Air Water Technologies Corp 1994 Definitive Proxy Statement

FAIRNESS OPINION

May 24, 1994

Board of Directors

Air & Water Technologies Corporation

U.S. Highway 22 West and Station Road

Branchburg, NJ 08876

Dear Members of the Board:

Air & Water Technologies Corporation (“AWT” or the "Company"), Compagnie Generale des Eaux, a French Corporation and principal stockholder of AWT ("CGE") and Anjou International Company, a Delaware corporation and wholly-owned subsidiary of CGE ("Anjou") have entered into an Investment Agreement dated as of March 30, 1994 (the "Investment Agreement") relating to certain transactions described herein. You have requested our opinion as to the fairness, from a financial point of view, of the transactions contemplated in connection with the Investment Agreement, and certain related agreements, to the existing holders of the Company's outstanding shares of Class A Common Stock, par value S.001 per share ("Class A Common Stock"), other than CGE.

Pursuant to the Investment Agreement, and subject to the conditions thereof, it is contemplated, among other things, that (1) AWT will issue to CGE 1,200,000 shares of AWT’s newly designated 5 1/2% Series A Convertible Exchangeable Preferred Stock (the "Series A Preferred"), for cash consideration of $60,000,000, convertible into 4,800,000 shares of Class A Common Stock, and (2) AWT will acquire from Anjou, by merger and exchange of shares, respectively, PSG Professional Services Group, Inc., a Minnesota corporation, and 2815869 Canada, Inc., a Canadian corporation, each a wholly-owned subsidiary of Anjou (such subsidiaries being collectively referred to herein as the "PSG Group"), for an aggregate purchase price of 6,500,000 shares of Class A Common Stock.

We understand that the consideration to be received by Anjou in connection with the Company's acquisition of the PSG Group will be subject to adjustment pursuant to the Investment Agreement based on the adjusted stockholder's equity of the PSG Group on the date of the closing of the transactions contemplated thereby. We also understand that on and after the date of such closing, CGE will have the right to cause AWT to include as nominees for AWT`s Board of Directors designees of CGE in a number sufficient to provide CGE percentage representation on the AWT Board approximately equal to its fully diluted percentage share ownership, as more specifically set forth in the Investment Agreement, and that the Company's Bylaws will be amended to provide that CGE shall have the right to designate the Chief Executive Officer and the Chief Financial Officer of AWT. In addition, pursuant to a Registration Rights Agreement to be entered into between AWT, CGE and Anjou pursuant to the Investment Agreement (the "Registration Rights Agreement"), CGE and Anjou will be granted registration rights respecting AWT securities held by them.

The Investment Agreement also provides that, for so long as CGE (with its affiliates) is the largest shareholder of the Company, AWT will be CGE's exclusive vehicle in the United States for its water and waste water management and air pollution activities and, as more specifically set forth in the Investment Agreement, will coordinate with AWT in the development of other commercial activities in the United States and elsewhere.

Pursuant to a letter agreement dated March 18, 1994 between AWT and CGE respecting the transactions described above (the "Letter Agreement"), CGE purchased from AWT 500,000 shares of Class A Common Stock for an aggregate purchase price of $5,000,000.

In connection with the Letter Agreement, CGE has also delivered to AWT a letter dated March 18, 1994 (the "Credit Letter"), committing to (1) provide any assistance and support necessary for a bank or other financial institution to provide bridge financing, if necessary, to AWT for up to $125,000,000 on a senior basis and, upon the consummation of the transactions contemplated by the Investment Agreement, to provide $125,000,000 of permanent bank debt financing on an unsecured basis to repay AWT’s current debt to Prudential Insurance Company of America (the "Prudential Note"), which replacement financing will not contain a negative pledge restriction on AWT's assets and permit working capital borrowing and (2) after the consummation of the transactions contemplated under the Investment Agreement, to provide certain credit support for AWT projects from time to time, all on terms as more specifically set forth in the credit Letter.

The transactions contemplated in connection with, the Investment Agreement, the Letter Agreement and the Credit Letter, and the other agreements entered into pursuant thereto, are herein sometimes collectively referred to as the "Transactions".

Allen & Company Incorporated has from time to time acted as financial advisor to AWT and has acted as its financial advisor in connection with the Transactions and will receive a fee for such services upon the consummation of Transactions pursuant to our engagement agreement with AWT dated November 15, 1993 (the "Engagement Agreement"). In addition, as you know, our firm and certain of its officers and directors are stockholders of AWT and Enrique F. Senior, a Managing Director of our firm, is a member of AWT's Board of Directors and its Executive Committee.

In arriving at our opinion expressed in this letter, we have, among other things:

(i) reviewed the terms and conditions of the Investment Agreement and the agreements and instruments to be entered into pursuant thereto and the terms and provisions of the Letter Agreement and the Credit Letter;

(ii) reviewed the terms and provisions of the form of Certificate of Designation of the Series A Preferred (the "Certificate of Designation"), included as Exhibit A to the Investment Agreement, and the form of 5112.% Convertible Subordinated Notes of the Company, included on Attachment A to the Certificate of Designation, for which the Series A Preferred will be exchangeable;

(iii) reviewed the Proxy Statement dated May 24, 1994 relating to the Annual Meeting of Shareholders to be held on June 14, 1994 and regarding, among other things, the approval of the Transactions;

(iv) analyzed certain historical business and financial information relating to AWT, including the Annual Reports to Stockholders and Annual Reports on Form 10-Q of AWT for each of its fiscal years ended October 31, 1989 through 1993, AWT's Quarterly Report on Form ID-Q for its quarter ended January 31, 1994 and certain internal business and financial information prepared by management of AWT;

(v) analyzed historical business and financial information provided to us by the PSG Group, including audited financial statement of the PSG Group for each of its fiscal years ended December 31, 1991 through 1993 and certain internal business and financial information prepared by management of the PSG Group;

(vi) reviewed certain financial forecasts and other data provided to us by AWT and the PSG Group relating to future prospects for their respective businesses;

(vii) conducted discussions with members of the senior management of AWT and the PSG Group with respect to the business and prospects of AWT and the PSG Group, the strategic advantages and operational efficiencies that could result from a merger of AWT and the PSG Group, as well as management's assessment of the prospects for the environmental industry in general, including a continuing trend toward consolidation in the industry and the capital intensive nature of operations therein;

(viii) reviewed public information with respect to certain other companies in lines of business we believe to be comparable to the business of AWT and the PSG Group;

(ix) reviewed the historical and current market prices and trading volumes of the Class A Common Stock and market data for the publicly traded securities of other companies we believe to be comparable to AWT and the PSG Group;

(x) considered the views of AWT's management concerning the strategic implications and marketing and operational benefits which might result from the Company's acquisition of the PSG Group;

(xi) considered the terms of selected financings generally comparable to CGE's investment in the Series A Preferred and to the financial support committed to be provided under the Credit Letter, as well as recent trends in the pricing and terms of preferred stock and debt financings since the date of the announcement of the Transactions;

(xii) considered the current financial condition of the Company, including its current need for capital, alternatives for raising capital and the relative costs of such alternatives, the terms of its present credit facilities, including the Prudential Note, and the substantial resources required to continue the growth of the Company's business under present economic and market conditions;

(xiii) reviewed publicly available information regarding the business and financial conditions of CGE and its holdings in North America and considered the strategic advantages to the Company which AWT's management believes may be realized from an alliance with CGE in the United States and elsewhere; and

(xiv) conducted such other financial studies, analyses and investigations as we deemed appropriate.

In addition to the specific information summarized above, our opinion expressed herein reflects our general familiarity with AWT as well as information regarding the current prospects for AWT, and financing alternatives available to it, which information we acquired during the course of our association with the Company, and, in particular, our recent engagement under the Engagement Agreement. Our opinion does not, however, constitute a recommendation of the Transactions over any other alternative transactions which may be available to the Company.

We have assumed and relied upon the accuracy and completeness of the financial and other information provided by AWT and the PSG Group to us and the representations contained in the Investment Agreement, and we have not undertaken any independent verification of such information or any independent valuation or appraisal of any of the assets of AWT or the PSG Group. With respect to the financial forecasts referred to above, we have assumed that they have been reasonably prepared on a basis reflecting the best currently available judgments of the management of AWT and the PSG Group as to the future financial performance of AWT and the PSG Group, respectively. Further, our opinions are based on economic, monetary and market conditions existing on this date.

Our engagement and the opinions expressed herein are solely for the benefit of AWT's Board of Directors and are not on behalf of, and are not intended to confer rights or remedies upon, the PSG Group, Anjou or CGE, any stockholders of AWT or any other person other than AWT’s Board of Directors. Furthermore, the opinion rendered herein does not constitute a recommendation by our firm that any stockholder of the Company vote to approve the Transactions.

Based on the subject to the foregoing and such other factors as we deemed relevant, including our assessment of economic, monetary and market conditions existing on the date of this letter, we are of the opinion that, as of this date, the Transactions are fair, from a financial point of view, to the current holders of AWT's Class A Common Stock, other than CGE.

Very truly yours,