- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION10-Q
(Mark One)
{X} Quarterly report pursuant to Section 13 ANDand 15 (d) OF THE SECURITIES
EXCHANGE ACT OFof the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 OR
[_] TRANSITION REPORT PURSUANT TO SECTIONFor the quarterly period ended SEPTEMBER 30, 1998
------------------
or
{ } Transition report pursuant to Section 13 ORor 15 (d) OF THE SECURITIES
EXCHANGE ACT OFof the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBERFor the transition period from __________ to __________
Commission file number 1-10728
-----------------------
UNITED STATES FILTER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0266015
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0266015
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
40-004 COOK STREET, PALM DESERT, CA 92211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 340-0098
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]X No
[_]--- ---
The number of shares of common stock, $.01 par value, outstanding as of FebruaryNovember
13, 1998 was 106,278,587171,903,477 shares.
Total number of pages 2225
--
THERE ARE NO12 EXHIBITS FILED WITH THIS REPORT
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PART I--FINANCIALI - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 19971998 AND DECEMBER 31, 1997SEPTEMBER 30, 1998
(UNAUDITED)
MARCHMarch 31, DECEMBER 31,
1997 1997
---------- ------------
(IN THOUSANDS)1998 September 30, 1998
--------------- ------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................equivalents $ 135,144 57,82166,917 58,028
Short-term investments............................... 2,158 904investments 241 116
Accounts receivable, net............................. 572,940 739,587net 873,890 1,053,419
Costs and estimated earnings in excess
of billings on uncompleted contracts............................... 130,310 205,427
Inventories.......................................... 245,201 350,968contracts 217,935 223,103
Inventories 473,698 526,508
Prepaid expenses..................................... 8,931 19,893expenses 16,471 31,988
Deferred taxes....................................... 53,152 82,246taxes 151,107 174,279
Other current assets................................. 17,086 28,257assets 51,377 51,429
---------- ---------
Total current assets................................ 1,164,922 1,485,103assets 1,851,636 2,118,870
---------- ---------
Property, plant and equipment, net.................... 319,687 761,147net 960,019 1,044,339
Investment in leasehold interests, net................ 23,230 22,424net 21,699 20,286
Costs in excess of net assets of businesses acquired, net.................................................. 788,096 913,793net 1,312,776 1,366,356
Other assets.......................................... 101,628 178,315assets 319,315 284,732
---------- ---------
$2,397,563 3,360,782$4,465,445 4,834,583
========== =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND SEPTEMBER 30, 1998 (CONTINUED)
(UNAUDITED)
March 31, 1998 September 30, 1998
--------------- ------------------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.....................................payable $ 274,653 304,890357,260 404,747
Accrued liabilities.................................. 275,537 410,245liabilities 535,329 611,600
Current portion of long-term debt.................... 11,956 25,464debt 118,849 23,783
Billings in excess of costs and estimated
earnings on uncompleted contracts............................... 61,441 121,831contracts 90,073 81,245
Other current liabilities............................ 26,183 77,045liabilities 45,702 96,430
---------- ---------
Total current liabilities........................... 649,770 939,475liabilities 1,147,213 1,217,805
---------- ---------
Notes payable......................................... 31,464 475,181payable 574,806 450,910
Long-term debt, excluding current portion............. 42,646 128,988portion 404,416 65,783
Convertible subordinated debentures...................debentures 554,000 554,000414,000
Redeemable or remarketable securities - 900,000
Deferred taxes........................................ 12,198 3,506taxes 82,910 64,092
Other liabilities..................................... 61,655 66,108liabilities 110,662 152,307
---------- ---------
Total liabilities................................... 1,351,733 2,167,258liabilities 2,874,007 3,264,897
---------- ---------
Shareholders' equity:
Preferred stock, authorized 3,000 shares - -
Common stock, par value $.01. Authorized 300,000
shares; 80,334155,825 and 103,957170,275 shares issued and
outstanding at March 31, 19971998 and December 31, 1997,
respectively........................................ 803 1,040September 30, 1998,
respectively 1,558 1,703
Additional paid-in capital........................... 1,013,734 1,500,786capital 1,945,223 2,060,898
Currency translation adjustment...................... (19,491) (37,287)
Retained earnings (accumulated deficit).............. 50,784 (271,015)adjustment (57,282) (71,304)
Accumulated deficit (298,061) (421,611)
---------- ---------
Total shareholders' equity.......................... 1,045,830 1,193,524equity 1,591,438 1,569,686
---------- ---------
Commitments and contingencies.........................
---------- ---------
$2,397,563 3,360,782contingencies
$4,465,445 4,834,583
========== =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINESIX MONTHS ENDED DECEMBER 31, 1996SEPTEMBER 30, 1997 AND 19971998
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996Three Months Six Months
Ended Ended
September 30, September 30,
---------------------- -----------------------
1997 19961998 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)---------- ---------- ----------
(in thousands, except per share data)
Revenues........................... $ 463,423 829,427 1,094,636 2,346,553Revenues $938,358 1,225,882 1,731,294 2,345,213
Costs of sales..................... 369,736 621,893 859,754 1,798,595
---------sales 698,491 861,445 1,296,064 1,649,614
-------- --------- --------- ---------
Gross profit..................... 93,687 207,534 234,882 547,958profit 239,867 364,437 435,230 695,599
Selling, general and administrative expenses.......................... 81,482 148,478 196,752 414,546expenses 176,416 244,415 330,666 467,579
Purchased in-process research and
development....................... -- 299,505 -- 299,505development - - - 3,558
Merger, restructuring, acquisition and other
related charges......... -- 141,109 5,581 141,109charges - - - 257,920
-------- --------- --------- ---------
---------
81,482 589,092 202,333 855,160
---------176,416 244,415 330,666 729,057
-------- --------- --------- ---------
Operating income (loss).......... 12,205 (381,558) 32,549 (307,202) 63,451 120,022 104,564 (33,458)
Other income (expense):
Interest expense................. (6,484) (13,198) (15,907) (34,374)
Other, net....................... 1,818 1,779 2,981 3,002expense (12,883) (29,533) (23,878) (55,181)
Gain on disposition of affiliate - - 31,098 -
Interest and other income, net 1,287 3,603 2,782 7,730
-------- --------- --------- ---------
---------
(4,666) (11,419) (12,926) (31,372)
---------(11,596) (25,930) 10,002 (47,451)
-------- --------- --------- ---------
Income (loss) before taxes....... 7,539 (392,977) 19,623 (338,574)income taxes 51,855 94,092 114,566 (80,909)
Income tax expense (benefit)....... 1,211 (18,882) 3,845 (1,273)
---------18,292 33,881 41,708 14,277
-------- --------- --------- ---------
Net income (loss)................ $ 6,328 (374,095) 15,778 (337,301)
=========33,563 60,211 72,858 (95,186)
======== ========= ========= =========
Net income (loss) per common share:
Basic............................Basic $ 0.10 (3.71) 0.27 (3.65)0.26 0.37 0.57 (0.59)
======== ========= ========= =========
=========
Diluted..........................Diluted $ 0.09 (3.71) 0.26 (3.65)
=========0.25 0.36 0.56 (0.59)
======== ========= ========= =========
See Accompanying Notes To Condensed Consolidated Financial Statements.
3
UNITED STATES FILTER CORPORATION AND SUBSIDIARIESSEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------------
1996 1997
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:......................
Net income (loss).......................................... $ 15,778 (337,301)
Adjustments to reconcile net income (loss) to net cash
provided by...............................................
(used in) operating activities:............................
Deferred income taxes...................................... (11,700) (23,606)
Provision for doubtful accounts............................ 3,292 6,172
Depreciation............................................... 28,406 47,236
Amortization............................................... 9,338 20,695
Write-off of in-process research and development and
goodwill.................................................. -- 352,025
Loss on sale or disposal of assets......................... 3 11,557
Change in operating assets and liabilities:................
(Increase) decrease in accounts receivable............... 7,990 (23,569)
Increase in costs and estimated earnings in excess of
billings on uncompleted contracts....................... (35,904) (30,158)
Increase in inventories.................................. (17,125) (19,590)
(Increase) decrease in other assets...................... (20,271) 1,723
Increase (decrease) in accounts payable and accrued
expenses................................................ 17,209 (26,450)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts.............. (3,561) 22,584
Increase (decrease) in other liabilities................. (5,081) 16,796
-------- --------
Net cash provided by (used in) operating activities...... (11,626) 18,114
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property, plant & equipment...... (43,283) (77,683)
Payment for purchase of acquisitions, net of cash ac-
quired.................................................. (404,478) (411,082)
Proceeds from disposal of equipment...................... 394 3,860
Sale of short-term investments........................... 152 1,260
-------- --------
Net cash used in investing activities.................... (447,215) (483,645)
-------- --------
See Accompanying Notes To Condensed Consolidated Financial Statements.FINANCIAL STATEMENTS.
4
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINESIX MONTHS ENDED DECEMBER 31, 1996SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
1997 1998
---------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 72,858 (95,186)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes (6,967) (42,036)
Provision for doubtful accounts 4,581 10,264
Depreciation 40,523 52,120
Amortization 15,565 25,877
Merger, restructuring, acquisition and other related
cash charges - 155,396
Write-off of in-process research and development
and goodwill - 40,818
Gain on disposition of investment in affiliate (31,098) -
(Gain) loss on sale or disposal of property, plant and equipment (217) 29,724
Change in operating assets and liabilities:
Increase in accounts receivable (93,464) (113,688)
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts (11,062) (430)
Increase in inventories (43,079) (28,798)
Increase in other assets (18,552) (34,577)
Increase in accounts payable and accrued expenses 28,301 40,859
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts 16,683 (21,231)
Increase (decrease) in other liabilities (1,980) 1,243
--------- --------
Net cash provided by (used in) operating activities (27,908) 20,355
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of property, plant and equipment (56,136) (88,413)
Payment for purchase of acquisitions, including certain
merger and restructuring charges, net of cash acquired (111,814) (256,110)
Proceeds from disposal of equipment 6,594 6,297
Proceeds from disposition of investment in affiliate 50,897 -
Sale (purchase) of short-term investments (9,608) 125
--------- --------
Net cash used in investing activities (120,067) (338,101)
--------- --------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1996 1997 1998
-------- ---------
--------
(IN THOUSANDS)(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 358,441 --remarketable or
redeemable securities - 913,637
Net proceeds from saleissuance of convertible subordinated
debentures............................................... 403,650 --common stock 2,574 -
Proceeds from exercise of common stock options............ 1,487 3,514options 538 1,455
Redemption of convertible subordinated debentures - (81,527)
Principal payments on debt................................ (7,300) (20,170)long-term debt (16,711) (465,308)
Net (payments) proceeds from borrowings on notes payable.. (913) 404,914payable 63,008 (59,400)
Dividends paid............................................ (3,067)paid (50) ----------
------- --------
Net cash provided by financing activities............... 752,298 388,208
---------activities 49,359 308,857
------- --------
Net increase (decrease)decrease in cash and cash equivalents.... 293,457 (77,323)equivalents (98,616) (8,889)
Cash and cash equivalents at March 31, 19961997 and 1997...... 27,730 135,144
---------1998 144,128 66,917
------- --------
Cash and cash equivalents at December 31, 1996September 30, 1997 and 1997... $ 321,187 57,821
=========1998 $45,512 58,028
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................ $ 15,602 34,023
=========interest $21,304 37,175
======= ========
Cash paid during the period for income taxes............ $ 10,596 22,212
=========taxes $31,737 16,823
======= ========
See Accompanying Notes To Condensed Consolidated Financial Statements.
5SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
UNITED STATES FILTER CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTENote 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIESOperations and Significant Accounting Policies
----------------------------------------------
The accompanying condensed consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. The condensed consolidated financial statements reflect all
adjustments and disclosures which are, in the opinion of management, necessary
for a fair presentation of the information contained therein. All such
adjustments are of a normal recurring nature. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto that are contained in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997.1998. The
results of operations for the interim periods are not necessarily indicative of
the results of the full fiscal year.
INCOME (LOSS) PER COMMON SHAREIncome (Loss) per Common Share
- ------------------------------
Income (loss) per common share is computed based on the weighted average number
of shares outstanding. In the current period, the Company adoptedoutstanding and in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share". Dilutive securities consisting
of convertible preferred stock, convertible subordinated debt and common stock
options are included in the computation of income (loss) per dilutive share when
their effect is dilutive. Accordingly, "Basic EPS" and "Diluted EPS" were
calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1997 19961998 1997 --------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)1998
-------- ------- ------- --------
(in thousands, except per share data)
BASIC
Net income (loss) applicable to common shares................... $ 6,328 (374,095) 15,778 (337,301)
======== ========== ======== ==========shares $33,563 60,211 72,858 (95,186)
======= ======= ======= =======
Weighted average common shares outstanding................... 65,061 100,927 59,016 92,340
======== ========== ======== ==========outstanding 130,461 164,601 128,274 161,271
======= ======= ======= =======
Basic income (loss) per common share.........................share $ 0.10 (3.71) 0.27 (3.65)
======== ========== ======== ==========0.26 0.37 0.57 (0.59)
======= ======= ======= =======
7
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- -------------------
1997 1998 1997 1998
----- ------- ---- --------
(in thousands, except per share data)
DILUTED
Net income (loss) applicable to common shares...................shares $ 6,328 (374,095) 15,778 (337,301)33,563 60,211 72,858 (95,186)
Add:
Effect on net income of conversion of
convertible subordinated debentures....... --debentures - * --3,312 - * - **
-- * -- **-------- ------- ------- -------
Adjusted net income (loss) applicable to
common shares..... 6,328 (374,095) 15,778 (337,301)shares $ 33,563 63,523 72,858 (95,186)
======== ========== ======== ================= ======= =======
Weighted average shares outstanding..................... 65,061 100,927 59,016 92,340outstanding 130,461 164,601 128,274 161,271
Add:
Assumed conversion of subordinated
debentures - * 10,481 - * - **
Exercise of options and assumed
conversion of subordinated
debentures.................... 2,418* -- ** 2,055* --2,687 2,960 2,495 - **
-------- ---------- -------- ----------------- ------- -------
Adjusted weighted average shares outstanding..................... 67,479 100,927 61,071 92,340outstanding 133,148 178,042 130,769 161,271
======== ========== ======== ================= ======= =======
Diluted income (loss) per common share...........................share $ 0.09 (3.71) 0.26 (3.65)0.25 0.36 0.56 (0.59)
======== ========== ======== ================= ======= =======
- --------_________________
* The calculation of dilutedDiluted EPS does not assume conversion of subordinated
debentures for the three and ninesix months ended December 31, 1996September 30, 1997 as the
effect would be antidilutive to income per common share.
** The calculation of dilutedDiluted EPS does not assume conversion of subordinated
debentures or exercise of stock options for the three and ninesix months ended
December 31, 1997September 30, 1998 as the effect would be antidilutive to loss per share.
6
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTEUnder the treasury stock method, the exercise of all outstanding options
would have increased the weighted average number of shares by 3.0 million
for the six months ended September 30, 1998.
Note 2. INVENTORIESInventories
-----------
Inventories at March 31, 19971998 and December 31, 1997September 30, 1998 consist of the following:
MARCH DECEMBERMarch 31, 31, 1997 1997
-------- ------------
(IN THOUSANDS)1998 September 30, 1998
-------------- ------------------
(in thousands)
Raw materials...................................... $ 56,830 116,446
Work-in-progress................................... 58,619 83,136materials $130,501 150,847
Work-in-progress 102,198 100,301
Finished goods..................................... 129,752 151,386goods 240,999 275,360
-------- -------
$245,201 350,968$473,698 526,508
======== =======
NOTE8
Note 3. PROPERTY, PLANT AND EQUIPMENT
On September 17, 1997, the Company acquired more than 47,000 acres of
agricultural land in Imperial County, California and other parts of the
Southwestern United States in exchange for 8.0 million shares and warrants to
acquire 1.2 million shares of common stock, par value $0.01 per share, of the
Company. These shares and warrants are subject to certain restrictions and
limitations more fully described in agreements among the Company and the
holders of such securities. The recorded value of the acquired land is
approximately $210.0 million.
NOTE 4. NOTES PAYABLEDebt
----
Notes Payable. As of December 31, 1997,September 30, 1998, the Company had a Senior Credit
Facility which provides credit facilities to the Company of up to $750.0
million, of which there were outstanding borrowings of $419.1$450.9 million and
outstanding letters of credit of $40.5$52.3 million. Borrowings under the Senior
Credit Facility bear interest at variable rates of up to 0.45% above certain
Eurocurrency rates or 0.15% above BankBoston's base rate. The Senior Credit
Facility expires October 2002 and is subject to customary and usual terms.
In connection with the acquisition of The Kinetics Group, Inc. ("Kinetics")
(see note 5)Remarketable or Redeemable Securities Issuance. On May 15, 1998, the Company
has an additional loan agreement with a bank that
provides a revolving line-of-credit under which a subsidiaryissued $500.0 million 6.375% Remarketable or Redeemable Securities due 2011
(remarketing date May 15, 2001) and $400.0 million 6.50% Remarketable or
Redeemable Securities due 2013 (remarketing date May 15, 2003) (collectively,
the "ROARS"). The net proceeds from the sale of the ROARS, including a premium
payment to the Company may borrow upby Nationsbanc Montgomery Securities LLC, were $913.6
million. The net proceeds were used to $100.0 million of which there were outstanding borrowings of
$33.8 million at December 31, 1997. Borrowingsrepay indebtedness under this agreement bear
interest at the bank's reference rate or other interest rate options that the
subsidiary may select.
In connection withSenior
Credit Facility, indebtedness assumed in the acquisition of Memtec Limited, and
a portion of the indebtedness assumed in the acquisition of Culligan Water
Technologies, Inc. ("Memtec"Culligan") (see note
5),.
Convertible Subordinated Debt. As of September 30, 1998, the Company hashad
outstanding $414.0 million aggregate principal amount of 4.5% Convertible
Subordinated Debentures due December 15, 2001 (the "Debentures"). The
Debentures are convertible into common stock at any time prior to maturity,
redemption or repurchase at a Multi-Option, Multi-Currency Master Facility Agreement
with a bank that provides for borrowingsconversion price of up to $60.0$39.50 per share.
On September 23, 1998, the Company redeemed approximately $81.5 million of which
therethe
$140.0 million aggregate principal amount of 6% Convertible Subordinated Notes
due September 15, 2005 (the "Notes"). The redemption was financed with
borrowings under the Senior Credit Facility. The remaining notes were outstanding borrowingsconverted
into approximately 3.2 million shares of $22.3 million as of December 31, 1997.
Borrowings under this agreement bear interest at LIBOR plus 0.75%.
NOTE 5. ACQUISITIONSthe Company's common stock.
Note 4. Acquisition
-----------
On December 31, 1997,June 15, 1998, a wholly-ownedwholly owned subsidiary of the Company and Kinetics
effectively consummated a merger andthe
acquisition of Culligan in a tax-free reorganization
(the "Merger") contemplated under and pursuant to a definitive Merger
Agreement among the Company, Kinetics and substantially all of the
shareholders of Kinetics. In connection with this merger, thereorganization. The Company issued 5,803,80348.6
million shares of the Company's common stock for all of the outstanding common
stock of Kinetics (0.5824 shareCulligan (1.875 shares of the Company's common stock for each
outstanding share and each outstanding option or other right to acquire a share
of KineticsCulligan common stock)stock, par value $.01). In addition, the Company assumed
approximately $50.0$491.7 million of third party institutional debt.
7
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Kinetics, based in Santa Clara, California,Culligan is a providerleading manufacturer and manufacturerdistributor of sophisticated high purity process pipingwater purification and
treatment products and services for household, consumer and commercial
applications. Products and services offered by Culligan range from those
designed to solve residential water problems, such as filters for tap water and
household softeners, to equipment and services, such as ultrafiltration and
microfiltration products. Culligan also offers desalination systems and
is also a leading
integrator inportable deionization services ("PDS"), designed for commercial and industrial
applications. In addition, Culligan sells and licenses its dealers to sell
under the United States of high purity water, fluid and gas handling
systems that are critical to the pharmaceutical, biotechnology and micro
electronics industries.
This transactionCulligan trademark five-gallon bottled water.
The acquisition has been accounted for as a pooling of interests and,
accordingly, the condensed consolidated financial statements and notes thereto
for all periods presented have been restated to include the accounts of
Kinetics. In
restating the Company's historical financial statements for the poolingCulligan. Reconciliation of
interests with Kinetics, the Company's balance sheet as of March 31, 1997 was
combined with Kinetics audited balance sheet as of September 30, 1997.
Additionally, results of the Company for the fiscal year ended March 31, 1997
were combined with the results of Kinetics for the fiscal year ended September
30, 1997; historical results of the Company for the three and nine months
ended December 31, 1996 were combined with historical results of Kinetics for
the three and nine months ended June 30, 1997, respectively. Concurrent with
the Company's merger, Kinetics year end was recast to March 31. Accordingly,
results of Kinetics for the six month period ended September 30, 1997
(including revenue of $227.4 million and a net loss of $8.5 million) are
included in both the restated historical results for the fiscal year ended
March 31, 1997 and the results for the nine months ended December 31, 1997.
Separate results of operations of the combined entities for
the three and ninesix months ended December 31, 1996September 30, 1997 are as follows:
9
THREE MONTHS
ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)Three Months Six Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
(in thousands)
Revenues:
Company (as previously reported).......... $368,124 838,936
Kinetics.................................. 95,299 255,700 $823,593 1,517,126
Culligan 114,765 214,168
-------- ---------
Combined.................................. $463,423 1,094,636Combined $938,358 1,731,294
======== =========
Net income (loss):income:
Company (as previously reported).......... $ 14,351 29,014
Kinetics.................................. (8,023) (13,236)24,091 36,794
Culligan 9,472 36,064
-------- ---------
Combined..................................Combined $ 6,328 15,77833,563 72,858
======== =========
Income per common share:
Basic:
As previously reported....................reported $ 0.24 0.540.27 0.42
======== =========
As restated...............................restated $ 0.10 0.270.26 0.57
======== =========
Diluted:
As previously reported....................reported $ 0.23 0.520.26 0.41
======== =========
As restated...............................restated $ 0.09 0.260.25 0.56
======== =========
MergerConcurrent with the merger with Culligan, the Company designed and implemented a
restructuring plan to streamline its manufacturing and production base, redesign
its distribution network, improve efficiency and enhance its competitiveness.
The restructuring plan resulted in a pre-tax charge of $257.9 million in the six
months ended September 30, 1998. Included in the charge is approximately $49.2
million of merger-related expenses incurred to consummate the KineticsCulligan
transaction, totaled $4.3
million consisting ofincluding investment banking fees, printing fees, stock transfer
fees, legal fees, accounting fees, governmental filing fees and certain other
transaction costs. Integration and other acquisition costs of approximately
$40.6 million were incurred during the six months ended September 30, 1998 to
combine the operations of Culligan and the Company and consist of travel,
training, payroll and benefit plan conversions, legal and consulting fees and
other one-time charges related to the transaction. The plan identifies certain
manufacturing facilities, distribution sites, sales and administrative offices,
retail outlets and certain related assets that became redundant upon
consummation of the Culligan transaction. As a result, and in accordance with
SFAS 121, an impairment loss was recognized and idle assets were written down to
the lower of their carrying cost or net realizable value. These assets will not
be depreciated while they are held for disposal. Assets with remaining service
lives were written down to the extent that carrying amounts exceeded future
discounted cash flows and estimated proceeds from disposal. Had the Company not
recognized the impairment losses, the resulting depreciation expense for the
period beginning with the plan's implementation and ending September 30, 1998
would not have been material to reported results. These assets have a carrying
value of approximately $58.8 million as of September 30, 1998 and are includedexpected
to be disposed of during the Company's current fiscal year.
The restructuring plan also resulted in the reduction of the combined workforce
by 950 employees consisting of 123 management personnel, 295 administrative
personnel, 444 manufacturing personnel and 88 sales personnel. In addition, the
plan impaired certain carrying amounts of goodwill and other intangible assets
in accordance with SFAS 121, which requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In determining the amount
of impairment of these assets, the Company valued the assets based on the
present value of estimated expected future cash flows using discount rates
commensurate with the risks involved. The components of the merger,
restructuring, acquisition and other related charges are as follows:
10
(in thousands)
Merger, integration and other acquisitions costs $ 89,773
Write-off of duplicative assets and lease terminations 79,982
Severance, relocation and related costs 50,649
Write-off of goodwill and other intangible assets 37,516
--------
Total merger, restructuring, acquisition and other related charges $257,920
========
Cash charges $155,396
Non-cash charges 102,524
--------
$257,920
========
Approximately $32.9 million of merger and restructuring related charges are
included in accrued liabilities at September 30, 1998. Additional costs to
complete the restructuring plan are not expected to be material.
Prior to the Company's acquisition of Culligan, Culligan acquired Protean plc,
including Protean's Analytical and Thermal Division ("A&T"). In connection with
Culligan's acquisition of A&T, the Company recorded a charge of $3.6 million in
the accompanying December 31, 1997 Condensed
Consolidated Statements of Operations.
8
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding
ordinary shares (including American Depository Shares) of Memtec. The purchase
price was $36.00 per share. The Company acquired certain shares in privately
negotiated and open market purchases prior to the Offer resulting in a total
cash purchase price of approximately $397.2 million (including estimated
transaction costs of $10.6 million). The purchase price was allocated to the
assets and liabilities of Memtec based on their estimated respective fair
values. The value of developed technology was approximately $64.4 million, and
is being amortized on a straight-line basis over 25 years. The value of other
intangible assets including patents, trademarks, license and distribution fees
was approximately $7.3 million, and is being amortized over periods ranging from
5 to 12 years.
The Company also acquired from Memtec certainsix months ended September 30, 1998 for purchased in-process research and
development projects that had not reached technological feasibility and that had
no alternative future use.
Such projectsAfter an income tax benefit of $50.5 million, the charges detailed above
totaling $261.5 million reduced earnings by $211.0 million.
Note 5. Comprehensive Income
--------------------
In the current period, the Company adopted SFAS 130 "Reporting Comprehensive
Income", which establishes standards for disclosing comprehensive income in both
annual and interim financial statements. Accordingly, the Company's
comprehensive income was as follows:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1997 1998 1997 1998
--------- -------- -------- ---------
(in thousands, except per share data)
Net income (loss) $ 33,563 60,211 72,858 (95,186)
Foreign currency translation adjustments (11,410) (7,115) (19,588) (14,022)
-------- ------ ------- --------
Comprehensive income (loss) $ 22,153 53,096 53,270 (109,208)
======== ====== ======= ========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
Revenues. Revenues for the three months ended September 30, 1998 were valued$1.2
billion, an increase of $287.5 million or 30.6% from the $938.4 million for the
three months ended September 30, 1997. Revenues for the six months ended
September 30, 1998 were $2.3 billion, an increase of $0.6 billion or 35.5% from
the $1.7 billion for the six months ended September 30, 1997. These increases
were due primarily to acquisitions completed by an independent appraiser
usingthe Company subsequent to
September 30, 1997. For the six months ended September 30, 1998, revenues from
capital equipment sales represented 47.5% of total revenues. Revenues from
services, operations, replacement parts and consumables represented 22.4% of
total revenues, while revenues from distribution represented 22.1% of total
revenues and revenues from consumer products represented 8.0% of total revenues.
Gross Profit. Gross profit as a risk adjusted cash flow model under which expected future cash flowspercentage of revenue ("gross margin") was
29.7% for the three months ended September 30, 1998 compared to 25.6% in the
corresponding period in the prior year. Gross margin was 29.7% for the six
months ended September 30, 1998 compared to 25.1% in the corresponding period in
the prior year. These increases in gross margin for the three and six month
periods ended September 30, 1998 were discounted using rates ranging from 31.9%due primarily to 45.9%. The discount rates were
determined by various internal(i) efficiencies realized
as a result of the Company's reorganization plans implemented in the third
quarter of the prior year and external factorsthe first quarter of the current year; (ii)
certain economies of scale related to the Company's significant growth including
general economic
and industry economic conditions, cost and availability of capital,enhanced purchasing power; (iii) favorable product completion and technology risk, competition and market acceptance. The future
cash flows were based on significant estimates of revenues, cost of goods sold,
operating expenses, research and development expenses, capital expenditures,
depreciation and interest charges on financed capital expenditures over the next
ten years. The estimates of these items included significant assumptions
regarding (i) revenue growth, which was assumed to grow from no revenuemix in the current period
forresulting from the projects currently in-process to substantially all of the
revenue for the Memtec subsidiary over the ten year period as the projects in-
process supplant or supersedeCompany's emphasis on selling higher margin value added
products and services in the current Memtec product offerings; (ii) gross
margin,period; and (iv) the incurrence of certain
unreimbursed project costs during the six months ended September 30, 1997
recorded by Kinetics, which is projected to improve approximately 5%was acquired by the endCompany as of the ten
year period as the new projects with higher gross margins supplant or supersede
the current Memtec product offerings; (iii) operating expenses as a percentage
of sales, which were projected to be 20%. The estimated market value of such in-
process research and development projects was $299.5 million and was expensed at
the acquisition date. The allocation of the purchase price of Memtec is final
and is not expected to change materially subsequent to December 31, 1997.
Memtec is incorporated under the law of the State of New South Wales,
Australia1997
and has worldwide operations. Memtec is a leader in the designing,
engineering, manufacturing and marketing of an extensive range of filtration
products and systems, focusing on two principal areas of the filtration
market: industrial filtration and water filtration. Memtec had revenues of
approximately $243.6 million and net income of approximately $7.5 million for
the year ended June 30, 1997.
The acquisition of Memtec has been accounted for as a purchasepooling of interests.
Selling, General and accordingly,Administrative Expenses. Selling, general and
administrative expenses for the resultsthree months ended September 30, 1998 were
$244.4 million, an increase of Memtec's operations have been included$68.0 million or 38.5% from the $176.4 million
for the three months ended September 30, 1997. During this period, selling,
general and administrative expenses were 19.9% of revenues compared to 18.8% for
the comparable period in the consolidated financial statementsprior year. For the six months ended September 30,
1998 selling, general and administrative expenses, before purchased in-process
research and development and merger, restructuring, acquisition and other
related charges described below ("certain charges"), increased $136.9 million to
$467.6 million as compared to $330.7 million in the comparable period in the
prior year. During this period selling, general and administrative expenses
before certain charges were 19.9% of revenues compared to 19.1% for the
Company fromcomparable period in the date of acquisition.
Summarized below areprior year. The increase in selling, general and
administrative expenses before certain charges in the unaudited pro forma results of operations of the
Company as though Memtec had been acquired at the beginning of the nine month
periodsthree months and six
months ended December 31, 1996September 30, 1998 can be attributed primarily to acquisitions
completed subsequent to September 30, 1997.
Merger, Restructuring, Acquisition and 1997.
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
---------- ---------
(IN THOUSANDS,
EXCEPT PER COMMON
SHARE)
Revenues................................................. $1,269,263 2,515,056
========== =========
Net income (loss)........................................ $ 23,454 (336,394)
========== =========
Net income (loss) per common share:
Basic.................................................... $ 0.40 (3.64)
========== =========
Diluted.................................................. $ 0.38 (3.64)
========== =========
Other Related Charges. Concurrent with
the merger with and into Kinetics and the acquisition of
Memtec,Culligan, the Company designed and implemented a restructuring
plan to streamline its manufacturing and production base, redesign its
distribution network, improve efficiency and enhance its competitiveness. The
restructuring plan resulted in a pre-tax charge of $141.1 million.$257.9 million in the six
months ended September 30, 1998. Included in the charge is approximately $49.2
million of merger-related expenses incurred to consummate the Culligan
transaction, including investment banking fees, printing fees, stock transfer
fees, legal fees, accounting fees, governmental filing fees and certain other
transaction costs. Integration and other acquisition costs of approximately
$40.6 million were incurred during the six months ended September 30, 1998 to
combine the operations of Culligan and the Company, and consist of travel,
training, payroll and benefit plan conversions, legal and consulting fees and
other one-time charges related to the transaction. The plan identifies certain
productsmanufacturing facilities, distribution sites, sales and technologies acquiredadministrative offices,
retail outlets and certain related assets that became redundant upon
consummation of the Culligan transaction. As a result, and in conjunctionaccordance with
SFAS 121, an impairment loss was recognized and idle assets were written down to
the lower of their carrying cost or net realizable value. These assets will not
be depreciated while they are held for disposal. Assets with remaining service
lives were written down to the extent that carrying amounts exceeded future
discounted cash flows and estimated proceeds from disposal. Had the Company not
recognized the
12
impairment losses, the resulting depreciation expense for the period beginning
with the Memtec transaction that
supersede productsplan's implementation and technologies acquiredending September 30, 1998 would not have been
material to reported results. These assets have a carrying value of
approximately $58.8 million as of September 30, 1998 and are expected to be
disposed of during the Company's current fiscal year.
The restructuring plan also resulted in earlier acquisitionsthe reduction of membrane related businesses. As a resultthe combined workforce
by 950 employees consisting of 123 management personnel, 295 administrative
personnel, 444 manufacturing personnel and 88 sales personnel. In addition, the
plan impaired certain carrying amounts of goodwill and other intangible assets
were determined to be impaired by approximately
$55.0 million in accordance with Statement of Financial Accounting Standards
No.SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121which requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate
9
UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED) that the
carrying amount of the assets may not be recoverable. In determining the amount
of the impairment of these assets, the Company valued the assets usingbased on the
present value of estimated expected future cash flows using discount rates
commensurate with the risks involved. The restructuring plan also
included closing or reconfiguringcomponents of certain facilities and reducing the work
force by approximately 350 employees, most of whom work in the facilities to
be closed.
Included in merger,
restructuring, acquisition and other related charges are the following:as follows:
(IN THOUSANDS)(in thousands)
Write-downMerger, integration and other acquisitions costs $ 89,773
Write-off of duplicative assets and lease terminations 79,982
Severance, relocation and related costs 50,649
Write-off of goodwill and other intangible assets............... $ 54,950
Asset write-offs, including equipment and facilities............. 47,887
Merger, integration and other acquisition costs.................. 21,135
Severance and related costs...................................... 17,137assets 37,516
--------
Total merger, restructuring, acquisition and other related charges..................................................... $141,109charges $257,920
========
Cash charges..................................................... $ 36,431charges $155,396
Non-cash charges................................................. 104,678charges 102,524
--------
$141,109$257,920
========
Approximately $30.3$32.9 million of merger and restructuring related charges are
included in accrued liabilities at December 31, 1997.September 30, 1998. Additional costs to
complete the restructuring plan are not expected to be material.
After an income tax benefit of $34.5 million, the charges detailed above
totaling $440.6 million reduced earnings by $406.1 million.
NOTE 6. SUBSEQUENT EVENT
On February 9, 1998, the Company announced it had entered into an Agreement
and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998,
among the Company, Palm Water Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water
Technologies, Inc. ("Culligan"), Delaware corporation. PursuantPrior to the Merger
Agreement, Merger Sub will be merged withCompany's acquisition of Culligan, Culligan acquired Protean plc,
including Protean's Analytical and into Culligan (the "Merger"Thermal Division ("A&T"). In connection with
the Merger,Culligan's acquisition of A&T, the Company will issue in exchange for each issued
and outstanding share (other than treasury shares and shares owned by the
Company)recorded a charge of Culligan common stock, par value $.01 per share, 1.714 shares of
common stock, par value $.01 per share, of the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated$3.6 million in
the first half of fiscal 1999.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues for the threesix months ended December 31, 1997 were $829.4
million, an increase of $366.0 million or 79.0% from the $463.4 millionSeptember 30, 1998 for the three months ended December 31, 1996. Revenues for the nine months ended
December 31, 1997 were $2.3 billion, an increase of $1.2 billion or 114.4%
from the $1.1 billion for the nine months ended December 31, 1996. These
increases were due primarily to acquisitions completed by the Company
subsequent to December 31, 1996. For the nine months ended December 31, 1997,
revenues from capital equipment sales represented 45.3% of total revenues.
Revenues from services, operations, replacement parts and consumables
represented 23.9% of total revenues, while revenues from distribution
represented 29.1% of total revenues and revenues from consumer products
represented 1.7% of total revenues.
Gross profit. Gross profit as a percentage of revenue ("gross margin") was
25.0% for the three months ended December 31, 1997 compared to 20.2% in the
corresponding period in the prior year. Gross margin was 23.4% for the nine
months ended December 31, 1997 compared to 21.5% in the corresponding period
in the prior year. These increases in gross margin for the three and nine
month periods ended December 31, 1997 were due primarily to the incurrence of
certain unreimbursed project costs at The Kinetics Group, Inc. ("Kinetics")
during the three and nine months ended December 31, 1996 after restatement for
the acquisition of Kinetics in the current period accounted for as a pooling
of interests transaction (see below).
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 1997 were
$148.5 million before purchased in-process research and development and
merger, restructuring, acquisition and other related charges described below
("non-recurring charges"), an increase of $67.0 million or 82.2% from the
$81.5 million for the three months ended December 31, 1996. During this
period, selling, general and administrative expenses (before non-recurring
charges) were 17.9% of revenues compared to 17.6% for the comparable period in
the prior year. For the nine months ended December 31, 1997, selling, general
and administrative expenses (before non-recurring charges) increased
$217.7 million to $414.5 as compared to the $196.8 million, before merger
expenses described below, in the comparable period in the prior year. During
this period, selling, general and administrative expenses (before non-
recurring charges) were 17.7% of revenues compared to 18.0% (before merger
expenses) for the comparable period in the prior year.
Purchased In-Process Research and Development. On December 9, 1997, the
Company, through a wholly-owned subsidiary, completed its tender offer
("Offer") to purchase all of the outstanding ordinary shares (including
American Depository Shares) of Memtec. The purchase price was $36.00 per
share. The Company acquired certain shares in privately negotiated and open
market purchases prior to the Offer resulting in a total cash purchase price
of approximately $397.2 million (including estimated transaction costs of
$10.6 million). The purchase price was allocated to the assets and liabilities
of Memtec based on their estimated respective fair values. The Company also
acquired from Memtec certain in-process research and
development projects that had not reached technological feasibility and that had
no alternative future use.
Such projects were valued by an independent appraiser using a risk
adjusted cash flow model under which expected future cash flows were
discounted, taking into account risks related to existing and future markets
and assessments of the life expectancy of such projects. The estimated market
value of such in-process research and development (R&D) projects was $299.5
million and was expensed at the acquisition date.
In addition, the Company also acquired from Memtec and its subsidiaries
(consisting of Memcor, Fluid Dynamics, Filterite, and Seitz) developed
technologies including large volume purification product lines; membrane
systems for water purification and waste treatment; metal fiber product lines
for industrial applications involving elevated pressures, temperatures and
corrosive environments; disposable product lines for industrial applications;
and depth media product lines for the pharmaceutical and food and beverage
industries.
11
As a result of the degree of competition in the filtration industry and the
use of technological change as a competitive tool, a significant proportion of
Memtec's technology will be superseded, although the rate of change varies
significantly across the markets addressed. Memtec's R&D initiatives are
therefore targeted at superseding current products. Memtec has a range of
ongoing R&D projects in each of its product lines. Certain of these projects
are directed at next generation products for existing market applications
while others are directed at new market opportunities where Memtec's
technological base may be applicable.
Memcor R&D projects are primarily directed at enhanced microfiltration
products capable of cost effectively addressing larger scale applications or
more chemically aggressive environments. These R&D projects are at the
laboratory to pilot stage of development and require a number of years further
work before full introduction to the market of a product is likely. Other
Memcor R&D projects seek to utilize Memtec's knowledge of electrochemical
processes to enter new markets ranging from high quality water production to
environmental sensors. These R&D projects are also at the laboratory to pilot
stage and similarly require a number of years further R&D before a product is
available for launching.
Fluid Dynamics R&D projects are directed at developing new applications for
Memtec's proprietary metallic media. The media enables precise fine filtration
in a range of hostile environments as well as having unique conductive
properties. These R&D projects are at the laboratory stage of development and
require additional research ranging from twelve months to several years
depending upon the particular product before any market launch is possible.
Filterite R&D project center around its two proprietary technologies--the
unique Filterite highly assymetric membrane and the CoLD melt spinning
technology. R&D projects are examining expansion of product offerings from
these core technologies. These projects require further materials science
laboratory work followed by manufacturing prototyping and tailoring to market
applications--a process which will range from eighteen months to several
years.
Seitz R&D is directed at next generation filtration technologies for the
food and beverage and chemicals industries drawing on the core technologies of
Seitz. These R&D projects are predominantly at the pilot stage, requiring
extensive trialing evaluation and development based on the trialing before
market launches are possible.
Failure to complete these R&D projects successfully and on time would open
the way for competitors to introduce alternate technologies, with consequent
implications for Memtec's revenues. To be successful in most cases the R&D
projects must be developed from laboratory or pilot scale models to full scale
products capable of production within a quality accredited manufacturing
process. The existing R&D projects are expected to be completed and
commercialized over the next ten years with expected R&D and project related
expenditures of approximately $275 million over such ten year period. The
expenditures will be expenses or capitalized in accordance with generally
accepted accounting principles.
The valuation process distinguished between R&D projects with no alternate
use or value and those with alternate use. Predominantly all R&D projects are
at a stage of development where the progress to date is not applicable to any
other use within Memtec nor is it saleable to any third party known to
management.
Merger, Restructuring, Acquisition and Other Related Charges. On December 31,
1997, the Company merged with and into Kinetics in a tax-free reorganization,
which was accounted for as a pooling of interests. Concurrent with the merger
with and into Kinetics and the acquisition of Memtec, the Company designed and
implemented a restructuring plan to streamline its manufacturing and
production base, improve efficiency and enhance its competitiveness. The
restructuring plan resulted in a pre-tax charge of $141.1 million. The plan
identifies certain products and technologies acquired in conjunction with the
Memtec transaction that supersede products and technologies acquired in
earlier acquisitions of membrane related businesses. As a result certain
carrying amounts of goodwill and other intangible assets were determined to be
impaired by approximately $55.0 million in accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS
121 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate
12
that the carrying amount of the assets may not be recoverable. In determining
the amount of the impairment of these assets, the Company valued the assets
using the present value of estimated expected future cash flows using discount
rates commensurate with the risks involved. The restructuring plan also
included closing or reconfiguring of certain facilities and reducing the work
force by approximately 350 employees, most of whom work in the facilities to
be closed.
Included in merger, restructuring, acquisition and other related charges are
the following:
(IN
THOUSANDS)
Write-down of goodwill and other intangible assets................ $ 54,950
Asset write-offs, including equipment and facilities.............. 47,887
Merger, integration and other acquisition costs................... 21,135
Severance and related costs....................................... 17,137
--------
Total......................................................... $141,109
========
Cash charges...................................................... $ 36,431
Non-cash charges.................................................. 104,678
--------
$141,109
========
Approximately $30.3 million of merger and restructuring related charges are
included in accrued liabilities at December 31, 1997. Additional costs to
complete the restructuring plan are not expected to be material.
After an income tax benefit of $34.5$50.5 million, the charges detailed above
totaling $440.6$261.5 million reduced earnings by $406.1 million.
The write-down of assets as a result of$211.0 million for the restructuring plan (including
assets of business' whose products were superseded by Memtec's products) will
not have a material affect on the Company's consolidated results of operations
in the future.
Merger expenses incurred during the ninesix months
ended December 31, 1996
relate to the Company's acquisition of Davis Water & Waste Industries, Inc.
("Davis") which was accounted for as a pooling of interests. These merger
expenses, which totaled $5.6 million, consisted primarily of investment
banking fees, printing fees, stock transfer fees, accounting fees, legal fees,
governmental filing fees and certain other costs related to certain Davis
pension plans and change of control payments.September 30, 1998.
Interest expense.Expense. Interest expense increased to $13.2$29.5 million for the three
months ended December 31, 1997September 30, 1998 from $6.5$12.9 million for the corresponding period
in the prior year. Interest expense increased to $34.4$55.2 million for the ninesix
months ended December 31, 1997September 30, 1998 from $15.9$23.9 million for the corresponding period
in the prior year. Interest expense for the three and ninesix months ended December 31, 1997September
30, 1998 consisted primarily of interest on the Company's (i) 6.0% Convertible
Subordinated Notes issued on September 18, 1995 due 2005, (which were redeemed
or converted during the current quarter as discussed below) (ii) 4.5%
Convertible Subordinated Notes issued on December 11, 1996 due 2001, (iii)
borrowings under Kinetics' long-term line-of- credit,6.375% Remarketable or Redeemable Securities issued May 15, 1998 due 2011
(Remarketing Date May 15, 2001), (iv) 8.0% Senior
Subordinated Notes issued by Kinetics,6.5% Remarketable or Redeemable Securities
due 2013 (Remarketing date May 15, 2003), (v) borrowings under Memtec's long-term
line-of- credit, (vi) Senior Guaranteed Notes issued by Memtec bearing
interest at rates ranging from 7.7% to 8.0%, (vii) other long-term debt bearing
interest at rates ranging from 2.0% to 9.2%10.1% and (viii)(vi) borrowings under the
Company's Senior Credit Facility. At December 31, 1997,September 30, 1998, the Company had cash
and short-term investments of $58.7$58.1 million.
Income taxes. The Company recorded an incomeTaxes. Income tax benefit of $18.9 millionexpense for the three months ended December 31, 1997 as comparedSeptember 30, 1998
increased to $33.9 million from $18.3 million in the corresponding period in the
prior year. The Company's effective tax rate for the current period was 36.0%
which was nominally higher than the effective tax rate of 35.3% for the second
quarter in the prior year. The Company recorded income tax expense of $1.2$14.3
million for the six months ended September 30, 1998, a decrease of $27.4 million
from income tax expense of $41.7 million in the comparable period in the prior
year. Before non-
recurringcertain charges, income tax expense was $15.6$64.8 million or an
13
effective tax rate of 32.8%35.9% for the threesix months ended December 31, 1997September 30, 1998 as
compared to 16.1%36.4% for the comparable period in the prior year.
13
Net income.Income. Net income before non-recurring charges for the three months ended December 31, 1997September 30, 1998 was $32.0$60.2
million, an increase of $25.7$26.6 million from the $6.3$33.6 million for the three
months ended December 31, 1996. Net incomeSeptember 30, 1997. Income before non-recurringcertain charges for the ninesix
months ended December 31, 1997September 30, 1998 was $68.8$115.8 million, an increase of $49.0$42.9 million
from the $19.8$72.9 million for the ninesix months ended December 31, 1996.September 30, 1997. Net income
in the six months ended September 30, 1997 included a one-time after tax gain of
$18.8 million or $0.15 per diluted share on Culligan's disposition of an
investment in an affiliate. After non-recurring charges, net loss in the threesix
months ended December 31, 1997September 30, 1998 was $374.1 million as compared to net
income of $6.3 million in the corresponding period in the prior year. Net loss
for the nine months ended December 31, 1997 (after the non-recurring charges)
was $337.3 million as compared to net income of $15.8 million in the
corresponding period in the prior year.$95.2 million. Net income (loss) per common
share for the three and ninesix months ended December 31,September 30, 1997 and 19961998 were as
follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
1996Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1997 19961998 1997 1998
-------- ------- ------ ------ --------------------
(in thousands, except per share data)
Basic........................................... $ 0.10 (3.71) 0.27 (3.65)
====== ======Basic $0.26 0.37 0.57 (0.59)
===== ======
Diluted......................................... $ 0.09 (3.71) 0.26 (3.65)
====== ========== ==== =====
======Diluted $0.25 0.36 0.56 (0.59)
===== ==== ==== =====
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
- -------------------------------
The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's bank
line-of-credit.Senior
Credit Facility. At December 31, 1997,September 30, 1998, the Company had working capital of
$545.6$901.1 million including cash and short-term investments of $58.7$58.1 million. On
May 15, 1998, the Company issued $500.0 million 6.375% Remarketable or
Redeemable Securities due 2011 (remarketing date May 15, 2001) and $400.0
million 6.50% Remarketable or Redeemable Securities due 2013 (remarketing date
May 15, 2003) (collectively, the "ROARS"). The net proceeds from the sale of
the ROARS, including a premium payment to the Company by Nationsbanc Montgomery
Securities LLC, were $913.6 million. The net proceeds were used to repay
indebtedness under the Senior Credit Facility, indebtedness assumed in the
acquisition of Memtec, and a portion of the indebtedness assumed in the
acquisition of Culligan. The Company's long-term debt at December 31, 1997, was $554.0 million consistingSeptember 30, 1998
consisted of $140.0 million of 6.0% Convertible Subordinated Notes due 2005 and(i) $414.0 million of 4.5% Convertible Subordinated Notes due 2001. The Company also had
other long-term debt totaling $154.5 million consisting of (i) $18.32001;
(ii) $500.0 million of 8.0% Senior Subordinated Notes issued by Kinetics, (ii) $60.0ROARS due 2011 (remarketing date May 15, 2001); (iii)
$400.0 million of Senior Guaranteed Notes issued by Memtec bearing interest at rates ranging
from 7.7% to 8.0%ROARS due 2013 (remarketing date May 15, 2003); and (iii)(iv) other
long-term debt of $76.2$89.6 million bearing interest at rates ranging from 2.0% to
9.2%10.1%. Subsequent to December 31, 1997
substantially all of Kinetics' debt (including borrowings on their revolving
line-of-credit described below) was repaid with borrowings under the Company's
Senior Credit Facility.
As of December 31, 1997,September 30, 1998, the Company had a Senior Credit Facility which
provides credit facilities to the Company of up to $750.0 million, of which
there were outstanding borrowings of $419.1$450.9 million and outstanding letters of
credit of $40.5$52.3 million. Borrowings under the Senior Credit Facility bear
interest at variable rates of up to 0.45% above certain Eurocurrency rates or
0.15% above BankBoston's base rate. The Senior Credit Facility expires October
2002 and is subject to customary and usual terms.
In connection with the acquisitions of Kinetics and Memtec,On September 23, 1998, the Company assumed through its subsidiaries two additional loan agreements with banks.
One agreement provides a revolving line-of-creditredeemed approximately $81.5 million of the
$140.0 million aggregate principal amount of 6% Convertible Subordinated Notes
due September 15, 2005 (the "Notes"). The redemption was financed with
borrowings under the Senior Credit Facility. The remaining Notes were converted
into approximately 3.2 million shares of up to
$100.0 million, of which $33.8 million was outstanding at December 31, 1997.
Borrowings under this agreement bear interest at the bank's reference rate or
other interest rate options that the subsidiary may select. The other
agreement is a Multi-Option, Multi-Currency Master Facility that provides
borrowings of up to $60.0 million, of which $22.3 million was outstanding as
of December 31, 1997. Borrowings under this agreement bear interest at LIBOR
plus 0.75%.Company's common stock.
The Company believes its current cash position, cash flow from operations, and
available borrowings under the Company's line-of-creditSenior Credit Facility will be adequate
to meet its anticipated cash needs from working capital, revenue growth,
scheduled debt repayment and capital investment objectives for at least the next
twelve months.
14
CERTAIN TRENDS AND UNCERTAINTIES
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the United States Securities and 14
Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor""Safe Harbor" provisions of the U.S.
Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-
lookingforward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
Acquisition Strategy In pursuit of its strategic objective of becoming the
leading global single-source provider of waterEarnings Variation Due to Business Cycles and wastewater treatment
systems and services, the Company has, since 1991, acquired more than 125
United States based and international businesses. The Company plans to
continue to pursue acquisitions that expand the segments of the water and
wastewater treatment and water-related industries in which it participates,
complement its technologies, productsSeasonal Factors. Our operating
results can experience quarterly or services, broaden its customer base
and geographic areas served and/or expand its global distribution network, as
well as acquisitions which provide opportunities to further and implement the
Company's one-stop-shop approach in terms of technology, distribution or
service. The Company's acquisition strategy entails the potential risks
inherent in assessing the value, strengths, weaknesses, contingent or other
liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. In addition, the Company's
acquisition of approximately 96% of the outstanding ordinary shares of Memtec
was accomplished through a tender offer, and the Company could make other
acquisitions in the future by means of a tender offer. The level of risk
associated with such acquisitions is greater because frequently they are
accomplished, as was the case with the acquisition of Memtec, without the
customary representations or due diligence typical of negotiated transactions.
Although the Company generally has been successful in pursuing acquisitions,
there can be no assurance that acquisition opportunities will continue to be
available, that the Company will have access to the capital required to
finance potential acquisitions, that the Company will continue to acquire
businesses or that any business acquired will be integrated successfully or
prove profitable.
International Transactions The Company has made and expects it will continue
to make acquisitions and expects to obtain contracts in markets outside the
United States. While these activities may provide important opportunities for
the Company to offer its products and services internationally, they also
entail the risks associated with conducting business internationally,
including the risk of currency fluctuations, slower payment of invoices, the
lack in some jurisdictions of well-developed legal systems, nationalization
and possible social, political and economic instability. In particular, the
Company has significant operations in Asia, which will be adversely affected
by current economic conditions in that region. While the full impact of this
economic instability cannot be predicted, it could have a material adverse
effect on the Company's revenues and profitability.
Reliance On Key Personnel The Company's operations are dependent on the
continued efforts of senior management, in particular Richard J. Heckmann, the
Company's Chairman of the Board, President and Chief Executive Officer. The
Company does not presently have employment agreements with most members of
senior management, including Mr. Heckmann. Should any of the Company's senior
managers be unable or choose not to continue in their present roles, the
Company's prospects could be adversely affected.
Profitability Of Fixed Price Contracts A significant portion of the
Company's revenues are generated under fixed price contracts. To the extent
that original cost estimates are inaccurate, costs to complete increase,
delivery schedules are delayed or progress under a contract is otherwise
impeded, revenue recognition and profitability from a particular contract may
be adversely affected. The Company routinely records upward or downward
adjustments with respect to fixed price contractsannual variations due to changes in estimatesbusiness cycles,
seasonality and other factors. The market price for our common stock may
decrease if our operating results do not meet the expectations of costs to complete such contracts. There can be no assurance that future
downward adjustments will not be material.
Cyclicality, Seasonality And Possible Earnings Fluctuations The salestock market
analysts.
About 45% of our sales are of capital equipment. Sales of capital equipment within the water treatment industry is cyclical and
influenced by various economic factors including interest rates and general
fluctuations of the business cycle. A significant portion of the Company's
revenues are derived from capital equipment sales. While the Company sells
capital equipment to customers in diverse industries and in global markets,
cyclicality of capital equipment sales and instability of general economic
conditions, including
15
those currently unfolding in Asian markets, could have a material adverse
effect on the Company's revenues and profitability.
The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in northern
climates. The sale of water and wastewater distribution equipment and supplies
is a significant component of the Company's business. Cyclicality and
seasonality of water and wastewater distribution equipment and supplies sales
could have a material adverse effect on the Company's revenues and
profitability.
The Company's high-purity process piping systems have been sold principally
to companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and sales of those systems are critically dependent
on these industries. The success of customers and potential customers for
high-purity process piping systems is linked to economic conditions in these
respective industries, which in turn are each subject to intense competitive
pressure and are
affected by overall economic conditions. The semiconductor
industry in particular has historically been, and will likely continue to be,
cyclical in nature and vulnerable to general downturnsfluctuations in the economy. The
semiconductor and pharmaceutical industries also represent significant markets
for the Company's water and wastewater treatment systems. Downturns in these
industries could have a material adverse effect on the Company's revenues and
profitability.
Operating results from the sale of high-purity process piping systems also
can be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new
contracts, possible deferrals or cancellations of existing contracts and the
evolving and unpredictable nature of the markets for high-purity process
piping systems.
As a result of these and other factors, the Company's operating results may
be subject to quarterly or annual fluctuations. There can be no assurance that
at any given time the Company's operating results will meet or exceed stock
market analysts' expectations, in which event the market price of the Common
Stock could be adversely affected.
Potential Environmental Risks The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the Company's operations or activities, or historical
operations by others at the Company's locations, will not result in cleanup
obligations, civil or criminal enforcement actions or private actions that
could have a material adverse effect on the Company. In that regard, United
States federal and state environmental regulatory authorities have issued
certain notices of violation related to alleged multiple violations of
applicable wastewater pretreatment standards by a wholly owned subsidiary of
the Company (the "Subsidiary") at a Connecticut ion exchange resin
regeneration facility (the "South Windsor Facility") acquired by the Company
in October 1995 from Anjou International Company ("Anjou"). A grand jury
investigation concerning these conditions also is pending. The Subsidiary has
reached a tentative agreement with the United States Attorney's Office and the
United States Environmental Protection Agency ("USEPA") to plead guilty to a
single violation of the United States Clean Air Act, pursuant to which the
Subsidiary would pay a fine and the South Windsor Facility would undergo
annual environmental compliance audits by the USEPA for five years. The
Company believes that this settlement would conclude these matters in their
entirety; however, there can be no assurance that this settlement will become
final, and it is not expected that it would include a formal release of all
liabilities in this regard. As a consequence of such a settlement, the
Subsidiary would be debarred from United States government contracts for a
period of time that the Company currently expects to be brief. The Company
does not believe that the debarment would have a material adverse effect on
the Subsidiary or the Company. The Company has certain rights of
indemnification from Anjou which may be available with respect to these
matters. In addition, the Company's
16
activities as owner and operator of certain hazardous waste treatment and
recovery facilities are subject to stringent laws and regulations and
compliance reviews. Failure of these facilities to comply with those
regulations could result in substantial fines and the suspension or revocation
of the facility's hazardous waste permit. The Company serves as contract
operator of various municipal and industrial wastewater collection and
treatment facilities, which were developed and are owned by governmental or
private entities. Under those service contracts and applicable environmental
laws, the Company as operator may incur liabilities in the event those
facilities experience malfunctions or discharge wastewaters which do not meet
applicable permit limits and regulatory requirements. In some cases, the
potential for such liabilities depends upon design or operational conditions
over which the Company has limited, if any, control. In other matters, the
Company has been notified by the United States Environmental Protection Agency
that it is a potentially responsible party under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at
certain sites to which the Company or its predecessors allegedly sent waste in
the past. It is possible that the Company could receive other such notices
under CERCLA or analogous state laws in the future. The Company does not
believe that its liability, if any, relating to such matters will be material.
However, there can be no assurance that such matters will not be material. In
addition, to some extent, the liabilities and risks imposed by environmental
laws on the Company's customers may adversely impact demand for certain of the
Company's products or services or impose greater liabilities and risks on the
Company, which could also have an adverse effect on the Company's competitive
and financial position.
Competition All of the markets in which the Company competes are highly
competitive, and most are fragmented, with numerous regional and local
participants. There are competitors of the Company in certain markets that are
divisions or subsidiaries of companies that have significantly greater
resources than the Company. The Company's process water treatment business
competescycles in the United States and
internationallyworldwide, instability of economic conditions (such as the current conditions in
the Asia Pacific region and Latin America) and interest rates, as well as other
factors.
In addition, operating results of some of our business segments are
significantly influenced, along with other factors such as interest rates, by
particular business cycles and seasonality, including:
BUSINESS CYCLES
AND SEASONS
SEGMENT AFFECTING RESULTS
------- -----------------
Waterworks . Real estate development
Distribution . Housing starts
. Winter months in temperate regions
. Industrial capital spending
Consumer and Commercial . Consumer spending
. Housing starts
Industrial Products and . Microelectronics
Services . Pharmaceutical
. Biotechnology
. Municipal spending
Profit Uncertainty in Fixed-Price Contracts. Contracts with fixed prices make
up a significant portion of our revenues. If our original cost estimates are
incorrect, there are delays in scheduled deliveries or we otherwise do not
progress under a fixed-price contract as we expected, the profits under that
contract could decrease, or we could lose money on that contract. When our
estimates of cost change for fixed-price contracts, we record adjustments in our
financial statements, and any future downward adjustments could be material.
15
Competition. We compete against many companies in fragmented, competitive
markets and we have fewer resources than some of those companies. Our
businesses compete within and outside the United States principally on the basis
of product quality and specifications, technology, reliability, price, customized
design and technical qualifications, reputation and prompt availability of
local service.the following factors:
BUSINESS FACTORS
-------- -------
Water and . Product quality and specifications
Wastewater . Technology
Treatment . Reliability
. Price (can predominate among competitors in
the wastewater treatment business that have
sufficient technical qualifications,
particularly in the municipal contract bid
process)
. Customized design and technical qualifications
. Reputation
. Prompt local service
Filtration and . Price
Separation . Technical expertise
. Product quality
. Responsiveness to customer needs
. Service
. Technical support
Industrial Products . Quality
and Services . Service
. Price
Waterworks . Prompt local service capability
Distribution . Product knowledge by sales force and service
branch management
. Price
Consumer and . Price
Commercial Products . Product quality
. "Taste"
. Service
. Distribution capabilities
. Geographic presence
. Reputation
The Company's wastewater treatmentwaterworks distribution business competes in the
United States and internationally largely on the basis of the same factors,
except that pricing considerations can be predominant among competitors that
have sufficient technical qualifications, particularly in the municipal
contract bid process. In connection with the marketing of waterworks
distribution equipment and supplies, the Company competes not only with a
large number ofagainst independent wholesalers, and with other
distribution chains similar to the Company, but also withours and manufacturers who sell directly to
customers. The principal methods of competition for the Company's waterworks
distribution business include prompt local service capability, product
knowledge by the sales force and branch management, and price. The Company's
consumer products business competes with thousands of companies,
including those with national, regional or local distribution networks, businesses with regional scope and local product assemblers or
service companies, as well
as retail outlets. The Company believes that there
are thousands of participants in the residential water market. The consumer
products business competes principally on the basis of price, product quality
and "taste," service, distribution capabilities, geographic presence and
reputation.
Competitive pressures, including those described above, and other factors could
cause the Companyus to lose market share or could result in significant price erosion,decreases in prices, either of
which could have a material adverse effect upon the Company'son our financial position and results
of operations and cash
flows.
Potentialoperations.
16
Risks Related To Water Rights And Water Transfers The Company
recently acquired more than 47,000 acresto Acquisitions. We have made a large number of agricultural land (the
"Properties"), situated inacquisitions
since 1991 and we plan to continue to pursue acquisitions. Candidates for
acquisition include businesses that allow us to:
. expand the Southwestern United States, the substantial
majority of which are in Imperial County, California (the "IID Properties")
located within the Imperial Irrigation District (the "IID"). Substantially all
of the Properties are currently leased to third party agricultural tenants,
including prior owners of the Properties. The Company acquired the Properties
with appurtenant water rights, and is actively seeking to acquire additional
properties with water rights, primarily in the Southwestern and Western United
States. The Company may seek in the future to transfer water attributable to
water rights appurtenant to the Properties, particularly the IID Properties
(the "IID Water"). However, since the IID holds title to allsegments of the water rights within the IIDand wastewater treatment and water-
related industries in trust for the landowners, the IID would control the
timingwhich we participate;
. complement our technologies, products or services;
. broaden our customer base and geographic areas served;
. expand our global distribution network; or
. use our "one-stop-shop" approach in terms of any transfers of IID Water bytechnology, distribution
or service.
If we are not correct when we assess the Company. The
circumstances under which transfers of water can be madevalue, strengths, weaknesses,
liabilities and thepotential profitability of any transfersacquisition candidates or we are subject to significant uncertainties, including
hydrologic risksnot
successful in integrating the operations of variable water supplies, risks presented by allocationsacquired companies, our results of
water under existing and prospective priorities, and risks
17
of adverse changes tooperation or interpretations of United States federal, state and
local laws, regulations and policies. Transfers of IID Water attributable to
water rights appurtenant to the IID Properties (the "IID Water Rights") are
subject to additional uncertainties. Allocations of Colorado River water,
which is the source of all water deliveries to the IID Properties, are subject
to limitations under complex international treaties, interstate compacts,
United States federal and state laws and regulations, and contractual
arrangements and, in times of drought, water deliveriesfinancial position could be curtailedadversely affected and we could lose
money. In addition, if we acquire other businesses by making so-called
"hostile" tender offers, as we did with Memtec Limited, we may encounter added
risks. When we negotiate to acquire a company, that company generally makes
legally binding statements (known as "representations") to us and provides us
with access to internal documents and other data that we rely upon in deciding
whether to acquire the company and if we decide to acquire the company, on what
terms. We would not get such representations or internal information in a
"hostile" tender offer. We will continue to look for acquisition opportunities,
although we may not continue to easily find desirable acquisition candidates or
complete acquisitions.
Risks of Doing Business in Other Countries. We have acquired businesses and we
conduct business in markets outside the United States government. Further, any transfers of IID Water would
require the approval ofand we expect to continue
to do so. The risks associated with conducting business outside the United
States Secretaryinclude:
. currency fluctuations;
. slower payment of invoices;
. underdeveloped legal systems;
. nationalization; and
. social, political and economic instability.
Current economic conditions in the Interior. Even if a
transfer were approved, other California water districtsAsia Pacific region and users could
assert claims adverse toLatin America have
adversely affected our operations and sales there. We cannot predict the IID Water Rights, includingfull
impact of this economic instability, but not limited to
claims that the IID has failed to satisfy United States federal law and
California constitutional requirements that IID Water must be put to
reasonable and beneficial use. A finding that the IID's water use is
unreasonable or nonbeneficial could adversely impact title to IID Water Rights
and the ability to transfer IID Water. Water transferred by the IID to
metropolitan areas of Southern California, such as San Diego, would be
transported through aqueducts owned or controlled by the Metropolitan Water
District, a quasi-governmental agency (the "MWD"). The transportation cost for
any transfer of IID Water and the volume of water which the MWD can be
required to transport at any time are subject to California laws of uncertain
application, some aspects of which are currently in litigation. The
uncertainties associated with water rightsit could have a material adverse effect
on our revenues and profits.
Importance of Certain Employees. Our senior officers, particularly Richard J.
Heckmann, who is our Chief Executive Officer, are very important to the Company's profitability.
Technological And Regulatory Risks The watersuccess
of our operations. We have various compensation and wastewater treatment
business is characterized by changing technology, competitively imposed
process standards and regulatory requirements, eachbenefit arrangements with
our senior officers, including Mr. Heckmann, that are designed to encourage them
to continue their employment with us. However, if any of which influences the
demand for the Company's products and services. Changesour senior officers do
not continue in regulatory or
industrial requirements may render certain of the Company's treatment products
and processes obsolete. Acceptance of new products may also be affected by the
adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technological and regulatory
standards and to develop successfully and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
grow and to remain competitive. There can be no assurance that the Company
will be able to achieve the technological advances thattheir present roles, our prospects may be necessary for
it to remain competitive or that certain of its products will not become
obsolete. In addition, the Company is subject to the risks generally
associated with new product introductions and applications, including lack of
market acceptance, delays in development or failure of products to operate
properly.
There can be no assurance that the Company's existing or any future
trademarks or patents will be enforceable or will provide substantial
protection from competition or be of commercial benefit to the Company. In
addition, the laws of certain non-United States countries may not protect
proprietary rights to the same extent as do the laws of the United States.
Successful challenges to certain of the Company's patents or trademarks could
materially adversely affect its competitive and financial position.
Municipal Market A significant percentage of the Company's revenues is
derived from municipal customers. While municipalities represent an important
market in the water and wastewater treatment industry, contractor selection
processes and funding for projects in the municipal sector entail certain
additional risks not typically encountered with industrial customers.
Competition for selection of a municipal contractor typically occurs through a
formal bidding process which can require the commitment of significant
resources and greater lead times than industrial projects. In addition, demand
in the municipal market is dependent upon the availability of funding at the
local level, which may be the subject of increasing pressure as local
governments are expected to bear a greater share of the cost of public
services.affected.
17
Year 2000 RisksRisks. The 'Year 2000'Year 2000 issue concerns the potential exposures related
to the automated generation of business and financial misinformation resulting
from the application of computer programs which have been written using twosix
digits (for example, 12/31/99), rather than four,eight (for example, 12/31/1999), to
define the applicable yeardate of business transactions. Many products and systems
could experience malfunctions when attempting to process certain dates, such as
January 1, 2000 or September 9, 1999 (a date programmers sometimes used as a
default date). We are currently identifying which of our information technology
("IT") and non-IT systems will be affected by Year 2000 issues.
Most of the Company's operatingour IT systems with Year 2000 issues have been modified to address those
issues; accordingly, management doesissues. We have also commenced identification and assessment of our non-IT
systems, which include, among other things, components found in water and
wastewater treatment plants and process water treatment systems operated and/or
owned under contract by us and in our hazardous waste treatment facilities, as
well as components of equipment in our manufacturing facilities.
Our Year 2000 compliance program consists of three phases: identification and
assessment; remediation; and testing. For any given system, the phases occur in
sequential order, from identification and assessment of Year 2000 problems, to
remediation, and, finally, to testing our solutions.
However, as we acquire additional businesses, each IT and non-IT system of the
acquired business must be independently identified and assessed. As a result,
all three phases of our Year 2000 compliance program may occur simultaneously as
they relate to different systems. Each phase may have a varying timetable to
completion, depending upon the system and the date when a particular business
was acquired by us.
We have completed the identification and assessment of most of our IT systems,
and those systems have been modified to address Year 2000 problems. We will
continue to assess the IT systems of businesses that we have recently acquired
and that we may acquire in the future.
We are in the identification and assessment phase with respect to all non-IT
systems, which is projected to continue until September 1999 for currently-owned
businesses. With the possible exception of the remediation and testing phases
for certain of our non-IT systems, all phases of our Year 2000 compliance
program are expected to be completed by September 1999, although we can not
anticipate any significant costs, problems or uncertainties associated with
becomingassure you that all phases for all businesses will be completed by that date.
In particular, we can not assure you that acquired businesses will be Year 2000
compliant, although we currently have a policy that requires an acquisition
candidate to represent that such business is Year 2000 compliant. The Company is currently developing aTo the extent
feasible, we also review the Year 2000 status of acquisition candidates before
we complete an acquisition.
In addition to our internal systems, we have begun to assess the level of Year
2000 problems associated with our various suppliers, customers and creditors.
To test the Year 2000 compliance status of our suppliers, we plan to assuresubmit
hypothetical orders to our suppliers dated after December 31, 1999 requesting
confirmation that its otherthe orders have been correctly processed.
Our costs to date for our Year 2000 compliance program, excluding employee
salaries, have not been material. Although we have not completed our assessment,
we do not currently believe that the future costs associated with our Year 2000
compliance program will be material.
We are currently unable to determine our most reasonably likely worst case Year
2000 scenario, as we have not identified and assessed all our systems,
particularly our non-IT systems. As we complete our identification and
assessment of internal operatingand third-party systems, withwe expect to develop contingency
plans for various worst case scenarios. We expect to have such contingency
plans in place by September 1999. A failure to address Year 2000 issues
are
modified on a timely basis. Suppliers, customers and creditors of
18
the Company also face similar Year 2000 issues. A failure to successfully
address the Year 2000 issue could have a material adverse effect on the
Company'sour business, financial
condition or results of operations.
Recent DevelopmentsPotential Environmental Risks. Environmental laws and regulations require us to
meet certain standards and impose liability if we do not meet them.
Environmental laws and regulations and their interpretations change.
18
We must comply with any new standards and requirements, even when they require
us to clean up environmental conditions that were not illegal when the
conditions were created. We can be held responsible for failures to meet
environmental standards by businesses we acquired that happened before we
acquired them. All of these requirements can cost us money.
Environmental costs can result from cleanup obligations, civil or criminal
enforcement actions or private actions. Costs of environmental compliance and
fines or penalties for environmental violations could have a material adverse
effect on us in the future. Environmental risks that we have in our businesses
and some of the specific environmental liabilities that we know about and that
could result in significant future costs to us are discussed below.
. Cleanup Liabilities. The United States Environmental Protection Agency
has notified us that we are a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (CERCLA) at certain sites to which we (or companies we have
acquired) have allegedly sent waste in the past. We may receive
additional notices under CERCLA or state law.
You should be aware that in 1995, Culligan, one of our subsidiaries,
bought part of Anvil Holdings, Inc. and assumed certain environmental
liabilities associated with soil and contamination at Anvil Knitwear's
Asheville Dyeing and Finishing Plant in Swannanoa, North Carolina. Since
1990, Culligan has monitored the contamination pursuant to an
Administrative Consent Order entered into with the North Carolina
Department of Environment, Health and Natural Resources related to the
closure of an underground storage tank at the site. Groundwater testing
at this plant and at two adjoining properties showed levels of a
cleaning solvent that Culligan believed to be from the plant that exceed
applicable state standards.
We have begun cleanup of the contamination and estimate that the costs
of future site cleanup will range from $1.0 million to $1.8 million. We
have sufficient financial reserves for site cleanup. We anticipate that
the potential costs of further monitoring and corrective measures to
address the groundwater problem will not have a material adverse effect
on our financial position or results of operations. However, because the
full extent of the required cleanup has not been determined, we cannot
assure you of this result.
Also, based on all of the sites we know to require cleanup, including
the Anvil site, we do not believe that our liability relating to such
sites will be material to us. However, we cannot assure you that such
sites will not have a material adverse effect on our financial position
or results of operations.
. Hazardous Waste Treatment and Recovery Facilities. We own and operate
several hazardous waste treatment and recovery facilities, which are
subject to very strict environmental laws and regulations and compliance
reviews. If we do not comply with these regulations, we could be fined
significant amounts of money or the facilities' hazardous waste permits
could be suspended or revoked.
. Liability for Wastewater Treatment Facilities and Wastewater Discharges.
By contract, we operate various wastewater collection and treatment
facilities that were developed and are owned by governmental or
industrial entities. We also operate facilities owned by us, including
service deionization centers and manufacturing facilities, that
discharge wastewater in connection with routine operations. Under
certain service contracts and applicable environmental laws we may be
held responsible as an operator of such facilities. Potential
responsibilities include paying the fines or penalties if the facilities
malfunction or discharge wastewater which fall below certain regulatory
thresholds. In some cases, such possible malfunctions or discharges
depend upon design or operational conditions over which we have limited,
if any, control.
. Underground Storage Tanks and Potential for Soil and Groundwater
Contamination. Some of our facilities contain (or in the past
contained) underground storage tanks which may have caused soil or
19
groundwater contamination. At one site formerly owned by Culligan, we
are investigating, and have taken certain actions to correct,
contamination that may have resulted from a former underground storage
tank. Based on the amount of contamination believed to have been present
when the tank was removed, and the probability that some of the
contamination may have originated from nearby properties, we believe,
although there can be no assurance, that this matter will not have a
material adverse effect on our financial position or results of
operations.
. Impact of Environmental Laws on Our Product Sales. The liabilities and
risks imposed on our customers by environmental laws may adversely
impact demand for some of our products or services or impose greater
liabilities and risks on us, which could also have an adverse effect on
our competitive and financial position.
Risks Related to Municipal Water and Wastewater Business. Sales to municipal
customers make up a significant percentage of our revenues. We encounter some
different risks with municipalities than we do with industrial customers.
Competition for selection of a municipal contractor usually requires a formal
bidding process. By requiring formal bids, municipal projects entail longer lead
times than industrial projects and force us to commit more resources. In
addition, the municipal business depends upon the availability of funding at the
local level, which may be subject to increasing pressure as local governments
are expected to bear a greater share of the cost of public services.
Technological and Regulatory Risks. Changes in technology, competitively
imposed process standards and regulatory requirements influence the demand for
many of our products and services. To grow and remain competitive, we need to
anticipate changes in technological and regulatory standards. We need to
introduce new and enhanced products on a timely basis. We may not achieve these
goals and some of our products may become obsolete.
New products often face lack of market acceptance, development delays or
operational failure. Stricter governmental regulations also may affect
acceptance of new products. The market growth potential of acquired in-process
research and development is subject to significant risks, including high
development, production and sales costs, introduction of competing technologies
and the possible lack of market acceptance of the developed products and
technologies.
Our trademarks or patents may not provide substantial protection from
competition or be of commercial benefit to us. We may not be able to enforce our
rights under trademarks or patents against third parties. Some international
jurisdictions may not protect these kinds of rights to the same extent that they
are protected under U.S. Filterlaw. If a third party successfully challenges our
trademarks or patents, it may affect our competitive and financial position.
Risks Related to Water Rights and Transfers of Water. We own more than 47,000
acres of agricultural land in the southwestern United States, most of which is
contemplatinglocated within the issuanceImperial Irrigation District (IID) in Imperial County,
California. We lease substantially all of $750the 47,000 acres to $900 millionagricultural
tenants.
We acquired the land with water rights, and we are seeking to acquire additional
properties with water rights, primarily in the southwestern and western United
States. In the future, we may transfer water attributable to such water rights,
particularly from the land located in the IID.
Our ability to transfer water and the profitability of unsecured
redeemableany such transfers are
subject to various uncertainties, including:
. Hydrologic risks of variable water supplies;
. Conveyance risks from unavailable or remarketable securitiesinadequate transportation
facilities;
20
. Risks presented by allocations of water under existing and prospective
priorities; and
. Risks of adverse changes to qualified institutional buyers (as
definedor interpretations of U.S. federal, state
and local laws, regulations and policies.
The IID holds title to all of the water rights within the IID in Rule 144Atrust for the
landowners and would control the amounts and terms of any transfers by us of
IID water. Transfer of IID water are subject to additional uncertainties,
including:
. Limitations of Colorado River water allocations (the source of all water
deliveries to IID properties) under
. international treaties;
. interstate compacts;
. U.S. federal and state laws and regulations; and
. contractual arrangements;
. Curtailment of water deliveries by the U.S. government in times of
drought;
. The approval of the U.S. Securities ActSecretary of 1933, as amended)the Interior;
. The use of the Colorado River Aqueduct owned by the Metropolitan Water
District of southern California, a quasi-governmental agency; and
. Compliance with all U.S. federal and state environmental laws and
regulations.
Even if a transfer of IID water were approved, other California water districts
and users could assert claims adverse to refinance existing indebtedness underthe IID water rights, including but not
limited to claims that the IID has failed to satisfy U.S. Filter's Senior Credit Facilityfederal law and
for general corporate purposes.California constitutional requirements that IID water must be put to reasonable
and beneficial use. A finding that the IID's water use is unreasonable or
nonbeneficial could adversely impact title to the IID water rights and the
ability to transfer IID water.
The proposed issuance of such securities is not
expected touncertainties associated with water rights could have a material impactadverse
effect on U.S. Filter's financial position or itsour future results of operations.profitability.
Impact of Recently Issued Accounting Standards. In June 1997, the Financial Accounting Standards BoardFASB issued a new
statement titled "Reporting Comprehensive Income.""Disclosures about Segments of an Enterprise and Related
Information". The new statement is effective for fiscal years beginning after
December 15, 1997. The Company is currently evaluating its options fordetermining required disclosure
under this new standard and will implementinclude the statement duringdisclosures in its fiscal year ending March 31, 1999.next annual
report.
In June 1997, The Financial Accounting Standards Board1998, FASB issued a new statement titled "Disclosures about Segments of an Enterprise"Accounting for Derivative
Instruments and Related
Information."Hedging Activities. The new statement is effective for fiscal
years beginning after DecemberJune 15, 1997.1999. The Company is currently evaluating its options for
disclosure underdoes not believe that the
adoption of this standard and will implement the statement duringhave a material impact on its fiscal year ending March 31, 1999.
19consolidated
financial position or results of operations.
21
PART II--OTHERII OTHER INFORMATION
ITEMItem 1. LEGAL PROCEEDINGS
N/A
ITEMItem 2. CHANGES IN SECURITIES
Privately Placed Securities
Effective December 31, 1997,On September 22, 1998, the Company issued 5,803,803to Hadwaco US, Inc.
69,333 shares (the "Shares") of its common stock, par value $.01
per share (the "Common Stock"),
to:share. The Bianco Family 1991 Trust, dated February 1, 1991; David J. Shimmon; BT
Capital Partners Inc.; Churchill ESOP Capital Partners; D&S Partners; Silicon
Valley Bancshares; L.H. Fine, Weinress, Franskson & Presson, Inc.; Gregory
Presson; in a tax-free merger pursuant to which the Company acquired all of
the outstanding capital stock of The Kinetics Group, Inc., a Delaware
Corporation. Such sharesShares were issued in a transaction exempt from
registration pursuant to Section 4(2) of the United States
Securities Act of 1933 as amended.
Pursuant to an agreement between the parties, such shares were
subsequently filed for registration for resale pursuant to a Registration
Statement on Form S-3 (Registration No. 333-45981).
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEMItem 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
N/A
ITEM(i) The following directors were elected to terms expiring in 2001:
Class I Directors: For Withheld
----------------- --- --------
J. Danforth Quayle 120,217,396 946,633
Arthur B. Laffer 120,309,466 844,802
Alfred E. Osborne, Jr. 120,310,343 841,859
Andrew D. Seidel 120,311,524 841,278
(ii) To approve the Company's Senior Executive Annual Incentive Plan:
For Against Abstain
----------- --------- ---------
116,240,360 3,530,872 1,260,061
(iii) To approve the Company's 1998 Stock Incentive Plan:
For Against Abstain
----------- --------- ---------
115,104,902 4,829,148 1,097,244
(iv) To approve an amendment to the Company's 1991 Director's Stock
Option Plan:
For Against Abstain
----------- --------- ---------
116,243,891 3,505,536 1,281,867
(v) Ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the Company:
For Against Abstain
----------- --------- ---------
120,193,998 361,306 587,098
Item 5. OTHER INFORMATION
On February 9, 1998, the Company announced it had entered into an Agreement
and Plan of Merger (the "Merger Agreement") dated as of February 9, 1998,
among the Company, Palm Water Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Merger Sub"), and Culligan Water
Technologies, Inc., a Delaware corporation. Pursuant to the Merger Agreement,
Merger Sub will be merged with and into Culligan (the "Merger"). In connection
with the Merger, the Company will issue in exchange for each issued and
outstanding share (other than treasury shares and shares owned by the Company)
of Culligan common stock, par value $.01 per share 1.714 shares of common
stock, par value $.01 per share of the Company pursuant to formula.
The Merger will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended. Consummation of the Merger is subject to
customary regulatory approvals and the approval of the stockholders of each of
the Company and Culligan. The Merger is expected to be consummated in the
first half of fiscal 1999.
ITEMN/A
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
ThereThe following exhibits are no exhibits filing herewith.
Reports on Form 8-Kfiled herewith or incorporated herein by reference:
3.02 Amended and Restated Bylaws of United States Filter Corporation (filed
herewith)
4.01 Third Amendment to Amended and Restated Multicurrency Credit Agreement
and First Omnibus Agreement dated as of November 10, 1998 by and among
the Company and various lenders with BankBoston, N.A. as Managing Agent
(filed herewith)
10.01 First Amended and Restated Employment Agreement between Richard J.
Heckmann and the Company (filed herewith)
10.02 Employment Agreement between Nicholas C. Memmo and the Company (filed
herewith)
10.03 Employment Agreement between Andrew D. Seidel and the Company (filed
herewith)
10.04 Employment Agreement between Harry K. Hornish, Jr. and the Company
(filed herewith)
10.05 Employment Agreement between Calvin R. Hendrix and the Company (filed
herewith)
10.06 Employment Agreement between Kenneth I. Wellings and the Company (filed
herewith)
10.07 Employment Agreement between Kevin L. Spence and the Company (filed
herewith)
10.08 Employment Agreement between Damian C. Georgino and the Company (filed
herewith)
10.09 Employment Agreement between Michael J. Reardon and the Company (filed
herewith)
27.0 Financial Data Schedule
The Company filed onethree Current ReportReports on FormForms 8-K and 8-K/A during the
quarter ended December 31, 1997,September 30, 1998, as follows:
(1) August 17, 1998, reporting certain financial information to reflect 30 days
of combined operations of the Company and Culligan Water Technologies, Inc.
(2) August 17, 1998, amendment to 8-K dated December 9, 1997,August 17, 1998, reporting certain
financial information to reflect 30 days of combined operations of the
consummationCompany and Culligan Water Technologies, Inc.
(3) September 18, 1998, amendment to 8-K dated June 15, 1998, restating certain
of the Company's tender offer to purchase allfinancial information as a result of the outstanding ordinary shares
(including American Depository Shares, each representing one ordinary share)Company's
acquisition of Memtec Limited.
20Culligan Water Technologies, Inc.
23
SIGNATURES
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.
UNITED STATES FILTER CORPORATION
By: /s/ Kevin L. Spence
By: _________________________________-------------------
Dated: November 13, 1998 Kevin L. Spence
Executive Vice President, Chief
Financial Officer (Principal
Financial Officer and Duly Authorized
Officer)
Dated: May 14, 1998
2124
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.02 Amended and Restated Bylaws of United States Filter Corporation
(filed herewith)
10.01 First Amended and Restated Employment Agreement between Richard J.
Heckmann and the Company (filed herewith)
10.02 Employment Agreement between Nicholas C. Memmo and the Company (filed
herewith)
10.03 Employment Agreement between Andrew D. Seidel and the Company (filed
herewith)
10.04 Employment Agreement between Harry K. Hornish, Jr. and the Company
(filed herewith)
10.05 Employment Agreement between Calvin R. Hendrix and the Company (filed
herewith)
10.06 Employment Agreement between Kenneth I. Wellings and the Company
(filed herewith)
10.07 Employment Agreement between Kevin L. Spence and the Company (filed
herewith)
10.08 Employment Agreement between Damian C. Georgino and the Company
(filed herewith)
10.09 Employment Agreement between Michael J. Reardon and the Company
(filed herewith)
10.10 Third Amendment to Amended and Restated Multicurrency Credit
Agreement and First Omnibus Agreement dated as of November 10,
1998 by and among the Company and various lenders with BankBoston,
N.A. as Managing Agent (filed herewith)
27.0 Financial Data Schedule
25