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 July 31, 1997
-------------
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 of Corporation) (I.R.S. Employer 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 July 31, 1997.
Class A
$.001 Par Value Common Stock 32,019,254
- ---------------------------- -----------------------------
(Title of Class) (Number of Shares Outstanding)
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1997 AND OCTOBER 31, 1996
--------------------------------------------------------------------
(in thousands , except share data)
----------------------------------
[CAPTION]
ASSETS 1997 1996
------ ----- ----
(unaudited)
---------
CURRENT ASSETS:
Cash and cash equivalents $ 13,635 $ 12,667
Accounts receivable, net 93,377 100,933
Costs and estimated earnings in excess of
billings on uncompleted contracts 40,425 48,097
Inventories 10,667 11,319
Prepaid expenses and other current assets 9,998 12,027
-------- -------
Total current assets 168,102 185,043
PROPERTY, PLANT AND EQUIPMENT, net 29,315 35,432
INVESTMENTS IN ENVIRONMENTAL TREATMENT FACILITIES 21,960 22,062
GOODWILL 242,179 265,860
OTHER ASSETS 22,528 29,873
-------- -------
Total assets $484,084 $538,270
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings and current installments
oflong-term debt $ 14,391 $ 378
Accounts payable 88,009 73,951
Accrued expenses 79,840 76,656
Billings in excess of costs and estimated earnings on
uncompleted contracts 25,637 23,995
Income taxes payable 2,055 2,507
-------- --------
Total current liabilities 209,932 177,487
-------- --------
LONG-TERM DEBT 304,922 306,542
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01, authorized 2,500,000
shares; issued 1,200,000 shares; liquidation value
$60,000 12 12
Common stock, par value $.001, authorized 100,000,000
shares; issued 32,109,156 shares 32 32
Additional paid-in capital 427,036 427,036
Accumulated deficit (456,214) (372,433)
Common stock in treasury, at cost (108) (108)
Cumulative currency translation adjustment (1,528) (298)
-------- -------
Total stockholders' equity (deficit) (30,770) 54,241
-------- -------
Total liabilities and stockholders' equity (deficit) $484,084 $538,270
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
-----------------------------------------------------------------
(in thousands, except per share data)
-----------------------------------
(unaudited)
---------
Three Months Nine Months
Ended July 31 Ended July 31
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
SALES $158,939 $177,164 $454,17 $503,861
COST OF SALES 131,065 143,050 390,416 404,974
-------- ------- ------- -------
Gross margin 27,874 34,114 63,757 98,887
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 20,804 23,032 83,559 70,079
DEPRECIATION AND AMORTIZATION 4,861 4,730 16,889 14,806
IMPAIRMENT CHARGES - - 25,000 -
------- ------- ------- -------
Operating income (loss) 2,209 6,352 (61,691) 14,002
INTEREST EXPENSE (6,264) (5,732) (18,217) (16,964)
INTEREST INCOME 111 106 346 700
OTHER EXPENSE, NET (499) (832) (964) (1,445)
------- ------- ------- -------
Loss before income taxes (4,443) (106) (80,526) (3,707)
INCOME TAXES 347 352 780 1,001
------- ------ ------- -------
NET LOSS $(4,790) $ (458) $(81,306) $(4,708)
======= ====== ======= ======
LOSS PER COMMON SHARE
(AFTER PREFERRED STOCK DIVIDENDS) $ (.18) $ (.04) $ (2.62) $ (.22)
====== ======= ======== =======
Weighted average number of shares
outstanding 32,019 32,018 32,019 32,018
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
-------------------------------------------------------
(in thousands)
-------------
(unaudited)
----------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(81,306) $(4,708)
Adjustments to reconcile net loss to net cash
provided by (used for) continuing operations -
Depreciation and amortization 16,889 14,806
Impairment Charges and Other, net 27,732 621
Changes in assets and liabilities -
(Increase) decrease in assets -
Accounts receivable, net 7,432 3,837
Costs and estimated earnings in excess of
billings on uncompleted contracts 7,067 (1,635)
Inventories (812) (828)
Prepaid expenses and other current assets 1,952 (2,362)
Other assets 8,342 755
Increase (decrease) in liabilities -
Accounts payable 14,037 (52)
Accrued expenses (1,173) (13,319)
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,642 572
Income taxes payable (449) 49
------- -------
Net cash provided by (used for) continuing
operations 1,353 (2,264)
Net cash provided by discontinued operations 945 149
------- -------
Net cash provided by (used for) operating
activities 2,298 (2,115)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business 1,545 2,353
Capital expenditures (5,129) (5,281)
Investment in environmental treatment facilities 102 582
Other, net (6,092) (8,835)
------- -------
Net cash used for investing activities (9,574) (11,181)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and long-term debt (307) (295)
Net borrowings under credit facilities 12,700 16,000
Cash dividends paid (2,475) (2,475)
Other, net (1,674) (1,008)
-------- -------
Net cash provided by financing activities 8,244 12,222
-------- -------
Net increase (decrease) in cash and cash equivalents 968 (1,074)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,667 11,168
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,635 $10,094
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $19,877 $18,869
======= =======
The accompanying notes are an integral part of these statements.
AIR & WATER TECHNOLOGIES CORPORATION
-------------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
JULY 31, 1997
-------------
(unaudited)
---------
(1) Basis of Presentation:
---------------------
The interim consolidated financial statements and the
following notes should be read in conjunction with the notes
to the consolidated financial statements of Air & Water
Technologies Corporation and its consolidated subsidiaries
(the "Company" or "AWT") as included in its Form 10-K filed
with the Securities and Exchange Commission for the fiscal
year ended October 31, 1996. The interim information
reflects all adjustments, including normal recurring
accruals, which are, in the opinion of management, necessary
for a fair presentation of the results for the interim
period. Results for the interim period are not necessarily
indicative of results to be expected for the full year.
(2) Commitments and Contingencies:
-----------------------------
In connection with a broad investigation by the U.S.
Department of Justice into alleged illegal payments by
various persons to members of the Houston City Council, the
Company's subsidiary, Professional Services Group (PSG),
received a federal grand jury subpoena on May 31, 1996
requesting documents regarding certain PSG consultants and
representatives that had been retained by PSG to assist in
advising the City of Houston regarding the benefits that
could result from the privatization of Houston's water and
wastewater system. PSG has cooperated and continues to
cooperate with the Justice Department which has informed the
Company that it is reviewing transactions among PSG and its
consultants. The Company promptly initiated its own
independent investigation into these matters and placed
PSG's chief executive officer, Michael M. Stump, on
administrative leave of absence with pay. Mr. Stump, who
has denied any wrongdoing, resigned from PSG on December 4,
1996. In the course of its ongoing investigation, the
Company became aware of questionable financial transactions
with third parties and payments to certain PSG consultants
and other individuals, the nature of which requires further
investigation. The Company has brought these matters to the
attention of the Department of Justice and continues to
cooperate fully with its investigation.
No charges of wrongdoing have been brought against PSG or
any PSG executive or employee by any grand jury or other
government authority. However, since the government's
investigation is still underway and is conducted largely in
secret, no assurance can be given as to whether the
government authorities will ultimately determine to bring
charges or assert claims resulting from this investigation
that could implicate or reflect adversely upon or otherwise
have a material adverse effect on the financial position or
results of operations of PSG or the Company taken as a
whole.
The City of Bremerton, Washington brought a contribution
action against Metcalf & Eddy Services, Inc. ("M&E
Services"), the operator of a City-owned wastewater
treatment plant from 1987 until late 1995. The contribution
action arises from two prior lawsuits against the city for
alleged odor nuisances brought by two groups of homeowners
neighboring the plant.
In the first homeowners' suit, the City paid $4.3 million in
cash and approximately $5 million for odor control
technology to settle the case. M&E Services understands the
odor control measures generally have been successful and the
odors have been reduced as a result. M&E Services was not a
party to the first homeowner's suit, which has been
dismissed with prejudice as to all parties.
In the settlement of the second homeowners' case, the City
of Bremerton paid the homeowners $2.9 million, and M&E
Services contributed $.6 million to the settlement without
admitting liability. All claims raised by the homeowners in
the second suit (except for two recalcitrant homeowners)
were resolved. All claims by and between M&E Services and
the City in the second homeowner's suit were expressly
reserved and will be tried after the City's contribution
action, which is currently scheduled for trial in March
1998.
The City is seeking to recover the amounts it expended on
the two settlements, damages for M&E Services' alleged
substandard operation of the plant, and attorneys' fees.
M&E Services denies any liability to the City and believes
it has meritorious defenses to the claim. However, no
assurances can be given that an adverse judgment would not
have a material adverse effect on the financial position or
results of operations of M&E Services or the Company taken
as a whole.
The Company and its subsidiaries are parties to various
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.
(3) Reclassifications:
-----------------
Certain reclassifications have been made to conform the 1996
consolidated financial statements to the 1997 presentation.
(4) Recently Issued Accouting Pronouncements:
----------------------------------------
Statement 128: "Earnings Per Share" - This statement
requires that the Company begin to report "basic" and
"diluted" earnings per share which would replace "primary"
and "fully diluted" earnings per share as currently reported
by the Company. The key difference is that "basic" earnings
per share does not adjust for common stock equivalents.
Statement 128 is effective for the Company beginning with
the first quarter of fiscal 1998 (the three month period
ending January 31, 1998) and requires restatement of all
prior-period earnings per share data. Adoption of
Statement 128 is not expected to have a material effect.
(5) Recent Developments:
-------------------
Due to its highly leveraged condition, the Company has been considering
ways to restructure its debt or otherwise effect a recapitalization.
This has been exacerbated by deteriorating operating results.
In June 1997, the Company established a special committee of its
independent directors (the "Special Committee") to
receive and negotiate the terms
of any proposal made by Compagnie Generale des Eaux
("CGE"), the Company's largest shareholder. The Special
Committee and CGE have been holding discussions regarding a
range of possible alternatives but to date no agreement has been reached.
No assurance can be given that the Special Committee and CGE
will agree on the terms of a possible debt restructuring or
other recapitalization transaction. The Company believes
that the failure to restructure is likely to have a material
adverse effect on its business prospects and financial
condition.
In August 1997, United States Fidelity and Guaranty Company
and certain of its affiliates ("USF&G") notified the Company
that it would suspend the renewal and issuance of new bid
and performance bonds as of September 30, 1997, due to the
Company's current operating performance and resulting
financial condition, unless it receives indemnification from
CGE or Anjou International Company ("Anjou"), an affiliated
company, for at least 20% of all future bond requests
including renewals.
A bid bond guarantees that AWT will enter into the contract
under consideration at the price bid and a performance bond
guarantees performance of the contract. In order to procure
new contracts and maintain its existing contracts, AWT is
often required to provide such bonds to its clients. CGE
has informed USF&G and the Company that, pending the outcome
of its discussions with the Special Committee, it is not
prepared at this time to provide the requested
indemnification support. If new bonds are not issued, it
will be difficult for Professional Services Group and
AWT's other segments, to a lesser extent, to obtain new
contracts, and if existing bonds are not renewed, AWT may
lose a material portion of its existing Professional Services
Group contracts within the next twelve months. The Company
believes that its inability to obtain such bonds is likely
to have a material adverse effect on its ability to conduct
its businesses and on its financial condition. No assurance
can be given that the Company will be able to procure new
bonds for new projects or renewal of bonds for existing
projects from USF&G or any other surety.
(6) Significant Operating Charges:
-----------------------------
The operating loss sustained by the Professional
Services Group during the nine month period ended July 31,
1997 was primarily the result of the prior quarter
provisions and asset write-offs which approximated $9.3
million. These charges were primarily related to revised
estimates of direct project costs of $2.8 million required
under the PRASA contract; professional fees of $5.3 million
related to marketing consultants, the U.S. Department of
Justice investigation and certain litigation matters; and
provisions of $1.2 million for revised collectibility
estimates for certain non-current note receivables.
The operating loss sustained by Metcalf & Eddy during
the nine month period ended July 31, 1997 was primarily the
result of the $19.4 million of charges reflected in the
prior quarters, including $5.4 million of provisions
required in order to properly reflect the Company's revised
estimates for the collectibility of certain receivables
based on recent adverse developments in contract
negotiations and collection efforts, $6.3 million of
increases to its reserves for litigation, professional
liability and certain project contingencies due to revised
estimates of the expected outcome of certain unasserted and
asserted claims and litigation incurred in the normal course
of business, $3.4 million of equipment write-offs, a $1.7
million charge related to a cancellation penalty for a high
cost leased facility and other direct and indirect costs of
$2.6 million.
The operating loss sustained by Research-Cottrell
during the nine month period ended July 31, 1997 were
primarily the result of the second quarter $25.0 million
impairment charge discussed in the "Revised Business
Strategy" section below, and other receivable and warranty
provisions of $4.0 million related to its Ecodyne and
Custodis operations due to recent adverse developments on
two specific projects. In addition, the third quarter
results were impacted by higher than anticipated costs on a
specific APCD project by $1.0 million, receivable and
warranty provisions of $2.3 million related to the R-C
International operations and partially off-set by revised
estimates of $1.0 million of previously accrued
discretionary and self insured employee benefits.
(7) Revised Business Strategy:
-------------------------
During the second quarter the Company completed a review of
its operations' three year business plans. These plans
included a detailed analysis of markets, growth
opportunities and forecasted three year operating results,
cash flows and return on capital employed for each business
segment.
As a result of this review, management continues to consider
the actions necessary to redeploy its capital to its core
water business (Professional Services Group and Metcalf &
Eddy). This approach reflects management's assessment of
the greater market opportunities and growth potential in
these sectors compared to the air pollution markets. Among
other factors contributing to this approach were recent tax
law changes which may expand the duration of operations,
maintenance and management contracts and create additional
opportunities within the water and wastewater treatment
markets which are the primary markets for Professional
Services Group and Metcalf & Eddy. These enhanced
opportunities are in contrast to the air sector where
continuing delays in issuing new air quality standards by
the EPA and lack of enforcement of existing standards are
expected to limit the growth opportunities within the air
pollution control markets targeted by Research-Cottrell.
Furthermore, the returns on capital employed within the
Professional Services Group and Metcalf & Eddy segments are
forecasted to be greater than the returns for the Research-
Cottrell segment. From a competitive standpoint, management
also believes that the Company has greater competitive
advantages and market penetration through its Professional
Services Group and Metcalf & Eddy businesses than what has
been achieved by its Research-Cottrell operations.
As a result of the above, management continues to assess the
impact of de-emphasizing the Research-Cottrell business
segment and redeploying its capital to its Professional
Services Group and Metcalf & Eddy segments. A financial
advisor has been retained to assist the Company in exploring
strategic alternatives related to this redeployment. The
successful implementation of a redeployment program could
include the divestiture of portions or substantially all of
the Research-Cottrell segment, although no such definitive
decision to divest has been made by the Company's Board of
Directors at this time. The Company is currently in
discussions with several parties regarding the potential
divestiture of this business.
Based on the recent downturn in the operating performance of
certain of the Research-Cottrell businesses, the Company
reviewed the expected future cash flows of these businesses
and reassessed their fair value. In connection with this
review, the Company reflected a $25.0 million impairment
charge including a goodwill writedown of $17.4 million
related to the Ecodyne (sold during July 1997 for
approximately $2.0 million) and KVB businesses during the
second quarter of fiscal 1997. The impairment was
determined in accordance with Statement of Financial
Accounting Standards No. 121 by taking into consideration
the operations' fair values based on expected future cash
flows discounted at a rate commensurate with the risks
involved.
The realizability of goodwill and other long lived
assets is the result of an estimate based on the underlying
assets remaining estimated useful lives, projected operating
cash flows and ultimate disposition assumption (held for use
or held for sale). It is reasonably possible that this
estimate will change in the near term as a consequence of
further deterioration in market conditions and operating
results or the divestiture of all or part of the Research-
Cottrell segment. The effect of the change would be
material to the financial statements since a significant
additional charge may be required. At July 31, 1997,
Research-Cottrell's total assets and net carrying value was
$136.5 million and $84.4 million, including unamortized
goodwill of $76.6 million
(8) Financial Condition:
-------------------
The Company maintains a $60.0 million unsecured revolving
credit facility with Anjou ("Anjou Credit Facility"), an
affiliated company. The borrowings under the Anjou Credit
Facility bear interest at LIBOR plus .6%. The Company also
maintains a Senior Secured Credit Facility ("Bank Credit
Facility") which was increased by $20.0 million to $70.0
million as of April 28, 1997. As of July 31, 1997, the
Company's outstanding borrowings under the Anjou Credit
Facility totaled $60.0 million and the Bank Credit Facility
totaled $14.0 million (unused capacity of $32.3 million).
Outstanding letters of credit under the Bank Credit Facility
totaled $23.7 million on July 31, 1997.
The Bank Credit Facility is primarily designed to finance
working capital requirements and provide for the issuance of
letters of credit, both subject to limitations and secured
by a first security interest in substantially all of the
assets of the Company. Of the total commitment, borrowings
are limited to the lesser of $50 million or the sum of a
percentage of certain eligible receivables, inventories, net
property, plant and equipment and costs and estimated
earnings in excess of billings, and bear interest at LIBOR
(5.7% at July 31, 1997), as defined, plus 1.0% or at a
defined bank rate approximating prime (8.5% at July 31,
1997). The Bank Credit Facility also allows for certain
additional borrowings, including, among other things,
project financing and foreign borrowing facilities, subject
to limitations and contains certain financial and other
restrictive covenants, including, among other things, the
maintenance of certain financial ratios, and restrictions on
the incurrence of additional indebtedness, acquisitions, the
sale of assets, the payment of dividends and the repurchase
of subordinated debt. In addition, the related agreement
requires CGE to maintain its support of the Company,
including, a minimum 40% ownership interest in the Company
and its right to representatives on the Company's Board of
Directors proportionate to its ownership in AWT as well as
to appoint the Chief Executive Officer and Chief Financial
Officer of the Company. The Bank Credit Facility expires
March 31, 1998. The Company will need to replace this
facility at that time.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the nine month
period ended July 31, 1997, and the years ended October 31,
1996 and 1995 total capital expenditures were $5.1 million,
$7.5 million and $7.9 million, respectively. At July 31,
1997, the Company had no material outstanding purchase
commitments for capital expenditures. As of September 12,
1997, the Company reduced its Bank Credit Facility
borrowings by $4.0 million during the fourth quarter of
fiscal 1997. Current cash flow forecasts reflect additional
borrowing requirements of approximately $6.0 million and
additional letters of credit requirements of $10.0 million
during the fourth quarter of this fiscal year, which is
within the Company's credit capacity. Management is
addressing its on-going cash requirements through a series
of programs, for which there is no assurance of success,
directed at improving working capital management by focusing
on, among other things, collection of unreimbursed costs on
certain significant contracts, including the PRASA contract
($24.2 million), Metcalf & Eddy past due receivables,
increased emphasis on capital redeployment and asset
divestitures and the restructuring and strengthening of its
current capital structure.
The Company's forecasts indicate that it may be in
violation of several covenants at October 31, 1997 and, as a
result, will need to obtain an amendment of the Bank Credit
Facility or a waiver. In the absence of a waiver, the Banks
would have the right to refuse any further extensions of
credit and the right to accelerate payment of all
outstanding amounts under the Bank Credit Facility. In
addition, substantially all of the Company's long-term debt
and or obligations contain cross default or acceleration
provisions. To obtain the waivers, the Company expects that
the Banks would request additional credit support from CGE
and certain other changes to the Bank Credit Facility. CGE
has informed the Company that pending the outcome of its
discussions with the Special Committee regarding the
proposed debt restructuring or other recapitalization, it is
not prepared at this time to provide additional credit
support to the Company. As a result, no assurance can be
given whether the necessary waivers from the Company's Banks
would be obtained. In the event the Company were required
to repay accelerated outstanding amounts under the Bank
Credit Facility and other agreements, the Company does not
believe that it will have financial resources adequate to
repay such amounts and to satisfy its ongoing working
capital requirements. The Company believes that its
inability to obtain waivers from the Banks would have a
material adverse effect on its business prospects and its
financial condition.
(9) Convertible Debenture Delisting:
-------------------------------
On August 13, 1997 AWT's 8% Convertible debentures were
delisted from the NASDAQ SmallCap Market as a consequence of
AWT's capital and surplus not meeting the requirements of
the Marketplace Rule 4310 (c) (03).
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, 1996.
Results of Operations
- ---------------------
Summarized below is certain financial information relating to the
core segments of the Company (in thousands):
Three Months Ended Nine Months Ended
July 31 July 31
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales:
Professional Services Group $ 65,656 $ 68,167 $195,383 $195,474
Metcalf & Eddy 45,609 52,561 132,108 150,663
Research - Cottrell 48,111 57,640 128,077 160,615
Other and eliminations (437) (1,204) (1,395) (2,891)
-------- -------- -------- -------
$158,939 $177,164 $454,173 $503,861
======== ======== ======== ========
Cost of Sales:
Professional Services Group $ 56,908 $ 60,859 $177,697 $172,871
Metcalf & Eddy 32,986 37,443 103,731 106,758
Research - Cottrell 41,608 45,952 110,383 128,236
Other and eliminations (437) (1,204) (1,395) (2,891)
-------- -------- -------- -------
$131,065 $143,050 $390,416 $404,974
======== ======== ======== ========
Selling, General and Administrative Expenses:
Professional Services Group $ 3,473 $ 3,535 $ 16,601 $ 10,753
Metcalf & Eddy 8,311 9,370 37,437 29,646
Research - Cottrell 7,789 8,416 24,315 24,506
Corporate (unallocated) 1,231 1,711 5,206 5,174
-------- -------- ------- --------
$ 20,804 $ 23,032 $ 83,559 $ 70,079
======== ======== ======== ========
Depreciation and Amortization:
Professional Services Group $ 1,935 $ 1,667 $ 6,028 $ 5,710
Metcalf & Eddy 1,583 1,514 6,546 4,489
Research - Cottrell 1,216 1,451 3,930 4,283
Corporate (unallocated) 127 98 385 324
-------- -------- -------- --------
$ 4,861 $ 4,730 $ 16,889 $ 14,806
======== ======== ======== ========
Impairment Charges:
Research-Cottrell $ - $ - $ 25,000 $ -
======= ======== ======== ========
Operating Income (Loss):
Professional Services Group $ 3,340 $ 2,106 $ (4,943) $ 6,140
Metcalf & Eddy 2,729 4,234 (15,606) 9,770
Research - Cottrell (2,502) 1,821 (35,551) 3,590
Corporate (unallocated) (1,358) (1,809) (5,591) (5,498)
-------- ------- -------- --------
$ 2,209 $ 6,352 $(61,691) $ 14,002
======== ======== ========= ========
Recent Developments
- -------------------
Due to its highly leveraged condition, the Company has been considering ways
to restructure its debt or otherwise effect a recapitalization. This
has been exacerbated by deteriorating operating results.
In June 1997, the Company established a special committee of
its independent directors (the "Special Committee")
to receive and negotiate
the terms of any proposal made by Compagnie Generale des Eaux
("CGE"), the Company's largest shareholder. The Special
Committee and CGE have been holding discussions regarding a
range of possible alternatives but to date no agreement has been
reached. No assurance can be given that the Special Committee and CGE
will agree on the terms of a possible debt restructuring or
other recapitalization transaction. The Company believes
that the failure to restructure is likely to have a material
adverse effect on its business prospects and financial
condition.
In August 1997, United States Fidelity and Guaranty Company
and certain of its affiliates ("USF&G") notified the Company
that it would suspend the renewal and issuance of new bid
and performance bonds as of September 30, 1997, due to the
Company's current operating performance and resulting
financial condition, unless it receives indemnification from
CGE or Anjou International Company ("Anjou"), an affiliated
company, for at least 20% of all future bond requests
including renewals.
A bid bond guarantees that AWT will enter into the contract
under consideration at the price bid and a performance bond
guarantees performance of the contract. In order to procure
new contracts and maintain its existing contracts, AWT is
often required to provide such bonds to its clients. CGE
has informed USF&G and the Company that, pending the outcome
of its discussions with the Special Committee, it is not
prepared at this time to provide the requested
indemnification support. If new bonds are not issued, it
will be difficult for Professional Services Group and
AWT's other segments, to a lesser extent, to obtain new
contracts, and if existing bonds are not renewed, AWT may
lose a material portion of its existing Professional Services
Group contracts within the next twelve months. The Company
believes that its inability to obtain such bonds is likely
to have a material adverse effect on its ability to conduct
its businesses and on its financial condition. No assurance
can be given that the Company will be able to procure new
bonds for new projects or renewal of bonds for existing
projects from USF&G or any other surety.
Professional Services Group
- ---------------------------
The operating loss sustained during the nine month period
ended July 31, 1997 was primarily the result of the prior
quarter provisions and asset write-offs which approximated
$9.3 million. These charges were primarily related to
revised estimates of direct project costs of $2.8 million
required under the PRASA contract; professional fees of $5.3
million related to marketing consultants, the U.S.
Department of Justice investigation and certain litigation
matters; and provisions of $1.2 million for revised
collectibility estimates for certain non-current note
receivables. The operating income was $3.3 million during the
three month period ended July 31, 1997.
Excluding the effect of the aforementioned charges, the
operating results were $1.2 million higher and $1.8 million
lower than the three and nine month comparable prior periods
ended July 31, 1996 due to additional direct project costs
including certain higher non-recoverable costs resulting
from competitive pricing pressures and timing of certain
contractual incentive clauses for the PRASA project and
revised estimates for self insured employee benefits during
the current third quarter.
The Company's sales have remained comparable to the prior
periods as a result of the privatization market developing
more slowly than anticipated. Although the Company has been
successful in obtaining contract renewals, it continues to
experience delays in negotiating and closing new business
opportunities due to municipal clients' implementation
schedules. Results are expected to improve moderately
during the fourth quarter from the most recent three month
period due to new contracts and certain contractual
incentive clauses which are expected to be realized.
Metcalf & Eddy
- --------------
The operating loss sustained during the nine month period
ended July 31, 1997 was primarily the result of the $19.4
million of charges reflected in the prior quarters,
including $5.4 million of provisions required in order to
properly reflect the Company's revised estimates for the
collectibility of certain receivables based on recent
adverse developments in contract negotiations and collection
efforts, $6.3 million of increases to its reserves for
litigation, professional liability and certain project
contingencies due to revised estimates of the expected
outcome of certain unasserted and asserted claims and
litigation incurred in the normal course of business, $3.4
million of equipment write-offs, a $1.7 million charge
related to a cancellation penalty for a high cost leased
facility and other direct and indirect costs of $2.6
million. The operating income was $2.7 million during the
three month period ended July 31, 1997.
In addition to the effect of the aforementioned charges,
lower sales volume, gross margin rates and selling, general
and administration expenses reduced the operating results by
$1.5 million and $6.0 million in the three and nine month
comparable prior periods ended July 31, 1996. The lower
sales volume of $7.0 million and $18.6 million during the
periods reduced the operating results by $2.0 million and
$5.4 million due to delays in obtaining task order releases
primarily within the hazardous waste remediation service
lines, several contracts which were awarded to competitors
and delayed procurement in international markets. Delays
are increasing due to funding and administrative issues with
certain government agencies (e.g. Environmental Protection
Agency "EPA" and Department of Defense). The lower gross
margin rates reduced the operating results by $.5 million
and $2.1 million during the periods primarily due to
favorable pricing adjustments reflected in the prior
periods, pricing pressures and a business mix shift from
self-performed work to subcontracted work. Partially off-
setting the lower margins were selling, general, and
administrative expense reductions of $1.0 million and $2.3
million during the three and nine month periods as compared
to the prior periods as a result of lower personnel related
costs including certain employee benefit costs discussed
below.
The fourth quarter results are expected to be lower than the
most recent three month period due to the $1.4 million third
quarter effect of revised estimates of previously accrued
discretionary and self insured employee benefit costs. Full
year sales levels are expected to be approximately 15% below
the comparable prior year period due to continuing delays in
work releases.
Research-Cottrell
- -----------------
The operating loss sustained during the nine month period
ended July 31, 1997 were primarily the result of the second
quarter $25.0 million impairment charge discussed in the
"Revised Business Strategy" section below, and other
receivable and warranty provisions of $4.0 million related
to its Ecodyne and Custodis operations due to recent adverse
developments on two specific projects. In addition, the
third quarter results were impacted by higher than
anticipated costs on a specific APCD project by $1.0
million, receivable and warranty provisions of $2.3 million
related to the R-C International operations and partially
off-set by revised estimates of $1.0 million of previously
accrued discretionary and self insured employee benefits.
In addition to the effect of the aforementioned charges,
lower sales volume and reduced margin rates, to a lesser
extent, contributed to the operating results being $1.0
million and $6.8 million lower than the three and nine month
comparable prior period ended July 31, 1996. The lower
sales volume of $9.5 million and $32.5 million during the
aforementioned periods reduced the operating income by $1.9
million and $6.6 million, respectively. The lower sales
volumes were reflected primarily in the REECO, Ecodyne, APCD
and KVB operations which approximated 74% of the variance in
the nine month period and substantially all of the variance
in the three month period. These operations are
experiencing reduced volume as a result of fewer bid
opportunities due to delays in issuing new air quality
standards by the EPA, lack of enforcement of existing
standards and price pressures from highly competitive
markets. The gross margin rates adjusted for the previously
mentioned charges, have also decreased by 2.6% and 2.3%
($1.3 million and $2.9 million) during the three and nine
month periods, respectively, due to price pressures,
unfavorable product line mix and project execution. The
operating loss was $2.5 million during the three month
period ended July 31, 1997. The unfavorable trend compared
to the prior periods related to volume and margin rates is
expected to continue due to the reasons previously stated.
Corporate and Other
- -------------------
The unallocated corporate costs were $.4 million lower than
the comparable three month prior period due to revised
estimates of previously accrued discretionary and self-
insured employee benefits. In addition, higher average
borrowings resulted in increased interest expense.
Revised Business Strategy
- -------------------------
During the second quarter the Company completed a review of
its operations' three year business plans. These plans
included a detailed analysis of markets, growth
opportunities and forecasted three year operating results,
cash flows and return on capital employed for each business
segment.
As a result of this review, management continues to consider
the actions necessary to redeploy its capital to its core
water business (Professional Services Group and Metcalf &
Eddy). This approach reflects management's assessment of
the greater market opportunities and growth potential in
these sectors compared to the air pollution markets. Among
other factors contributing to this approach were recent tax
law changes which may expand the duration of operations,
maintenance and management contracts and create additional
opportunities within the water and wastewater treatment
markets which are the primary markets for Professional
Services Group and Metcalf & Eddy. These enhanced
opportunities are in contrast to the air sector where
continuing delays in issuing new air quality standards by
the EPA and lack of enforcement of existing standards are
expected to limit the growth opportunities within the air
pollution control markets targeted by Research-Cottrell.
Furthermore, the returns on capital employed within the
Professional Services Group and Metcalf & Eddy segments are
forecasted to be greater than the returns for the Research-
Cottrell segment. From a competitive standpoint, management
also believes that the Company has greater competitive
advantages and market penetration through its Professional
Services Group and Metcalf & Eddy businesses than what has
been achieved by its Research-Cottrell operations.
As a result of the above, management continues to assess the
impact of de-emphasizing the Research-Cottrell business
segment and redeploying its capital to its Professional
Services Group and Metcalf & Eddy segments. A financial
advisor has been retained to assist the Company in exploring
strategic alternatives related to this redeployment. The
successful implementation of a redeployment program could
include the divestiture of portions or substantially all of
the Research-Cottrell segment, although no such definitive
decision to divest has been made by the Company's Board of
Directors at this time. The Company is currently in
discussions with several parties regarding the potential
divestiture of this business.
Based on the recent downturn in the operating performance of
certain of the Research-Cottrell businesses, the Company
reviewed the expected future cash flows of these businesses
and reassessed their fair value. In connection with this
review, the Company reflected a $25.0 million impairment
charge including a goodwill writedown of $17.4 million
related to the Ecodyne (sold during July 1997 for
approximately $2.0 million) and KVB businesses during the
second quarter of fiscal 1997. The impairment was
determined in accordance with Statement of Financial
Accounting Standards No. 121 by taking into consideration
the operations' fair values based on expected future cash
flows discounted at a rate commensurate with the risks
involved.
The realizability of goodwill and other long lived assets is
the result of an estimate based on the underlying assets
remaining estimated useful lives, projected operating cash
flows and ultimate disposition assumption (held for use or
held for sale). It is reasonably possible that this
estimate will change in the near term as a consequence of
further deterioration in market conditions and operating
results or the divestiture of all or part of the Research-
Cottrell segment. The effect of the change would be
material to the financial statements since a significant
additional charge may be required. At July 31, 1997,
Research-Cottrell's total assets and net carrying value was
$136.5 million and $84.4 million, including unamortized
goodwill of $76.6 million.
Financial Condition
- -------------------
Net financial debt (debt less cash) increased by $11.4
million during the nine month period ended July 31, 1997.
In addition to the preferred stock dividend payment of $2.5
million, the Company utilized $11.1 million of cash for
capital expenditures, investments in environmental treatment
facilities and other investment activities including start
up costs during the period. These cash requirements were
funded principally through borrowings under the Company's
credit facilities discussed below.
The Company maintains a $60.0 million unsecured revolving
credit facility with Anjou ("Anjou Credit Facility"), an
affiliated company. The borrowings under the Anjou Credit
Facility bear interest at LIBOR plus .6%. The Company also
maintains a Senior Secured Credit Facility ("Bank Credit
Facility") which was increased by $20.0 million to $70.0
million as of April 28, 1997. As of July 31, 1997, the
Company's outstanding borrowings under the Anjou Credit
Facility totaled $60.0 million and the Bank Credit Facility
totaled $14.0 million (unused capacity of $32.3 million).
Outstanding letters of credit under the Bank Credit Facility
totaled $23.7 million on July 31, 1997.
The Bank Credit Facility is primarily designed to finance
working capital requirements and provide for the issuance of
letters of credit, both subject to limitations and secured
by a first security interest in substantially all of the
assets of the Company. Of the total commitment, borrowings
are limited to the lesser of $50 million or the sum of a
percentage of certain eligible receivables, inventories, net
property, plant and equipment and costs and estimated
earnings in excess of billings, and bear interest at LIBOR
(5.7% at July 31, 1997), as defined, plus 1.0% or at a
defined bank rate approximating prime (8.5% at July 31,
1997). The Bank Credit Facility also allows for certain
additional borrowings, including, among other things,
project financing and foreign borrowing facilities, subject
to limitations and contains certain financial and other
restrictive covenants, including, among other things, the
maintenance of certain financial ratios, and restrictions on
the incurrence of additional indebtedness, acquisitions, the
sale of assets, the payment of dividends and the repurchase
of subordinated debt. In addition, the related agreement
requires CGE to maintain its support of the Company,
including, a minimum 40% ownership interest in the Company
and its right to representatives on the Company's Board of
Directors proportionate to its ownership in AWT as well as
to appoint the Chief Executive Officer and Chief Financial
Officer of the Company. The Bank Credit Facility expires
March 31, 1998. The Company will need to replace this
facility at that time.
The businesses of the Company have not historically required
significant ongoing capital expenditures. For the nine month
period ended July 31, 1997, and the years ended October 31,
1996 and 1995 total capital expenditures were $5.1 million,
$7.5 million and $7.9 million, respectively. At July 31,
1997, the Company had no material outstanding purchase
commitments for capital expenditures. As of September 12,
1997, the Company reduced its Bank Credit Facility
borrowings by $4.0 million during the fourth quarter of
fiscal 1997. Current cash flow forecasts reflect additional
borrowing requirements of approximately $6.0 million and
additional letters of credit requirements of $10.0 million
during the fourth quarter of this fiscal year, which is
within the Company's credit capacity. Management is
addressing its on-going cash requirements through a series
of programs, for which there is no assurance of success,
directed at improving working capital management by focusing
on, among other things, collection of unreimbursed costs on
certain significant contracts, including the PRASA contract
($24.2 million), Metcalf & Eddy past due receivables,
increased emphasis on capital redeployment and asset
divestitures and the restructuring and strengthening of its
current capital structure.
The Company's forecasts indicate that it may be in violation
of several covenants at October 31, 1997 and, as a result,
will need to obtain an amendment of the Bank Credit Facility
or a waiver. In the absence of a waiver, the Banks would
have the right to refuse any further extensions of credit
and the right to accelerate payment of all outstanding
amounts under the Bank Credit Facility. In addition,
substantially all of the Company's long-term debt and or
obligations contain cross default or acceleration
provisions. To obtain the waivers, the Company expects that
the Banks would request additional credit support from CGE
and certain other changes to the Bank Credit Facility. CGE
has informed the Company that pending the outcome of its
discussions with the Special Committee regarding the
proposed debt restructuring or other recapitalization, it is
not prepared at this time to provide additional credit
support to the Company. As a result, no assurance can be
given whether the necessary waivers from the Company's Banks
would be obtained. In the event the Company were required
to repay accelerated outstanding amounts under the Bank
Credit Facility and other agreements, the Company does not
believe that it will have financial resources adequate to
repay such amounts and to satisfy its ongoing working
capital requirements. The Company believes that its
inability to obtain waivers from the Banks would have a
material adverse effect on its business prospects and its
financial condition.
Convertible Debenture Delisting
- -------------------------------
On August 13, 1997 AWT's 8% Convertible debentures were
delisted from the NASDAQ SmallCap Market as a consequence of
AWT's capital and surplus not meeting the requirements of
the Marketplace Rule 4310 (c) (03).
Statement Regarding Forward Looking Disclosures
- -----------------------------------------------
Statements contained in this report, including Management's
Discussion and Analysis, are forward looking statements that
involve a number of risks and uncertainties which may cause
the Company's actual operating results to differ materially
from the projected amounts. Among the factors that could
cause actual results to differ materially are risk factors
listed from time to time in the Company's SEC reports
including:
- the Company's highly competitive marketplace,
- changes in as well as enforcement levels of
federal, state and local environmental legislation
and regulations that change demand for a significant
portion of the Company's services,
- the ability to obtain new contracts (some of
which are significant) from existing and new
clients,
- the execution of the expected new projects and
those projects in backlog within the most recent
cost estimates,
- the resolution of existing claims and
litigation arising in the ordinary course of
business and
- the ability to restructure its debt and
recapitalize.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In connection with a broad investigation by the U.S.
Department of Justice into alleged illegal payments by
various persons to members of the Houston City Council,
the Company's subsidiary, Professional Services Group
(PSG), received a federal grand jury subpoena on May
31, 1996 requesting documents regarding certain PSG
consultants and representatives that had been retained
by PSG to assist in advising the City of Houston
regarding the benefits that could result from the
privatization of Houston's water and wastewater system.
PSG has cooperated and continues to cooperate with the
Justice Department which has informed the Company that
it is reviewing transactions among PSG and its
consultants. The Company promptly initiated its own
independent investigation into these matters and placed
PSG's chief executive officer, Michael M. Stump, on
administrative leave of absence with pay. Mr. Stump,
who has denied any wrongdoing, resigned from PSG on
December 4, 1996. In the course of its ongoing
investigation, the Company became aware of questionable
financial transactions with third parties and payments
to certain PSG consultants and other individuals, the
nature of which requires further investigation. The
Company has brought these matters to the attention of
the Department of Justice and continues to cooperate
fully with its investigation.
No charges of wrongdoing have been brought against PSG
or any PSG executive or employee by any grand jury or
other government authority. However, since the
government's investigation is still underway and is
conducted largely in secret, no assurance can be given
as to whether the government authorities will
ultimately determine to bring charges or assert claims
resulting from this investigation that could implicate
or reflect adversely upon or otherwise have a material
adverse effect on the financial position or results of
operations of PSG or the Company taken as a whole.
The City of Bremerton, Washington brought a
contribution action against Metcalf & Eddy Services,
Inc. ("M&E Services"), the operator of a City-owned
wastewater treatment plant from 1987 until late 1995.
The contribution action arises from two prior lawsuits
against the city for alleged odor nuisances brought by
two groups of homeowners neighboring the plant.
In the first homeowners' suit, the City paid $4.3
million in cash and approximately $5 million for odor
control technology to settle the case. M&E Services
understands the odor control measures generally have
been successful and the odors have been reduced as a
result. M&E Services was not a party to the first
homeowner's suit, which has been dismissed with
prejudice as to all parties.
In the settlement of the second homeowners' case, the
City of Bremerton paid the homeowners $2.9 million, and
M&E Services contributed $.6 million to the settlement
without admitting liability. All claims raised by the
homeowners in the second suit (except for two
recalcitrant homeowners) were resolved. All claims by
and between M&E Services and the City in the second
homeowner's suit were expressly reserved and will be
tried after the City's contribution action, which is
currently scheduled for trial in March 1998.
The City is seeking to recover the amounts it expended
on the two settlements, damages for M&E Services'
alleged substandard operation of the plant, and
attorneys' fees. M&E Services denies any liability to
the City and believes it has meritorious defenses to
the claim. However, no assurances can be given that an
adverse judgment would not have a material adverse
effect on the financial position or results of
operations of M&E Services or the Company taken as a
whole.
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 various 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.
ITEMS 2-5
There are no reportable items under Part II, items 2
through 5.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of per share earnings.
Exhibit 27. Financial Data Supplement
(b) On July 18, 1997, the Company filed a report on Form 8-K
reporting preliminary discussions relating to a proposed
recapitalization of the Company.
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 September 15, 1997 /s/ Alain Brunais
------------------ ------------------
Alain Brunais
Chief Financial Officer