18,323
DEFERRED DEBT ISSUANCE COSTS 3,982 4,084
GOODWILL 233,561 237,002
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS _ 6,269
OTHER ASSETS 20,410 20,275
-------- -------
Total assets $557,932 $601,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 50,018 $ 28,240
Current installments of long-term debt 1,523 3,455
Accounts payable 54,670 56,499
Accrued expenses 71,585 51,359
Billings in excess of costs and estimated earnings on
uncompleted contracts 26,031 24,229
U.S. and foreign income taxes 4,881 4,743
Net current liabilities of discontinued operations 2,687 _
-------- --------
Total current liabilities 211,395 168,525
======== ========
LONG-TERM DEBT 221,560 221,906
-------- --------
MINORITY INTEREST IN AFFILIATES 286 545
-------- --------
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 25,408,183 and 24,908,183 shares
in 1994 and 1993 25 25
Additional paid-in capital 306,224 301,048
Accumulated deficit (180,701) (89,557)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (749) (1,094)
-------- --------
Total stockholders' equity 124,691 210,314
-------- --------
Total liabilities and stockholders' equity $557,932 $601,290
======== ========
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE AND SIX MONTH PERIODS ENDING APRIL 30, 1994 AND 1993
------------------------------------------------------------------
(in thousands, except share data)
-------------------------------
(unaudited)
---------
Three Months Six Months
Ending April 30 Ending April 30
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
SALES $133,204 $172,349 $265,431 $333,448
COST OF SALES 105,107 126,420 211,318 245,552
-------- -------- -------- --------
Gross Margin 28,097 45,929 54,113 87,896
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 38,163 35,712 72,832 69,060
AMORTIZATION OF GOODWILL 1,725 1,705 3,444 3,413
PROVISION FOR ASSET VALUATION - - 17,300 -
-------- -------- -------- --------
Operating Income (loss) (11,791) 8,512 (39,463) 15,423
INTEREST EXPENSE (6,713) (6,163) (13,017) (12,274)
INTEREST INCOME 249 242 642 399
OTHER EXPENSE, NET (549) (757) (1,294) (1,231)
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and minority interest (18,804) 1,834 (53,132) 2,317
PROVISION FOR INCOME TAXES 64 313 42 434
MINORITY INTEREST (121) 14 (259) 97
-------- -------- -------- --------
Income (loss) from continuing
operations (18,747) 1,507 (52,915) 1,786
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (35,000) 1,468 (38,229) 1,568
-------- -------- -------- --------
NET INCOME (LOSS) $(53,747) $ 2,975 $(91,144) $ 3,354
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE
Continuing operations $ (.74) $ .06 $ (2.12) $ .07
Discontinued operations (1.40) .06 (1.53) .07
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ (2.14) $ .12 $ (3.65) $ .14
======== ======== ======== ========
Weighted average number of
shares outstanding 25,065 24,812 24,940 24,814
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTH PERIODS ENDING APRIL 30, 1994 AND 1993
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(in thousands)
(unaudited)
1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (91,144) $ 3,354
Adjustments to reconcile net income (loss) to
net cash provided by
(used for) continuing operations -
Discontinued operations 38,229 (1,568)
Depreciation and amortization 8,520 8,872
Minority interest (259) 97
---------- ----------
(44,654) 10,755
Changes in working capital, net of effects
from acquisitions -
(Increase) decrease in current assets -
Accounts receivable 7,700 (5,830)
Costs and estimated earnings in excess of
billings on uncompleted contracts 4,629 12,961
Inventories (283) (1,425)
Prepaid expenses and other current assets (851) 3,617
Increases (decrease) in current liabilities -
Accounts payable (1,82) (22,987)
Accrued expenses 20,226 (11,160)
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,802 (9,768)
Income taxes 138 (610)
Other assets 544 (1,361)
---------- ----------
Net cash used for continuing operations (12,578) (25,808)
Net cash used for discontinued operations (10,786) (6,044)
---------- ----------
Net cash used for operating activities (23,364) (31,852)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,729) (1,491)
Investment in environmental treatment facilities (1,907) (645)
Software development (2,355) _
Other, net 59 (808)
---------- ----------
Net cash used for investing activities (5,932) (2,944)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,000 _
Payment of notes payable and long-term debt (2,278) (2,191)
Net borrowings under line of credit 21,966 30,434
Change in cumulative currency translation adjustment 157 (280)
Other, net - (8)
---------- ----------
Net cash provided by financing activities 24,845 27,955
---------- ----------
Net decrease in cash and cash equivalents (4,451) (6,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,624 10,121
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,173 $ 3,280
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 12,566 $ 11,532
========== ==========
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
APRIL 30, 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 amended 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 April 30, 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. In addition, the Company may sell up to an additional
$10,000,000 of eligible and/or supplemental receivables, at
its option, until June 15, 1994 under a temporary accounts
receivable purchase agreement. 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 April 30, 1994 and
October 31, 1993, $25,000,000 and $20,000,000, respectively,
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 six month periods ending April 30, 1994
and 1993 follows:
Company share of joint ventures: 1994 1993
------- -------
Sales $19,153 $33,816
Cost of sales 15,811 28,852
General and administrative expenses 2,324 2,942
------- -------
Income $ 1,018 $ 2,022
======= =======
Investment at April 30 $ 1,344 $ 3,325
======= =======
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 $2,814,000 at April 30, 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. As a result of the anticipated
divestitures, the Company in the first quarter of 1994
recorded a $17,300,000 charge representing the difference
between the carrying value of these operations of
$37,000,000 and management's estimate of the anticipated net
sales proceeds of approximately $19,700,000. Total assets
of these operations approximate $45,000,000 at April 30,
1994, which includes approximately $11,000,000 for accounts
receivable, $6,200,000 for costs and estimated earnings in
excess of billings, $11,000,000 for inventories, $9,600,000
for property plant and equipment, $1,700,000 for other
assets and $5,500,000 for goodwill.
(6) Commitments and Contingencies:
-----------------------------
At April 30, 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 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 has stayed all proceedings
(including further factual discovery and a trial date which
had been set for May 18, 1992) 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. On
April 15, 1994, the District Court issued an Order requiring
a Special Master to assist the Court with the complex
accounting matters in this case. It is now anticipated that
a trial will begin in March, 1995.
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 which is still pending
before the Court.
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) Investment Agreement:
--------------------
On March 30, 1994, the Company entered into an Investment
Agreement with its largest stockholder, Compagnie Generale
des Eaux ("CGE") and Anjou International Company, a wholly-
owned subsidiary of CGE ("Anjou"), together with a Letter
Agreement between the Company and CGE, dated March 18, 1994,
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 a
$125,000,000 term loan from CGE to repay the Prudential
Notes; 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 a favorable vote of the
Company's stockholders at the Company's 1994 Annual Meeting
of Stockholders, currently scheduled for June 14, 1994.
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 Six Months Ending
April 30, April 30,
------------------- ----------------
1994 1993 1994 1993
------ ------ ------ ------
Sales:
Research - Cottrell $ 48,733 $ 76,589 $103,283 $143,933
Metcalf & Eddy 70,924 78,495 139,127 161,588
Residuals Management Group 13,547 17,358 23,021 27,927
Eliminations/Other - (93) - -
-------- -------- -------- --------
$133,204 $172,349 $265,431 $333,448
======== ======== ======== ========
Cost of Sales:
Research - Cottrell $ 48,779 $ 61,711 $101,678 $115,876
Metcalf & Eddy 45,639 50,329 91,527 107,522
Residuals Management Group 10,694 14,473 18,129 22,154
Eliminations/Other (5) (93) (16) -
-------- -------- -------- --------
$105,107 $126,420 $211,318 $245,552
======== ======== ======== ========
Selling, General and Administrative
Expenses:
Research - Cottrell $ 11,244 $ 10,626 $ 20,984 $ 19,767
Metcalf & Eddy 21,638 19,976 41,821 40,041
Residuals Management Group 2,723 3,189 5,204 5,537
Eliminations/Other 335 189 331 199
Corporate Unallocated 2,223 1,732 4,492 3,516
-------- -------- -------- --------
$ 38,163 $ 35,712 $ 72,832 $ 69,060
======== ======== ======== ========
Amortization of Goodwill:
Research - Cottrell $ 807 $ 791 $ 1,591 $ 1,584
Metcalf & Eddy 916 904 1,829 1,809
Residuals Management Group 2 10 24 20
-------- -------- -------- --------
$ 1,725 $ 1,705 $ 3,444 $ 3,413
======== ======== ======== ========
Provision for Asset Valuation:
Corporate Unallocated $ - $ - $ 17,300 $ -
======== ======== ======== ========
Operating Income:
Research - Cottrell $(12,097) $ 3,461 $(20,970) $ 6,706
Metcalf & Eddy 2,731 7,286 3,950 12,216
Residuals Management Group 128 (314) (336) 216
Eliminations/Other (330) (189) (315) (199)
Corporate Unallocated (2,223) (1,732) (21,792) (3,516)
-------- -------- -------- --------
$(11,791) $ 8,512 $(39,463) $ 15,423
======== ======== ======== ========
Three Months Ended April 30, 1994 Compared to
- - ----------------------------------------------
Three Months Ended April 30, 1993
- - ---------------------------------
Consolidated sales of $133,204,000 for the three months
ended April 30, 1994 reflected a decline from $172,349,000
in the prior comparable period. The decline is attributed
to lower sales volumes in all three segments. Sales at
Research-Cottrell decreased $27,856,000 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 $27,376,000
were recorded in Research-Cottrell's original equipment
product lines primarily with respect to particulate and VOC
control equipment, both in the United States and in Europe.
The sales in the United States 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. Sales of particulate and VOC control
equipment in Europe have decreased by $4,838,000. Lower
volume of $4,338,000 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 $7,571,000 primarily from lower pass-
through sales of approximately $4,808,000 representing
direct project costs passed through to the Company's clients
and planned reductions in its general engineering services
of $1,934,000 which were not offset by expected growth in
the hazardous waste remediation. The Residuals Management
Group recorded a decrease in sales of $3,811,000
attributable to lower volume in natural gas compressors and
other related systems.
Cost of sales decreased $21,313,000 to $105,107,000 from
$126,420,000 in 1993. For Research-Cottrell, cost of sales
decreased by $12,932,000 to $48,779,000 primarily as a
result of lower sales volume partially offset by additional
installation and construction costs associated with
particulate and acid gas control systems, chimneys and
emissions monitoring equipment. At Metcalf & Eddy costs of
sales decreased $4,690,000 to $45,639,000 primarily due to
lower sales volume described above. Cost of sales in the
Residuals Management Group decreased as a result of the
decreased sales volume described above.
Selling, general and administrative expenses of $38,163,000
increased $2,451,000 from $35,712,000 in the prior period.
Selling, general and administrative expenses at Research-
Cottrell increased $618,000 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 $1,662,000 due in part
to additional insurance and selling costs offset by lower
sales volumes. Decreases in selling, general and
administrative expenses for the Residual Management Group
were due to lower levels of expenses related to the
decreases in sales volume. Unallocated corporate general
and administrative costs increased primarily due to the
hiring and relocation of certain senior executives.
Interest expense increased $550,000 primarily as a result of
higher levels of short-term borrowings during the current
period compared to the prior period.
As previously announced on May 13, 1994, the Company has
determined to liquidate its asbestos abatement business.
The Company previously reported in January 1994 that it
would discontinue its asbestos abatement operations and that
these operations, which it would seek to sell, had been
considered a discontinued operation for financial reporting
purposes as of the Company's 1993 fiscal year. The Company
made its determination to discontinue this business after an
operational review, initiated in the fourth quarter of its
1993 fiscal year, that was prompted by increasing negative
cash flows during fiscal 1993. The operational review led
to a more extensive investigation of, among other things,
recorded financial results and internal operating controls
within the asbestos abatement operations after the discovery
of accounting irregularities. The Company further reported
that certain members of senior management of the asbestos
abatement operations had been replaced. Subsequently, for
the first quarter of fiscal 1994, the Company reported that
the asbestos abatement operations incurred a loss of
$3,229,000 primarily due to revisions of estimates of costs
to complete on existing contracts.
The Company's determination to liquidate its asbestos
abatement business and take the additional charge is based
upon consideration of a number of factors occurring in
fiscal 1994 that have caused the Company to conclude that it
will be unable to realize value through the sale of the
business and associated assets. The Company's efforts to
sell the business on a reasonable basis have been
unsuccessful and, since the announcement of the Company's
plans to discontinue the business, the operations'
performance has continued to deteriorate. Factors that have
contributed to the declining performance include the loss of
management and other personnel with the experience and skill
necessary for the business to be operated profitably and
without continuing negative cash flows, deteriorating
margins both with respect to new project contracts and
existing backlog, greater difficulties in obtaining change
orders from clients, and the likelihood of further erosion
of margins due to substantial increases in required workers'
compensation contributions for a significant percentage of
the business's employees. The $35,000,000 charge reflected
in the current period consists of operating losses of
$12,759,000 and a loss on disposition of $22,241,000.
Six Months Ended April 30, 1994 Compared to
- - --------------------------------------------
Six Months Ended April 30, 1993
- - -------------------------------
Consolidated sales of $265,431,000 for the six months ended
April 30, 1994 reflected a decline from $333,448,000 in the
prior comparable period. The decline is attributed to lower
sales volumes in all three segments. Sales at Research-
Cottrell decreased $40,650,000 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 $38,140,000
were recorded in Research-Cottrell's original equipment
product lines primarily with respect to particulate and VOC
control equipment, both in the United States and in Europe.
The sales in the United States 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. Sales of particulate and VOC control
equipment in Europe have decreased by $10,239,000. Lower
volume of $8,631,000 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 $22,461,000 primarily from lower pass-
through sales of approximately $13,897,000 representing
direct project costs passed through to the Company's clients
and planned reductions in its general engineering services
of $3,953,000 which were not offset by expected growth in
the hazardous waste remediation. The Residuals Management
Group recorded a decrease in sales of $4,906,000
attributable to lower volume in natural gas compressors and
other related systems.
Cost of sales decreased $34,234,000 to $211,318,000 from
$245,552,000 in 1993. For Research-Cottrell, cost of sales
decreased by $14,198,000 to $101,678,000 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 and additional installation
and construction costs associated with particulate and acid
gas control systems, chimneys and emissions monitoring
equipment. At Metcalf & Eddy costs of sales decreased
$15,995,000 to $91,527,000 primarily due to lower sales
volume described above. Cost of sales in the Residuals
Management Group decreased as a result of the decreased
sales volume described above.
Selling, general and administrative expenses of $72,832,000
increased $3,772,000 from $69,060,000 in the prior period.
Selling, general and administrative expenses at Research-
Cottrell increased $1,217,000 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 $1,780,000 due in part
to additional legal fees, insurance and selling expenses
partially offset by lower overhead on lower sales volumes.
Decreases in selling, general and administrative expenses
for the Residual Management Group were due to lower levels
of expenses.
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. As a result of the anticipated
divestitures, the Company in the first quarter of 1994
recorded a $17,300,000 charge representing the difference
between the carrying value of these operations of
$37,000,000 and management's estimate of the anticipated net
sales proceeds of approximately $19,700,000. Total assets
of these operations approximate $45,000,000 at April 30,
1994, which includes approximately $11,000,000 for accounts
receivable, $6,200,000 for costs and estimated earnings in
excess of billings, $11,000,000 for inventories, $9,600,000
for property plant and equipment, $1,700,000 for other
assets and $5,500,000 for goodwill.
Interest income increased $243,000 and interest expense
increased $743,000 primarily as a result of a favorable tax
settlement and higher levels of short-term borrowings during
the current period compared to the prior period.
As previously announced on May 13, 1994, the Company has
determined to liquidate its asbestos abatement business.
The Company previously reported in January 1994 that it
would discontinue its asbestos abatement operations and that
these operations, which it would seek to sell, had been
considered a discontinued operation for financial reporting
purposes as of the Company's 1993 fiscal year. The Company
made its determination to discontinue this business after an
operational review, initiated in the fourth quarter of its
1993 fiscal year, that was prompted by increasing negative
cash flows during fiscal 1993. The operational review led
to a more extensive investigation of, among other things,
recorded financial results and internal operating controls
within the asbestos abatement operations after the discovery
of accounting irregularities. The Company further reported
that certain members of senior management of the asbestos
abatement operations had been replaced. Subsequently, for
the first quarter of fiscal 1994, the Company reported that
the asbestos abatement operations incurred a loss of
$3,229,000 primarily due to revisions of estimates of costs
to complete on existing contracts.
The Company's determination to liquidate its asbestos
abatement business and take an additional charge in the
second quarter of fiscal 1994 is based upon consideration of
a number of factors occurring in fiscal 1994 that have
caused the Company to conclude that it will be unable to
realize value through the sale of the business and
associated assets. The Company's efforts to sell the
business on a reasonable basis have been unsuccessful and,
since the announcement of the Company's plans to discontinue
the business, the operations' performance has continued to
deteriorate. Factors that have contributed to the declining
performance include the loss of management and other
personnel with the experience and skill necessary for the
business to be operated profitably and without continuing
negative cash flows, deteriorating margins both with respect
to new project contracts and existing backlog, greater
difficulties in obtaining change orders from clients, and
the likelihood of further erosion of margins due to
substantial increases in required workers' compensation
contributions for a significant percentage of the business's
employees. The $38,229,000 charge reflected in the current
period consists of operating losses of $15,988,000 and a
loss on disposition of $22,241,000.
Financial Condition
- - -------------------
Cash used by continuing operations for the six months ended
April 30, 1994 amounted to $12,578,000. In addition, during
the six months ended April 30, 1994 the Company's
discontinued asbestos abatement operations utilized
$10,786,000 of cash, resulting in net cash used for
operating activities of $23,364,000. The Company also
utilized $5,932,000 of cash for capital expenditures,
investment in environmental treatment facilities, software
development and other investment activities during the first
six months. An additional $2,278,000 of cash was used for
the payment of notes and long-term debt during this period.
These cash requirements were funded principally by increased
borrowings under the Company's Credit Agreement amounting to
$21,966,000. This situation resulted in a reduction in
available capacity under the Company's existing bank lines
of credit as of April 30, 1994.
The Company's principal sources of liquidity to meet short-
term working capital needs, in addition to its existing cash
balances ($3,173,000 at April 30, 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 plus its $10,000,000 Temporary Accounts Receivable
Purchase Agreement with First Chicago, which expires on June
15, 1994. Under the Credit Agreement, the Company may
borrow up to $40,000,000 for working capital purposes of
which $36,000,000 was outstanding in April 30, 1994 (up from
$25,500,000 and $14,000,000 at January 31, 1994 and October
31, 1993, respectively) with the remaining unused balance of
the Credit Agreement available for Letters of Credit of
which $29,200,000 was issued and outstanding on April 30,
1994. Of these Letters of Credit, $19,150,000 support
foreign borrowing facilities of which $14,018,000 was
borrowed on April 30, 1994. Under the Company's $30,000,000
of combined Account Receivable Purchase Agreements,
$25,000,000 was outstanding on April 30, 1994. As of June
3, 1994, the Company had $3,000,000 available to it under
the combined Accounts Receivable Purchase Agreements and
$4,300,000 of additional credit capacity available under the
Credit Agreement.
The decreased availability of working capital under the
Company's credit facilities have resulted in the prospect of
a cash deficiency during the third quarter unless measures
are taken by the Company.
In an effort to address its 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.
On March 17, 1994, the Company announced that it had entered
into an 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 from certain financial undertakings
from CGE which include a $125,000,000 term loan from CGE to
repay the Prudential Notes; 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 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,
if available, and will need to reach accommodations with its
creditors and suppliers promptly or possibly seek the
protection of Federal Bankruptcy laws.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the six
months ended April 30, 1994 and for the years ended October
31, 1993 and 1992 total capital expenditures were $1,729,000
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 in the past no
assurance can be given, that it will be able to continue to
obtain such financing in the future without improvements in
its credit capacity as outlined above. At April 30, 1994,
the Company had no material outstanding purchase commitments
for capital expenditures.
PRASA Litigation
- - ----------------
At April 30, 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 has stayed all proceedings
(including further factual discovery and a trial date which
had been set for May 18, 1992) 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. On
April 15, 1994, the District Court issued an Order requiring
a Special Master to assist the Court with the complex
accounting matters in this case. It is now anticipated that
a trial will begin in March, 1995.
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 which is still pending
before the Court.
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.
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.
ITEM 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on May 13, 1994 in which it
reported its determination to liquidate its asbestos
abatement business and in connection therewith take a charge
of approximately $35 million and its anticipation of having
a loss from continuing operations of approximately $18
million for the second quarter ended April 30, 1994.
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
------------------------------------
(registrant)
Date June 10, 1994 /s/William R. Lewis
------------- -------------------
William R. Lewis
Senior Vice President and
Chief Financial Officer