UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
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( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________________
Commission File Number: 0 - 26630
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CULLIGAN WATER TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0350629
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Culligan Parkway, Northbrook, IL 60062
- -------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(847) 205-6000
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(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 and (2) has been subject to such filing
requirements for the past 90 days.
X Yes _______ No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 25,154,597 shares of common
stock, par value $0.01 per share, as of November 28, 1997.
FORM 10-Q
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CONTENTS
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Page Number
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PART I - FINANCIAL INFORMATION
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Consolidated Condensed Balance Sheets at January 31, 1997
and October 31, 1997.......................................... 1
Consolidated Condensed Statements of Operations for the
three months ended October 31, 1996 and 1997.................. 3
Consolidated Condensed Statements of Operations for the
nine months ended October 31, 1996 and 1997................... 4
Consolidated Condensed Statements of Cash Flows for the
nine months ended October 31, 1996 and 1997................... 5
Notes to the Consolidated Condensed Financial Statements...... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
PART II - OTHER INFORMATION
-----------------
Item 6: Exhibits and Reports on Form 8-K...................... 16
Signature..................................................... 17
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
at January 31, 1997 and October 31, 1997
(in thousands)
January 31, October 31,
1997 1997
------------ -----------
(audited) (unaudited)
Assets
------
Current assets:
Cash and cash equivalents........................................................ $ 8,984 $ 8,992
Restricted cash.................................................................. -- 143,968
Accounts and notes receivable, net of allowance for doubtful accounts of $5,695
and $6,421 at January 31, 1997 and October 31, 1997, respectively.............. 80,843 113,904
Inventories...................................................................... 47,213 63,486
Deferred income taxes............................................................ 10,964 10,775
Prepaid and other current assets................................................. 4,650 6,499
------------ -----------
Total current assets.......................................................... 152,654 347,624
Property, plant and equipment, net of accumulated depreciation..................... 78,740 125,109
Intangible assets, less accumulated amortization of $117,671 and $141,748 at
January 31, 1997 and October 31, 1997, respectively................................ 76,883 272,480
Other noncurrent assets............................................................ 29,085 47,556
------------ -----------
Total assets.................................................................. $ 337,362 $ 792,769
============ ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
at January 31, 1997 and October 31, 1997
(in thousands)
January 31, October 31,
1997 1997
----------- -----------
(audited) (unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable......................................................................... $ 23,867 $ 36,658
Accrued expenses and other current liabilities........................................... 36,950 56,601
Short-term debt and current maturities of long-term debt................................. 12,414 11,126
-------- --------
Total current liabilities.............................................................. 73,231 104,385
-------- --------
Long-term liabilities:
Long-term debt........................................................................... 36,231 307,567
Noncurrent and deferred income taxes..................................................... 29,805 29,949
Other noncurrent liabilities............................................................. 24,455 27,935
-------- --------
Total long-term liabilities............................................................ 90,491 365,451
-------- --------
Minority interest.......................................................................... - 1,972
Stockholders' equity:
Common stock ($.01 par value; 60,000,000 shares authorized;
21,342,957 and 25,146,729 shares issued and outstanding at
January 31, 1997 and October 31, 1997, respectively)................................... 213 252
Additional paid-in capital............................................................... 235,894 366,370
Retained earning (deficit)............................................................... (61,780) (39,912)
Foreign currency translation adjustment.................................................. (687) (5,749)
-------- --------
Total stockholders' equity............................................................. 173,640 320,961
-------- --------
Total liabilities and stockholders' equity............................................. $337,362 $792,769
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Operations
for the three months ended October 31, 1996 and 1997
(in thousands, except share data)
Three Months Three Months
Ended Ended
October 31, October 31,
1996 1997
------------ --------------
(unaudited) (unaudited)
Net sales....................................................................................... $ 97,104 $ 140,086
Cost of goods sold.............................................................................. 54,494 83,084
----------- -----------
Gross profit.................................................................................. 42,610 57,002
Selling, general and administrative expenses.................................................... 29,274 39,288
Amortization of goodwill........................................................................ 166 1,241
Amortization of other intangibles............................................................... 385 412
Write-off of goodwill and in-process R & D...................................................... - 20,170
Merger and restructuring costs.................................................................. - 5,236
----------- -----------
Operating income.............................................................................. 12,785 (9,345)
Interest income................................................................................. 725 228
Interest expense................................................................................ (1,371) (2,575)
Other income (expense), net..................................................................... 896 (217)
----------- -----------
Income (loss) before income taxes and minority interest..................................... 13,035 (11,909)
Income taxes.................................................................................... 5,084 2,993
Minority interest............................................................................... - 258
----------- -----------
Net income (loss)........................................................................... $ 7,951 $ (15,160)
=========== ===========
Primary income per share (Note 2):
Net income (loss) per share................................................................. $ 0.37 $ (0.61)
=========== ===========
Weighted average common and common equivalent shares outstanding............................ 21,310,262 24,979,446
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Operations
for the nine months ended October 31, 1996 and 1997
(in thousands, except share data)
Nine Months Nine Months
Ended Ended
October 31, October 31,
1996 1997
----------- -----------
(unaudited) (unaudited)
Net sales....................................................................................... $ 272,416 $ 354,254
Cost of goods sold.............................................................................. 151,696 202,441
---------- -----------
Gross profit............................................................................... 120,720 151,813
Selling, general and administrative expenses.................................................... 83,324 102,345
Amortization of goodwill........................................................................ 299 1,962
Amortization of other intangible assets......................................................... 16,597 1,236
Write-off of goodwill and in-process R & D...................................................... -- 20,170
Merger and restructuring costs.................................................................. -- 5,236
---------- -----------
Operating income.............................................................................. 20,500 20,864
Interest income................................................................................. 1,818 865
Interest expense................................................................................ (4,047) (5,277)
Gain on disposition of investment in affiliate.................................................. -- 31,098
Other income, net............................................................................... 3,865 1,533
---------- -----------
Income before income taxes, minority interest and extraordinary item.......................... 22,107 49,083
Income taxes.................................................................................... 14,743 27,092
Minority interest............................................................................... -- 665
---------- -----------
Income before extraordinary item........................................................... 7,364 21,326
Extraordinary item for write-off of capitalized refinancing costs (net of
applicable income tax benefit of $272)..................................................... -- (422)
---------- -----------
Net Income.................................................................................. $ 7,364 $ 20,904
========== ===========
Primary income per share (Note 2):
Income before extraordinary item............................................................ $ 0.35 $ 0.91
Extraordinary item.......................................................................... -- (0.02)
---------- -----------
Net income per share........................................................................ $ 0.35 $ 0.89
========== ===========
Weighted average common and common equivalent shares outstanding............................ 21,163,346 23,376,535
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Statement of Cash Flows
for the nine months ended October 31, 1996 and 1997
(in thousands, except share data)
Nine Months Nine Months
Ended Ended
October 31, October 31,
1996 1997
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income.................................................................................... $ 7,364 $ 20,904
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Write-off of goodwill and in-process R&D.................................................... -- 20,170
Amortization................................................................................ 16,896 3,198
Depreciation................................................................................ 7,405 10,620
Gain on sales of assets..................................................................... (103) (337)
Gain on disposition of investment in affiliate.............................................. -- (31,098)
Gain on insurance settlement................................................................ (1,980) --
Deferred income taxes....................................................................... (796) 70
Changes in assets and liabilities:
Receivables, net.......................................................................... (12,467) (11,540)
Inventories............................................................................... (6,668) (7,371)
Other current assets...................................................................... (579) (535)
Accounts payable and accrued expenses..................................................... 1,439 (6,005)
Other, net.................................................................................. (3,907) (4,950)
-------- ---------
Net cash provided by (used in) operating activities....................................... 6,604 (6,874)
-------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment........................................ 5,760 3,795
Proceeds from insurance settlement.......................................................... 4,500 --
Proceeds from disposition of investment in affiliate........................................ -- 50,897
Purchases of property, plant and equipment.................................................. (11,231) (26,782)
Payments for acquisitions................................................................... (13,961) (134,282)
Payments for investments in joint ventures.................................................. -- (3,217)
Restricted cash held in escrow for Protean acquisition...................................... -- (143,968)
-------- ---------
Net cash used in investing activities..................................................... (14,932) (253,557)
-------- ---------
Cash flows from financing activities:
Proceeds from stock offering................................................................ 27,063 --
Proceeds from exercise of stock options..................................................... 5,769 675
Borrowings of long-term debt................................................................ -- 265,457
Repayments of long-term debt................................................................ (26,195) (2,384)
Net short-term borrowings (repayments)...................................................... 4,803 (2,635)
-------- ---------
Net cash provided by financing activities............................................... 11,440 261,113
-------- ---------
Effect of foreign exchange rate changes on cash................................................. (256) (674)
-------- ---------
Net increase in cash and cash equivalents....................................................... 2,856 8
Cash and cash equivalents at beginning of year.................................................. 3,877 8,984
-------- ---------
Cash and cash equivalents at end of period...................................................... $ 6,733 $ 8,992
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................................... $ 4,248 $ 5,983
Income taxes................................................................................ $ 12,438 $ 31,279
======== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial statements
for the quarter ended October 31, 1997
(in thousands, except share data)
1. GENERAL
Culligan Water Technologies, Inc. and subsidiaries (Culligan or the
Company) are engaged in the manufacture and sale of water purification and
treatment products and services. A substantial part of the Company's sales
are made to franchised dealers and licensees.
In the opinion of management, the unaudited interim consolidated financial
information of the Company contains all adjustments, consisting only of
those of a recurring nature, necessary to present fairly the Company's
financial position and results of operations. All significant intercompany
accounts, transactions and profits have been eliminated. These financial
statements are for interim periods and do not include all information
normally provided in annual financial statements and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended January 31, 1997 filed with the Securities and Exchange Commission.
The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the full year.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding. Common stock equivalents, consisting
of options, are included in the computation of income per share when their
effect is dilutive. The effect of these options are not included in the
computation of income per share for the three months ended October 31, 1997
as they were antidilutive during such period.
3. INVENTORIES
Inventories consisted of the following:
January 31, October 31,
1997 1997
--------------- ---------------
(audited) (unaudited)
Raw materials............................ $ 19,137 $ 23,998
Work in process.......................... 7,788 9,744
Finished goods........................... 20,288 29,744
-------- --------
$ 47,213 $ 63,486
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
January 31, October 31,
1997 1997
--------------- ---------------
(audited) (unaudited)
Land and land improvements............... $ 21,113 $ 21,408
Buildings................................ 28,289 39,312
Machinery and equipment.................. 51,132 103,158
-------- --------
100,534 163,878
Less accumulated depreciation............ (21,794) (38,769)
-------- --------
$ 78,740 $125,109
======== ========
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended October 31, 1997
(in thousands, except share data)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
January 31, October 31,
1997 1997
----------- -----------
(audited) (unaudited)
Tradenames.................................................................. $ 44,160 $ 43,250
Goodwill.................................................................... 26,424 219,031
Other intangible assets..................................................... 6,299 10,199
-------- --------
$ 76,883 $272,480
======== ========
Amortization of intangible assets consists of the following:
Three Months Ended Nine months ended
Expected October 31, October 31,
Useful ------------------------ ------------------------
Life 1996 1997 1996 1997
---- ---- ---- ---- ----
(years) (unaudited) (unaudited) (unaudited) (unaudited)
"Fresh start" amortization
Amortization of tradenames and other
"Fresh start" intangibles................ 40 $ 325 $ 325 $ 975 $ 975
Amortization of reorganization value in
excess of identifiable assets............ 3 -- -- 15,551 --
---------- ---------- ---------- ----------
325 325 16,526 975
Amortization of goodwill........................ 10 to 40 166 1,241 299 1,962
Amortization of other intangibles............... 3 to 40 60 87 71 261
---------- ---------- ---------- ----------
$ 551 $ 1,653 $ 16,896 $ 3,198
========== ========== ========== ==========
"Fresh start" amortization consists primarily of amortization of reorganization
value in excess of identifiable assets and represents the expense arising from
the adoption of "fresh start" accounting in accordance with SOP 90-7. Such
amortization of reorganization value in excess of identifiable assets was
recorded over a period of three years and ceased on June 30, 1996.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
January 31, October 31,
1997 1997
----------- -----------
(audited) (unaudited)
Accrued compensation and vacation.......... $ 12,963 $ 14,853
Accrued (prepaid) income taxes............. 1,536 (1,059)
Deferred income............................ 3,502 5,258
Other...................................... 18,949 37,549
----------- -----------
$ 36,950 $ 56,601
=========== ===========
7
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial statements
for the quarter ended October 31, 1997
(in thousands, except share data)
7. OTHER INCOME (EXPENSE), NET
Results for the three month and nine month periods ended October 31, 1996,
include a gain on an insurance settlement of $100 and $1,980, respectively,
associated with a fire which substantially destroyed the Company's facility
in Belgium in July 1993.
8. DERIVATIVE FINANCIAL INSTRUMENTS--ACCOUNTING POLICY
The Company uses derivative financial instruments selectively to offset
exposure to market risks arising from changes in foreign exchange rates.
Derivative financial instruments currently utilized by the Company include
foreign currency forward contracts. Hedges are executed to minimize
transaction costs on currency conversions and minimize losses due to adverse
changes in foreign currency markets. External derivative financial
instruments correlate with the Company's net exposure in specific
transactions in all material respects.
Gains or losses related to hedges of firm commitments are deferred and
included in the basis of the transaction when it is completed. Gains and
losses on unhedged foreign currency transactions are included in income as
part of other income (loss), net. If a hedged item matures, or is sold,
extinguished, terminated, or, if related to an anticipated transaction, is
no longer likely to take place, the derivative financial instrument is
closed out and the related gain or loss is included in income as part of
other income (loss), net.
9. FINANCING ARRANGEMENTS
On April 30, 1997, the Company signed a new credit facility to replace its
existing $150 million reducing revolving credit facility (the "New Credit
Facility"). The Company borrowed $37.8 million under the new facility to
repay outstanding indebtedness under previous financing arrangements in May
1997. The New Credit Facility is a $300 million multi-currency revolving
credit facility consisting of a $200 million, five-year multi-currency
revolving credit facility and a $100 million, 364-day multi-currency
revolving credit facility, which at the option of the Company may be
converted into a four year amortizing term loan. The New Credit Facility
provides for unsecured multi-currency borrowings and the issuance of letters
of credit. The New Credit Facility is guaranteed by the Company's principal
domestic subsidiaries. Loans under the New Credit Facility bear interest, at
the election of the Company, at either a base rate based on (i) the higher
of the prime rate or .5% per annum above the Federal Funds Rate or (ii) a
Eurodollar rate, together with an applicable margin tied to the Company's
financial leverage. The New Credit Facility contains certain customary
representations and warranties and certain financial and other covenants,
including restrictions on incurring other indebtedness, the creation of
liens, sales of assets, the making of investments and the payment of
dividends and repurchases of common stock, as well as certain customary
events of default.
In connection with the signing of the New Credit Facility, the Company was
required to write-off certain capitalized costs associated with the previous
credit facility. The write-off of $694, net of an applicable tax benefit of
$272, is reflected as an extraordinary item on the accompanying consolidated
condensed statement of operations.
On October 21, 1997, the Company established a $100 million line of credit
pursuant to a letter agreement (the "Letter Agreement") with The First
National Bank of Chicago, maturing on April 21, 1998. Borrowings under the
Letter Agreement are guaranteed by the Company's principal domestic
subsidiaries and bear interest, at the election of the Company, at either a
base rate based on (i) the prime rate or (ii) a fixed rate equal to the sum
of .65% per annum plus an applicable Eurodollar rate. The Letter Agreement
incorporates by reference various representations, warranties, certain
financial and other covenants, and events of default set forth in the New
Credit Facility. The Company intends to use the Letter Agreement to finance
future acquisitions and for general corporate purposes.
8
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended October 31, 1997
(in thousands, except share data)
10. ACQUISITIONS AND DIVESTITURES
On March 15, 1997, the Company disposed of its investment in Anvil Holdings,
Inc. for total cash proceeds of $50,897. The transaction, which included
payment of outstanding accrued interest receivable and dividends resulted in
a pre-tax gain of approximately $31,098.
In connection with a $155 million acquisition of the water filtration
business of Ametek, Inc. (the "Water Filtration Business"), a wholly owned
subsidiary of the Company was merged into Ametek, Inc. on August 1, 1997,
immediately following the spin-off of Ametek's non-water filtration
operations. As a result of the merger, which was accounted for as a
purchase, each share of Ametek common stock was converted into the right to
receive .105 shares of common stock of the Company (or an aggregate of
3,473,298 shares of the Company's common stock resulting in additional paid-
in capital of $129.6 million) and cash in lieu of fractional shares. A final
determination of the allocation of purchase price including the valuation
of patents, trademarks and tradenames, required purchase accounting
adjustments related to the finalization of adjusted net worth, certain final
balance sheet purchase price adjustments under the acquisition agreement,
and final adjustments to in-process research and development have not been
made. The Company does not believe that the operating results or financial
condition of the Company will be materially impacted based upon the
finalization of the valuation of patents, trademarks and tradenames,
required purchase accounting adjustments related to the finalization of
adjusted net worth, and certain final balance sheet purchase price
adjustments under the acquisition agreement. The Company is in the process
of obtaining further external information to verify its purchase price
allocation with respect to the acquired in-process research and development.
This stems from obtaining additional information concerning an assessment of
various research & development projects that were in-process at the date of
acquisition and obtaining additional internal and external information to
identify and quantify purchased in-process research and development. The
allocation of purchase price varied from that presented in the Company's
June 30, 1997 S-4 Registration statement and the Company's consolidated
results of operations and financial position based upon the finalization of
such information which requires external verification or validation of the
following:
a. Information regarding forecasted revenues and expected cashflows from
internal and external marketing inquiries of Ametek's Series 2000
product line.
b. Verification of anticipated material and product cost structures from
outside suppliers based upon various formulation scenarios for the
extruded carbon block technology.
c. Obtaining comparative applicable industry data concerning the cost of
capital, debt structure and relative beta used to discount the cash
flows of the current projects and in-process research and development
projects.
The Water Filtration Business had revenues of $68.6 million and net income
of $8.2 million for the year ended December 31, 1996 based on revenues and
expenses either directly attributable to the Water Filtration Business or
allocated to the Water Filtration Business using methods considered
reasonable by Ametek's management.
As a result of the acquisition of Ametek's Water Filtration Business on
August 1, 1997 and the subsequent decision made by the Company in the
quarter to exit the market for the sale of consumer products in the
department store and mass merchant channels, the Company recorded a merger
and restructuring charge of $5.2 million during the three and nine month
periods ended October 31, 1997. The merger and restructuring charge reflects
the costs of integrating and streamlining manufacturing, sales,
distribution, research and development, and administrative functions
completed during the third quarter in the Company's point-of-use business.
Included in the $5.2 million merger and restructuring charge are $0.7
million for severance costs related to the elimination of redundant
employees, $1.3 million related to the write-down of receivables aggregating
$3.1 million in the Consumer Products Division, $2.5 million related to the
write-down of excess property, equipment and other assets, and $0.7 million
representing legal and other professional fees. The property, equipment and
other assets consist principally of fixed assets used in the manufacture of
molded carbon block, of which approximately $0.5 million was acquired in the
acquisition of UltraPure in January 1996 and the balance of which relates to
property and equipment of the Company's Everpure and Consumer Products
businesses. The value of these fixed assets is considered to be impaired as
a result of improved extruded carbon block technology acquired in the
acquisition of Ametek's Water Filtration Business in August 1997. These
assets are not expected to generate any significant future cash flows and
have therefore been written-down to estimated salvage value, which is not
material. The write-down of these assets is not expected to have a material
effect on future operations. In addition to the $5.2 million merger and
restructuring charge, the Company recorded a charge of $4.2 million to cost
of goods sold to write down excess inventory and to establish reserves for
excess purchase commitments that resulted from the Company's restructuring
plan. Total future cash requirements relating to the merger and
restructuring are approximately $1.2 million.
In addition, the Company wrote-off $17.0 million of in-process research and
development purchased in the acquisition of the Ametek's Water Filtration
Business and $3.2 million of goodwill pertaining to the Company's UltraPure
operations as a result of improved technology acquired in the acquisition of
the Ametek's Water Filtration Business. Because the UltraPure technology was
abandoned in favor of technology acquired in the acquisition of the Water
Filtration Business, the Company does not expect significant future cash
flows from the UltraPure operations. As a result, the goodwill associated
with the UltraPure acquisition was written off.
Summarized below are the unaudited pro forma results of operations of the
Company as though the water filtration business of Ametek, Inc. had been
acquired at the beginning of the Company's nine month periods ended October
31, 1997 and 1996:
9
CULLIGAN WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the quarter ended October 31, 1997
(in thousands, except share data)
Nine Months Nine Months
Ended Ended
October 31, October 31,
1996 1997
----------- -----------
(unaudited) (unaudited)
Net sales............................................................. $ 326,671 $ 392,635
========== ===========
Net Income............................................................ $ 10,090 $ 22,773
========== ===========
Net income per share.................................................. $ 0.41 $ 0.89
========== ===========
On September 30, 1997, the Company acquired all of the outstanding capital
stock of The R&S McCoy Corporation, Florida Bottled Water Company, McCoy
Transport, Inc., H2O Ventures, Inc. and Gold Coast Water Technologies, Inc.
(collectively, referred to as "McCoy"), in a $16.9 million transaction
accounted for by the pooling-of-interests method. The net assets of McCoy
amounted to approximately $2 million as of July 31, 1997. The effect of the
pooling is not material to the Company's operations and, accordingly, prior
years' financial statements have not been restated. In connection with the
acquisition, the Company issued and delivered an aggregate of 350,980
shares of common stock to the selling stockholders of McCoy.
During the nine month period ended October 31, 1997, the Company completed
several other acquisitions of businesses which compliment existing products
and operations of the Company for approximately $134.3 million in cash and
$11.2 million of debt, respectively. Except for the McCoy acquisition
discussed above, all acquisitions have been accounted for as purchases. The
purchase price in excess of net assets acquired has been recorded as
goodwill.
11. SUBSEQUENT EVENT
On October 22, 1997, the Company announced that it had reached an agreement
with Protean plc, a UK corporation, on the terms of a recommended cash
offer to acquire all of Protean's outstanding shares at a price of 240
pence in cash for each Protean share. The offer, which was made by Lazard
Brothers on behalf of a newly-formed wholly owned UK subsidiary of the
Company, valued the whole of the issued share capital of Protean at
approximately $171 million and was recommended to shareholders by the
Protean Board of Directors. In connection with the offer, the Company was
required to place enough cash in escrow to acquire Protean's outstanding
shares. As of October 31, 1997, the amount of restricted cash held in
escrow was approximately $144 million. On December 2, 1997, the Company
declared its offer to be unconditional in all respects. As a result, the
Company has successfully completed its offer to acquire Protean and now
owns or has received valid acceptances for an aggregate of over 97.9% of
Protean's outstanding shares. The acquisition will be accounted for as a
purchase, and accordingly, the excess purchase price over the identifiable
fair value of the net assets acquired will be recorded as goodwill.
Protean manufactures, distributes and services water purification equipment
and analytical and thermal equipment. The companies in the water
purification division of the Protean Group supply equipment which is
designed to purify tap water to the levels needed by scientific, medical
and industrial customers. The companies in the analytical and thermal
equipment division supply electric furnaces and ovens, specialized
thermally controlled equipment (including equipment for freeze-drying and
thermal conditioning), instruments and consumables for use in
chromatography, glass and plastic single-use containers and bench-top
analytical equipment.
Protean had total revenues of (Pounds) 81.1 million (US$132.5 million) in
the year ended March 31, 1997, of which (Pounds) 38.7 million (US$63.4
million) related to its water purification equipment operations and
(Pounds) 42.4 million (US$69.1 million) related to its analytical and
thermal equipment operations.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARATIVE SUMMARY OF OPERATING RESULTS
The following discussion and analysis of results of operations compare (i) the
Company's results of operations for the three months ended October 31, 1997 with
the Company's results of operations for the three months ended October 31, 1996,
and (ii) the Company's results of operations for the nine months ended October
31, 1997 with the results of operations for the nine months ended October 31,
1996.
As an aid to understanding the Company's operations on a comparative basis, the
following table has been prepared to set forth certain statement of operations
and other data for the three and nine months ended October 31, 1996 and October
31, 1997.
(dollars in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1996 1997 1996 1997
----------------- ------------------ ----------------- -----------------
Dollars % Dollars % Dollars % Dollars %
-------- ------ -------- ------ -------- ------ -------- ------
Net sales $ 97,104 100.0% $140,086 100.0% $272,416 100.0% $354,254 100.0%
Gross profit 42,610 43.9% 57,002 40.7% 120,720 44.3% 151,813 42.9%
Selling, general and administrative expenses 29,274 30.1% 39,288 28.0% 83,324 30.6% 102,345 28.9%
Amortization of intangible assets 551 1,653 16,896 3,198
Write-off of goodwill and in-process R&D -- 20,170 -- 20,170
Merger and restructuring costs -- 5,236 -- 5,236
-------- -------- -------- --------
Operating income 12,785 (9,345) 20,500 20,864
Gain on disposition of investment in affiliate -- -- -- 31,098
Other income (expense), net (a) 896 (217) 3,865 1,533
-------- -------- -------- --------
Income before interest, taxes, minority
interest and extraordinary item (b) $ 13,681 $ (9,562) $ 24,365 $ 53,495
======== ======== ======== ========
Adjusted income before interest, taxes,
minority interest and extraordinary item (b) $ 13,581 14.0% $ 15,844 11.3% $ 37,936 13.9% $ 47,803 13.5%
======== ======== ======== ========
(a) Other income, net for the three month and nine month periods ended October
31, 1996 includes a gain of $100 and $1,980, respectively, on an insurance
settlement associated with a fire at the Company's Belgian facility in July
1993.
(b) Adjusted income before interest and taxes is calculated as follows:
(dollars in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1996 1997 1996 1997
-------- -------- -------- --------
Income before interest and taxes......................... $ 13,681 $ (9,562) $ 24,365 $ 53,495
Amortization of reorganization value in excess of
identifiable assets.................................... -- -- 15,551 --
Write-off of goodwill and in-process R&D................. 20,170 20,170
Merger and restructuring costs........................... -- 5,236 -- 5,236
Gain on insurance settlement............................. (100) -- (1,980) --
Gain on disposition of investment in affiliate........... -- -- -- (31,098)
-------- -------- -------- --------
Adjusted income before interest, taxes, minority interest
and extraordinary item................................ $ 13,581 $ 15,844 $ 37,936 $ 47,803
======== ======== ======== ========
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Month and Nine Month Periods Ended October 31, 1997 Compared to the
Three Month and Nine Month Periods Ended October 31, 1996
Net Sales. Net sales increased $43.0 million, or 44.3%, from $97.1 million for
the three months ended October 31, 1996 to $140.1 million for the three months
ended October 31, 1997 and increased $81.8 million, or 30.0%, from $272.4
million for the nine months ended October 31, 1996 to $354.3 million for the
nine months ended October 31, 1997. Of the increase in revenues for the nine
month period ended October 31, 1997, $55.9 million or 20.5% was attributable to
acquisitions, and $25.9 million or 9.5% was attributable to internal core
growth. Changes in currency exchange rates had an unfavorable effect of $8.8
million or 10.8% in the period-to-period comparison.
In the first nine months of the current fiscal year, household product sales
increased $54.7 million, or 37.3%, due primarily to: increased sales at Company-
owned dealerships in the U.S. and Europe; the acquisition of the water
filtration business of Ametek, Inc. consisting of the Plymouth Products division
of Ametek and three foreign subsidiaries (the "Water Filtration Business") on
August 1, 1997, a manufacturer and supplier of point-of-use water filtration and
treatment products; the acquisition of a bottled water company in Argentina; and
the continued growth of drinking and bottled water products in the U.S. These
increases were offset by the negative impact of a price repositioning in the
consumer faucet-mount product lines and a reduction in sales caused by foreign
exchange fluctuations.
Commercial and industrial product sales increased $27.2 million, or 21.6%,
primarily due to: increased market penetration of commercial products in the
U.S.; revenues associated with an industrial project in the U.S.; and
acquisitions of international commercial / industrial operations during the
second half of fiscal 1997 and the beginning of fiscal 1998.
Gross Profit. Gross profit increased to $57.0 million for the three month period
from $42.6 million in the prior year, an increase of $14.4 million, or 33.8%,
and increased to $151.8 million for the nine months ended October 31, 1997 from
$120.7 million in the prior year, an increase of $31.1 million, or 25.8%. Gross
profit margins decreased to 40.7% and 42.9% for the three month and nine month
periods respectively, from 43.9% and 44.3% in the prior year comparable periods.
This decrease primarily resulted from a shift in product mix due to the large
industrial project in the U.S., repositioning of consumer faucet-mount product
lines and the overall impact of acquisitions of international commercial /
industrial operations completed during the second half of fiscal 1997 and the
beginning of fiscal 1998.
Selling, General and Administrative ("SG&A"). As a percentage of sales, SG&A was
28.0% for the quarter and 28.9% for the nine month period ended October 31,
1997, decreasing as a percentage of sales, by 0.6% and 0.5%, respectively, from
the prior year comparable periods. This decrease as a percentage of sales was
the result of the impact of increased industrial sales which generally carry
lower SG&A costs as a percentage of sales, the continued cost containment
initiatives and the impact of acquired businesses which have, after integration,
an SG&A level as a percentage of sales below the Company's historical levels.
Amortization of Intangible Assets. Amortization of intangible assets for the
three month period ended October 31, 1997 increased slightly over the prior year
period due to additional intangibles recorded in connection with the Company's
acquisitions. Amortization of intangible assets for the nine month period ended
October 31, 1996 included $15.6 million related to amortization of the
reorganization value in excess of identifiable assets of the Company's former
parent, which became fully amortized in June 1996. Consequently, there was no
such amortization in fiscal 1998.
Write-off of Goodwill and In-process R&D. During the three and nine month
periods ended October 31, 1997, the Company wrote off $17.0 million of in-
process R&D purchased in connection with the acquisition of the Water Filtration
Business of Ametek. As of the purchase date, the Water Filtration Business was
engaged in ongoing research and development relating to carbon block extrusion
technology which was less labor intensive than competing technologies and a new
water filtration product line that is expected to improve the purity of water
and flow rates. The projects are proceeding according to schedule and it is
estimated that technological and commercial feasibility will be achieved in 6 to
12 months for both of these projects and that its development will not require
cash expenditures that are material to the financial position of the Company.
The principal risks associated with successfully completing such in-process R&D
is that other competitors may bring a technologically superior product to
market. The market growth potential of acquired in-process R&D is subject to
certain risks, including costs to develop and commercialize such products, the
cost and feasibility of production of products utilizing the applicable
technologies, introduction of competing technologies, and market acceptance of
the products and technologies involved. The Company does not believe that the
failure to complete such R&D projects would have a material adverse effect on
Culligan's results of financial position. This technology is expected to provide
an improvement of approximately 100% in operating margins for these particular
products as compared to overall historic operating margins of the water
filtration business primarily due to anticipated cost reductions. As of the
purchase date, Water Filtration Business was selling mold process based water
filtration products. These products rely on developed technology and do not rely
on the results of the on-going in-process R&D. Revenue derived from Water
Filtration Business's current products are expected to remain constant once the
anticipated in-process products are introduced. Most of the future growth is
expected to come from the new products. The existing technology of the Water
Filtration Business acquired was included in goodwill and is being amortized
over 40 years.
Culligan also wrote off the remaining goodwill of $3.2 million arising from the
acquisition of UltraPure in January 1996, related to more costly carbon block
production technology used prior to the acquisition of the Water Filtration
Business. UltraPure was engaged in the business of development, design,
production, and sale of molded carbon block and molded filtration devices for
the liquid filtration business. The effect on future operations related to this
write down is not expected to be material.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the acquisition of Ametek's Water Filtration Business on August
1, 1997 and the subsequent decision made by the Company in the quarter to exit
the market for the sale of consumer products in the department store and mass
merchant channels, the Company recorded a merger and restructuring charge of
$5.2 million during the three month and nine month periods ended October 31,
1997. The merger and restructuring charge reflects the costs of integrating and
streamlining manufacturing, sales, distribution, research and development, and
administrative functions completed during the third quarter in the Company's
point-of-use business. Included in the $5.2 million merger and restructuring
charge are $0.7 million for severance costs related to the elimination of
redundant employees, $1.3 million related to the write-down of receivables
aggregating $3.1 million in the Consumer Products Division, $2.5 million related
to the write-down of excess property, equipment and other assets, and $0.7
million representing legal and other professional fees. The property, equipment
and other assets consist principally of fixed assets used in the manufacture of
molded carbon block, of which approximately $0.5 million was acquired in the
acquisition of UltraPure in January 1996 and the balance of which relates to
property and equipment of the Company's Everpure and Consumer Products
businesses. The value of these fixed assets is considered to be impaired as a
result of improved extruded carbon block technology acquired in the acquisition
of Ametek's Water Filtration Business in August 1997. These assets are not
expected to generate any significant future cash flows and have therefore been
written-down to estimated salvage value, which is not material. The write-down
of these assets is not expected to have a material effect on future operations.
In addition to the $5.2 million merger and restructuring charge, the Company
recorded a charge of $4.2 million to cost of goods sold to write down excess
inventory and to establish reserves for excess purchase commitments that
resulted from the Company's restructuring plan. Total future cash requirements
relating to the merger and restructuring are approximately $1.2 million.
Other Income, Net. The decrease in other income, net for the three month and
nine month periods ended October 31, 1997 from the prior year comparable periods
was largely due to the inclusion in the prior year, of a gain on an insurance
settlement related to a fire at the Company's Belgian facility in October 1993,
partially offset, in the current year, by a gain on the disposition of a non-
strategic company-owned dealership.
Adjusted Income Before Interest and Taxes. Adjusted income before interest and
taxes increased $2.2 million, or 16.2%, from $13.6 million for the three month
period ended October 31, 1996, to $15.8 million for the three month period ended
October 31, 1997. For the nine month period ended October 31, 1997, adjusted
income before interest and taxes increased $9.9 million, or 26.1%, to $47.8
million from $37.9 million for the prior year's comparable period due to the
reasons described above.
Interest Income (Expenses), Net. Interest expense, net of interest income,
increased to $4.4 million during the first nine months of fiscal 1998 and $2.3
million in the third quarter of fiscal 1998 from $2.3 million and $0.6 million,
respectively, in the prior year's comparable periods. Increased borrowings to
fund additional acquisitions were only partially offset by the paydown of debt
with proceeds from the Company's disposition of its equity investment in an
affiliate and the more favorable interest rates resulting from its new credit
facilities.
Income Taxes. The effective tax rate differs from the statutory rate primarily
because of the nondeductibility of the amortization of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash requirements consist principally of working capital
requirements, scheduled payments of principal and interest on its outstanding
indebtedness, capital expenditures and acquisitions. The Company believes that
cash flow from operating activities and periodic borrowings will be adequate to
meet the Company's operating cash requirements in the future.
In the nine months ended October 31, 1997 cash used in operating activities was
$6.9 million, an increase of $13.5 million from the prior year's comparable
period. Improved operating results and reduced interest expense were offset by
increases in working capital which were required to fund the higher sales volume
and new growth initiatives.
Cash utilized for capital expenditures during the nine months ended October 31,
1997 was $26.8 million. During the first nine months of fiscal 1998, capital
expenditures have increased over historical levels due to expenditures
associated with a new build, own and operate water treatment facility in the
Caribbean and the expansion of manufacturing operations to support new growth
initiatives of the Company. Capital expenditures are expected to continue to be
made, as required, for the purpose of maintaining and improving operating
facilities and equipment to increase manufacturing efficiencies and enhance the
Company's competitiveness and profitability on a worldwide basis.
On April 30, 1997 the Company signed a new credit facility to replace a $150
million reducing revolving credit facility.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The new credit facility is a $300 million multi-currency revolving credit
facility consisting of a $200 million, five-year multi-currency revolving credit
facility and a $100 million, 364-day multi-currency revolving credit facility,
which at the option of the Company may be converted into a four year amortizing
term loan (collectively the "New Credit Facility"). The New Credit Facility
provides for unsecured multi-currency borrowings and for the issuance of letters
of credit. The New Credit Facility is guaranteed by the Company's principal
domestic subsidiaries. Loans under the New Credit Facility bear interest, at the
election of the Company, at either a base rate based on (i) the higher of the
prime rate or .5% per annum above the Federal Funds rate or (ii) a Eurodollar
rate, together with an applicable margin tied to the Company's financial
leverage. The New Credit Facility contains certain customary representations and
warranties and certain financial and other covenants, including the restrictions
on the incurring of indebtedness, the creation of liens, sales of assets, the
making of investments and the payment of dividends and repurchases of common
stock, as well as certain customary events of default. As of October 31, 1997,
the Company had available credit under its New Credit Facility of $11 million.
The New Credit Facility is available, among other things, to finance the working
capital needs of the Company, fund standby letters of credit to support
international debt and finance acquisitions.
On October 21, 1997, the Company established a $100 million line of credit
pursuant to a letter agreement (the "Letter Agreement") with The First National
Bank of Chicago, maturing on April 21, 1998. Borrowings under the Letter
Agreement are guaranteed by the Company's principal domestic subsidiaries and
bear interest, at the election of the Company, at either a base rate based on
(i) the prime rate or (ii) a fixed rate equal to the sum of .65% per annum plus
an applicable Eurodollar rate. The Letter Agreement incorporates by reference
various representations, warranties, certain financial and other covenants, and
events of default set forth in the New Credit Facility. As of October 31, 1997,
the Company had available credit under the Letter Agreement of $90 million. The
Company intends to use the Letter Agreement to finance future acquisitions, and
for general corporate purposes.
During the nine months ended October 31, 1997, the Company completed a number of
acquisitions of businesses which complement existing products and operations of
the Company for an aggregate cash purchase price of approximately $278 million
including the assumption of debt. The Company intends to continue to make
acquisitions as part of its business strategy and presently expects to finance
these activities either by internally generated funds, bank borrowings, public
offerings or private placements of equity or debt securities, or a combination
of the foregoing. No assurance can be given, however, with respect to the
financial or business effect of any possible future acquisitions.
The Company's principal non-U.S. operations are located in Western Europe, the
economies of which are not considered to be highly inflationary. The Company's
subsidiaries in Spain, Italy, France and Belgium are subject to currency
fluctuations because these subsidiaries have monetary assets and liabilities
denominated in other than their respective local currencies. It is the Company's
policy not to speculate in non-U.S. currencies, but rather to hedge against
currency changes by using bank borrowings by its non-U.S. subsidiaries to reduce
the extent to which its monetary assets are at risk. From time to time, the
Company has entered into forward exchange contracts in order to hedge its
exposure on certain intercompany transactions. At October 31, 1997, the Company
had four forward exchange contracts. The contracts which expire in July 1998
total $3.7 million. Net assets of the Company's non-U.S. subsidiaries translated
at October 31, 1997 exchange rates were approximately $42.8 million at October
31, 1997, an increase of approximately 0.7% from January 31, 1997.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128").
Implementation of Statement 128 is required for periods ending after December
15, 1997. Statement 128 establishes new methods for computing and presenting
earnings per share ("EPS") and replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. The new methods under this standard are
not expected to have a significant impact on the Company's EPS amounts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
130, "Reporting Comprehensive Income" ("Statement 130"). Implementation of
Statement 130 is required for periods beginning after December 15, 1997.
Statement 130 establishes standards to report and display comprehensive income
and its components in a full set of general purpose financial statements. The
standard requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with the other financial
statements. The Company is currently evaluating its options for disclosure under
this standard and will adopt the Statement in its financial statements for the
fiscal year ending January 31, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Implementation of
Statement 131 is required for periods beginning after December 15, 1997.
Statement 131 establishes standards for the way companies are to report
information about operating segments in annual financial statements and requires
those companies to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company is currently evaluating its options for disclosure under
this standard and will adopt the Statement in its financial statements for the
fiscal year ending January 31, 1999.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
------------------
On August 29, 1997 a purported class action was filed against
Culligan International Company, certain unidentified distributors and
certain other unidentified individual defendants in the Superior
Court, County of Los Angeles, State of California. The Complaint in
the action alleges that the defendants violated provisions of
California law relating to home solicitations by failing to include
language and notices relating to rights of rescission and engaging in
unfair, unlawful and deceptive business acts and practices. The
Complaint in such action seeks disgorgement of alleged illicit
profits, injunctive relief, punitive damages and treble damages and
alleges that the amount the class is entitled to exceeds $20 million.
The Company intends to vigorously contest the matter and does not
believe that it will have a material adverse effect on its financial
condition or results of operations.
Item. 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed four Current Reports on Form 8-K during the quarter
ended October 31, 1997, as follows:
Date of Report Item Reported
--------------- -------------
August 13, 1997 Item 2. Acquisition or Disposition of Assets
(incorporating by reference certain financial
statements of businesses acquired and pro forma
financial information from the Joint Proxy
Statement/Prospectus included in the Registration
Statement on Form S-4 (File No. 333-26953) of the
Registrant).
September 8, 1997 Item 5. Other Events.
November 4, 1997 Item 5. Other Events.
November 21, 1997 Item 5. Other Events.
December 12, 1997 Item 2. Acquisition or Disposition of Assets.
16
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULLIGAN WATER TECHNOLOGIES, INC.
(Registrant)
By: /s/ Michael E. Salvati
-----------------------------------
Name: Michael E. Salvati
Title: Vice President, Finance and
Chief Financial Officer
Date: May 14, 1998
-------------------------
17